lower tier care. maybe there's a difference. many d.c. general is a really great hospital as well as the -- is it? no, also -- let's be honest. there's a limit as to what america can do. we're blaming health care for h.i.v. prevalence rates which is related to drug use? well, we can say let's set up treatment programs. we know there's a high level of recidivism. .

>> and emerging from a system, people see that they can no longer be, -- you are on target saying that we need to get kids and their parents a sense of the future.

but not saying that we will take over your life and because of advertising -- it is the matter of empowering. we know what it is like when you have the flu. it is overwhelming for folks to manage the costs, and they cannot do it. our health-care system is not, in the future, who are below the

age of medicaid the, there is a lot we can be doing to return to them. >> thank you for coming. i am an associate professor at georgetown. what i have heard so far is massaging the rising health care issue. it all starts with the insurance companies not hillary and president clinton or managed health care.

but what the insurance companies charge for health care. they were charged with keeping the cost under control. they did not. let's look of the obscene profits of the insurance companies. it starts there. there is an article a week or so ago in the washington post. the authors said it all starts with the doctors. i like what i heard before that we are in a catch-22 situation with the liability issues. i think the major thing is pointing the finger and examine focusing on the insurance company. it was mentioned that we have a public plan and it sounds like most of you are in favor are against the public plan, to say that it would be unfair competition. what do we have now?

we have the insurance companies in charge, and they set the rules. something has to change. that is where it all starts. in terms of this introduction here, i think it is important, the last phrase of this pamphlet, we defend the highest principle of all, integrity of the physician patient relationship. right now we are denied the choice of the physician, who participates with their insurance companies. also, fda approved medications come out, new drugs are better

than older often, and insurance companies don't allow that. how can we improve the health of the nation if insurance companies come between the doctors and patients? >> thank you. >> with all due respect, let me say that i agree with you that insurance reform is in order. i think that is what you heard most of the panelists agree on. we are not saying that the system is perfect. we have the best health-care system in the world. as sector murphy said, back in 1965, an x-ray was state of the art. in -- it is time to do something, and we talk about

that on the panel today. what i think i hear you saying is let the federal government say to the insurance company, how much profits that you can make. let's limit your profit to a certain percentage, and let's say you have to pay 90% of your premiums -- have to be paid out in the form of claims or say that gm, what kind of a car you can make and sell and how much to charge for it. or to big oil who says we will have an excess profits tax week are talking about the actor, a

move toward socialism, and that is bad enough when you are talking about several industries -- when you talk about moving to socialism in delivery of health care and you have a socialist bureaucrat between the doctor and bureaucrats, from my perspective, we don't want that, my patience of 26 years in marietta georgia, they don't want that either. i think you may break points in regard to the care of the people that through no fault of their own are suffering and they need help. we are not saying that they don't. we are here to offer and it alternative. the president had his own home meeting at the white house without any point counterpoint. this opportunity that the district of columbia medical

society -- and asked by invitation, doctors who are members of congress to come and discuss this issue and get another view. >> we're all in practice. have we not been kept by medicare and managed care? i suggest we find a fair% cut, it is important for the help of the nation. i would suggest that you find up profit, five or 10%, but in the 5% range, anything above that should go to pay young doctors coming out of training with outrageous debt for their

education and their sacrifice, it uses these profits to pay these young doctors going to regions in down east where they're needed, pay their salaries and then we will see a surge of interest in madison. >> -- a surge in medicine. >> one of the last cases i did before came up here and share your frustration. this public auction does not have any resemblance to that.

i agree with you that there needs to be changed. >> you complain about medicare and medicaid and their rates, a lot of residency programs are only half full. >> at this point, sure. >> capping reimburse rates to save money, the government is doing that. it is not working. we have seen an example in massachusetts as well. do you want to make a couple of comments? >> i believe the members have to

get back for a vote. on behalf of the medical society, we are very grateful for you taking time out of your schedule to have this discussion. this point counterpoint has been brave. these questions are difficult and provocative. the fact we have had this discussion shows us the complexity of the problem. the idea that this is being ramrodded through with a short time frame affects nearly 20% of our economy and nearly everyone of us as providers and as a citizen. this is something that is

terrifying to see, a runaway train that appears to have lost -- left the station. we had a conversation before the meeting. we opined about steve jobs, of apple computer who has access to anything he wants for medical care anywhere in the world, had his liver transplant at vanderbilt hospital. people come here if they can manage it. not only do they come here, we don't have one or two centers of excellence, we have many centers

of excellence all over the country. senator kennedy when he was diagnosed with his general -- with his problem was diagnosed at mass general and went to duke hospital. it doesn't do anything to say that have access to those who cannot afford care are not an issue that needs to be addressed. we need to reflect on what was said earlier on, we don't want to tour of the baby with the bath water. i think it is very important that we draft this health-care

system, with all that is good with providing access and affordability to those citizens who do not have it. i think it is a mistake that the entire system needs to be reform. -- reform thed. >> unfortunately, we are already tenants over our time -- we're already 10 minutes over our

time. thank you everybody, for coming in. thank you very much. >> a look at the life of judge so the mayor by classmates and friends. jimmy brown, who was part of the white house in the confirmation process. that's tonight at 6:30 p.m. and 9:30 p.m. here on c-span. >> live coverage of the confirmation hearing for judge so lemaire starts monday at 10:00 a.m. eastern on c-span, c- span radio and on the web at c-

span -- or. we will replay the proceedings of weeknights on c-span to. coming this fall home to america's highest court, the supreme court on c-span. >> on q&a, on president harry truman and his decision to recognize the state of israel. there is a press conference the next day, what will you do? truman said i don't know, we will have to see. he had guarded decided -- he had already decided. tonight at 8:00 p.m. and -- at 8:00 p.m.. you can listen on line as a c- span at podcast.

>> president obama said that world leaders from answers the concern about the events surrounding iran's election. he also talked about creating international norms for nuclear weapons. other questions focused on climate change and health care in the u.s.. this lasts 40 minutes. i would like to thank the people

of italy for their hospitality. i am confident that your city will be rebuilt, and the people will be -- or people will serve as an example of people who can rise up against tragedy. we have come here for a very important reason. the peace and prosperity of every nation. the threat of climate change can't be changed by borders on a map.

rising food prices for our fellow -- josephsons are driving people into poverty. we can either shape our future or let events shaping for a spirit -- events shape it for us. we can work together to create a safer, cleaner, more prosperous world. it is clear from our progress the last few days that we must choose. the gathering included not just leaders of the g-eight, with representatives from other organizations.

after weeks of preparation, after a spirited discussions, discussed many issues. let me outline what i believe what emerged from the meeting. well our markets are improving, and they have appeared to avert global collapse, many people is still struggling. we agreed recovery is still of.

we must attain our support for these plans for a strong and lasting recovery. we agree that there are historic measures that help stop the spread of nuclear weapons. i laid out a comprehensive strategy about pursuing that goal. we agreed to substantially reduce our warheads later this year. this week the leaders of the g- 8-week encouraged people to keep their arms control commitments.

i invited leaders from other nations to attend a global nuclear summit that i will host in washington in march of next year. we face a real time challenge in iraq, the g-8 nations get together to call on a rock to fulfil its international commitments without delay -- iraq to fulfil its international commitments without delay. we have offered iran a past -- a path, with this right comes responsibility. we hope iran takes the right

path when we see each other in september. we took from parking steps forward to address the threat of climate change. the g-eight nations will reduce our emissions by 80%, we will cut global emissions in half. 17 of the world's leading economist have made a commitment to reduce the emissions. we have 40 cap legislation in the house of representatives, and we made the clean energy investment a part of our stimulus. we believe the nation will lead

the 21st century global economy. we did not seek agreements on every issue. these achievements are meaningful as we head into copenhagen and beyond. we have committed to investing $20 billion into agricultural development programs to fight world hunger. this is in addition to the emergency humanitarian aid that we provide. we do not view this assistance as an and. we want to help people be sufficient and provide for their families. that is why we are approaching this issue. the coordinated effort by the

countries themselves and help from multilateral institutions along with financial commitments from nations. i want to speak about one on one meetings i have with leaders outside of the conference. with spoke about how we could approach a strong and coordination -- coordinated effort on nuclear proliferation. i believe we laid a solid foundation on these issues. ultimately, this summit reflects a recognition. the only way for bistre shared

effort, -- the only way forward it is shared effort, none of this will be easy to find common ground. we have not agreed on every point. we have shown that it is possible to make progress and we are confident there will be done. let me take your questions. >> we were told you made your appeal during the meeting personal, by setting your family experience in kenya.

could you talk about what-how that influence your policies? >> that is true. i started with this point, that my father traveled to the united states from kenya. at that time, the per-capita income of kenya was hired in south korea. today, south korea obviously is a highly developed and wealthy country, and kenya is struggling with the poverty. the question i asked in the meeting was, why is this?

there had been some talk about colonialism and other policies by healthier nation's, without in any way diminishing the point i made was the south korean government, working with the private sector societies can create a set of institutions by transparency and accountability that allows for. there is no reason why african countries -- and yet in many african countries when you want to get a doctor or start a business you have a problem. there remains a lack of transparency. the point i was trying to make

is we have millions of people who drop into higher poverty, a million people around the globe are hungry. healthier nation's have a moral obligation as well as a national security interest to participate. we have to meet those responsibilities. countries in africa and elsewhere that are recovering from support -- severe poverty have an obligation to use the available way that is transparent and accountable and built on the rule of law that

will allow long-term improvements. there is no reason why africa cannot be self sufficient. with the right irrigation and constitutional mechanisms in their, they will be able to grow crops, and to the market, get a fair price. all these things have to be part of a comprehensive plan. that was what i was trying to underscore. the point i was making is back my father traveled to the united states 60 years ago. i have family members who live

in villages were hunter israel. -- where hunter is real.

michael fletcher? >> thank you. why will they listen to you from russia? >> i don't think it matters so

much that they will listen to the united states or russia. it gives us as two nuclear superpowers to talk about the dangers of nuclear proliferation and hopefully eliminate the problems. there are countries that of but decided not to go with nuclear weapons brazil is one. countries and develop peaceful nuclear energy and don't pursue nuclear weapons.

but the united states and russia in turn will decrease their stockpile. part of the goal here is the u.s. and russia we will be concerned. i am confident that we can build a non-proliferation from mark the we can all work -- from more that we can work from. it is not a matter of singling north korea or piranha out. -- or iran out.

>> yesterday morning you had a very spirited discussion with the g-8 plus 1. but was there discussion and? after six months, did you find it more complicated or less complicated? >> on the second question, it is not even close. congress's those tougher.

-- congress is always tougher. the question of what is the appropriate international structure and framework. i have said that there is no doubt we have to refresh and up date. these were set up in a different time and place, some were set out post world war ii.

what exactly is the right format? i think this will be debated. everybody wants the smallest possible organization. i think it is highly unfair if they have been shut out. part of the challenges revitalizing the united nations. a lot of energy is going into these various summits, but when it comes to problems, the un general assembly is now always

working as effect leave -- effectively as it could. it has to be reformed and revitalized. one thing i think that is true, for us who think we can somehow deal with these global challenges in the absence of major powers, it seems to be wrong-headed. they will need to have these conversations. they are not adequately represented in these international forums.

we are trying to find the right pace for action, and over the next several years will see an evolution and we will be able to find the right combination. one thing i am looking forward to is for a summit meeting. i have only been in office six months now, and i think there is a possibility of streamlining them. the u.s. isn't committed partner in this. we need to make sure about it. -- the u.s. is a committed partner in the spiriis.

>> i would like to return to domestic issues, health care. the momentum seems to have slowed down a bit. the blue dog democrats yesterday said they have strong reservations about what is developing. wendell up jumping and? -- when will you be jumping in? >> our team is working every day on this issue. it is the highest legislative priority. it is important to recognize we

are closer to achieving serious health care reit -- reform. coverage that allows american families to keep their dr.. we are close to that reform. that doesn't make it easy. it is hard. we are having a whole series of constant negotiations. this is not simply a democratic or republican issue. it has different priorities. my job is to make sure their parameters, there are specific

ways of doing this. there are a whole host of things i put on the table that i want to see. i said it has to be deficit neutral. what ever this produces, you pay for it. people would like to get the good stuff without paying for it. there will be some tough negotiations. i am confident that we will get it done. i am trying to keep a focus on

people across the country that are getting hammered by premiums, they are losing their jobs and health care. they are going into debt and some into bankruptcy. small and large businesses are feeling the pinch. i am also looking at the federal budget. there has spent a lot of talk about the deficit and the debt. we are in the worst recession since the great depression. what cannot be denied is that the only way to get a handle on our medium and long term budget

is if we chorale in health care. nobody denies this. my hope is that everybody is talking about and getting serious about health care and put some serious proposals on the table. it will be difficult. in one of the meetings i had, as this satisfied as americans may be with the health-care system, as concerned as they are about the prospects they may lose their jobs, they're also afraid of the on known. people think they will lose

their doctors, health care plans through a bureaucratic government system that is not responsive to their needs. overcoming that fear is often actively promotion by the special interests who -- is a challenge. we have day to day negotiations with the a house and senate. >> is it pretty much a do or die by the august recess? >> i never believe anything is a do or die. i would like to get it done by the august recess.

>> do we have any members of the foreign press here? >> [unintelligible] >> if i and-gender question, on

one hand, the sovereignty of nations states you don't want stronger nations belaying weaker nations. but where you have -- is not an international responsibility. it is one of the most difficult questions in international affairs. i don't think there is a clean formula. in general, it is important for the sovereignty of nations to be respected, and to resolve conflicts between nations with diplomacy and through international organizations to set up international norms,

countries want to -- there are going to be exceptional circumstances -- the need for national intervention comes tomorrow -- a moral question. in rwanda, where genocide has occurred. i told a story in the last session. he said he had gone to rwanda, went to some sort of museum that commemorated or marked the tragedy in rwanda. there was a photograph of a boy,

he loved soccer and wanted to be a doctor. the last line on the exhibit said that right before he and his mother was killed he turned to his mother and said don't worry, the united nations will, and save us. that voice has to be heard. the threshold at which international intervention is appropriate has to be high. it has to be a strong international outrage at what is taking place. it is not always going to be a

easy. there are some in the international community build -- who believe that this is sacrosanct and cannot interfere in someone's internal affairs. rather than focus on hypothetical, we should build up international norm with pressure from the public and center on nations who are not practicing universal values. and not hypothesize on particulars circumstances. richard wolf? >> is iran in that category?

while you came up with a statement of condemnation, with their crack down on protests prove >> i read your article. this notion that this is a quorum not accurate. what we wanted, which we got is a community a condemnation of peaceful protesters -- that this violates basic international norms with this harassments.

there is the other story, the agreement that we will reevaluate iran posture for negotiating a nuclear weapons policy. we will evaluate that and a g-20 meeting. the international committee -- committee said, here is a door you can walk through.

if iran chooses not to walk through the door, they will say that we need to take further steps. that has always been our promise. we will not wait indefinitely for the breach of international safety and the development of weapons. waking up one day and find ourselves in a much worse a torsion -- a much worse situation. i think they will look at the statements coming out of the g-

eight. thank you very much, everybody. today on newsmakers, republican representative michael burgess and bill cassidy talked not about health care legislation making its way through congress, and what to expect before the august recess. >> i think the deadline has been to -- driven by political purposes. the reason the clinton health- care plan failed is because

everybody went home on the august break. at political process is driving something like this. i think the american people are smarter than they are presumed to be, and they are letting their representatives know now, which is why we are seeing this fascination about wanting something different than they are hearing about. >> representatives michael burgess today on newsmakers at 6:00 p.m.. >> q&a tonight ronald and alice radosh and harry truman's decision to recognize the state of israel. cracks will you do if you the scare -- declared a state is a want to do?

he said i don't know. he said i will support a jewish state. >> tonight at 8:00 p.m. eastern and pacific on q&a. you can also listen to the program on c-span.org radio, and online as a seed spanned -- c- span podcast. >> now general pretorius talks about afghanistan patra. >> thank you for the warm welcome. thank you for your kind introduction and your service in your development efforts, and

for all your doing to contribute to the dialogue. this is the second world affairs council i have had the pleasure of addressing this year. i have a great amount of admiration for this organization. i will address another one tomorrow. the council in seattle seems distinct, being one of the nation's -- foreign -- former secretary of state: paul talked about one of the investments we made. tonight we have of -- with us members from nine different countries. a few moments ago i had the pleasure of meeting a group of

folks based here in seattle. it is great to of all of them here in the audience. i want to recognize the general. i think all people here recognize the general. [applause] he truly is the personification of the american dream. he started as an immigrant, he had his career in the army as a private, and rose to four stars, including supreme allied commander in, and had attained the highest military position in the u.s. in 1990.

it is a pleasure tour have him here with us this evening. we have also here with us members of west point, class of 1974. the pride of the court as a model goes. it was 39 years ago last week, in the summer of 1970 that we new cadets were just beginning to wonder what we had gotten ourselves into. they will be happy to tell you funny stories about cadets. classmates, it is great to see you again, and everybody else, thank you for this warm welcome. i am thrilled to be here.

. .

