they had the liquidity. they were able to buy up institutions like indy mac, washington mutual, lehman brothers, rather than the government having to wind them down. >> congressman, i think when we talk about liquidity in the markets, we're not talking about institutions that merge or don't buy other institutions or not. i think what we're talking about is is there a market for buying and selling bonds in a quick way with stable prices. so obviously the capital and the depth of the balance sheet of institutions will affect potentially both questions. but i think they are severable. let me make a couple of comments. one, i think that as we come out of the financial crisis there is undoubtedly going to be more volatility. i started testifying as treasury secretary concerned there was no volatility in the market, now

there's concern there is volatility in the market. it shouldn't be a surprise as we see a return to the more normal economy there's more volatility. i think that the institution themselves are stronger than they were going into the crisis. they have more of a capacity to come through a period of economic stress in a healthy way. and that's a good thing. i think in our fsoc report we look at the risk we see to the broad financial system. and we do include liquidity on the risk, but it's not the single factor that we're looking at. and i think it is also important to separate the different parts of the market because treasuries are very different from high risk bonds. >> yeah. let me ask you this other question. i don't have much time. but do you believe that there is any link between our anemic financial growth rate and the fact our institutions have to hold so much capital in reserve rather than putting that capital back into the economic system to good use?

>> congressman, i think that there is a lot of money that is on the balance sheet of businesses. they don't even need to borrow to get access to. and yet there's a more fundamental question is why are they not investigating more? i think it has to do with a sense of confidence that they're looking for. that the continued economic growth will be strong. >> but do you see a link? is there a causal -- >> i don't think there's a lack of access right now to capital that is the problem. i mean, i focused earlier on things like housing and small business because i think that's where the questions are real as to whether individuals or small businesses are having trouble accessing capital. large firms right now are not having trouble accessing capital. >> do you feel that these

companies should have to hold as much capital in reserve as they are? and is that helping or damaging the economy? >> i think that the fact that our banks now have the ability to see themselves through a difficult period makes our system safer and sounder. they did not have the capital, they had too much leverage. and we saw in the financial crisis what the result was. we can't go back there. >> all right. thank you, sir. >> time of the gentleman has expired. chair now recognizes the gentle lady from missouri, ms. wagner. >> thank you, mr. chairman. there seems to be so much interest in this issue of liquidity. so i just can't help myself. and perhaps i'll ask a question that will help put this to rest for all of us. in going back to your march 2015 testimony, secretary lew, on the issue of liquidity you said, and i quote, so i think that this is something that requires a lot of

analysis. we're doing it. and i'd be happy to share with you a more complete analysis when we complete it. now, this was march of 2015. i didn't get anything at 11:18 last night. what's the plan here? >> well, as i've indicated earlier, our hope is in the next few weeks that analysis of october 15th will be completed. and we look forward to sharing it with the committee. it's been a complicated analysis. it's required a number of agencies working with very different bodies of data. and i'm very anxious -- >> so within the next three weeks we will receive -- >> i can't say three weeks. over the summer is the schedule we're working on. i hope -- i've been pressing people very hard to finish it as soon as possible. and as soon as it's finished we'll share it. >> and you believe that that

will come this summer then? >> that's the schedule we're working on, yeah. >> and that should answer all of our questions about the importance of liquidity -- >> no. >> -- lack thereof? >> i wouldn't say any single analysis will answer all the questions. it will help us understand october 15th much better. and in the fsoc report we noted that there's a broad range of factors. and, you know, i must say i've taken a lot of questions today that want me to comment on regulation. in the fsoc report we added regulation in the list of things we need to look at. we're open to looking at all the causes. i identified the things i'm confident are things we need to be -- >> i've got several more questions here. we look forward to your report this summer. to date fsoc has designated four non-bank financial companies as systemically important financial institutions essentially signaling to market participants that the government considers them too big to fail. as a result richmond fed president lacquer stated that

shareholders and creditors of that firm can expect the government to shield them from losses during periods of distress. ultimately putding the taxpayer on the hook for a future potential bailout. for that reason i'm interested and i think others on this committee are also have mentioned this today, i'm interested in how these companies can ultimately de-risk and shed their designation status from fsoc and remove the implicit report carries with it. knowing is to reduce risk in the financial system. i think that you also would share that sentiment. i know that senator mark warner has told you before that there was never any intention of creating a hotel california, i believe were his words, with the designation process where you were able to check in any time you like -- or pardon me check out any time you'd like but never leave. secretary lew, in the absence of

any practical guidance from fsoc on how to exit sifi designation, is it possible for designated firms to know what they are supposed to do to reduce systemic risk? >> yes, congresswoman. i think that the process is clear that we review the designations annually. if the business of the designated company has changed and it no longer represents risk, they know what the risks are. we've identified the risks very clearly. and right now it's been in the news that ge capital has changed business plans for reasons that have nothing, i believe, to do with the sifi designation but will cause there to be a review. and we'll have to see whether that changes their character. so we're open to when firms change their structure. >> they specifically though know how they can reduce risk. you've given them guidance on this? how to change their business model, their structure?

>> they know what it is about their business that created the designation in the first place. they know what the transmission -- >> do they know from you specifically? >> there's a very long analysis that goes to the companies when they're designated that identifies for them the basis of determining the risk. if the basis then changes -- >> so you have a list? because i've got limited time here. a list of specific information on what firms can do to remove this designation? >> it's not a question of take steps a, b and c. it's a question of what are the risk factors -- >> so you don't have a list. >> the risk factors are quite clear. >> the risk factors are quite clear to whom? >> to the firms designated. >> have you provided them with those risk factors. >> it's in the analysis available to the public. >> the chair now recognizes the gentleman from california, mr. sherman.

>> thank you for holding these hearings, i hope we get the other members to also testify, it's simply, the sharm is a lofty position. if you were to interview the chairman of this question, i'm not sure you would get the views that reflect every member. i'm glad that secretary lieu is here, but i look forward to hearing from the others. you have filed reasons to dismiss prudential's lawsuit. this is a document filed on your behalf. you just put it on your website, because it's a public policy interest. redacting any proprietary information about the individual company. why would the reasons for -- arguing the dismissal of the lawsuit be under seal? >> congressman, obviously, it's a matter under investigation. i'm not going to comment on the substance of pending legislation.

we have tried to be as transparent as we can be. while protecting legitimate commercial information that we need to protect. >> i would hope that you would make that document available for members of this committee since it's a public policy document as much as anything. lehman brothers didn't go under because it had too many assets, it had too many liabilities. i'm confused as to how there's discussion of mutual funds being listed as sifis. if the market dropped by thousands of points, that's terrible for the economy. it's terrible for me because i have my individual account. why would an unaveraged mutual fund be slas phied with a sifi, knowing it has no liabilities? >> we have made the vumt that

the area we need to spend considerable time on is looking at the activities. and whether or not there's risk with those activities. z we haven't completed the review yet. >> are you looking at whether the asset management company would go bankrupt, whether the mutual fund would go bankrupt or whether the economy would suffer not because the sifi wasn't able to pay its liabilities, but rather because a big company was å>u$is or that in the stock market? >> ultimately, the questions of looking at financial stability involved looking at what the losses would be to creditors and associated businesses, not so

much an issue here, what the run risk would mean in terms of the potential in the markets. whether or not it locks up essential services. we are looking not just at firms, but activities to see whether -- >> identity could be designated as sifi, not because of their inability to pay their liabilities would cause a problem, but just because their activities cause a problem? >> no, the question is, are there activities within asset managers that if there were under a stress situation, a series of events -- these things don't happen in good situations, they happen when there's bad situations. are there activities that present the kinds of risks we need to be concerned about? >> i need to move on to another issue. >> we ask the question knowing

the answer could be yes or no. i don't sit here today with a firm view. >> we're, of course, faced with this trade deal. they're usually enforceable only at the executive branch of our government wants to take action. with regard to china currency manipulation. we pass a law requiring the executive branch to do things you explained to the committee the last time i asked you about it, the law is policy. it will not be followed. if the executive branch won't inforce u.s. laws because our trading partners would finds that offensive, it's difficult to see how any part of it would be enforceable. my time has expired.

