chairman, we have to consider poole. with this last witness the where 7 of the 9 justices, do@@ situation that existed at that time. one, in which, the president had lobbied heavily for money but without anyone having a book written and how you get through before justice roberts became these times. wall street, perhaps, would say the chief justice, he said that that the end justifies the the powers were zero little means and we have been saved. disquieting. here in washington, what quarterbacks. would you maintain an independent status as others do monday morning quarterbacks say, in fact, if we have to play again next sunday, how do we do better? in having their own review as how can we learn what happened whether it should be granted? on the gridiron on sunday? . . mr. chairman, that is our job rks and own here today. we have to ask some serious individual review as to whether it ought to be granted? questions and he is an expert >> i would probably do what witness as part of the process. we have to ask what we do justice alito did, although i haven't decided if i'm given the differently if he had to do it honor of becoming a member of over again 3 he may or may not the supreme court, i haven't be able to answer that. what should we do in order to decided anything. i'm not even sure where i would glean the causes, the events, the solutions, and what

live in new york if -- in washington, but putting that aside, senator, my approach regulatory changes would be would probably be similar to necessary for these considered justice alito, which is if we are to be prepared to experience the process, take for either not have it happen again a period of time consider its cost and benefit and then decide or to provide the transparency, accountability, predictability, cost and benefit and then decide whether to try the native and rule of law the next time that may have been lacking in this once in a century events. or not and figure out what i mr. chairman, on a bipartisan think works best in terms of the basis i'm thrilled that we're functioning of my chambers and bringing to a close this report the court. hearing because i believe it has i can't give a definitive answer been helpful and will continue because i generally trying to to be helpful not just as keep an open mind until i oversight but as a partner in experience something and can the necessary reform. then speak from knowledge about mr. chairman, i may take note whether to change it or not. that just yesterday, on the >> judge so to mayor, you have house, all of the commissioners have had experience on the pilot for the 9/11 commission were program conducted by the judicial, federal judicial named. this is a beginning of up to an conference. and these were the conclusion 18 month process in which, i reached by the pilot program. believe, all the members of the

committee will be working they said, quote, attitudes of together to ensure that our reforms fits future possible judges towards electronic media challenges. i think the chairman and yield coverage of civil proceedings back. >> think you very much. were initially neutral and came -- thank you very much. favorable after experience under the pilot program. judges and attorneys who have i now yield five minutes for opening statements to the experience with media coverage chairman of the subcommittee, under the program generally congressman kucinich from ohio. reported observing a small or no effects of the camera presence >> thank you very much, mr. on participants and proceedings, chairman. courtroom decorum or the i don't think the question is whether or not this is a administration of justice. would you agree with that based question for monday morning quarterbacks but whether or not on your own personal experience taxpayers should have been based on having television in your courtroom? purchased the bank of america >> my experience was limited. i can't speak to the more broad franchise. now, with mr. paulson testimony conclusion of that report. today, it is an undisputed fact i can say that as i -- as we discuss when i met with you that he told bankamerica's ken senator, mine was positive in lewis that the government might the two cases i believe i only had two cases where the media remove him if the bank of america back of its deal to

acquire merrill lynch. it requires a judgment call to asked to record a proceeding. think he was being justifiably i may not remember others but i tough in response to their consideration of invoking the do remember two. own the circuit court, we do change clause in its merger contract. provide tapes upon request. arguably, it was unwise which he and some media has asked to viewed as a potential threat to record our oral arguments, but the financial system at a moment of crisis. my experience has generally been positive. and i would certainly be able to nothing in the secretary paulson recount that. >> c-span has conducted a survey proxy testimony today justifies the government's decision to ignore evidence that bankamerica which shows that 61% of the american people would like to withheld information from its shareholders about mounting losses at merrill lynch before the crucial shareholder vote on see the supreme court televised december 5th. and in the survey, it disclosed how little the american public that is a potentially illegal acts. i have seen no justification for knows about the supreme court. the government to override chairman, i would ask consent this be included in the record. recommendations of professionals >> without objection it will be that the professional staff included in the record. after the fact. >> the interest that has been -- recommendations of a

generated by this confirmation professional staff after the facts. sadly, that is precisely what proceeding encouraged by the television shows, the enormous mr. paulson and mr. bernanke did. this hearing and the two interest that people have in what the court does. previous hearings revealed that and there has been a fair amount the government concluded that of coverage by the justices on mr. lewis's running of bank of television as i cited yesterday. many have appeared on america was in legal jeopardy. television. justice kennedy says he believes they had determined that mr. the television is inevitable. lewis in new about accelerating losses at merrill lynch before the shareholder vote to ratify everybody has said who's the merger but he did not testified that there's a grave provide that information to shareholders. concern about the collegiatety the top lawyer at the bird, had he determined that his management team for possibly in and people do not want to make violation of securities laws for withholding material information an opinion before talking to from shareholders. colleagues. if anyone has a strong objection top fed -- top professional staff at the fed had determined that his management team had and justice suitor has noted failed to do due diligence in that if tv cameras come to the requiring merrill lynch and not court, they would have to come up to the task to identifying and solving the problems in which they found themselves in in over his dead body and his

late 2008. the professional staff was body won't be there at all. pressing for a number of new requirements on bank of america would you tell your colleagues, as conditions of any federal bailout in order to ratify three the favorable expression experience that you've had with television in your courtroom and if you look at the screen -- in order to ratify. perhaps take the role in if you look at the screen. encouraging your colleagues to follow that experience for the an email to chairman bernanke, i supreme court? >> i would certainly relay my experiences to the extent some quote, "there were clear signs of them may not know about the in the data we have that the pilot study in many courts, i deterioration at merrill lynch has been observed in under way would share that with them. and will participate in the entire quarter, albeit discussions with them on this picking up the significantly around mid november. issue. and those things i would do, restricted at federal reserve analysis of the merger, "the senator. >> some of my colleagues have questioned whether as you stated your panel in the maloney case severity of merrill lynch losses was really bound by supreme only came to light as

court precedent. problematic. the seventh circuit reached the same decision your panel did. these were clearly shown in and in that opinion written by merrill lynch management reports highly respected republican judge, frank easterbrook, the that bac ignored. seventh circuit pointed out that the potential for losses and other risk exposures cited by declined to reconsider older supreme court cases which have management, including those held second amendment applies coming from leveraged loans and only to the federal government. the trading in the complex judge easterbrook wrote, that structured credit derivatives does not license inferior courts to go their own way. it just notes the older should also have been reasonably precedent is open to well understood, particularly as reexamination by the justices bank of america -- bac is also themselves when the time comes. active in both of these products. that was your court's conclusion for minimill from the fed's also, wasn't it? >> it was. and i understand having reviewed general johnson -- general counsel, justice easterbrook's opinion that he agreed with the reasoning of maloney on that >> lewis should have been aware of the problems at merrill point. >> i want to return to the issue lynch earlier. as early as mid november, that could cause other problems for of basic authority,

him to run a disclosures for the responsibility of the supreme court to decide the major cases shareholders. next slide, please. on separation of power. a different question that does not seem to be the one of louis there was a case whichle supreme is focused on is related to disclosure. court denied a couple of weeks management may be exposed if it does not properly disclose ago involving claims for information that is material to benefits brought by survivors of investors. his potential liability here will be whether he knew or victims of september 11th should have known the magnitude of merrill lynch losses when against certain individuals in bank of america made its disclosures to get the saudi arabia. shareholder vote on the merrill lynch deal in november. -- excuse me, in early december. this case caused a conflict. congress had legs lated under next slide, please. sovereign immunity in 1976 that from talking points prepared by top staff at the federal reserve. "bankamerica should be expected claims like flying an airplane into the world trade center were to require two more inches of an exception to sovereign involvement in the management of the bank of america and the immunity and the executive board of directors. the final slide.

branch interposed objections to from an email for the president having that case decided because of the boston federal reserve. of the sensitivity of matters "going forward, particularly if with saudi arabia. and the case involved circuit we believe that existing splits and a very, very management is a significant source of the problem and they important matters in that do not have a good grasp of the extent of their problems and the tragedy, which you've commented preppy strategies to resolve reached you being very close to them. i think it -- i think they need the incident. don't you think that that's the kind of a case the supreme court to resolve their manager. should have heard to decide that kind of very basic conflict recommendations from top staff, between article 1 powers of the they build up the merger of bankamerica and merrill lynch congress and article 2 powers of without requiring placement of the executive? their top management or board of >> senator, obviously, issues directors or imposing any meaningful new requirements. related to september 11th and not every national government we national security are very important issues to the country as a whole. for the reasons i mentioned have at the same way. earlier, i lived through september 11th, so i understand the u.k. dismissed the top it's great tragedy and effect on management for royal bank of

scotland without affecting its america. the question you asked me, ability to operate. though, is one that asks me to make judgment about an act the supreme court has done. the management of systemically and i didn't participate in important banks not only kept their discussions. their jobs that they've the i didn't review the cert billions of dollars from american taxpayers to plug the holes in their balance sheets. certainly tarp and many new petitions and talk with them their reasons. it would seem and is inappropriate to me to comment lending facilities. on a question that i wasn't a >> if you could summarize. party to in making the decision. >> the lasting harm to be some of this committee's investigation will be exposing >> would you at least degragreeh the treasury and the fed's failure to account for a proposition that conflicts accountability to systemically significant banks in exchange between the congress and executive branch are of the for a federal bailout. not a single c.e.o. kucinich to highest duty for the supreme court to consider and to decide? give bank was removed from his job -- and the single c.e.o. was >> the -- all conflicts under removed from his job.

the constitution -- all issues arising from the constitution the biggest most powerful bankers have essentially receive are important. >> i know that. that's a pretty easy question to a free ride at the taxpayers' expense. in conclusion, by choosing to answer. i'm not asking you to agree with bail out bank of america without also move -- removing its top justice roberts that the court ought to take more cases, which management and withholding potential material information seemed to me to be pretty easy. from shareholders prior to the merger, the government said a the question about justice scalia saying that there's signal to the management of all turmoil when the circuit split systemically cigna to get banks and you don't have the supreme that their mistakes and their mistakes will be treated court taking -- isn't that of differently regulators than those treated by managers of a the highest magnitude. midsize banks free over the our discussions here have coming months and years, this will prove dangerous and we will involved a great many issues. deeply regret this. but i would suggest to you on i yield back. >> mr. chairman, we have not separation of powers and when you undertake the role of the received any of the documents congress contrasted with the never displayed. could we get copies of each of those to put on the boards? role of the president. >> i would be delighted to do congress's article 1 was placed so. i now yield to the john lennon of zero hot -- judgment from with privacy because we're ohio, again. closest to the people. when you have a comment like the

-- i now yield to the gentleman terrorist surveillance program from ohio. which flatly contradicts. >> thank you. the enactment on the foreign surveillance intelligence act, i would also like to think secretary paulson for coming before the committee today. only way to get a wiretap is i look forward to the testimony with court approval and the fall 2008 was a watershed time sixth circuit dodges the case on for our economy. it was a time for economic standing with very questionable challenge that we felt those grounds and the supreme court won't even hear it. and you have a case involving five and of women in credit tightening. i believe this is dangerous and september 11th and a very think many americans would argue blatant conflict between that it has not helped. congress powers expressed under federal bailouts and stimulus article one with the sovereign packages are transforming our free-market economy to a political economy. immunities act and the president the current issue before this stepping in under foreign committee is merely a symptom of powers, isn't that a category of the ever-increasing reach of the the highest magnitude? federal government into the >> it is so difficult to answer everyday affairs of american businesses and families. that question in the abstract. should anyone be surprised by for the reason i've just what the federal government has administered bailout program?

explained, the issue is much, much more complicated than an massif fed and the treasury absolute that says if a case presents this question, i'm always going to take it. acting in such a way. that's not how a judge looks at they have used this to control the issue of granting or not our economy with the increasing nationalization from banks to car companies, higher taxes, government takeovers, and granting certiary -- possibly health care, more american jobs are being lost. >> i've only got a minute and a the american people are saying enough is enough. half left and statements i want they want answers. an accord to hearing from mr. to make in conclusion. i would ask you to rethink that. paulson about his role in these and i would also you to rethink dealings. -- i look forward to hearing from mr. paulson. i yield back. the issues you didn't want to >> thank you very much for your answer yesterday about conflict statement. we turn now to our witness, between the congress and the henry paulson. court. mr. paulson served as the secretary of the treasury from even though the constitution made congress article 1 and the 2006-2009. president article 2 of the supreme court has really he previously served as the reversed the order. chairman and c.e.o. of goldman

the judiciary is article 1 if sachs. the powers were to be redefined. we swear our witnesses and freed you have said repeatedly that the job of the court is to apply would you please stand and raise your right hand? the law, not to make the law. and take a look again at the do you solemnly swear to tell standard of proportional and con the truth, the whole truth, and grew ent and see if you don't nothing but the truth? agree with justice scalia that let the record reflect that he that's another way for the court to make law. answered in the affirmative. and take a look at what justice you may be seated. roberts said here in the confirmation hearings that there mr. paulson, you may begin. would be deference inry inspect >> ok. for congressional fact finding chairman, ranking members, and and how that is not in the distinguished members of the committee, i served as secretary garrett case and in the voting of the treasury from july 2006 to january 2009. rights case. and out of consideration for the people who are going to appear during my tenure, the world here later, i'm not prepared yet experienced a financial crisis unprecedented in our lifetimes. to announce my own vote. but it is my hope that and the the crisis presented a relentless series of novel conventional wisdom is strong challenges that required swift,

for your confirmation, that innovative, and dramatic you'll use some of those responses. had the crisis of 2008 and left characteristics of your to unfold without strong, litigation experience to battle federal reaction and out the ideas that you believe intervention, the world of 2009 would look very different than in because i have a strong hunch that they are closer to the ones the world we live in today. many more americans would be that i would like to see adopted without their homes, their jobs, their businesses, their savings, by the court. and don't let the issues of and their way of life. separation of power skip by. the congress is entitled to the crisis of confidence last fall credit to disrupt our deference on these issues and entire financial system, not just the institutions that had credit losses on their mortgage investments that all financial firms whether week or solvents. as liquidity dried up, the continued collapse of financial institutions provided credit and >> we've heard your thoughts would have met in short order about specific cases and the firms across industries, not jurisprudence. just wall street, but every street. they would have seen a massive and like to ask a general curtailment of access to

question. this is about job interviews. liquidity to purchase supplies why you want to be a supreme and pay their employees. court justice? payrolls would of quickly turned into millions of more layoffs. this, in turn, with -- would >> can i tell you a story? have meant a greater retreat of this will explain who i am and consumer spending. it would have been extremely why. difficult to break the momentum of this downward spiral. when senator moynahan told me he now, the financial system is stabilized, we can and should would consider sending my name take the time to learn the lessons of the past. for consideration as a district in the midst of a rapidly court judge, he asked me. changing crisis, are -- are responses were not perfect, but i am confident that they were substantially correct and that i ask permission to tell my they saved the station from great peril. mother and grandmother. this hearing is about bank of they were visiting and i told them. america. mom was very, very excited. in my prepared testimony, i lay she then said, how much more out the series of events surrounding the acquisition of money are you going to earn? merrill lynch. [laughter] there are three issues that are appropriate to address at the i told rose going to take a big outset of this meeting.

pay cut. first, some have applied that i then she stopped and she said, and other government officials allowed concerns about systemic are you going to do as much risks to outweigh concerns about foreign travel as you do now? potential harm to bank of i was flying all over the u.s. america and its shareholders. as part of mine private practice that simply did not happen. work. i said probably not because i'm in my view, and the view of going to live in a court house numerous government officials working on this matter, the in lower manhattan. interest of the nation and bank of america were aligned with respect to the closing of the now the pause was a little longer. merrill lynch transaction. second, some have suggested that then she said, now all the there was something inappropriate about my conversation of december 21st fascinating clients that you work with, as you may have heard with mr. lewis in which i mentioned the possibility that the federal reserve could remove yesterday that i had some fairly well-known clients, you're going management and the board of bankamerica if the bank invoked a clause 3 i believe was to be of a traveling with the appropriate for me to explain to new people you meet, right? mr. lewis that the government >> know, most of them are going to come before me as a was supportive of bankamerica and over strongly that if they litigant's and i can become exercise that clause, that would friends of them. joy kossel lack of judgment and now the pause was really long

would jeopardize bank of and she finally looked up and said, why you want this job? america, merrill lynch, and the financial system. -- that would show colossally omar, who is sitting next to her list. the federal reserve could invoke said, you know your daughter and its authority to remove management and the board of bank of america. i intended to my message to her staff with public service. reinforce the strong view that had been expressed by the fed it really has always been that and shared by the treasury that it would be unthinkable for bank of america to take this given who i am, my love of law, destructive action. third, the destruction -- the my sense of importance about the suggestion has been made it that rule of law, how central it is i discouraged mr. lewis from making required disclosures to to the functioning of our the public workers republic society, how it sets us apart as markets about losses at her lynch -- at merrill lynch. many senators have noted from the rest of the world. it has always greeted a passion in me. that passion lead me to want to i would like to conclude with what is the most prominent in my be a lawyer first then to be a recollection of the events of judge. last fall. i cannot think of any greater what i recall most vividly is a nation faced with a threat of an service that i can give to the

country than to be permitted the unparalleled economic crisis and privilege of being a justice of the efforts of the men and women from both the public and private the supreme court. sectors who worked hard to steer >> thank-you. our nation away from that. it was my privilege to work with i for one have been very them and i am proud but we have impressed with you, judge. accomplished. thank you, mr. chairman. i certainly intend to support i would be very happy to answer your confirmation for the court. your questions. >> thank you very much, mr. paulson. we will begin with the question period. each member will, in turn, have i thought i was going to be the only thing between you and the five minutes. i will begin. door. [laughter] as you can see, but the document i planned it just yield all the of on the screen. rest of my time, but since i am -- puts the document up on the not. screen mr. lewis claimed that he i yield the rest of my time, if that is ok with you? you. >> this is almost over. there was one question, i would have renegotiated the deal withheld balance of my time before. i want to make sure i ask this if you did not tell him he could not do so. question because i asked it of the lawyer says to mr. lewis the chief justice roberts and you can always negotiate.