>> hey, where am i? the solitary office worker shouted back, you're in an airplane. [laughter] >> on hearing this very useful information, our pilot immediately made a 275-degree turn and executed a perfect blind landing on the sea-tac runway, and just as the plane stopped the engines coughed and died from lack of fuel. we sat there stunned. no one said a word. finally my aide asked the pilot. how did you do that? elementary, said the pie lot. i asked a simple question. the answer he gave me was 100% correct but absolutely useless. therefore i assumed that must by microsoft support office. [laughter] >> and from there, the airport is only three minutes away on a

cures of 87 degrees. [laughter] >> now, i want you to know, i am keenly aware that microsoft is one of the sponsors this this evening's event. [laughter] >> i cleared this humor earlier. you see the hand right here. we have a fellow commanding award winner who works for microsoft who gave the thumbs up to this. that's particularly important because of course i am going to use microsoft power point in one moment. [laughter] >> i don't want to see any bugs in this up here as we go through this. well, what i would like to do this evening, with the assistance of that great application power point, is provide you an update on the evens in the central command area of responsibility. we will do it for about half an hour or so, and then i would be happy to take any questions you have. next slide, please. this slide shows the area of responsibility of the u.s. central command. 20 countries, stretch from egypt

in the west to pakistan in the east, kazakhstan in the north, off to the waters off somalia, and in the southern most land country in our area. you know the challenges in that area, and that is indeed why, when people ask us what we do in central command, we occasionally say we feel like the little guy in the circus who runs around trying to keep the plates spinning. this does, though, capture sort of the money slide, if you will, what it is that we try to do in central command. needless to say, we are still hard at work in iraq, and i will talk some about that. increasingly, enabling, helping the iraqi security forces, but still working against al-qaeda in remark and shi'a extremist

elements that are still active. we do a great deal of work in building regional initiatives and cooperation in the araban peninsula, setting up its headquarters there after al-qaeda has been quite soundly defeated in saudi arabia and many of the gulf states. we have a very active partnership, of course, with egypt. we're concerned about reps smuggling. we have to worry about counterpiracy. what we advised the maritime companies we will provide that later during the q & a. the strait of hormuz is of enormous importance. it's 40-50% of the world's energy sources flow through that on a daily basis. we have an enormous challenge in

the form of iran, whose provocative actions, the continued arming of extremist elements in iraq, lebanon, gaza and western afghanistan cause problems, and whose apparent quest for nuclear technology and delivery means causes enormous pause, as you would imagine, throughout our region, but particularly among the arab states. so, preventing proliferation is a another one of our tasks. we're working to build partnerships in the northern area. it's a network established that we would love to hear about given all we have done in the years sense the end of the soviet union, and be pioneered the door opening in these areas. that's to enable the buildup of

our forces in afghanistan, and i will talk about that situation there. and how we also work to assist our pakistani partners who in the last two months have carried out quite significant operations against extremists who now most notably are seen by them to pose a threat to their country, which is a very, very important development, needless to say. here's the challenges for this year and it's a rome number. as i mentioned they're been a downward spiral in afghanistan, and we have to arrest that downward spiral and help to turn it upward. pakistan actually some hartening activities there on the part of the pakistanis. we are not carrying out that fight. it is they who are fighting the taliban in swat. they're carrying out -- the

significance of. the seeing their fight against extremists who threaten their existence cannot be overstated. meanwhile, as i will show you, there have been very substantial gains in iraq but there are also still significant concerns, and i will talk about those. we are, of course, reducing our forces there, also making other changes in accordance with the security agreement between iraq and the united states, and that is on track, although, as i mentioned and highlight, there are certainly continuing challenges. >> i talk about the challenges from the so-called iranian influence. this is the both the hard power and the soft power they exert in the region in a generally maligned fashion. although we should note that there are common interests and it not impossible that some of those common interests could be perhaps turned into something in the months ahead. and then, of course, the

concerns all have there as well as of course our european partners, the united states and others, about their apparent nuclear amibitions. lebanon just had an election in which the coalition that really is seen as not linked most closely to iran has prevailed, as was the case in iraq back in january of this year. i was just there. i should note for what it's worth, i was also just in afghanistan, pakistan, egypt, and turkey as well as lebanon. so i can give some first-hand recounts during the question and answer period. i talked about the concerns in yemen, about the need to assist them and to ensure they do not become a failed state right across the water, of course, somalia, is, i think, without question, a failed state, and it causes enormous problems and it is, after all, the reason that

of course you have the kinds of piracy challenges you have in the waters between somalia and yemen and then off the east coast of yemen. then the efforts with the central asian states states whoe extraordinary natural resource's. i talk about piracy. the narcotics trafficking is one that virtually all the states in the region, including run, by the way, are seeking to come to grips with because it obviously enslaves they're pop -- populations and fosters criminal networks that challenge the rule of law, as do some of the elements of arms smuggling that take place in the region. then we are fully supporting various policy initiatives that the obama administration is pure -- pursuing. of enormous concern of course in the area for which central command is responsible is the situation of the palestinians,

the middle east peace process for which senator mitchell has taken the reins,. i'm privileged to partner with one of the world's great diplomats, ambassador richardhole -- holbrooke, a force of nature, an extraordinary individual, of course, was the key figure in the dayton accords in bosnia, in fact, when general shelly was the chairman of the joint chiefs and gave up as j5, then lieutenant general wes clark. we're working together, very important to have a regional approach. and then denis rawson, an experienced and skilled diplomat who is focusing efforts on iran and the outreach to syria.

next slide. let's talk about iraq and then go on to talk about afghanistan and then some others, and then turn to the questions. 2009 is a very significant year in iraq, as it notes it is a transition year, a year during which all of the nonu.s. coalition members have departed or will depart, although there is still a nato training mission in iraq that does have other nations in it. we are obviously drawing down our forces. we just completed the withdrawal of our combat elements from the cities in accordance with the u.s.-iraq security agreement and we're going from being the primary conductors of combat operations to supporting iraqi forces. this is not something we just started on 30 june. this has been ongoing for 12 to 18 months and that was the final, withdrawal, and it did certainly accelerate in cities

in which we had a large presence in the spring, and that would be baghdad, mosul and basra. so we still have in those locations coordination centers but anywhere not centers for combat forces. they're centers for coordination elements from our force, who can still provide the iraqis the access to enablers they might need in a tough position, share intelligence, provide logistical emet -- -- med-evac assistance. and they did have the provincial elections in january, interestingly, the parties that succeeded were those that were least associated with iran and most associated with more nationalist and secular tendencies rather than the more religious and, again,

iranian-oriented parties. they are now preparing for the january 2010 election. you can see the maneuvering going on. it's quite interesting. the constitution in iraq requires a substantial degree of coordination among the different parties, the different ethnosectarian groups because of the composition of the political spectrum, and it's been fascinating to watch it in action. it's not democracy as we know it. it is something different, but it is certainly something in which the people are represented and in which the people have a say, and they will go to the polls in significant numbers in january, and prior to that there will be a census. it will be not a significant event. perhaps in most countries. that is a very significant event in iraq because it will have a great deal to do with how many sunni, shi'a, and a variety of others, will end up being

registered, and it can eventually have some impact on the ultimate elections in certain circumstances. there are still numerous challenges. there are still al-qaeda elements and other sunni extremist elements at work. we have seen their horrific attacks in recent weeks. in the runup to 30 june they wanted to make a statement to imply we had been run out of the cities and in fact did unleash as many suicide bombers as they okay, and there's reconciliation with some of the extremists. there have been detainee releases to pursue that with the iraqi government but there's no question that iran still does fund, train, equip, and direct to varying degrees some groups that are still active inside iraq and that's a concern.

there are these external influences. there's still some movement of foreign fighters through syria but theover number is down of moving through for a whole variety of reasons, not the least of which are the host countries making its difficult for military age males to fly to iraq on a one-way ticket. this is a serious dale and the state department helped a great deal with this. there are certainly considerable mistrusts and this is mistrust between arabs and kurds. general shally was operating and in charge of the effort to

support the iraqi kurds in the kurdish regional government area. there are disput as between the provinces because saddam redirected -- redistricted it during his time. there are sunni-shi'a concerns. there are disputes and competition. there are budget pressures. iraq got a little used to that $140 per barrel price of oil for a bit, and that was sweet for them. pretty sweet for boeing. one of my friends came over and landed a several billion dollar deal and there are challenges now that the price of oil is back down to under $70 a barrel amp lot of work still to be done in the provision of electricity, water, schools, health care and all the rest, although there

have been significant gains as well, and have broken electrical production records this year by quite significant amounts. once we have been able to achieve security and keep the power lines from being knocked down, keep the roads and bridges intact and all the rest of that, it has made an enormous difference, needless to say, and i talk about those disputes. next slide. now, if you look at it and say, why don't you back that up and try it again. this is microsoft taking its revenge on me here. back up one more time. let me describe what you would see if microsoft wasn't mad at me. [laughter] >> what you would see -- actually you can see, this is the height of the violence. there were 1600 attacks in a single week, actually 1,600 incidents incidents in a single week back in june of 2007. that was the height of the

violence. what you would have seen is a scale that went about like this, from the period of the mosque bombing in particular, shi'a shrine north of baghdad that was blownup a sunni yeah, and the cycle of violence started and it never stopped until we were well into the surge and conducted the operations to take away the sanctuaries and safe havens al-qaeda established, and over time also to deal with the shi'a extremists, and its literally came down like this. the number now, the number for last week was the lowest on record since we started keeping records in july 2003. the number of security incidents, and the month of june despite the horrific sensational attacks we did see, did indeed go down to the lowest as well. next slide. this captures. this is a macabre statistic but if our job was to secure the people, and that was the focus

of our forces from the beginning of the surge until now. you keep track of violent civilian deaths. this shows iraqi dead on the top, confirmed coalition -- we had a huge gap because we were not in the neighborhoods at this time. we didn't have the good data sources we eventually developed and we largely closed that gap over time. the bottom line is that at this point right here there were 55 dead bodies every 24 hours in baghdad alone. every 24 hours. and we wondered why they couldn't get any legislation done. bridges were blown up. pipelines were blown up. high tension wire towers were blown down and it was a horrific period. when i took over in february of 2007 and we launched the surge there were 42 car bombs in you that month and the number went up the next among. over time, our partners by locating in in neighborhoods

with those we were seeking to secure, 77 additional joint security stations in baghdad alone as an example -- were able to drive he level of violence down to take away those sanctuaries and safe havens from the al-qaeda and sunni extremists and also over time from the shi'a militia, and although there have been ups and downs and remain concerned bet the high profile attacks -- these are the car bombs, suicide car bombs and vests -- we have been able to drive that down together with our coalition and iraqi partners to lower levels but still levels of concern. i don't want to diminish in the least the challenges that face iraq, nor the fact that as ryan crocker, washingtonian, i might add, in the best diplomatic wing man anyone could have ever had,

used to say, iraq does remain -- the progress does remain fragile and does remain reversible, although it is less so in each respect since the conduct of elections in january, and now since the handoff of security taxts to -- taxts to the iraqis as well. this shows you where the al-qaeda elements were in 2006- 2007. baghdad is right in here. they had a substantial presence in baghdad itself. the inset is the city of baghdad, seven million people, and you can seal how it runs up and down the tigris and the euphrates river valleys, the approaches to baghdad, and over time it was greatly diminished. microsoft is doing me in here because this is much, much less right now than it was before. next slide. now, how was that done? we made this slide to show to

congress when we went back and testified, ambassador crocker and myself, because the fact is that dealing with al-qaeda in iraq, terrorist group requires much more than counterterrorist operations. it requires much more than just our high-end, special, special forceses elements. indeed, it requires -- they are very important. their operations at the height of the surge, for example, might have been as many as ten operations a night, taking six or more bad guys, specific individuals, off the battlefield in any given 24-hour period. that's hugely significant but it is not enough. we banged away in ramadi for years, and you still couldn't drive from one side of ramadi to the city center literally without getting hit when you did that. until we used all of these forces, not just counterterrorists but conventional, large conventional forces, increasingly large iraqi

forces and increasingly capable iraqi special operations forces and then over 100,000 so called sons of iraq, the product of the awakening movements where we were able to work with shaikhs of sunni tribes in particular, and 20% of it was shi'a over time, and to have these tribal awakeningses where way they said, enough, we want to get rid of al-qaeda from our areas. if you help us we will stand with you although in some cases we had to clear first before folks would raise their hand because of the level of fear that crept in during the years of al-qaeda presence. also, though, that's not enough. it's not enough just to do kinetic. you have to do political activity, and you have too consummate it with legislation and pass laws that equitably distribute income, have a budget that recognizes all the members of societies and then over time

try to reduce the ethnosectarian tensions. you have realize the fabric of iraqi society was torn, and we were trying to create conditions in which the fabric could be lined back up again and a couple of stitches put in over time and eventually over time it perhaps can be knit back together to what it was. it takes enormous intelligence and the breakthrough is not any particular discipline of disciplines. there have been break threws in signals intelligence, imagery intelligence, measurement intelligence, and then the applications that help us put it together with increasingly large database and storage capable. the real breakthrough has been the fusioning and that is what we have worked to do to break down all the walls around cia, dia, nsa, nga, special, special ops, conventional, coalition,

iraqi and so fort and we have worked hard to do that, as well as proliferation of unmanned aerial vehicles and other platforms that have made such a difference. he wad to overhaul detainee operations. we have 26,000 or so detainees at the height of this, and those were breeding grounds for the terrorist class of 2007, until we started to do counterinsurgency operations inside the wire and outside, and we identified the irreconcilables, the hard core and separated them from the rest of the population so they couldn't be training terrorists to be released. you have to get at the roots of discontent, the problems that might lead somebody to be willing to sign on with an extremist group to begin with. so you have to get to education, jobs, services, religious, and we learned loot of lessons in that regard. all of the this -- then you even take a host of other areas with other countries, source

countries, syria borders, and then the whole area of strategic communications and information operations in n we had a very substantial and very aggressive effort overtime but always emphasizing our truth because our motto was to be first with the truth. what we tried to do with all of this was to put pressure on every aspect of what al-qaeda in iraq needs, and these are their needs right here. the groups that comprise that constellation we term al-qaeda in iraq, and we were able to cut down on the flow of foreign fighters, to take away safe have vens to reduce the public support, to degrade the attraction of their idea idealogy to label them for their extremism and oppressive practices, to interdict command and control links and especially those that went back to the tribal areas in pakistan, and to cut down on their access to

money, which is the oxygen in many of these movements. next slide. so it takes all of that. now, we had a lot of big ideas that were active during this period. it was not just 30,000 extra troupes of the surge, not just the 125,000 extra iraqi troops during that period nor even the 100,000 sons of iraq, although they married -- mattered. the biggest difference was the ideas. the concepts, the employment of the forces in accordance with these, starting with a focus on securing the people and recognizing we also had to serve the people and, frankly, be seen to serve the people. next slide. to do that you have to live with them. you cannot commute to the fight. you can't live in a big base outside the city. at that time we couldn't, with the level of violence we had, drive through the neighborhood a couple times, go back to your big base and have the people feel secure. you had to move in with them and

as i mentioned, baghdad, 77 additional locations alone. next slide. comprehensive. that's what i explained with the anaconda slide there this is true at large and this is why we had to link arms with our state department brethren, aid, the other interagency groups not just from the u.s. but other countries, and then obviously with our iraqi partners and in so doing achieve unity of effort. ryan crocker and i established that cooperation was not optional, and we looked for opportunities to make that point, and we did. we had our offices right next to each other. we spent a lot of time together each day. we met with every congressional delegation together. we met with nouri al-maliki always together even if he called on one of us. next slide. you do now still -- don't -- this is not all about soft power. this is also about doing what in the military gets bade to do and that is to get your teeth into

the enemy and go for his jugular and stay after them and pursue them relentlessly, and at times kill or capture them. now, you shouldn't start clearing an area unless you can hold and it have the plan to build on it as well, and so before we launched our offensives we knew what we were going to do once we had the areas cleared. when we began clearing ramadi we knew how we were going to hold ramadi and it was very tough fight. now, you have to have such good intelligence that you can figure out who are the irreconcilables because you want to promote reconciliation. you can't kill or capture your way out of an industrial strength insurgency. you have to see who can be part of the solution, and then those who are truly irreckon sidelinable have to be killed, captured or run out of the country. that's this process here.

it require as very granular and nuanced understanding of local situations because that's where this take place. take place with individual shaikhs and tribal elements and mid-level leaders. now, when you transition, hand off, in this case to iraqi security forces, you have to be sure the conditions obtain to enable you to do that successful, so you're not trying to give them a problem we can't handle which will only make things worse, and perhaps lead to them being challenged in a way that ultimately means they are hijacked by some of the enemy elements which was the case to varying degrees in late 2006 and 2007. we had to work very hard to reclaim the national police in particular, and it took to do that, bill the way, the relief of their overall commander, both of their division commanders, their brigade commanders and something like 70% of the battalion commanders.

next. now, we were very, very aggressive with our information operations campaign and public affairs. i think many of you will know that we tried to be very accessible to the press. we embedded them everywhere but we did not put lipstick on pigs. if it was a problem we said it was a problem. i had people come from washington and they said, you have a perceptions problem. i said, with all due respect, sir, we have a result problem. when the rules turn around the people will see it. until then we're not going to try to spin it or anything else like that, and so this was our motto, and this is what we tried to do. by the way, the dean first part is critically important. when you conduct an operation there's a race for the headline of cnn or the other 24-hour news services, which is just about all of them now, and you can see who gets its first. we have to do it truthfully to the very best of our ability

throughout that process. but the militia has speed dialed into their cell phone the local stringers for those news organizations, i can tell you. next. got to live our values. i put out an instruction, directs to the troops in the fall of 2007. in fact, when there's a bit of a concern that in fact over time the grinding effect of combat for years and years may have actually led folks to say they turned a blind eye to this if they saw a buddy do something, and we worked very hard to make sure that we knew that short-term expediency just brings long, term problems and we must embrace and live the values for which we have fought so are over the decadeses and centuries. next. we sought to create an environment in which our junior leaders felt they could exercise

initiative. i would sketch out whitelines in the road and tell them to get down the road. at each level between me and those guys would define those lines a little bet better. as you get closer to the local situation. and i realize we might be doing ok in that record when we are in a tough area of southwest baghdad that had been coming back to life and we saw on the door of this company commander's chant post a sign that said in the absence of orders of assignment, figure out what they should have been and execute aggressively. needless to say i took that off the door and it made its way into through counterinsurgence guide. these are the elements of the guidance in fact that was issued during that period of the surge. and then you have to continually learn and adapt. you have to look for lessons, best practices and worst practices and then institutionalize them. you must share them.