>> the chair recognizes the gentleman from oklahoma. >> great to see you again. we work through the subcommittee chairman, the underclass man, didn't have a chance to ask you questions last time, that's appropriate, now you're back to the old guys on the back row. i share some of the concerns of my colleagues on both sides of the aisle. but there's a real problem with this liquidity issue in the financial services committee, and i find it seems very hard to argue this reduction has nothing to do with the cumulative impact of new rules and regulations of the capital requirements. while we continue to work to improve the safety and soundness, it's important we be ever mindful of unintendedly creating risk and harming the ability of end users to drive this economy and create growth.

i have a particular issue i'd like to focus on, and that's on the leverage ratio rule as it applies to the treatment of segregated margin. this is an issue that increases costs for end users and impacts their ability to hedge risks. congress required margin received from customers for clear derivatives belongs to the customers and should remain segregated from the banks affiliated on member's accounts. however, this margin is treated as something the bank can leverage and treats punitively by requiring higher capital requirements for clearing. if end users don't have the ability to hedge their risk, more risk is introduced into the system, customers pay more, it cannot growth is harm. it's an example of leverage ratio rule when applied inappropriately in my opinion. can you tell me why does the rule treat customers as

something they can hedge. >> the leverage rules apply to all assets, it even applies to treasuries and cash, it's a very increasing rule. i think it is reasonable to ask questions as to whether or not there are intended consequences. and certainly you distinguish it safe from the volker rule. the volker rule exempted treasuries, a lot of the questions i got earlier referred to the volker rule. i hope we agree it would seem to have the effect by requiring extra capital to cover these margin accounts that are segregated.

i hope you see where i'm coming from on that? >> yeah, look, i haven't focused on the margin issue, i have focused on the treasury and cash issue. you go back to the purpose of the leverage rule, it's a very solid objective, which is to make sure institutions don't get over extended. and i think that where the -- what the percentage is makes a big difference in terms of whether it's the binding constraint or not. >> segregating the money makes sense. i think we did a good job there. let me ask you this, then. if regulators have been focused on removing risk from the banking system, through the capital requirements, risk is going to exist somewhere within the system, if we remove it from the banking system, where does

it pop up next? >> if the banks can't play this role, somebody will. will somebody who played that role be more of a danger to the overall economy than the banks? >> i think it is an overstatements, the banks aren't playing that role. they're still doing their core business. even under the volker rule, they're not prohibited from market making and holding inventory for market making. you're asking a question that i'm asking as well. with the new -- the evolution of the markets, are there questions of financial stability that we need to ask that are different. you look at some of the newer players on the market, where the volume of trading is. i think it does raise questions, both about the plumbing of the system, but also, you know, about implications on liquidity. >> historically the banks in making these markets. it would seem to be a better perspective of evening things out.

the entities who are winding up taking their place, have made their money off volatility, if we take it away in the people who like to take the wave out, give it to people who make more -- >> i don't think one can overstate the tradition of the banks doing things in their economic interest to maintain markets. clearly having inventory had been real. i also think if you look at what the definition of liquidity is some -- it may not be reasonable to think that there should be no price fluctuation, even if there are dramatic things going on. >> the time of the gentleman has expired. the chair now recognizes the gentleman from missouri. >> thank you, mr. chairman secretary thank you for being here. we're moving toward the fifth anniversary of the pass around of dodd frank. many of us were here during

those turbulent and troublesome days. we know that great care was taken in the creation of this act. and we think that we made significant progress. and i think you apparently agree with us as well, that we have made tremendous progress. and regulators have moved to -- toward implementation. some of the rule making i agree with, some of it i, along with my colleagues have challenged. when you think about dodd frank as a whole. what do you think is the most significant thing left undone? what would you want to see right now completed so that we would have the full strength of dodd frank at work preventing another collapse? >> that's a very good question.

there's pieces that need to be completed, and that's not really what you're asking. you're asking, what is the area that we haven't addressed. i'd have to say gse reform is the area we haven't addressed. it would be a good thing if we would -- i'm not sitting here today optimistic that that he is going to happen legislatively, it's why we engage so much in the senate, in the bipartisan discussion to try to work through an approach to gse reform. you mentioned gse reform. there are a lot of courses. doing a great job of -- at least some of the work he's doing, some of the housing needs we have in the trust fund.

one of the things that i -- you may be able to help me with -- what do we do to enable private money to move back into the market. >> look, i think that there have been some small steps taken, but there needs to be an active effort to look at what can we do to have a more private active industry. most mortgages are backed by fha or gse. it's not a great place for the industry and the market to be. which is why i said gse reform, it's a path toward private active private marketplace. and. >> but you -- >> all right, sir. the experiments that have been successful, we see there are ideas there, that you can

insulate the public from the first risk and start to bring private money into the place. it can be through mortgage insurance and capital market products. more thought has to be put into that area to develop it further. >> you do believe there's an equal secondary market? >>. >> sorry. >> you do believe we need a secondary? >> yes, i think it would be good if there were more private nongovernmental -- >> so the gse's would be a

hybrid? >> yeah, or they would have competitors. >> i think there's a -- in this committee, there's some suggestion from time to time that the gse's are not even needed. one of the things i'm concerned about, when some prefer it be completely private, whether or not the private market, you believe the private market has an appetite to fully take over or in my -- i would re-enter the market. >> i think right now, the structure of our mortgage industry makes the continued operation of fanny and freddie necessary. the idea behind gse reform was to be able to chart a path where

there would be a different marketplace in the future. we live in the present. we live in a world with fla and fanny and freddie. >> the time of the gentleman has expired. >> thank you, mr. chairman, very much. and for the record, mr. secretary, one of my colleagues earlier asked if the gse's have repaid the money they have borrowed from the american taxpayer. the simple answer that my colleague tried to elicit was that payments they have made to the government now exceed the rescue funds they received. mr. secretary i think you agree here this is not the real answer, nor the real question. the real question is, have they repaid their debt to the american taxpayer? for that answer, i think we can go to the federal reserve bank of new york, that was asked that question. and they put it this way.

should these figures be interpreted to mean the treasury and taxpayers have been repaid by fannie mae and freddie mac. and the two firms should now pay dividends to the shareholder. no. taxpayers are entitled to a substantial risk premium, government support has lowered funding costs and boosted profits, the government has never collected the commitment fee that the government has owed from fanny and freddie. >> the false narrative that is perpetuated is that taxpayers have been repaid. it's time to end conserve it othership and return control to the shareholders. from your comment earlier, i assume you disagree with this g narrative, and agree with the conclusion of the fed, that failing to work to wind down the gse's and give space for private

capitol to come in would be a colossal missed opportunity to put u.s. residential mortgage finance on a more stable long term footing. >> congressman, i totally agree. and i was trying to indicate in my response earlier, the risk is being born by taxpayers on an on going basis. and the conservtorship is not over. i would only add one additional thing to what i said earlier, the damage done to our economy by the housing crisis, was far more than simple amount of money that was put into the gse's, and i think americans are still healing from the pain of that financial crisis. so i think that the right thing is to do gse reform and get on to a new restructured system, but it is not the right time to be talking about ending the conservatorship. >> i think on that gse reform concept. i'm endorsed reforms that would

increase private sector participation in the secondary housing market that would limit disruption to the housing market. if you look at the particulars, more risk sharing is something that can be done to create a lot of space here. a common securitization platform is something that works for the gse's and brings in private capital to use that platform. common mortgage backed security, would be a good start for congress to pass this year. >> i think the items you just mentioned are the kinds of things we've been talking about and thinking about. obviously there is a common security platform being built. it's something that could be expanded beyond the gse's and be available more broadly. the more we are able to lay a foundation that a private securitization market can could

be built on the better off we would be. >> if i have a minute here, i'm going to push -- last week the treasury department announces deliverables for the upcoming strategic and economic dialogue with china. one of the issues a few years back, ownership caps were raised from 33 to 44%. this is largely symbolic, it doesn't provide further benefit to firms operating in china. when chinese institutions invest in the u.s. they face no ownership cap, or activity restrictions. and this is just one of many impediments that our financial services firms face, when operating there. i wanted to raise with you that issue and also i raised with you earlier that on this technology restriction, we've got china agreeing to delay implementing a certain restriction on its draft anti-terror laws that would require foreign companies to hand over their encryption keys.

clearly our banks and financial services firms, technology firms cannot operate under those conditions in china. recently we were in shanghai and they were pushing that. it is still on third reading, the people's congress is adjourned until next year, but that still hangs out there, and so we need to have greater push back -- >> i have -- i agree with you totally, i have push back with china's most senior leaders on this issue, and have made it clear to them that it is a significant issue here, and it's something that in the context of both the leaders meeting, we need to see movement on. >> thank you, chairman. >> the time of the gentleman has expired. >> thank you so much for joining us today secretary leu. i can't resist asking questions about liquidity as well since that's come up several times.

i want to take a different approach. as opposed to the required capital standards. i was wondering, in your testimony, you mentioned that it's been a year now since we have floated institutional investors, and i was -- at least your executive summary was not very descriptive of how that's been working. i'm wondering if we have seen less use or about the same of assets which are typically a little more liquid than other investments in the money market mutual fund. >> congressman, first, the rules i don't believe are effective yet, they were put in final form, but with the future effective date. i think we've seen a continued reduction on short sale funding which is a good thing. we have large amounts of investment in money market funds. and we saw in the financial

crisis that there was run risk there, and the reason that the rules were put in place by the sec was to create a safer path forward. i certainly will keep an eye on that as it's implemented, we've made clear we have to keep attentive to whether or not they are sufficient or whether there's a need for additional policy. >> but it would not be a good thing if we were to close down -- or essentially shut down the money market? prevent those institutional investors from having the liquidity? that would be something you would be watching out for? >> right, the problem is, is that the connection between the money market funds and the rest of the financial system, what we saw during the final crisis was that the risk of money market investors, institutional investors leaving -- selling their position was creating the

risk that the overnight funding that the largest financial institutions relied on would evaporate. and that could have caused the entire implosion of major financial institutions. we're in a much better place, because there's less reliance on wholesale funding and we have rules in place to make it safer. >> you mentioned also that the threat of migration of servicing from banks to nonbanks, recently announced ail gore inch mick lending that goldman sachs wants to do. really demonstrate there's a change in the market structure, there's more risk taking incentives. i'm wondering in that context, whether or not -- how nonbank sifi's, do you think it's more important to focus on a few industries, fewer institution? or what do you see? do you see an expanded role in the fsoc given the change in the market structure?

