try to solve that. to the point of cross-border movement of terror itselfs and insurgent elements -- terrorists and insurgent elements, we worked very hard to create an environment whereby if we could get act stand to take action d get pakistan to take action, we could solve a lot of the problems in the eastern five provinces to include kabul of afghanistan. ..

the forces of the level were starting to come down and the afghan forces were not operating along the border because they had bigger issues to deal with deeper into eas in the east ande south. and so, while we had had excellent partnership across the border in 2009 and 2010 and some that stand in 2011, that partnership basically ended at the end of november and didn't pick back up again actually it still hasn't picked up again. the other issue was ultimately to attack the insurgent elements on the eastern side of the frontier that we needed for them to go after. and i ran as you may remember in the media i didn't spend a lot of time talking about but we ran a very concentrated operation against the knife's edge and

being an partnershi in partnersf afghanistan that committed large numbers. it proved to be quite good as the troops and gave me the sense that we could accelerate the afghans moving into the lead of the cross-border coordination is a very serious issue. it's a major security issue that's going to have to be result over time. it's playing out here by the end of 2016 and the new president i think it's going to have to take a real clear i realistic look at what the american policy is with respect to the advisors and the amount of time we will remain in the country and consider very seriously whether he needs to speak directly to the president of the united states of changing the policy given the operational realities in afghanistan.

>> and 30 seconds that happened in 2009? [laughter] >> i think it started because president obama decided to continue and he made it a point of keeping in touch with them and not teaching him, but advising the only way that was the right approach and it was a debate between the vice president and joe biden just before they took over and then came over. we have a slightly troubled relationship and we met with the

president and the first question is when does the contract expire? [laughter] when the day was over they called me up to the palace and i can't remember who said it, was it him or me. that suspicion begins strongly to up the process. i have established quite a good

relationship with karzai and when he was going to choose his vice president for candidate and offered to come up with said it's your choice and first i want to bring in. can i think about this and i came back and we had six meetings but i didn't succeed obviously. why did he want to bring him back on board if he could see the turnout was needed in order to win the election? it's very simple. at that time there was a turn in the direction with more reliance

on that kind of forces and less on the technocrats. we work very closely as it was less panicky. there were institutions created and we must allow them to do their work and try to insist that they do their property. that had to be there. i remember during the period this is anecdotal. the second day that he was there he was in helmand and i saw the president before and i said

mr. president, can we go down to the office because you never know. so they went downstairs and i said to the president it was a very emotional meeting. if you do not accept the second round and then i accept that strategy because if the president doesn't follow the constitution, then there is no role for me who has insisted on following the constitution. and it was a meeting that lasted 20 minutes, 45 minutes. there is a certain kind of intimacy in peace kind of things. he came back and there were things happening in the ballot boxes and the next day the

president announced he would go for a second round and the rest you know. the president continued for a second term and you said he had all of the opportunity during the second round. i think president karzai suffered through these five years in the fact that he never had this 50% mark, therefore i think he felt he didn't quite have the legitimacy that the constitution required. they blamed that on the obama administration. >> can i add a little bit? i think the legitimacy question is interesting and you and i had a discussion about this also. but i think in the terms of the public perception one thing i noticed in the past five years is that karzai wasn't challenged over the legitimacy.

any of them could have challenged his legitimacy but publicly he doesn't get challenged the past five years. yes it was a personal pain for him absolutely, but in the public discussions come he wasn't challenged. >> i think that brings us to the end of our time. and i think it is a topic which is bigger than the two hours allowed, but for me the discussion even though i lived through some of this and have seen others it is fascinating and revealing, so i want to thank the three panelists and all of you for coming and for your questions. maybe this won't be the last time we host is kind of discussion but for the first draft it was extremely good so i thank you very much. [applause] we will go live now to the cato

institute for a look at the housing and mortgage finance system. stomach the question that we want to address is how did we have the market that worked perfectly good become a crony capitalist system that is continually prone to failure and the first is the populist concern in the commercial banking go back to the country. the second and a spillover into the consumer finance. the second is when you create something you end up doing much more than you thought you were originally going to be. once we impose a transparent budget requirement, we try to gedothings off budget that havel costs to the treasury but that were not budgeted and voted on and that his political heroine for politicians. fourth is with the great depression with a lot of economic stress we formed a safety net and again that grew tremendously. very quickly the u.s. banking system was fragile by design. why? because thomas jefferson wrote the northwest passages in the

size of the family farm in for the next 100 years the country was settled by family farmers and those farmers were both households and business so there was very much populist concern with how they get credit. but the constitution left the bank charters to the states so you couldn't have a national bank to distribute money nationwide and what that meant is the banks always failed with respect to the crisis but they would never give up this right. why? it accounted for as much as one third of all of the state revenues. this was a form of economic rent they could tax the banking system even though it was fragile light design. so this was the source of all populist concern of thinking for the next 100 years. so, how did we go from only state banking to interstate finance? we had trade between it and have been per state finance system and we went the second best. we created these institutions

called them government-sponsored agencies but they came about to get rid of the problem of state banking and they started with limited missions to provide liquidity because the banks were ill-equipped and the word liquidity is the most misused word in the language and i will say more about that later. we created these and they didn't do what they were supposed to do at the time, but they expanded to new issues later on. the deposit insurance was the worst solution to the wrong problem. the glass-steagall act that was passed in the good of the fragility of the banking system because the universal banks that were bigger and more diversified and fail but in order to save the economic rent being generated in that system we passed in the glass-steagall and added to the deposit insurance but failed everywhere that it was tried and we did it anyway. the big banks didn't want to do it because it was across the small banks that were failing and they refuse to go alon refur

the same reason that they were forced to go the next year. just a little bit of theory but there is a famous economic theory that says banks shouldn't carbanks shouldn'tcare how mucht because the risk giving away but they do care a lot for two reasons when the government stands behind the debt it says it is cheap no matter how risky it is into the second thing is we tax equity before you can pay the equity holders. and this is a huge incentive for all of the banks and financial institutions to leverage as much as possible and so the bank capital went down 20%. the regulatory minimum was immediate and those incentives exist today. so in the postwar period america was on the winning side and we were devastated so we had things pretty good and we had a lot of economic stability. i would point out, ownership rose to its current level in the 60s the homeownership rate to

65% totally funded by private savings and loan deposits in the mutual institutions into savings banks. the home ownership at the time was considered a very good thing. there were no subsidies we could speak of, but the idea that people -- america was the land of opportunity and people could save -- they had to say 20, 30, 40% and this was savings they might not otherwise get anyway and savings is a good thing and leverage is a bad thing. even after they bought a house, you have to have a sink and account or pay the mortgage so they continued to save. they didn't take cash out. they reduced consumption and benefited everybody. 80% of the small businesses that were formed in the country -- i don't know almost every service kicked back where did they get the money? the savings and investment process was incredibly beneficial at this time. what happened to?

the political bargain changed dramatically once you introduced the regulation and the regulation always morphs into a financial depression so the political bargaining started. give us low capital requirements. then the building sites that give us fixed rate mortgages that are payable and they did all of those things. thethey had to invest the mortgs it made no sense at all and when interest rates started to go up the panthers came in and said we are not going to accept. so we give them that, too. in this bargain things are doomed to fail and they always do and they did. the political bargain in the commercial banks was we introduced to the cra. this was a little bit of economic rent for the survivors being they had to take less profit or loss for a handful of mortgages they could do but in the 80s it became a bigger deal because remember this was

all to get the permission to merge or open branches that very thing that reduces the risk of the fragility they would charge the price for because the government wanted to extract the rent in return and in the 80s the insurance fund for the savings loans was bankrupt so the way they hated that is we would charge banks a fee to take over the loss and we will give you the right to what you should be able to do anyway and this became expensive, so this is the regulation of the talk about. eventually we deregulated the ability to grant the cross lines but you still need of the regulatory permission and even after it was made legal in order to branch. because it was so important, the banks in the '90s signed a $7 trillion in commitments that for like 20 million or 30 million in the past. how much was the $7 trillion? worthy of the mortgage stock.

