even when the va concurs. they seem like there's somebody who is responsible for making that happen. and yet, i can never get that happen or find that person's naum. so that occur in 2009? and why did you stop doing the -- why did you stop dealing with this? why are we dealing with this mail issue five years later. >> in 2008, well below -- before there was even a record's management officer there's now, actually salt of that 2008 effort, there's now in every single regional office a record's management officer who has that responsibility. >> he must not be doing a very good job if they had to testify about the boxes and you had to react all the as you depth and do something about it like it was an emergency. >> congressman, i can't answer the question. >> that's the problem because of the fact that like with mr. robinson you mentioned, too. that he talked to you and you took it under your interest to

solve his problem. well, the problem is, miss secretary, you got 20,000 people working for you. every one of them has a problem going to come to you and you're going to solve that? this problem of -- and this rule spoke of, supervisor who has been firing people and is still there and apparently after providing retribution to people trying to improve the system, you need to have a system where those people are removed and you need to make it stick because not everybody can reach you and have you intervene and solve their little problem. you need to have a managementing that manage 20,000 people in an effective manner. how huh are you fog to do that in. >> congressman, we have several complaints that we forward to the ig that come directly from our leaders and staff and they

are raised by an employee a trusted chain of command and the chain of command raises the issue and we forward it over. i'll give you example and ms. halladay mentioned this, the baltimore situation. it was raised by the chain of command and the ig was called and invited the ig in knowing and assess what was going on. we have that happen all the time. i know there are 34r5places and very sensitive to those comments. we have to have an environment where our employees are -- >> how are you going to do is that? it's not working now. >> congressman, it works in some places. it doesn't work in others and where it does not work well, we'll address that situation. >> i'm out of time but i -- none of us have any belief that unless something radically changes with the whole system that there's really going to be some change. i'm out of time. >> ms. kirk patrick you're

recognized for five minutes. >> many of my constituents in arizona veterans organizations believe the focus on ending the va's backlog has incentivized the claim processors to provide zero percent disability ratings or low ratings in an attempt to quickly complete claims and reduce the claims backlog numbers. files from several veterans in a district and files that the disabled veterans of america gave my office suggest that some of these claims were improperly given a lower rating based on the evidence submitted with the claim as the claims backlog numbers continue to decrease, we have seen an in your in the number of appeals by 18%. so my question, general hickey, is, what is the this vba doing to ensure that claims are properly aed. ka-- properly adjudicated a

improperly awarding lower disability ratings? in other words, can you describe your quality assurance process? >> >> the oversight for me and all of vba to discuss it, i will tell you that we have significantly ramped up our efforts in this area as indicative, i think, even the gao commented that there's been some extra effort that's been put into this this. we have now the following -- we've quality review team specialists that i put into -- i took 600 people off the line doing claims. that's how much i value getting the right answer to the veteran the first time. 650 people that could have improved our backlog numbers faster. but u said, no. we have to do them better. so they are now quality review team specialists in every regional office. they, like their star counterparts, must take and pats

the skill certification tests to hold that position. that's note absolutely easy test to do and to pass but they do. they are in the regional offices doing two things. one, they're doing something new for us called in-process reviews. it is basically -- i'm going to check areas where we typically make mistakes and i'm going to pull a look at them on a hire level frequency and if i find while the claim is in process i'm going to come to you as an employee and not say, gotcha. i'm going to come to you as an employee and say, let me show you what you did. if you fix it right now it won't count against your brooirnls standards so we got out of the gotcha culture. we do 250,000 of those nationwide every year. the second thing we did was those quality review teams do a five-employee pull at the end of the month for their claims to see what they're overall individual quality is. the next then we did was we did a fundamental change of our challenge system.

i thank this kwe committee for resources to do that. and you go through an intense program to be trained on how you do it. the next thing, and thank you for the omnibus add on this. we have recently and we're doing it now, less than 60 miles in that direction, we have what we call "spark training." we have identified either through volunteerism or people challenged on both either their production or their quality or both, we're running them through a refresher program, that specializes them with problems they make. the special monthly compensation that the ig discussed. hard to do. we built tools into the vbms to help do it but we're retraining that out there with the people who have been challenged to do that. any number of other things and if there's time i'll let mr. murphy add. if not, happy to come over in a full roundtable with you and lay

out every part and piece of what we do in this area. >> i have about a minute left. the first panel suggested that using specialized case managers to review the claims might speed up the process. what's your thought about that? >> i think that's exactly what we're doing in a segmented lanes. we're broken now. we did it in record-breaking and we got into a completely new organization alamo tell as part of the transformation effort. we have the express lane. one or two medical conditions not extraordinarily complex. we have the special operation's lane. we have really complex claims that require high journey level capability and experience. and then we have the core lane which is sort of the same thing we do over and over again with lots of medical conditions but not in that special operation's category. i think that's what we do well in terms of segmentation. i heard and listened closely to the idea that some employees feel like they can't pick up the phone and call a veteran and get

a piece of information they need. i hope they're watching right now and hear me say, not only can they, they should. i would love for them to engage in a conversation and get a piece of information this need to drive it all the way home. >> mr. hughes? >> one thing i want to follow-up on is an issue from a couple of hearings ago with ms. halladay in reference to the va database and we tend to have a lot of hearings but not as much follow-through as i would like. any assessment today as to whether the va has secured the database as the insecurity were revealed? >> are you talking about our federal information security act compliance? >> you testified before this committee that the database of 20 million veterans and their families was -- had significant potential to be hacked and we

had a whistle blower that the va denied. there's a pattern here and i want to follow-up on that hearing, i think, from last june. >> when we did our current review this year, for 2013, information security was still the most -- the last standing material weakness in the va. there are still problems. there are still many security vulnerabilities that need to be corrected. oint within the va had put together a crisp initiative to try to work some of these vulnerabilities. they improved last year but our contractor still said that there were. there was not a formal process in place to make sure that we didn't have repeat findings from the year before. and the current audit is in progress for this year. >> i look forward to seeing

that. i'll ask that question, mr. chairman and committee members. we had a lot of testimony and very concerning testimony about hacking and the va, again, denied that it occurred. finally admitted what the whistle bellower brought forwar and said we'll fix it. what i heard was we are're not for certain but it's not quite fixed yet. >> it's not. >> it is not fixed yet and we are hear, we're going to fix it and we're going to get to that so i want to ask that question about -- you brought outside this room, a listing of your current disability claimed backlog. does that include every disability claims or only those that make the performance reports? >> they include a congressman, all the ones that were decided in fy 2000 as part of the rating bundle and confirmed in 2005 as part of the rating bundle. >> what does it not include. >> it does not include nonrating work. that is not included in there

for which we are working hard on. >> are those disability claims? >> they are not. they are -- once you get a disability claim decision then you have the opportunity to apply for other kinds of benefits. >> we heard from ms. hull today that the data may have been manipulated. that may be inaccurate. and you're still -- do you still stand by this claim even though it doesn't includal your performance data which i think was why mr. soto lost his jooeb because he revealed that. is that accurate? >> congressman, it includes everything in the rating bundle. i can to provide you a list to show we've done 44% more work since 2011 in the nonrating bundle. i left that out there as well. we're doing far more work than we have done over the years and we're scheduled -- >> reason you make a claim on accuracy. remind you how aye determine independently whether it's ak wr accurate or not.