>> i think we have tried to be very careful and analytic in the approach, and not to overreach and go into spaces that we don't need to be or belong in 37 the institutions that have been identified are market utilities that have cross cutting exposures. and the largest kinds of firms that are non bank firms, where the determination was made that the risk is there. it's not that we're looking to regulate more firms for the sake of regulating more firms. we're going to continue to go through the criteria and we're obviously getting to smaller firms as we get down the list. >> thank you, secretary leu. i was stunned at some of your comments to mr. cleever about

gse reform and also that negative equity has declined. homeowners are in a lurch after this recession. a lot of housing in my district deteriorating because you can't lend for needed improvements in the home basic things like roofs, plumbing and so on. i guess i just want to get your insight about the health of the homeowner in this environment. >> i would be happy to follow up, i don't have time. i have tried in a few instances to express the concern that credit worthy borrows should have access to the market. and there are a number of things we're looking at in that regard. >> the chair now recognizes the gentleman from florida, mr. pozzi. >> thank you, mr. chairman. mr. secretary, in october of 2013 the online publication

repeal factor.com, submitted a freedom of information request for documents concerning the intergovernmental agreements with the united kingdom, switzerland and canada. the department promptly acknowledged a request on october 24th, 2013 stated that expedited treatment has been approved. this is a letter from your agency.

however since then, there have been no responses from the department. despite repeated follow-up inquiries from the requester. on january 27th of this year, 15 months after the initial request, i sent you a letter asking for prompt action on the request, and to keep me informed on the response that would be fourth coming. despite additional inquiries, the only answer i received so far is, we're working on it. it's now been 20 months. almost two years since their simple initial request under the freedom of information act, and five months since my letter

inquiring about the status of that request. is this the treasury standard for expedited treatment? >> congressman, in general, our performance on foya is better than that. i'm not familiar with the specifics, i'm happy to look into it. >> you know, it's just hard to believe that there's some season the department is -- >> i'll have to look into the matter and get back to you. >> stonewalling that one. >> on another matter, i'd like

to bring your attention. the fiscal year 2012 financial services appropriations bill included report language directly to the secretary of treasury, to submit a report to congress, regarding the potential risk to the u.s. financial markets and economy posed by financial terrorism in economic warfare. i subsequently met with treasury assistant fitz pain in august of 2012 and was told the treasury would work on that. the report language also included in fiscal year 13 and 14 appropriation bills, in july of 2013, my staff sent nearly a half dozen e-mails to the appropriate treasury staffer for a status update. those e-mails went unanswered. finally, in fiscal year '15, that became public law. the actual bill language was included to the same effect. the secretary of the treasury, in consultation with the appropriate agencies, departments, bureaus and commissions that had expertise and complex financial -- house of representatives in the

senate, committees of financial service -- not later than 90 days after the date of enactment of this act on warfare and financial terrorism. congress has thought the issue was important enough that it has included language as far back as fiscal year 2012. the department isn't giving this matter the same attention. i was hoping you could provide us some information about your progress on the report. as the secretary provided this report to the relevant committees in congress, given the department has had knowledge of this issue for over three years, i would have thought the department would have prepared to meet that 90 day threshold set by congress. when can we expect the report? >> i'll have to check on the report, the economic of economic warfare and terrorism, there's no agency in any government of the world that does a bit more effective job of treasury. i'm happy to defend the record we have here, we really are the global leaders making progress in this area. i think it's an area of great bipartisan consensus. >> just doing the report as the

law requires would be a great way to boast or toast what you're doing, if you would just -- >> i will check on the report. it takes a great deal of my attention and the world's attention. i just -- the report i'll have to check on. >> so will you have someone get to me in the next week on these issues? >> we don't have to wait another two years for that one? and let me know the stats of this report within the next two weeks? would that be too much? >> we'll get back to you. >> i heard you say yes a little while ago to somebody on the other side, i was hoping we could get the word yes twice in three hours, can we expect that maybe in a week? >> i don't know the status of the issues are, we'll get back to you promptly. >> time of the gentleman has expired.

the chair now recognizes gentleman from texas. mr. green, ranking member of our oversight investigative subcommittee. >> thank you, mr. chairman. i thank the ranking member, i thank the witness for appearing today. mr. secretary in your annual report you cite some concerns about cyber security. ironically yesterday the subcommittee on oversight and investigations held a hearing on the cyber security styled, global perspective on cyber threats. one of the things that we took away, or i did, from this hearing is that there appears to be clear and convincing evidence that cyber threats and attacks ñúqg pose a clear and present danger to our financial system. and i'm pleased to see that you have addressed this, and you need additional assistance

pursuant to what i'm reading. you indicate that you would like for congress to provide the financial regulators with the authority to oversea third party vendors. and i believe i have some sense of why, but i think that the record should reflect your thoughts on why this is so important. >> congressman, this issue of cyber security is it obviously a new issue, it's gone right to the top of the worry list, and priority list that we have. as i talk to ceo's, it's the top issue that many of them have. the challenges are many. it is hard to protect a system, it's hard to have individuals in the system. operate in a way that makes it as safe as possible. i think the financial sector is at the lead, and we have a lot of work to do in the financial sector. there's many other areas where the exposure is even greater and some of them overlap i mentioned earlier, if your power and

phones are not there, it's difficult to run a financial institution. it's very much in the mind of the regulators and the industry. the more tools we have to work together the more likely we are to be successful. a threat that shows up in one place. if you know about it, you can look for it, as opposed to being blindsided by it. we're making progress, we're -- there is much better sharing of language than there was. but i don't think we are where we need to go the passage of legislation to enable the greater sharing of information would be very helpful. >> i want to concur with you, the witnesses who appeared yesterday all indicated that you are at the top of the game, as it were. that you're doing better than most. >> i don't take much comfort in that, though. >> they didn't say there was absolute security. and i understand this, my concerns have to do with the

need for authority. what would you have us do immediately to give you this authority. it's in broad terms here, are there specifics you can call to our attention? >> the cyber security legislation that's pending would take down some of the barriers for sharing of information and collaboration in the private sector. getting that in place, would be quite helpful. we're doing things now on a voluntary basis where there's risks the firms have to balance, which would be very much at ease if the legislation were to pass. we have executive orders. i would be happy to follow up with you on more specific issues in the financial space, that could be helpful. >> thank you. and finally, this -- you have indicated that you believe that you should be allowed to coordinate a national plan as it were, to deal with these responses to cyber threats. and you'd like to coordinate this with law enforcement, homeland security, as well as regulators.