no bank knew what the other ones were doing. it was just trying to get an advantage so it could g go in to take over the market. the new political bargain in fannie mae and freddie mac, fannie mae was a zombie in the 1980s. 1980s. its liabilities were well below, while above. how many watch the walking dead? the zombie that can't kill them they make off the living which is exactly what fannie mae did when the loans were driven down because they could issue all the debts they want the government raised the matter how insulted they are. this is what happens to zombies. and because they can stay zombies, they can generate profits. and they generated so much profits that they register getting a good part of that in the economic rent not just to the borrowers up to politicians the work for in terms of political patronage to the managers. half of them didn't go to the borrowers that went to other members of the political elite

so they said we have to spread that around more. but they added onto the home ownership goal of 70% and the share of the market had risen from zero to 50% and there was no increase in the homeownership rate. now you hav have to raise to 70d was supposed to have been? they had to make a major push and this all happened in the late 1990s. then my boss and your former boss set up a requirement they havhad to maintain a 50% market share competing with the private lenders in the market. i'm going to go pretty fast here but this required a ter term ins leverage to increase the subsidies so the whole system -- they are leveraging 100-1 taking enormous risks to try to make money to subsidize the loans that they have to make. so the housing bubble kept in fleeting and it couldn't have inflated without a zombie you

can't kill to continue to fuel that bubble that is the role of the agencies and so the bubble inflated until the time it first the losses were tremendous. it does part of it is not especially understood. the rule for fannie mae and freddie mac were never changed and required 20% cash down payment or private mortgage insurance but they didn't have them. most of it was zeroe zero down y close to zero down. we get the excess leverage and we end up with a system that crisis and all of that is because there were second of mortgages that were funded by the banking system so it is true feeney and freddie didn't bear the biggest part of the loss that they were instrumental to keeping the bubble growing to systemic proportions. so, you can read this we wouldn't have had the bubble if we had normal housing. we needed this incredible excess leverage to bring the system

down. the financialcrisis was scheduled to investigate this and it was explicitly stated that it would be modeled after the core commission which was a sham to create glass-steagall that did the wrong thing in the wake of the great depression so the purpose of the commission was to deny, obfuscate and covered up and it was beautifully done in that regard and it suggested doing the same things that ha have gone wrong doing more of that in the futu future. so we have gone through the anger part of this. the anger at the wall street bailout, that is what the fed does. the deal was you will do this and implement the housing program and if you go bust we will bail you out. and forget everything you read that comes out of your washington in terms of accounting because the experts put on the budget have nothing to do with the cost. it's the implicit cost.

remember fannie mae was a zombie. if you can keep a zombi zombie s and to give it very low tax liabilities into cheap that its the franchise valuit'sthe francs it out, not the cost of a report on the budget. those are a joke. so then the biggest myth that was exposed is that somehow the government securities are liquid. there is no such thing. it's going to be very volatile because they live long-term and we did a lot of short-term financing of the illiquidity are meant and that has been a root cause of many of the financial pressures in the past. so, the response of bailing out wall street was we have to be allowed to main street, too and there were a lot of ad hoc mechanisms that tried to do that but the bottom line was that the hazard for bailing out borrowers made by likelihood of repayment in the future even greater. the problem got worse and once you give the franchise's value back to the banks and bail them

out then you can take that back in the context of penalties in the legal system. countrywide was bought by bank of america and they subsequently paid 100 billion in penalties for the loans that countrywide supposedly committed. the economist magazine supported that they ssupportedthe desoto e 200 billion. some of you might disagree but no illegalities over the penalties and they said that the u.s. legal system is an extortion racket. what they are really saying is you are extracting back from those that you bailed out and it's a part of a crony capitalist system. it doubled down on the crony capitalist system and tried to maintain all of the same elements in terms of banking regulation more of the same and with respect to housing it really didn't do anything. it didn't address the housing policy, if you didn't address

the fixed rate mortgages. all of that was left to the future. what has happened in the interim? the government has taken over 90% of the market and we are still talking abou about were gg to do about fannie mae and freddie mac that the nature of that discussion isn't really a policy discussion. it's political bargaining going on about how much economic rent can we get these zombie institutions to generate and who is going to get it to shareholders, the management, the treasury is trying to get those area to the regulators are trying and of course the affordable housing is trying to get the economic rent. it's all the same thing as we had before. it's a little bit like gorbachev tried to save the soviet system. dodd frank tried to save the securitization but this was an oxymoron because the securitization was a form that had no capital to begin with so it was never going to be a capitalized mechanism of security funding.

there was a minimum down payment of 20% by historical standards that would be pretty low. how did the regulators determined that great? the affordable housing weighed in and it's now zero down payment requirements. so i will summarize this we started with a fraction system that was too fragile and we ended up with a crony system that was what the founding fathers were trying to avoid where we have banks that are too big to fail doing everything and we don't have any effective control over them. this was the worst fear. i grew up near willie sutton the bank robber that got arrested but he knew what question to ask. he asked where is the money and how much of it is very and how do i get my hands on its? that's the question i always ask. when we are trying to find the securities in the private sector where is the money?

there is no point in negotiating political bargains until you know you can find the loans. here historically is where the money came from historically it came from households and the deposits saved in the savings and loans and mutual savings bank and capital markets funding came along a little bit later in the retirement savings then there was the bernanke savings block and recently we had the chairman printing money on one, two and three. excuse me. we had been printing money and this can't go on forever. the deposits cover the mortgage finance almost through 1980. a little bit of retirement savings but you can see the retirement savings are starting to shrink. we have had no household savings other than retirement savings for 30 years. that little bit at the end. retirement savings was shrinking at the same time it was supposed to be expanding. basic picture, we should have

had a skyrocketing housing savings during the last 30 years because the baby boomers. but instead it plummet to zero and at the households are becoming more and more leveraged in that entire period. what are the consequences, why did that happen? i gave you the third moral hazard of the fact that when the government provides social insurance, people tend not to save and this is now one of the other big myths that ronald reagan and tip o'neill sat down and decided to turn a page to the funded retirement system over a few drinks. i had no doubt they sat down over a few drinks. they didn't turn the retirement through the medicaid to the funding system. the trust fund was an accounting figment that never happened. so where do we get the money? from abroad. we took all of it. how much impact did that have been a mortgage market?

not much. there wasn't enough to get from foreign services. why? because the treasury was competing from the national deficit. so i'm going to spend one minute on this site and then i have to move on. china's policy -- we had a major debate over the last few weeks. they say that our monetary system was out of control with their short-term policy and the new chairman responded in a speech using the term macro prudential regulation 29 times. does anybody know what that means? it is a total oxymoron. a strategy for economic growth was to stimulate savings but then drive the savings to business investment so you could grow the economy. the first part works for the second didn't work very well because when you have the government driving investment you have a lot of mal investment and they have a problem. what we try to do in the short run is the same as the long run. wwe discourage this evening and

try to inflate asset values so people think they are rich when they really are not. it varies at the fed and they do not create wealth by creating asset bubbles. it doesn't make people wealthier. then we end up with the investment of driving that extra savings into the investments that aren't going to pay off. so we are right back where we started in the subprime lending move. the deficit problem i wish i could talk about it more. the fact is we cannot tax our way out of the deficit. people at the bottom half of the income distribution don't have the residual resources to save and pay more taxes and people at the top half are already paying 60% half of which is going to transfers, so it's not going to have been that we are going to tax our way out. if we want to grow out of the fiscal problem so there's more money left we have to generate an economic growth rate of 2%. that's not going to happen because we need more investment that we have the high tax in the world. so none of this acts up.

you don't want a default we have a 30 day debt we won't call that a default or we will confiscate. when we get into the acceptance stage on this we are going to realize we cannot continue to generate economic rent to distribute the way that we are in the past because we don't have the savings to fund the mortgage finance. i understand the politicians that want to hear this. this. the next essential press because it says that really all this political interference end up with more crony capitalism than it does benefit households. so what do we need? more productive work, or savings to go back to a market system with market incentives for the savings and insurance.

most say we should get rid of deposit insurance. one way out as we could default by inflating that all of those claims and liabilities are indexed to inflation so it's almost impossible. the second reality is the deposit insurance is here to stay so we have fixed the bank regulation. what are the implications for housing policy? depoliticize it. it is wrong to the liabilities that were in a fixed nominal contacts now it's down to 15%. implications for the borrowing rates. the chairman that arise in his

lifetime he be the next 30 years that is good news and bad news that means we have stagnation for the next 25 years like japan so that isn't a particularly good outcome or wit the economic growth we will have rising interest rates. if you have a private system that is capitalized but it's true wattage rate have to rise but it will be implicit revenues going back to the treasury mostly in terms of tax and you can take the same revenues and transparently budget them for the subsidies for the mortgages, so it's not. the problem is that we are going to make it more expensive. the problem is that it have to be transparently done and it would take the economic rent out dot for the borrower but for the politicians in all of the economic seekers. cash down payment there is no point in arguing the down payment if there is no money in the system. so we ought to go back to the down payment system that encourages the savings for the

borrowers. i don't want to talk about this it's the least accountable entity i would say i don't think the benefits will achieve the cost but i doubt that there will ever be any benefit of it because it is a bond market created against market interest. the u.s. exception with mortgage capital markets all of this took place when we thought the money was in the retirement system that isn't going to be true in the future so we are way too focused on what the rent seekers and investment community say we need and not enough investment where the money is and what do we need to get to it. can that guarantees be limited in the discussion it's never happened because it was never the politicians in the guarantees in the first place. wall street decided that these institutions were given to you by the government a monopolization's. the guaranteed myth that we need

guarantees for these securitizations, look at the 17 trillion of the u.s. government guaranteed securities out there right now earning about the zero interest rates, the public pension funds are looking to make 8% interest rate. they don't want zero return. they want risky investments where the returns equal to risk. [applause] i think that was helpful to be reminded of that mortgage finance does take place in the broad environment of fiscal monetary policy. so certainly should emphasize that to me there are at least a dozen of things that contribute and i am going to talk about the mortgage finance but in no way should that be interpreted as is excusing the rest of them. i've also said my own benefit so as i looked down and see somebody looking at their phone

i'm going to tell myself. we will see how much of that actually works out. let me first start out those of you up here that even have been at a distance related to the mortgage finance policy they revolve around homeownership and you can't talk about it you put a question out there and say to ourselves the homeownership merit subsidy anyhow because again that's where a lot of the debate is about and first the academic evidence is very clear the homeownership is correlated with a lot of positive outcomes. they vote more other children are more likely to graduate from college. all of these things are found in the data. let me also say one of the things that is helpful to repeat to yourself at least once a day is correlation doesn't equal causality. we know that it is correlated with a lot of these outcomes.