>> we do it four different ways. claim-base, which is our historical way. issue-base, which is the new way. >> is that independently verified or internal to the va. >> it is -- it had once been our process had been fish departmentally verified by ida before and. >> it's not a iso 9000. >> i directed iso 9000. i said it a couple of times but maybe i didn't si it clearly. >> you said you were looking to receive certification. you're not certified today? >> no. i'm directing that we be certified. >> a long way between certification and achieving that. >> you know the difference and i know the difference. you have not achieved iso 9000 certification? >> i've just decided to do that. >> that's the only way this committee is going to gain trust is that if you independently verify your data. and every bit of data here is not -- none of this is independently verified. it's coming from interfamily to

the va. am i wrong on that? who has independently verified this claims' data? >> congressman, that is why i'm going to do what we're going to do. i want you to have confidence in it. >> so there is no -- for the record, is there independent verification of these backlog numbers, these claims work numbers, outside the va? or is that all internal? >> i'm not going to say it's all internal. i don't know the answer. i'll take it for the record and find out if there's outside people other than ida that have done it and i have another group on contract right now to give ussen independent verification. >> thank you, mr. chairman, i yield back. >> thank you, mr. chair and thank you very much to all of you for being with us tonight. -- tomorrow. i wanted to get back to the focus on veterans and in particular, the issue about the

fully developed claims. this is something that we've heard a lot about from the vso's and i, for one, thought that we could have a great deal more kofls in this. we heard testimony this evening from our initial panel that this is not been a particularly successful process. and i just wanted to see if we could start at this end of the table and get comment from all the three parties here as to whether you feel that the fully-developed claim process is helpful to getting the veterans the decision that they need. >> me? >> yes. >> i could say, we were in on this early when we looked at the 2011 backlog initially and fully developed claims were key to the transformation plan. the issue we have with that conceptually made sense to sort

of have this concept alamo tell to move more claims and serve more veterans in a way that was going to help the backlog. my issue and my concern is that when i looked at the numbers in the transformation plan, dba was banking on doing a lot more and using that to break the backlog. they were at that the time, at 4%. their projection was to be as 20%. they were making some large assumptions that they were going to get from 4% to 20% in an effort to break the backlog. at the time i didn't think they were going to get there. i don't know where they are in term of percentages. if they don't that's a significant amount of claims that aren't going to be processed and aren't going to be plied toward breaking the backlog. >> okay. thank you. >> congresswoman, we're at 40% today. your state and county service officers are out there and they are really driving home this effort. so we're at 40% which is well ahead of where we expected to

be. and so, i got to tell you i'm extremely appreciative of how seriously all of our veteran service organizations across the nation are doing in this regard. yes, some of them -- by the way, they still are done faster than the claims we're doing not in a fully-developed environment today. but we had been clearing out old ones so it's hitting the average but we're working them. they're part of the pritiatiy they're part of the pritiati they're part of the pritiatiy they're part of the pritiat of r prioritiation bundle. we're doing them work them back from oldest to newest. >> ms. halladay? >> we also thought it was a good idea. but we're going to be looking in this year's protocol and our benefits' inspections as to doing some testing there to see if it's really hitting the mark or if it could be improved. >> thank you. i think it would be very helpful and i know the vso's want to be part of the solution and help

the veterans and i think that you can appreciate this as a bipartisan effort in this committee which is very rare in this congress, right now, that we are all veterans focused and want to get these responses as quickly as we can. the next question i have is with regard to the communication with the veteran with the process of the claim pending. what is your experience -- was a little disappointed in the first panel -- the expression that it was difficult to communicate with veterans that -- because of the pressures on the employees that were processing the claims and because of their performance metrics they didn't feel that they necessarily had time and, yet, it seems to me, you know, that's sort of a false pos because if you don't have time you're not going to get the answers you need to process the claims so, again, let's start at that ends.

if you could comment and then, general hickey. >> i definitely feel communications directly with the veteran would help to make sure you're very clear on what evidence and what conditions are present so that you can process the claim tightly, very quickly. >> great. thank you. general hickey? >> i think part of what i would say is that we do that by also working with the vso's and in fact, we highly, highly encourage our veterans to work with the veteran service organization. we know this is very complex. we know it's tough. we do it every day. we are really feel strongly and we train to that and we teach it in mandatory tap and we say, please, use a veteran service officer to help navigate this system. a system that's been connected in law for many, many years and connected in process for many, many years. >> it's complex. >> my time is up and i'm sorry

to cut you off but i'm being respectful to the chair at this late hour. >> thank you very much. mr. kauffman, you're recognized for five minutes. >> thank you, mr. chairman. as a gulf war veteran, secretary hickey, i have a question for you. after an april 2014 iom report, recommended use the term got gulf war illness" you pushed back favoring va's current terminology, chronic multisymptom illness. it was subsequently reported that the department has has dodged references to gulf war illness and research into the condition because officials fear of flood of new disabout benefits claims and costly payouts really complicating you're highly publicized goal to eliminate the backlog of benefits' claims by the end of 2015. this is confirmed by your

december 2013 testimony before the senate veterans affairs committee. where you stated, and i quote, every time we get a new thing, you are right. i'm telling you, i will get to 2015 and 125 days, except if i have a large perpetration of something like we experienced in the agent orange environment. 260,000 claims in our inventory overnight in october of 2010. that will kill us. end quote. in response to iom, va stated that the chronic multisymptom technology was preferred because it could be experienced by veterans from multiple conflicts including the current conflicts. however, i note that 38 cfr

section 3.317, va's regulation governing compensation for a disability due to undiagnosed, diagnosed and medicalally unexplained chronic multisymptom illness states specifically it pertains to a, quote persian gulf veteran who exhibits objective indications of qualifying chronic disability, end quote. further, i note that 38 cfr section 3.2 va's regulation governing persons of war provides that the persian gulf war period extends from august 1990 through a future date to be prescribed by the president, meaning that legally, there's no difference in presumptive eligibility for veterans of the current conflict. given va's regulations cited above. can you further explain your

comments on refusal to adopt the phrase "gulf wore iar illness?" >> i did not refuse to adopt. i moorely had a conversation and my conversation was because i have concerns that we do not disenfranchise other veterans from other areas that may experience similar medical conditions that have been put into that category. do we not think that veterans from world war ii or korea or even today's wars have fibromyalgia? they just didn't know what it was back then. do we not think that they do? do we not think they were expose h posed to some of the things that have been lumped together in that bucket? mine was not to say gulf war may not experience the conditions my comment was to say -- other veterans from otthe otter ares other eras might. and rather than under the conditions themselves that might

apply to any veteran from any era? i didn't want to disenfranchise any other veteran. >> in bhooirmarch 2013, the hea before the committee, joseph thompson of the national academy testified that in order to achieve the 25 h 2015 goal, quote, everything will have to go exactly according to plan, end quote. he also noted that the department lacked any surge capacity. in other words, va could not accommodate the addition of new presumptive benefits based on these statements, are vba's 2015 goals restricting the department's ability to adequately assess veterans' benefits needs? >> congressman, absolutely not. if i had iom come to me tomorrow and say there was a highly connected issue and -- frankly they don't come to me. they come to the secretary or the acting secretary to say that. if they said that in those cases

that there was a presumptive that should be declared, all bets are off and i'll be sitting over here telling you i cannot meet 125.98 and we'll do the right thing and if that's a new presumptive, that's a new presumptive. i won i won't stop it. no, absolutely not. i would never try to prevent that from happening because that's just absolutely not in my dna. >> mr. chairman, i yield back. >> mr. o'rork, you're recognized. >> i want to thank you for the progress you're making across the board and specifically at the what okay regional office in texas which serves the veterans that i represent in el paso. we've seen wait times for

first-time service claims which were at 470 moving much closer to our ultimate goal of 125. for the process, had soldiers in the wounded war your transition unit languishing at ft. bliss, we're making progress and i share everyone else's concerns that the progress and these numbers be verified by independent third parties who can confirm that the progress is real. but from everything that we're led to believe, things are moving in the right direction and at a pretty good clip. to miss halladay, or before i leave, secretary hickey, a lot of serious allegations raised in the previous panel by mr. robinson and mr. soto, can you provide answers to those that come back to this committee so we can share them with the public? >> yes, i can, congressman. >> thank you. and to miss halladay, one of the things you said in your opening

comments that struck me was, some of the success may be compromised by data integrity issues. anything that secretary hickey has said tonight that alleviates those concerns that you raised in your opening statement? >> no. >> one of the numbers that you cited in your opening statement was -- and i didn't catch the full statement so i'd like you to elaborate. 32% of rating decision were inaccurate. those warrant all rating decisions. that was within a certain category. i wanted to better understand that and the discrepancy against the 90% accuracy rating that we hear? >> under our review of the special initiative to process rating claims pending over two years, we pulled a sample of 240 rating decisions that included both final ratings and provisional ratings and found

that 77 of those ratings had some inaccuracition. that's where the 32% is coming from. it was focused on just this initiative. general hickey did agree to go ban and review all those provisionals so many of those we're very hopeful would be corrected as the process moves forward. >> and also for miss halladay and then for mr. bertoni, we heard in el paso, that perhaps a consequence of this focus on first-time service connected disability claimtion is a rise in appeals. now, the secretary has told us that the appeals, the rate of appeals has not changed over the last 10 or 20 years. but you know, we heard anecdotally at our town hall meetings we hold every month, of veterans whose appeals, when they sign in the e-benefits

haven't been touched. you can see when the last time the rating's officer, the appropriate title, has looked at one of those appeals. and veterans stood up at my town hall in april and said -- it's been two years since anyone has touched this claim. that's anecdote. but that's also how i started to understand that we had a problem within dha. anything that you can tell me that would either confirm we have a real problem or as the secretary states, you know, that's natural given the number of first-time claims that we're processing and are coming through at the same rate? and we're processing them on pace? >> our numbers, well, we had a key point of concern is the increased appeals inventory. the workload has continued to grow at an alarming rate. we are had 220,600 approximately, adds of september.