this is a thinking, adaptive enemy and we cannot ever get into a rut where we think that what works today will work tomorrow or what works today in baghdad well work today in mosul or vice versa. next. okay. let's talk about afghanistan. back in 2005, on mill way home from a second tour in iraq, secretary rumsfeld asked me to go via afghanistan and look at the so-called train and equip over there, the effort to develop the afghan national security forces. one of the things i came back from that with the enormous challenges of afghanistan, a company that doesn't have the blessing that iraq has. looked the enormous violence that iraq had but did not have the oil, the water, the natural gas, and much else. it does have some fantastic mineral wealth, i might add, if it can be extracted and gotten to market. in any event looking at all of

that, and a staggering rate of illiteracy and 30 years of war and all the accumulated difficulties that had visited on the country, i said that i thought this would be the longest campaign of what was then called the long war, and i think that has proven to be accurate. afghanistan is going to take sustained substantial commitment. more forces, which indeed are on the way. we're going from 30,000 at the beginning of the year to about 68,000 or so by this fall. more so-so-called enablers, helicopters, route clearance teams, more trainers. and certainly more civilians, and of course 400 plus of those already on the way as well or in the -- in training to get there. clearly, the afghan national army and police have got to grow further.

one of the studies ongoing is to determine if they should be grown larger than is currently envisioned, and i think that will be a conclusion that is reached. certainly you have to take in a regional approach. you can not solve the problems of afghanistan if indeed there is not some effort in pakistan and as i mentioned that is actually ongoing now in pretty substantial ways. and in fact of course the af-pak, the strategy for afghanistan and pakistan that president obama announced several months ago. the announcement of ambassador hole brooke, and then you have to take all of this and ensure that you once again achieve that unity of effort i discussed earlier. and that is in this case with the substantial number of international partners, nongovernment organizations,

international organizations, and certainly host nation ministries and agencies as well. so, what has to be done? well, some substantial taxts. again, i will show you in a moment how the violence has escalated in afghanistan over the course of the past two years in particular. again, as in iraq there has to be a commitment, indeed, to secure and serve the population. the new commander in afghanistan, his tactical directive released focuses on that and talks about the circumstances in which close air support can be used. so as to ensure that we minimize the chances of civilian casualties from the use of those close air support and attack helicopters and so forth, while still making sure we don't end up with our soldiers feel that i go have one hand tied behind their back. certainly the effort to in this case we call it promote

reintegration. local level activity. the that requires the nuanced understanding and appreciation at local levels that in some cases is still a work in progress, so you can identify who the irreconcilables are, separate them from the population and re-integrate the others bag into the population. the elections are coming up on the 20th of august. obviously have to work hard to improve security by then to ensure that they are seen as legitimate, particularly in pashtun areas, and i will show you how the violence is, and these are insurgent areas. an enormous amount of work required to build the afghanistan government, for it to be seen as serving the people and not taking advantage of them, to clamp down on the corruption that has markedded

some of the elements, and also then to get after this narcotics problem, the illegal nark ticks industry that is such a plague on afghanistan and makes one of the major export crops, if not the major export crop, an illegal business and obvious challenges to the rule of law efforts in that regard. then a host of other initiatives that need to be taken here, all very tall orders but all very necessary to ensure the overriding objective with afghanistan is achieved and that is it not become a country in which transnational extremists can establish sanctuaries fromwhich they plot attacks like those of 9/11. next. now, microsoft is favoring us at this point in time, and you can see, though, how indeed the violence has escalated. you can see on the bottom, these are the years. those are very distinct cycle, the fightening season takes place -- slows down in the

extreme winter, and the mountains of afghanistan, but as you can see during the summer the fighting season, the level of violence, the level of security incidents -- this includes all attacks of all varieties, including attempted attacks, improvised explosive devices found and cleared as well as those that explode. you can see how the levels have gone up each year in particular 2007, and indeed now. some of the reason right now to be sure is because our forces are on the offensive and they are seeking to take away these safe havens to agreeing in kandahar and in regional command east as i will show you on a map in a second. some of it also because the taliban is trying to attack before we can build our forces up and before we can indeed launch further offenses. now, this shows the country of

afghanistan, kabul being right up in here, and the violence is largely concentrated in a variety of areas that-the pashtun belt of eastern and southern afghanistan, especially down in helmund province and kandahar province, which happen to be the major poppy-producing provinces in all of afghanistan. so as it says right there, 10% of the districts have 70% of the violence and that's where we have to focus our effort to help secure the population and separate the insurgents from the population. next. back up, please. this shows in fact where our forces are going just in a macro sense so as not to get into classified information. about the first of the additional forces, a brigade, third brigade, 10th mountain division, went in here.

southwest of kabul in a very important area, also right along the ring road that is so critical to the commercial activities in afghanistan. the next was in combat aviation brigade in regional command south and is just about doubled, together with the marine helicopters, the number of helicopters that we have had in afghanistan, which is of enormous importance. third this, marine expedition ary which has been in the news because if the offense it launch on the helmund river, the populated area of helmund province, and they're operates neglect central and southern parts of the fishhook area and engaged in tough fight as are the british comrades who launched offenses of their own further north. flowing in now are the stryker

combat teams. a lot of them based at fort lewis. i forget the origin of this one but those stryker organizations named for the vehicle that is their platform, have didn't exceedingly well in iraq, and the commanders in afghanistan and i are very keen to get them on the ground there they will focus in these areas here. certainly some of them in kandahar and some in the surrounding provinces. and we're going to take a brigade from the 82nd airborne division and overlay it with a number of advisors that will supplement its normal structure for the police and the army elements in regional command south, having done something similar to that in regional command east. so that's the plan for the future. and again, there's some tough months ahead there to be sure. and some difficult fighting that will be necessary first to secure as many additional districts as possible prior to the elections on 20 august, and then to continue the progress

for the remainder of this fighting season and then as we go in and prepare for the 2010 fighting season. next slide. let me talk briefly about these other locations. iran, gulf,. again, we're very keenly watching the activity in iran where certainly it does appear there are fishers that have emerged in the ruling structure, and that there is true competition between raf san january any and his camp and the supreme leader and president mahmoud ahmadinejad. we will be very interesting to see how that plays out. needless to say, rightly, leaders are staying out of that, and allowing events to transpire while keeping a very close eye on that, and also while still seeking to counter these activities that take place in iraq, western afghanistan,

southern lebanon, and gaza. now, because of iranian activity, we have an interesting situation in the araban peninsula where many of our long-time partners have expressed a desire to work with us that is uniquely strong since really the gulf war. we have more patriot batteries back up in the gulf states than we have for many years again at may, all the way back to the gulf war. there's a great deal of interest because of the concerns about iranian missile activity and their development of delivery means, interest in shared early warning and air and missiling defense. there are concerns about infrastructure that is vulnerable and much more partnering going on to protect it. needless to say concern about maritime security, not just the counterpiracy but ensuring

navigation in the strait in difficult times. trying to disrupt and interdict the arms smuggling that goes on to, again, hamas and lebanese hezbollah and the extremist elements that are still hack tonight varying degrees in iraq and western afghanistan. we conduct more joint exercises than we have in quite some years, and again, with much more enthusiasm for them. there are regional training centers springing up such as the air war -- fare areas. and an extraordinary center for an extraordinary air force of a small country that has tremendous capability now partly because of that center. but others, special operations center that just opened outside in jordan, near east asia.

we are putting into bahrain, and a variety of other initiatives like that, and then a lot of activity, again to ensure that proliferation of various components for nuclear weapons and missile cannot take place. egypt, the president mubarak, and the king of saudi araina, both have met with the president of syria, in recent months. there are a number of efforts to reach out to syria and indeed one of our assistant secretaries of state, jeff feltman and others, have meats trips to damascus as well. it will be interesting to see how that develops. one would think that overtime syria will see its future lies more with the arab world the

western world than with iran and again, given their economic challenges, and given the relative economic opportunities, one would think that that would be the way of the future and we will have to just see it that happens, and also see what the impact of the upheaval in iran might have on that. and then there is considerable outreach with the arab world to iraq which is concerned about iranian influence in iraq, and frankly, ambassador crocker and i visited arab countries, and they suppressed that concern, and i said, why don't you have a little arab influence in there? how about you sending an ambassador, re-opening your embassy, re-establishing trade and other relations and that is what is happening, and in fact president mubarak was quite firm about that when i met with him a

couple weeks ago. then the evident to strengthen the lebanese forces, not to provoke confrontation but to build them patiently, slowly so that they can become the legitimate armed force in their country as opposed to other elements that are there. next slide. yemen, gulf of aden, red sea, our concerns that yemen is a location in which there is an al-qaeda threat that is emerging. ed a kauai in the aarabian peninsula has been push out, appears to have lodged in southern yemen. it is a a concern. it has link back to pakistan, and then over into somalia, so we're focusing on helping the host nation. also takes steps to combat piracy which is down considerably recently, and that's more because of the high seas associated with the monsoon

this time of year, although other fact users are contributing. marry time companies are indeed taking the steps we advised them to take in the past, the three simplest of which actually were not being followed and the first is, speed up when a pirate approaches you. [laughter] >> i'm not making this up. [laughter] >> the second was take evasive action. your ship is 100,000 opportunities, their ship is a dingy with an outboard motor. and the third is take up the ladder. believe it or not -- [laughter] >> actually not quite so easy. there's a pilot ladder that is bolted on there if they take the ladder up it's tough to get up on these big ships. now, in a more serious note, the u.s. merchant -- coast guard commandant has issued

instructions to the u.s. companies, which there are notmarked a metedly because it's easier taxwise to do it in the cayman islands or something like that but they have indeed issues direction to consider a variety of steps beyond that, all the way up to and in fact arming security forces on them which may be necessary overtime. the challenge, of course, is that somalia is a failed state, and so people say, what do -- turn the pirates over in the tore, and you ask, which authorities? because the authorities in some cases will have them become out in their boats before you can weigh anchor. next slide. i want to talk very briefly at the end here. i think this is the second to last slide. about how we fight now days. there are people that say all you do is counterinsurgence, stability and support operations. you don't do real combat.

our troopers can do real combat. in one. number two we do it differently. if you contrast the way we fought the battle of sad sadr city, launches acarids offensive out of sadr city and east baghdad, this is a very tightly packed neighborhood, two million people in this very large, some of it slum conditions, and they were launching volleys of rockets, as many as 15 time as day, landing in the embassy area, the green zone, where the seat of iraqi government was, and needless to say an enormous challenge to our activities there, and obviously taking life and wounding others. to combat that, we provided one single brigade commander, one

colonel, john horton, third brigade, fourth infantry division, with all of these assets. never before has a commander had this number of assets. when we did the fight in 2003, when its all began, we all fought in the entire corps for one predator, one unmanned aerial vehicle and the picture wasn't all that great. now for one brigade commander we had these two predators here, which have full motion video and were armed, a special operations platform, win is an intelligence agency, the other was a special mission unit. then we had six other lower flying shadow and raven -- this is 24 hours a day, circling the city at verious levels, all of which have a screen associated with them and a chat room underneath. that's how you command and control it because the pilots might be at nellis base, or in

germany or georgia and then obviously in iraq and they're all in their chat room with their equally indecipherable language i mighted a e add for dad here. we had three teams of two apache helicopters each circling. we had dismounted infranty strikees, tanks, guided missile rockets, counterfire radars, blimps. optics, towerrers with optics and identifying teams, and once we got this going and got all the pipes and everything else aligned and the communications and command and control, on three different days we destroyed five rocket teams and we killed 77 teams overall during the course of about a three or four-week battle. also, one of the top eight leaders wounded another one of the top eight, and the three special assistants of another, and about 780 militia members as

well. with minimal, minimal damage inside the city, some tough fighting along a particular line that we had to secure because it was an area in which rockets were being shot with considerable precision. but this is how our troopers fight with all of the so-called enablers we provide them, and included also close, air support, all the other high fliers up to national technical means and this other exotic platforms and it's all pulled together as relatively low level, brigade division level, and integrated down to special forces, snipers, at the very bottom, and infantrymen and then all the way up, and again, our forces can do this, and it is quite an evolution over the course of the last few years, next. now the key to all this is our

troopers,-under soldiers, sailors, airmen, civilians that support them and this is a picture from july 4th of a little over a year ago. i was privilegedded to reenlist 102,315 soldiers, sailors, airmen and marines, and one ceremony. they are the ones who have made the progress. the and their coalition partners and iraqi partners, who have fought the tough fights, have south to secure and serve the people, in kevlar and 120-degree temperatures, sand storms, mountains of afghanistan, and all the rest. and i can tell you that there's no greater privilege than having served with them in the capacities i have been privileged to fill over the past several years. thank you very much. [applause]

[applause] >> i think your list comment was particularly important because in this audience we have a number of returned veterans, parents of men and women who are serving overseas. so i appreciate your last comment. as the questions come up i have the privilege of asking the first question. one of the things i wanted to come back to you you spoke about the importance of being able to take an area, to then hold it and build on it a number of years ago the council in seattle has the ambassador for overseeing the first investment

of $18 billion in iraq. her challenge was in fact they were never able to spend $18 billion. there was challenges of the government to release money to battalion commanders in the field. saying you can write a check. there were responsible for the lives of 30,000 men but not allowed to write a check for $100,000. how is this working as you secure the populations? >> vastly better. in fact, i remember telling ambassador bremer very early on, up in mosul by this point in time, and we actually had things going pretty well. we had been able to hold an election. we had some iraqi partners helping to care the responsibilities, and had a governor, a provincial council, people pulling together but we didn't have any money. now we did go out and find some iraqi money, and that's another story. and we got them to spend that. but what i said to him was, you

know, look, we can launch a half million dollar missile with a single radio call and nobody even require mess to authenticate but i can't spend $10,000 without literally triplicate paperwork being thrown down at that time:. blk: ...

cccccccccccccccccccccccccccccccc cccccccccccccccccccccccccccc >> by the way, i was on a video teleconference with general mcchrystal in afghanistan this morning comparing what we were able to establish over time in iraq with what we have in afghanistan at this point. as you know, one of the initiatives is to build an

operational headquarters about his headquarters of the strategic level is not always tried to tackle operations. in iraq, we learned about the same thing and it took about 18 months. and it was multinational corps iraq appeare. we talked about the general they're being operational head of that, which, in fact, he wore. we put out a whole document called "money as a weapon system" and it talked about how you properly and responsibly and with due diligence determine what the projects are and then spend the money to execute them. >> a part of my role here is to be able to get the questions of the audience up into this conversation. and have a series of questions here related to bin laden.

i guess the question follows down to, essentially, why can't we find him? [laughter] [applause] >> i ask myself this question every morning. [laughter] i asked a few other people, too. [laughter] the bottom line is that man hunts are tough. i think it was eric roth for somebody that was in the north carolina hills. this was in our very own united states of america, presumably in a part that we controlled -- [laughter] and we could not find him for quite some time and we would not have if he did not have to come down and feed at the garbage pails of some state park or something. i was in the manhunt business in a previous life in bosnia and her to go noah -- herzegovnia

and we have the best year ever in getting war criminals -- in fact, milosevic was brought over in a deal. eventually, we did operations to get kerridge. as you all know, he was eventually found selling of herbal medicines with a biggebe belgrade right under the nose of everyone. when you translate that to 16,000 to 18,000 foot mountains in which anyone that is not from the family or the tried stand out like a sore thumb for vast distances, very good operational security. i mean, the fact is that while bin laden remains an iconic and important and symbolic figure, he is certainly not issuing even

strategic direction, much less day-to-day direction of any kind. do not get me wrong, we would certainly like to find him. but he is also in an area where we do not operate on the ground .... that complicates things as well. you have to see these areas to believe them. if you go out in the rocky mountains, i guess, and then add a little bit more to them, you have some sense of what it is i'm talking about. and then make it even more remote than they are and take away aspen and vail on all the rest of that. [laughter] >> we have a series of questions you're related to -- question here of related to, in essence, military goals. you have mentioned natural resources several times in both iraq and afghanistan. are u.s. troops protecting these resources or if the u.s. at work to exploit them?

how you respond to those kinds of questions? >> this is actually a great question because we use to get it in iraq of the time. the enemy is pretty skillful at propagating conspiracy theories in particular, and frankly, these are part of the world that are very given to believing in conspiracy theories. it is one of the cultural awareness topics that we share with our restored -- are soldiers. my response is to become a look, we could have bought all the iraqi oil for the next, i forget how many years that it was that i figured out -- it was at least 20 or 50 years. they export about 1.9 billion barrels a day. you could do the math. we could have bought all of that for about a year's worth of our operational expenses in iraq. and that actually did convince the iraqis when you did the math for them cured this is really not about minerals. it is not about pipeline wars.