there's been nothing thathere it it causes these outcomes so maybe a short way to think about it is does it cause people to be more responsible or is it likely that people will become home owners? i think it is a little bit of both. it's also worth keeping in mind it isn't without its costs to the interesting thing about this cycle economically is that historically in the recessions double bill of the raids increased. people leave. you might be in las vegas where there are no jobs so you move to dallas to find a job but unfortunately we've had more people moving to the country. one cannot overemphasize we didn't have the same economic environment everywhere in the country. dallas performs directly than las vegas or san francisco and as we all know washington has done not necessarily for the right reasons however. so again we've reached the

conclusion that you hired the homeownership rate into these are studies across the country and states in the u.s.. hire the home ownership rate and again that is a finding that again causes the correlation doesn't causality but it's highly suggested to me. also important to keep in mind that the marginal average homeowner isn't the same person and the report of that is that even if homeownership is correlated on average with all of these nice things that we like that doesn't mean that the marginal -- that i is the co-owr that wouldn't be a homeowner other than the policy intervention is going to be the same person as the average homeowner. so again how something can be an average good but it might not be very good for the person that is just on the margin. margin. but we also keep in mind when we talk about often the rationale for the subsidies because something generates a quote on quote positive externality that means i do something and you get a positive benefit you don't pay for their fur issue be subsidized to do more of it.

the positive externalities for home ownership you can think about this as do you live next to somebody that knows their lawn and doesn't keep trash in g the front or have a car up on blocks like by the people that grew up in virginia when i was younger and that said, those externalities are local. it's a big impact on somebody let lives across the street so the question is why should i hear in washington subsidize somebody in des moines to mow their lawn if i'm not getting the benefit of exit to the extent that these are positive subsidies to the extent that they improve outcomes and they are either very localized in the community in question and i've also just say that again you work in capitol hill every other person that comes in the door to tell you what a great thing indeed you get a subsidy for the industry and how many jobs we create i'm sure everyone of you have seen more job impact studies that you can remember. that is what shopped around. they are grossly exaggerated.

we all need a place to live. an apartment building is not all that different than a condo. it takes the same amount to build an apartment building where somebody rents than for somebody to live in a condo. there's nothing specific about the tenure that increases jobs because again we all have to live somewhere so i think you should be very to cope on the job argument that you often hear. kevin touched upon this but the chart you are looking at, the ownership rate by ten years for the census the lower bar is the gst and the point is that we hit long-term ownership rate in about 1960 the growth of fannie and freddie that in the 70s they had single-digit market share is that were air relevant in the mortgage market for the snl crisis into the point of this is the fanni that fannie ae has seen no long-term increase so it's fine to see we want to do things for the ownership that

we might want to do things for the home ownership rather than things that claim home ownersh ownership. the lower bar is the average loan to value for the house so again this is ancient history but it also surprises me to think that before 1960 the majority of the home owners own their homes free and clear no mortgage at all. this chart again shows the increasing leverage in households so what all of these subsidies have done they have a deliberate home ownership that we have delivered getting households swimming over their heads in debt. i'm not suri am not sure that ia worthwhile public policy goal. that doesn't run the rate.

kevin touched on this quickly that the original rationale for the gse surgery for fannie mae created in the 30s it wasn't created much later while in the system and federal reserve to some extent all of these institutions were created in the 30s. these institutions were created because we had fragmented banking systems so it might seem like a long time ago but until the mid-90s the bank was limited to one location. of course that means the biggest employer in town goes belly up its pretty likely the bank will go belly up so the lack of the geographic specification that these interventions would advance to solve that. by contrast, canada that had the same if you look at the gdp in the depression in the u.s. and canada they similarly had a great depression and we have thousands, literally tens of thousands of pink carriers and canada has a euro. they didn't have the fed or the fdic, but they did have about six banks that were well

diversified across the country. as of again many of these intervention tried to substitute for the lack of geographic diversification and the lack of product diversification in the system so the plant would be i don't know i think the bank of america is at 49 states now that he sensually we havhe's in chilr of large banks and regional banks that are generally well diversified geographically. it's interesting enough if you look for instance at yes there are too big to fail issues with the big banks they are also. so i would argue to some extent the lack of access to the capital markets and the lack of the geographic diversification is the problem that we solved. of course we have other problems with this, too but those can be addressed and it's important to keep in mind is often presented if we get rid of fannie and freddie we have no backstop. we certainly need to remember the federal reserve purchased a trillion dollars in the mortgage-backed securities. the european central bank

purchased 700 billion in the cupboard mortgage bonds. we have lenders of last resort and backstops in the mortgage market and continue to have the banks so i would continue we cannot replace them with anything and we would still lead of the worlthe world in the more socialism. we are still in the interventions in the market. we don't have fannie and freddie who do we have? let me say and this touched upon the leverages i don't look at this as an issue of how do we replace the entire year 10 trillion market. i think we have households that are too leveraged and realistically at the size of the housing market we should think about more of the six or 7 trillion-dollar mortgage market to them for ten. i don't think all of this was brought to the stability and it isn't good for households. also important to keep in mind the originations are about a trillion a year. we don't need to replace the market overnight. every single plan even the action water's plan, all of these have transition periods.

nobody seems to be recommending an overnight fix it as all six or seven or ten year problem at that rate we can replace the entire mortgage market if we continue to flow over and. so who would find this? the securitization was promised to be something that connected main street to wall street but the reality is that the majority got a massive majority of the funding still came from other institutions but it wasn't unusual in the bank of america to take a thousand mortgages or so those mortgages to fannie mae to the mortgage-backed securities and sell the bank of america they hold on the ballot sheet three and why would you have this roundabout process that adds costs and complexities to the model? well in that model we take the credit risk in the bank of america and bank of america takes the interest rate risk but more important for bank of america under the current capital rules for banks they cut

the capital more in half by holding the mortgage-backed security rather than the whole mortgage so the system combined with the capital that we have in the banks encourages massive leverage in the mortgage market. my back of the envelope is looking solely at the institution of the bank and the gse and that type of the market at the time of the crisis was leverage to 60-1. that is a recipe for disaster. and of course as we know that i guarantee the business was leveraged over 200-wind so i don't care about the quality of the mortgage of the leverages 200-wind you will fail someday it is a guarantee and an absolute lack of capital on the system. i would propose a system that we need to go back to in a sense and again there are lots of problems in the crisis that was deposited based. some of those things we still need to address but most of the rest of the developed world rely on the deposit system. to me it also reduce reduces thy called the asymmetric problems

which are kind of the problems i'm going to make you the load whether you will pay me back or not so we went back from the originate and held it to the world crisis that we originated to everybody else. they have a wonder it is the current employer likely to be around if you lost your job are you likely to get it back. you can gather what i would call the soft walk of local information to the lending process that we could. the economic benefits and activities. if the person that originated the loan held below because again if you go to the local branch of the bank.

if you can figure out this person is never going to get the job back. they can do a better job and one of the hardest things is to figure out of the people that are behind of their mortgages, who has got the chance to get back on their feet and who doesn't? and i think if you have that local knowledge that is embedded in that, you can make much better decisions in that regard. and of course you don't have to get into all of these negotiations with the different holders of the mortgage-backed securities and the bank can make the decision itself. mention as well the diversity in the economic diversity also keeping in mind so much of the mortgage market wa was capital market funded during the crisis and so whether it was overnight lending, these things are not as sticky as deposits. what i mean by deposits being sticky of course some of this is attributed to the human behavior. the deposits generally stay with the banks and in the banking

system. one of the things that isn't widely recognized in the financial crisis and you can go to the fdic website and check this for your self the total deposits in the banking system increased throughout the financial crisis. yes people were taking their deposits out of india mac and want -- taliban wamu. you don't see these in the same way that we sell the funding lead the overnight purchase markets and other capital markets. we found a lot of different other activities without the guarantees. what we see here is the line is in auto sales and the redline is a housing start. they are subject to the same forces that drive them and the big spike in the auto is the cash for clunkers.