2011. and as of june 30th, 2014, we see 268,000, just shy of that, which is about an 18% increase. we see that there is a significant increase of 25% on the notices of disagreements waiting for appellate review. i think that that's significant. it's growing over time. >> and mr. bertoni, i only have ten seconds. >> in our review of the backlogs in 2012 we visited several locations and there was concern that the focus on the backlog, the front-end focus did divert staff away from that back end and one of the causes. >> ft would divert the staff from appeals? >> right. >> thank you, mr. chair, thanks. >> thank you, mr. chairman. joined hickey, we talk about independent reviews and those

are key in any business that you have anything that your running. the question comes in -- what do you do with the information that you get? and you talk about getting certification with iso 9001. which, obviously, would be a feather in your cap. but there's also from that, i read something about i h so 900 which makes recommendations on what you're improving so the question is where either method, independent review or outside review wlooivg iso 9 0-- review iso 9001, how do we institute the improvements that make us better? >> at the heart and core of what i bring to the table and there's a negative side of it, which is a dna that talks about process improvement. i didn't sit on anything. we don't relax. we continue to look for ways to

get better and to apply what we've gained and what we've learned so by example. mr. murphy's organization gathers data consistently on the number of errors we make and what we make them on. different than sometimes what the ig looks at in terms of the way they look for errors. we take an immediate turn when we start seeing a trend line on a particular error where we're seeing a rise we turn it into training immediately. we turn it into the conversations with our quality review teams and, in fact, tell them to start looking harder at those eshs. and to start making improvements there as well. i've also mandated that we start doing face-to-face, in the morning, huddles, at regional offices. >> are there obstructions in the system that slow you down or prevent you from making improvements in the overall system? >> certainly, there are. i made mention of and i'll tell

you this is even more significant in the appeals process. and that is -- the appeals process looks akin and you'll all know this well, to the tax code that's been wired together by law over many, many, many years and it is hard to unwire it to make any process improvement in it so we struggle, frankly, with the appeals' process in finding definitive may jeer improvements to make in it and when i have an issue kwa law i sometimes hit a stakeholder vested interest. on something that shouldmake sense to everyone which is a standard form that we should have in the application for a benefit. and we heard from our stakeholders and they had some concerns about that reference. and it's still in rulemaking so i can't talk about it but i'll tell you that we heard them and i'm hoping we'll have very early this fall, a solution that makes a difference to both.

>> you talk about law and you talk about the blockades and you talk about trust. congress is a body that doesn't have the highest approval rating itself. and trust in the american people is sometimes absent there as well. not just within the agency that you're working with. but i'd like to discuss your vision of over sight on the part of congress and the oig, gao and the vba itself, going forward. i mean are there -- everyone has a role but are we actually accomplishing something within our role? when everyone weighs in but at the end of the day, are we getting something done? are we making changes? >> if i stood from the veterans' perspective, i would tell you that 200,000 veterans this year alone, will get answered to claims at a higher quality rate than they've ever gotten before in the history of this organization. so i think you all have made a

difference. i think your staff when they come and visit us, sure, they put me on a little warning and a little heads-up and i get a little tighter in the way i look at things. when the ig tells me certain problems, then we look to see how we can apply solutions to fix it. >> but do you feel you have access going in the other direction as well? you mentioned you're sometimes bound by laws. so do you feel you have access to come back to us and say -- hey, can congress enact some changes so that we can make this better? here's where i'm bound? >> >> i understand what you're saying. oftentimes before i take one step to come to you, find out what my stakeholders might think of my taking that direction in coming to you. and oftentimes, when i won't come to you is because my stakeholders have concerns about changing the law. they're my partners. >> i understand that. >> i don't want to bring you something for which they have little to know support and i know you all well enough to know you're not going to do anything if we don't have the veteran

service organizations. >> but i'd hope you feel free to have a dialogue. >> thank you, i do and i preesh yooirt that. >> i yield back. >> mr. walsh you're recognized. >> thank you mr. chairman. thank you all for coming tonight. i feel like i reach an age, miss halladay where i say things like "we go way back." and i appreciate the quality of the work you've done over the year has improved the quality of the work we do for our veterans. jean hickey you earned the gratitude of this nation for the work you did in uniform and you knew when you took this job it was a hard time and it was a hard job and that's why you took it. it would have been easier to have retired after the groundbreaking you're and for that i'm grateful and you know, we're part of organizations that we get judged on the organization over individual merit and if you think you got a tough job, we've got one to do it too. that's okay. that's the way it's supposed to be. that's why i bring it up. i want to make note, this note, to me, is more than just a note

in a bathroom. this is a tangible example of the cultural problems. and this note and the disrespect shown to these staffers. this was not an ignore the staffer. this was ignore the people of southern mn's first diekt. ignore the people of the 8th district of pennsylvania. this attitude -- they were doing exactly what i've said here encouraged them to do. go out and investigate for this committee so we could get data and prove it and be welcomed. imagine if you're a congressional staffer finding information, imagine how intimidating it is to be an employee trying to say what's rather? you heard these folks come forward and it's heart-breaking to me that your folks are triing to make it work. i know this troubles you. i know deeply. i want to ask this question. you come from a successful career as a general officer in the united states air force. did the air force work better than the va?

>> congressman, every organization, every large organization has those people who are all in, as i use the words with my employees, who do absolutely everything right to the absolutely max of their ability and every organization has people that don't. so you watch things that happen in my former beloved air no, sir and you watch things that happen in ni current beloved va. i love them both because of the missions they do. and because of the great people who participate in them day in and day out, working their tails off to make a difference for this nation. >> and, miss halladay, maybe you, with the general, can together chime in. this is not unusual in a large organization for the disconnect between the 40,000 foot strategic vision and the granular level of somebody doing the work to have somewhat what of a disconnect? but i would make the case that the lack of a national strategy

and a clear mission up and down, is causing us to see that. do you see the disconnect when you do your work? >> we do see some disconnect with that. i think you have to have very clear policy 2k3w50idians. i think some of the fast-letter guidance that's gone out has hit the core values of some of the staff in the veros and that's why we're getting all the allegations we're getting today. i think you have to be very clear on your policy and you have to understand what the intended consequences are. and the unintended consequences. you have to deal with both. when i personally went up in philadelphia to take a leek, at the issues tluch and when i met with the deputy undersecretary for benefits, they said they did recognize a misapplication of the guidance was a risk. and time and time again, my problem is, put in the controls

if you recognize it's a risk. and i didn't see that. and i think that we have to work very hard. >> does she have the power to make those changes? >> she has the power and is responsible to put the controls in place. and i think that's where our oversight can help vba the most. >> tonight i was fascinated by this. general hickey, knowing you and knowing you want these changes and knowing how personal it is to you you mentioned that the suggestion came up and warranted change and she didn't know that. and didn't know -- that seems to be to be almost -- why that wouldn't happen. and i almost have to ask, did she get a bonus for making those changes? the issue is here you got employees trying to improve the system and trying to make it and there's such a disconnect there that those things never connect it? >> so congressman, everything we're doing today was an employee initiative. it was an employee who said, segment in work. do it according to these ways.