how far along we with this concept of your having this opportunity to coordinate a national plan. >> well, we're obviously within the federal government, we collaborate quite a lot, dhs plays the lead on cyber security, i'll tell you, in the fine space, we have a regular meeting by -- amongst the agencies that work most closely together, and we're looking at what we can do to be more prepared and obviously that gives us the ability to reach out more effectively and develop a plan. >> thank you for your service, and i yield back. >> time of the gentleman has expired. the chair now recognizes the

gentleman from south carolina, mr. mull veinny. >> thank you. mr. leu in october, you went to the senate finance committee and had a hearing concerning prioritization of payments, you told them at the time that the systems are automated to pay, because for 224 years, policy of congress has been to pay our bills. you went on to say it wouldn't be easy to pay some things and not others, in may of 2014, you gave this chairman a letter saying something slightly different, you said, if the debt limit were not raised and assuming treasury had sufficient cash on hand, the systems would be technologically capable of making principle and interest payments while the treasury was not making other payments, end quote. when did you come to learn that new york fed was technologically capable of making payments set forth in your letter to the chairman of may 2014. >> congressman, i don't remember the exact date. i can tell you the statement i made at the senate in october 2013 are entirely consistent. what i said in october 2013 is that we make tens of millions of payments and we don't have the

capacity to pick and choose among all of them, i didn't address the question of, is it a technical capacity to pay principle and interest. i did indicate that we do have the technical capacity, it would be terrible thing to do, you would be defaulting on something else, you would be defaulting on a medicare payment or on a veteran's payment or something else. the only solution is to raise the debt limit and not put any president in the decision where they have to make the decision do they pay one thing, but not the other. >> that was a really good answer the first three times i asked it, i asked you that same question, sir, in may of 2014, and you told me you would have to check. when you came back in march of 2015, you told me you had checked but you had forgotten it, and you didn't remember it on that day, but you would look into it again. i sent you a set of written

questions and asked you the exact same question. i got two pages with no answer in it. i'm not going to ask you any more questions, mr. leu. i feel like i've given you enough opportunities to answer that question. when did you know? it's an answer you should know. if you don't know, you should be able to go back and look it up. in fact one time you told me you did go back and look it up, and you knew it, but forgot it before you got here. mr. lynch asked you whether you thought your answers to this committee were disdainful. you said, no, you thought they were rev ran the. i kept waiting for the laughter after that. i've asked you some really serious questions, we've asked you some really serious questions. the other questions i asked you, not the first time, this is not an empty question, mr. leu. we try to make you look bad. we are interested in answering the questions because of the market turmoil always raises its

head as we come up against the debt ceiling. in addition to the question i asked you about when you knew, i also asked you, i said in the event we reached the debt limit and exhaust extraordinary measures, can the treasury principal and interest payments on the debt? you've had, by the way, six months to answer these questions. i also would ask you, we commit, in the event we reach the debt limit and exhaust extraordinary measures, the treasury will continue to make principle and interest payments on the debt. you didn't answer that either. what are we to imply nor your refusal for a year and a half to these questions? >> well -- >> no, i let you go until you stopped. in fact i was even go to go until i had a minute and a half left. you had your chance, my turn. we are interested in asking these questions, because we are concerned about what happens in the markets.

we would hope that the secretary of the treasury of the united states would be just as concerned. your name is on the money mr. leu. we have given you a chance to calm the markets. you've refused to do so. we've given you a chance to give this committee an answer, you refuse to do so. number one, you don't want us to know the information we ask for because it's harmful to you or the administration. and the other implication, is that the answers regarding payments, are not being given to us because you want the chaos. you think it's preferable to you and your administration, this administration to have the chaos, it will help you achieve politically what you want to achieve. i'm done asking, mr. leu. when the chaos comes, it will not be on the shoulders of the people on this committee, it will be on you. you've had a chance to calm the markets and refuse to do so. >> the time of the gentleman has expired. the chair now recognizes the

gentleman from minnesota, mr. ellison. >> i'd like to thank the chair and the ranking member for the time. and i'd actually like to thank you, mr. secretary for answering some of the written questions i'd give you. i know it's not easy doing that. you did give us some answers and they were answers that we can use, i want to extend my thanks and appreciation for that. you're going to get a question from me about somalia. i know you're shocked. what i'd like to ask you is, if you have any information on the bill that we passed last year into law. in was a bill we passed last year that was called the money improvement act. the goal of the bill was to improve oversight of nondepository financial institutions, now that the law is in place, all well supervising the money services

businesses. i just want to know what you know, and if you don't know anything, i understand, because i didn't tell you i was going to ask you that. if you do know, i would be happy to get a report. >> congressman, thank you. as we've discussed many times, this issue is a very important one. and we're concerned about the problems that families are having in making payments. we're working on the implementation of the legislation, and i'm happy to get back to you with a more detailed response on the status of the implementation. we're more broadly working on this issue of how to deal with remittances in somalia. as i think you know, we're involved with the world bank to develop solutions to the problem. and that really means building up some capacity in the somali financial system. right now, there's not a real financial system to engage with. we have had meetings at a senior

level in somalia, the political level at the central bank level. i know that our undersecretary will be traveling to your district to have some meetings on this issue. >> well, i appreciate that. and i just want to say again, i'm four square with the administration's effort to stop terrorist financing on a task force to help achieve that. on the other hand we can bet so successful at that effort we close off all the money, that i think would be unfortunate, because it would serve the interests of el shabaab and terrorists over there, to see the collapsing of the somali economy. which depends on the remittances to the degree of 40%. i would like to talk with you more about the implementation of that program. i know that you all are doing some technical assistance to somalia. i talk with political leaders there, and try to give them my

best perspective on how they can improve their system. could you talk a little bit about the work that you all are doing on that technical assistance area? and what sort of message that you'd like them to receive in order to develop that solid banking system that i think they're going to need. >> there's not an easy answer to that question. it's hard to exaggerate how little they're starting with in terms of building a functioning financial system. and the tragedy is, that there are legitimate transactions like family remittances that should be able to go forward, it's very hard to know that the money isn't going to go into hands that will do real harm. trying to figure out how to build that system is why we're working with the world bank. we can't go into somalia the way we go into some countries because of the security conditions. we have people coming out of somalia into other countries for training.

it's not the most efficient way to do it. our people are great when they can go in and work with people side by side. we just can't do that in somalia. we're trying to do it offsite, to help them build the skills. it's going to take. it's a process, it's not something you can just hand over and have a functioning system. they're trying, we're going to work with them, and we have to be creative finding the ways to start that building process. >> i want to urge you on behalf of the people who live in minnesota and many other parts of this country. we're actually going to start a somali caucus because we have constituents who live in both districts and definitely want to see them -- see that country get stable and strong and not be a haven or an attractive nuisance for bad people. we try to do our part, and we hope you will continue to push with that technical assistance.

>> we will do so, and we will continue to work with you and try to find a solution to this. >> the timing of the gentleman has expired. the chair recognizes the gentleman from tennessee, mr. finger. >> thank you, mr. chairman, thank you for being here today. i'm going to go back to an issue you and i talked about a few months ago, liquidity. recent comments from larry somers, former treasury secretary under president clinton and later served as an adviser in the white house. he recently warned regulatory authorities have made a mistake, when they looks at each institution, you'll be safer if you withdraw from the markets a bit. and forgot if all institutions withdraw from the markets a bit, the markets will be less liquid. i think there is real issue yqñn there, frankly, a lot of the effort that's going into macro prudential should be into making sure we have liquidity.

what is your reaction to his comments about the role of the regulations, not just dodd frank, but layered capital and liquidity mandates? >> as i've said in response to several questions today, i think this issue requires our very serious attention, i think there are a number of factors that have been at work. it ranges from the point we're at in the economic cycle and the volatility that's natural at that point to the emergence of new market mechanisms that are different and present different risks to the volume of corporate bond issuance. i have also said that we have -- our eye on whether or not there are regulatory issues, it's one of the things we need to look at. so i'm not approaching this from the point of view that we know exactly what it is. frankly, i don't think anyone

knows exactly what the answer was. >> you think it would be a possibility that it could be over regulation. >> i think the factors i described i know are at work. the question of regulation is much more speculative. people have jumped prematurely to a conclusion about regulation, which would take our eye off of where the real risks lie. >> would you say we need more regulation. >> we have come a long way since the financial crisis. our system is safer and sounder, we have the ability for our institutions to with stand a bump in the road that they didn't have before. that doesn't mean we should ever stop. >> you think more is needed? >> i didn't say more or less, we can't say that -- you know, you can't take 50 years between looking at these questions, that didn't turn out so well. we need to keep our eye on the future, and we have to to be open to the possibility that there are multiple different factors at the core of an issue. on something like liquidity, it is a fundamental importance that we have a deep and liquid market here.

you still have to separate out treasury markets from corporate markets to high risk markets. they're not all the same. liquidity issues aren't all the same. >> summer's comments have been echoed by everyone, many overseas regulators such as mark carney at the bank of england. we talked about you issuing a data driven analysis. and i think you have said it's going to be in a white paper coming out. >> hopefully -- our goal is to get it this summer, and we'll share it as soon as it's completed. >> it seems like we -- every time we have a hearing, we talk about the problems that we face, and more regulation. i know i'm going to differ with you, and i know you have -- >> it didn't sound -- >> i know, it sounds like you are inclined to be for more. >> we have to be open to less also. i didn't say more. >> i will -- >> get you over to more or less. >> it's what seems to be happening is the more liquid that's tied up in the markets, it's not the bigger institutions that pay the price here.