it is not about trying to corner the market. in fact, china is the one that got the contract, the first contract for oil in iraq, in part because the iraqi pricing scheme that they did was not that advantageous to the countries. in fact, china and india were very active inside afghanistan, again, trying to get some of the iron ore and some of the other minerals out of there. >> we have got a series of questions around this question about reconcilable and irreconcilable differences. how, essentially, it does leadership to think about these e -- these issues? how you determine what is and is not reconcilable? >> again, there are various weitz. if the weapon is pointed at you, irreconcilable. [laughter] no, to be candid, one of the very tough things we had to get

passed in iraq when i got back of their last time for the surge was this idea that we were going to sit down, maybe even make a deal with people who had our blood on their hands, and we had to get past this. and we worked hard at it. i was very fortunate to have as a deputy lieutenant-general kurram lamgraham lamb from the . he was also a division commander in the beginning and the first year of iraq and we had some great exchanges during some interesting episodes during those early days. i asked that his government extend him and they did. primus for blair at that time still. and it was very fortuitous. he said, you know, when i was in northern ireland -- again, he was the special operator over there -- he eventually had to sit down with martin mcguinness,

a notable ira brigade commander and a very tough customer. he had a lot of blood of u.k. soldiers on his hands, particularly two of the s a s a appliance. and he said, had to sit across the table from martin mcguinness and he said he did not know whether to throttle him, but of course, he decided to have dialogue. over time, that was necessary for the reconciliation that blossomed into the northern ireland peace agreement. he advised us how we needed to think our way through that in iraq andç that is what we did. by the way, i might add that i used him at initially and 22 sas guys because they can deploy very quickly and cobbled together the first element that eventually became known somewhat

innocuously as the force strategic engagement cell, which was comprised of u.k. two star general and a very serious diplomats and their supporting structures. they provided the kind of guidance and direction that worked its way down to our troopers. it was really the italian commander -- the battalion commander, the company commander level that this was actually taking place. you can see some of the folks out here that were probably part of that, by the way, just based on seeing what they have on their uniform. and again, what we needed to do was provide increasingly specific left and right limits on the road, if you will, as you got closer to their specific local circumstances and the kind of intelligence support that they needed but could tell them whether these guys were telling the truth in general or could be trusted and so forth. we have to go through the same process in afghanistan and, frankly, because they're not had

the same density of troops, not the same level of resources, we do not have the same structures, we have some significant work to do there. general mcchrystal was keenly aware of that, as is ambassador carla eikenberry, who has also had several on the ground there. they're working on a campaign plan that is very similar -- very similar to the one that ambassador crocker and i put together for iraq. >> part of this pushes toward the question about leadership. increasingly, as these decisions are made lower down, how do you think about leadership and the changing role of military leadership in this tax there have been clearly changes in leadership in afghanistan. how do you start to think about that stuff? >> this is a great topic and there is a whole power point briefing on it. it talks about big ideas. it talks about, how do you

change an organization. how you test the guys -- do you have a slide that you can pop up here? we would just see if microsoft is going to be cooperative or not. still, i mean, really, the help desk is awesome. [laughter] people ask you, how you develop leaders who are comfortable in this kind of situation and the answer that i give it is you need people who have had out of their intellectual comfort zone experiences. for me, for what it is worth, it was graduate school. i went there from commanding general staff college. i thought i was a reasonably swift fellow. like our microsoft rupp was first in the class and all this stuff. i learned that there are some really smart folks out there that do not see the world exec for the way we do. in fact, some see it very very differently.

and some have extraordinary assumptions about the state of nature, as it is called, as it relates to international relations and political science. to learn about political facade -- philosophy, basic economic concepts and all the rest of this stance you in very good stead. but again, it was the process of being in a situation where it was out of my intellectual comfort zone. these are cogs right here. what this is is a so-called engine of change. when i was privileged to be a three-star commander at the center, we controlled a lot of the elements that made up these cogs. we control the organization that wrote the doctrine, and that is the field and around the counterinsurgency operations field manual produced during that time under our oversight. that cod, the concept, the big ideas that guide the education

of our commission, warrant and noncommissioned officers and of the leaders and centers. then, of course, you have to change the way you train your units at the national training center in damany government -- mojave desert town in california and in louisiana and are you conduct counterinsurgency contingency operations. these are connected by leaders to learn this right here and then you have to have a feedback mechanism or lessons learned and we have the center for lessons learned. that helps you refine the doctrine, adjust the curricula cannot make tweaks out in the training centers and of course, change the way you are conducting operations. all of this facilitate, of course, by microsoft and buy a lot of applications that make up this greater world called knowledge management.

virtual communities, the ability to literally look over the shoulder of those who are in iraq from all the way back here in the states virtually, to do it through the internet, to see in a sense, the orders they are receiving, the intelligence they are getting, the orders that are issued. the significant activities of that day and all of the rest of that. so that we are producing a learning organization. what you're after, again, our leaders, leaders who "get it" as they say. so, they are comfortable with that kind of cop-operation which is different. this is not the kind of conventional tank on take warfare. it is a harvard warfare. and they're comfortable with that and then they can -- is a hybrid warfare. and there, with that and they can continue to lead in that. this overall model is applicable to any organization. leaders have to get the big ideas right.

they have to communicate them to effectively to support net leaders. they have to oversee the implementation and they have to capture the lessons learned and best practices. >> as our final question, leaders getting the ideas right and mccain them effectively -- our final question is, would you please address how, if at all, the change from the bush administration to the obama administration, has it affected your freeze and the way that you do your job? >> i am -- the affect your abilities and the way that you do your job? >> ipod because -- i pause because, to be candid, uncomfortable. those leaders are deadly serious about what they're doing, truly committed to the welfare of the country and the men and women

who serve in uniform. one was in the final years of, obviously, the close contact that we had an the other in the early years. what i will say is that the processes that we have gone through with president obama and his administration have been very good, frankly. we met the day after they took office. we met on iraq. in fact, i was in kurdistakyrgi and i got the call to meet in iraq. i got back and they said, not about, two days from now we will meet in afghanistan. each of those was with a roughly 60 the review. i very strongly supported the decision that was made on iraq. i did it was a very pragmatic

and good decision on the way forward for iraq. i feel the same way about the afghanistan-pakistan strategy. we have had every opportunity for input, consultation, and subsequent meetings with the president, and many more with the varying levels with principles, principal deputies committee, certainly, the joint chiefs and the secretary of defense. again, i think everybody is trying to get it right. the objective that was laid out for afghanistan is vitally important to our nation, as i mentioned earlier, to ensure that it does not become a sanctuary for the kind of transnational extremist better able to do to us what they did on 9/11. that does require a comprehensive effort, as i described to you and it requires a a substantial and sustained commitment to our partners in pakistan as well. again, i think the process has been good. i think i strongly support the

outcome and the strategies that have been adopted in the review processes -- and the review process as an oversight that has been conducted since then. >> the goal of the world affairs council is to help every person to learn and think about the hard issues of our day. there's nothing harder right now than thinking about the role of the u.s. abroad. in the time of economic crisis and military intervention around the world, these hard issues are what affect our community. and we are the third largest of military investment in the nation in the puget sound area. please join me in thanking general patraeus for joining us this evening. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009] >> today on news makers,

republican -- two representatives on what to expect before the august recess. >> i think you'll deadline is being driven by political purposes. tom daschle said that the reason that it failed was because of a one went on break and they heard from their constituents and got an earful and said, hey, i cannot vote for this. i cannot look into the crystal ball and say it is going to go this way or not, but i do think the american people are smarter than they presumed to be and they're letting their representatives know now, which is why i see this fractionation of the democratic caucus. it may just be that they figured out the scheme and they are moving their pressure up at an earlier date. >> representatives michael burgess and bill cassady on news makers today at 6:00 p.m. eastern time here on c-span.

>> house c-span funded? >> taxpayer dollars. >> private donations. >> public support. >> consumer funded, i guess. >> you were funded, i do not know. with private contributions. >> house c-span funded? 30 years ago, america's cable companies greeted c-span as a public service, a private business initiative, no government mandate, no government money. >> and now, a house hearing with treasury secretary timothy geithner. he is talking about the obama administration's plan to regulate derivatives, the financial products that led in part to the current instability in the financial markets. this is a joint hearing by the agriculture and financial services committees. it is about two hours, 40 minutes.

>> in the interest of time, i will submit by a full statement for the record. we have 111 members of congress. i know many of my colleagues who are attending today's hearing of questions of the secretary. last month, the white house presented broad reform proposals to overhaul the financial regulatory system. i am pleased to note that several of their key provisions regarding the over-the-counter derivatives are similar to what the agriculture committee passed earlier this year as part of a bipartisan bill that would strengthen oversight in futures and over-the-counter markets. however, the devil is always in the detail and i hit the 42 hearing additional details about the administration reform ideas and i hope secretary geithner will help us get into the weeds on how this will work. i want to yield two meeting-two minutes to remember who has done

a lot of work and has some knowledge in this area, the gentleman from by-from idaho, mr. minnick, for two minutes. >> i am a farm boy who grow skeptical of wall street wondering how i love of bread could cost dollar when it contained only a few cents' worth of wheat. i also spent over 20 years of bases -- as a seal of substantial companies who relied on wall street and used derivatives to hedge currency and regulate risk. i have listened to many experts and city the administration's 84 page concept paper. if we are to craft a regulatory structure which which can -- egulatory eep barac structure which can keep our nation from ever again repeating the financial excesses which brought today's economy to our knees, we have to give serious consideration to the fallen reforms come which go beyond those proposed by the

administration. first we should merge the s.e.c. and the commodities futures trading commission. financial derivatives, whether they originate -- >> excuse me. we do hold -- one of the members on the republican side point out the acoustics in this room are terrible. now i think when ways and means holds in the room, they consider that an advantage. but we are here not marking up a tax bill, but having an important public hearing. so we are going to ask everybody to speak fairly loudly. particularly you, mr. secretary, because while i can't see you, i would like to be able to hear you. mr. minnick may resume. >> first, we should merge the s.e.c. and the commodities futures trading commission. financial derivatives, whether they originate in a commodity, a security or neither like weather futures, are functionally identical and must be traded, cleared and settled subject to the same rules. bifurcated responsibility might be made to work temporarily, but

is a poor long-term solution which will discourage boeing bold action when crises arise and will encourage regulatory arbitrage. second, banking regulation should be removed from an already overburdened federal reserve and the remaining three federal depository institutions regulators, the ots, the fdic and the occ should be combined into a single federal bank regulator, which should also be given broad consumer protection responsibility and resolution authority for both banks and all other entities deemed systemically risky. powerful global institutions like citibank and bank of america or aig should not be allowed to shop for the weakest federal regulator. finally, the proposed systemic risk oversight console should have the highest quality permanent staff is f it is to respond appropriately as future dangers arise. because the federal reserve is

more institutionally independent than executive branch agency and has increasingly global responsibilities, that staff should be housed in the fed and the counsel should be chaired by the fed chairman. i thank both chairs and yield back. >> i thank the gentleman and just for clarification. the gentleman spent a lot of time looking at this, but mr. frank and i, at least the two of us, have come to the conclusion we're not going to be merging the s.e.c. and the cftc, but we appreciate the gentleman's comments. i want to recognize my good friend and the chairman of the financial services committee, mr. frank. he and i have gotten together and we have a good working relationship. and we think are close to having a consensus on where to move with this. and you can see by this hearing today that we have a good cooperation going on between the two committees. mr. frank? or excuse me.

i'm sorry. i am supposed to recognize mr. lucas. i'm getting ahead of myself. so i didn't mean to overlook you, mr. lucas. my good friend from oklahoma who worked with us to get hr-977 out of the agriculture committee last february. mr. lucas is recognized. by the way, we're going to limit people to four minutes. because of all of the members that are involved. we would hope that everybody would abide by that. mr. geithner, we're not going to hold you to four minutes. we want to hear what you have to say. mr. lucas? >> thank you mr. chairman and thank you to both chairmen for holding this to hear the treasury's proposal as well as examine the legislation that the house agriculture committee passed a few months ago. as ranking member of the house agriculture committee and senior member of the financial services committee, i would like for this occasion to examine the issue from two different perspectives. the agriculture committee has been active in exploring the

role derivatives play in the glaerkt place and overall economy. the committee has held numerous hearings to gain further information and insight into the complex nature of credit default swaps and how they should be regulated. in february of this year, as the chairman noted, the ag committee passed hr-97 7. the one can argue the consechts transparency and accountable birkts we must make certain our actions call for an appropriate level of regulation that will respect the nature of the marketplace and encourage product innovation and economic growth. derivatives do serve a valid purpose in the mark dlet place when used with judgment. they are essential for managing risk. we must consider that there are numerous industries that have legitimate price risk and there must be a way to mitigate that. derivatives provide a legitimate means for managing that risk. the financial problems that we have seen recently are not the result of merely the existence of derivatives but there are

problems in measuring their true performance or knowing with certainty the depp'ing and breadth of the over-the-counter market or knowing with confidence the credit worthiness of the counter party. simply put, the marketplace can be protected from market failures, if regulators are fully aware of the threat. ignorance of this relatively new financial instrument caused much of the financial failures. we now know these complex markets need better models and methods for oversight and transparency. however, we must be careful not to overreach and force business into very expensive clearing operations that cost capital they do not have or force them out of risk mitigation altogether. then business will be forced to manage risk with higher prices which will ultimately be passed on to consumers. the need to avoid artificial costs for business was the reason i opposed the clearing requirement in hr-977. there is considerably #og@@@ @

this would recognize the fact that not all contracts can be cleared and that there is a need for customized contracts. these are just a few of the concerns we have on my part as we move forward today. again, i thank you for the opportunity to discuss the issues regarding these important financial institutions, and the secretary geithner, and put forward to your answers and questions posed by the panel. >> i am pleased to recognize my good friend, the chairman of the financial services committee, mr. frank. >> thank you, mr. peterson. mr. frank. >> thank you, mr. peterson. and i begin with an apology to our friends in the media. there is no fight to cover between these two committees. i know that's an easier topic than the complexities of how

actually to do something. but i believe that the besetting sin of the house of representatives is jurisdictional fights. and n which our egos get in the way of good public policy. i am very proud that chairman peterson and i and other members of our committee, as well as chairman ginsler and chairwoman shapiro have made very extra special efforts to avoid that. and i believe we have achieved that. and there will be some disagreements, but they will be based on substance. there are some areas where there were no disagreements. clearly, we will be significantly expanding the regulation of derivatives. and i want to address the issue that was raised by the very thoughtful gentleman from idaho, with whom i agree on most issues, not on the question of the merger. i will say if we were starting from scratch, i don't think we would have the current organizational structure. but we're not starting from

scratch, and i don't think it is practical to talk about making those major changes. but i also say this. there have been some complaints that in what the obama administration has proposed, and i think they have a great deal of credit coming to them for the initiatives they are taking and a broad range of financial restructuring. and some of what we are talking about. some people complain there's not enough structural change. frankly, i think that's the wrong issue. what we should be held accountable for is making substantive changes in the rules. who does these things is less important to me than what's done. and by the time we are through in the collaboration between these two committees and the work of the congress as a hole and the work the financial services committee and others will, do we will, i believe have substantially increased the authority of regulators to deal with these things. we have within our jurisdiction the question of hedge funds. i believe that hedge funds should be required to register. we will be talking about further

expansion derivatives and undoing some of the decisions not to deal with them in the past. we will be talking about a number of other areas where we will be making some important substantive changes and giving the regulators the authorities to do things. with regard to derivatives, clearly the gentleman from oklahoma is correct. they play an important role. the problem we have is this. the role of the financial sect sor to be an intermediary between people who are engaged in the productive activity of the economy and people who have the money they need to do that. the role of the intermediaries is to gather up money in reasonably small amounts. one of the problems we have seen in the past couple of decades. activity that is a very important means to the end of

productive activity has become for some in our society an end in itself. our job is to try and separate those things out. where we have instruments, activities, entities that are an important means to gathering the funds that our private sector economy needs to do productive activity, we need to protect that. we need to make sure it's done with integrity. we need to give encouragement to investors who may be afraid to invest. that's why i regard sensible regulations very pro-market. you protect the people with integrity from those who might try to cut corners. you give some encouragement to those who should be investing. our job is to reduce the extent to which there are things that go on for their own sake. i believe we're capable of doing that and i'm pleased chairman peterson and our committees lawyer on the way in cooperation with the administration to adopting such rules. and i now recognize the ranking member of the financial services committee, the gentleman from alabama, mr. baucus. >> thank you, mr. chairman.

as the chairman of the ranking member of the agriculture committee have said, derivatives serve an important function in the market. they allow -- i don't know what -- they allow thousands of company companies -- >> i'm going to start over, if i can. thank you. does that work? >> it's working. >> all right. as the three gentlemen said, they allow us to hedge risk to deplore capital, to lower their cost and to offer protection against fluctuating prices.