mr. lewis said that you cannot justice alito when they were we were told that you cannot. before the committee. in death penalty cases it takes mr. lewis is asked if he would five justices to stay an try neto renegotiate the price f execution but only four to grand you were told not to by mr. paulson. his answer to that was yes. is it true then, mr. paulson, certiary to hear the case. it would become a moot point, that you told mr. lewis that he the person could be executed into between. could not renegotiate the if the four justices were merrill lynch deal? >> it was not quite that willing to hear a case, agrees director specific. i can be very clear that we with the fifth vote as a matter viewed it the invocation of that clause whether it was to of koucourtcy to the person is executed in the few weeks that renegotiate or just to get out of the merger as being very might be between granting of risky. the markets were driven by fear and uncertainty. cert and the hearing of the case. the invocation of that clause, both justice roberts and alito agreed this rule was sensible. whether it was ultimately going to be resolved by the courts or

it appears according to a study by renegotiation of the shareholder vote, it would lead to an extended and difficult done by the "new york times," process. the fact still remains that we the rule that both chief justice roberts and alito said was do that clause as being a reasonable and i think the legally binding, -- the in majority of us on the committee binding contract request was thought was reasonable. that a yes? >> that is what i said. they said that suggested that rule has not been adhered to the >> the invocation of that rule of four because there have been a number of cases where four justices voted to for cert clause would be a serious mistake. it would be a colossal lack of judgment if we invoked the and wanted to stay the execution clause to renegotiate or and the fifth would not and the whether to go through the person was executed before the courts. >> i am still trying to find out case was heard. if you were on the supreme whether that was a yes or a note. court, basically the same thing -- yes or a note. i asked justice robert and justice alito, if you were on >> did i order him directly? the supreme court, four of your it was not that directory i did fellow justices said they would like to consider a death penalty say that i thought invoking a clause would be a kossel lack of

case and they asked you to be a fifth vote to stay the judgment. there was no sound legal basis for it. execution. the distinction between even though you didn't necessarily plan to vote for invoking a clause to renegotiate or grow the courts was, for all cert, how would you approach practical purposes, not a that issue? significant one. >> i answer the way those two >> if he had issued and justices did, which is, i would consider the rule of the fifth indicated the fact that because, vote in the way it has been practiced by the court. would it not be a cause celeb of judgment on his part? it has a sensible basis, which would this have jeopardized his is, that if you don't grant the own bank and the american economy if he had exercised it or not? >> yes. stay an execution can happen before you reach the question of mr. chairman, it was the view of whether to grant certiary or a very experienced federal reserve lawyers that there was not. >> thank you, i applaud both no sound legal basis. it is my understanding that chief justice roberts and alito for their answers. it appears that perhaps there is no instance where a somewhere between the hearing delaware court has another room and the supreme court their company using a clause to get

minds changed. out of a merger. . now, now in 2007 christopher . . scott everett was executed even though four voted for stay of execution. justice stevens wrote a statement joined by ginsburg for review of the denial. first application for a federal writ of habeas corpus. i'm not asking for a commitment, but justices stevens and ginsburg said, but that something that ought to be considered? >> unquestionably. there was an under lying reason for that practice. >> and there's an understanding that when the case is reviewed it may very well end up the sentence below it may well be upheld. and the execution would go

forward. >> if he had that lack of but this is on the various steps judgment, why would you not have for that hearing. just forced him out? >> yes,sir. >> i'm making a distinction >> thank you. between an action he might have senator sessions? >> briefly. taken, which he did not take. thank you, again, for your if he had taken an action which showed a lack of judgment, i think then the regulator would testimony and i know judges come have not irresponsible if the before these committees to make promises and they mean those regulator didn't push him out. but he did not take that action, things. and then they are lucky, get a and he -- they fulfilled[px the lifetime appointment. i think most likely the judicial contract and they acquired philosophy will take over as the merrill lynch. >> did you call mr. lewis or did years go by, the 10, 20, 30 years on the bench. he call you in an effort to discover this deal? this is an important decision for us to reach and to consider. >> which of these calls? >> is it true that mr. lewis and we'll all do our best. called you in december of 2008 and asked the government to get i hope you felt it's been a fairly conducted hearing. involved in the merrill lynch that's been my goal. >> thank you, senators to all deal? did you call him? >> no, the first time we heard of this was a call from lewis. senators. i have received all the and so on december 17 i heard graciousness and fair hearing from a member of my staff that that i could have asked for. he would be calling and that i and i thank you, senator for

got a call from him, and he said your participation in this process and in ensuring that. that he and his board were >> you're very courteous. for the record, a number of concerned to learn of the extent significant articles should be in the record, one the of meryl losses which -- merrill "washington post" on july 9th, uncommon detail. losses which he had become aware of. "wall street journal" defining >> my time has exspired, but let activism down. july 15th. me -- expired, but let me ask "new york times," new scrutiny of judge's most controversial you this -- is it true that bank case. qu"new york times," nominee's of america brought up the rulings are exhaustive but bailout to you? did you bring up the bailout to narrow. them? how ricci almost disappeared. bank of america came÷ to us wit their concerns about the losses the ninth justices reject and their concerns about going ahead with the acquisition. and in terms of the bailout, i sotomayor position 9-0. the wise latina article, which prefer to use the word "rescue." is an important analysis. for the record, i would also whatever word we use, this came out of discussions because we offer a letter from senator froman of the national rifle had had very much -- at least i

association and series of other people who co-signed that letter think we had an alignment of making this point. i think it's important, senator interests. my concern was the american people. froman, a lawyer, surprisely, i took a look at the losses that heller was a 5-4 position that i heard coming. the second amendment does not apply to private citizens or if it does, even a total gun ban >> can you please pull the mic a little closer to you. >> sorry. could be upheld if a legitimate so as i said, the rescue came public interest could be found. out of discussions, and i they ao found d.c.'s absolute band on hand guns within the believe it was the view of the home to be a reasonable government that the fed and restriction. and if this had been the treasury, that when she's majority view, then any gun ban announces were announced that could be upheld and the second they would truly shake the amendment could be meaningless. market were it not for some form goes on to say the second amendment survived today by single vote in the supreme of government support being in place. court, both its application to so we felt that we needed that the states and whether there will be a meaningful strict in place in order to keep the standard of review remain to be decided. justice sotomayor has revealed system intact.

her views on these issues and we >> well, let me say we'll believe they are contrary to the continue on a second round to intent and purposes of the second amendment and the bill of ask questions about this. i yield to the ranking member. rights as a second amendment leaders we're deeply concerned >> thank you, mr. chairman. about preserving all fundamental mr. paulson, with our previous rights for current and future two testimony witnesses, generations and strongly oppose this nominee. obviously chairman bernanke offer that and letter from the found himself in an awkward americans united for life. situation of saying that the 60-plus association. although mr. cuomo had said the >> we'll hold the record open threat you had said -- i'll until 5:00 tonight for any other quote it from his letter. "secretary paulson informed us materials people wish to submit that he made the threat at the to the record. >> thank you, mr. chairman and request of chairman bernanke." thank you for your courtesy that came from cuomo's office, and i apologize that his work was a little sloppy. but there is no transcript, throughout. >> now, judge sotomayor, this there is no written record, so hearing is extended over four we have to take his interpretation of your days and the first day you statements, and that's one of the reasons that you're here listened to our opening today. we also dealt with ken lewis who statements, rather extensively. you shared with us a very came here with a situation in concise statement about your own which he had received a threat

by your own statements, and yet he had to say that the threat fidelity to the law. was not the reason that he went i expect it will be in law through with the bad deal, for school texts in years to come. if he had said that, then the over the last three days, you've ohio pension funds and others answered our questions from senators on both sides of the that have sued saying that the aisle. merger diminished their asset and i hope i speak for all of senators, both republican and value in bank of america would democratic on this committee have, in fact, had their lawsuit when i thank you for answering with such intelligence, grace go forward much more readily. and patience. so each of you before you have i also thank the members of your been in an odd situation. family for sitting here also you are uniquely positioned to with such intelligence and grace help us. one, you have told us yes you and especially patience. did issue the threat. two, you believe it was during the course of this week, almost 2,000 people have reasonable. i want to put it in perspective attended this hearing in person, 2,000. and perhaps for historicalpñ millions more have seen it, heard it or read about it thanks perspectives go back to the first gulf war in which margaret to newspapers and blogs and television and cable and web thatcher said to miss george casting. and i think through the proceedings the american people herbert w. bush, "don't go have gotten to know you. even though i sat on two wobbly on me, george," when she

felt he was not prepared to go different confirmation hearings for you over the past 17 years, forward and have a war after he i feel i've gotten to know you had brutally treated the people even better. of kuwait. the president told the american this is not a war. people in his internet address back in may that the justice of your threat is admitted. you felt there was clearly the supreme court, you would not disaster if they didn't go only bring experience required forward with it. over the course of a brilliant legal career but the wisdom after one more thing i would accumulated over the course of an extraordinary journey. like you to elaborate on that and how mr. cuomo came to give a journey defined by hard work, fierce intelligence and enduring us the line he did. my understanding is, had the mac faith in america, all things are clause been completely valid, possible. had mr. lewis completely we witnessed that this week. experience of wisdom to benefit renegotiated, had they agreed to new terms or to a breakup, isn't all americans. when you walk under that piece it true that we would have had, in fact, a long period of time, of vermont or the supreme court speaking of equal justice under well, statchri'ú notice for sto law, i know that will guide you. holders, and then a stockholder judge sotomayor, thank you. vote occurred? >> yes, if there had been a

renegotiation there would have been an extended period there would have been a revote, is my understanding. >> isn't that at the center of why you issued the threat and why ken lewis ultimately decided [no audio] that the damage from that period, even if he got a better price or broke it, either way, could be disastrous to both firms? >> again, ken lewis didn't characterize it as a threat. >> he didn't characterize it as a threat. he managed to say he didn't feel threatened while receiving a threat. >> i prefer to characterize it as me explaining the fed supervisory story to him. >> i like margaret thatcher's way of doing it. >> however we characterize it, [no [no audio] the concern that i had is that

the mack clause isn't a legally viable option. there is no precedence for it, there is no basis for it. doing it would have shown a lack of judgment, and it, i think, would have undermined the viable of bank of america and their >> the next step in the confirmation process will be a financial system. vote on the senate judiciary committee. the committee is scheduled to meet on tuesday. a vote could be taken at that time or they could schedule a date for the vote. >> well, going back to mr. continuing coverage of the confirmation process here on the cuomo's characterization of what c-span networks. you said. for more on judge sotomayor's i want to ask a question of you, sort of an easy one. confirmation, check out our would you say sort of the website, c-span.org. reason, the vieability of the mac, you were saying the >> how is c-span funded? equivalent of what margaret tatcher said to george bush, >> sponsorships?

which is, stay the course, get >> taxpayers, possibly. this done, it is better to do it >> plan to retrain >> fund- right now than not? raising. >> let me go to explaining the >> how is c-span funded? confusion to secretary cuomo's 30 years ago america's cable office. it is really quite simple. companies greeted c-span is a public service, a private the fed invoked a privilege that kept me from recounting my company. no government money. >> and now, former secretary conversation with ben bernanke to cuomo's office. so if it hadn't been for that treasury testified before a house committee about the ruling fed privilege, i would have told on the bank of america merrill and would have said to the -- to lynch merger last year. this cost over $100 billion in attorney general's cuomo's government guarantees. office exact -- to attorney this portion is about two hours. general cuomo's office exactly what i'm saying here today. so it is understandable that it is -- understandable in light of the fed privilege. and after mr. cuomo's statement

came out, i asked if you could ask to mr. lewis and the board. those were my words. but it was based upon what i believed to be the fed's strong >> when we held our first opposition to the fed's meeting on this merger, i called it a shotgun wedding. renouncing the deal. now, it looks like a marriage of now in answer to your last convenience. question, i was attempting to ted lewis got what he wanted and send a very strong message to the treasury and the fed got ken lewis in terms of how what they wanted. all this happened against a strongly the fed and treasury backdrop of unchecked government viewed this matter. power with no transparency or and it wasn't just the words accountability. ken lewis appears to have about the fed supervisory powers manipulated the system to his than the other language, which i benefit. he started the bailout when he presented at that time. which, again, very strong made first phone call to mr. paulson. message on the lack of the they got the government involved. he got the treasury to cough up m.a.c. being a legally viable $20 billion of taxpayer money to

option, and a very strong help finance this merger. message on what i believed and he never had to disclose $12 what the fed believed this would billion in merrill lynch losses do to bank of america and until was over. he never had to ask shareholders to reconsider the transaction. merrill lynch and the final markets. >> thank you very much. >> thank you. in the end, mr. lewis got >> i now yield five minutes to everything he wanted. mr. cuse niche. mr. paulson and mr. bernanke -- kucinich. also got what they wanted out of this marriage. they got an uninterrupted merger >> you state, quote, "such an that they believe helped to action would show a colossal lack of judgment and would stabilize the market. the problem is that while all of jeopardize bank of america and the american financial system." this was going on, the american people come investors come and second, if a lack of management the congress were kept in the dark. judgment merits a lack of decisive action, what about -- the american people, potential violations of the law? investors, and the congress for mr. paulson, were you aware of kept in the dark. this is unacceptable and must be concerns felt at the fed and prevented from happening in the

future. treasury that ken lewis' that being said, significant management team failed to do due issues needed to be resolved today. diligence in acquiring merrill was bank of america really lynch and possibly violated securities laws by withholding forced to go through with the deal? or was this just an old- material information from his shareholders to get the vote for fashioned shake down? the merger with merrill? did ken lewis threatened to back out of the deal in order to squeeze more money out of the >> i have become aware with some federal government? of the e-mails that were did mr. paulson believe that ken released -- lewis had demonstrated a >> did you know at that time? colossal lack of judgment? >> -- that there were concerns. why did he and mr. bernanke >> at that time did you know, mr. secretary? believe we should leave mr. >> by staff members, some lewis in charge of bank of america -- did he and mr. concerns at that time, along the lines of what you expressed on bernanke leave the mr. lewis in due diligence. i had not heard concerns at that charge of bank of america? time about securities laws. did congress make a mistake in >> now, chairman bernanke testified here that he shared conferring broad authority on those concerns about bank of

america's management. the fed and treasury in october did you share the concerns with anyone? of 2008 when tarp was created? >> in terms of concerns about bank of america's management? here is what i would say about should congress have created more accountability, management. transparency, checks and balances in the operation of the tarp funds? congressmen, i have been involved and was involved in at perhaps mr. paulson will help us least three situations when i was at treasury where c.e.o.'s shed some further light and were replaced. helpless to answer these questions. i look forward to his testimony fanny, freddie, a.i.g. this morning. >> let me ask you, on that i now yield five minutes to our point, in 2008 did you ever ranking member of the committee inform the management of any for his opening statement. bank that they would be forced out for any reason? >> well, i would say this -- here's the cal cluss.fxt you -- here's the calculous. >> mr. chairman, i would ask unanimous consent that the you have to ask yourself, is gentleman from florida and the this management capable of judgment from new jersey to sit on the panel pursuant to our running the firm? is there someone there or rules and ask questions at the someone else you know of that end of all other questions? can do a better job? i would say these large complex

financial institutions are not easy to run, and it is not easy [no audio] to find strong people to run them during a financial crisis. y just want to say -- >> well, i just want to say this, mr. paulson, so i appreciate you answering these questions. the investigators of this ok, thank you. committee have reviewed tens of mr. chairman, after reading thousands of pages with a personal response to bank of former secretary paulson's america's problems was crafted. testimony, it appears that most these documents clearly show of the basic facts are no longer that you were an advocate of aggressive fiscal response. in question. secretary paulson has confirmed you advocated for large asset that he did tell bank of america injection, a large asset protection plan. ceo can louis that if bank of but nowhere in these documents did we find -- found you america exercise the clause and advocated for holding bank of later needed assistance than america's management accountable for failing to do due dilljens management would or could be and for withholding potential fired. this is not in debate. information from shareholders. as a matter of fact, candor and so, mr. secretary, did you clarity is refreshing and advocate for requiring such account yabblingt as a condition of the bailout you were

helpful. developing? the fact that the secretary does not believe it was >> i advocated thing inappropriate, perhaps we should look at it in light of the times. accountability we had in place, which was we treated bank of just as revisionists have written what we're doing after america like stupe -- city 2001 to protect the homeland, we're already beginning to group. question whether in fact means -- citigroup. used at the disposal of the fed in terms of replacing the and the treasury, and the fdic, were inappropriate or appropriate now that a global financial meltdown has been c.e.o., in this squation, it was averted. my judgment, and it was the i think in fairness, just like judgment of the regulator, that in the cold war, had the soviets it was appropriate to keep mr. come over theczech border, we lewis. that this was a decision that would have to come as we are and was made by the board of bring we had read what we had directors and for regulators to the beginning of this crisis was come in and decide to replace him, we didn't think that was the secretary of the treasury, appropriate. relatively new to the job, a fed >> mr. paulson, as you know, chairman, relatively new to the invoking the mac, however i will job, all of whom were being told considered it would have been here is what is happening on a was not against the law. daily basis and to do something meanwhile, bank of america's about it. decision to withhold information they came to us with a plan. it was a plan i voted against. from shareholders and their

failure to do due diligence are there's a plan to buy toxic assets of 4 $700 billion. potential violations of law. perhaps you can explain to this when they went back and started committee how a secretary of the looking at how to execute, it treasury can justice punishing became clear that it was more an unwise but lawful act while complex. ignoring potentially illegal ones? it might not have been in the >> in terms of leg at, -- taxpayers the best interest. although there are things i legality, i certainly don't feel approve of, i think today, mr. qualified to sit here and opine on whether there was an illegal action. i certainly haven't seen evidence of an illegal action. in terms of the relationship between b& a and the -- between b of a and the capital markets and b of a and the s.e.c., i think that's a matter for others

to opine on. >> i now yield to the ranking member. >> thank you, mr. chairman. as i look at this, i think when most people look at this, they see a clear pattern of deception and intimidation. that you intimidated mr. lewis. it starts with the meeting when they didn't know what the meet,ç=ñ about. you slap a piece of paper in front of them the amount of t.a.r.p. money they were going to take. but my biggest concern, this what i think is a pattern of deception. this is the concern. i think the american people need to see this situation, because it sheds light on where we are headed. we are karzaar, we have auto taxes, we have unprecedented involvement by the private sector and coming soon to people across the america, we have people that are going to decide what kind of health care you are going to get. you see what happens when you give this involvement to the

federal government. took place in this acquisition. first i want to talk to you about what some people would describe as an exaggeration. you said the world was going to be terrible if this didn't get combleeted. yet there were people at the fed, like ash -- craft that said this was over the top. you didn't put anything in writing. you made sure that ken lewis' testimony to attorney general cuomo, he said mr. paulson said we don't want a discloseable event. we have the e-mail that says if merrill lynch decides to file early, we want to steer them to a later filing date. so you controlled when the american people could find out on though you were using kathleen sebelius -- even though you used $700

billion of their money. the office of the congressman trawler was alsoaçt left in the dark. we have e-mail from brian peters from the fed -- where he says we should not reference the call from secretary paulson. i want to read from the memo they put together. ú c1 board in the dark as well. not only did mr. paulson deliberately keep the s.e.c. in the dark about events at merrill lynch, you also failed to raise meetings at the financial oversight board which congress established to bring oversight to t.a.r.p. it was not until the january 15 meeting that you and mr. bernanke informed the board of the government's plans for additional bailouts of bank of america in connection with the merrill lynch merger.