it's the small guys. it's the guys back in states like tennessee and arkansas that end up paying the folks at the bottom, and we need to make sure that when something does happen, there is enough liquidity available to take care of these issues. thank you. and with that, i yield back the balance of my time. >> chair now recognizes the gentleman from colorado, mr. perlmutter. >> thanks, mr. chair, thank you, mr. secretary for staying cool under the withering cross-examination of my republican colleagues. i just really have a different view than the chairman, than mr. duffy as to what's going on in the economy. you may as well start with all the records being set by dow jones. it's up from 6500 at the end of george bush to 18,000.

the s&p 500 from about 700 to 2100. the nasdaq is three times what it was. foreclosures are down, very low, there's been a tremendous improvement across pretty much all sectors, from manufacturing to hotels to whatever. so when they're talking about calming the markets and you're causing them to royal. i want to thank you for rebuilding the markets. from the recession that we were in at the end of george bush. i don't know if you have your report in front of you, but there are some very important graphs that i'd like you to take a look at, if you have your report in front of you. so let's take a look just as easy ones, starting with 4.1.4. that is just for -- under the obama administration, we see oil imports drop and increase like we haven't seen in decades. do you see that one? >> i do. >> how about 4.1.6. civilian unemployment rate dropping like a rock? this is on page 20 of the report.

after the 2007/2008 recession. you see that? >> yes. >> now let's talk about fsoc. if you would turn to page 62 and 63. i want to look at graphs 5.3.16 and 5.3.19. see those? >> yes. >> if you could tell us what graph 5.3.16 is? >> now, you're -- i read the words, i'm looking at some of these graphs. >> let me tell you what it is, and then you can expand on it if you like. at the -- as the recession took place, starting in 2008. 2007 and 2008, we saw loan loss reserves fall. so banks couldn't with stand more and more losses. since fsoc was created in 2010, what do you see in terms of the loan loss reserves? they've almost triples. >> we're seeing performing loans doing better, and the

foreclosure issue settle in. >> now, let's look at the one that's really quite telling. that's 5.3.19. fdic insured failed institutions, you see that? >> my friend the chairman was talking about this recovery, and why isn't it bigger, other than the fact we have 13 million new jobs, we see pensions at all time highs. but under republican administrations, i think between 1980 and 1990, we had the reagan administration and the first george bush administration, look at the number of failed institutions. you see that. >> i do. >> it falls off to virtually zero under the clinton administration. there were no bank failures, you see that?

we see a tremendous spike in failed institutions, you see that? >> so now it's fallen off precipitously. we're here to talk about the fsoc and about dodd frank and putting some structure into the market so we don't have a failed banking system. would you like to comment on that? >> i think that you have talked about the improvement of the economy in a compelling well, obviously the graphs illustrated but so does the number of people working every day. i think there's no doubt, but that the steps we've taken through wall street reform and f 1 oc have made our system safer. we also have economic recovery underway, which is why everything is also getting better. what i don't think we can do is kind of rest comfortably that there's no problem out there to worry about.

because what will happen is, we'll get to the down point of a business cycle, there will be stress in the system, and we owe it to the american people to make sure we're in a position when times get tough, that we don't go back to the 2007-2008 kind of situation. that's what we're doing. >> and i completely agree with you, that's why you need the loan loss reserves, so you can with stand a down turn. that's why we take into consideration these precautions. if i were -- >> if i were my republican friends, i would be grasping at this straw too. i want to thank you, and i want to thank the president for putting this economy back on track. and i yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from florida, mr. ross. >> thank you, mr. chairman. >> pleasure to have you here again. i want to talk about the ultimate goal of fsoc.

fsoc's goal is to reduce risk in the markets, is it not? >> yes, it's to reduce, make sure we have financial stability always on our minds. >> and the elimination of risks too. i don't think that's the ultimate goal. let's talk about why i focused on stability. let's talk good stability. in gaining stability. we need to make sure our institutions have a proper road map. right now, we have a designation of a sifi that leads to an institution now trying to find out how they get out. i give you credit with what happened in february. allow opportunity every five years to get a decertification of being a sifi. my concern is, why don't we have in place a road map. a precautionary measure to prevent them from ever being designated as a sifi. >> the process is not one where we assume everyone could be a sifi. to go through, the firms that present themselves because of their size, complexity and structure. >> true, but are we not focusing on more of a treatment for the cure instead of giving the

prevention of the problem? >> i think the reality is, no two firms present themselves in an identical place. the way we go through the analysis looks at each firm and the risk that it presents. >> it should be done that way. in a proactive way, if these firms being looked at were given some guidance to prevent them from going over the cliff. we wouldn't have to have the designation. let me move into something quickly here on asset managers. i think they're pretty important and i've got concerns about them being declared sifis. for example, in dodd frank it says that some of the criteria to include are leverage, the extent and nature of the off balance sheets, the exposure of the companies, the amount and type of liabilities of the company. let's talk about leverage. what is a leverage ratio that you would consider to be worrisome some 30-1? >> i don't want to give you a

single number. >> so the smaller would be better? >> yeah. >> knowing that 5-1 may be a concern. >> it depends on what the investments are in. >> correct. >> it's a combination of leverage and risk. >> asset managers won't have a greater than one and a half to one risk. in fact, i think van guard is almost minuscule. it seems that that should be a consideration that would prevent them from being a sifi. >> we have made our focus for this last period of time looking at the activities that contain the most risk. >> but they don't really contain risk. they don't even have any collateral as such to put at risk. >> asset managers have different business models. some of them are leverage, some are not. >> but the leverage is minuscule. let me go into this if i can. once you're a sifi you become jointly and separately liable for all sifis, is that right? >> i'm not sure what you mean. >> the sifis themselves will bail out the sifis. >> i'm not sure what you're referring to. >> let me move on then to what

the impact is if an asset manager were to be deemed a sifi. you of course realize the cost of compliance but asset managers deal in mutual funds, 401(k)s, investments that deal with people's retirements and pensions. there's a study out there by the american action forum that indicated that the capital requirements necessary if an asset manager was deemed a sifi could raise the cost as much as 25%, that cover the life of that program of the retiree could be over $100,000. will that not be taken into consideration when trying to determine whether they're a sifi or not? >> obviously those same retirees have an interest in making sure that they have access to their savings when they need them and -- >> but it could have a significant impact on the mom and pop -- >> i don't start out with the presumption that firms should or shouldn't be analysis.

we have to come to a conclusion of what risk factors we're looking at and if they warrant any kind of action. >> i agree with you. i think it would be a good preventative measure to do it in conjunction with the institution so they can prevent that risk from being taken and continue in a financially stable environment. >> my sense is that the asset manager industry is very much offering its views as we go through this process. >> very strongly, yes, sir. my time is up. i'll yield back. >> the chair now recognizes the gentleman from maryland, mr. delaney. >> thank you mr. chairman and thank you mr. secretary for being here. i want to associate myself with the comments that congressman ross just made because i have a similar view on asset managers

but i don't want to take the time on that. i think you talked about the prioritization of our debts. it seems like that's a misguided idea because the best credits in the world which obviously we should view the united states as certainly one of them never priorityize their debts. berkshire hathaway, exxon mobile, all their debts are treated the same where as weak credits are forced by the market to priorityize their debts. so it strikes me it would be a misguided idea to force the united states government into a position where it was somehow signaling to the world that we're a weak credit. very quickly if you don't mind. >> i couldn't agree more. i think that the reality is the technical question of could you pay a principle and interest misses the point which is that if you pick and choose what you pay you're going to default on something. >> and present very differently than the way we want the united states to present. >> even if you reach the conclusion that you had to do

that because it would be disastrous not to, it's a terrible place to be because you're still in default. the only thing that solves the issue is that raise the debt limit. >> when you think about the role of banks which have been very important to our economy for a long period of time which is why the government has supported them which is why we also try to regulate them in ways that make sense, right now banks are not all that important when markets are good. there's a lot of other alternatives for liquidity, but they're really, really important when markets are bad because there's no incentive for market-based participants to participate in markets when they're bad other than if they're kind of vulture investors trying to get really good deals. i worry that what happened with liquidity has put these banks in a position that if there were some kind of a crises they wouldn't be able to respond as well. i know there's a lot of reasons why this liquidity data is emerging, but it seems to me -- +rh and this is coming from someone who is supportive of dodd frank. i think all of the things we did we obviously had to do. it seems to me the notion of having high liquidity standards for banks coupled with not looking at risk-weighted assets

from a capital test and having this kind of overlay where you still risk weighed assets but you need a minimum amount of capital which puts a lot of capital against really low risk weight assets like treasuries, it seems to me those create very big incentives for banks not to be liquidity providers in a crises. do you agree with that assessment? >> i think the liquidity rules, the theory behind them, was you look at the overall exposure of the firm. they didn't make distinctions between different kinds of assets. i obviously think the treasuries in cash have a degree of safety that's different than almost any other asset in the world, but that's a different approach than saying everything is treated the same. >> would you support changes to the regulatory framework that actually eliminated disinsent tifs for institutions to hold treasuries in cash so that they're actually in a position to do their job in a crises? >> i don't think we have any evidence that they're not in a position to do their job. the treasury markets remain deep in liquid and as i've said a couple of times today, i don't

think that what people looked at on october 15th in terms of movement on treasuries had to do with a lack of -- it wasn't the effect of any kind of regulatory environment. >> but the people running these institutions seem to think they have a disincentive to hold liquidity in cash. >> i've give you an example. i've heard a lot of them say as if it affects the treasury market that vol kerr has something to do with it. >> i'm talking about treasuries. >> i think you asked the right question, is it something in the leverage rules. >> it used to be no matter how many treasuries you had you didn't have to have capital against them. now you kind of do. so that in my mind, if i was running an institution that >> i've give you an example. i've heard a lot of them say as if it affects the treasury market that vol kerr has something to do with it. >> i'm talking about treasuries. >> i think you asked the right question, is it something in the leverage rules.