>> amazing how disenfranchised they felt. this is my last question. was that panel an anomaly? or do you think that's a fair representation? >> congressman, i would refrain from -- that would -- to me, that would feel like if i made a comment like that that would feellike i was being being disingenuous about the real feelings that i had and i won't do that to my employees. >> in all fairness to you, i'm out there enough to say that i would say that's fairly typical. so you know from my perspective that the express concerns were fairly typical of what i hear. whether they've spoken out of whistle blowing or confiding on the side conversation. i-year-old back. >> mr. jolly for five minutes. >> thank you, mr. chairman. general hickey, first, thank you for your service. an incredible career. and i appreciate your clear dedication through your comments tonight. frankly i got a soft spot for the kc 135.

but tonight you find yourself representing the va. we can have as many yooefr sight hearings athe day is long but at the end of the day, short of major legislative changes it's up to the administration to address the issues. did the affairs office review your written testimony tonight? >> yes they did. they do all the time. >> in your testimony you say you appreciate the president's involvement in improving claims processing. what has the president done to show leadership lately on that issue? >> so congressman, the -- the budgets start in va. the budgets come to you all through the omb process, through approval in those processes that exist there. so from that perspective, absolutely. i will also tell you, the whole effort on fully-developed claims

was an effort to bring some focus to that. every day i get up and i have to make decisions i need to have good leadership in front of me and -- >> i understand that. look, i appreciate that and i'm saying this constructively. it's not a gotcha question. we're begging for leadership. everybody is begging for leadership and i'll tell you i think the political establishment is too late to identify a crisis and too quick to declare a result. and i'm afraid that the president of the united states is going to do that in this instance which is why i ask. you mentioned in your oral testimony that you would appreciate the support for legislative solutions by this body. your answer to mr. row was a fully-funded i.t. budget. would that be the number one priority? are there other things we should consider as a congress who's responsible for doing our job as well? >> congressman, one of the things that i would tell you first of all, yes. it's a fully-funded i.t. budget. not just at one year but all years.

fully-fend f funded i.t. budget. we're in a world that requires that in order to create real fish sa efficiency and effectiveness. and the second thin, the chairman put together a roundtable that brought us together to have discussions about appeals. in that he brought fort the vso's and he brought us and the board of veterans appeals and other stakeholders to the able. i thank you. what resulted in that is, frankly, the disabled american veteran leadership said, if you're having a hard time moving this for word let us steak the leadership with the other vso's and we'll move forward. i don't care who takes credit. got to do something about the appeals process. >> so do we need legislative solutions that this body needs to enact? i have to ask you quickly. >> i believe you do and i would like you to take the leadership on having that discussion with

you. >> my nasdaq question is related to mr. soto. i'm in anniinteresting position. he works in my district and he's claimed that there's an office many my district that's retaliated against him. i'm going to meet with him in the morning and i'll get i privacy release. i understand tonight you cannot discuss the circumstances of his case. but i think every member and i know i receive them often, receive complaints from employees. and we try to handle them very judiciously. we understand that there are two sides to every story. and i understand that in this situation as well. but i cannot go to his supervisor and expect an impartial answer so once i receive that si release tomorrow i'm going to come to you and allege affairs and going to ask for an explanation and i hope that the va has found to be in the right. i'll be honest. i don't sit up here hoping the

va is found to be in the wrong. i hope it's in the right. >> tlahank you. >> but i need an answer. i can tell you every member of local 1594 is going to call my office, not the va, and they're going to ask what i'm doing in my capacity so i'm sharing that were you on the record tonight simply to let you know how serious it is and not that i would expect you to have an answer tonight about if case but to tell you i'll be bringing that to you and to allege affairs very soon and i need an answer. >> and congressman, i'll provide it with the documentation that you told me you will provide. >> if it's not timely provided i'll continue to come each week. >> i'll work to make sure it's provided timely, congressman. >> otherwise, i'll come to your office way i recently have done with another agency and it's very effective when a member of congress sits in the lobby of an administration office. so i appreciate your understanding. mr. chairman, i-year-old back. >> mr. fitzpatrick for five minutes. >> miss halladay, i want to

follow-up on some questions they were asking about performance measures and evaluations and how long that's been going on and the federal government. and you indicated that the federal government over the last several years has been doing better in providing bonuses, pursuant to performance objectives. goals and objectives set at the beginning of the year. were you talking about other federal agencies. >> i was talking across federal government. there had been a change to really look at performance in terms of results. which is ditch than in the past. you know, years ago, it was just if you had a good attitude, if you were trying hard. almost like a report card in school. but i really think that the government, the federal governmentwide and opm has made a strong effort to judge performance on results and it's very important. you can have an outstanding employee one year and that

employee could be a fully satisfactory person in the next year. if they don't produce the results that are defined in their performance plan. i think that there's been a general improvement in that. >> where's the va going wrong in that? >> i don't have specific information. i know they had problems with their certification of their performance plan. i believe it was last year and a lot of the ratings were actually re-assessed after the first and second level review the make sure that that they were tied to results. i think that right now, there's a strong feeling that senior executives are getting bonuses for underperforming programs.

i think you have to look very carefully at that. because in some cases, you're having a senior person come in, and i'll use general hickey as an example. she took over a tough assignment. you may not be able to turn that assignment immediately into top-performing organization. but you can move it forward with each step. and i think sometimes you have a leader that actually can produce results but it isn't as immediate as other people want and you have to recognize that and incentivize it. >> general hickey, i also want to thank you for you're incredible service to our nation but as miss halladay said you've taken on a very tough job here at the va. you were here earl year-over-year when we were given the testimony about flawed data and duplicate payments in the va. she claimed her manager at the philadelphia rooej natural

office were claiming that wasn't the case. we wrote and you responded. would you say now, a couple years later she was more correct than the manager's at the philadelphia va office on that question? >> so congressman, there are duplicate payments and i can tell you we do about 10,000 pension claims a month and about 64 of them are duplicate payments. >> she was calling out a problem she saw and -- you know, she deals with these issues every day and she was identifyhe was problem and she didn't think upper management was concerned about our understood or -- was even involved in. >> congressman, i can tell you that the management at the office did raise the issue to us and did have discussion with the pension business line leadership. so i think there has been conversation but i appreciate the situation that she's in. >> and i appreciate that you have indicated to this committee and members of congress that your door is opened and you want transparency and you indicated that i unacceptable to you that

others don't share that same commitment. with respect to the memo that was provided to us midway through the hearing, there's been a lot of talk about the st names that are on there. that is very, very concerning because of our constitutional obligation oversight. but there are two names at the top of the memo with a circle around it. cease and rule. not committee staffers, but employees of the va, both whistleblowers, i believe. ryan seese who was here today in the audience,kristen rule. why is their name -- they knew nothing about this meeting. they were involved in the meeting, weren't invited in the meeting. why were the two whistleblowers, doing, as the secretary indicated, change processes, made a huge impact, improved the aswrensy in philadelphia office. why are these people being singled out?

they should be applauded. they're being denigrated, singled out and being made an example of. why is their name even on this me memo, if you know? >> congressman, thank you. i can tell you when i got the call, the committee staff was on the way. i conveyed to the folks in the philadelphia regional office a list of things that had been described to me to make available parking and room to meet in and claims files. and i said, i would expect they may want to meet with the i.g., who is -- >> why is kristen rule's name on this document? >> i also indicated to the staff that i thought in addition to speaking the i.g. that the committee staff may want to speak to those whistleblowers. i didn't know who they were and did not know if they were going to be available that day and suggested we needed to make sure if they were requested that we make them available to the committee staff. >> thank you. >> mr. meehan for five minutes. >> i'm not sure i understand that answer. you said you didn't know who they were, and yet their names

are on the top. >> sir, the acting director at the time was familiar with the employees and wrote down their names to make sure that if they were in the office that day, and wanted to be addressed by the committee staff, that they be made available. >> you had the philadelphia office. you've heard testimony that there are 96 white boxes of essential return mail and eight small cabinets of military mail. some of which were holding claims that had been existing for as much as three years. were there, in fact, 96 white boxes in the cabinets with that kind of mail? >> sir, i was just appointed to the director's position in philadelphia. my understanding from the report is when that was initially raised, the undersecretary asked the pension fiduciary service

director to send his staff up there, and i would need to review the final report to identify -- >> this was raised in february of 2012. >> yes, sir. >> it's now 2014. >> yes, sir, and there is a report, and i apologize -- >> where are those boxes? what happened to those boxes? >> my understanding is that those were boxes of mail that needed to be scanned into the system. that those claims had been processed. and i believe that was the finding from the pension and fiduciary service -- >> that is not what was explained. what it said was they were important pieces of mail potentially. do you know how many there were? >> no, sir, i don't. >> so there were 26 boxes and you have no idea how many claims could have been associated with those boxes? >> my understanding of those mail in those boxes with those claims had already been worked. >> well, that's not the testimony. the testimony was that they were claims that had not been sufficiently identified, and

therefore they were incomplete and as a result of their incompleteness, those veterans who made those claims were not being communicated with. some were not being communicated with for months and even years with respect to the claims they were making. >> i will be happy upon arrival at the regional office to investigate further and ensure that the full answer is provided. >> what happened to those 96 boxes of documents? we have heard testimony that they may have been shredded. >> sir, my understanding is that those were boxes of mail that needed to be scanned into our virtual va system, that the regional office has continued to make progress in that regard to ensure those documents on claims that had been completed are also part of the electronic virtual va system. >> general, do you know more about this? >> congressman, i believe the number, if i'm recollecting collect correctly, i'll ask the i.g. to correct me if i'm wrong, is 68 boxes. i believe it was documents in paper -- >> it's 96.

this is the document. >> we think it's a different number that kristen rule has identified. >> so is there a different set of boxes? so there's triage "a. "is there triage "b"? >> when we went into the philadelphia bureau, we identified 68 mail bins full of claims and associated -- >> are they different than the 9 96 other mail bins? >> i can't answer that. >> we might have over 150 mail bins of unresponsive -- on which we don't know how many hundreds of potentially thousands of pieces of veterans correspondence could be included within them. >> so, congressman, the mail has been used to do the claim already. the claim has been completed. >> no, general, it has not been completed. the testimony we received is that that document was not able to be appropriately, was either return mail or other kinds of

correspondence in which identifiers required further follow-up to be able to identify. am i missing something? >> congressman, i will take -- go deeply into this and come back to you personally and meet with you and, again, bring whoever i need to to explain it so it can meet your needs and your understanding, so we ensure you are well informed. >> i need to know how many there were, how many bins, and how many of these f i'm hearing testimony that there could be as many as 150 separate bins. this is not ambiguous. this is clear -- >> congressman, i'll look into it and get back to you and make sure we bring people capable of explaining to you what work is done. in fact, i invite, if you have the opportunity, i know you're busy, i'd invite you to come up to the regional office. >> i'll be there. i've been in horsham and the philadelphia hospital as well. we didn't expect we were having these troubles on this side of the aisle as well, too, with benefits. i will be there.