so again, you claim that failing to force the merger would have had cat strask -- catastrophic event, but it wasn't worth revealing it to the oversight board. so you think catastrophic events going on, but you don't revealñ it to the final>e oversight boa. go back to the october meeting. you deseeved the banks in

congress of the united states decided to give you $700 billion in taxpayer money and the whole premise was that you were going to take that money and you were going to buy the troubled and toxic assets and you were going to clean things up. and yet to date the treasury has not purchased those assets. i want to know, when did you know that you could not be able to do what you told congress? i remember sitting in on the conference calls. i remember whether you came in front of lawmakers and you said we're going to buy these troubled assets and yet less than 10 days later you injected capital into the institutions. did you deseeve congress before the october vote mr. paulson? again, a pretty clear pattern of what's taken place. >> unfortunately i don't think i have time to respond to every question you asked or any statement you made, many of which i disagree with. but let me get to the t.a.r.p.,

because i think that's critical. we went to congress, and when we asked for authority to buy liquid assets. we also recognized we needed flex, and we worked with congress to make sure we had the flexibility to make sure we could deal with what we had coming at us. congress, i believe, knew they were giving us this flexibility, and thank goodness they did give us that flexibility. now, what happened in the last few days before we got the t.a.r.p. legislation which passed on october 3rd, and in the week after we got the t.a.r.p. legislation, the markets continued to freeze up. we had a whole series of bank failures overseas, five or six different countries had to intervene to rescue their banks, market participants were clamoring to do something quickly, we need today do something quickly, and the way we were able to do something quickly and make a dramatic

difference and prevent something very dire from happening was to make the tchay in -- and inject capital. i would say one other thing. i would say one other thing -- i think subsequent events have proved unequivocally that there is not an easy, quick way to purchase illiquid assets. so when did i come to the opinion that we needed to move and do something? >> sometime between october 3rd and october 13th, obviously. my question is was it before october 3rd. wouldn't you say the main point that you and mr. bernanke sold to the congress of the united states is that we were going to go in and buy these toxic troubled assets? would you agree that was the main point?

>> yes. >> and it changed in 10 days? >> that was the main thrust, and that was what we talked about. but we, from the beginning, wanted flexibility. congress wanted to give us flexibility. it was very good that congress gave us flexibility. >> the gentleman's time has expired. i now yield to the gentleman from pennsylvania, mr. kanjorski. >> thank you. i'm not sure whether the committee is having this examining to see whether we could promote these shareholder interests of bank of america. that seems to be what you potentially violated. i'm going to give you an opportunity, since this is your first testimony before the congress to be a little more explicit and descriptive of the situation that happened from

september 15 to the 18 by act of congress. proceses were taken. you heard my colleagues on the other side seem to suggest that you over-reacted. that there was an exaggeration of difficulty, and that in some way an abuse of power occurred on behalf of yourself and the president and this congress in acting precip tussly in the fall of -- precipitously in the fall of 2008. now we have had chairman bernanke before this committee on three or four times, and i always ask the question to make sure we restate that picture and that the american people have a chance to understand what happened. i dare say for criticism, i think both yourself and chairman bernanke and the new secretary of treasury have failed to inform adequately the american

people as to what meltdown meant. i remember those vital days and some of those meetings and telephone conference calls that we all participated in and some of the descriptions. i don't want to provide that testimony, but i'm hoping that maybe you may preb whether questions of law and order were asked, whether questions of the capacity to feed the american people for what period of time were asked. i am not going to say what i remember the answer to be. but i think when you give the description now, something dire had to be stopped from happening . that's great for you to understand that and those of us that were there, but that doesn't mean a damn thing to the american people. as we move through, you can see committee members don't quite understand what the situation of september, october, november, and december of 2008 was like. please take moments now to

describe as fully in detail as you can what were the projections that could happen to not only the united states but the world in a berd of 24 hours, 48 hours, 72 hours, and how that would comport to what life would be like if no action were taken. >> congressman, thank you for the question. one of the issues we dealt with at the time, the more explicit we were and -- >> mr. paulson. >> would terrify the american people and lead to an even greater economic problem. so as we were attempting to explain this, there was this congress flict. we -- there was this conflict. we didn't want to over-- overly scare people. >> well them the truth.

we have to deal with the american people and some of our fellow members who think this was a facade of some sort. that this didn't really happen. >> well, if you have a situation where a banking system is frozen and money can't move between financial institutions, what would ultimately happens is that every business, even businesses that seem to be solid, and small businesses across america, will not be able to fund their inventory, they won't be able to meet their payroll. when a financial system breaks down, the kinds of numbers that we're looking at in terms of unemployment, was much greater than what we are looking at now, people in the streets. and of course, people around the world, it is very significant. i remember talking with, for

instance, german leaders, who were explaining u?t people in the old east were unhappy with the big discrepancies in wealth but they at least believed in the system and believed in some form of market-driven capitalism, but that if we had a meltdown of the system, this could even lead -- this could lead to chaos or people even questioning the basic system. >> let me put it a little more consensus sinkly. mr. -- a little more suscintly. >> i was on wall street last week and we talked about what could have happened if the president, yourself and others had not taken action. the one member i remember sitting at the panel described

it, as people talked about we would have gone back to the 16th century. we're being optimistic. >> well, i try not to use high peshly -- hyperbole and describe something that is impossible to prove now that it didn't ever happen. but at least when it happened, we had this debate, i had someone say look at everything that's been in place since the great depression. we certainly couldn't go through that again. i looked at it the opposite. i looked at it in a world where information can flow, money can move with the speed of light electroncally, look how fast this liquidity went, looked at the ripple effect. looked at when a financial system fails a whole country's economic system can fail. i believe we could have been gone back to the sorts of

situations we saw in the depression. i remember asking ben bernanke what he thought the world would look like, and said well just take a look at what happened in the depression. but i didn't spend a whole lot of time thinking about that because i knew it was going to be very bad, and i never wanted to experience "very bad." i didn't want to ever get to the point where we could really understand it. >> the gentleman's time has long expired. >> mr. paulson, there are those of us that don't agree with your analysis that going about solving this problem was the correct way. you know, if you look at the -- you talk about a meltdown. we have 9.5% unemployment right

now. if you take into consideration those who are working part time or who are getting unemployment compensation, it is close to 16.5%. you are talking about how you saved the economy and saved the world, we do have a meltdown going on right now, and if you don't believe it, go out to indiana and look at some of the parts of my district. let me ask you a couple questions. first of all, i asked mr. bernanke if he talked to you about telling mr. lewis if they use -- used the mac clause that they were going to be fired. and he said he didn't give you any instruction about that. yet when you spoke you said in your testimony that you were confident that that was a strong opinion of the federal reserve. how did you know that? i mean, there must have been some communication. how did he know you were confident that was the position? >> i would say two things, first of all, you are right, i don't

remember ben bernanke ever suggesting to me that -- >> you don't remember? you know mr. bernanke said theo same thing. he said he didn't remember. >> so you ask where i came away with that view. and i participated in a number of meetings and calls where chairman bernanke participated. there were lawyers from the fed, staff lawyers from the fed, people from treasury. and i came away sfr that with those discussions. >> if you came away w with that from those phone calls, someone must have suggested that you can't do this, and i would suggest that it must have been mr. bernanke. >> what i would say to you is i don't know whether someone in those conversations or calls expressly said it or if my understanding came from just the tone and the forcefulness.

>> you know, you are a very smart man. i don't think anybody is buying what you are saying right now. you guys were on a phone call. there was a number of conversations and e-mails, and you are saying that you didn't get any suggestion from mr. bernanke that he wanted you to let them know they were going to be fired if they didn't do what you said? >> i said i clearly came away with the understanding that this -- from the e-mails and some of the other things that that was the view of the fed. but i also don't remember ben bernanke ever talking about that possibility with me. >> it is interesting that both you and mr. bernanke can't remember. let me just read something here that really concerns me. first of all, they expected a $9 billion liability. a few days later they found out it wasn't $9 billion it was $12 billion, and they were concerned

they weren't going to be able to swallow all of that and that's why they said they wanted to use the mac provision. you didn't want to make any of this public. why is that? >> this only came up in connection with ken lewis asking me for a letter fwr treasury. what i said with a letter from treasury is, any kind of a specific agreement here. we haven't decided on the size of the program, the dollar amount. we haven't decided on how many assets. so if i gave a letter, all i would be saying is what i've already said publicly. 13ready said publicly. systemically important and we are committed to not having a

failure. let me finish. >> don't use up all my time. >> what i said was the opposite. i said if we give you a letter we will disclose it. >> please pull the mic closer. >> if we give you a letter, we will disclose it. >> "bernanke and paulson insist lewis rely solely on their assurance of verbal support because as paulson told lewis in a written pledge, quote, would be a discloseable event, and we do not want a discloseable event." and he goes into more detail than that. >> let me say that lewis has testified clearly before this committee that i never, ever suggested to limb -- him that he delay any disclosure. what i said to him was something i woo expect you-all would -- would expect you-all would agree with. which is, if you are going to issue a letter from the treasury, i am not going to issue a letter without

disclosing that letter, and i don't see the point of a letter because we have no specific agreement. there is nothing so write down. we don't have the size of the program, we don't have the dollar amount, and we have already publicly said -- >> you gave him verbal assurance, but you wouldn't put it in writing. >> i gave him verbal assurance that we were committed to working to get something done. >> why didn't you want to put it in writing? there are several places where he said you would not allow it to be put in writing. you didn't want people to know. you didn't want public disclosure. why not? >> i atempted to answer it before and i will try to answer it again. >> can we ask the witness to speak into the microphone. i can't hear him. >> sorry. i had already said publicly, as had the fed, that we were working to prevent the failure of any systemically important institution, and bank of america was one. now, going beyond that, we had made it clear that we were going

to be working with him to develop a support program. but we didn't have a size, wea didn't have the amount of assets that would be recovered, we didn't know what form of equity and how much. we had nothing definitive to stay. i said, i don't see how a letter is going to be meaningful or helpful, but if i give you a letter we're going to disclose it. that got twisted around to say i didn't want a disclosure. >> i know my time is up. here's what he said, "i was ininstructed that, quote, we do not want a public disclosure." that's what he said flat out. >> well, he has testified something different before this committee. >> mr. chairman, i'm sorry, his time has expired. >> i have a procedural question. and forth. is there enough slack in the mic that he could pull it that direction. >> thank you very, very much.

mr. paulson, we're having problems hearing you. the gentleman from massachusetts, mr. lynch. >> thank you, mr. chairman. mr. secretary, i want to go back to the line of questioning suggested by mr. jordan of ohio. i also sit on the financial services committee. you testified at least a half dozen times before that committee prior to the t.a.r.p. vote. you did, indeed, in all of your testimony, along with mr. bernanke, express the intent, the central intent of this t.a.r.p. program was to buy toxic assets to get the economy moving again and get folks lended again. and you pounded away at that central theme. and what mr. jordan was saying is that a matter of days went by and you changed completely the

focus of that program. now, in my opinion you misled congress. whether you were asked by mr. baucus in the financial services committee he said, wouldn't it be more impactful -- i'm paraphrasing -- to just inject the money into the banks? and what was your response? >> i believe i said -- >> you dismissed that in oach committee, which led members of congress to believe you weren't going to do that? now if you had said, i have a plan, i want to take $800 billion in taxpayer money and i want to give it to my pals in the nine biggest banks in america, how many votes do you think you would have got up here? that's why i think you have mislead congress.

let me ask you something else. you had a conversation december 22, i believe it was, with mr. lewis. according to his testimony i believe you were on a bike ride. he says that you spoke to him, that you were on a bicycle, he was able to catch up with you. >> what date was this? >> december 21 or 22. >> i happened to be out skiing. it would have been an interesting bike ride. >> well, whether you are on skis or a bicycle, that's not important. i want to know what you said. what did you say to him directly? give me the jift of this conversation. paraphrase it if you must. >> which conversation on the 21st? i had two conversations with him

on the 21st. >> the one in which he says you stated that there was a real threat -- he says there is a possibility, i won't use the word "threat," but he could be removed and the board could be removed under the emergency fed power, not by treasury. that conversation. >> ok. this conversation is one where i said, number one, that the treasury and the fed have communicated publicly that we are committed to prevent the failure of systemically important institutions and bank of america definitely is one, number one. secondly, that we believed that the exercise of a mac clause would show a lack of judgment. >> this is what you said to him?

>> yes. >> and if he did so, it could destabilize both the -- destabilize both merrill lynch and the financial system, and under those circumstances the federal government could replace the board. >> did you have a conversation with mr. bernanke prior to this that you were going to have this conversation and put it on the line like this? >> the conversation i had with ben bernanke -- i did have a conversation before this with ben bernkifment i had received a call from ken lewis telling me that he had been giving more thought to the situation, and he and his board were increasingly concerned, and were considering exercising the mac clause. and i had a conversation with ben bernanke beforehand. but i will say to you i had so

many conversationed with ben bernanke, i have trouble extinguishing one call fromñ5t another. the call i had with him was not one where we were saying, now, let's get our script down. i had a call with ben bernanke, told him i aheard from lewis, then i got back to lewis with the conversation i just had from you. >> let me ask you, either on skis or bicycle, was anybody with you when you made this call? >> no. i made the call from my living room at a ski cabin in colorado. >> there was nobody else in the room at the time? >> unless one of the kids were running through, one of the grandchildren. other than that, i think i was by myself. >> my time has expired. i yield back. >> thank you very much. i now yield to the gentleman from florida, mr. mica. >> thank you, mr. chairman. mr. paulson, you just spoke about some conversations with

mr. lewis. if i could just clarify. i guess mr. lewis claims that he first learned of the $12 billion financial loss of merrill lynch on december 14, which was nine days after the shareholder vote. now, you just testified that he called you at that point and told you he was strongly considering backing out. is that what you were referring to just a moment ago? or was it a conversation later on december 21 when lewis informed you that he was considering backing out because of financial losses at merrill lynch? there's two conversations. one earlier which is shortly after board meeting when he first indicating and the second time. do you recall? >> there were multiple conversations.

the first call was the first time i had any inkling of the problem was on december 17. >> he said on the 14th that he called you, and that's what we have information of. then there is another conversation on the 21st that he wasnx& moving toward getting ouf the deal because of what he had learned, and he said that is when you threatened to remove him and the board of directors at bank of america. do you recall threatening him in one of those conversationed? >> i don't recall that as a threat. i clearly recall saying to him as a threat --

>> so you did not threaten him board of directors? >> no. what i explained to him today is that the fed could remove him or the board of directors. >> so you told him all hell would break loose if they backed out of the deal. is that correct? >> i didn't use those words, but i sure told him it would be a serious problem and it would create financial havoc. >> there were back upplans. did you disclose the backup plans or mention you had any alternative to lewis? >> i don't know what you are speaking of in terms of backup plans. >> it is my understanding you had information relating to a possible backup plan by british regulatory authority and that there were backup plans if, in fact, they didn't go through

with the deal. you are not aware of any backup plans? that was the only option? >> the i don't know -- you know, we certainly had -- we had our t.a.r.p., and we were low on capacity in the t.a.r.p., but i don't know anything about british -- >> i don't have informationa1 - we have information that they have the shareholder competence and that a vote will be approved with tomorrow's vote. if a vote is approved, m.l. will authorities currently in place within the united states. additionally it is reasonableóto expect that m.l. will provide

necessary support to approve stemic destruction. are you aware of that? >> not that i'm aware of. >> and you never threatened lewis to remove him or his board? >> you keep putting words in my mouth. i told you three times, and i keep telling the committee repeatedly that of course i told lewis that the 23ed fed had the authority and do replace lewis and the board. >> so you did tell him that you had the authority to remove him and the board? >> i told him that the federal reserve could replace him and the board if he pursued the

course of invoking the mac. >> and again, for the record, you were not aware -- dwrure telling this committee you are not aware of any contingencey or backup plans other than your holding mr. lewis and the board to the deal that you wanted to impose? >> i'm saying that my plan and my preparedness was to get ready with the support package when the company announced the earnings. >> mr. chairman, i have information contrary to what the witness is testifying, and i would like to ask unanimous consent that that be made part of the record. >> wocx -- without objection. so ordered. >> i yield my time to the gentleman from illinois. >> thank you, mr. chairman.

>> what didn't happen with lehman, i believe you used the expression, "moral hazard" which is bailing out financial institutions, inviting more risk taking. is that a term you would not use anymore? >> no, i think moral hazard is a very important concept. and i do think where we have a regulatory system that's in balance and where you have the winddown powers, and hopefully congress will pass, that let's a nonbank institution fail without disrupting the system, that it will be -- that moral hazard will have more teeth in it. >> so why was lehman a moral hazard and not fannie may, freddie mac, a.i.g.?