i'm not sure what -- derivatives are about shifting risk and my greatest concern is that we do not want a system, and i fear that the administration is going down the path of shifting that risk not to the investors or to the dealers, but ultimately to the taxpayers. the companies -- the four companies that will deal in these derivatives, over-the-counter derivatives the most will be four or five of the largest companies, financial companies in america. all of them will be deemed to be systemically significant. part of the administration proposal is for when these companies get in trouble. and one reason they could get in trouble is trading in these

over-the-counter deatirivatives because they can protect against risk, they can lower costs, but as we saw with, i guess, enron, as a great example, they can take both dealers and investors down. and when that happens, i would like some assurance that the taxpayers are not going to ultimately be the ones who assume that risk. that's not what we ought to be about. last september, leading up to last september, a lot of people made investments. they wrote over the counter derivatives. they made billions of dollars. profits on the way up. but when things turned down, who was asked to come in and backstop them? who was asked to take the risk,

to suffer the loss. it was the taxpayer. now i personally believe that we ought to allow corporations to continue to write customized derivatives and that, yes, the government can look at them, but i -- another thing that we ought to consider is the government the best party to judge risk? and i say no. i think the government has a very poor track record, regulators, of identifying risk. are we going to leave when we start having standardized trading of over-the-counter derivatives, particularly the more complex one, and the regulators bless those trades, or say that they are safe, are we going to attract a whole new generation of investors who think that i are investing in a

safe security or future? we found with freddie and fannie that people began to think it was an implied government guarantee. and they invested in those stoc stocks. we need to totally avoid any implication that because the government is going to regulate these markets, they are going to ensure these markets or backstop these markets. and i would like some assurance from the secretary of treasury that we ultimately decide the level of regulation. i look forward to the memorandum of understanding between the fed, the cftc and the s.e.c. but that ultimately, the taxpayers do not come in and

take the burden and the risk and the costs of over-the-counter derivatives gone bad. thank you, mr. secretary. >> i thank the gentleman and i thank the members for their attendance and the chairman and ranking members for their statements. mr. secretary, we appreciate you being with us. we look forward to your statement, and members, i guess we have votes maybe coming up at 10:30 but we'll have time for the secretary'statement and maybe a couple of questions. secretary? >> thank you, chairman peterson and chairman frank and ranking members lucas and baucus. and i'm grateful for the chance to come before you today. and i want to compliment both of you and your colleagues for already doing so much thoughtful work in trying to lay the foundation for reform and for bringing this basic spirit of pragmatic cooperation, tran skending the clax institutional

differences that have made it harder to make progress in these areas in the past. now before i get to the subject of this hearing, which is the important need to bring comprehensive oversight and regulation to the derivative markets, i want to make a few broader pnts about the imperative of comprehensive reform. there are some who have suggested we're trying to do too much too soon. that we should wait for a more opportune moment when the crisis has definitively receded. there are some who are beginning to suggest we don't need comprehensive change, even though the costs of this crisis have been brutally damaging to millions of americans, to hundreds of thousands of businesses, to economies around the world and to confidence in our financial system. and there are some who argue that my bye making regulations smarter and stronger, we will destroy innovation. and there are even some who arguehat we should leave responsibility for consumer protection for mortgages and consumer credit products largely where it is today. now in my view, these voices are

essentially arguing that we maintain the status quo and that's not something we can accept. now it's not surprising that we're having this debate. it's the typical pattern of the past. as the crisis starts to recede, the impetus to reform tends to fade in the face of the complexity of the task and opposition by the economic and institutional interests that are affected. and it's not surprising because the reforms proposed by the president and the reforms that your two committees are discussing would substantially alter the ability of financial institutions to choose their regulator, to shape the content of future regulation and continue the financial practices that were lucrative for parts of the industry for a time but ultimately prufd so damaging. but this is why we have to act and why we need to deliver substantial change. any reglaer to reform of this magnitude requires deciding how to strike the right balance between financial innovation and efficiency. on the one hand, and stability and protection on the other. and we failed to get this

balance right in the past. if we do not achieve sufficient reform, we will leave ourselves weaker as a nation, weaker as an economy and more vulnerable to future crises. now one of the most significant developments in our system during the most recent decades has been the substantial growth and innovation in the market for derivatives, in particular the over-the-counter derivative market. because of this enormous scale and the critical role these instruments play in our markets, establishing a comprehensive framework of oversight for derivatives is crucial. all the derivatives bring very important benefits to our economy by enabling companies to manage risk. they also pose very substantial challenges. under our regulatory system, as it has existed, institutions were allowed to sell very large amounts of protection against certain risks without adequate capital to back those commitments. the most conspicuous and the most damaging examples of this were the monoline insurance companies and aig. banks were able to reduce the

amount of capital they held against risk by purchasing credit protection from thinly capitalized special purpose insurers subject to little or no initial margin requirements. the complexity of the instruments overwhelm the checks and balances of risk management and supervision, weaknesses that were magnified by sis stem attic failures by the credit rating agency. these failures enabled a substantial increase in leverage both outside and within the banking system. inadequate enforcement authority and information made the system more vulnerable to fraud and market manipulation. and because of a lack of transparency in the otc derivative markets, the government and market participants did not have enough information about the location of risk exposures or the extent of mutual interconnection among firms. this lack of visibility, magnified contagion as the crisis intensified, causing a damaging wave of dereferaging and margin increases, the clax margin spiral, contributing to a general breakdown in credit

markets. these problems and derivatives were not the sole or principal cause of the crisis. they need to be addressed. our proposals for reform are designed to protect the stability of the financial system, to prevent market manipulation, fraud and other abuses, to provide greater transparency and to protect consumers and investors by restricting inappropriate marketing of these to unsophisticated parties. this proposed plan will provide strong regulation and transparency for all otc derivative products both standardized and customized and strong provisions for all otc derivative dealers and other major market participants in these markets. we propose to achieve these goals with the following broad steps. first, we propose to require that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems. central clearing makes possible

the substitution of a regulated clearinghouse between the original counterparties to a transaction. and with central clearing the original counterparties have no longer credit exported to each prpth they reaccomplice that with credit exposure to a clearing house backed by financial safeguards established through regulation. second, we propose to encourage greater use of standardized otc derivatives and thereby facilitate a migration of the otc derivatives on to central clearing houses and exchanges. we will also require, and i want to underscore this. that regulators police any attempts by market participants to use customization to avoid custom clearing and we will impose higher capital and margin requirements for counterparties using customized and noncentrally cleared derivative products to account for their higher level of risk. third, we proposeo require that all otc derivative dealers and all major market participants be subject to

substantial supervision and regulation, include appropriately conservative capital and margin requirements and strong business conduct standards to better ensure that dealers have the capital needed to make good on the protection they provide. fourth, we propose steps to make the otc derivative markets fully transparent. relevant regulators will have access on a comprehensive basis to all transactions in open positions of individual market participants. the public will have access to data on open positions and to bring about this high level of transparence ewe'll require the sec and cftc to keep recording requirements, including an audit trail on all otc derivatives and to trades and to provide information on all otc derivative trades to a regulated trade repository. fifth, we propose to provide the s.e.c. and the cftc with clear unimpeded authority to take regulatory and civil action against fraud, market ma nip ulg

and other abuses in these markets and we'll work to tighten the standards that govern who can participate in these markets. and finally, we will continue to work closely with our international counterparts to ensure our regulatory regime is matched by similarly effective efforts in other countries. for these are global markets and these standards to be effective have to be applied and enforced on a global basis. with these reforms, we will bring protections that exist in other financial markets, protections that exist to prevent fraud and manipulation in other markets and to preserve market integrity to the otc derivative markets. the s.e.c. and cftc will have full enforcement ability. firms will no longer be able to make arrangements without adequate capital. no market would escape oversight and we'll bring the risk reducing and promoting benefits of central clearing to these important markets.

now turning these proposals into law will require complex, difficult judgments. and some of these judgments will involve assigning jurisdiction over particular transactions and particular participants to our regulatory agencies. i want to say we've been close to -- working closely as you have with the s.e.c. and the cftc over the last few months to develop a sensible, pragmatic allocation of duties and have made very substantial progress in narrowing the outstanding issues. i want to join the chairman in complimenting chairman shapiro and chairman ginsler for working productively and closely together. as congress moves to craft legislation we are working to advance the overall process of reform. just as an example, we provided detailed legislative language for the establishment of the consume procedure techs agency to the congress just last week. the s.e.c. is moving forward with new rules to govern and reform credit rating agencies. and the cftc as you saw announced hearings yesterday on whether to impose limits on

speculation in energy derivatives in order to dampen price things and to require new disclosure by derivative traders. those some are examples of things we're doing as you move ford consider legislation. we welcome the commitment of these committees and of the congressional leadership to move forward on legislation this year. this is an enormously complicated project. it's important we get it right and we share responsibility for fixing the system and we can only do that with comprehensive reform. i look forward to answering your questions and talking through the range of important complex issues we face in the reform effort. thank you, mr. chairman. >> thank you, mr. secretary. and we have about, i think, eight or nine minutes for a vote. i'm going to go ahead with a couple of questions here. first of all, we, in our bill, you know, we propose mandatory clearing. and if they can't be cleared, then we give the cftc the requirement. they put some margin in collateral requirements on the

transaction. one of the questions that i still have, you know, aparentally you're not ready to give us a detailed response on how this is going to work. but, you know, you mention the broad definite of standardized or presumption of standardized have cleared and high volume will be an attribute of a standardized contract which, for me, kind of just raises even more questions about what's going on here. so while you may not be able to give us detail of what a standardized otc derivative is today. can you tell us to what degree of certainty will a swap dealer or end user of derivatives be able to know going into a swap whether it's going to be classified as standardized or customized? will the answer be in the statute itself or a regulation promulgated by federal regulators? will clearing houses be providing answers based on if they choose to clear the derivative or not or will the market as a whole show the way based on volume of the otc

derivative? and how much confidence will market participants have beforehand whether the otc derivative they enter into will be judged standardized or customized? >> mr. chairman, of course, we want to have -- we want to give people as much clarity as we can. i don't think we've made a final judgment about to what extenty to wee want to define those standard of standardized in statute or regulation. my suspicion is what we'll recommend is we lay out broad principles and statute and have them defined with more clarity in regulation. i think the important thing is that again that we move the standardized on to central clearing but we establish comprehensive enforcement authority, comprehensive transparency, comprehensive reporting sufficiently conservative margin and capital requirements across the entire market. and to avoid the risk that our definition of standardized is arbitraged. that people try to get around that definition and design

customized products to escape the protection that comes with it. we are going to propose to put higher capital requirements on the customized products to limit that risk. the basic -- the basic design of this proposal is to make sure there is comprehensive oversight over all transactions in these markets and comprehensive authority to the s.e.c. and cftc to police and deter fraud and manipulation in those markets and to make sure there are appropriately conservative capital margin requirements across those instruments. >> thank you. what about -- what if the clearing house determines there's too much risk, too little profit in clearing some standardized otc transaction or what happens if no central counter party will clear a standardized contract? or do you think the central counterparties should be required to take on this business? >> haven't thought through that, but i don't think that's likely to be a significant risk. i think the economic instruments of the participants will

encourage central clearing. as the markets become more standardized, it's more economic and compelling and efficient for a greater share of those products to move into central clearing. i think both sides of the parties will be -- particularly the users of those markets will have an interest in seeing that. but that's something we'll think through carefully with you. >> thank you very much. i think we're going to recess the committee and go over and vote. i don't know how many there are. but we'll come back

mr. secretary, of t.c. contracts are used to manage very real risk and the otc blocmarket is y purpose is to this jeopardize is the ability to hedge market risk, exposing customers to increasing volatility. why isn't the reporting of otc trading enough, sir?

>> who is in charge of the sound system? where are they? it sounds like it is better now. >> if we were to mandate clearing -- central clearing of all derivative products, we would, in effect, began in customized products. we are not proposing to do that. in part, because we believe that there are a broad range of risks that cannot be adequately hedged and manage without recourse of specialized instruments. we also believe, however, that we need to have, as i said earlier, a comprehensive framework of reporting enforcement and gordy, capital requirements protections

across all of those instruments. as many of you have pointed out, even though that is not necessary, you know we need to have a comprehensive remarks around all of those products. >> it so, it is fair to say, secretary, that you agree that if the regulator knows about the trade, if the regulator has the necessary tools, that should be sufficient to address and to avoid potential systematic risk? >> i believe that for the customized part of the market -- >> customize, of course. >> you want to mention that there adequate capital hedges held against those exposures. and that the relevant authorities have the full protections to police those markets to prevent manipulation and fraud. that requires the reporting level and transparency that we do not have today. >> and you indicated in your opening comments that for these kinds of contracts, potentially,

the capital requirements could be substantially higher than for the senate is contracts and things that would be traded by an exchange. could you give us a feel for in your mind how much more the standards would be for these kinds of products? >> i cannot tell you how much higher, but let me explain the rationale for that. these customized products can often entail more leverage, more uncertainty about future risk, less capacity to judge the- future risk, and that in itself requires a high level of competency to record a risk. people are encouraged to use customized when there is a standardized option that is economically compelling. >> but you would agree that there are a number of industries, whether it is energy or a variety of industries that the energy is so unique that there has to be a a an option for these customized contracts? >> but i do believe that.

i have a stack of books from across the country and the powers business, commodities business, in the business of producing large-scale machinery that the to the importance of maintaining the option. but i want to underscore that because those products come with a lot of risk, and a lot of the losses that were so conspicuous in the interest of days and the edgy work insurance companies running cazares products. there it -- therefore, it is important that there be a framework of authority over those instruments as well. >> thank you, sir. my time has expired. >> the question on us renault will be the chairman of the financial-services committee subcommittee on capital markets, mr. kanjorski. >> thank you, mr. chairman. the white paper requires that the sec and the sftc make

recommendations on harmonizing their statutes and regulations by the end of september. as you know, we have been meeting with the two regulators and yourself and representatives of the treasury department over the past several weeks. it seems they have made tremendous progress on many things, but i think it is clear that on some things, they themselves will not come to resolution. i'm curious if you can give us some insight, and particularly because of the timing of all of this. you mentioned four or five different positions people have taken and i did not fit into any of those categories. i'm in favor of comprehensive çreform, but taking our time to make sure we do not cause unintended consequences. . .

we're working at a point where we just not have them together with the treasury, but we're more likely to find a common ground that both your committees

can support. we're not quite there yet. >> i appreciate that, and of course anything that we can do on the congressional side, we offer our assistance, because i am getting a little pessimistic as to whether or not the deadlines we are setting are going to be met, and not that that would be tragic if they're not met, but we're causing great expectations constantly with these deadlines that make it look a little difficult or the perception that we're not as successful as we hope we can be. mr. secretary, have you given up and has the administration given up on the long-term perspective of joining the s.e.c. and the cftc together? >> there are a lot of compelling reasons made by people in this room and many others over a long period of time for merging both those agencies. our judgment is a necessary condition, and the most

important, and the hardest thing to do is to bring the underlying statutes an laws into conformity and convergence. we think that's the most important thing to do, because as your colleague, chairman frank said, the critical test of whether we do enough to improve the system is going to to be what we do with the substance of regulations. what we propose is to begin with that task, which we think is going to be enormously difficult and complicated, and that would provide a better basis for the congress to consider institutional reforms in the future. >> so you're not going to cut short the fact that you anticipate we will dot preliminary reports and then continue on over a series of years with better reform? >> that's a judgment you have to make, but i think there is enormous value, and this is an enormously complicated task in bringing the statutes into

conformity so you don't have different enforcement authority over what are economically similar types of products. >> thank you, mr. secretary. >> i thank my colleague over the prospect of several more years of this is not the happiest that is before me. the gentleman from florida, mr. posey, is now recognized. >> thank you, mr. chairman. mr. secretary, i had a couple of questions i wanted to ask when you were in committee, something came up each time before i got to ask my questions, so to put things into proper perspective, i would like to pose a couple of them now. the stimulus bill was advertise the to reduce unemployment and help us get it back on track. it apparently hasn't done that. i have seen some information which indicates, in fact,

unemployment has gone up to about 9 1/2% from below 8% instead of having the other effect, and i know the vice president the other day said that it was something that the economy no one had anticipated, and that they misread the economy. i'm wondering where you think your plan went wrong. >> congressman, thank you for raising that question. i think if you step back and look at where we are today relative to where we were at the end of the year, we have achieved the critically important effect of helping slow the rate of decline in the economy, helped stabilize the financial system, business consumer confidence has improved very substantially. the rate of decline in economic activity globally has slowed and stabilized. financial systems are starting to heal. cost of credit, broad concern about catastrophic risk in the economy, the financial system has receded dramatically.

those are critically important signs of initial progress, and they are drew entirely -- due entirely to the actions this congress took and the administration took to put in place the largest recovery program in peace time in the united states. the stimulus package is on its expected path in terms of rate of change and in terms of putting money in the pockets of taxpayers to provide businesses money to the state so the states don't have to reduces tens of thousands of police and firemen and there are infrastructure projects that have started to have take effect and will have their maximum effect in the second half of this year. my own sense is and this is the consensus of broad based economists that there have been improvements in arrest whrag was the worst recession globally we have seen in generations and those are the results of the actions took, the administration put in place and

complementary actions taken by governments around the world to address what is the worst crisis we have seen in a long period of time. >> mr. chairman, the chart just indicates the opposite. it shows -- >> no, i don't think that's true. i don't think it's true, congressman. if you look at the die namics of all recessions, even as growth starts to improve and turn positive, unemployment continues to rise. that is the inescapable natural element of recessions. that is not an argument for not acting very forcefully in the face of a crisis of this magnitude. i think what the congress did, what the president did, was necessary and critically important, again, to reduce the risk that we have seen hundreds of thousands of further jobs and millions of job losses beyond this and we see thousands of more businesses failing necessarily. >> you know better than me how cyclical they are anyway. the next question is we know

even in our districts banks have money to lend but they're not lending it. people have money to buy a new car but they're not buying them. people have money to take a vacation but they're not taking them. the consumer confidence isn't what we would like it to be and the money is not getting spent, and personally it is because they don't know what is coming. we're looking really kind of for a plan. >> congressman, once again -- >> let me just repeat, members go right to the end of their time with their questions. the answer ought to be ten seconds but members want to have an answer, they have to leave time for t mr. secretary, briefly. >> households across the country borrowed enormous amounts of money relative to income in the runup to this crisis. what the economy is going through is a necessary and very healthy crisis as the united states and families go back to living within their means that.

is causing a greater contraction and demand for credit than we normally see in recessions. you are seeing a very healthy increase in private savings bee behavior and probably in response to that. i think those are necessary healthy dynamics although they will produce a slower recovery. >> i thank the gentleman. the gentlemen from pennsylvania, the vice chairman of the committee, mr. holden. >> thank you, mr. chairman. mr. secretary, as you know, the variety of over-the-counter derivatives are traded here and europe. as you discuss the proposal, do you have agreement with the european parliament to follow suit? what is to prevent these markets to go to some other nation with a less regulatory regime to follow? >> we are working closely with them and there is substantial conversions an overall approach. the broad strategy that we're going to embrace here will be embraced in the u.k. and europe will be matched by the other major financial centers of the world, and i think again they

see a broad interest as we do we in trying to raise the basic quality of standards in these markets. of course, as many of you said, it is all in the details in getting that right, but we are trying to do something we haven't done in the past, which is to move in parallel with other countries so we're not left with the position that we raised standards here and we find it migrates to other countries. i'm quite encouraged by the broad approach. >> if we can't agree with the europeans, what stops the markets from moving to dubai and hong kong? >> we won't stop with the europeans. in all the major areas of financial activity, you want to have global standards enforced more evenly, applied more effectively for just the reason you said. >> thank you, chairman. >> thank you, gentlemen. i recognize the gentleman from virginia, the former chairman and ranking member of the committee. >> thank you, mr. chairman. mr. secretary, are welcome. sitting here in the surroundings of the house ways and means

committee with its fine audio system and with our good friends from the financial services committee with us along, some of us on the agriculture committee might say that they feel that they are visiting in talcott ton. however, i must say that having said that, and how much we appreciate you taking this time, i think that this hearing is premature. the fact of the matter is that i very much agree with you that we need to have as much transparency in these markets as possible. we also must have that much transparency and more in the deliberation of this legislation it is critically important that you be able to answer questions from members on both sides of the aisle about the specific details of legislation which does not yet exist, so i would ask you first, would you be willing to return to meet with these two committees an answer our questions when we actually

have the substance of the legislation in front of us, and can get more precise answers from you? >> i will respond to any invitation by your chairman to come before you and help make the legislative process work on the pace that is appropriate. >> that's a good answer. i would convey to both chairman my hope that they will make this an open and bipartisan process, and assure us that once the legislation is in writing that we won't rush to mar mark it up without having the opportunities for the millions of americans who are very much affected by it as well as their ren cen tiffs having the opportunity to ask the questions that need to be asked. in particular, i would note that you indicated you hoped that the members of the committee would write legislation that would establish broad principles upon which then the various agencies would write the particular lair ti in the regulations, but we don't even at this point have

those broad principles in front of us to know how we think that process would work, but let me ask you, specifically, about one area that is of considerable concern to me and many0thers. you have told us that the s.e.c. and cftc are working on how to divide the jurisdiction over the otc derivatives an dealers. when this is finalized, does the administration intend that each agency would exercise exclusive regulatory jurisdiction over their assigned area? the exclusion jurisdiction provision of the commodity exchange act has worked well to avoid regulatory duplication and conflict, and i would hope that it would be built into the legislation on otc derivatives as well. can you confirm to me that it will be? >> good question. a lot the people like that approach. that is the presumption we will bring to this, but again, until we see the full package and have a chance to walk you through that, i don't want to respond in detail -- or i don't want to get

ahead of the delicate careful process we're trying to work through now with those two agencies. >> i see you have the same problem that i have with this process then. i wonder if you could -- >> yeah, i think, of course i agree that it will all be in the substance and details of this, and we do carry the burden of presenting before you detailed proposals in legislative form so you can consider those recommendations and we're going to deliver on that commitment. >> i thank you. i wonder if you would be willing to assure the committee that you would get back to us on that specific question in writing once you have the information in front of you. >> absolutely. i think when we proposed our recommendations on how to solve these jurisdictional questions, a necessary part of the answer will be a response to the question you raised. >> thank you, mr. chairman. >> thank you, gentlemen. i just remind the gentlemen that we marked our bill up and passed it out of committee in february rundzer an open process.