>> it used to be no matter how many treasuries you had you didn't have to have capital against them. now you kind of do. so that in my mind, if i was running an institution that would make me have less of them. >> right. i think that it is very important for us to maintain the deep and liquid treasure markets. it is something that is part of what makes our dollar the world's reserve currency. it's part of our economic back bone. i don't see a weakness in the treasury market right now but i can assure you a day doesn't go by that i don't ask questions about it. >> xm bank, i've talked about ideas where institutions like xm are required to sell off some of their portfolio on a regular basis so there's better transparency as to how their assets are priced. do you support approaches like that?

>> i'm not familiar with that. i'd be happy to look at it. i think the xm bank does important work for leveling the playing field for u.s. exporters. >> and i agree with that position. i just think additional transparency around how they price their assets -- >> i just haven't looked at that. i would be happy to look at that. >> the time for the gentleman has expired. the chair wishes to alert members to accommodate the secretary's schedule. we anticipate clearing three more members in the cue. presently that would be mr. stooifrs, mr. pitten jer, and mr. barr, depending on whether or not somebody else walks in on the democratic side. the gentleman from ohio is now recognized. >> thank you, mr. chairman, mr. secretary. you've already answered questions from mr. duffy and mr. ross and mr. fincher about liquidity. i want to ask a couple things about that. you said you don't think that's a problem and to you the world is rainbows and everything is liquidity.

>> i don't think that's what i said. >> you said there wasn't a problem with liquidity? >> i said we haven't seen problems in the treasury. i think there are issues about liquidity that require attention and i went through at some length the issues we need to pay attention to. >> great. let's talk a little bit about that. so you do believe that we need to give it a little attention. as your role of chair of the f sock, have you directed the office of financial research to study this problem and how the policies that are completed and proposed might come together to cause a problem, or have you asked them anything at all? some of us would love to see them do a study. i wrote them a letter asking them to do a study and i'm just curious if you've asked them to do a study on liquidity. >> they are doing work in this area. they've obviously issued some analysis, and i know they have other work that is ongoing. i think it's not just an ofr question but a question that we have to ask in domestic finance in treasury, securities and banking regulators have to ask. i think that there's a serious

conversation in this area. what i've tried to make clear is that it would be a mistake to jump to conclusions about what the relationship between the safer, sounder world after financial reform and liquidity is. we have to be open to it but not assume that that's the whole explanation. >> i don't disagree with you which why i asked you if you had asked the ofr to do a study. you indicated there's some work going on. when can we expect to see a study? >> i would have to get back to you. >> please do because that's their job. their job -- it's called the office of financial research, so it seems to me that they are the most logical place to look at

it. >> they've been doing a lot of analysis on october 15th, for example, to understand what happened on that day, and they are very much in the space of helping to make it possible to look between the data that different regulators have and do the analysis. >> which is their job and i'm just asking you to have them do their job and make that available to us because as policy makers, we would love to see that. it may impact some of the policies we decide to make. as somebody who enforces those policies that are made by congress, obviously you have some ability to change the way you do your job, too. but we would love to see that

information and the sooner we can see it, the sooner we can make an informed decision as opposed to maybe me assuming it is a problem and you assuming it's not. >> i couldn't agree more that we have to understand things before we act. >> please ask them to do a study that is detailed with regard to this because i think when you see what's going on between the vol kerr rule and the department of labor and what's going on in the private sector separately from regulation where a lot of people are simplifying their business model, getting out of risky businesses, those three things come together in a way that could really cause a liquidity crises in the future. i just want to make sure we look toward it and try to anticipate it and head it off. so please, i would urge you to do that. the other question i've got real quickly is with regard to designating systemically

important institutions. has anybody talked to you about that because i didn't hear whether anybody had talked to you about that today? >> there were quite a number of questions earlier. i'm not sure what question you had. >> do you think the $50 billion -- let's talk about bangs for a second -- the $50 billion level, many folks including the federal reserve have said that's an inadequate and artificial number. how do you feel with that number in the law? >> i think that it's important that we use the flexibility we have to treat institutions of different sizes differently and we've tried to do that and we need to continue to ask is it being done as well as we can do it. i think it's a mistake to think that a $2 billion institutions is the same as a $50 billion

institution or a $100 billion institutions. some of the suggestions i've heard about drawing the line say at $500 billion are very bad policy. that would take the next six largest institutions out of the heightened supervision. >> let me suggest an alternative approach. have you looked at non-bank assets, the assets that are not under the covered institution? i'd ask you to look at that because that's where the systemic risk is indicated. >> the time of the gentleman has expired. the chair recognizes the gentleman from north carolina. >> secretary, there's been some discussion today, a considerable amount, regarding the debt. from what i understood you seem to be dismissive of this. do you see it as a threat? >> i spent most of my professional life trying to control spending so i don't

dismiss it at all. i think we've made enormous progress. >> do you see it as a level of concern as much as iran in terms of national security and economic security? how would you place it? >> if we had stayed on the course we were on in 2008 i would say we've made progress -- >> with due respect, this is the question i'm asking, how do you view the threat? do you view it as important, as a concern that we have with iran and the security threat there? the economic threat that we have with the debt, is that as compelling to you? >> there are obviously different kinds of threats. we have made more progress on our fiscal position than in terms of moving iran. >> you heard the statement from the admiral earlier and from peter orzach still today, the former budget writer for president obama, still talking about the direction of spending if you had asked me this question in 2009 i would have given you a different answer. >> that's why i'm asking you today, is it a vital concern today? >> i don't think it's the most

pressing concern today because we have controlled the rate of growth. >> $18 trillion is not a concern? >> we've stabilized the deficit and the growth of the debt. >> the trajectory of spending is going up. >> for the next ten years we have a stable deficit situation. >> october 2014, the deficit is projected to return to an upper path over the rest of the decade and beyond. sir, a lot of smart people disagree with you. a lot of smart people are concerned about the trajectory of spending and the imploding debt and the fiscal crises that it's going to put us in. what i'm asking you is, do you not share that concern? >> i'm telling you i do have a concern about our fiscal policy. we have to maintain a responsible fiscal policy. we also have to maintain growth and we have to -- >> do you think it's enough to talk about, to bring it -- >> we've done more than talk. we've reduced -- >> sir, with all due respect, the man that you report to, has he ever brought it up at inauguration, at the state of the union? he came here to the capitol this

week to talk about tpa. has he ever come to talk to the members of congress about the debt and the -- >> congressman, when he took office -- >> do you advise him to address this debt concern? >> congressman, we have reduced the deficit percentage of gdp. that speaks to what we're doing and what we've done. >> there's a lot of smart people who perceive you and your job and have serious concerns about it. let me go onto another issue and that deals with fata. there are 34 countries, as you know, committed to the 40 recommendations of fata and going after terrorism and terrorism financing. what capabilities do we have of going after those countries that are not in compliance? we have turkey, we have qatar. clearly they're complicit with terrorism financing.