>> i would actually thank you for the question. i think if tim gite miller, ben bernanke, and hank paulson had found something legal we could let me explain the difference. in lehman brothers, there was a liquidity problem and a capital problem. we were unable to find any buyer and come in and get the acquisition on an assisted or unassisted basis. so although the fed was unable to loan against lehman collateral and did loan to help lick which -- liquidation, that

would not have saved behr sterns. jpmorgan was able -- jpmorgan, the fed was able to make a loan and assist in the acquisition. jpmorgan took care of the capital problem. they were able to guarantee the trading book while the merger was being voted on. a.i.g. was a different situation, because in a.i.g. the perception at the time was, this is a liquidity problem only because they had a number of stable regulated insurance companies that were per seeved to be well capitalized and were collateralized for the loan. so we faced a situation in lehman brothers where the government did not have

wind-down powers, the government didn't have power to inject capital. that came after we got the t.a.r.p., and we didn't have a buyer. so there was no power that we could find to solve both the liquidity and the capital problem. >> did bank of america request your assistance to purchase lehman? >> did bank of america? >> yes. >> we went to bank of america repeatedly and bank of america asked each time for more assistance, and we had the -- we had the private sector ready to fill the gap, but bank of america, in my judgment, was never serious about it, because each time they showed less interest, and it turns out they were interested in merrill lynch. we had another buyer, barclays that we thought was going to do

the deal right up until sunday morning. >> let me ask just one more question given the short time frame. most of these other groups that were saved -- fannie may, freddie mac, a.i.g. -- the management was replaced. lewis wasn't replaced. was his situation different? in short, did you promise him he could keep his job if he did it this way? >> absolutely not. these decisions -- for the government to come in and take the responsibility away from the board and replace the board, there has to be a very good reason. fannie may, freddie mac, a.i.g., there was good reasons. i also looked at this very practicing matcally -- pragmatically and said, these are big institutions to run. is he capable of running this

institution? you also have to say, who else is suitable to come in and run these institutions? >> i appreciate that. and my time is up. you can see how that appears to be splitting hairs of who you fire and who you don't fire and it could be construed to someone's first thought that they have to listen to whatever you say and they have to play ball or because you have such discretion, those who play ball keep their jobs, and those that don't, get fired. >> the gentleman's time has expired. the gentleman from utah. >> thank you. and thank you secretary paulson for being here. i appreciate it. when this company experienced enron there was outrage from coast to coast, people that were not informed about the material things that were happening and not happening within that company. because the shareholders were left in the dark. my concern is the lack of

transparency to the shareholders and to the public at large, not only as investors but as investors -- as shareholders, if you will, being the taxpayers of this country. so the question i have, i want to follow up on mr. jordan's question, a little deeper into why you did not get a little agencies. for example, the s.e.c., why didn't you feel compelled to share information with them? >> first of all, we were working with the regulators that were involved in putting the financial assistance together. that was the effort. but the responsibility, it is not a treasury secretary's job to get between a compp -- company and the s.e.c., for instance. i've been around long enough to know these are critically important decisions, and that's the responsibility of a c.e.o.

working with his general counsel and with the regulator. >> but you were a participant in the financial stability oversight board. one of the requirements with t.a.r.p. was the final stability oversight board. you had two meetings and you did not inform the s.e.c. nor the comp troller of the currency. why is that? >> i take exception with that. at the january 8 meeting i sat down with chris cox and explained to him -- it was still early, and we didn't have the package together but we were working on it -- i gave him the details to the extent we knew them at that time. so on january -- >> this thing was fully baked at that point. let me go back -- pardon me. let me go back to what attorney

general cuomo said, quote, "he told congress that hank paulson informed this office that he did not keep the s.e.c. chairman in the loop during the discussions and negotiations at the bank of america in december of 2008." is that true or not true? >> what attorney general cuomo's office said was, the question was in december. i also explained to the attorney general in january in that -- >> in the -- is the attorney general's statement true or not true. "informed this office he did not keep the s.e.c. chairman in the loop during the discussions and norks with the bank of america in december of 2008." >> in december i did not. that's absolutely correct. .

>> there was an understanding we were going to work to get something done, but we had

nothing specific to bring forward. the other point i made was that on january 8, as his number of the financial stability oversight board, i gave chris cox debriefing. >> i think what needs to be explored further is that i was not here, i was a freshman. i would have voted against tarp and think it is an absolute disaster. i think the congress before this did set up this financial stability oversight board to precisely make sure there was not this audacity of arrogance that would be held in just one or two persons' hands and it would be more involvement from other agencies that are relevant. to exclude the one agency that is tasked with taking care of shareholders, i think it is inexcusable and we need to dive into it further. i see that my time is expired.

thank you. >> i yield five minutes to the common from the fairmont, congressman welsh. >> thank you very much, chairman. i was on the call in september or october when you informed congress that you in ben bernanke informed us of the dire conditions in the financial markets. we were going to do three things -- stabilize the financial system, reform the system eventually, and repays a taxpayer. is that more or less a fair assessment? >> yes. >> when i hear that concern about repaying the taxpayer, when the deal with bank of america went through, the federal government and you were very much a part of this and did two things to help in a

stability effort. one was the tarp payment of $20 billion. second was the asset backing of these securities for $120 billion. the intention was to did the taxpayer get repaid on the $20 billion tarp payment. some firms have repay debt and there would be an 8% interest rate paid to the taxpayer in preferred stock, correct? >> on the second round, it was a 8%. >> there was $118 billion backing of u.s. government in a non-recourse loan providing assurance to the bank of america shareholders and the owners of these securities that the federal government would make good on them in the event there was a collapse, correct? >> yes. >> my understanding it was the intention of the treasury department that the taxpayers be

compensated for providing this guarantee, correct? >> yes. >> that guarantee was going to be, as i understand it, in the form of a fee of $4 billion. >> i've forgotten the precise number, but that sounds right. >> that would be arrived at in the ordinary course of what was the customary fee for such a guarantee program, correct? >> yes. >> mr. lewis, as you understood in your capacity as treasury secretary, that in fact, the american taxpayer was on the hook to back stock -- to backstop those loans if they went sour, correct? >> i clearly understood we had a term sheet and the deal was not finalized yet. i left office before it was finalized. >> i understand that, but a deal is a deal. you shake hands and that is all you need. i think that is the way most

americans would be, right? >> on this one, i know where you are leading, i just was not -- i don't have the details because -- >> i'm not asking the details. you, as treasury secretary of the united states government, the person filling the shoes of alexander hamilton, would agree that when you give your word, you are going to keep your word. >> i would expect we would keep the word. >> i think you would, and i give you credit. but mr. lewis is saying there is no deal, he did not sign it, though he benefited from it, he does not want to pay the taxpayer for the benefit provided by the u.s. taxpayer and the government. is that the right thing for him to do? >> i did not know what the circumstances are. >> weight. there are a lot of things you did well. i understand your trying to

stabilize the situation. this is a simple yes or no -- we, being the treasury department and u.s. taxpayers, $128 billion of our money at risk. bank of america took great advantage of that because it provided stability and confidence. now mr. lewis he does not have to pay for because someone forgot to have the term sheet signed. is that acceptable to you? >> can i explain why i am hedging on this? i was part of doing a similar deal for citigroup. we had a term sheet and it was very difficult to get done. citigroup wanted to get it done at least as much as the u.s. government. it was hard to get it done. what i don't know is if the circumstances are as you presented them -- there would be one answer then. but i don't know why because i wasn't there. all i know is we have a term

sheet, i left government, and the deal did not close. >> here is the bottom line and this is one of the frustrations -- all lot of us voted for that program because we felt it was the lesser of evils. we did not want to. i remember on the phone call, you are actually quite candid in saying the last thing you wanted to do was go to the american taxpayer and ask for a bailout. but it was your honest judgment that if we did not do it, there would be a calamity that would ripple across all of america, so you went ahead. we did the same thing with bank of america and now mr. lewis wants to benefit from the taxpayer and treasury commitment and does not want to pay. most americans think that a deal is a deal and they should pay. >> i would say if it was a deal, i would think he should pay. no one was tougher than i was in trying to protect the american taxpayer. no one is looking at these programs in hindsight more than

i am in wanted to get the money back. >> this is not hindsight. this is a deal with a wink. the american people made a deal with a handshake and mr. lewis had his fingers crossed. >> i don't want to take the other side of your argument. i'm just saying i don't know why the deal did not get done. it could not get done because was so complex, people couldn't figure out how to get it done. it could not get done because he wanted out or the government wanted out. i don't know the answer. >> the gentleman's time is expired. >> thank you very much. >> ideal time to the journal on from ohio. >> thank you, mr. chairman. thank you for being here and your description of the environment in which you were in. and your actions. when we have hearings, we try to

do two things -- find out what happened, and find out should it have happened and why did it happen. that is the oversight. why it happened is a factual issue. on the factual side, what we hear from you is that you do not deny you told mr. lewis do not renegotiate and do not back out. you disagree as to whether or not it was an actual threat for his removal being the consequences, but, you told him don't negotiate and get back out. though why you say is for the american people, you believe it was irresponsible, the interests of the shareholders of bank america where the interest of the financial markets and $12 billion is not material for you to believe a material change had occurred. you cite your vast experience. you also say you have taken

action there has been removal before and cite the actions of fannie mae, freddie mac, and aig of removal. those were so different. yet failures of organizations, not just merely a business deal going forward. they are not comparable. i don't think you have an instance where you can find a comparable threat from the treasury secretary for the purposes of removal of a ceo for a business transaction to go forward unless there are other threats you put forth we are not yet aware of. the thing about your vast experience that strikes me is that you have no exact science with your vast experience. you cite the impact on the markets, your view of this deal, the impressions of how markets might have an impression. that's not a sign. there is no accounting problem from what you made your

decision, no data point from which you made your decision, and with all the responsibilities you had, which include skiing, there is no way you could have been up to speed on the economics, due diligence and specifics of this deal. to the extent of someone to intervene enough to say do not renegotiate this deal and do not back out. i agreed with rep lynch. i absolutely believe you misled congress. i want to take you back to the meeting you had with dick cheney and ben bernanke where you came before the republican conference to explain your $700 billion bailout deal which i voted against. you came forward and said you're going to buy toxic, illiquid assets. if these were not removed from the market we would have calamity. the crisis was those toxic assets were causing the market to have instability because the markets had the impression these toxic assets, having no value,

raise questions as to the value of the institutions. i thought it was a crock then. i voted against it. you turned completely away from the toxic assets and i believe you are misrepresenting congress. i don't think it was an issue of asking for flexibility. i also voted against it because the deal was you did not tell us who was going to get the money, what the money would be used for, how much, and the part that was crucial to me was you did not step forward and say these are the changes that need to be made in our regulatory systems to make sure this does not happen again. the other thing that was important is i believe we were about to participate in the largest theft in history. i come from ohio, ground zero for the mortgage foreclosure crisis. when you were standing in front of us asking for $700 billion of taxpayer money to back a bailout of what you call toxic assets for mortgage-backed

securities as a result of the mortgage foreclosure crisis and credit default swaps, i realized u.s. you're giving -- you are asking for a bailout of people who were systematically defrauding people in my community and people were buying houses, refinancing houses with over valuations. i had a great concern as did my community that the underlying collateral for these mortgage- backed securities was not there. that is ultimately what took down the valuation of those securities. my question is, in your vast amount of experience, since you were in this position of july 2006, while the mortgage foreclosure crisis was raging throughout the country and your description of people losing their homes was happening then and not just in 2008 when he stepped in with the tarp program commodore record foreclosures, securities were traded with significant questions of the underlying value of the

collateral, subprime mortgage lending was spiraling, refinances were increasing based on inflated and escalating property values. where was your vast experience then? what do you believe we should have done in 2006 to have stopped it? >> first of all, you are making the comment that i did not see this crisis coming to the extent it came, you are absolutely right. i, like many others, underestimated this. what i did do, very shortly on arriving, was began preparing for a financial crisis. i began meetings with the president's working group on preparations and, although i would take exception to many of the things she said, i began working on a plan which we announced in march, well before it went to congress, to overhaul

this outdated, and adequate regulatory system. we came out with that in march. we came out with recommendations we need the authority to wind down these non-banking institutions if they get in trouble. the only other thing i would say is that i am not disputing the fact that when ben bernanke and i came to congress that we understood illiquid assets -- they were at the heart of the problem of the financial institutions. that was a part of the problem. it was the major cause for the losses. our approach was to buy this illiquid assets. that was our primary approach. we learned as the situation began to crumble all around the world and was clear we had to move quickly, we need to change

gears. i made the decision that when the facts change, you need to move quickly and change. the only point i was trying to make was not to say we did not come to congress and ask for a liquid assets, but thank goodness when we did come to congress, we asked for flexibility and congress gave it to us. the last point i would make is the people i care about are the same ones you care about. the american people, the people who will lose their jobs and the tragedy is they did not create the problem. the big banks created the problem. the problem was created not by then, but they would be the one who would pay the greatest penalty if there was a collapse. that was what i was working for. >> the gentleman's time has expired. i yield five minutes to the gentleman from california. >> -- the gentlewoman from

california. >> if the american people did not create the problem, who created the problem? he said the people of america did not create a problem. tell us who created it. >> -- >> were the banks involved? >> there is so much blame to go around -- >> give us a few people. a few institutions. >> access is had been building up for a very long time. >> i just want you to give me some names. i have a limited amount of time. what we include the banks? do we include anyone who got tarp funds? >> financial institutions, regulators, investors. there are plenty of mistakes by a vast multitude. >> you would be interested to know in the financial-services committee yesterday, all the

banks almost to the person indicated they were not responsible for this. but let me move on. do you use e-mail? >> no, i do not personally. >> you did not personally or professionally? >> i have never used it for any business communications. >> while you were secretary of the treasury, you never used e- mail? >> no. >> how to communicate? >> telephone. >> did you know mr. lewis before your secretary of the treasury? >> yes. >> for how long? >> four or five years. >> to view him socially? >> no. >> but professionally? >> yes. >> when you gave bank of america $15 billion in october, he did not want it. we were told. why did you give it to him? >> that is certainly not my

recollection. let me tell you why we gave it to him. >> briefly because i second question. >> after we got the tarp authority and the system was on the edge and we need to move quickly, we decided the only way to do something dramatic and make a difference was to put out quickly and get out into nine systemically important, major institutions. we called them together, the regulators let them know what the recommendation was for each institution. mr. lewis, like other ceos there, willingly took the capital because they realize they had as much to gain as anyone from the stability of the system. >> so you gave them $15 billion in october and another $10 billion in january and another $20 billion on january 20. it is interesting that equals about $45 billion.

they paid $50 billion for merrill lynch. in many respects, i feel like the taxpayers of merrill lynch for bank of america. >> i would say this to you -- the taxpayer has benefited in two ways. first of all, i would be very optimistic the taxpayer would get all that money back with a profit. second, what the taxpayer got was an averted calamity. if we had the financial system collapse, the taxpayer would be the people who are hurt. >> this press release went out from your office as secretary of the treasury on january 16. this press release talks about the package to bank of america and specifically says that treasury and the fdic will provide protection against the possibility of unusually large

losses on asset pool of approximately $118 billion of loans. this was a done deal on january 16. >> -- >> when your secretary. >> we worked out the details and put out a term sheet. but the deal was not closed-end. >> how could you possibly say this publicly if it was not closed? were you giving bank of america something they did not have to agree to but give the appearance they had something and then they could renege on that? >> i have no idea what happened after i left. >> how professional is it to put out a statement in a press release that something has been consummated when it has not been? >> -- >> that is like contracts 101. >> i am getting it from both ankles year. people want me to put out letters when there is nothing to

disclose and here we had -- we communicated to the market we have a term sheet and the market knew that this deal was not closed yet. we announced the deal with the intent of closing it. why it did not close, you will have to ask people who are at treasury today. >> i would certainly hope we would question for their who was responsible at that time for these negotiations so we could have them come before the committee. >> i yield five minutes to the gentleman from indiana. >> had tim geithner signed off on that memo for the terms of the deal? you were just about the transition between treasury secretaries. had tim geithner or the incoming administration signed off on the tentative terms? >> as you know, tim geithner was the treasury secretary- designate. we wanted there to be a very

smooth transition. i posted him generally on a number of matters, including that one. but i never viewed him as a decision maker and i did not go to him to sign off on the details of that term sheet. >> i have a larger question i want to pursue, and i want to correct the record on some things i believe have been misstated. as somebody who voted for all three versions fortarp and took an incredible political heat in the middle of a tough race, i believe it was the right thing to do and i would do it again with some additional caveat. there has been a lot said today about the restrictions put on you. in fact, you came, not very tactfully in my opinion, and said you wanted a blank sheet of paper with whatever you want to do. initially, you did not need any republican votes.

others in our caucus that the -- voted for an additional 20 pages of things. we left there for the treasury secretary and any others to do what they think they needed to do. we can try to pass blame or say what we want, and we probably need to tie it down more in the future, but at the end the day, our conference, after hours of debate, knew that given the nature of the crisis we had signed a blank check for good or bad. we were going into an election season, we were about to leave town, it was getting highly politicized and things were changing. i'm not defending the decision she made, i'm just saying it's a little bit much for members of congress to claim there were all of these guidelines in place. we knew full well that an opt out clause -- that said, clearly you miss less and would probably would not have had the votes even though we knew it was there

because we understood it was toxic assets and we did not believe you're going to take over and the way this is going to evolve -- had we known that, the bill would not have passed or we would have put tighter restrictions in. there was a verbal misleading. if anyone read the document, it gave you a blank check. i don't understand why people were saying we were not in a crisis. every 40 hours for three months, simply was calling me and telling me a bank was calling in a revolving loan, the mark to market was tightening up assets and thanks for having assets dropped. people who were never late did not know how to get apparel dollars. major corporations were having to borrow overseas from third- world countries to meet payroll. i don't know where it would have gone. i recommend -- i represent a district that has the highest unemployment in the u.s.. we have been first all way through. it is 57% manufacturing.

there is 17% unemployment. we were headed to more than we are now. i'm not happy with where things are, but it could have been worse. it is relatively stabilized and i think we can have differences of opinion of how to do it. here is my concern about what i saw. when you intimidated, at the very least, mr. lewis, we went from toxic assets and loans and your stated goal to us was we did not want the government micromanaging and directing. that was the next step. then, when you handed over, you thought you had a process but do not know what happened after that. since then, we have common stocks in banks and we are telling them no bonuses. tomorrow, we have a proposal, now that we have taken over stock in general motors, to tell them they cannot close dealerships.

this is the problem when government starts to take over. if you were treasury secretary now, where would you have started to draw the line? he started to walk into it with mr. lewis, but which have moved to common stock? do you believe this has gone too far? what lessons can we learn from what we have seen here? right now, the government is in so deep that getting out will be very difficult and we are micromanaging and congress is going to start to tell people what kind of tie they can buy if we're not careful. >> to me, that is the right question. one of the things that was most difficult for me is that i came to the job believing totally, and i still do, in markets and free enterprise and not wanting to see government overly involved. i was forced to make some

decisions which were very objectionable, but they were better than the alternatives. i thought the decisions we made were going to ultimately help to preserve the markets. i think the key question is not only how you get into these programs, but what is the right exit strategy? what's the right exit strategy and what is the system stable? when do we get out? i do not think it is appropriate for me, as a former secretary of treasury five months out of the job to not be any closer to it that i can and now to be saying more than that. i think everyone here understands that government has been forced to do things, i think forced to do things not only by an unprecedented crisis, but forced to do things because

we did not have the tools we needed. there was no wind down authority, there is nothing to deal with the failure of a large non-banking institution. we had a really outmoded, outdated regulatory system. >> but it is fair to say that even under great pressure, you did not take common stock. >> i did not. >> the gentleman's time has expired. we have seven votes on the floor, so the committee will recess until 1:30. we will return at 1:30.