after cash for clunkers we wouldn't be translated into change things along. the point being despite the fact we don't have a gse for the auto loans, which i recognize we didn't be allowed a couple of auto companies but that said that it doesn't affect the financing side as much. we saw them recover at the same rate of the economy the same way the housing market is not and does not despite all of these guarantees. this is a similar chart with the mortgage market in the shape and the other chart is consumer borrowing not including auto citizens for short-term credit card loans so the point being the recovery match the recovery but it recovered along with the rest of the economy where is the mortgage and housing market did not. we have thrown these massive guarantees in the mortgage market and get the mortgage market continues to be weak and the housing market continues to be weak than other segments which traditionally moves with.

but despite the fact that we have no gse or auto loan gse if you get the auto loans at the relatively affordable rates they are only slightly above the mortgage rates and you can get them fixed up to five years sometimes seven years. the reason that is important to the mortgage market did you keep the mortgage for 30 years and for the fact is that we can manage that interest rate for some amount of time. again we saw some recovery. interestingly enough a lot of the debate and kevin touched upon the down payment issue a lot of the opposition and the mortgage finance reform is if people have to pay down payment to exclude a love of people the auto loan is an interesting area because the auto loans are pretty much underwater the second you drive off the lot so these are very high loans yet we saw during the crisis and we solve regularly that the auto

loans performed better than housing loans. of course i suspect that might have something to do with the fact if you don't pay your loan over a long amount of tim time you'll go outside your house one day and your car will be gone. it's funny how that incentivizes people to pay. as we know on the other hand the median time to get somebody out of their house in the city of chicago is a thousand days after they stop paying their mortgage. a thousand days. every three years. i'm not implying people are lazy or gaming the system but i'm implying that three years of free range sounds attractive and it might change a few people's incentives. i mentioned the decline in mobility rates. it might encourage you to stay in place if you are in orlando or chicago and you lost your job and you are looking at the fact i can get three years rent-free or i can move to dallas texas and to try to find a job and pay my own rent that's going to change people's decisions on the margin so if you want to subsidize people and assist people that is a legitimate

debate to have and you can do it anyway that doesn't lock them in place. if you want to get cash for keys or relocation assistance or pay somebody's rent for six months i'm not in favor of those things but those would be more effective than the programs we've chosen to do because we've chosen to lock people in place. also important to keep in mind when of the great frustrations if you spend a lot of time in economics you spend a lot of time debasing and arguing about the market failure and the market can do this and that and then they just sort of wave a magic wand and say therefore this beneficial ongoing social plan will come in and fix everything. i'm the first to say we should have legitimate realistic models of market. we should also have legitimate models of government. someone thinks it needs to be kept in mind in terms of any sort of government reform in the mortgage finance system and these are also some of my

observations having worked on the hill and also having studied public choice and influence in the government. first of all of the premiums are underpriced. the government isn't going to charge a fair rate. we have seen this with flood insurance and mortgage insurance and social security and the political incentives are underpriced in the risk premiums and it's important to keep in mind any system is going to be procyclical. what i mean by that is you could imagine if your boss was going to go out and campaign on the housing market is heated any to bring the price down you will not get redirected on that and guess what my experience in the banking committee staff is that the financial regulators largely within their discretion bend the will of the oversight committees and of the oversight committees are in the midst of a bubble and like they are making a lot of money no regulator or politician that has any sense will stand up against that. the system will look the other way and overreact and clamp down when it goes bust so the point

is you need to have market incentives that lean against that. if you look at companies like enron or fannie mae the short sellers that identified the problems people for the sec or other regulators you have to have people that have centives to bring the pessimism to go out and expose the fraud because again the political system will push the opposite. i spent my time as the bubble was built on the banking committee and i can tell you from any person that came in my door and raised concern about the housing market being unstable i had 1100 other people say there is a great machine called home ownership we should get more people into it. that is what is going to happen again. i'm certain i will live to see the day someone tells me that housing prices only go up. another thing to keep in mind and kevin touched on this with social security all federal insurance programs are cash flow. there is no lockbox for anything and this is true for the corporation. the banks paid the premiums and

what we do with the premium is put them in the treasury so they get the peace of the paper. this is what we work with under all these other things. what does the treasury do with the money? they spend it. there is no asset and there's only empty promise that will have to be recovered by the taxes at some point. as of again any insurance program can be cash flow. i've certainly seen on the other side i remember years i spent arguing with the committee they decided that the fha the federal housing commission was throwing off lots of excess cash which they did spend and your scoring is ridiculous. i turned out being right and they were wrong but it doesn't make a difference because the money was spent. this is the way the programs are going to run and it's important to keep in mind you are going to see this increasing on capitol hill that the budget pressure continues to increase in the future years into the attractiveness for the politicians will be how do i get the transfers in a way that are not reflect on the budget and

one way to do that is create contingent liabilities that don't show up in the budget and there is no better way or attractive area to do this than the mortgage finance because it is such a big market and you can hide the subsidies anyway they don't come back until later and it's someone else's problem and as kevin mentioned at that point you can blame wall street. also let me say it wasn't a tail events. one of the things to keep in mind the competition and guarantees don't mix let's go back to the e. con 101 that competitive market means you weren't a centrally zero friend. nobody earns excess profits, failure is pushed to the margin so if you have a system -- and i think one of the reasons we have a crisis as we went from a world in the 70s and 80s the banking markets work uncompetitive to the world of mortgage finance became increasingly competitive into the problem is that all of the competitive players whether it was the banks where the gse had a guarantee so when they went

out of business the taxpayer was called upon. i'm a big fan of competition. i think competition brings consumer choice and efficiency but as a society we need to make a choice. we can either have the extensive guarantees that means you have monopolies and the stagnation that you have a sense of stability or you can have competition where this is the right choice for consumers. you can have the vigorous competition but you will pay out at some point guaranteed. important to keep in mind i will sesee the day people tell me the housing market only goes up. we haven't fixed the housing business cycle. there will be a boom and bust again sooner rather than later and any reform has to assume that we will see another bust again. part of the problem is fundamentally what we've done with all of the guaranteed creditors is the heavy government regulation substitute for the market discipline that you would see so just think about it because the regulators who never lose their jobs are being responsiblorbeing responsg

this and we've told the creditors want to pay attention because they won't lose anything so to me there are very weak incentives i would challenge you to think of any regulator that has made the price doing a poor job last time around and of course my favorite example i think it is arguably there was no regulator that did the worst job in the crisis than the new york federal reserve. i'm happy later people want to ask to detail their various failings during the crisis so what did we do after the new york fed failed tremendously? we gave the president a promotion to the treasury secretary. good for him. what kind of incentive is that you can screw up and not regulate and we are never going to what you responsible? of course to me if you want a system where there is monitoring that is effective and people that put their own money at risk and go out of business would have a far greater incentive to pay attention to the system you're not going to have that if you are protecting creditors. also to make a quick bite

somebody argued about home ownership that housing is safe but you see the five year moving average act 1890 which is put together at yale. the point is you see the springs and housing so the argument is essentially a safe assets that performs well and you're never going to lose money and hasn't been true. it's a risky investment. it's not that all investments are risky but you shouldn't go into it thinking it's going to be a win-win with no problems. quickly so we can wrap up and skip over the borrower protection issues with dodd frank and i also want to make a quick point this credit score and the loan-to-value this is fha so it is the safest mortgages. we aren't talking prepayment penalties. when yowhat you see is the scors normalized so in the right corner of th at the top where is 1.0 that is probably the prime borrower who puts on a sizable

down payment and everything else is normalized so in the far end of the corner you can see those that have over 95% and under 580 or eight times more likely to default than those who put a sufficient amount of equity down. the point is despite all of the talk and kevin touched upon you don't do anything about it or about fico. they are product features like documentation, down payment. a chumminess amount of evidence on this those are rounding errors and it comes t to the credit score of the borrower and the payment and so we have learned that you can make loans to the poorer credit borrowers if it is a sizable down payment and you can also make loans with no down payment t down payment r or if you however make a loan down payment loan to a subprime borrower you will not get your money back and that has been repeatedly proven over and over

again. so to me we need to be able to focus on the mortgage finance. as an aside an interesting thing we are the only developed country in the world for somebody with a history of not paying their bills can get a mortgage. go to europe -- if you have a history of not paying your bills or socialist friends if you don't pay your mortgage they garnish your wages so we are friendly. that's fine that's a political decision but we should be open to the ramifications of it. ..