>> great. i will make that arrangement. >> thank you, general. >> mr. meehan, it's my understanding that miss rule talked about the 92 boxes some 2 years ago and the 62 boxes we're talking about were boxes that are currently undiscovered. you're recognized for five minutes. >> thank you, again, mr. chairman, and colleagues on the committee. first, the -- mr. jolly mentioned a few minutes ago, too, general hicky, we hear the same concerns of people who stepped forward to provide information in the oakland office that have been retaliated against or interviewed or practically harassed about other issues when they thought they were coming forward to help. instead, they're hauled in for review hearings on things that they actually were helping on instead or made to feel like they're in trouble over that. so i would like to have the opportunity to approach you later, as mr. jolly mentioned,

with some of these folks because they've been retaliated against and i think one is even on at least suspension or maybe let go. i'd like to have that opportunity. okay. then as well, when we talk about the bonuses, the -- you know, i think you reward the people who are grinding out the work at the ground level, making veterans' claims be finished and finished accurately and with good quality. that's where we talk about -- especially catching up on the backlog. we start getting the mid-level management, as well, or the top-level executive management. there's a little less justification when we're talking about these backlogs, these, you know, veterans living in their car because they can't get an answer back. or waiting years and years and years or hearing about 96 boxes or 56 or 58 or 14,000 files in oakland, california. you know, the captain of the ship goes with the ship and the

ship goes down, the captain goes down with the ship. so at the upper level, i think it's highly inappropriate for veterans that are living in their car or contemplating suicide, even, when we're seeing top-level people receiving bonuses. so i would like to consult with you as well on who's receiving them at the top level and why and how we justify that and i'd like to see that reformed. as we've done legislatively a couple efforts to limit that around here. so that's just, again, that's a small part of the problem, but it's big in the eyes of the people. >> congressman, i did not give any bonuses to any executives at the height of the backlog in 2012. >> but they call them different things and that's to kind of give the -- >> they got basic salary. they got no bonuses. >> we'll investigate that more later. how many -- how many claims are currently pending at the board of appeals? >> i have appeals at the board of veterans appeals because

they've already been claims, decisions have already been made. 72% of those are being paid. >> i mean a raw number. >> i can get that for you in just a second, sir. >> we don't have a lot of time. maybe a general number. >> right now, i have 276,000 appeal -- things that the board -- appeals -- not at the board of veterans appeals. in the whole end-to-end process. that includes vba's portion, vba's portion, vso's portion, because they have a chance, an opportunity to do things, and it does not include the court. >> whatever it is, that's a huge number. how long do you expect them to grind through that with veterans who've already waited years in many cases to get from, through the first point, and then to find out that their case has been tossed and pushed back to the veterans board of appeals? >> so, congressman, i won't -- i'm not going to blow any smoke on this. we need a better way to do this process. this appeals process.

it is not -- we are not doing the best we can do by veterans in this appeals process. i can tell you -- >> because 97% of them get remanded back, my understanding, to the regional office once again. so it's time lost for veterans, big time, especially when they're in a bad way, so, first of all, we are -- vba's part of this is to do three things. those three things that we to we have done 25% more than we did 44 years ago. but i will tell you this. that remand is not necessarily because we made a wrong decision. remand can be because the veteran came in in a very open process that never ends and brought in a brand new thing that didn't exist at the time of the initial -- >> and additional information is a good thing. >> it is. >> it shouldn't have been in the appeal board probably to begin with tsh. >> it should be a claim for increase. i agree with that. >> there's some funny business that was alluded to, what's a

new claim, what's an old claim on the date? we don't believe the dates are being maintained -- we're getting information on that. once it becomes a new claim, it's hard to go backwards like on the -- >> we can do that for you, congressman. we're working on that. i can tell you the full complete body of those claims, 14,000 of those, 10,000 of which we were able to grant on the provisionals, we would not have been able to take care of those 10,000 veterans the way we did by doing that provisional process. that said, i understand, so that's why we are doing a 100% review of them. >> thank you. miss rubens, in the oakland office, 14,000 claims were found stored in cabinets back in 2012. you visited that office. and discovered these files were actionable, not just stored, what have you. these were actionable claims that needed to be taken care of. they dated back to early '90s. and you connected -- you directed the office to process these claims immediately, yet we

find until very recently they hadn't hardly been moved. so what was your follow-up on those files, those claims that were stored in the cabinet somewhere dating back to the '90s? >> sir, in fact, in 2012 when we identified the volume of work that needed to be addressed in the oakland regional office, there were a number of steps undertaken to include a large number of claims to be brokered so that they would get immediate attention by some of our highest performing offices. we also provided many help teams to come in to oakland to help to train them, to identify the system issues and to ensure that they continued to work those claims, oldest claims first. >> we know that some of those are still not done. we know some of in are stashed and still not completed. so, the -- mr. chairman, i'll yield back. thank you. >> thank you very much, mr. lamalfa. thank you to the members. thank you to the witnesses. both the first and the second panel.

i think, miss hickey, what -- the concern that we have is the american public, when you say you have cut the backlog in half, they think that half the veterans have gotten their disability. but that's not true. because the veteran board of appeals, going through their process, there are other machinations that are being handled. so what we're trying to do is get to the bottom of how many veterans are actually receiving a check for their disability claim? not how many you have moved out of the va because we know that you don't have -- you don't count them when they two to tgo court. is that true? >> congress -- or chairman, we have three different processes. >> no, ma'am, yes, or no. when it goes to the veteran court of appeals -- >> the veteran court appeals is not counted in any va metric.

it's not a va organization. >> well, but understand there are still veterans -- >> absolutely. wholly agree with you on that. >> so it is true to tale the american people that the backlog that veterans are now experiencing is still there. >> congressman -- chairman -- i'm sorry, it's late and i'm getting flustered with my words. forgive me, please. chairman, the backlog is of rating claims. that's been the commitment from the beginning. >> i got that. >> that group is -- >> ma'am, will you please admit, though, that there are still veterans waiting for their disability claims because they have gone to the court? >> i will admit, chairman, that there are veterans waiting on particular decisions on an initial claim, which we are paying, 72% of everybody in the appeals process is already getting resources from va for any number of medical issues they have claimed. >> i apologize, member.

i thought that would be an easy yes or no answer, but obviously it wasn't. i would ask unanimous consent that all members would have five legislative days with which to previ revisz a revise and, tend their remarks. this hearing's adjourned.

tonight at the united nations the security council met on the downing of malaysian airliner over ukraine yesterday, and here are some of the remarks by the russian ambassador. vitaly churkin. >> translator: thank you. first, we'd like to express our heartfelt condolences to the family and friends of the passengers and members, the crew members of the malaysian flight which crashed, as well as governments of those countries whose citizens were on the list of victims of this tragedy. there's a need for impartial, open investigation of what happened.