it's been out there since then, and you know, i think that we can assure you that we're going to continue that open process. we're having a hearing here today and we're probably not going to get around to this until maybe september, so i think we're being as open as we can be. >> mr. chairman, if you might yield on that point, would that be an indication that we might have a hearing on the legislation itself rather than the subject? >> of course. i'm puzzled by the inference that we didn't plan to do that, and i'm puzzled by the argument that it's premature to have a hearing. i didn't subpoena the gentleman here. he is free to do other things. i would think when we actually start to get the legislation a hearing is a part of the process to open the subject up. of course there will be a hearing on the bill itself. >> if the gentleman yields, if that is coupled with a followup hearing on actually what we're going to do, then i would be

glad. >> that is an odd accusation that now -- >> it is not an accusation. it is a question. >> well, premature is not a question. it is at least a description. maybe the gentleman regards it as something good to be premature. i have never done that. but the point is that we are having a chance now to air the question. i now recognize the gentleman from california,s ms. waters. >> thank you very much, mr. chairman. there is substantial attention given to otc derivatives in your testimony, and as you know, i have been talking a lot about credit default swaps, and i remember when you told me the last time i asked you, you said that if we ban credit default swaps, they will just emerge in another way, that the

sophistication and creativity of those who deal in these markets is such that they will just find another way to do what they want to do. basically what i'm reading from your testimony is that you think that credit default swaps are necessary. however, this country did very well without them for a long period of time. if credit default swaps do such a good job at defusing risk, why do so many financial institutions lose so much money even when they were using credit default swaps as a hedge? doesn't this prove that these products are more dangerous than originally thought, and why not ban credit default swaps? >> i think, as i said in my testimony, the principle risk these instruments presented came from the fact that a set of institutions wrote a lot of commitments without capital to

back those commitments, and the regulatory authorities of this nation charged with policing these markets to prevent fraud and manipulation were not given authority over those basic markets. we're proposing to address those two critical features. now, this country has decades of experience with derivative products of all classes. they provide as many of your colleagues have said, an important economic function in helping companies and businesses across the country that are ledged against their risk, and i think all of responsibility in the job is to make sure that those benefits come with appropriate protections for financial stability and investment for investors and that's the proposal we pros pose. >> mr. geithner, you talk in your testimony about all of these steps that it will take in order to supervise and manage and oversee credit default

swaps. if you got to work that hard at trying to make them more substantial in terms of having the collateral to back up the risks, why do you have to do it at all, if you have to work this hard at it? >> i don't think we have to work so hard, but congress has to legislate the authority to make that possible. that didn't exist before and we're asking that congress provide that authority. i don't think it is beyond the capacity of the people in this room or the regulatory authorities to do. that we are proposing in some sense to extend recreate and apply the protections that existed in the range of other markets to these markets where they do not exist. that is not a task that is too complicated for us to manage. >> thank you, mr. chairman. i yield back. >> the ranking member of the financial services committee, the gentleman from alabama, mr. baucus. >> thank you, mr. secretary. mr. secretary, on more than one occasion, you said on more than

one occasion we won't make the system stronger by banning products. doesn't the proposal give that authority to the consumer finance protection agency, and do it without any review or oversight? >> i wouldn't -- well, it is true that in the consumer credit area, where we have seen just terrible examples and failure of underrated standards and basic protection for consumers, we are proposing to give this new agency enforcement authority, and in that context, we would expect them to provibe certain types of marketing practices, and i think that would be appropriate, given what we have been through. that is an approach that has been done in lots of areas before. it is important to recognize that if you look at what the congress of the united states did in the wake of the great depression, we put in place there r. this comprehensive set of reforms to help protect

consumers and depositors ensure the market of market functioning. we are proposing to do in the spirit of that, the big mistake in the country was that we allowed a huge array of activity to build up and exist outside those protections. >> they would be allowed to ban products, though? >> there is some consumer practices that we believe should not be permitted, but we're proposing that the congress establish the lasik rules that would govern. >> so if their actions would have to be based on existing statutes or could they go beyond those? >> no. i think we're going to propose that you legislate a framework of standards that would help shape and govern regulation, and rules that that agency would write and enforce, but that's the responsibility that it would have to set initially. >> you have said, you know, and i just followed your testimony, sometimes you say you don't

believe in banning products, but you have said they can prohibit certain products if they're not appropriate for consumers. >> now, if you're asking again whether we think it is appropriate in the consumer protection area, this is the marketing of financial products to individual consumers. >> i understand there is some practices that i think should be proscribeed. i think the statute would have to describe that in some sense. >> i'm not arguing with you. what would be the determinant whether a product was appropriate? what if it was appropriate for 95% of the population, but not for 5%? >> well, i think that's a good way to frame the basic dilema. the centerpiece of our proposed approach to reform in this area is to encourage more simplicity and fairness so that consumers have the choice of a more accessible easier to understand option on different financial instruments but they could adopt or embrace a different type of

product with had less standards. there is less contrast in the basic philosophy in the consumer side in this other area than i think you are implying. >> who would review their actions with, you know, with a lot of the fed's actions, you said the treasury would have to prove there, who is the reviewing authority over the consumer finance protection agency? >> well, i'm not a lawyer or a student but the congress is accountable for it and would be accountable to the congress under the basic model that exists for the s.e.c. >> would we have to prove their actions? >> not their individual actions, no, but the statute would establish that basic relationship. >> let me ask you something else. back in 1998, and i will just pass this, larry summers testified in the senate against the notion of regulating

derivatives. among the things he said is it would cast a shadow of regulatory uncertainty over an otherwise thriving market, raising risk for the stability and competitiveness of the american derivatives trading, even small regulatory changes could throw the whole system out of whack. that was after chairman borne proposed regulating derivatives. what has changed? >> i think this has been dramatic changes in the basic scale, design, development of those major markets, and i think that even though, as i said in my testimony, the failures in those markets were not the principle cause of this crisis, they did cause substantial damage, and i think that justified substantial reform. >> sure. i'm not saying it hasn't changed but i guess i would say do you still share some of his concerns? >> the proposal that the president laid out reflect and

of course i played a substantial role in shaping those proposals, my judgment, our collective judgment about what is appropriate given the risks we have seen illustrated by this crisis. >> the gentleman's time has expired. >> the subcommittee chairman from iowa, mr. boswell. >> thank you, mr. chairman. thank you both for this hearing. mr. secretary, are you are well aware that the market price in agriculture has been very volatile, and it is a concern. experts tell me that the population is growing by 90 plus million per year. food is important, and i just want to say this -- please remember in all these discussions you have that we're envied around the world. we have the least expensive food in the world. maxine and i, i live in california and she lives in iowa. we contribute something, and we get back.

i'm concerned about everyone over the counter, all these derivatives transactions registered with some agency. would this include an agency like using derivatives like grain elevators? they've got a hedge. they've got to be careful. they get caught out there in a weak position, and they can go down and this's no market out there in the marketplace for the producer. >> if i understand your question correctly, we preserving and i think it's appropriate to preserve the ability of grain elevator operators and a whole range of businesses to make sure they have the ability to hedge against the unique and specific risk they face. the market as a whole need a greater level of transparency, oversight and protection. >> thank you. mr. chairman, i will use my remaining time to make a statement. i'm getting frustrated. i heard my colleague from florida a minute ago ask where did you fail? wait a minute. we want to make this a success.

damn it. it is time to get together. here we are, just review a little bit. let's go back. last administration, $700 billion was asked of us to catch things up. unbeknownst to many of us, the fed did $800 billion. it is $1.2 trillion. as early as february, are folks are saying across the aisle, look what you have done to us. horse feathers. that's just not the way it happened. i'm looking right at you. the reason i have a loved one at mayo, many doctors and i ask them time and time again is getting well thinking you can get well, is that about 90% of it, and every one of them said yes. well, this country is in that position. we've got to get well and we ought to all be hoping and praying we are going to make this thing work and quick picking fault with it and saying why it won't work. then if you want to politicize after it, go for it, but let's get this country back in shape and let's do it together.

>> i thank the gentleman. one of our subcommittee ranking members, mr. mirren from kansas. >> mr. chairman, thank you. secretary geithner, it is too infrequent that we have the opportunity to hear from you and have a dialogue and i'm going to ask questions or at least ask you to respond to thoughts that i have somewhat unrelated to the topic of today's hearing, but most of the banks in my state could not contribute to the financial crisis that our country faces today if they did things right. we still have bankers who say no, i'm sorry, i can't make this loan. you can't afford to repay it, and yet my banks, which ultimately affect my constituents are facing an and an uncertain regulatory environment, examinations are becoming perhaps more frequent, but the uncertainty of the exam is clearly there. the fdic insurance premiums have

increased, and we now hear of a new consumer financial product safety commission, with potential additional regulations upon banks and again, i want to stress that the banks that we have at home are not the financial institutions that we have been engaged in in regard to wall street. the consequence of this uncertainty is direct upon the economy. i have had this conversation with officials at the fed. while the federal reserve has lowered interest ates in hopes of encouraging consumers to borrow money and consume, the regulatory environment, particularly with the examinations, has discouraged banks from making loans. we are at cross-purposes as we try to improve the economy that uncertainty lends itself to borrowers that i visit with who say we are current. our company is making a profit, and yet our banks can't tell us whether they're going to reauthorize or renew or loan.

in addition to that, it means potentially higher interest rates, which will reduce the demand. therefore, potentially stifle the economy, and ultimately, the increasing cost of being in the banking business means that we will see increased consolidation, and yet one of the theories that i think we have operated under is that we want to avoid institutions that are too big to fail, and yet many of the things it seems to me that are happening at the department many of treasury and within our financial system is increasing the role for consolidation, increased cost of being in business means that we're going to spread the cost as best we can among a larger group of banks and so we see continual consolidation in the industry. my point is that while it's damaging to my bankers, it's ultimately damaging to their borrowers, which is ultimately damming to the united states economy, and i would appreciate any response that you might tell me that would recognize in

the counsels that you're engaged in. >> absolutely recognized and it is a significant issue of concern. what is causing the pressures on borrowers an banks is the fact that the large parts of the financial system in this country just took on too much risk during the boom and the cost of that is fundamentally unfair, but that's ma happens in financial crises, but they affect businesses that are prudent. that's why they can be so damaging, and that's why it's very important that we do everything we can to put a better foundation for recovery in demand and growth and try to make sure the financial system has capital where it's necessary and that these markets or credits start moving again. that's the basic philosophy that underpins everything we have done. you're also right that there is a risk in the financial crises when people overcorrect. after taking on too much risk, that they take on too little. people that got overextended

pull back too much that. can cause collateral damage. that is the rational for trying to make sure you do as much as you can to provide enough support for the economy to get back on track, but i'm very much aware of the concerns you expressed. i believe that the principal bank supervisors are carefully managing those risks. anytime you think about reform to legislation in the financial area, that will come with a period of uncertainty. we need to minimize that uncertainty. that's one reason why we want to bring clarity quickly to the rules of the gave that will govern our financial system going forward. if we wait to do this, the markets would be left with a greater period of uncertainty and that might deter more lending and risk taking. >> i would add that you continue to differentiate or begin to differentiate the difference between the significance financial players and those that are out there in the business every day of making loans to consumers to buy an automobile

to purchase a home, to plant a crop. it does seem to me that differentiation between those kind of banking institutions and the financial institutions ought to be treated differently, and i would hope that that would be the case. >> mr. chairman, could i respond briefly? i completely agree, and the approach we have taken is to apply more exacting standards to the largest institutions than we are to the 9,000 banks across the country that are in a different set of circumstances. we are very committed to make sure that we preserve that basic balance. we are not a nation of three banks or four banks or five banks or ten banks, which is true across many industrial economies. we are a nation of 8,000, 9,000 diverse financial institutions and we want to preserve that. >> thank you for listening to my point. thank you, m chairman. >> the subcommittee chairman of domestic policy, the gentleman from north carolina, mr. wiley.

>> thank you mr. chairman. mr. secretary, i'm over here, right in front of you, behind this tall guy. last year, our mutual good friend rahm emanuel, and i and sue marek, my bipartisan cosponsor introduced a bill calling for a pilot program to execute interest rate swaps on a transparent electronic execution platform. people perceived that he was from chicago, and was the c.f.t.c. guy, and i was from charlotte, the banking side guy, and we came together on this notion that that was a good thing. i note that that is an important part of your proposal this year,

and i want to ask you two questions about it. this is not a cheering house or a an exchange if something before you gets to that, and it seems to me that the regulators could already be mandating this part of what you have proposed in legislative form now, so the first question is do you see that the regulators, comptroller of currency, the other regulators are really aggressively pushing that knowing to your satisfaction even before this legislation is passed, and number two, i have been somewhat disappointed that because we have control over fannie and freddie, no direction has really been given to them to

using a gressively these electronic trading platforms, so i'd like to have your assessment of whether you think that would be a good idea and when that might be in the works? >> congressman, the basic spirit of your proposals when you proposed them were right. we have adopted the basic recommendation to have central clearing of standardized products but we want them to be traded either on organized exchanges or transparent execution trade systems for the reasons you have proposed. i don't believe, though, that we can move substantially in that direction without the legislation being clarified, so my own sense is we need to get the broader legislation in place before we can bring about this broad trance transformation in that market activity. i do believe, though, that the economic benefits of not just central clearing, but more exchange traded and transparent

electronic products will be very compelling to the users in these markets so i believe once the legislative framework is clarified that you are likely to see much, much greater use of those platforms. >> what about the fannie and freddie clause? >> including all users who are beneficiaries of those types of products. >> we have control over fannie and fred dry now. wouldn't we be in a different position with respect to them to insist on a more aggressive forward-looking approach to this than we would be possibly with private sector entits that are under regulation? >> -- entities that are under regulation? >> the legislative framework over fannie and freddie has come closer to what matches banks and financial institutions but i think you want the market to move in this direction as one. again, i think there will be good risk management benefits

for moving this this direction, and once we have the framework generated, i think you will see substantial movement in that direction. >> thank you, mr. chairman. i yield back. >> thank you, mr. watt. the gentleman from texas. >> thank you, mr. chairman. thank you, mr. secretary, for coming. we had a little dialogue the other night about capital and equity. i want to go back to that, because when we look at the standardized and customized transactions, the question i have is i hear you talking about margin requirements, capital equity, and, you know, in traditional commodities, the clearinghouses set the margins for clearing those transactions. the regulator then determines whether the clearing agency has adequate capital for the activities they are involved in. as we move to the trading of these derivatives, you see that

same structure? because sometimes i hear you saying that the regulator would start setting the capital margin requirements for these transactions, and i wanted to be clear about my understanding of where you are on that issue. >> congressman, you said it right. i think the four central counter parties, central clearinghouses. they design the margin rules. they design the financial safeguards. the regulators have an important obligation to ensure, because central clearing can concentrate risk if those safegaurd margin cushions are adequate. that's an important obligation of the cftc and s.e.c. under our basic framework. you want to make sure people don't compete and take advantage of the distance of multiple activities to eject activity by having thin margins an cushions. for those products that are not centrally cleared, it is very important that there is capital margin required through supervision regulations against the risk of positions imposed,

so i think you need to have that basic balance, but the approach varies depending on whether it clears and whether the ris something still bilateral. >> looking at the customized products that aren't going to be cleared in this regulatory structure that you're going to propose, where would the margin requirements and capital requirements for the customized transactions, where do you see that falling? >> i think that's a judgment that has to be reached in cooperation between the s.e.c., ctfc and federal reserve. you have a bunch of different entities and they will have different regulatory authorities. we want to make sure there is going to be a common approach that is conservative that. is a similar approach that we think about the design of capital requirements generally. >> how would you with multiple enat this time is -- entities involved, what kind of coordination would you have, like you alluded to, shopping