i do think we need to get away from winners and losers in terms of which sectors of society. one of the things my opinion why we've seen decades of wage stagnation is because we haven't invested in things that increase labor productivity. if you want to see wages go up, make workers more productive. the house of pricing does not make a more productive. you concern to all those things poorly as will but those are things at least have a chance of increasing wages and reducing wage stagnant station. there should be no contingent liabilities. i don't think we should all see is financed tools of incompatibility do transfers to them on budget, appropriate,

there are variety of ways honestly. hiding these things will come back and blow up at you. so without i'll turn it back to john at a time for a few questions. [applause] >> we do have time for a few questions. one or two. >> mark, i'd like to ask a question. i agree with you that the moral hazard is the highest aspect. are you advocating one increasing duration of clawback? and i realize the concept of contention capital -- >> let me start with any sort of system of insurance whether it's public or private has moral hazard. we all know that. the question is integrated that

with a government guarantee how are you going to control it? i'll be very clear. my position is not you should just give the guarantees and look the other way and hope it all comes out well. you can't do that. he have to do these efforts, how do align incentives back in an appropriate way. to me the principles i think it's first got to be simple. so i'm in favor of long as the government guarantees like deposit insurance and implicit guarantees, i think we need more capital in the system. i think it needs to be more clear capitals i would get rid of the risk-based capital roles and have a flat it can't be gained. it's also got to be, i'll be the first is a, basel iii has moved in a better direction even if it's insufficient, what cap or has to be real capital. the banks wit were the same wayt i remember fannie and freddie resolve it for months on because we counted defer tax losses as capital. that's ridicules but it's absurd, a fraud on the american people. and i am sympathetic to clawbacks so i think for insured

institutions that go belly up and bankrupt or even get bailed out, you know, certainly law and back, i am, again, i only use this example, i don't mean to pick on fannie mae but the fact that they walk away with $99 left the rest of us to clean up is obscene. i apply that to the executives at citi anywhere else but i also want to emphasize there's a big variety of cultural aspects of different institutions. the corporate culture at wells fargo is not the same at citibank. the way you have to get rid of that in my opinion is yet to let these institutions fail, be reorganized, how many more times with the bailout city back? they have a rotten corporate culture. [inaudible] >> i think clawbacks are a reasonable approach but i wouldn't rely solely on that rely solely on that added you think the benefit of clawbacks to structure them correctly they can be simple and transparent. i am sympathetic, attention with

convertible capital, i guess i start from the premise as we know there's bit on this site, equity on the side. i think you just have to have places like the kind against building of creditors but if we're going in were work creditors are going to be protected they make sense to have a layer of creditors whether it's like subordinated debt, whether it's convertible capital that switches to equity, i think that's a reasonable approach if we don't think we're ever going to get bankruptcy. one of the mistakes made during this crisis was in several financial institutions subordinated debt, subordinated debt, a supposed be something if institution gets in trouble, you are gone. this isn't super senior, you're the first one. we bailed out them in the right of institutions that to me was just undermine decades of efforts to try to build market discipline back in the system. i think convertible capital. there are ways to do it badly, ways to do well.

sorry for the very long convoluted answer. >> i'm currently interning at a startup fund. i'm from the university of iowa. my question goes to the whole panel. we've seen a lot of government financing in housing system that is why the housing market got inflated and the bubbles happened, and through financing their fannie mae and freddie mac, the bubbles can even more bigger. as a university student the biggest thing i see is increasing debt within our students. you see a similar trend in the university that system or the federal government subsidizing debt? and they're making the tuition bubble even more, and -- >> i think, you, it's interesting to me because a lot of the mortgage subsidies are talked about do not increase osha. some of the student debt has increased participation at college but some just i can housing market where subsidies

have it captured by the provided, it's the same in education. you go back and look at trends of common classes, faculties teach average, the last 20, 30 years. it's unusual for senior faculty to teach, the same thing, the number of university presidents or earn over a million dollars, i'm not picking on them specifically potential of data points that suggest much of the subsidies go to student that have been captured by the students -- the universities and not the students themselves. they will have to pay off. so what we need to do is just in the housing market, find ways to provide subsidies, do in a way that doesn't end up running up the cost of what you're trying to subsidize. i know that kevin might have something to add, maybe not. is at the university so maybe he can't talk to that. >> i've been at nine universities and never had to go to a faculty meeting.

again, students, education is paid for by cash up front from past saving the subsidies and now you're leveraging. whenever you have high leverage your malinvestment. the problem is people can look back and say in education is historically always paid off. that's true. i was also true of homeownership by the was even to people making low down payment and in particular the environment in the past. close site leader doesn't mean it's -- you change the equation in terms of amount of leverage that you put them. when you put that hand, others will capture those benefits. i believe there's an incredible range of syncing on the university faculty and university administrators that -- rent sinking, relatively little value to money spent and that's why the unemployment rate is so high among so many grads, specially the new grads who are more towards political science, i don't mean to make fun of it,

unless you come to capitol hill a lot of those guys are waiting tables right now. it's a big problem and there will be a student loan bubble that occurs. >> the one hopeful difference is at least on the service there aren't a lot of people who want to you that we shouldn't try to make education more affordable. whereas in them, if you remove the subsidies on the pricing is going to fall. anakin is not as much resistance tuition falling but if you go out, all the argument i offer you for keeping mortgage subsidies, we can have housing prices fall. that will destroy balance sheets. much more opposition to do things in housing sector that would bring the cost down. i'll say clearly as i mentioned i think competition and guarantees don't mix, one of the fundamental in housing policy is this confusion of we wanted to be about consumption and investment at the same time. we as a country don't want people sleeping on a heating grate, which i think that's not something we want as a country.

but fundamentally if you want housing to be about consumption and you can't be about making it more expensive. the only way to make an investment a good investment of by limiting its supply. anything as widely freely available is not a good investment. i think fundamentally and this is were i will channel might into progressive, housing is a basic necessity of life. it a shelter. why do we spend his time trying to come up to policies to make more expensive books i want to housing to be cheaper. unfortunately we of the world we have convinced people that housing is the best investment in the world, get in and make a lot of money. we should accept the importance of housing is a roof over your head. not some cacique and gamble in emphasize you cannot have it both ways. we've got to make public policy choice, consumption or investment. >> we are a little overtime, so why don't we cut questions off nobody got a question that wasn't answered, i'm sure they

will stick around and add to personal. thank you so much for 10 and please join me in thanking our scholars. [applause] >> [inaudible conversations] >> [inaudible conversations]

>> earlier today on "washington journal" space analyst miles o'brien discuss the malaysian airline crash and possible reasons why it was flying over such a dangerous area. here's a look. >> host: ask equipped before we letk you go, the downing of this malaysian airline, 298 people died on board and by alla accounts a missile struck the plane. what does a study by the safety of the national exposure in that part of the world? >> guest: you have to ask yourself why an airline which used to fly into that region, yh specially when earlier this vero week, two aircraft have been shot down by surface-to-air missiles. ukrainian fighter, ukrainian ais tanker.

the danger wassi quite clear. and there were all kinds of notices to airmen, and the faa had completely prohibited u.s. flights in the area a little south of there. the airlines will tell you safety is the number one priority, but truthfully, savings is a big deal. the shortest distance between two points is a straight line. they happened to take that flight right over a war zone. other airlines were flying in, frankly, a lackadaisical manner that was dangerous. the families who lost loved ones in this need to get some answers because this is not safe. host: what is next for malaysian airlines? guest: i don't see how they survive, steve. it is a flag carrier supported by the government. there will be another that flies out ofmalaysiabut the

the unbelievable, what are the odds of this kind of a coincidence, a malaysia airlines triples happen, what are those odds that this could happen? i don't even, i couldn't do the numbers on that. it's such a horrible tragedy for the loved ones by such an unfortunate situation for the airlines. the truth is civilian, the airlines are not flying are now. the war was going on before the shootdown and the people being shot down so these airlines have got to think about these things. >> host: miles o'brien, thank you very much for being with us. >> guest: you're welcome. >> are you today the u.n. security council call for an international investigation into that plane crash. they approved a statement that said quote the council sends sympathies and controls to the families of the victim into the people and governments of all those killed in the crash. council members took part in a moment of silence as the remember the two wanted 90 victims at the start of their emergency meeting in new york.

and now we want to hear your thoughts on the investigation into the malaysian airline crash. go online to facebook.com/cspan to join the conversation. you can tweet us with #cspanch #cspanchat. several of you have already weighed in on facebook. patricia posted -- and in case you didn't hear ambassador power's comments at the u.n., here's a portion now. >> yesterday we were all shocked by the downing of malaysian airlines flight 17. all 298 people aboard, 283 passengers and 15 crew were killed. as we stared at the passenger list yesterday we saw next to three of the passengers names a capital i. as we now know, the letter i stands for infants.