>> tonight, spend an hour with the "wall street journal's" technology: this. >> tonight, prime minister gordon brown talks about afghanistan and focuses on helicopters and the current operation, the financial crisis, british scandals, and local issues. that is tonight at 9:00 on c- span. >> the nation's governors continue their annual meeting today in biloxi, mississippi. on the agenda this afternoon is a session on emergency preparedness. speakers include: security secretary, janet napolitano and

fema administrator, craig fugate. we have live coverage of the event in biloxi, mississippi, expected to get underway shortly. while we wait to get underway, we have remarks from the governor o'malley who was with us to talk about issues facing this state, including the economy and health care. host: we have joining us is >> a recent account says marilyn does this host: maryland is facing a shortfall, a state faced with budget devastation, how do you face that? guest: this is not easy and all will be painful. we have reduced and cut

spending by 3.3 billion over the last years, as a state budget that was once $15 billion. it will not be easy, we will put maryland first and we will protect the public education that has made maryland the number one school system in america, according to american-state magazine. and we will push to the state weather the other side of this recession. we are in this together. and steve, i am glad that the people of maryland two years ago did some tough things to restore fiscal responsibility. otherwise this gap would be something similar to what california is facing. but we will be able to make it in maryland and continue to

move forward. host: governor, you know that california gets a lot of attention because of its devastation, are there lessons that other states can learn from what governor schwarzenegger is doing out there? guest: i believe that progress is possible if we have the guts to raise taxes. sometimes that involves more often in these days making very unpopular cuts. but everything we hope to achieve as a nation and on the state level, for growing middle class, and public education and expanded opráy@@@ @

they locked in things like proposition 13 and other measures that made it impossible for their leaders to maintain fiscal responsibility. it is understandable and i guess human nature that we all want to see increased services and lower costs, but that's not the way the world works. >> he spent time -- congress may mandate states to spend more on health care. will maryland agree to that? >> that will be a big challenge for all the states. i think all governors would agree president obama is doing the right thing in forcing us as a country to deal with health care. these kinds of increases, 17% a year, are things we cannot sustain. small businesses cannot sustain it. families cannot sustain it.

the government cannot sustain it. president obama is doing the right thing by forcing us to tackle this issue. the house has come up with a version of the be very expensive to states and the senate is looking at a version and at some time, the governors hope we can join with the president and take the lessons we have learned in the states, both in terms of controlling costs and improving quality. at the end of the day, come up with something that works. the president's style is one of defining the goals, which in this case is better, more effective, more accessible health care for all americans. congress has taken their best shot at coming up with the plan. but we have a long way to go and the president wants to get their a short time. i believe the governors are very anxious to be heard and share their best practices for the things we learned with the president. but to simply show the cost to the governors is something i believe -- i don't believe

president obama wants to do. he wants to tackle this together and without this sort of an unfunded mandate we have seen in the house version. >>host: you can call the numbern your screen if you have a question for the governor. half of your colleagues are not in mississippi for a variety of reasons. what impact does that have on this meeting? guest: we always like to have as large an attendance as possible. but there are some governors, the governor rendell right now, they are doing what they are elected to do. they are focused on fiscal responsibilities of the families in pennsylvania are able to make their way forward in these tough economic times. none of us can blame governors for not being here if that is their situation. i was surprised at the number of governors who are here.

we have very good conversations about health care and we are also going to be creating for the first time a task force -- excuse me, a special committee on homeland's security. that is something that is long overdue from the governor's association and the proposal has bipartisan support. we have critical mass here. we have a lot of governors to have come from all over and we look forward to hearing from our former colleagues who are running departments for president obama like janet napolitano at home and security as we head into hurricane season. host: pennsylvania is having its first payless payday for workers. will that happen in maryland? guest: i don't believe it will happen in maryland. but we have to do some difficult and painful things. when we have to go to the budget cuts last year, all of our employees were asked to absorb

some furlough days. these things are not easy. we're going to be taking more cuts. but we will not be sending out ious like california has done and i believe we have the wherewithal to maintain the aaa bond rating by being fiscally responsible so we could have such a strong state where education is concerned. we have for years in a row with 0% increases in college to engine for kids in the state of maryland. that is all a result of maintaining fiscal responsibility, something very tough in these difficult times. i do wish governor rendell the best and he's a good and courageous man. people pennsylvania are lucky to have him. i know that he is willing to do the tough things necessary for the families of pennsylvania. host: we have a caller on the phone from baltimore. >caller: i'm calling from

baltimore, md. guest: where in baltimore? caller: baltimore city. i recently read an article about the state of transit. they were indicted for insurance fraud. they found out they had committed fraud against the state and against the victims of the citizens of the state of maryland. i would like to know what office of the state of maryland government would oversee this and correct this and resolve the matter of the insurance fraud committed against the state of maryland transit and its citizens and the insurance companies and subsidiaries that failed to provide protection and service to the citizens of the

state of maryland that were injured or hurt by the state of maryland transit administration -- >> that was the governor of maryland joining us this morning. we will take you live there now from biloxi, mississippi for a panel on emergency preparedness. >> we made presentations to a number of distinguished public servants and private sector individuals around country were nominated by their governors for distinguished service awards. there are four who are not with us today but i would like to mention briefly. i would like to thank the governor's for their recommendations. the secretary from the state of connecticut has worked through a budget deficits and worked on crafting a budget that streamlines the state government and eliminate redundancy and increases accountability while making bold investments in areas that need it most. the former chief justice of the

minnesota supreme court was the first woman to lead the state's highest court in 1998. she is a former legislator and victims' rights advocate who spearheaded the children's justice initiative which helps get abused kids out of foster care faster and improve public trust and confidence and access to justice and technology. in the private sector category, john walsh of florida, he has worked tirelessly for more than a quarter-century to educate the public in the fight to locate missing and abducted children. he is the host of the television series, " the america's most wanted" which provides an avenue for americans to participate in the abduction -- in the recovery of missing persons. will allen of wisconsin -- the founder of growing power, an organization that promotes the existence of food systems tree is a former basketball player and former. he is an activist dedicated to

supporting low-income and small family farmers and bringing healthy, affordable food to urban areas. on behalf of nga, we congratulate these four americans for their service to their state and country. this afternoon, we focus on emergency preparedness. the location of this meeting on the necessary -- on the mississippi gulf coast after it was devastated by hurricane katrina and read the serves as a reminder that we must always be prepared for disasters. while not all areas of the country face the threat of hurricanes, we need to be ready to face other disasters or terrorism. we saw this past spring that we need to be prepared for emergencies are rising from public health threats like the swine flu virus. today, we have with us are for more -- our former colleague in the current: security secretary, janet napolitano, who will lead

a discussion on, and security. she understands the challenges facing state and local officials preparing for the unexpected. her commitment to working with state and local officials and ensuring our concerns are heard and address will help prevent come out and help us prepare for all types of emergencies. in addition, we have several distinguished guests to talk about specific aspects of emergency preparedness. we will turn to our panel of speakers after that. let me invite my colleague, gov. o'malley of maryland to introduce the keynote speaker. [applause] >> thank you very much. it is my humble honor to be able to introduce a woman who many of us know as a friend, who all the snow as our colleague, and we're very fortunate as governors to have one of our own at the

department of home and security. if someone who has served as a governor and had to stand up in emergencies and answer the question of what do you know, what are you doing about it, and what should my family be doing? secretary napolitano comes todhs after serving as governor for six years where she implemented one of the first, security strategies in the country, opened the first state counter- terrorism center and spearheaded efforts to transform immigration enforcement. madam secretary, you will be hard to know that in conversations yesterday, governor for talking about the importance of our taking advantage of this moment in history and your understanding of how states work and their importance to him and security by creating our own special committee on home and security. silicon better interact with your department on issues, with hurricanes, counter-terrorism, fusion centers, or the like. already, secretary napolitano

has coordinated federal, state, and local, and security efforts and has presided over a large scale disaster relief efforts and readiness exercises. she has helped to launch a comprehensive strategy on cyber security, something that is very important to all governors. without any further delay, let me introduce our friend, our colleague, our partner and a person we are proud to have a secretary of common security, janet napolitano. [applause] >> thank you, the gabelli and governor douglas. it is good to be back with the nga and good to be back in mississippi. the last time i was here was with gov. barbara. we were doing reviews of what had happened after hurricane katrina, talking about emergency response and resiliency.

let me, i've might, let me speak briefly in a couple of areas. then i will open up for questions. i rely on governor douglas to be the. suffice it to say this is a unique time. this is a unique opportunity as far as states and the federal government. i'm not the only governor in the cabinet. i have three colleagues who have also served as governor. when i think you'll see later today, secretary sibelius' at home when -- at health and human services. the secretary of agriculture is governor vilsack. and the secretary of commerce is former gov. locke. we understand as the former governor's the importance of the state in how services actually get delivered on the ground and improve the quality of life's of

people we all represent. i am grateful to governors perdu and o'malley who serve on the homeland's security advisory committee. i am grateful to the governor rounds and warner for serving on a task force i created that i announced last week to review the color codes. you all know that at home and security, we have these color codes that have been around for a while. they have been around long enough to ascertain whether that's the best way to keep people informed as to whether that's -- as to what's happening or whether there are other ways. maybe we keep it for certain segments of the economy and maybe we change it. the task force has a broad ambition was no pre decisions. but it is time to review the color code situation. i anticipate the report back to me with recommendations within 60 days. i am also grateful for the work

many of you have done with me on particular state situations and emergencies. whether it is just a phone call or whether we have had to do site visits or the like, i view this as a partnership where we are supportive of you in the efforts you are making. i think you will hear more about that from craig fugate when the panel occurs. thank you. i also think that the nga establishing a permanent committee makes perfect sense. there are so many around -- silly issues around require linkage between the federal and state government and to institutionalize a way that can occur as communications can occur makes all the sense in the

world. i encourage you in your efforts there. i want to talk about three issues today. i want to talk about path id. i want to talk about information intelligence sharing at the law enforcement level. and i want to. h1n1. -- i want to talk about h1n1. we were all sitting around r around real id one year ago. everybody said this bill does not work for us. the benchmarks are expensive. it is not flexible. we want to be secure, we are all security governorsall butreal id was drafted without input from governors that have to implement that. it has flaws and it needs a fix. one of the things i did when i became secretary was engaged with the nga.

what is the fix? how do we fix real id silly me the security principles underlying it because we need a more standard form of identification that is more law enforcement secure. that was one of the 9/11 commission recommendations. we need to do it in a way for states to not only comply but accomplish it. wait to see if we could do it in a more cost-effective matter. hance was born path id. it has been introduced as a bipartisan group of senators and at its first committee hearing last week. governor douglas and i were on one of the panels. i thought we were reading. and dramatic. but there was another hearing going on and got all the press. in terms of impact on people, moving this bill forward this

year, this fall is very, very important. the real id deadline is december 31, 2009. my view is we need to keep the deadline as a hard deadline and have a real sense of urgency about getting this fixed in place prior to the dublin. what i am asking governors to do is not just write a letter or do a sign on with nga. that's a start. what i need governors to do is make the time to personally visit with your senators and congress people about this bill. the number is that 1261. it is co-sponsored by many others and we anticipate marked up in the senate by the end of the month. that means it will be moving. nga and, and security have taken

the time to do a real fix, which is what path id, it is a real security bill that will actually be implemented and we need to take the time now to get the fix passed this fall. i share that with you and ask for your direct, immediate, personal help on the bill. second, information and intelligence sharing. i believe this is one of the areas where the department of common security can provide real value added. here is what i have learned in my six months in washington dc -- there is a lot of intelligence and intelligence analysis about those who would seek to harm us, particularly in our homeland. that circulates around in washington dc. it circulates pretty well. i get a morning briefing every morning and get all the information. but what we need to approve -- we need to improve upon is how

information its share to the states so that states not only to get intelligence but also are improving their own analytical capability and capacity. not just intelligence sharing, but analytical capacity week to work on. i spoke a few months ago at the national conference on fusion centers. the method and going to use to do this and improve this is the future in -- diffusion center concept where you have federal, state, and locals call located and doing it in that fashion because sharing information on a real-time basis with the many thousands of law enforcement departments around the country, logistically does not make sense. having active infusion centers that can make their own independent just -- independent judgment about what needs to happen at the state and local level is a better way for us to go. i will be looking forward to working with you on how we strengthen the fusion centers

that we already have. that we make sure as a goal that every state has at least one fusion center. in addition to improving the amount of intelligence and analysis that is shared, that we also, on the receiving side, increase the number of people actually have the appropriate level of security clearance to review some of this information so that everything does not have to be scrubbed down to a non- secret level. it is improving the capacity at the state level and also at the federal level. this is a long-term initiative and will not happen overnight. a lot of it has been started that we need to mature and create a web, a security web for the country of information sharing and analytic capacity. that is something i will be looking forward to working with the states on in the right way.

i want to be conscious of constitutional and privacy protections. there are lots of issues we need to be conscious of as we do this. but all our efforts will be better if we are working more seamlessly in the information sharing environment. the third thing i would like to speak about is h1n1. i take my cues from the scientists and history. scientists and history tell us that when you have a new flu like h1n1, and it goes away, it will come back. we can anticipate and we should be planning as if it will come back early this fall from the southern hemisphere in some form, somewhat different than the form we saw this spring. the form we don't quite yet know and cannot say with certainty exactly what form it will be.

this is something i think we all need to be leaning forward on. as we saw this spring, where h1n1 really hit was school-age children. when you have to start thinking about schools and what you're doing with schools and whether some schools may need to shut down and of those children need to stay at home because the whole point of this is too slow or retard the spread of the disease, then you have issues about parents who need to stay home with their children. also do some homeschooling. the department of education is very serious about education should not stop if there is guidance at the school or the school needs to be closed. that means thinking about how you continue operations, how you continue doing things. we need to be leaning forward on

that now. why? the school year starts in a few weeks in many states. we have already seen some summer camps closed because of school. this thing transmits very quickly and we need to be leaning forward in a very aggressive posture. doing that, the meeting with the private industry sector and education leaders and making sure they have really thought through what they're going to do and how they're going to do it, that will not be wasted effort. even if h1n1 dozen, or comes back in a mild form that is negligible, these efforts are good preparation for other sorts of hazards that may appear from time to time. it is not wasted effort, but the urgency is now and the timing is now. if i can summarize my remarks, we need path id before december 31.

i need you to engage in the bill we have worked on jointly between governors and the department, and security. we need to be working together on the fusion centers and how we share and improve information sharing in the kind of environment in which we live. we need to all be leaning forward on h1n1 and preparing for its reemergence in the united states. that is timed with the beginning of the school year, which is also for some of you the same time as hurricane season. you need to be thinking through how you do emergency operations, response, and the like. if you are doing it in the midst of an h1n1 outbreak. those cheerful words, i will close with one thing -- i believe security efforts in this country have never been stronger. one of the things i know the

governors in every city is struggling with our budgets. security and public safety comes first. we want to continue moving forward with the efforts we have started, so i am looking for ways at our department at our level where we can provide more flexibility so security effort to keep moving forward even in the midst of the economic downturn. i think the governors of this country need to be congratulated for all the work that has already happened, post 9/11. it's a different country now that was then, but the threat is different now than it was then. the governors played a big role in making sure we are more prepared and because we're more prepared we do not have to live in a constant state of fear. thank you very much. [applause] . .