places to do business, so if you have the fed, s.e.c., cftc, trying to have jurisdiction over a particular opportunity or particular customized transactions, how would that coordination happenen? >> better than it has. it has to be better than it has. the important imperative is that there be appropriately conservative capital margin requirements set across the core con institutions in these markets and the areas of risk centralized. this is critically important t has to be enforced more evenly. if you just take the example of banks an thrifts. they had nominally similar capital requirements, but because of different enforcement regimes a lot of banks chose to become thrifts. a lot of banks wanted to take advantage of lower enforcement standards. you need more consistent enforcement across the basic enits it ties -- entities. it is harder to do than it is to

say. >> what would you see in forcing these customized transactions to have a third party counter party to hold those transactions? >> i think the definition of a customized product in some ways is that it is not so standardized it can be centrally cleared. the risks are complicated enough that the one agency could not adequately manage those risks that. is not a detailed enough standard to detail the line between standardized and customized, but that's the way to understand the difference between the economics between them. >> i now recognize the chairman of the livestock and dairy subcommittee from georgia, mr. scott. >> thank you very much, mr. chairman. i'm over here, mr. secretary, over here in the corner. over here. >> good. >> i like to see if i can squeeze in a couple of questions. first of all, i have a concern

that your proposal could very well force non-financial dealers to meet capital requirements in order to provide legitimate-managed risk, but given that these non-financial dealers do not have depositors, unlike large financials, and a low or no systemic risk profile, is it possible that such a requirement could unintentionally create a bank monopoly and an over-the-counter derivatives market, and wouldn't that reduce competition, reduce liquidity, reduce -- and raise prices an increase systemic risks by consolidating the markets? >> i don't think so, but you're right if that was a result of what we were proposing, that would be a subject of concern to us and many other people. maybe i could respond this way. at the centerpiece of our proposals is to make sure that the major participants in these markets because of their

importance to the economy be held to more exacting standards, higher more constraining requirements for leveraging capital in the future. that's one way to protect against the risk that you both you and ranking member baucus have pointed out, so more exacting requirements for the major participants will help reduce that risk. >> well, why would we not just have those capital requirements and lend to firms that whose failure could indeed create the systemic risk to the u.s. economy? >> i think again, you need to have capital backing risk where risk is taken, and where entities are taking short-term liabilities borrowing short-term and taking shorter-term risks that. requires a capital system. if you don't apply a uniform system around those enits at this time sh entities, then what will happen is that the risk will migrate to those parts of the system where there are lower

standards, as we have already seen in the financial crisis that. is important to guard against. that goants mean you have to be completely comprehensive but you have to capture enough of the core participants to avoid that risk. >> we're going to be doing sweeping limits on the trading of energy derivatives. take, for example, oil. which i think is what has really been the driving force behind the call for increased regulation over the counter market. oil, as you know, is globally traded, and its price is set not solely by activities in the united states market, but other markets, so i find it kind of dubious that we can control speculation and hold down the price of oil simply by union laterally regulating our markets would not businesses simply move to less regulated markets? and, in effect diminish our opportunity to legitimately

hedge? >> i'm sure that is a concern. i think you're right in saying it that way. i think what the s.e.c. chairman proposed the other way and an appropriate way to approach policy in this area is to look for ways to limit volatility. it's very hard to not look at the last two years, pattern in the global energy markets, even though there has been enormous shifts in confidence about the global economy, and not to believe that we have seen a level of volatility that has been damaging, fundamentally to the capacity of businesses to manage risk and damaging to confidence, and so i think it is worth trying to see whether you can, through better disclosure, limit that risk. it is hard to do. lots of people have tried it unsuccessfully. i think you are also right if you you are going to do it effectively, you have to do it in a common approach where oil and other commodities are trading globally. >> so have other countries taken steps or have there only been promises or loose commit manies?

loose commitments? >> i apologize. nobody else has the timer but myself. the the gentleman's time has expired. thank you, mr. chairman. >> thank you , mr. secretary r. >> i have one more on my side , mr. chairman. >> ok. >> he's a member of both committees. >> that's two-fer. >> we had a two-fer over here, too. >> i would just like to announce that the secretary has to leave about 1:10 or so, and there may be votes, i don't know at 12:3 oh quarter to 1:00. if that's the case, it will probably be the end of this. i will encourage members if you can kind of, you know, keep it to one question and we'll try to get through as many members as we can. the gentleman from alabama, mr. rogers. >> thank you mr. chairman for

being here and for your service. i would like to go back to the answers you gave mr. posey a little earlier. i live in alabama and we have been devastated economically with the car industry and all the supplier plants. i was on the phone this morning with the tractor dealer who is a large tractor dealer in birmingham who told me he has invested $70 million in recent years opening new stores throughout the south, but that he is has completely lost confidence and is not going to open any more. he had to lay off 250 employees and have others take early retirement. i have another company in my district called medi-craft that makes wrought iron railings for outdoor furniture. they have to go out of business, because their bank received tarp funding and has chained their lending cry tear quassments even though this is a profitable business o they can no longer

get it to work. i hear the anecdotal stories around my district that we are in a crisis of no confidence. people are scared to death. even the people who haven't lost their jobs are worried they're going to, so when i hear you answer mr. posey's question with, quote, business and consumer confidence has improved greatly, close quote, quote, there has been a substantial improvement in arresting what is the worst recession in history, close quote. how do i reconcile that with what i am seeing in the real world? >> i think you're right congressman. across the country you still see businesses and families under tremendous financial pressure. we will be living with it for some time with the consequences of digging out of this mess we started this year with, so in acknowledging and pointing out the fact that we have made very substantial progress in trying to repair the damage by this

crisis, we do not have an economy that is growing again and i think it is likely it will take a while to come out of. it underscores the importance of this government doing everything we can to try to mitigate these pressures and that's what the recovery act is designed to do, and that's what the programs we have done and helped get credit flowing again are descriened to do, and they are having their necessary desire, and in effect starting to get some traction, but you are right to emphasize that we have a ways to go, and i think, again, this is going on across the country, businesses feel enormous strain. >> what time line is a while in your mine? >> again, this took us a long time to get into this. you know, as a nation, we just were living way beyond our mines for a long period of time. people took on way too much debt. we are making progress. you have already seen a very substantial increase in private

savings, and i say that is a healthy, necessary process. our current account deficit, which approached 7% of g.d.p. two years ago is now under 3% of g.d. p. we are starting to see this country get back to a point where we will have a stronger foundation for sustainable growth going forward but it will take time. >> that is a great point. you made the statement a while ago that tightening of spending and greater rate of save something is a healthy trait we are seeing in our country. why are we are not seeing it in our government? that's what folks back home want to know? we are spending like drunken sailors all borrowed money and they don't think it is good and healthy for individuals or small businesses but why aren't we are practice what we preach? >> excellent question. we can debate this for hours but to lessen the financial crisis here and around the world is when you face a loss of confidence and loss of demand of this magnitude and you have a financial system on the edge of collapse, the only path to mitigate the dow jones is for the government to do what this congress did, and this

government did, which was to provide support for investments, for targeted tax cuts to get demand going again. that is necessary but not sufficient. it also ires making sure you stabilize the financial system and help get credit going again. that is the strat jy this country has adopted. >> thank you. >> i only have the one timer, but i think what we should do is tap when a member has 30 seconds left. the next time, for questions, you hear the one tap, that will mean 30 seconds for you people to wind up, and next is the gentleman from p new york, mr. meeks. thank you, mr. chairman. thank you for your service. i have learned coming in here that there is always a question in trying to go forward so we don't get involved in unintended consequences and things of that

nature, and there are two concerns that i have that i give examples of. for example, many small businesses use derivatives for dir riff tiff risk management purposes that pose no systemic risk to the system, and many of those may opt out of hedging interest rates and currency risk if all trades are moved to exchanges, and they can customize or require home homo genius collateral requirements. this may lead to more firms doing riskier things. that could be an unintended consequence. we also, you know, the concern with the dealer banks who rushed to establish proprietary exchanges and push their transactions to owned clearinghouses or exchanges, which would create, it seems to me, a strong incentive for this, and could potentially stifle competition in the market and further concentrate the market, which could create more of a

systemic risk. i was wondering if you could give us some of your thoughts on this. >> i think you said it well. i think the risk is overstated, that if we move to greater standardization and greater central clearing, more exchange trading morks exchange trading on electronic platforms, that that would make it harder and more expensive for businesses to hedge risk. i think that is quite unlikely. we are preserving the ability, as i said serve ram times, for small businesses an large businesses to engage in more customized hedges against the risk they face in in the event that standardized products don't provide adequate protection, so we're preserving that capacity. we think it's important to the economic benefits you laid out. >> let me ask this question. there is a concern that pushing

all derivatives to clearinghouses will create a natural monopoly by reducing the innovation factor in proper risk management systems. should we consider creating some kind of utility-type clearinghouse, do you think? >> i am worried about the same risk, but again, i want to be clear. we are not proposing to force all derivatives on to exchanges, in part, because of the risk you point out. we want to make sure that the standardized products that can be traded on electronic trading platforms that more of that happens because we think that would create a more stable system, but we are still with careful oversight, appropriate capital requirements, authority to address market manipulations and want to make sure there is adequate protection over a more customized derivatives area. >> thank you. i yield back. >> the gentleman from new jersey, mr. garrett. >>

>> thank you, mr. sake terry. your -- thank you, mr. secretary. your opening comments on those people that think you are moving too soon or that we don't need change or your point that smarter regulation basically will destroy innovation, those people you said were -- excuse me. >> they're not in this room. >> you say they want status quo. i appreciate that comment, because i think there are people in this room that think maybe we don't want to move too soon, that we want to be thoughtful about this and somebody else before i came here said we want to be able to read and digest the entire legislation before, and some say we want to do it at the appropriate time and you're in agreement with that? >> i'm in agreement we need to get this right. this is enormously complicated. you need to look at it comprehensively, the entire package before you evaluate it. >> to a point that i think you and i agree with regard to naked

cds's, some people demonize these things. would you demonize them or do you think they actually play a valuable role that we should not just be totally outlawing them? >> i'm not sure whether i would spend a huge amount of time extolling their merits. across our financial system it is important that people have the ability to hedge risks that they face. >> you want to eliminate them? >> i do not believe it is necessary or appropriate for us to ban them, but i want to underscore, as we said, we do believe there needs to be comprehensive oversight over these markets, both the standardized and customized. >> we want to get to the underlying cause of this in the first place. let's look at what is always in the front page, the a.i.g. situation. the a.i.g. situation was the derivatives involved there and the underlying problem was mortgage-backed securities, right? >> right. >> those instruments, as far as

i understand, would not be, by any stretch of the imagination, a standardized product is, that correct? >> i'm not sure where you're going with this, but imi think in that case, the largest part of the protection they wrote, they could not back with capital were credit protection on real estate-related asset-backed securities. >> right. so the products they were dealing with would not be defined as a standardized product that would necessarily be able to go through a cheering house is, that correct, because you're deelting with the securities all over the spectrum, and therefore to say we will standardize them might be prok matticcal? problematical? >> again, our regulations would get to the core by making sure there is sufficient capital regardless of how we do it.

we are addressing the core of that problem. >> if you do that with a.i.g., not because they would be able to go through the clearinghouse in the standardized and create liquidity here, but because they would be non-standardized products and you need capital to fulfill the risk? >> as whole, but the capital is central to this, a core part of what brought this system to the edge of collapse was inadequate capital against a range of commit manies banks an institutions like a.i.g. made. ok. >> one last area in 30 seconds. in the energy field, i don't know if anybody else talked about this, is it not problemmatical for those in the energy area to have those energe the naked swaps as well because of the nature of that industry and the nature of the trades of those and the liquidity and inability to put the capital behind them, at least in the system now? >> quorch we're proposing to hedge that is areing but we will

look at that area carefully. >> ok. >> i apologize, i was -- i didn't pay attention to 30 seconds. i apologize. that's my fault. . the area of commodities. you have spoken about the good way to keep the parties

undertaken. their assets tend to be tide up in reinvestments. who two you think this will play on naun financial entities. on naun financial entities. jo we are trying to get the balance right. a systematic source of

confidence could not understand or support. we'll try to be careful and get it what i'm concerned about consolidation in back to the place of being too big to fail. i do not want to go there. we've been there. >> i share your concern and i do not think our proposals carry the risk, but i think we will be happy to raise concernsç about risks on them at the same time, between financial and non- financial traders, how would you visualize that taking place between commodities, a company

continuing to produce it in the market if they are required to have extensive cash capital. >> i'm not sure i can be responsive right now. but i think our principal concern has to be that they he sure that the financial intermediaries provide the basics -- basic function. those intermediaries, because of vella leval they take on -- because of the level they take on, hold capital risks. concerns and will work with you to work out those concerns.

my view is that those capitol requirements did not provide the my view is that those capitol >> the gentleman from texas, mr. conway. >> thank you for being here this morning. i have an operation and a question. -- an observation and a question. you occupy a vote -- one of the most important positions in this arena and we need to speaking with the most incredible poise possible -- credible voice possible in order to lead this effort. i was startled when you mentioned that things are there

during the quarter were looking like they're gordon turned the corner. >> no, i did not use those words. >> let me finish, but that is fine. he followed up by saying -- you pandered to us and the administration by saying that was due entirely to the work of the congress and the administration. that is not credible. if we put this regulatory scheme in place, maybe there'll be some compromises or was not, if we put this in place and the rest of the world says, no, thanks, we're not going to do it, as they did with climate change over the weekend and business starts to go to places where they are not as regulated, can you quantify for as the reduced role that americans domestic financial markets will play a worldwide with the consummate loss of jobs and wealth and influence across the skin? >> i am very worried about that risk. i've spent a large portion of my professional life making sure that we have corp. partly to

reduce that risk. our system is stronger, has been strong or overtime. where we were willing to take protectionist for investors in the past, it proved to be a great asset for our institutions and markets in the past. i think that basic philosophy should underpin what we do. z÷ but as you pointed out, we have to do much better job of raising standards here and have them stay with us. but i believe in the importance of that and you are right to underscore that it did warns. -- its importance. goods i appreciate the fact you could make that there is some risk. -- >> i appreciate the fact that you admit that there is some risk. we'll have to catch up to that.

>> the gentleman from california, mr. sherman. >> thank you. we have got folks that bought derivatives last year and they did not just look atç the capil that is available by the issuer. they said, this is too big to fill cola -- too big to fail, maybe not, and these purchasers relies that the taxpayer would pay them -- bill them out as it has. today, derivatives are being sold and the buyers of those derivatives are looking at their counterparty and saying, well, there may not be enough capital there, but what additional source of capital? is it may be more bailout?

can you make a statement that derivatives that are sold to they are not going to make the subject of the allowance for either the issuer or the purchaser that capitalism is back? >> i think i understand your concern and i believe i share its fundamental premise. if we are going to be successful in creating a more stable system, we have to make sure that we address and reduce the moral hazard risk. >> i am talking about literally today, can you tell people who are buying derivatives today that they cannot look to the taxpayer for any kind of bailout? >> again, let me just start with your premise. its principal source of losses to the core of the financial system came from institutions like the model lines that are

relatively small institutions and they received no it -- no assistance from the government. , not asking whether you agree with me on the promise. i'm asking for -- >> i am not asking what you agree with me on the premise. and asking for a simple statement. will a derivative issue today be sent to radio out tomorrow? >> there is a a complicated set of legal dimensions around the reversal -- diversity of finances and our market. and i do not think that question as you have raised its -- >> i will ask you in a different way. do you want to use this opportunity to tell the financial markets that there is no bailout possibility, or you

want to use this opportunity to tell our constituents that derivatives being told they might result in the bill allows payment of tomorrow? >> weatherwatch use this opportunity to do -- what i want to use the deputy to do is to lay the case of participation in the derivatives markets. but i can understand why you would prefer to enter somebody else's question. i get four minutes. it is a very simple thing. i want a yes or no answer. but no, why not going to answer that way because what you are asking me to do is to give a in a responsible answer to republican did -- irresponsible answer to a complicated question. i am not prepared to answer the question as it was framed and will be happy to talk to you about this at any length you like and try to come to a better understanding about the legal complexities. >> i look forward to those discussions, thank you.