to the families and friends of the victims, it is impossible to find words to express our condolences. we can only commit to you that we will not rest until we find out what happened. a full, credible and unimpeded international investigation must begin immediately. the perpetrators must be brought to justice. they must not be sheltered by any member state of the united nations. let me share with you our assessment of the evidence so far. we assess malaysian airlines flight 17 carrying these 298 people from amsterdam to kuala lumpur was likely done by surface-to-air missile, and s. 811, operator from a separatist

held location in eastern ukraine. the airline was traveling at accrues altitude of 32008 and the speed was typical for an airliner along an established flight corridor frequented by commercial traffic. the flight was transmitting its assigned transponder code correspond with its flight plan at flight tracking data was publicly available on the internet. there was nothing threatening or provocative about mh 17. of the operational systems located near the border, only the sa 11, as a 20 and sa 22 cents systems are capable of hitting an aircraft out of this life's altitude of 32000 feet. we can rule out shorter range known to be in separatist hands including manpads, sa eight and sa 13 systems which are not capable of hitting an aircraft at this altitude. early thursday and sa 11 system

was reported by a western reporter and separatists were spotted hours before the incident with a sa 11 system close to the site where the plane came down. separatists and initially claimed responsibility for shooting down a military transport plane and posted video that are now being connected to the malaysian airlines crash. separatist leaders also boasted on social me about shooting down a plane, but later deleted these messages. because of the technical complexity of the sa 1 sa 11 its unlikely that separatists could effectively operate the system without assistance from knowledge of personnel, so we cannot rule out technical assistance from russian personnel and operating the system. the ukrainians do have an element systems in their inventories. however, we are not aware of any ukrainian citizens in the area of the shootdown, and more

important, since the beginning of this crisis come ukrainian air defense have not fired a single missile despite several alleged violations of the airspace by russian aircraft. this also follows a pattern of actions by russian backed separatists are on june 13 and separatists shot down ukraine and transport claim caring paratroopers. on june 24 as this comes with me to welcome you cringing about cease-fire, we received word that separatists down a ukrainian helicopter, killing all nine on board. on july 14, separatists claim credit for the downing of ukrainian military cargo plane flying at 6000 meters and on july 16, they claimed credit for the downing of the ukrainian fighter jet. if, indeed, russian backed separatist were behind this attack on a civilian airliner, they and their backers would've good reason to cover up evidence of their crime. it is extremely important that

an investigation be commenced immediately. in the first instance the special monitoring mission should act as a first responder link the foundation for efforts by other international organizations and individual nations including those whose citizens were victims of this tragedy. yesterday president obama or shored ukraine's president poroshenko that u.s. experts will offer all possible assistance upon his request. president poroshenko has invited the independent and credible international civil aviation organization to join in investigation. international investigators must be granted immediate, full and unfettered access to the crash site, all those concerned from russia, pro-russian separatists and ukraine should agree to support an immediate cease-fire to facilitate access by international investigators. in this regard we look to the as look to the as and am also greek agree with separatists and others in the region to make this possible.

all evidence must remain undisturbed and any evidence removed from the site by the russian backed separatist operating in the area should be promptly returned and handed over. russia needs to make this happen. spent so we here at salisbury house in des moines, iowa, and it's a home that was built by carcarl and edith weeks in the 1920s. carl weeks was a man of many and varied interests. one of the most notable legacies of his interests on his amazing collections that both a mass in terms of artwork, sculpture, the library collection is an amazing collection of rare, limited first edition works, medieval manuscripts. it's incredible. so carl weeks collected the books that he collected not only because they are important historical works but also because he believed that books themselves were works of art.

and were works beyond the words on the page. so he collected almost every edition of leaves of grass by walt whitman, changed over time. whitman added poems but for carl it was sort of the art of collecting. carl also collected a variety of first edition of ernest hemingway's work. so this is a works by hemingway published in 1935 and this is a great piece because it illustrates the personal relationship that existed between carl weeks and ernest hemingway. so this inscription, to carl weeks, instead of a drink, with very best wishes, artist hemingway. >> explore the history and literary life of des moines, iowa, started at noon eastern on c-span2's booktv and sunday afternoon at two on american history tv on c-span3.

>> july 20 marks the 40th anniversary of the first lunar landing. veteran nbc space correspondent on the life of the first man to walk on the moon, neil armstrong saturday night at 10 eastern on c-span2's afterwards. >> yesterday a house subcommittee held a hearing on the department into the targeting of the consumer group by the irs. we heard testimony from deputy attorney general james cole who responded to republican doubt about the matter has been handled and called for an independent prosecutor to conduct the investigation instead of the justice department. this is close to three hours. >> the committee will come to order. want to welcome our guest and we will get to our witness your in just a few minutes.

subcommittee hearing today continues the committee's ongoing oversight of the irs and its targeting of conservative tax-exempt groups. on may 10, 2013, lois lerner apologize for the iran's targeting and respond to a question at an obscure tax law. four days later attorney general eric holder call the targeting outrageous and unacceptable, found the justice department would begin a criminal investigation. that was may of last year. here we are now, 14 months later we have heard virtually nothing from the decision by the criminal investigation. all we have heard is its memorable sides of the aisle call for concern. we've learned barbara boxer men is playing a leading role in investigation. she is a substantial contributor to the president of the democratic national committee and now it's our job to investigate the targeting of people who oppose the

president's policy. the attorney general then comes out and says she is not alone. she's worked with the public integrity section and, of course, the federal bureau of investigation. then we learned the public integrity section at the fbi act met with lois lerner in 2010 to discuss how to bring prosecutions against these groups. the very same groups that were targeted by the irs. these are serious conflict of interest by the justice department just wants us to look the other way. no big deal, they say. then we have unnamed law enforcement sources who leaked to "the wall street journal" that no criminal charges were going to be filed in the irs targeting investigation. then you have the president of the united states go on national television and say there's not a smidgen of corruption in the internal revenue service. well if that's not prejudging investigation, i don't know what is. a house has passed a resolution calling on the attorney general to appoint a special prosecutor, 26 democrats, and i stress that,

26 democrats joined every single republican in the house of representatives in approving this measure. that the administration still will do anything. they still won't appoint a special prosecutor. my question is this. what more will it take for the administration to appoint a special counsel? then we find out just last month that the irs lost two years of e-mails from lois lerner due to a hard drive crash. mr. cole stutzman says the justice department is investigating. that, of course, is good, someone in the ms. fischer recognizes there's something rotten with missing e-mails but more must be done. we have serious concerns about the administration's investigation and serious questions or our witness today. we need to hold all accountable for the targeting of americans for exercising their first and then rushed to speak out in political fashion and that's what this hearing is so

important. and with that i would yield to mr. cummings. >> thank you very much mr. chairman. chairman jordan. welcome to this hearing, deputy attorney general call. for more than a year, republicans have claimed that the white house directed the irs to target conservative groups. but now that we've conducted our investigation we know the truth. there's no evidence to suggest that the white house played any role in directing or developing the search terms identified by the inspector general as quote inappropriate, quote any other aspect of how irs employees processed these applications. we have now conducted, ladies and gentlemen, 42 interviews.

these were witnesses that were called by the republicans. and they make it very clear that in our screening in cincinnati we developed these criteria on his own. we also know from his supervisor who described himself as a conservative republican that he did this not for political reasons, but because he was trying to treat similar cases consistently. not one of the witnesses we interviewed, including senior officials at the irs, the treasury department, the justice department identified any white house role in this process. our investigation also confirmed the findings of the inspector general, who was appointed by

republicans, whose audit stated that the irs employees reported that they were quote not influenced by any individual or organization outside the irs, end of quote. the inspector general has testified repeatedly before congress that he has identified no evidence of any white house role for political motivation. so now the republicans have a different argument. although they're still trying to somehow link this to the white house. now they claim the targeting of a conservative group is a massive governmentwide conspiracy involving the president, the irs, the security and exchange commission, the federal elected commission, and numerous other agencies, all coordinated in response to the supreme court's decision in citizens united. they claimed that the justice department is a key player in the conspiracy.

they have iqs of the department of engaging in criminal -- they accused the justice department of the united states of america of engaging in criminal activity by obstructing the committee. they claim the department is delaying or even closing down its own investigation for political reasons, and they claimed that the appointment of a special counsel is needed. mr. chairman, our staff as detailed 32 page memo that set forth the top 10 most egregious accusations against the department of justice. as well as sponsors showing why each one is unsubstantiated. and i ask unanimous consent that this memo be entered into the official hearing record. >> without objection. >> let me address just one of these allegation. last month we send a letter to the attorney general claimed that the department conspired

with the irs to compile an illicit registry of more than 1 million pages of information in order to criminally black conservative groups for the political speech. here is what that letter says. the irs said, over 1.1 my pages of nonprofit tax return information, including confidential taxpayer information protected by federal law to the fbi in october of 2010, end of quote. they are letter then accuses the department of working with the irs to quote, assemble a massive database of nonprofit groups end of quote which they call both an illicit and comprehensive registry. these accusations are complete nonsense. there's no illicit registry. there's no singling out of conservative groups. the vast majority of information was available to the general public, and this information was never used for any investigation

or prosecution. in 2010 the irs provided form 990 not only from conservative groups but from all groups regardless of political affiliation. and it wasn't until earlier this year more than three years later that the department discovered that a very limited amount of confidential taxpayer information was stored on those this. this was an inadvertent error that affected only 33 of 12,000 forms, less than half of 1%. the bottom line is that these discs were never even reviewed by the fbi or used as part of any investigation or prosecution. on may 29 the department wrote a letter to the committee stating as follows, quote, fbi advised us that analyst reported an index, which it set forth in one of the discs come into a spreadsheet, but did nothing further with the discs, and to the best of our knowledge, the