what role can you play as enforcer in that fata is not an enforcer, they merely have the standards, and yet clearly we see the infractions by those who, in some measure, would -- like turkey is a member of n.a.t.o. >> it's been an important process to bring the world together to control bad practices and bad activity. we are very much engaged on a bilateral basis with any country that we see doing things or not doing things that they need to do -- >> have you talked out turkey on the matter? >> i have talked with our counterparts in turkey about what they need to do in their banking system. >> have you called out qatar? >> i've talked to people around the world and they respond and they move. it's not an easy process where you turn a switch and have everybody doing everything they need to do. we're very engaged with everyone

around the world. >> thank you for your service. i yield back. >> our last questioner will be the gentleman from kentucky. >> mr. secretary, thank you for your patience and staying with us here. since we've talked a lot today about market liquidity, let me book end our discussion about that subject. market liquidity has declined 46% since its peek in march of 2008 and a recent article in the "wall street journal" provides this analysis. talk to almost any banker investor or hedge fund manager today and one topic is likely to dominate the conversation. it is the lack of liquidity in the markets and what this might mean for the world economy and their businesses. market veterans say they have never experienced conditions like it. banks have become to reluctant to make impacts that it's become

hard to execute large trades even in the vast foreign exchange and government bond markets without moving prices. i want to address my question to your skepticism that regulation has played a part in this liquidity issue. have you heard from bankers, many of your former colleagues on wall street and bankers that i've heard from as well, that they are less likely today to engage in market-making activities as a result of vol kerr and other regulatory pressures. >> i've heard things supported by fact and some of which are not. >> as secretary of treasury you have -- >> i talk to people all the time. >> and they've given you that feedback. >> yes. >> what is it that leads you to doubt their sincerity. >> i'm not doubting their sincerity. you cited at the end of the piece that you read that people are saying they're having

trouble moving blocks of bonds in any size they want without any movement of price. i think that that has something to do with market structure. you have different players in the market now. it may mean that to maintain liquidity you have to do multiple transactions. it's different from not being able to trance act. >> i understand, but would you acknowledge that when banks become reluctant to engage in market-making, that impacts liquidity? >> there's different kinds of market making going on. there's a lot of market making going on and you can't roll back the clock. the fact that you have the emergence of say electronic trading and high frequency trxl activity taking place in that space that isn't the traditional broker/dealer model. >> let me take one example. $350 billion of senior security commercial industrial loans provide financing for very dynamic job-producing companies,

many of which are in my own district. would you acknowledge that the volkerr rule has forced banks to take pretty significant losses in aaa and aa clo paper? >> obviously that rule is still taking effect. >> they're being forced to divest. aaa and aaclo paper? >> the banks are not going to have proprietary investments they've had in the past. that means they're going to have to sell some assets. >> sir, do you know how many aaa or aa clo notes defaulted over the last 20 years? the answer is zero. the rule is forcing banks to

devest in safe investments. you've got to acknowledge that that has a destabilizing impact on the financial stability of these institutions. >> what risk is there with aaa or aa notes that have never defaulted over 20 years and performed well over the financial crises? >> the objective of the rule was to reduce the level of risk exposure firms by getting them out of proprietary investments. i think we'll be better off when that's implemented and i think the markets will adapt. >> you don't dispute the fact that vol kerr forces banks to devest of aaa that hasn't defaulted in 20 years? >> with the exception of treasuries, it's a pretty tight rule. >> let me conclude with one other point. that is community banks. community banks in my district, the bankers tell me that dodd you can watch the last few

minutes online any time as we join a senate subcommittee hearing live as we look into the spending at the office of personnel management. the opm incident follows several across government, only the latest example of the inability to protect itself from cyber security threats. today's hearing before the subcommittee on financial services in general government is intended to elicit further information about the recent opm data breaches. also a time to discuss the enormous challenges facing the federal government as it attempts to ensure this does not happen again. the government spends approximately $82 billion a year on information technology.

we must ensure that hard-earned tax dollars of millions of americans are being spent wisely and effectively. just last year, the subcommittee held a hearing with opm director arculetta, steve van roykle, dan tangerlini and david panner. given the enormous resources and important security issues at stake, the subcommittee considered it imperative that omb and federal agencies appropriately managed these projects. we're all well aware of examples of projects that ended in spectacular failure as with the initial rollout of health care.gov. we should also be troubled by the accounts that don't grab headlines, including initiatives with ongoing costs that grow each year after year without demonstrating effective results or sufficient security.

consistent, that problems are anticipated before they occur and most importantly that someone is actually accountable and responsible. all too often, large complex i.t. projects drag on for years. outlanding the administration that initiated them. and the employees responsible for managing. in the fsg bill alone billions have been spent over the years on tax system modernization at the irs. work that has been continuing for decades and is still incomplete. even for projects now on track past problems generate millions in additional costs and years of delay. and as we have seen recently at irs and once again with the opm breach, both of which have compromised the personal data of millions of americans billions of federal dollars spent are no guarantee of security. across the government, i.t. projects too frequently go over

budget fall behind schedule and do not deliver value to taxpayers. responsibility for oversight is often fragmented throughout the agency owning the project and omb does not conduct appropriate review and management. whether issues related to programs requirements, performance, spending or security lots of people are involved. but often, no clear lines of accountability are drawn. what has happened at opm is devastating, millions of americans and their families and friends have been affected. giving those impacted limited free credit monitoring and any theft insurance will not be enough to address the long-term consequences that we may see for years to come. but also troubling is the knowledge that opm is just the most recent example of the government's systemic failure to protect itself. according to gao, we should have serious concerns for the future. the number of information security incidents reported by

federal agencies has exploded in recent years. vigilance is required and government systems may not be prepared for the job. 19 of 24 major federal agencies have reported deficiencies and information security controls. the i.g. at 23 of those agencies cited information security as a major management challenge. how many headlines of serious data breaches will it take to implement the steps necessary to protect ourselves? and at what point do some in washington recognize growing the bureaucracy without actually governing is a recipe for this type of disaster. the obama administration views the federal government as capable of tackling almost every problem that the nation faces. yet, while attempting to grow the size and scope of the federal government at every turn, the administration fails to follow through on the task that is already responsible for. if you bounce from one bigger government solution to another without carrying out your basic

responsibilities, this is what happens. it's easy to suggest more money is the solution. that seems to be the response the administration leans on every time there's a problem. but is often the wrong choice. especially in situations like this where it appears that the problem is something much greater than a lack of resources. the american people have lost faith in their institutions the last thing they will do is trust washington to solve a problem when it can't even protect the personal information of those it employs. there needs to be a dramatic change in the status quo. what i hope to hear from our witnesses today is not the same stale line that more money is needed, but an explanation as to why the federal government failed to do the basic job of protecting personal data of millions of employees with the vast resources it already has in hand. what it's doing right now to resolve this problem and what is being done to ensure that we are prepared for the next attack.

i hope with your help we can learn from this instant and identify ways to improve and protect our security. i appreciate the interest of all our colleagues and shared commitment to doing what we can to work together to try and address this so important issue. we cannot afford not to. senator? >> i'd like to welcome our witnesses, assistant opm and former chief information officer richard spyers. we are here to review information technology spending and data security at the office of personnel management. as part of that vie, we need to discuss recent cyber security attacks that have put federal employee information at real risk. we need to address the late breaking inspector general audit that expresses concerns about opm's i.t. modernization project. but while we conduct this subcommittee oversight of opm and the spending and response, i

also urge us to put this in the context of larger cyber security challenges that face our government and our society as a whole and progress or lack thereof by congress in strengthening our nation's cyber defenses and in providing needed funding for federal cyber security and i.t. initiatives. regarding the cyber incidents at opm, one breach involved personnel data of roughly 4 million federal employees stored on an interior department networks. investigators found another intrusion where information from background investigations was allegedly stolen. i understand opm recently became aware and the investigation is underway. while we may be limited in exactly what we can discuss in this context i'm very hopeful we can have a productive and ongoing conversation. the fact the security breaches happened is frankly, terrible. they force us to grapple with the reality that in our inner connected world, we're more vulnerable than ever and need to do more to protect our public employees vital personal information from foreign

attackers. after we've investigated why these cyber attacks were able to breakthrough we need to be willing to do what's necessary to ensure they don't happen again. these attacks don't just compromise the information of millions of federal employees, but our nation's security, as well. it's further troubling, the i.g.'s office has found that opm has not fully complied with the federal information security management act which mandates requirements for all federal agencies. while opm has made recent improvements, we need to remain vigilant. both have only been on the job roughly a year and a half. and to their credit, made i.t. security a priority. but they need to clearly understand that the job is not done. opm has indicated to the subcommittee most of the i.t. security systems are aged and at the end of the useful life for some security patches are no longer provided by the original vendor. fiscal year 2014 opm began a three-year modernization and seeking a third installment of $ 21 million to complete that

project this year. and without that funding, the investment of the previous two can't be meaningfully completed. i was alarmed by the i.g.'s allegations about mismanagement of the modernization projects to date and hope that opm's representatives will speak to these assertions directly here today. last, i just wanted to emphasize, i think we need to prevent another round of sequestration. opm's fy '16 budget request includes a $32 million increase over last year's level. virtually all of which would address i.t. infrastructure improvements. sequestration could critically threaten those investments and the livelihoods of our employees. while some of these cuts might be weathered in the short-term they can have serious long-term impacts. and i think we need to work together to ensure federal agencies are prepared to protect against cyber threats. the federal government is at constant threat of cyber attacks. it successfully wards off millions of attempted attacks a year. and i think we need to work together to protect the nation's