pressure shouldn't be brought to bear on this investigation trying to prejudge its outcome with broad statements and insinuations that are unjustified. in such a difficult situation, we think it would be right to create an international commission. mr. president, for any normal person, i assure first and foremost the question will arise, why did the ukrainian aviation dispatchers send a passenger flight to an area of military clashes, an area which was being used for carrying out strikes against civilians among others, and where there were anti-aircraft systems working? ensuring the security and effective use of civilian aviation in an airspace of a state is responsibility of that state in line with international standards on the territory where the flight is being carried out, the state must provide aviation

information necessary for ensuring the security of aviation. international law plans for the possibility of a timely closure by the state of areas that are difficult or dangerous for flights. it would seem that there would need to be investigation not only of the disaster but also extent to which the ukrainian aviation authorities carried out their obligations when necessary and did everything necessary so as to ensure that the military campaign of kiev would prevent disasters from occurring. today, kiev declared a full closure of the airspace, conducting of the so-called anti-terrorist operation. why couldn't this have been done earlier? not waiting for hundreds of victims. sir, during our last meeting on ukraine, some western colleague

s -- restraint of the kiev authority's use of force. well, here's that restraint now. during donetsk and luhansk, there's been storming of aviation artillery tanks as well as fire and strikes that are indiscriminate in nature. the punitive operation is increasingly full-scale in terms of disaster, structures and infrastructure. there have been dozens of civilians killed as well as transport systems destroyed and community targets and medical centers. according to the data, there are h 4 million to 5 million people in ukraine area clashes but no evacuation of civilians from these areas by kiev. people have to leave the areas

of military clashes by themselves, risking their life. there are many reports that people fleeing war, in particular seeking refuge in russia, are intentionally targeted by the armed forces. it's time russia has posted more than 110,000 refugees from eastern ukraine, and the number rises with every day. this data is confirmed by the unchr. in this regard, in six regions of russia, the artillery and mortar shelling by the ukrainian armed forces into russia has become regular. the targets are cross border. there are killed and wounded amongst our civilians. we are seeing these provocations as aggressive acts from

ukraine's side with respect to the sovereign russian territory and citizens of the russian federation. we place all blame on the kiev powers of government and call for the ukrainian side to take decisive measures to stem such incidents in the future. sir, we many times warned about the danger of a forceful solution to the crisis in ukraine and called for inclusive dialogue, specifically respectful, between all political forces, kiev, and the regions. however, at a cross roads moment, kiev chose wrong path and their western colleagues -- i'm talking about the u.s. here. they actually pushed them to escalate the crisis. they are trying to lay the blame for the catastrophe caused by this path on russia.

s we're asking for your comments on the investigation into the shoot-down of a malaysian airliner in ukraine. you can reach us through twitter at the #cspan or on our facebook page. facebook comments from some of you, patricia writes, "malaysia has a lot to answer for. they were flying over a war zone, even though all planes had been warned off." eleanor says, "no passenger jet should ever be shot out of the sky for any reason. they are not at war. this was a total tragedy, and it should never have happened. can ". 40 years ago the watergate scandal led to the only resignation of an american president. throughout this month and early august, american history tv revisits 1974 and the final weeks of the nixon administration. this weekend, opening statements from the house judiciary committee as members consider articles of impeachment against president nixon. >> selection of the president

that occupied a very unique position within our political system. it's the one act in which the entire country participates and the result is binding upon all of the states for four years. the outcome is accepted, thing a pont of that office stands as a symbol of our national unity and commitment. so if the judgment of the people is to be reversed, the majority will it to be undone, that symbol is to be replaced through the action of the elected representatives, then it must be for substantial and not trivial, supported by fact and not by surmise. >> watergate 40 years later. sunday night at 8:00 eastern on america history tv on c-span3. next, banking regulation and how experiences from the past will impact the future of u.s. and global banking systems. former federal deposit insurance corporation chairman sheila bair

and other financial regulatory experts take part on the panel. the 150th anniversary. that office and boston university host the event. >> we welcome our first panel. i'd like to introduce you to suzanne duncan, the moderator of this panel. suzanne is the head of global research at state street bank, and she's the author of scores of white papers and manuscripts, particularly in the area of investment management. you will see her commentary on almost every major media outlet throughout the globe. but the thing that we're most proud of is that she is a member of the board of advisers of our center for finance law and

policy. suzanne will introduce sheila bair, jerry caragan, and ray nadder. >> excellent. well, thank you very much, khan. thanks for the opportunity. i'm honored to be moderating a panel that really needs no introduction. we have with us today jerry coragan who is the chairman of goldman sachs bank usa and the former president of the federal reserve bank of new york and the federal reserve bank of minneapolis. we also have sheila bair who is the former chairman of the fdic and currently serves as a senior adviser to pew charitable trust. and finally, we have ray nadder who is a partner at his law firm, barnett, sivon & nadder and formerly served as deputy chief counsel of the occ. i'd like to kick off the discussion by asking each of our panelists to provide ten minutes. that is a very brief amount of time. ten minutes for opening remarks then the remainder will be

devoted to a discussion followed by a few questions from our audience. so the backdrop for this panel is the seminole paper that jerry coragan penned in 1982 titled "are banks special?" it would make sense to kick off with you, and we welcome your views. >> thank you very much. >> thank you all your joining us today. have a very full and somewhat provocative agenda over the course of the day, so i will deviate from my usual pattern. i'll try not to be provocative. but i probably will not succeed. first of all, let me say that i have made copies of the full text, being specially available somewhere out here this place, and i also made available a follow-up paper that i wrote in

2010, i think it was, for gary stern who proceeded me. asked me to write a sequel in terms of how does the world work now compared to when i wrote the original piece in 1981, '82. i think that i can summarize in maybe a minute and a half what the central philosophy of our bank special essay was. and what it basically came down to was first of all trying to come up with a really coherent and tight definition of banking. and i deliberate ly did that myself without any help from anybody but myself. and essentially the concept, of

course, was straightforward in that it started out with the proposition that that banks as part of their larger role of saving and devoting those savings to the most efficient possible uses was directly tied to the proposition of a very tight, narrow definition of deposit taking. and what that implied in terms of the lending side and the investing side of banking institutions. it seemed to me then, and it still seems to me to be the case now, that if you follow the suggestions that were made in that context in terms of what banks were and then why they were special, it led me to the

conclusion that banks, because of those special functions, should be and largely are unique in the sense that they are subjected to the so-called federal safety net, deposit insurance supervisory provisions and, very importantly, access to liquidity and payment facilities of the central bank. one of the things that irritates me still to this day is people still pay very little attention to the importance of the payment facilities of the central bank, not just in the united states but all over the world. and that, that was kind of the hypothesis. and then i set out to try to put humpty dumpty together. and i quickly came to the

conclusion that getting the definitions and the philosophy approximately right gave rise to another whole series of questions in terms of, you know, what power should banking organizations have, how much emphasis should we put on subsidiaries of banks as opposed to subsidiaries of bank holding companies? and that list goes on. i'm not going to go into any detail. it ended up that when the thing was put together i felt pretty good about it at the time. but i have to admit that quickly after the first version of the essay was put together, the banks system went through a pretty rough patch in the 1980s.

the fact of the matter is, starting with the failure of continental illinois, the thrift crisis, the southwest banks crisis, the new england banking crisis. this was not a good time and i began to ask myself the question, what did i miss? because certainly the experience in the '80s i thought was pretty lousy. a few of you may remember, john reid probably is someone who remembers quite well, that when we got to 1980, '81, '82, we came pretty close to a really serious situation that involved not just banks but insurance companies, investment banks. this was, turned out to be, too close to call. one of the things, one of the doctrines that i had left out of

the original essay is a doctrine that i think still is important today, maybe more important, is the so-called doctrine of prompt corrective action. getting ahead of problems when they begin to emerge as opposed to wait until it's too late. and i began to feel a little bit better that we did a pretty good job of dealing with that situation. i was surprised, as we went along, that a lot of people, were still reading that essay. as a matter of fact, they're still reading it to this day, which is really remarkable. so what i tried to do, which i will get to very quickly here, is to revisit the question over the past three or four weeks.