information obtained on the discs was never utilized for any investigative purpose, end of quote. that's from the fbi. what is the so-called illicit registry? the fact is it simply does not exist. this is not the basis of a white house scandal. this is the latest example of republicans desperately searching for one, and then using any excuse they can take many politifact that they no longer have any semblance to the truth. argument has no held 10 hearings and the irs has spent more than $18 million respond to congressional investigations. it is time to stop wasting millions of taxpayers dollars and start focusing on reforms to help our government work more effectively and efficiently for the american people. with that i yield back. >> i thank the gentleman. i would also offer unanimous

consent to enter to the record a couple of e-mails from 2010 from mr. builder, a lawyer in the justice department, e-mails to lois lerner. i'll just quote, thanks, lois. the fbi says raw format is best because they can put this into their system. again the point that the ranking member was just talking about them 1.1 been paid to compliment this information. the fbi got an exact format they wanted, had this information for four years and i'm aware of the testimony from the justice department that they did not use this information. but what else notice they had it for four years and it did contain 6103 confidential taxpayer information. i ask we enter this into the record as well. >> gentleman yield? >> happy to. >> i would ask that mr. cole, since was to be effective and efficient pickup and destruction and dysfunction, that when he answers his questions, that he

be allowed to answer what you just dated. i want to the answer to that, too, all right? >> i do, too because i hope he does answer and i hope he does answer our questions. that's why we got him your. >> very well. >> thank you. anybody else we should make an opening statement? mr. cartwright? ms. duckworth? >> thank you, mr. chairman. i'm reading the opening statement of the above ranking member card right. and also thank you deputy general call for testifying today. on may 14, 2013 inspector general russell george released a report stating that irs employees had the use and deployment -- tax except status. republican and democratic members including myself condemned the us this management identified in the inspector general's report. despite legitimate concerns expressed by some members before this committee that he began to investigate, chairman issa went on national television to declare the irs was involved in the targeting of the president's

political enemies. the inspector general has repeatedly refuted this baseless allegation. he reported that senior leaders at the irs said the criteria were not influenced by any individual or organization outside the irs. then on may 17, 2013, the inspector general was asked before a ways and means committee, quote, to find any evidence of political motivation in the selection of tax exemption applicants? his response, he responded quote, we did not. after anything 42 employees in the irs, treasury department and doj and receiving more than 680,000 pages of documents, the committee has not found any evidence of white house involvement or political bias. despite these facts, republicans continue to invent partisan election season conspiracy theories. one of the latest allegations is that the supreme court's decision in citizens united prompted a president obama, democratic members of congress and the irs, did you and others

launch a governmentwide effort targeting conservative groups. while i firmly believe that this is not position and undermines our campaign finance law, allowing special interest scholars to draft the voices of average americans, republicans attempt to characterize this as evidence of political pressure for agencies to target conservative groups lacking merit. these preposterous accusations have been contradicted by the committee's own investigation. we know that the inappropriate criteria started with irs employees in cincinnati. the inspector general's report says that they develop and implement it inappropriate criteria. the irs screening group mannesmann irs screening group man's in cincinnati confirmed this fact in a committee into the. he explained his employers first came up with an appropriate search terms not for political reasons but to promote consistency. and he proved his point by telling us that he is a conservative republican. former irs commissioner doug

shulman, any 2008 president bush appointee, was asked, did the citizens in a case in any way affect the hour as process for handling tax except applications? and his answer, no. you know, the best of my knowledge it did not. likewise, event of the elections crime branch said citizens united is not a problem. it is the law and so no, i am not aware of any effort or part of an effort to fix the problem from citizens united. while republicans continue to promote their unfounded allegations they conveniently overlook the funneling of dark money into elections. 501(c) organizations are not barred from participating in political campaigns. the regulations are clear, tasty political activity must be an and substantial amount of the groups activity less than 50%. these groups can already gain tax exception as a section organization but that would require them to disclose their donors rather than keeping the american people in the dark

about where they're getting their money. as i've repeatedly stated, anonymous money in politics disrupt the democratic process. that is why ranking of her cartwright introduced the open act which would require corporations and unions to disclose their political spending for shareholders and members. this legislation was shine a light on the dark money. i commend chairman lee and senator udall of the senate judiciary committee for an acting sg resolution 19, a joint resolution proposing an imminent to the constitution restoring raise the limits on financial contributions and expenditures in elections. thank you, mr. chairman, and i yield back. >> thank the agenda lady. members have -- gentlelady. members have seven days to submit opening sentence for the record. we welcome our witness, james cole, deputy attorney general of the tiny. you know how this works. stand up and raise your right hand. do you solemnly swear or affirm

that the test when you're about to give will be the truth, the whole truth and nothing but the truth so help you god? thank you. pleased to have you with us. you've done this a few times. you've got five minutes, or less, but around five. you get a go and then you have to answer questions. fire away. >> i'll take less than that, thank you. and before i start i want to thank the chairman for accommodating the request i made to have a we scheduling of the date of this evening. when it was first scheduled i was already scheduled to be down at the southwest border looking into the mcallen station in dealing with issues down there ending with a united states attorneys on the southwest border, trying to do with issues we have there as well. thank you for a company that. i'm here today to testify in response to the committee's oversight interest in allegations that the internal revenue service targeted conservative groups seeking tax exempt status.

when the allegations of virus targeting service in may of 2013 the attorney general immediately ordered a thorough investigati investigation. that criminal investigation is being conducted by career attorneys and agents of the department's criminal and civil rights division, the federal bureau of investigation, and the treasury inspector general for tax administration, known as tigta. i have the utmost confidence in the career professionals in the department and in tigta. and i know that they will follow the facts wherever they lead and apply the law to those facts. while i understand that you are interested in about the results of the investigation, in order to protect the integrity and independents of this investigation, we cannot disclose nonpublic information about the investigation while it remains in thing. this is consistent with the long-standing department policy. across both democratic and republican administrations, which is intended to protect the effectiveness and independents

of the criminal justice process as well as the privacy interests of third party. i can tell you that investigation includes investigating the circumstances of the lost e-mails from ms. lerner's computers. in response to your request, we've undertaken substantial efforts to cooperate with the committee in a manner that is also consistent with our law enforcement obligations. we have produced documents went to the limited communication's regarding 501(c) organizations by criminal division attorneys with lois lerner who is the head of the exempt organization at the irs. we have taken the extraordinary steps of making available as fact witnesses to career prosecutors from the department's public integrity section have explained these contacts with ms. lerner. in 2010 for the purpose of understand what potential criminal violations related to campaign finance activity might evolve following the supreme

court's decision in citizens united versus the sec, a public integrity section at turning reached out to the irs for a meeting and was directed to ms. lerner. in the course of that meeting it became clear that it would be difficult to bring criminal prosecutions in this area and, in fact, no criminal investigations were referred to the department of justice by the irs and no investigations were opened by the public integrity section as the result of the meeting. a separate contact between the the public integrity section and ms. lerner occurred in may 2013. when the department of justice had been asked both in a senate hearing and in a subsequent letter from senator sheldon whitehouse whether the department and the treasury department had an effective mechanism for communicating about potential false statements submitted to the irs by organizations seeking tax exempt status. an attorney and the public integrity section reached out to ms. learned to discuss the issue. ms. lerner indicated that

someone else from the irs would follow up with the section, but that follow-up did not occur. in sum, these two instances show that attorneys in the public integrity section were merely fulfilling their responsibilities as law-enforcement officials. they were educating themselves on the ramifications of changes in the area of campaign finance laws and ensuring that the department remained vigilant in its enforcement of those laws. as was explained to the committee previously, in 2010 in conjunction with the meeting i previously described, the irs provided the fbi with discs that we understood at the time to contain only public portions of filed returns of tax-exempt organizations. as we've indicated in letters to the committee, the fbi has advised us that upon the receipt of those discs, an fbi analyst reviewed only the index of the discs and did nothing further with them. to the best of our notes they

were never used for any investigative purpose. pursuant to the committee's subpoena, we provide you with copies of the disks on june 2, 2014. when it remained our understanding the disks contain only publicly available information, shortly thereafter the irs notified the department that the disks appear to inadvertently include a small amount of information protected by internal revenue code section 6103, and we promptly notify the committee of this fact by letter on june 4, 2014. we probably provided our copies of the disks to the irs and suggested that the committee do the same. in order to provide you with our best information regarding the disks, including the fact that they were not used by the fbi for any investigative purpose, we have never in the committee several letters regarding the disks and the director of the fbi to answer questions about them from chairman jordan in a house judiciary committee

hearing on june the 11th of this year. we recognize the committee's interest in this matter. we share that interest and are conducting a thorough and complete investigation and analysis of the allegations of targeting by the irs. while i know you're frustrated by the fact that i cannot at this time disclose any specifics about the investigation, i do pledge to you that when our investigation is completed, we will provide congress with detailed information about the facts we uncovered, and the conclusions we reached in this matter. thank you, mr. chairman. i will now be happy to answer your questions. >> think you. the gentleman from florida is recognized. >> thank you, mr. chairman. we learned in congress on june 13, 2014, that two years worth of lois lerner's e-mails were missing. the irs would not produce those. when did the justice department learned about that fact is because i think we learned about it after that, from the press accounts that were in the paper following the irs is