>> is always good to see but governor who knows our issues. my question has to do with the guidelines and whether there will be an initiative to reapply at the fema -- to reapply at my initiatives. and will there be a redistribution of the way aid is distributed to the states? >> the answer is, yes, we are

looking at all the policies and guidelines and regulations issuing from that. the met is based on the standard act. -- the met is based on the standard act. we will see it that as a policy that could be changed administratively. we're not close to being done with that review. it is moving forward with some speed but there is a lot of stuff there. some of the rules and practices, to the extent that we can be flexible, we will be flexible. craig, the head of fema, knows what it is like to distribute funds in that type of environment. there is an ongoing thorough

review of all the policy, regs, and so forth and at an appropriate time we will be engaging the national governors association. this is another reason to have a standing committee on some of these issues. particularly rulemaking or legislative changes. >> out with a thank-you for the first to have dawned on pass id -- i want to thank you for the work you have done on pass id. real id had a lot of uncertainties in the cost and affected a lot of us. what bipartisan days can we do as governor in to get this passed by the end of the year? >> as i mentioned in my remarks, meeting personally with your congressional delegation and telling them about the urgency of this.

what are the consequences if we don't demand real -- amend real id? and be willing to explain to people pass id is not a retreat at all from security. we are not lessening the security of the people of the united states. we are moving at all or. -- we are moving it forward. the states have agreed to let and it will move forward more quickly. that deadline is 2016. real id was 2017, so it is quite a bit quicker. the governors have the bully pulpit. this is a bill that will move us

forward, and if not, that is why -- a bipartisan group of governors would not be supporting it. engage them and use that bully pulpit. and in the other thing is, be available to the nga lege team. they need some of you to make particular calls to particular people at particular times. those of the things i would suggest. -- those are the things i would suggest. >> madam secretary, thank you for joining us today. if i turn to h1n1 for a moment. we talked earlier and i would like to thank you again and reinforce the conference call that we had with you and secretary sibelius where we were all given the opportunity to disseminate similar information to the public at large.

as a result of the round of h1n1, i assume that you have done some debriefing inside the federal family. could you share with us lessons learned and most particularly anything that we could do better in responding, should we have another round of h1n1? >> first of all, on lessons learned, bohol issues of schools and school closure, guidance, and how that is to be handled, we started seeing schools close -- people did not fully appreciate what that means and how much centers around schools being opened. that is why i urge us as we head into the fall school year, when the age 1 in one is likely coming back, to go back to last spring and think about what happened -- when the h1n1 is likely coming back, to go back

to last friend and think about what happened. everyone understands that school closure is not the ideal model. the best model is keeping schools open as much as possible and have students at home who are sick. depth and that is a lesson learned at the cdc level. -- and that is a lesson learned at the cdc level. as we all know, getting that kind of information out and talking to your state superintendents commager county superintendents, the school board association, what that they have focused and thought through -- whether they have lacked a common curriculum that they are ready to employ eight -- what that they have a region weh -- whether they have a

take-home curriculum that they are ready to employed. that was a lesson learned. if secondly, and we will build on this, as we communicated about communications, we had conference calls, not just for openers, but also with the private sector -- not just for openers, but also with the private sector. it communicated the same information so that everyone knew what we knew and what we did not know because it is a changing environment that you were dealing with, a pandemics situation. those of a kind of things that we will build on in the fall -- those are the kind of things that we will build on in the fall. all of these things have uses of the band 8 for a pandemic --

other than eight fa flu pandemi. >> let me join in thanking you to it continuing great relationship that you have provided. for me -- two things. first of all, all of us know if it is the substantive response from fema and a substantive response of the federal government that will be relied upon. having said that, in a disaster, as you know from your days in governor, it is those first critical hours that can people's

fears and restore their faith and let them understand that someone cares. i want to tell you that from my experience, it is that governor stop to get out there even if i cannot put up new power lines. they would not want me to. [laughter] i cannot rebuild the bridge into any of those things to repair damage or restore lives from a tornado. but what i can do and what is expected is to be there. but none note that the power of the state -- let them know that the power of the state is there and there is hope for a better day. you provide that on the federal level. you have provided in the first six months extraordinarily well. you do not realize the response in my state when the press was standing around. i know how you got myself on

number. -- i do not know how you got my cell phone number. >> there are lots of ways. [laughter] i've got your number. >> it help people who were scared are frightened. you can get jaded or overwhelmed and so backed up and so busy with all the responsibilities. sometimes it's easy to forget little things. but let me compliment you on what you have done so far in that regard by being there for us, telephonically or any other way, so that we can start to rebuild the hope the people immediately after a disaster. let me encourage you not to quit doing that. not to let that parts light. the second point. >> i would encourage you not to change your cellphone number. [laughter] >> of the second point about a fusion center, where i enders

and you are heading on that, better communications between various agencies, it is almost going to require 8 two tier level at least on the state level, those that need to be there for carrying out their duties, and then a smaller groups that just happens to be housed there, because that would be apparently the best way to communicate, which would have hired security clearances that under certain circumstances we get more sensitive information that should not be available to the broader population in the fusion center. do you have plans in place and how quickly can you share what you would like to see the states do in response to that?

there can be even higher security clearances that take a long time if you do not already have them. there is a timeliness factor to this issue. do you have any thoughts or your people have any thoughts about how to get this out quickly and have the governor's identify people that could be on the upper level of information sharing so that if something happened free months from now or six months are now, we would not be constrained in receiving the information? >> a couple of things. the fusion center, if you have to concepts -- to institutions that to exist. that is in center is an all risk, all hazards way of sharing the information. and you never joint terrorism task force. your jttf is an fbi driven on

the federal level institution. you're already should have state representation there. they already shed have a certain -- they already should have a secret clearance or above. there is additional or other hazards that also require some clearance. the fusion center in a way -- jttf as one function, actual in tel of possible terrorism or terrorist activity that needs to be shared at the upper level, and information that needs to come back. go back and read the 9/11 commission report about how much was seen at the state and local level and there was no way to collect that are put it together and say, wait a minute, why are all these guys taking flying lessons -- for example.

jttf continues and we were very closely with them. all hazards includes the fusion centers. i am envisioning some people there at that fusion center that will also have clarence so that we can increase over call intelligence in an analytic capacity. i have already moved intelligence analysts into the country. i think we will see more of that. the deputy undersecretary for deputy intelligence analysis comes out of the state of new york. he has set up their counter- terrorism fusion center. he knows very well how bad does. why don't i recommend bart convene a meeting with governors or their representatives sometime in the near future to talk about where they are with their fusion center and where we would need

to go and what would be required? i will ask him to take the lead and communicate through the nga and homeland security committee and yourself on. -- and yourself on. -- your cellphone. >> let me thank you for particularly the conference calls. i want to change the subject for just a minute. as a governor, you were very instrumental -- one of the voices on behalf of all of us for strong borders and about the need to protect those borders. as governors, we have the opportunity to say, federal government, you need to do something about it. it is your responsibility on the borders. why aren't you doing something? now you get to where the other hat as the security director. >> what would you like? >> there you bet.

if you could just share with us briefly what is your finding or frustrations that you have found in terms of trying to address the issues surrounding border security in a new job versus what many of us have expressed in terms for additional border security and when you were governor? >> a couple of things. one frustration is ironic. a lack of appreciation and washington, d.c. with what has occurred with regard to border security, particularly the southwest border. that is a different order operationally and otherwise than it was eight years ago. i can see it. when i was governor, that border was out of control. i was always back in washington saying, where are the border patrol agents? where are the stations and staffing and technology that you promise? the traffic ... arizona.

infrastructure has gone into place as time has gone on. it is a very different border. is it sealed so that there is never any illegal immigration? no. can you ever guaranteed -- note. -- no. when the bids on the ground coupled with technology and and there is a lack of appreciation in washington for what has already occurred. we are not only sustaining but we are growing and growing in the right way. secondly, and thus ensure part of the country a little more, i have been -- we are working now on the canadian border. that has different issues.

it is a different geography, among other things. and i don't equate the two necessarily operationally, but the law is equivalent on both. you have to have security on book borders. the main issue this spring is the western hemisphere travel initiative implementation, where people need the right documents to go back and forth. that implementation has gone very smoothly. we have a lot of preparation for it, a lot of advertising about it, and the wait times at the ports between canada and the u.s. are actually less this year than they were for the same year -- same date last year. i get daily chart that compares those sorts of things. the need to make sure that we do not get the northern border

because of what is happening on the southern border, that has taken some time. maybe a lack of appreciation there about what needs to occur and will continue to need to occur. i always know -- whenever i talk about security and borders, i will bet you dollars that someone will talk about the need for trade to go back and forth. i get that and i understand that. you can have your port inspection station and your technology. i understand. but supporters are part of our security system and i start from that standpoint. caught the scent of the trade issues that need to be confronted, being smart about it which i think we can and are, but we need both borders operating as real borders, not just a southern but also the no.. >> we're going have to move on

to our panel. we're delighted to have you back get nga. before we let you go, you will recall from your service here that at our annual meetings replay tribute to colleagues to leave office -- he paid tribute to colleagues as to leave office. some anticipation that you may have gone to a federal role but we did not. i won at 91 behalf of nga not only as your service as governor of arizona but as our chair two years ago. janet was the first woman to chair nga, and she pointed out that it was a milestone of 98 years to achieve. we're delighted that she had that responsibility. you may recall that her initiative as chair was innovate

america, supporting science technology, mathematics, and state initiatives to support economic development. before she got into office, she had a distinguished career in the legal field, working as a judge, and serving as a partner in the phoenix law on free president clinton appointed her united states attorney for arizona. then they elected her as the attorney general, the first woman to hold that position. in 2002 she was elected governor, the 21st governor of the state. i am the 82nd governor of vermont, to put that in perspective. [laughter] >> we have the grand canyon, though. >> well, all right. [laughter] recent noted -- we should not have voted to admit all of those

new states. the first woman to succeed of woman as governor in america. it is happening again with gov. corporate thank you for your service and on behalf of the nga, like to make his presentation to you. thank you and wish you all the best. congratulations again. [applause] >> thank you all very much. >> let me call upon our gracious host to introduce our panelists. >> thank you, governor douglas. when gov. lendl talked about this conference being here, he said it would be appropriate, considering what we went through

in 2005 and since then. this would be a session on emergency preparedness and management. one of the things he asked me to do was tell us some of the things you learned that you might not have been expecting. i've got three people here who are going to share with you some perspective on three of the things we have learned. before i introduce them, we are also happy to have credit gcraig fugate, a huge help to us before and after katrina. we're happy that you where the mississippi mema -- happy to have you wear the mississippi mema 10 wonder lapel. they had four big hurricanes in

florida and one year. he had -- he brings great talent to this job. you will be the first to speak, craig. i will introduce the other guys in the order you are going to need them if you have to face a disaster. greg brown is the ceo of motorola. he has been at this business for more than a century. let me tell you why you will need him. if you have a gigantic disaster with the other obliteration we had, you have totally failed communications. all of your communication systems are gone. as i said, we might as well have been civil war generals for the -- for about fiber six days. people had to come see you to

tell you what happened. we had more helicopters around and they had then. but have survivable, reliable, interoperable communications is the first thing you need. several testified before the senate and house about that. craig, we have not been able to get fema to allow grant money to be used for that. but there is nothing to protect property and lives as important as what motorola is doing for us here now. jady fishman is the ceo of the travelers company. he became the 2004 ceo of a the company. the travelers institute is that public policy dialogue that they have.

one of the public policies that they had been very good in trying to help us address is the issue of property and casualty insurance in the hurricane zone. after the storm we had many people who live outside the federal aid designated flood zones who did not have flood insurance because they were told by the federal government that they did not need it. they were not in a flood zone. tens of thousands of homes were destroyed by the flood surge of katrina. they did not have any insurance. some of them thought that they had $500,000, $1 million on their house, and they did but it did not cover storm surges. we have been trying to figure out housing insurance -- how the insurance company can help us deal with that fact and also the reality of southern businesses

to not like building close to the coast. we had a private insurance commission here in this southeastern a lot of those people to talk about a planned that travelers has put together as a suggestion, and it is a work in progress, i think, but if you are a coastal state, even if mainer new hampshire, there is some risk you will have a hurricane with a storm surge and that houses flooded by the storm surge are not covered by regular insurance. last, bryan mcdonald. he is with the horne cpa firm that at one time iran might agency. he is an accountant and we have been cited by oig and hug, we

immediately put out and contract hire a conning -- put out a contract hire an accounting firm to help the smaller towns and counties. when you're courthouse blow away and all your records below way, these people really needed help. we're very pleased. our air raids are incredibly low for disaster assistance -- our error rates are incredibly low for disaster assistance. we thought this was one of the smart thing that as far as i know no state had ever done before. i wish had been my idea. it really help the state government and local governments. i'm going to start with craig.

>> thank you, governor barbara. barb-- barbour. we want to be the premium agency to solve problems, walk on water, stuff like that. how do we plan to do that, i asked. you're doing all the work? state and local. maybe our mission statement ought to reflect that. let's take a step back and talk about the preeminent emergency management agency and talk about our mission as working together as a team and a nation. this is to prepare for, protect against, response and mitigating install hazards. let's make sure everyone here understands that we are part of 18. that team is made up of local and governors.

our job is to support you. we do it for a variety of ways, building capabilities, administering programs, and then when disaster strikes, which supporters response. in many disasters it is strictly going to be a financial grants program to backstop the money that you have spent that in at that your state responded and we're helping you to build. but there are disasters that get bigger than that. hurricanes are not the only threat that we face. not every disaster gives us a threat or warning. we have a tendency to plan for the last one, and our mission is to build a team and be part of that team. that team has to be greater than just government because you have represented a from the private sector. without them we cannot provide

for 4 feet are populations on a daily basis. that is what the private sector did. we have volunteers and fate based organizations that step up to disasters. -- faith based organizations this step up disasters. there is a tendency for far too many to retreat government as taking care of people in the disaster. i am looking at national hazards and technological and man-made advance. we have got to stop writing the public out of our plan. we need to look at the best untapped resources when we get into these large scale events. if they are not ready to take care of each other, if neighbors are not helping neighbors, no one is going to get there fast enough. we need to change the dialogue and make sure that the public understands that they are part of that team.

then we can focus on our services. the other thing to get across to fema is to stop putting people into a box. we do it for children. we often time planned for the people that should be taken care of themselves and forget that our children of the most vulnerable population. we have more regulatory requirements for many other subjects than our kids. we've also got to put a moral responsibility back on the people. i've got a real simple message that you can help me carry. it -- we need to tell people to get a plan, it trained in cpr, and when disaster strikes, check and your neighbors. we will save more people doing

that than any program we can get off the grand. -- off the ground. the last two things, and you got into -- we had a lot of rules and regulations. it turns out somebody did something that probably was not the right thing so we roeder regulations of it would not do it again instead of looking at it as a training issue. and then we had a measure everyone of these -- it doesn't make much sense to me. what we have to measure a stump went the coastline was just moved up the hill. we're trying to resolve disasters by trying to take all of these pieces and making sure that we can use the tools that we have. we can break this and that three big chance. what a lot says, we have to go back to congress.

what the policy and guidance as, we will fix that in house. we will go back and work with those issues, tried to make sure that they're doing what they're supposed to do and not precluding what congress intended to do for the stafford act. and the last thing that people are going to talk about is we have to look at the disasters not always been signed -- resolved by the stafford act. one of the issues are going to be the fema programs reimbursing you and helping you with things that are not insured. that generally gets things done but then you get the bigger disasters where there's tremendous loss of housing, community businesses, and fema does not do housing. we do shelters. it may be a temporary structure in europe driveway for a few years but that is essentially shelter. how do we define long-term recovery and make sure that all

of the federal communities are working together. i am a creature of government. i like to explain this with the tax base. we have to reestablish tax bases within a community or we run the risk of getting us fire stations rebuilt but there may not be that businesses and the tax base to support people working there. the stafford act is not the only solution when you are looking at large-scale disasters. we have to look at all of our federal programs and think about what we want to do and what we want to achieve and to find that so that we don't limit ourselves to what the stafford act does and recognize all whole host of federal programs that support your communities getting back to a sustainable tax base. is the standpoint of process and how come to focus and who are we working for in a disaster. ladies and gentlemen, that is you, the governors.

the lo>> thank you for keeping s on this. i like to particularly thank governor barbour to make sure that this would be on the meeting agenda today. america's infrastructure is the backbone of our society. as the report states, our country's infrastructure has not kept pace with our country's growth and shifting demands. the nation's governors have been presented a unique opportunity for the american recovery in reinvestment act to address instructor challenges not only in terms of modernization and repair, but also in the areas of emergency preparedness. let me give you some concrete examples. congress gave governors at their urging the discretion to it please use a portion of the state fiscal stabilization fund

for public safety or other government services. this amounts to $8.8 billion nationwide. some are planning to use a portion of their funds and allocations for public safety technology. i would urge you to balance your short-term needs related to budget gaps with using at least a portion of this onetime funding for long-term investment and measurable progress toward obtaining your state's inability process. $700 billion has been made available for underserved areas. congress has specifically included public safety access to broadband as one of its problems. i think there is an opportunity there. $2 billion was a made available

to the assistant grants program. this is the high water mark for this program which can be used for a broad range of law enforcement purposes, including technologies. the states have discretion over how 60% of this funding is used. fourth, another $300 million available through the mud for trade security which helps to protect critical infrastructure. in a similar vein, investment to be made to protect it a stretcher and enhance safety. highway money can be used for intelligence and transportation, solutions that enhance safety and facilitate preparedness. campus security, hospitals better prepared to handle vast emergencies. with the recovery act, if you have a unique opportunity to

leverage some of these funds for the critical infrastructure needed for emergency preparedness. that said, it does not change the fact that you will have the mandate for annual balanced budgets and undoubtedly the heavy lifting in the funding for state infrastructure modernization iran communications and emergency preparedness comes from the state. in terms of emergency preparedness, it covers disaster response, planning, securing our nation's borders and supports, and even emerging threats such as cyber security which is for less. borderless. it is like oxygen. without it, nothing happens. as the ceo of a ceo, i relate to the enormous challenges you face

as ceos of your particular states. it helps you balance your numerous pierides been in the area of emergency preparedness and keeping your state safe for the public. technology is the mechanism to deliver the various mechanisms of government that you manage in your state, including both the prevention and response side of emergency preparedness. i believe the states can balance their priorities and a just and merges to prepare and is in a cost-effective manner by taking an enterprise-wide approach to your technology infrastructure. as we have seen the last several years, more and more states -- 34 states have taken the state water bridge for the efficiencies and effectiveness, state, local, county, etc. for the inner awp ability and survivability of communications. the allies to take a holistic view of your technology needs across the regions in both

public safety and public service sectors and to assess your requirements to meet the notes of prevention and response. with any enterprise, you need to invest in multiple types of technology in order to satisfy the needs of your users. your users have three key requirements. they are the same across all of your agencies. one is seamless connectivity. it entire enterprise requires broadband communications networks, both wireless and wired in, both public and private. voice communications is critical both for the prevention and to ensure the safety of your states. broadband communication networks should be considered part of our nation's core infrastructure, just as roads, transit systems, education systems, and hospitals are. we are in support of the administration's call for a national broadband strategy.

second, real time information -- secretary napolitano talked about information and intelligence sharing and her movement toward fusion centers. your public safety personnel need information real time to assess mn gypsies. it not only require seamless connectivity but level applications, wireless video, and command centers to make it possible. as an example, the los angeles police department sought a 40% reduction in crime when they began using mobile video surveillance over a wireless broadband networks in jordan downs, one of the city's most dangerous areas. third requirement -- enhance of users. in addition to getting them real-time information to assess the situation, it has to get into the right hands. getting that information into hands of users is possible with

two-way radios, computers, and local computers. the type of device should be tailored by a type of user. as with any enterprise, ensuring your technology investments that are interoperable with other agencies using different technologies and are compatible with existing systems should note -- should be both a budgeting and planning priority. interoperable at across networks in cuba -- insurers real-time information gets into the hands of your users when they need them. it minimizes risk to prior and future investments and in addition, better spectrum utilization, data sharing, an integrated communications improved the effectiveness of the state's work force. our own experience, as was reference with public safety, we have known that mission critical technology is vital to the emergency preparedness. we have seen this in real time.