>> the gentleman from california, mr. royce, appears to be next on this list. >> secretary geithner, i would like to begin by thanking you for your work on this regulatory reform package. there are a number of provisions in there that i am encouraged by that are contained in the white paper. there is, however, one that raises concerns and let me raise that with you. that is, to ask you about the resolution authority that you discuss in the white paper. this idea as you have portrayed it is for government to unwind failed institutions, but it seems to allow for simply dropping out struggle -- cropping up struggling firms. -- propping up struggling firms. the reason i am concerned, you have got the government, you have got politicalization of the economy as it is. we're looking at a situation

where we might have a government takeover of health care, the energy markets, the government running gm and chrysler. and now you what page 77 of the reform proposal and this is howard read, "the regime also should provide for the ability to stabilize a failing institution by providing loans to the firm, purchasing assets from the firm, guaranteeing the liabilities of the firm, were making equity investment in the firm." this sounds like the fdic's open bank system -- assistance authority to keep a bank from failing. such authority is markedly different from a resolution authority that would entail an orally unwinding of a failed institution. you react permanent bill out of order were the federal government continues to put federal taxpayer money into institutions. the courts if you were proposing that, what the word -- for you

this cromitie would be right to be concerned. what we're proposing to do is to take the basic framework that congress legislated to allow the country to deal with risk to the eventual systems posed by the banks and thrifts and to adopt that framework to give -- to give us the ability to deal with a large complex system. the absence of the framework is damaging to the company -- country. we're born to take a fourth with good checks and balances, lots of experiences over time, and adopted to give us a similar tools that will manage the unwinding of the complex institutions. the virtue of using the model that we have, which is the framework, is that it has been tested, people understand the complexity and people

understand the framework. gratz but of course, given the fact that this is a word in a way that does the require an unwinding process, given the fact that based on current actions we are left with the assumption that this certainly would allow -- the way it is written -- ongoing government involvement in a way that would continue to protect their funds into an entity without limit. >> i do not think it has that risk, congressman, again, because the centerpiece of our reform proposals are to create a system that is strong enough to withstand the failure of major institutions. but to do that effectively, we need the authority that congress gave -- >> let me ask one last question. you were at the discussions to either provide a lifeline or let an institution fail. if i could ask you to commit your staff to provide for the

brokered a detailed analysis how this authority would have changed the way in which a id or lehman brothers were handled at exactly how these counterparties of these firms would have been treating -- treated differently under this regime. >> hard to do, but i did have the average energy to testify on this. >> thank you. >> i suppose, had you chosen to answer mr. sherman's question, you might have said that the united states is going to stand behind its money supply, we're going to design or regulation to ensure that there is no necessity for the government to intervene and be propped up in the future and it would be foolish for anyone to think that it is likely that we will fail to do that. but in the event that we fail,

the world can rely upon the american money supply. mr. sherman and i just had a difference of opinion whether or not to harp was -- tarp was a nail advised move. the data was and i thought it was not. -- an ill advised to move. i thought -- he thought it was and i thought it was not. would be shocked if we do not take the kind of action to make sure it is not necessary in future. of action necessary in the future. you have in your written testimony, the reference that he we are requiring. >> propose to require. >> we also will require you

refer to working with the international requirements this matching by similar regimes in other koirpts. we talked with other koirpts about this very question. regulatory arbitration country to country. it's been a challenge for

has any thought been given to the united states perhaps teaming up with europe and coming up with a fundamental regulatory scheme, sort of the minimum standards that are detectable, and then simply announced that investors will not be permitted in any way, directly or indirectly -- we are going to look at substance, not the form -- to be in our markets if they are elsewhere in planning and markets that are not living up to this minimum regulatory standard. it seems to be unrealistic to think that we will be able to do much more than that. if there has been given thought to this, would you share this with us? >> there is an elaborate cooperative framework now in place that has the united states at the table with not just europe, but designed to enforce

the minimum standards. >> mr. secretary, is it your impression that all of these countries or to agree with the different things you are saying that we should require? fourth i agree with you that is going to be enormously difficult, but it is the right thing to try to attend. >> if we move forward and require these things, are we going to be disadvantaged. >> i think if we get a bounce along and do it poorly, we will face that risk. we're or to try to be careful to do it in a way that improves confidence in our markets and in a way that reinforces what has been a substantial asset for this country, which is, we typically have stronger standards than those applied around the world. but again, this crisis has been so searing not just for your, but across the world and i think there is born to be substantial interest in raising standards thereto. theories there too.

it will be our intention to apply the strictest possible sanction. we should say that any country that allows us to be a host. i believe we'll have strict instructions in there. natural gas and public ultilities sometimes put up physical assets as class ral.

i understand speculators drive up costs. my question is, if we require these public ultilities to go through exchange and perhaps dik through exchange and perhaps dik upting their cash flow with a fee. is there a way to carve out these entities in >> it's going to be an important issue. i believe the experience with central clearing, and the sxirps with the minus gracious of der rif tiffs has reduced costs to users. that's encouraging.

we are still going to preserve capacity to engage in on a buy lateral basis customize the basis. it seems as though publicne ultilities would not be customized. >> i received a lot of letters. i suspect many of you have from ultilities saying we want to preserve our capacity >> i don't think we are in a different place. >> i to follow up. jo your definition of something that would be standardize is high volume.

i was gathering from that that thooz contracts would be considered standardized. >> they still may go into a customized category. >> the question is, are the terms i think that's the way to think about this definition. we are going to do our best to make proposals to you and get the balance in our place. >> i'll be happy to get back to

you on that particular question. thank you very much. i yield back. thank you. there's been a lot of comment about these customized versus standardized. people need to understand these banks make a lot more money on customized in terms of standardized. >> i think you are right. as you go through this process, you want to you will hear a really interesting diversity of opinion on this. >> let me recall to me my own distinction. we are talking about the end

user. gentleman from kansas. >> thank you. many merps probably never heard of this before the melt there is the beneficial risk tool managed but that many businesses can provide to other businesses, large and small. i think we should be careful of unintended consequences. when we consider the u.s. companies that played no role or part in the financial crisis, house should we waste systemic stability against requirements on end-users of derivatives? is there a chance that systemic risks, could stop companies from hedging risks they have on the books? >> yes, i do believe that if you

deprive institutions of the capacity to manage their risks affectively, you create a less stable system. less stable system. some claim that the administration plans that companies would have to post for a clearing house? >> that's a hard thing to do well. it's about the balance. it's the beb fit of the that you push a bunch of risk off shore. i don't think you look at the last couple years of history and say we error on the side of having to be too conservative. >> thank you, mr. secretary.

i yield back. >> the gentle woman from illinois. >> thank you. the administration's proposal strips all the consumer protection functions from all the banking regulators and puts them in a separate agency. can you give me a yes or no answer with that? no. we are not proposing or making government bigger in this case. we are taking authority that gifts in a bunch of different

places. we are moving that to a central place with more account ability. what's the function of the banking we want bank regulators to be princeablely responsibly for the soundness. we think we'll have consumer protection if we have better separate account ability for those functions. we are open with the consumer protection. >> there's a lot of dupe cakes

effort. our system is characterized by a mix up it is not a sis stem we designed beginning today. we will have to get less overlap. how do you do that if you separate those. they have not been done particularly well. we argue that separating is more simple and clearer. i have concerns about the recently passed i like to know

what is the administration's position and the position on new tax. i know there was a caveat at the 3:00 a.m. 300 >> could you inspire that in@@@r it is a complicated bill with a lot of complicated provisions and i want to do it well. >> i'm still worried that we will contend -- incentivize much of the market to move overseas if we impose new regulations on the market. how can we force all about?

-- forestall that? it is -- >> is an important thing to avoid, but if you look carefully at what the europeans have propose now, what the u.k. has proposed now, there is much more similarity in the approach that we have seen in a long time. that is encouraging, but we share your concern and we want to avoid that risk. >> the gentleman from indiana, mr. ellsworth. >> thank you, mr. chairman. we have all got hundreds of questions we could ask you. but before you, we only have four minutes to do it. the first time i heard about this was in a time magazine article and i thought i was just living under iraq, until i started pulling it back, and most who had not heard that term either.

bernie madoff has now been you. nced to life >> do we know a dollar figure on what these credit default swaps are worth. >> i'd be happy to respond on the number. the overall estimate and the magnitude are in the $600 trillion range. the market value are more in the $20 trillion range. that substantiallyover states that. these are enormously large markets. they assume interest change

risk, energy risk, the way this happened in credit derivatives. decades ago, people figured out a risk. cost of a change in interest rates >> there were companies like aig at road huge contracts without -- that road huge contracts without the money to back it.

this is an obligation we all share, not just to address the principal causes of this crisis, but to have a strong merger directory of if remark of possibilities for the future. >> what are the consequences, whether we voted for the tarp, the bailout, all of that, what are the consequences if these credit defaults were called in? could they be called in, cashed in? >> i would not think about the economic risks in what the congress authorized for the financial sector as being principally affected by what the economy, like you recall, we are living still with a very challenging seft economic risks in the future. if we are successfuljv;, the

ultimate risk to the taxpayer would be lower. >> i yield back. >> thank you charm. thank you mr. secretary for being here and answering these questions. >> with your proposal, i wanted to seek some collar if i cakes. was your attempt to register with the s. e.c. the hedge fund instead of the c.f. t. c. and if so, we will have to think through carefully what we're doing with the hedge funds. not quite there yet, though.

>> your proposal? about harmonizing the sec cftc. nou earlier remarks talked about statutes of both been -- needing to be brought in line. where is that harmonization it needed and where is it possible? >> well, we hope it is possible generally, across the board. you have these two differences. you have these different basic statutes across the markets that are responsible for -- and you have different enforcement cultures and approaches and those two different systems themselves make something that is not as strong as we should have. we are trying to get them together to propose ways to get into conformance. they're making progress, but we will spend a lot of time working through the detailed merits, alternatives a of

different approaches. but we are not far enough along yet to go into detail today. >> by heald back. >> the gentleman from massachusetts, mr. lynch. >> from massachusetts, mr. lynch. i want to go back to the system that the president's plan envisions where you have a standard derivative. the standard ones being linear in many cases. and you have custom derivatives trading with transparency. there's a big pay day for the!v

bank an unregular lalted system, the markets favor that system. the a major problem with derivatives has been the -- the actor pricing of risk. you are pointing these customers off the exchange where i think there will be, again, in this pricing of a risk that will continue. lastly, we are still allowing these gratuitous decide that's where folks can come in and take a bed where they have no interest at all in the underlying asset. those are all moral hazards, i think, that are going to lead us to continue to have a system that has been lost in it. i just not know how i can

support such a system. >> congressman, thank you for giving me another chance to address that concern. again, we're proposing comprehensive oversight where we are not just the participants in these markets, but over all of the products, said a rise or customize. we are proposing to give the sec and the cftc authority they do not know how. -- they do not now house. and we're trying to major capital requirements in the margin are higher where risk is higher. that will help. >> but sir, can i ask about the pricing mechanism? there is no exchange. you have these structures by private parties. >> you are exactly right. you want to have the standardize parts where you can have a price discovery and competition because there terms are standardized traded on exchanges or over an open electronic platforms. but a customized, unique among

special hedge for utility group to provide energy needs, that is going to reduce the product by definition. they cannot meet the standards of the product, -- york, in fact, suggesting that we enforce all of this stuff onto exchanges, effectively banning the capacity to customize, i would caution you to listen carefully to the users. you will find companies in industries across the country, small and large, trying to make sure that we preserve the capacity. we are or to try to get the balance right. we are aware of the concerns you said, but i think we have proposed is substantially better balance than we have today. balance than we have today. >> thank you. mr. secretary, i'm going to

paraphrase. i don't disagree with that assessment. i would sigh the question is wlrpt the lhadministration's t public debt has increased by almost $$1 trillion. given that back drop, i'm having to look at this new proat the corporation 3 m testified, projected that they would be looking at $100 million per year for a moneyed torry clearing

environment. i believe in questions be the gentleman in kansas. i believe you said something along the lines that it is difficult to ultimately gauge the cost burden for those who have to go to a mandatory listen, i'm not unsympathetic that improvements can be made in clearing these derivatives, particularly with respect to transparency. i think, with respect to margins, but i'm very concerned about a proposal but at least as of today seems like we are trying to silken the proverbial jello on the wall and if we did not ultimately know the cost, we do know this, unless hedging can

create a less credit and last credit can create fewer jobs. in this economy, i am leery that until we have convincing evidence about the ultimate cost and the ultimate impact on our job and are meant for moving forward on this -- i guess the question would be, when will the administration do remodeling on jobs? when will we expect that analysis? >> you began to question with an inappropriate response of the country with responses like we just inherited. but on the question you have asked, how we get the balance rightç in the future, i suspect they are much narrower. we are trying to preserve the capacity for hedging. we are trying to make its more possible for our country to have both a more stable, more resilience system and preserve the capacity of the people to hedge against these risks. we are basically committed to that. we are trying to make sure that

innovation, which is a great strength of our financial system and can proceed the future without risk of catastrophic damage, but i suggest that our -- suspects that our targets are not as great. adobe happy to talk about that any time. -- i will be happy to talk about that any time. >> i hope that is true. the next question, i now have 30 seconds. i think you said that some of your critics were wanting to maintain the status quo. many economists believe that the greatest cause we have for the economic crisis was fannie and freddie, and yet, your reform proposal has nothing about fannie and freddie. >> it is absolutely true that those institutions over time to on enormous risk because of the

implicit -- simplicity of the government to back them. the king, unfortunately, late in the process. we're born to have to come to congress and propose how to deal with the future of those entities, but now is not the time to do that. we are born to try to do that carefully and well, but we agree with you that is something we will have to confront together. and we will come to you with our best judgment with what to do and we will look at a range of options together. >> thank you. >> the gentleman from new york, mr. murphy. >> i want to say thanks for all of your hard work on this and i know you have been pushing for clearing of credit defaults wops long before any of us ever heard about it. -- credit default swaps long before any of us ever heard about it. in your testimony, you talk about clearing houses and clearing stuff, putting it on exchanges. do you see those as one to one

or uc transactions that might be cleared or not on -- or do you see transactions that might be cleared or not on exchange and so forth? >> there are some things that cannot be cleared and cannot be put on exchange. and there are some products that can be extended -- essentially cleared, but do not need to be on exchange. the demand for a beginner hedge or tichenor energy -- a particular hedge or a particular energy costs, they probably would not want to take on. >> i think we should try for clearing because i think that does drive for systemic risks. an >> you are right to emphasize that and we have been very careful to say we want to encourage standardize to be essentially clear.

>> considering putting minimum requirements for margins for the clearing houses? but for the clearing houses, absolutely -- >> for the clearing houses, absolutely. they concentrate risk. we need to make it are safe margin against default. >> i think competition is good, but i want to be sure that we do not have a race to the bottom. >> absolutely right. >> last question, hedge accounting, a year from a lot of the company's i talked to that had accounted, to be expensive enough to get them the treatment they want requires to be customized otc marketplace. how can we address that to try to bring that to other, where people who truly are hedging are not doing so that takes them off the standard or exchange traded product? >> you are right, the concern is the accounting requirements. there would not be able to meet those boys departments and that

is one important concern. but a fundamental concern is that not all risk that people have attended since to try to protect themselves from -- >> my question is, how we protect from risks veteran not be in the otc market -- risks that sure not be in the otc market? i want to make sure that we do not drive things into the otc market that do not need to be there. >> that is a good thing to look at and, of course, we have allowed for protection to my independent political influences on the accounting standards and i agree that is an important thing to look at. generally, we have a problem where a lot of the counting stuff runs against the basic interest -- and i'm going to be more careful how i say t$t, by your right to point out the importance of this. >> we can try to push it in one direction, but if we get into the accounting rules were we are marking one side of the balance sheet and not the other or we are driving to do something to

loosen out of what is the financial system, that can have a big impact. >> the gentleman from missouri, mr. lomira. >> the final comment in your statement today or your suggestions in your statement today is about working with international counterparts to address derivatives. can you just discussed that for a few minutes, as to the size of the involvement of our foreign counterparts if you have had any negotiations with those folks at this point, where you see the problems or the positives of where we need to go with this? >> let me give you one example to show you how important this is and how you can do it and do it well.

starting in 2004, 2005, the new york fed brought together the supervisors responsible for these markets and for all the major derivative dealers responsible for 95% of trading in these activities markets around one table and compel them to agree to a set of measurable benchmarks for improving standardization automation, basic risk management, quality of infrastructure in these core markets because there were global markets. so, that is one way to do it >> how did you compel them to do that. >> by getting the supervisors to agree on a common framework of constraint and reporting standards, we made it possible for each of those institutions that exist in different countries jurisdictions to be held to common standards and we have tried to enforce that not just for supervision, but make sure there was transparent

reporting of performance across firms. that helps to level the playing field. the u.s. has been terrific in the past in the capital area a decade ago in trying to get the world to come to a higher standard, but we are not effective enough and we're going to be very focused, as i said in trying to make sure that we bring the world on the table with us. and we have a very elaborate set of core operations working alongside the process here. >> how much presentation we have from other countries verses the amount of -- indeed >> you mean in terms of where the markets are? >> yes. >> i believe that it varies a lot across products but i would say it is probably on average roughly 50/50 u.s. and europe. but do not hold me to that.

>> bachus me an idea of the importance of the issue. do you have some things that are some problems right now with the way the other countries are regulating their markets that we need to watch out for? >> there is one concern i have, which is the idea of global markets and you want to have a common global framework. there is a tendency in europe to try to see -- come up with european solutions to managing risk in these areas. we have been very successful in the past in working with your to come up with a common approach because we think it will be an effective way to reduce risk. we are one to try to work with them to make sure that we end up with a thing that works with in these markets and is reducing overall risk. >> there are three members left on the democratic side. i'm wondering if members could do us each a minute and a half.

the denman for north carolina, and john from texas, the gentleman from illinois. maybe we will shake it a little bit. -- shave it a little bit. questions. >> thank you very much. >> good morning, mr. secretary. >> most of what you have discussed justifying the derivatives or the purposes is that the underlying asset from which the derivative is derived. >> there's no risk to mitigate. it sdpt appear to have anything to do with capitol allocation

that seems thin given how huge the derivatives market is. did you give any consideration as to whether or not the product should be allowed at all. >> let's get the question. the gentleman from texas. a quick question? yes, sir. >> please ask your question. we have 8, 246 deposits in our

country. >> mr. chairman, mr. secretary, thank you for being here today. there have been concerns about mandating clearing houses to force on to the clearing house. how would you a dr.s those concerns? >> can i go to reverse order in >> we need to make sure there are safe guards adequate to concentrate for that dramatic

consequence of risk. you'll have a chance to list ne the businesses across the country. is there economic value in my capacity. the existence of the underlying asset is a complicated asset. >> the gentleman from new york, this is an issue near andeer to my part. >> hopefully you are familiar with this task force and the fact that you have really two groups here being treated

differently. the hourly workers got 100% of coverage while the salry workers stand to loose up tot 770% of their pension. the fact that we now own 60% of general motors, we have been trying to reach out on the task force and trying to get answers for the retireries frustrated. i'd like your thoughts on what we can do about it. the trade offs in the judgement in part of this justice. why the alternatives would be happy to do that.

>> i appreciate having the opportunity. >> mr. chairman, i'd like to add a record r letter to the record. >> without objection, with that, we'll bring this to a close. i want to thank chairman frank and all members of both committees for good dialogue. we look forward to working with the two committees together. the committee is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009]

'u"ge sonia sotomayor true friends, colleagues and former classmates, plus, the confirmation process, michael jamie brown, was part of the by ousting the shepherded justices alito and robert through the confirmation process. that is tonight at 9 -- ed 6:03 p.m. and 9:30 p.m. eastern here on c-span. >> live coverage of the confirmation hearing for supreme court nominee sonia sotomayor. it starts monday at 10:00 a.m. eastern on c-span, c-span radio, and on the web at c-span door -- at c-span.org and will replace the proceedings each night on c- span2