notification to the congress. >> so you actually read about it in the press that nobody in the irs ever went to the justice department to give you a heads-up knowing that you are conducting the investigation that some evidence they had been destroyed? >> not before the 13th of june. >> okay. let me ask you this. you said in a testament that you share the commits interest and are conducting a thorough and complete investigation and analysis of the allegations of targeting by the irs. if that is the case, i guess my question is, why wouldn't you've known that these e-mails were missing? did you just simply not seek to obtain those in the course of investigation, or did the irs not provide documents that the justice department requested? >> again, it's difficult to get into the details of the investigation, but there's a number of different sources of e-mails in the irs. there's lots of recipients and senders, and we were looking at

many different forms and sources of those e-mails. it didn't become apparent based on that at the were any missing e-mails before then. >> let me ask you this. you are investigating and it did become a government agency, whatever, that agency has a duty once they know they're under investigation to preserve evidence, correct? >> that's correct. >> and have a duty to produce the relevant documents that are requested in the course of that? >> that's correct. >> that would fall ultimately to the agency had to make sure the agency complies with the justice department, right? >> i would imagine the agency ultimately there is responsibly but there are people further down i could do the work. >> in the course of investigating a case, if you're investigating an agency, an entity, and there's evidence that is destroyed and that agency knows that they're under investigation, don't they have a duty to report that to the justice department so that you know that the evidence has gone

missing? >> we would like to know that information. depends on when he learned of it, and certainly it's information we would like to have. >> let me ask you this. if you're in court and you make a representation to a judge, even if it's in good faith and to later find out that the representation you made is factually incorrect, you have a duty as an attorney and a member of the bar to go back to the court and follow a duty of candor to inform the tribunal of the mistake and correct the record, is that right? >> that's correct. >> do you think that you and the justice department look in a congressional investigation, if we have somebody heading in agency or who's involved with an agency and they provide information to us and that information, later they determine to be incorrect, do they have a duty of candor to the congress to correct the record? >> yes. >> very well. let me ask you this, mr. kohl.

there was a letter, we have sent a subpoena for documents and we received a response on may 28, 2014 it was signed by peter kathy, and in that the department position is as sane, certain items requested that the department is not going to produce them is that i could speak with that's correct. >> the reason for that side was substantial confidentiality -- i want to clarify not producing the documents is the reason for that, is the president asserting executive privilege on this matter? >> idol but there was an assertion of executive privilege. it was long for sensitive documents and items involving ongoing investigation that traditionally over decades that accommodation with the department and congress that those are not produced because they are law enforcement sensitive items. >> my final question would be

this congress held lois lerner in contempt, geez, almost nine weeks ago. federal law requires when that happens that the u.s. attorney from the district of columbia take that to a grand jury. is it your understanding of the law, the that is an obligatory duty that u.s. attorney must take that before a grand jury? >> my understanding of the law is that it does not strip the u.s. attorney of the normal discretion of the u.s. attorney has. he proceeds with the case if he believes it is appropriate to do so. >> so usc 194 says it shall be the duty to bring the matter before the grand jury. so you're saying actually even though congress mandated a duty, a prosecutor would essentially be able to drop that language by exercising discretion? >> i believe that there are -- there's aspects of it may give any prosecutor prosecutorial discretion on how to run a case

and how to review a matter. i understand this matter is under review. and as far as whether or not it has been presented to the grand jury, that's information you can't disclose because it's a grand jury proceeding. >> i understand that. maybe we will follow up on that and i yield back. >> the gentleman from maryland is recognized. >> i want to thank you very much for being here, and i wish you were under more constructive circumstances. unfortunately, republicans on the committee have to choose your department, the justice department, of engaging in criminal conduct of obstructionism and and of conspiring with the irs. so let me ask you directly, are any of those accusations to? >> no, they are not. >> okay. let me focus on one specific accusation. chairman issa and chairman jordan had accused the department of justice of conspiring with the irs to create what they call quote

illicit registry to prosecute conservative organizations. their claim is based on the fact that back in 2010 the irs provided to the fbi 21 computer disks with annual tax returns or form 990s from organizations with the tax exempt status. according to your letter these discontented forms of all routes that were filed between january 1, 2007 and october 1, 2010, and i quote, regardless of political affiliation, is that correct? >> that's my understanding, representative cummings, but i have not seen the list myself. my understanding is it was presented to us as public record information and not selected on the basis of any sort of political affiliation.

>> so based upon your knowledge, they were not just conservative organizations of? >> no. that's not my understanding. >> as i understand the vast majority of this information is accessible to the public. it's public information, the same as what the irs provides to the nonprofit organization guide s.t.a.r.t..org. is that right, do you know speak with my understand when we receive the disc is that it was represented to us that it was all public information. >> so these forms were provided in 2010 but earlier this year more than three years later, you discovered that a very limited amount of confidential taxpayer information was stored on those disks, is that correct? >> that's correct. >> this error effectively 33 of 12,000 forms on those disks if that's less than 1%. is that you understand? >> i don't know how much it specifically was.

i knew it was a small amount. >> do you have any reasonably that this error was intentional or that these redactions were done incorrectly or on purpose? >> i have no basis to be able to conclude anything on that, other than it's just a small amount and what was represented to us. >> okay. well, finally come to me the most important point here is that these disks were never reviewed, is that right to your no? >> that's right other than the index, basically first page of it. they were never reviewed and never used. used. >> and so deputy attorney general cole, to conclude, in your claims, and i hear having dealt with, having practiced law for so many years and dealt with the justice department and so many, many times, i mean, some of the very best and brightest citizens going to the department, many of them could make a lot more money doing

other things, but they decide that they're going to give their life to what i call feed their souls, and make a difference for people. and then just the idea to hear that the justice department is accused of criminal activity, the very department that has done so much to make sure that our laws are upheld. i mean, i just -- it's very upsetting to me and i'd just like to give you an opportunity, since you represent so many of these wonderful people who have decided to give their careers to us, and the idea that they are working hard but then they get these accusations. i want to know your reaction to that. >> well, ranking member cummings, i represent all of them, and the career people we have at the department of

justice are really some of the best and most honest lawyers i've ever seen. the amount of integrity that's there is really quite astounding. you're right, they do sacrifice a great deal of money to work there, but they work there because they feel it's important to go after the pursuit of justice. they work to try to find out what the facts are, what the law is, apply the facts to the law and let the chips fall where they may. there is no politics that's involved with all of these career people, and it's really impressive to see the work that they do and the results of the justice department is able to bring about, and the credibility the justice department has because of the wonderful work of the career lawyers. >> is it my understand that if you all find that this crash of ms. lerner's computer had any criminal element in it, you would be looking into that and addressing it as you would any

other criminal case, correct? >> that's what we do in everything. we look to determine whether there's any fact of any criminal violation of any federal laws. if there are, we acted properly. that's the whole purpose of the justice department, to find out what's going on, what the truth is and then take appropriate action. >> thank you very much, mr. chairman. >> mr. cole, isn't it true that richard pilger met with lois lerner back in 2010? >> yes, sir spin? >> yes, sir spin isn't it true he got information this 1.19 pages of information in the format that he asked for a? >> i think there was a request of several different forms they could come in, as i understand it, and we were asked to pick which one the fbi would prefer. >> lois lerner said we're checking on the disc we spoke about, incoming data regarding 501(c)(4) issue. does yet to have a format preference? all format is best because they can put in the system like excel.

so richard pilger meet with lois lerner. you guys ask for specific information. that's right with you guys asked for this to? >> i'm not sure. i've seen in the mills specifically asking for. i think -- >> when you get in the format you want, we'd like it in excel format. starting 501(c)(4). sure looks like you asked for and you got the data, right? >> my understanding is we get to the data, that the requests were made before the meeting and the data was delivered. >> if it's publicly available information, why did you ask the irs for and why did have to meet with lois lerner to get its? >> i don't have an edge to that right now other than maybe -- >> we would like an answer to that. spent i can try and find. >> you're the one who said it's public information coming at you to go to lois lerner and irs and get in the format you wanted? and mr. cummings says that's no big deal and get a for four years. you had this for four years to? >> information, the disc were in the possession of the fbi. >> twenty-one disks?

>> twenty-one disks. >> 1.1 million pages? and it did in contain information, correct? >> we learned that on the bus but i didn't ask when he didn't ask when you learn to i said it contained it, correct? >> we learned later that it contained it. >> mr. cummings just made a big deal about its no big deal. while in fact it is. the justice department astronaut mission of the use of publicly as they will put you go to lois lerner to get it. you get in 2010 and the format you want it. it's 21 to this, 1.1 million pages. you say it's available publicly but you go get it from the irs. it contains confidential taxpayer donor information. all those are facts, correct? >> they are not necessary facts that are all linked together though, mr. chairman. >> they are all in the database though correct? the irs -- i did make that up. the irs told us it was confidential information. >> no request at the time.