economic and national security interests by coming together to deal with these vital cyber security issues. chairman, thank you for holding this hearing and i'm eager to work together as we consider the needs of our federal agencies and combatting cyber threats. >> thank you senator. >> mr. chairman. may i just have a few comments and observations? >> you can comment all you like. >> first of all mr. chairman, i really want to thank you for your leadership and convening this hearing. i think america wants to know certainly our federal employees want to know what happened and what is the impact on them and what is the impact on the nation? i would strongly recommend to the chair that after this hearing and then also the briefing we'll receive this afternoon, the chair and the ranking consider having a classified briefing because as a member of both the intel committee and someone who has been involved on this, there are things that are best discussed that you need to know for your

responsibilities in a setting. and we would be -- and senator cochran and i would be happy to cooperate with you in establishing that. because it needs to be -- you'll know more this afternoon. second thing is the second point is what has happened at opm. and also what happened to the breaches at the army shows that that this is a serious national issue. it affects not only opm, but every agency and shows that national security and its impact is not limited to d.o.d. mr. chairman i also want to remind the committee or bring to their attention we tried to deal with this in 2012. under the leadership of senators liberman and collins there was a bipartisan effort to have a cyber security bill that dealt with new authorities for key agencies to establish standards for critical infrastructure create info sharing regime to

protect both.gov and .com and giving dhs authority to unite all levels of government to have both the authorities, to make sure they have the resources to know how to do the right job. exactly what you're saying, sir. let's not just throw money at it. let's get value and security for the dollar. that was stopped because the chamber of commerce established a massive lobbying campaign because they were worried we would overregulate. well, we are where we are. so we need to do a lot of work. we had a bipartisan study group. collins, coates, maybe we need to resurrect that because it's opm today it'll be another agency tomorrow. we've got to make sure our cyber shields are up we're fit for duty, and we're fit to protect our people. so, i just wanted to refresh everybody that and of course

my federal employees need to know what happened how do they protect themselves? and we need to know how to protect america. so thank you, mr. chair. >> thank you, senator. and i think the suggestion of the classified briefing is an excellent one. and also, that this is not a you know certainly not a partisan issue. this is something that's been going on for a long long time through successive administrations administrations. we have three witnesses appearing before us today. katherine arculetta michael esra and richard spyer and former chief information officer at dhs and irs, director arculetta, i invite you to present your testimony. >> chairman boseman and members

of the subcommittee. entities are under constant attack by evolving and advanced persistent threats and criminal actors. these adversaries are sophisticated, well-funded, and focused. unfortunately, these attacks will not stop. if anything, they will increase. although opm has taken significant steps to meet our responsibility to secure personnel data it is clear that opm needs to accelerate these efforts. not only for those individuals personally, but also as a matter of national security. my goal as director is to leverage cyber security best practices and protect the sensitive information entrusted to the agency modernizing our i.t. infrastructure, to better confront emerging threats, and to meet our mission and our customer service expectations.

opm has undertaken an aggressive effort to update its cyber security for fiscal year '14 and '15, we committed nearly $67 million towards shoring up our i.t. infrastructure. in june of 2014, we began to completely re-design our current network while also protecting our legacy network. these projects are ongoing, on schedule, and on budget. we implemented state of the art practices such as additional fire walls factor authentication for remote access and limited privilege access rights. we are also increasing the types of methods utilized to encrypt our data. as a result of these efforts in

april of 2015 an intrusion that predated the adoption of these security controls affecting opm's i.t. systems and data was detected by our new cyber security tools. opm immediately contacted dhs and the fbi and together we initiated an investigation to determine the scope and the impact of the intrusion. in early may, the inner agency incident response team shared with relevant agencies that the exposure of personnel records had occurred. in early june opm informed congress and the public that notification actions would be sent to affected individuals beginning on june 8th through

june 19th. we are continuing to learn more about the systems that contributed to individuals' data potentially being compromised. for example, we have now confirmed being compromised. we have confirmed that any federal employee across all branches of government who submitted service records to opm may have been compromised even if their full personnel file is not stored in the opm system. these individuals were included in the previously identified population of approximately 4 million concern the and former federal employees and have been included in the notification. early in may the team concluded that additional systems were likely compromised. this separate incident which also predated the development of

our new security tools and capabilities continues to be investigated by opm and our interagency partners. based on this investigation in early june, the interagency response team shared with other agencies there was a high degree of confidence that systems related to background investigations of current, former and prospective government employees and for those a whom federal background investigation was conducted may have been compromised. while we have not yet determined its scope and its impact, we are committed to notifying those individuals whose information may have been compromised as soon as practicalable. but for the fact that opm implemented new and more stringent security tools in its

environment, we would never have known that malicious activity had previously existed in the network. in response to the incidents opm, working with our partners at dhs has immediately implemented additional security measures to protect the sensitive information we manage. we continue to execute our aggressive plan to modernize opm's platform and bolster security tools. we are on target to finish a completely new modern and secure datacenter environment by the end of physical year '-- fiscal year '15. the budget requested an additional 21 million above 2015 funding levels to further support the modernization of the

i.t. infrastructure which is critical. this funding will help sustain the network security upgrades and maintenance in years to improve the posture including database incorruption and stronger fire walls and storage. we discovered the instraousons because of our efforts to improve cyber security at opm, not despite them. i am dedicated to insuring that opm does everything in its power to protect the federal workforce and to insure that our systems will have the best security posture the government can provide. thank you and i appreciate the opportunity to testify today. i am happy to address any questions you may have.

>> mr. eser. >> chairman, and ranking member coops and members of the committee. thank you for inviting me to testify at today's hearing on the i.t. automatic work. >> can you put your microphone on? >> it's on. just pull it closer then. >> today i will be discussing opm's long history of systemic failures to properly manage it's i.t. infrastructure which we believemaaq it may have led to the breaches we are discussing today as well as issues to the current modernization project. there are three primary areas of concern that we identified

through our fiscal audits during the past few years. security assessment and authorization and technical security controls. information security governorance is what forms the foundation of a successful security program. for many years opm operated in a decentralized manner with the program officers managing their i.t. systems. this decentralized structure had a negative impact upon opm's i.t. security posture and all the audits between 2007 and 2013 identified this as a serious concern. by 2014, steps taken by opm to central eyes i.t. security responsibility with the cio had resulted in many improvements. however, it is apparent the ocio is negatively impacted by the

many years of decentralization. the second concern is security assessments and authorization. this process includes a extra hence comprehensive system to make sure it meets the security system before allowing the system to operate. we identified problems related to system authorizations in 2010 and 2011, but removed it as an audit concern in 2012 however problems with opm system authorizations have reappeared and in 2014, 21 opm systems were due to receive a new authorization butío811 were not authorize sized by year end. in addition, the ocio has recently put authorization efforts on hold until it completes the currentxb@ modernization project. this action to extend authorizations is contrary to omb guy kwrupbs that states that an extended or interim

authorization is not valid and it's worth noting omb no longer authorized and we still expect them to have concern the authorizations. the third concern relates to opm's use of technical security controls. opm implemented a variety of controls and tools to make the systems more secure. while this is a positive step we are concerned these tools are not being implemented properly and did not cover the entire infrastructure as we found that opm!gñu does not have a inventory of all data bases, and opm cannot fully defend its network without a comprehensive list of assets.

there has bench discussion in securing the systems as they are old legacy systems and while this is true in many cases and many systems are main frame based, it's our understanding that some of the systems impacted by the breaches are impact modern systems for which most ft technical improvements necessary to improve them could be accomplished. i would also like to briefly address opm's modernization project which will overhaul it's entire infrastructure and migrate all systems. we discussed this project and our concerns related to project management and the use of a sole source contract for the duration of the effort. one area of significant concern that we identified is that opm does not have a dedicated funding source for the entire

project. its estimate of $93 million includes only the initial phases of the project. the $93 million estimate does not include the cost of migrating 50 major systems to this new shell environment and the cost of the worth is likely to be substantial and the lack of a dedicated funding source increases the risk that the project will fail to meet its objectives. opm has a lot of deal to strengthen it's security posture and we fully support the concept of the project, but for a tax of this magnitude it's imperative they follow solid management pws practices to provide the project the best chance for success. thank you for your time and i am happy to answer any questions you may have.

>> thank you. mr. spires. >> good morning chairman and ranking member and members of the sub committee. i am honored to testify today and i hope my experience is valued regarding the recommendations i will make on how the federal government can more effectively safeguard data and improve a cyber security posture. most federal government agencies find themselves susceptible to data breeze to core i.t. systems because of thre primary causes. first, lack of i.t. management practices. the best defense is the result of managing your i.t. infrastructure and applications well. but beginning in the 1990s and up to the present the federal government has failed to effectively adapt with the changes in i.t.