our banks, as i suggested, 30 years ago still special -- or have events simply outpace this. and if you look at the period of the last decade or so, clearly between legislative changes to say nothing of the financial crisis, itself, at first blush i think the case could be made that banks, being special, had run its course. that so much had changed and the changes were so radical in many respects that specialness of banks, as i said, has run its course. the more i thought about that, the more i came, believe it or not, to the opposite conclusion

that, indeed, i could make a case at the specialness of banks today is more important, not less important, when i wrote that first essay in 1981, '82. you know, made many sad, made me glad, i'm not sure. but i've decided it's time now to write the sequel again, to revisit the thought process and the principles that were tied up in the 1982 essay. i'm not sure how long that will take. but it's going to be very difficult because while i think the principles are still essentially right, i also know that the experience of the last 30 years with particular emphasis on the last ten years is going to be extremely

difficult to rationalize in the current setting and looking to the future of why i believe that banks still are special. the challenges that lie ahead for the banking industry and for the financial industry more generally are going to be a major subject of our discussion throughout the day today. and i look forward to listening and learning to what people have to say about that. but the bottom line of my conclusion for the day, that in my 38 seconds left to finish, is i for one still very much believe that banks are special. i think the functions that they perform and the context of the 1982 principles are still essentially right. but the world has changed

radically. and how you square the circle with 30-year-old principles and contemporary realities is not going to be easy. so thank you very much for your patience. >> thank you were gerry. exactly on time. sheila, let's now hear your perspectives. >> so i would agree that the banks are still special i think for all of the reasons that gerry articulated in his landmark paper. the three functions that he identified in that paper were transition accounts, backup of liquidity, as well as the transmission felt for monetary policy. the first two clearly are the most important to an effectively functioning economy. and with transaction accounts in particular, both households and businesses need to know they have a safe place where they can

keep money that needs to be ready available, that will have stable value, that will be there when they need it, and banks are uniquely equipped to provide that, but we learned through many hard lessons that government intervention is necessary to provide that stability in the form of central bank lending, as well as fdic insurance. so, and with that, those government supports comes moral hazards. so you need overly provincial regulation as well. so that is the basic framework. i think it is highly relevant. i think the problem is we've deviated, we started letting entities that were not banks to the safety net and things like capital requirements to perform banking functions. the 2008 crisis, i think, has been rightly called a run on the shadow sector. that is what is going on. but we really don't have clarity of purpose in moving forward to try to define those functions that are essential to the economy and need to a part of the safety net from those and

make sure that those entities are regulated appropriately with others who want in good times to provide those services. and of course in good times anything works. so we have this medal now. i think money market fund reform is a prime example of where the cleanest solution to that, in my view, is they're not a bank, they're mutual fund and should act like a mutual fund and have a floating map the way other mutual funds do. but there's tremendous resistance. it proved itself to be unstable during the crisis. but there's a tremendous resistance to making that kind of significant change. and so we have a muddle. i think we're going to end up with a muddle if published reports are right, with some tepid reforms, perhaps inluting, you know, borrowing mutual fund, money market fund investors from getting their money or having to pay more. you know, that's an easy way to stop runs, but i don't think that's helpful to investors and

that could be disruptive to the payment system in a crisis. there are also other areas that are not traditional banking functions that are in the safety net like clearinghouses. i must say, i don't get that. dodd/frank opened for the first time allowed clearinghouses to be able to access the fed's lending facilities but did not provide the same kind of regulation the banks get. and the oversight continues with s.e.c. and cftc which are great agencies but woefully unfunded. that's why we're trying to push for derivatives into centralized clearing because they work pretty well, but with this new source of moral hazards and unfunded, underfunded regulators, i fear where that may take us. the second function, backup providers of liquidity, the banking system ended up being a disrupter of liquidity, not a provider during the crisis. i think that was very unfortunate. and the reason that occurred was

because we had too many banks as well as shadow banks relying on short-term funding, not traditional more stable sources of funding. they went to highly short-term funding then they used that to fund very risky opaque investments that were hard for investors to value and understand their solvency and they had very thin capital levels as well, so they ended up pulling back. that's why we had the recession. they withdrew liquidity as opposed to performing their function of providing that liquidity in times of economic stress. so regular lateers i think recognize this and have been moving forward with tougher requirements. there's still so much work. courageously they've proposed a tougher leverage ratio. i hope we'll see that finalized soon. but in 2010 in the basil committee we agreed to capital surcharges for the largest systemic institutions. that hasn't even been proposed yet. most of the studies i've seen, most of the banks have increased

their capital level through, say, 1% or 2%. a lot of it was through mergers. i know people disagree with me. and i think that ask really this key to making sure that they are not liquidity drupters when the next downturn comes. but the focus has been more on requiring banks to hold the liquid assets on their balance sheets as opposed to getting significantly higher capital levels. and i think that approach, the emphasis on that approach troubles me for a couple of reasons. one is you obviously advantage banks with large trading operations as opposed to loans. which are not liquid. that's counterintuitive to me, financial institutions, big trading operations i was seeing that were most likely to get in trouble and most in need of bailout assistance. but you also, i think, regulators are making assumptions that these assets are liquid when i don't think they are liquid. they're putting significant hair

cuts on them. will they be able to sell the assets in a crisis? do they have enough capital to absorb the losses? that's just not clear to me. and no amount of so-called liquid assets on their balance sheets is going to staunch a run if the market views them as insolvent. getting the capital levels up is really important and more transparency as to what's on their balance sheet as well so investors don't panic. they can see better what the heck they've got on their books and have a better sense of what the values are. but we didn't have that kind of transparency during the crisis. it was the same for regulated bank holding companies like citi. to make sure that the banks will be providers of liquidity, not disrupters is extremely important. finally, a monetary policy, i would defer to gerry and others who are much more knowledgeable on this than i, but it seems to me banks have become less relevant as a transmission belt for monetary policy, direct market interventions have really become the tool of choice for

the fed. whether that's a good idea or bad idea, i've had my concerns. i've expressed them before. i don't need to go through that again. i do think that is a significant switch in how monetary policy is perfo performed, and, again, history will tell whether this is the right move or not. i've certainly had my own concerns. i would say in conclusion that i do think banks are special but i think the answer is to recognize that the backup providers of liquidity in times of economic and market stress, absolutely need to have a reliable payments system. those are really the core functions that need to be, and a safety net. the rest of it i don't think does. and if you give them the safety net access, especially if you give it to them without, you know, the corresponding increased regulation and capital requirements, we're asking for trouble. you know, nigh view is put the bailout genie back in the bottle and don't ratify bailouts as the choice going forward.

but i'm not sure i see the clarity of purpose in the preforms going on now, especially with clearinghouses. that's troubling and something people who care about a safe stable banking system should also be worried about. thank you. >> put the bailout genie back in the bottle. that's a good one. last but not at least. ray, we welcome your views on a related theme. dodd/frank. >> thank you very much. excuse me. the subjects that are being discussed are much broader than preemption, and perhaps more interesting. i will try and limit my remarks so we can get on to the discussion of these broader policy issues which are fascinating and i think make for lively discussion. let me begin by saying i worked at the occ for ten years and i'm very proud of the time i spent at that agency and i'm very proud of the occ.

and the work done by controllers hawke, ludwig, dugan and by acting controller walsh, were first rate. they were terrific controllers. they made wonderful policy decisions and they certainly contributed to the resolution of the problem when the financial crisis hit. and in that regard i also want to compliment sheila and tim geithner and secretary polson and the others who i think were extremely courageous, sometimes taking actions that were needed when, to be diplomat, the statutory authority may not have been entirely clear, but it stepped up to the plate and did things that took quite a bit of courage to do. and i think we all owe a debt of gratitude to the leadership we had, both in the administration and in the regulatory agencies.

one of the concerns or criticisms i would make of the immediately following the crisis was the lack of attempts to educate the american public about what exactly was happening, what caused it, and why we needed to take extraordinary steps. as a result, i think there's a lot of popular misunderstanding about the function of the banking system, the role of the banking system, and why allowing the banking system to collapse would have been a catastrophe for not only the united states, but the whole world. and that type of educational effort should be made, was not made as well as it could have been made. unless it is made, i'm afraid it could have negative implications for policy decisions going forward. now, i will speak briefly about preemption because this is an

example of how sometimes the popular beliefs and understanding about the causes of the financial collapse do not line up with the facts. and that, speaking more broadly, we really don't have all of the facts. we don't have the empirical studies. we don't have the research done. a lot of the decisions that are being made are based on common understanding or misunderstanding about causes. and therefore without the actual information available -- it may take a while to have the studies done. they're starting to come out. there was a good study recently by the federal reserve bank of boston, which i highly recommend. chris cook was the primary author of that. there's a good paper coming out

of nyu by larry white. and so the literature that is actually coming out now often disagrees with the perceptions that we had in 2008 and 2009. so preemption might be a good way of illustrating that because there was a lot of concern and the conventional wisdom was preemption was directly related to the housing crisis, that national bank preemption allowed unscrupulous loans to be made. the facts are, first of all, the occ took the lead, the first agency going back to controller hawke in the year 2000 when he began luring them to watch out for standards, to tighten up on

the practices, to look for equity stripping, to look for loans being made that were not in the best interest of consumers. that went forward in 2003, 2004 by regulation. the occ said that you, national banks, cannot make a loan based on the asset value of the collateral. it would have to be making loans, consumer loans based on an analysis of the ability of the borrower to repay. then when you look at the data, the data shows that the overwhelming majority, just about all of the loans that are consider predatory are made outside of the national banking system and of the loans that are considered subprime, national banks have a very low percentage of those loans. some reports 15% of the subprime loans were originated in national banks, and those loans performed better and were less costly than subprime loans originated by others.