katrina was clearly our largest single disaster recovery response, as i'm sure it was for all the other companies affected. although we provided personnel and equipment and more to gov. barbour, it was like overnight going from and interconnected communicating infrastructure to overnight waking up what felt like a third world country -- overnight. it is a different thought. it is a different mentality. i remember asking questions about what was deployed and where it was deployed, the money that was invested, and were their redundant systems, and what about battery backup. but it battery pack up has been deployed a mile away in a basement that is flooded, the investment is useless. there are a lot of lessons about

best practices that are available to grow going for it. we saw in practice the benefits of true inner agency commissions -- communication. when several police agencies were able to use the state of louisiana police network, it allowed a better response. the minnesota bridge collapse -- we sought the single radio system used by first responders during the bridge collapse in 74 different agencies provided seem less and interoperable communications for first responders for several jurisdictions throughout the area. in the california wildfires, thinker their radios and batteries and other communications supply, but a host of well offer process season that allowed efficient and strong response to those

hazards. in terms of lessons learned, the most obvious -- given the immense amount of emergency types, is important to taken all hazards approach to an emergency preparedness, that is exactly what the man has done. -- what i phenfema has done. it is to be actively reviewed and we know that is being done. if the potentially have hazard mitigation funds available, and i could go a long way. second, there is a direct correlation between restoration and prepared this. exercises, drills, scenario planning, keeping contact information updated, knowing what you can count on before and after an advanced greatly facilitates the recovery

process. inspect what you expect. there is no shortcut around training. third, very important have network monitoring. mission critical systems and applications which can provide early diagnosis opossum -- problems, off track storms and outages, and provide assessments. this reduced costs, it enables processes to be corrected and mobley -- remotely. it makes field personnel more efficient by providing backup support that they need. fourth, existing assets should be hardened. plan for the worst. for example, prior to hurricane katrina, towers, shelters were built to a category three specification. post katrina, we built to a category five specification. fit, primary network should be augmented with alternative

technologies such as national networking and/or satellite and cellular. alternate energy should be available. and most importantly, a subject i have already touched on, true interoperable it. that is not negotiable. it provides the means of effectively managing situations in crisis mode, response mode, and also the prevention mode. p-25 standard was jointly developed, and it includes participation for multiple equipment manufacturers. it is an open industry standard. it does not represent a specific technology but it does represent a unique requirements for reliable voice, data, and video communications.

technology can serve -- saw the problems of iraq ability. but in many cases, they can be an impediment to funding. states should get the maximum flexibility to use their money for the communications centers. as governors i urge you to make the case to the federal government for support and upgrading our infrastructure, just as they are doing for roads, schools, and hospitals. i think someone at that interoperable it has been stalled since 9/11. but there remains much to be done. there is one of emergency situation where the use of p25 devices was extremely beneficial.

earlier, i gave the example of michigan state troopers bringing their devices into louisiana and being able to communicate with other public safety agencies. at time when communications was barely possible, this was a huge benefit to all. a parallel example of that is e- mail. once the standards allow proprietary e-mail systems to be interoperable, they can be an indispensable tool. i urge you to continue to make the case to the federal government for funding and flexibility in using disaster mitigation dollars for technology both for prevention and response. in terms of cyber security, we have to do to a more in terms of the public and private partnerships. i have the privilege of being one up 30 ceos to serve on the

president's administration against that but i will tell you that cyber security -- obama highlighted this in a press conference four weeks ago -- this is a national issue. it is a state and local coordinated effort as well. i think that with some of the national associations that you have in place, some good coordinating work will be done on that. lastly, i will leave you with one final thought. people ask me about different budget situations. there is pretty much a ubiquitous shortage of funds. i think that the number one requirement is you.

when a governor takes a leadership role and he or she makes it a priority, and then determines and declares that as a top priority to your respective administration and constituents, things happen significantly. putting the state on a path to it in a crash -- enterprise-wide approach, bringing different stakeholders' together -- i was thrilled to see the nga proposal on public safety communications and the explicit recognition and the need for public and private sector coordination. i really appreciate you hiding this on the agenda and your continued courage and leadership in making this a priority. thank you. >> thank you, governor barbour. how poignant is to be here on the coast of mississippi, coming

in from the airport years after katrina, and see the level of building that still needs to be done. speak about a work in progress, and makes the point very eloquently. and governor, a tip of the hat to you. there's no one who has been more constructive and add more to the dialogue about private casualty insurance they knew. you remind me that you're coast is predominantly a working coast. there's a tendency to think about it being high-rise condominiums looking over the water. here it is about jobs and energy and commerce and shipping. these all things that create stability in the state. you've challenged us and we have tried to respond and be engaged in the debate. we thank you for your as a leader. i am the chairman and chief executive of the travelers company. we are a large property and casualty insurance conducting business primarily in the united

states. fortune 500 ranks as as 900 -- as 1990. we're very fortunate to have avoided the investments that were so problematic for financial-services companies. we posted net income of nearly $3 million and generated a return on equity in excess of 1% in 2008. we cannot requested nor have we taken financial assistance from anyone. we trade on the new york stock exchange and a few weeks ago we were added to that -- we were added to the dow jones 30 industrial index. we're here not because traveler sees any structural relief related to this exposure, but we have managed our when exposure prudently and were well it -- and are well protected. we have an obligation to participate in finding a solution to the difficult

problem of availability and affordability of insurance in coastal areas. this issue, which we think can be traced back to hurricane andrew in 1992, came particularly problematic after the 2004 and 2005 seasons. hurricane and wilma and 2005 particularly. when scientists indicated that they believed we had entered into a period of more -- a stronger hurricanes, and 2006 were nine from the u.s. expected -- perspective, both years were active and there were serious category four and five storms. 2008 was again serious west creek hurricane making landfall and making landfall in texas particularly. we have spent time and effort engaged in the debate, in part

because we have been disappointed that our industry has not been able to find consensus. no pun intended, there seems to be a notion that you did a whole, \ -- dig hole, insert head. the awful people -- fall people have gotten involved. it was indicated in an editorial. when a insurance decides how much insurance he can write, it has to look at capital and make -- and be able to pay all of its claims. the company has to evaluate whether it can make a reasonable and fair return on net business over time. both of these issues are seriously impacted by the regulatory environment in which the business operates.

the less predictable the regulation, the more difficult it is for a company to commit capital to the long term. we have attempted to identify the real issues that are at work here and to propose solutions that will help deal with these challenges. we know that there are any number of potential solutions to this crisis, in large measure depended on an individual's view on whether the government should be government-based or private- based. while we tilt strongly to a private solution, we believe that there are other ideas and thoughts that have been presented. we're open to input from anyone. we do not pretend to have been a monopoly -- to have and not -- to have a monopoly in good thinking. and then whether mother nature will determine whether it will provide relief.

with that, let me turn to the proposal specifics. the travelers proposal has five specific actions that confront coastal communities. as you all know, insurance has been a state by state regulated industry for many years. wind does not recognize state borders, it just blows. the insurance community can be most effective when it is able to spread risk across customers and consumers would like this with like risk. we have suggested the creation of four wind zones, where mechanisms could be used to spread across each of the consumers in that state.

the statistical likelihood of an event occurring in texas is virtually identical to that happening in louisiana, which is identical to it occurring in mississippi or alabama. what the industry is facing right now was a situation where individual and insurance commissioners represent their constituents as they should, but it makes the possibility of spreading the insurance risk quite limited. it makes it a meaningful vehicle to spreading ensure as much more effectively and predictably. secondly, we seek regulatory stability. that is not to say that we seek last regulation. quite the contrary. make the regulation as onerous as you think, make it as pro- consumer as you think this is important, make it as difficult as you like, but make it. allow us to understand the rules and regulations that will permit us to commit and then stick to it. a less predictable the

requirement, the less willing insurance companies are to commit capital to the future. . >> there will be an increased

commitment of capital will go along with it. our suggestion is towards concessions that will work just fine. the third element is waiting transparency. there is a conception among months of the public that the insurance industry winds and the public loses. when wind blows, rich: and when they do not blow, rates go up. -- when winds blow, rates go up, and when they do not blow, rates go up. this could be subject to appropriate public inspection and most importantly, to the extent that the science turns out to be wrong or we continue to just get lucky, there should be a mechanism by which premiums are adjusted downward to reflect the fact that experience was not as we expected.

the entire industry uses when it based models -- wind based models. it allows insurance companies to take on more risk than they did previously but it is nonetheless a prediction. i quote yogi berra when we say you're talking about the future. the insurance industry has an obligation to have a fair transaction and a fair deal with the public. the fourth element is a series of issues that takes place in 2004 and 2005 when agencies went up these. i am speaking of the context of hurricane katrina. i am not speaking about the normal when the season that we're capable of handling.

the insurance companies responded because it was necessary and the industry raised that capital. that capital is not ours. it is our shareholders. in return has to be earned on it. a meaningful part of that mechanism is to reflect the cost of these very costly events. we believe that one way to deal with that is to have the federal government provide insurance for those extreme events at cost. not to -- not through subsidy but to every state that is impacted. that eliminates the return on capital. the insurance industry would be obligated to pass those on to the consumer. it can be adjusted for the individual. it is a great deal different

from what is required in the northeast and it wouldn't have a meaningful impact. many public policy folks ask me how we keep this from coming out of a flawed program. the insurance will be made available to the insurance industry, not to the consumers. there are too many public policy makers of that will give a break to the insurance companies. the flood program is bill to the consumers themselves and is a subject of much political debate. lastly, to do with the issue of mother nature, many of you have not addressed this aggressively. we're speaking about much stronger building codes and enforcement of those building codes. and finding ways in which our industry is investing in

stronger homes that are better able to withstand those storms. we all know the stories of the land that silts outside of new orleans that caused so much damage in new orleans and mitigation will pay a role -- will play a role in that whether it is a fire issue or a hurricane issue or a flood issue. that is our program. we are interested in being a participant in the debate. i feel a genuine responsibility as an industry leader to be as thoughtful as we can and we recognize that the absence of the industry is important. >> the key, but gov. barbara. thank you for allowing me to be part of this panel.

i greatly appreciated. let me give you my word that i will do my best to say that i will not be a long winded cpa. the teamwork that she mentioned, one team, one fight, we saw it right here. as a point of reference, this building is the joint field office for the state response to katrina. for years ago today, you would have found me in this room sitting about where you are, but facing in that direction. i was with 1000-1500 others. we were working around the clock, seven days a week and bringing hurricane assistance to this devastated area. i can promise you that our

efforts would be celebrated as a best practice. even more so, i had no idea that this room would be hosting governors from around the country. it is a real powerful moment. in the wake of katrina, we had a focused governor who said to get the money, get the money out, and do not have to give the money back. we were very clear on that. our efforts were greatly benefited by this work environment. it was a very intense work schedules. a little bit about the environment, this room looks quite a bit different than it did four years ago. as a matter of fact, the floor was concrete. we were in the process of scraping up the child that had buckled as a result of the water

and the panel's one of the panels that she see now. but the panels at the time, you could see the water mark. i doubt any of you would have seen this, but you would have seen a car floating in the coliseum next door. one of their cameras stayed on it for a while before the power went out. in our case, the disaster response and recovery help illustrate the will brilliance of our founders and their confidence in the federal system. ours is a recovery that was defined by cooperation. our local governments have been on the front lines to ensure that post disaster activities represent the actual circumstances on the ground. i mentioned that agency's work seven days a week, 12-16 hours a

day in this very building to overcome those recovered barriers. it as a matter of fact, my boss had a couple of things going one of those was our daily meetings. i started with a 7:00 a.m. meeting and we ended with a 7:00 p.m. meeting. there was work on both sides. there was a true spirit of teamwork fed led to that. i had to smile when we walked in to get it back as she walked out into the concourse area, you'll notice to palms. one of those is on very fertile ground because that was where the conference table sat which was 6 of your tables pull together and some $2 billion in public assistance was obligated as a result of those meetings. it was a very powerful time and it was very to more oriented.

we also realize that the area was not designed with a regional disaster in mind. in our moment of crisis, we had a leader that took the long view. the governor realized that the natural disaster could only be compounded by a second disaster caused by the deactivation of hundreds of millions of dollars of federal aid. that event in wickum just as local jurisdictions were working to rebuild and the realized the impact on record-keeping that was caused by the size and nature of the disaster. let me make it clear. fema did not want to see a disaster either. i am not here to suggest that first responders should be armed with flashlights and water and medical supplies and a calculator, that is not what we were about. but we did recognize the gravity

of the situation and the need to provide on the ground resources. that, coupled with a web based technology that was owned by the state. that provided the financial structure specifically designed to meet the guidelines that were required to insure an honest government. working with officials, we established the first state based audit system for public assistance. along the way, the government accountability office there special recognition and then again in december of 2008. in fact, it was reported that finan and the state reduced the burden on applicants for meeting public assistance requirements and gain immediate access to key documents that helped officials make project approvals.

you all understand that when a local official said that i need to do it and i need to do it now, what can i not do it? the mill was not saying no because they were mean-spirited, they said they needed more reformation to make a decision to ensure that you are in compliance with the regulation. we helped straddle that hurdle. my cpa firm values our role in mississippi's recovery, specifically our role, but it was not a contractor driven solution. we were back of house to a state and federal government debt rose to the occasion. -- government that rose to the occasion. in many ways, i am the forest gump of cpas. i was simply here when they took the picture. i was blessed to lead a team of very powerful people.

2.8 million images later, with over $3 billion in public assistance obligated with over 11,000 grants, with less than 1% be obligated, i am -- [unintelligible] they've found the common sense to be the right fit in speeding relief while minimizing waste. the system, as best i can tell is just one of some five ingredients that i see in the governor's successful leadership forum. your time is viable and i do not want to take any more of it. we share a common belief to take that intended for bad and use it for good. i think that is what we attempted to do in katrina. i will say to you that each of the states in this room contributed to our recovery and if there is any lesson learned,

that good may come of this. i believe that the end of transparent -- the era of transparency is here to stay whether it is disaster assistance or recovery assistance, we must provide smart solutions to see that the taxpayers' money is used for its intended purpose and to demonstrate an honest government. let me close by thanking you and offering all of those that work in this building and by writing a final chapter in the gump story. >> some very important perspectives on a topic is critical for each of the governors as we respond to national disasters or those that are not natural in our state. we do appreciate your being with us today. we thank you for facilitating this important conversation. let's think our panelists for being here today. [applause]

>> i would pass the governors to move as quickly as we can to our next meeting.

>> live coverage tomorrow with the national governors' association from biloxi, mississippi. it will be the topic of the virginia, a period that begins at 11:30 a.m. eastern and you can see that on c-span2. >> 29, spend an hour with the wall street journal's technology expert, walt mossber. this week, on prime minister's questions, the focus is on afghanistan, the fund for crisis

and local issues. prime minister's questions, tonight at 9:00 p.m. eastern on c-span. >> now up defense secretary robert gates talking about the 2010 budget proposal with includes cuts to programs. this is about one hour. [applause] >> please take your seats. welcome to this very special meeting. i believe our guest is the first to address the economic club of chicago. some have called him the

ultimate washington insider. the truth is his favorite places near mount rainier. he came to the nation's capital 40 years ago on a whim as a graduate student. he signed up for a cia recording business mostly because it was a free trip. 45 years later dr. robert gates is running the place. the first entry-level person to ever become the agency's director. along the way he has worked with democratic and republican administrations. he has managed to maintain his sanity, his reputation that made a town famous -- in a town made famous by bureaucracy and back fighting. he's done pretty well. its three highest profile positions. cia director.

president of texas a&m university. secretary of defense currently. he's helped remake 3 organisations that were bound by culture. he's done it by listening to people on the frontline. analysts and agents, teachers and students, corporals and colonels. is funded mostly by focusing on the product. he said the national propensity of bureaucracy is not a decision, but to chew the cud until there's no taste at all left. he has chewed up a number of bureaucrats. he's not afraid to make a decision. his ego is not in line with his title. he's not afraid to put himself or his job on the line. at his confirmation hearing in 2006 he told senators "i did not want this job, doing this to serve my country." he has retained the reputation. after a reporter recently said he was pretty outspoken parity

smiled and said, what are they going to do, fire me? all his experience and skills brought to bear in his current job. it is not only fighting insurgencies and terrorists, but fighting bureaucracy at the pentagon, not to mention the members of congress and company that want to stay at the status quo. the defense budget has doubled in the higher decade, now higher than any other time since the second world war. the u.s. spends more on defense than the entire world combined. defense spending as a major impact on our economy. bob gates is having a major impact on defense spending.

the bound to help bring accountability to the budget process. he is working hard to making good on his word. he has kept track of every soldier killed in battle. he writes a personal note to every family. lately he's been called everything from the anti- rumsfeld to a bureaucrat unbowed. he sees himself as a public servant with a duty to make a difference. there's no higher calling in his eyes. it gives me great pleasure and honor to welcome the secretary of defense dr. robert gates. >> thank you, secretary daily. it is an honor to the economic club of chicago. i appreciate the special arrangements you have made.

i want to thank all the distinguished citizens of this great city laware here today. i am mindful that i am speaking in the hometown of my boss. president obama's and his greetings, as do rahm emanuel and david axelrod and the rest of the chicago group. they are discovering that washington is the true windy city, no doubt. [laughter] [applause] the place where those who travel the high road of humility encounter little heavy traffic. [laughter] the only place in the world you can't prominent person walking down lover's lane holding his own hand. [laughter] the issues that brings me here today is central to the security of all americans, the future of the u.s. military, how it should be organized,

equipped, and funded in the years ahead. to win the war as we are in while being prepared for threats on or beyond the horizon. earlier this year i recommended to president obama and he enthusiastically agreed that we needed to fundamentally reshape the priorities of america's defense establishment and reform the way the pentagon does business. in particular, the weapons we by and how we buy them. above all, to prepare to wage future wars rather than continuing to rearm for previous ones. i am here on relatively short notice to speak publicly about these matters because the congress as we speak is debating the president's defense budget request for the next fiscal year. the budget request that implements many needed reforms and changes.

debating the president knows the defense budget request for the next fiscal year -- debating the president's defense budget request for the next fiscal year, especially things that affect troops, families, and the war effort, have been widely embraced by both parties. however, some of the crucial reforms that deal with major weapons programs -- have met with less than enthusiastic reaction in the congress, among defense contractors, and with in some quarters of the pentagon. so i thought it appropriate to address some of these controversial issues here, in a place that is appropriately not only be adopted home of our commander-in-chief, but also a symbol of america's industrial base and our economic power. first, some context on how we arrived at this stage. president obama's budget proposal is the nation's first truly 21st century defense budget.

it explicitly recognizes that over the last two decades the nature of conflict has fundamentally changed. and that much of america's defense establishment has yet to fully a debt to security realities of post cold war world. and the complex and dangerous new century. during the 1990's the u.s. dollar british the demise of the soviet union under end of history, by making deep cuts in the funding for the u.s. military, including a 40% reduction in the size of the u.s. army. this took place even as a post cold war world grew less stable, less predictable, and more turbulent. the u.s. military, with some advances in areas such as precision weaponry, essentially simply became a smaller version of the force that held off the

soviets in german -- and germany for decades and expelled iraq from kuwait in 1991. there was little appetite for or interest in preparing for what we call a regular warfare. campaigns against insurgents, terrorists, militias, and other non-state groups. this was the bipartisan reality in the congress and the white house. of course after september 11 some things did change. the base defense budget, not counting spending for the wars, increased by 70% over the next eight years. during that time there were important changes in the way u.s. forces were organized, based, and deployed. investments were made in new technologies such as unmanned aerial vehicles. however, when all was said and done, the way the pentagon

selected, evaluated, developed, and paid for new weapons systems and equipment did not fundamentally changed. even after september 11. indeed the kinds of equipment, programs, and capability needed to protect our troops and defeat the insurgency in iraq and afghanistan were not the highest priority of much of the defense department. even after several years of war. i learned about this lack of bureaucratic priority for the wars we are in the hard way. during my first few months on the job as the iraq surge was getting underway. the challenges i faced in getting what our troops needed in the field stood in stark contrast to the support provided conventional modernization programs. weapons designed to fight other modern armies, navies, and air forces. programs that had been a pipeline for many years and had

acquired a loyal enthusiastic following in the pentagon, the congress, and in industry. the most pressing needs of today's war fighters on the battlefield, in the hospitals, or at home simply lacked place and power at the table when priorities were being set and long-term budget decisions were being made. so the most important shift in president obama's first defense budgets was to increase and institutionalize funding for programs that directly supports to those fighting america's wars and their families. those initiatives included more helicopter support, airlift, armored vehicles, personnel -- personal protection equipment, and intelligence surveillance and reconnaissance apparatus for it troops in afghanistan and iraq.

we increased funding for programs that provide long-term support for military families and treatment for the signature of bones of these wars, such as dramatic brain injuries and posttraumatic stress. -- signature wounds. the world of insurgents and ied's is with us for zero long- haul, but we recognize that and other world has emerged. growing numbers of countries and groups are employing the latest and increasingly accessible technologies to put the united states at risk in disruptive and unpredictable ways. other large nations known in pentagon language as near peers are modernizing their militaries that could pose a challenge to the u.s. over time. in some cases their programs take the form of traditional weapons systems such as more

advanced fighter aircraft, missiles, and submarines. but these other nations have learned from the experience of saddam hussein's's military in the first and second goal force. that it is ill-advised, is not suicidal to fight a conventional warhead to head against the united states, fighter to a fighter, ship to ship, tank to tank. they also learned from a bank erupted so the union not to try to outspend us or outmatched our overall capabilities -- a bankrupted soviet union. they have taken advantage of our technology and vulnerability to take advantage of our freedom of movement and to deny our military options and strategic choices. at the same time insurgents and malicious requiring or seeking precision weapons, sophisticated communications, cyber capabilities, and even weapons of mass destruction.

the lebanese extremist group hezbollah currently has more rockets and high munitions, many quite sophisticated and accurate, then all but a handful of countries. in some the security challenges we now face and will in the future have changed. our thinking must likewise change. the old paradigm of looking at potential conflict is either -- as either regular or in a regular war, conventional or unconventional, high-end or low end is no longer relevant. as a result, the defense apartment needs to think about and prepare for war in a profoundly different way than we have been accustomed to throw out the better part of the century. what we need is a portfolio of military capabilities with maximum versatility across the widest possible spectrum of conflict. as a result, we must change the way we think and the way we

planned. fundamentally reform the way we do business and purchase weapons. it simply will not do to base our strategies solely on continuing to design and buy as we have for the last 60 years only the most technologically advanced weapons to keep up with or stay ahead of another superpower adversary. especially one that imploded nearly a generation ago. to get there we have to break the old habit of adding layer upon layer of cost, complexity, and delight to systems that are so expensive and elaborate that only a small number can be built and are then usable only in a narrow range for low probability scenarios. we must also get control of what we call requirements creep, where more and more features and capabilities are added to a given piece of equipment often to the point of absurdity. an example is the new presidential helicopter.

president obama referred to it as a defense procurement run amok. once the analysis and requirements were done, we ended up with helicopters that cost nearly half a billion dollars apiece and enabled the president, among other things, to cook dinner while in flight under nuclear attack. [laughter] we also had to take a hard look at a number of weapons programs that were grotesquely over budgeted. we are having major performance problems, we are reliant on unproven technologies, becoming increasingly detached from real- world scenarios. in september 11 and the war is -- as of september 11 and the wars that followed had never happened. the manufacturing sector's have at some point faced a combination of these challenges

in your own businesses. in the defense arena we face an additional often insurmountable obstacle, bringing rationality to budget acquisition decisions. major weapons programs, regardless of their problems or performance, have a habit of continuing long after they are wanted or needed. recalling ronald reagan's old joke that a government program represents the closest thing we will ever see on this earth to eternal life. [laughter] first there's the congress, which is understandably concerned, especially in these tough economic times, about protecting jobs in certain states and districts. there is the defense and aerospace industry, which has an obvious financial stake in the survival and growth of these programs. then there is the institutional military itself. within the pentagon and as expressed through an influential network of retired

generals and admirals, some of foam are paid consultants to the defense industry and some often quoted as experts in the news media. as a result, many past attempts by my predecessors to end failing or unnecessary programs have gone by the wayside. nonetheless, perhaps in a triumph of hope over experience, i determined and the president agreed that given the urgency of the wars we are in, the daunting global security environment we will inhabit for decades ahead, and our country's economic problems, we simply cannot afford to move ahead with business as usual. to this end, the president's budget request cut, curtailed, or end of the number of conventional modernization programs. satellites, ground vehicles, no

club dues, fighters. they were either performing poorly or access to real world needs. conversely, future oriented programs where the u.s. was relatively underinvested were exhilarated or received more funding. for example, we must sustain and continually improving our specialized strategic deterrence to ensure that ours and our allies security is always protected against nuclear-armed adversaries. in an initiative little- noticed, the president program includes money to begin a whole new generation of ballistic missile submarines and nearly $700 million in additional funds to secure and short america's nuclear deterrence. some of our proposed reforms are meeting real resistance. they are called risky one -- for not meeting certain military requirement, or lacking in study or analysis. those three words, requirement, risk, and analysis, are commonly invoked in defense matters. if applied directly, they help us make sound decisions. i have found, however, that

they more often have become the holy trinity of the status quo, or business as usual. in truth, preparing for conflict in the 21st century means investing in new technology. it means taking into account all the aspects and capabilities we can bring to the fight. it means measuring those capabilities against real threat posed by real-world adversaries with real limitations. not threats conjured up from enemies with unlimited time, and limited resources, and unlimited fax technological acumen. air security provides a case study. let me start with the controversy over the f22 jet. we had to consider when we were preparing for future potential conventional state on state conflict, what is the right mix

of the most advanced fighter aircraft and other weapons to deal with the known and projected a threat to u.s. air supremacy? for example, we have unmanned aerial vehicles that can simultaneously perform intelligence, reconnaissance, and surveillance missions as well as deliver precision guided bombs and missiles. the president's budget request was -- would purchase 48 of the most advanced aircraft than ever greater range than some of doorman's fighters, in addition to the ability to calling for four hours over the target. we will by many more in the future. we also took into consideration the capabilities of the newest manned combat aircraft programs, the f35 joint strike fighter. it is 10 or 15 years newer than the f22. care is a much larger suite of weapons and is superior in a number of areas. most important, their ground missions such as destroying

sophisticated anti-air defenses. it is a versatile aircraft that cost less than half of the other aircraft. some 500 will be bought over the next five years. more than 2400 over the life of the program. we already have eight foreign partners committed to buying them along with us. f35 has had development problems. just like every advanced military aircraft ever built, including f22. but the f35 will be the backbone of america tactical aviation fleet for decades ahead, if money is not drained away to spend on other aircraft that are uniform military leadership considers lower priority for access to our needs. having said that, the f22 is clearly a capability that we need.

the silver bullet solution for one or two potential scenarios. specifically, the defeat of a highly advanced enemy fighter fleet. f22 does not make much sense any place else in the spectrum of conflict. nonetheless, supporters of the f22 lately have promoted its used for an ever expanding list of potential missions. these range from protecting homeland from seaborne cruise missiles to as one retired general recommended on television using the f-22 to go after somali pirates cool are in many cases teenagers with -- who are in many cases teenagers carrying an ak-47. a job that can be done by a few navy seals. these are examples of how far fetched some of the arguments

have become for program that has caused $65 billion and still counting to produce 187 aircraft. not to mention the thousands of uniformed air force positions that were sacrificed to help pay for it. in light of all these factors and with the support of the air force leadership, i concluded that 183, the program a record since 2005, plus four more added in the fyo supplemental was a sufficient number of f- 22's and recommended as such to the president. the reaction from washington has been predictable. the most substantive criticism is that completing the f-22 program means we are risking the future of u.s. air supremacy. to assess the risk, it is worth

looking at a real world potential threat and assessing the capabilities that other countries have now or are in the pipeline. by 2020 the u.s. is projected to have nearly 2500 manned combat aircraft of all kinds. of those nearly 1100 will be the most advanced fifth generation f-35 and f-22's. china is projected to have no fifth generation aircraft by 2020. by 2025 the gap will widen. the u.s. will have approximately 1700 of the most advanced fifth generation fighters compared with only a handful of comparable aircraft to the chinese.

nonetheless, some portray this scenario as a dire threat to america's national security. correspondingly, the recent task of a possible nuclear test in north korea that the attention of the country. the risk of national security has been invoked, mendon because the missile defense budget was reduced from last year. in fact, whether the threat is real or growing from rogue states or from short to medium- range missiles that can get our deployed troops or our allies and friends, the budget sustains all increases funding. most of the cuts in this area come from two programs that are designed to shoot down enemy missiles immediately after launch. this was a great idea, but the aspiration was overwhelmed by escalating cost, operational problems, and technological challenges. consider the example of one of those programs, the laser. this was supposed to put high- power lasers on a fleet of 747's.

after a decade of research and development we have yet to achieve a laser with enough power to knock down a missile more than a 50 miles from the launch pad. thus requiring big planes to loiter deep in enemy airspace to have a feasible shot at a direct hit. moreover, the 10 or 20 aircraft needed would cost about 1.5 billion each. also tens of millions of dollars annually each. for maintenance. and for operation. the program and operating concept were fatally flawed and it was time to face reality. so we curtailed to the existing program while keeping the prototype aircraft for research and development. many of these decisions, like the one i just described, where more clear-cut than others. but all of them, insofar as they involved hundreds of billions of dollars and security of the american people, were treated with the utmost seriousness by senior civilian

and military leadership of the pentagon. an enormous amount of thought, study, assessment, and analysis underpins the budget recommendations, including national defense strategy that i issued last summer. some have called for yet more analysis before making any decisions in this budget. but when dealing with programs that were clearly out of control, performing poorly, and access to the military's real requirement, we did not need more study, more debate, or more delay. paralysis through analysis, in effect. what was needed was three things. common sense, political will, and tough decisions. qualities often in short supply in washington, d.c. all of these decisions involved

considering tradeoffs, balancing risk, and setting priorities. separating something nice to have from something necessary to have. requirement from appetite. we cannot expect to eliminate risk or danger by simply spending more, especially if we are spending on the wrong things. but more to the point, we all, the military, the congress, and industry have to face some iron fiscal realities. the last defense budget presented by george w. bush for fiscal year 2009 was $550 billion. in that budget the bush administration proposed that my recommendations for fiscal year 2010 budget of $524 billion. the budget does -- just submitted by president obama to congress was 5 under $34 billion. so even after factoring in inflation and some of the war cost removed from supplemental appropriation, president obama's defence request represents a modest but real increase over the last bush request. i know. i submitted them both. [laughter] in total, as secretary daily

indicated by one estimate our budget adds up to about what the rest of the entire world spends on defense. and only in the parallel universe of washington, d.c. would that be considered gutting defense. the fact is that even if the defense budget had been higher, my recommendation to the president, with respect to troubled programs, would have been exactly the same. for all the reasons i have described. there is a more fundamental issue. if the department of defense cannot figure out a way to defend the united states of america on a budget of more than half a trillion dollars a year, then our problems are much bigger than anything that can be cured by purchasing a few more ships or planes. what is important is to have a budget baseline with a steady, sustainable, and predictable

rate of growth that avoids extreme peaks and valleys that are enormously harmful to sound budgeting. from the very first defense budget i submitted for president bush in january 2007, i have warned against doing what america has done multiple times over the last 90 years, by cutting defense spending after every major conflict. the war in iraq is winding down. one day so will the conflict in afghanistan. when that day arrives the nation will again face pressure to cut back on defense spending, as we always have. it is simply the nature of the beast. the higher dollar base budget is now, more unrealistic, the harder it will be to sustain necessary programs we have, and a more drastic and dangerous the drop-off will be later.

so where do we go from here? authorization for more f-22's in both versions of the defense bill working its way through congress. president has indicated he has real redlines in this budget, including the f-22. some might ask why threaten a veto and risk a confrontation over a couple billion dollars for a dozen or so more airplanes? the grim reality is with regard to the defense budget we have entered a zero sum game. every defense dollar devoted -- diverted to fund excess or unneeded capacity, whether for more f-22's or anything else is a dollar that will be unavailable to take care of our people, to win the war as we are in, to deter potential adversaries, and to improve capabilities in areas where america is underinvested and potentially vulnerable. that is a risk i cannot accept and one that i will not take. with regard to something like

the f-22, regardless of whether the number of aircraft is 12 or 200, if we cannot bring ourselves to make this tough but straightforward decision, reflecting the judgment of two very different presidents, two secretaries of defense, two chairman of the joint chiefs of staff, and the current air force secretary and chief of staff, where do we draw the line? if not now, then when? if we cannot get this right, then what on earth can we get right? it is time to draw the line on doing defense business as usual. the president has drawn the line and that line is with regard to a veto. it is real. on a personal note i joined the cia more than 40 years ago to help protect my country. just about my entire professional career in

government, i've been known as a hawk on national security. one criticism of me at cia was i overestimated threats to the security of our country. i have not changed. i did not turn from a hawk into a dove on january 20, 2009. i continue to believe the world is and always will be a dangerous and hostile place for my country with many who would do as harm and many who hate what we are and what we stand for. but the reality is the nature of the threats against us has changed. so should the way our military is organized and equipped to meet them. i believe, along with senior uniformed military leadership of this nation, that the defense budget we propose to president obama and that he sent to the congress is the best that we could designed to protect the united states now and in the future.

the best we could do to protect our men and women in uniform, to give them the tools they need to tour our enemies and to win our wars today and tomorrow. please stand by this reform budget and we are prepared to fight for it. -- we stand by this. i arrived in washington 43 years ago this summer. of all people, i am aware of the realities in washington and i know the changes -- things don't change overnight. the influence of politics and parochial interests in defense matters is as old as the republic itself. henry not, but for secretary your war, was charged with building the first american fleet -- henry knox.

he eventually ended up with six frigates being built in six different states. the stakes today are very high. with the nation at war and the security landscapes steadily growing more dangerous and unpredictable, i am deeply concerned about the longterm challenges facing our defense establishment. i'm just as concerned that the political state of play in washington does not reflect the reality that major reforms are needed, or the tough choices and real discipline are necessary. we stand at a crossroads. we simply cannot risk continuing going down the same path. where our spending and program priorities are increasingly divorced from the very real threats of today and the growing ones of tomorrow. these threats demand that all of our nations' leaders rise above the politics and parochialism that have often played considerations of or national defense. from industry to interest groups, from the pentagon to the foggy bottom, from one end of pennsylvania avenue to the

other, the time has come to draw a line and take a stand against the business as usual approach to national defense. we must fulfill our obligation to the american people to ensure that our country remains safe and strong, just as our men and women in uniform are doing their duty to this end, we in washington must do ours. thank you very much. >> thank you very much, mr. secretary, for that very thoughtful -- those very thoughtful remarks. the custom of the club is to have a question and answer session.

we appreciate you are willing to participate. our question committee has come up with some thoughtful ones. the first one is on a personal level. what leadership or personal experiences as director of cia had helped you in your role as secretary of defense? how are the two jobs similar? are there major differences between the two? >> when i get out of this job i want to write a book about the challenges of leading change in large public institutions, because whether it is cia or a huge public university or the department of defense, they all have very important characteristics in common. first, they are all publicly accountable. second, they are all accountable to a legislature. third, they all get their budgets from legislature. fourth, they all have permanent cadre who will be there before the leader of rise and will be

there after the leader is gone. moseley have the opportunity just to outlast them. they all have either retirees or alumni who consider that they still should have significant influence over how the place gets run. [laughter] the reality is what i have learned at all three places is particularly when it comes to leading change, the central strategy for me has been that it is my responsibility to set the goals, to set division, but then to incorporate the professionals in the organization in figuring out how we accomplish that goal. how do we get from here to where we need to be? because the truth is, if they participate in it, if they helped to design a solution, then they will increase its and they will defended once you

have left. i've worked for too many people in the government wh came in and tried to impose change from the top and the change walked out on the day they left. the key is bringing professionals on board, working with them and establishing a productive partnership. then you have the opportunity for a permanent change. i learned that lesson at cia first and continue to apply it until today and in the defense department. >> this week, on prime minister's questions, the focus on helicopters in the current operation, the financial crisis, house scandals and local issues. prime minister's questions, tonight on c-span.

tomorrow, on "washington journal," judy feder, and governor jack marco of delaware, south dakota gov. mike rounds and gov. jim douglas. washington journal, live at 7:00 a.m. eastern on c-span. >> caught his c-span funded? >> donations? >> sponsorships? >> taxpayers? >> philanthropy? >> bund reason? >> 30 years ago, america's cable companies created c-span as a public service, a private businesses initiative. no government mandate, no government funding. >> joining us is congressman mike ross and the chair of the

health care attack force -- a task force. joining us is david clarke. let me begin with an open-ended question. what would it take for you to support a health-care bill as it moves from the house and on to the senate? >> that is a good question. let me be clear. the conservative democrats known as the blue dog coalition