now, i think the proof of the effectiveness of occ supervision -- and i want to add, the other banking regulators took other steps. so the fdic and the fed certainly had similar regulations in place. so when you have -- if you look at bank holding companies that were originating subprime loans, they were not being originated in the depository institution. prime example might be countrywide, the largest originator of subprime loans had the national bank and later thrift, the loans were being originated in a nonbank, state regulated affiliated holding company level. now, i'm not criticizing my good friends in the state banking system because these were not banks. they were being state regulated. they were, at the time, there was very little authority of the

state banking regulators to regulate these activities. now there is a lot of authority, and we'll see improvements. but at the time loans were being originated, it was being originated in state institutions that had very little regulatory authority. now, why is it important to have preemption? we've heard of the controller state national standards, they're more effective, less costly, they're beneficial. but there's also an important factor involving safety and soundness. the individual states in the name of consumer protection can take actions which are contrary to safe and sound operation of depository institutions. a good example was in the early '90s when interest rates, as you recall, were 13%, 14% for home mortgage. you had states which prohibited

the enforcement of clauses saying that a mortgage is due and payable when the home is sold. so depository institutions, primarily thrift institutions had 30-year mortgages on their books thinking they would have an average life of seven years, which is statistically how often a home would turn over, funded by short term deposits. when you prohibited those loans in the name of consumer protection from being called, when the house was sold, you transformed those loans into 30-year low yielding assets being funded by high cost deposits, hundreds of millions, which now would be billions of losses were caused by that. these are just one example i have. i can certainly give you many

examples where you've got state laws designed to protect particular consumers and particular states without the strong ability to have national laws that seemed to hurt one group of consumers but actually are necessary to protect national banks and national banking system. in one one minute that's left, i would conclude by saying, consumer protection is important. we now have is a cfpb. it's necessary. there certainly were preemption rules which people can disagree with. but the standards and the ability to preempt state law is critical to the national banking act and important to safe and sound operation of depository resolutions.

>> you've listened to each other's remarks. what did you agree with and what did you disagree with. ray, i'll put you on the spot to answer that one first. >> well, i'll be glad to take a stab at that. with respect to gerry's remarks, i agreed with very much almost everything he said. i think banks are special. i think they serve a unique function which is no other financial intermediary can provide some of the services that banks provide, including transferring long-term assets into short-term viabilities, which is critical to our system. the one point, and it was really sort of an aside which i would disagree with was his reference to the benefits of prompt corrective action. i think corrective action is certainly a worthwhile goal but i don't think it's a realistic provision. when i worked on the senate banking committee, in a way it was criticizing something i was

partially an author of. the prompt corrective action requir requir requires acquiring a bank when its capital is 2%. when a bank fails, somewhere between 20%, more closely, 40% of its asset value is wiped out by seizing that institution. if you were to seize institutions when they had 2% capital, the losses would be put on the fdic system if they could stand it. and we've seen in the crisis institutions that if were marked to market probably would not have met the 2% test. but they were not closed, they were able to be revived at a tremendous savings to the american economy. so the theory of prompt corrective action is great. i don't think it works in practice. with respect to sheila, i agreed with much of what she said and i

respect her views tremendously. i agree that it was a bank, it was a run on the banks. i disagree with her solution and i disagree with the philosophy that to make banks a source of liquidity we have to make them hold liquid assets. in 1913 -- prior to 1913 there was a run on the banking system. we did not have a federal reserve. we had a bank called jp morgan in new york city which got together the other money-centered banks and said we need to provide liquidity to the banks in this country to prevent a run, and they provided liqu liquidity. out of that experience we developed the federal reserve system. one of the primary purposes of the federal reserve system is to provide liquidity when you've

got panic in the marketplace. when assets are good but you have a panic causing a run, the federal reserve and the federal home loan bank system are there to provide liquidity. if you say that banks have to hold $2 trillion in government bonds in order to provide the liquidity in case of an emergency, you are taking that fund out of the economy. and since there's leverage, that $2 trillion can be $5 trillion, $6 trillion of lending, and you're not readily helping safety and soundness. because the way the proposal is, you are going to be encouraging banks to holding long-term treasury bonds. and if there's a liquidity crisis and interest rates are up, those bonds are going to have to take a big hair cut. and you're encouraging the banks to acquire foreign debt.

under the proposal, italian debt and -- spanish debt, portuguese debt and french debt count 100% >> so a rational institution is going to say rather than holding short-term debt, i'm going to go along with treasuries and i'm going to mix it in with foreign debt and, therefore, you're creating the next crisis, in my view. >> let me just make a few comments on raised comments. maybe you misunderstood what i said on liquidity rules.

you do that with higher capital requirements. i think you need more transparency, too. some investors can get a better sense of whether the financial institution is vol ved on greater transparency on this large, connell plex financial institutions. and then reducing on making 2 reliance for the short term debt. so, on that one, i'm not sure we do disagree. pca, it's a perfect no. i will tell you that the former chair that was responsible for solving these failed institutions, having some type of statutorily prescribed process to reach the trigger point was extremely awful to us.

it is never happy, a thing, to close a bank. there's a lot of pressure from politicians, from stake holders, you know, sometimes from regulators. they don't want to own up to the fact. i thought it was helpful. i don't think it's quite as high, but that's the problem. by definition, you're in times of market distress so you're not going to get very good pricing. i think something that could make pca work bether is a better methodologies around reserving and determining when you hit that 2% trigger point. as we're saying, perhaps months before, we thought we got that 2%, that their capital had declined to that point. there are ways to improve pca,

but i do think that you need some type of projected method, especially the closing that the fcc can point to and say sorry, our hands are tied. the longer you wait and that was certainly the lesson in the snl crisis. like bankers say, your first loss is your best loss. on preemption, we're just going to disagree on that. i think in the year of consumer protection, it's just a matter of policy is ill advised. i don't think it e's i do think you're right, the occ did have an ability to pay the supervisory standard. it wasn't clear how they applied to the successful rate mortgages with other regulators about whether you underwrited it. it's the ability to pay the first two or three years of whether we're talking about the

ability to repay throughout the life of the loan or at least several years ahead and through the reset period. also, national banks were funding these loans. i think those standards applied to mortgage originations, but not to the loans and the national banks funding. i think that was another whole in the approach we were trying to take. there was some really important stuff going on in the united states. there are market factors that can temper the state's ability to go too far. and they tried to calibrate it right.

i don't agree with your decision. i think the fcc did that. i think it hurt its reputation. it did result in many states consumers not having the protections they should have had. we'll just have to agree to disagree on that. >> what are your thoughts on sheila's comments she raised? >> i have two things i want to comment on briefly. first, i'm not prepared to accept the suggestion that a preemptive action can't work. in fact, i would argue that based on the experience of 1980 to 1982, it worked quite well. and, indeed, because it were quite well, we were able to get through an extraordinary difficult situation it involved

banks and insurance companies domestically and internationally. that was not an accident that we got through that without spending one nickel of taxpayer money. that's what it's all about. and if you contrast that experience in the fall of 2007 where leaders were basically saying don't worry, the mortgage thing is man ajtble well, that was obviously quite wrong, to put it mildly. . if they really are committed to the proposition that we can fix the fail through resolution authority and other related

techniques, by definition, resolution authority, orderly wind down of seriously troubled financial institutions seems to be bound together with a framework of a much more corrective action. i understand some of the nuances that under referring to. and they're valid. i mean, to make it work is not going to be easy. but e eve got to get there. the second thing, sheila, i'd like to clarify, if i can, this liquidity thing. second of all, i believe that on

a very, very short list of enhancements to the regulatory agenda post-crisis that one of the most important steps in that process has been putting into place through the basil committee side-by-side standards of capital adequacy and liquidity of adequacy. and these two things, capital and liquidity, these are a single discipline. these are not opposite sides of the same coin. that's a unified approach. and when we think of that, we

have to also keep in mind that the definitions of liquidity that are not being used is unencumbered liquidity. the framework of this single discipline is playing out, it is not unusual to find emerging situatio situations for the amount of unencumbered liability is not equal to the assets of liabilities of major banks, 17, 18% is no longer unusual. and, again, it's unencouple

beryled. so i think that your concern, zerks sheila, about other also peblsp the liquidity world remain important. i think we have made and are making a lot of progress there. that that single discipline of capital adequacy and liquidity adequacy, when we look back ten year s from now, unless i'm dea wrong, whi