i could still control with a lot more than the pounding electrocution i felt with the original. >> i'm glad you did that. >> tonight, a hearing on defective medical devices and the cost to patients. starting at 11:00 p.m. eastern on c-span2. after meeting with president obama today, senate democrats said they hoped to pass a health-care bill this year. their remarks are next on c- span. then we will get reaction from senate republicans on health care. also, the head of the fed insurance corp., sheila bair, and talks about banking oversight. . .

host: caller>> we talked about e legislation that is mellowness country. we are working on health care now. there was unity in the caucus. different ideas were expressed.

every idea was that we in a stand that, before year's end, we will have comprehensive health care reform. four out of five committees have completed their work. we're going to do, if there's any way humanly possible, a bipartisan bill. we will continue to work with their counterparts as long as we have to. the american people want health care reform and we are going to do health care reform. that is in spite of the high shrill voices that are trying to interrupt town hall meetings and tried to throw a wrench into everything. we're going to work hard. there was a lot of experience in that room. we had someone who was leading as who i admire so very much. the president did not get one standing ovation, but several of

them. he reminded me of the days when i was an athlete. the coach would give you a pep talk before the beginning of the game. you came out of their ready to take on the world. we are ready to take on the world. senator dodd. >> we thank the president. we're going to do this every tuesday at the white house, having lunch. the president was very enthusiastic about where we are. the president's strong suggestion is that we get this thing done. i have a lot of confidence in the person next to me who has put enough effort to get bipartisan agreement. we are ready and willing, of course, to sit down and nail

down legislation and to work with the house. the process is a dynamic one. we welcome people to come to our table and share their ideas, whether they are republicans, nurses, doctors, the citizenry. we are determined to get this job done. we're going to be gone for a month. in that month, have a million people will lose their health care coverage. we will return with a renewed sense of purpose. we will bring certainty and stability to the american public so they no longer have to worry that night that they no longer have coverage and that they will have care if they get into trouble. i'm going to go into surgery in a few days. i have a great health care plan and. -- health care plan.

just because i am a member of congress, it does not mean that as well. i am confident that democrats and republicans can get the job done. >> it was unenthusiastic, comforting, warm, reaffirmation, reconfirmation that health care reform is so necessary for the american people. working together, we will accomplish it. we will get it done this year. we believe that it should be bipartisan. it will be more sustainable and more enduring. the american people want us to be working together. second, we agreed that we have to get costs down because the costs are just too high. the expenditures today is just wasted. we need to bring it down so that american families do not spend

as much an american businesses cannot spend as much and that the budgets are not so high. we have to get a commitment to reform the health insurance industry. so many companies are taking advantage of so many americans, denying coverage to those with pre-existing conditions and so forth. i think this is the right thing to do for the country. the president does, too. we will get health care reform passed this year working together. we're going to get the costs down. we're led to reform the health insurance industry. we're going to get -- we are going to reform the health insurance industry. we are going to get costs down. it is so wonderful to hear president obama speak.

it is like a symphony. he is so good. he just has a together for all the right reasons. we received great moderation by our leader. we're going to get this done for their right reasons because it is the right thing to do. -- for the right reasons because it is the right thing to do. >> what makes you think that you can get it done on a bipartisan basis? >> the preference is to do it together. the american people want us to work together. the american people do not like partisanship. but the american people also do not like groups of people trying to kill something that should be done. it should be done. it should be passed, health care reform. costs will eat us alive. we will get it done, but we will

get it done together first. >> in nevada, we do not take a lot of questions. it is 115 degrees. we will take a couple of questions here. we talk about energy legislation. yes, we spent a lot of time on that. >> [unintelligible] >> we will pass cash for clunkers. >> when will you do it? >> before we leave here. >> do you think you have the votes for it? >> yes. >> as the president weighed in with more details on what he wants? >> 80% of the two bills represented by these two chairs are resented anyway. the president has been involved from the beginning. anyone who thinks that president

obama and his people have not been involved in health care reform did not know what is going on. there is not a day that goes by that i did not talk with people in the white house about health care reform. >> the main thing here is that this is so right. this is the right thing to do. when we explain with such conviction about what this is the right thing to do, the american people will begin to realize that that is the case. much of health care reform is health and trench reform. it will become quite popular. our goal is to explain what we're doing and why we are doing it, bringing costs down, reforming the insurance industry, and letting people keep their same doctors and their plans and have the trust that they want to have, when they a understand that, it is going to turn out quite well. >> the the what you to take the

lead on the allocations of the credits under the trade bill? >> i have heard from the chairmen that they're working that out. >> [unintelligible] >> we will hear from senate republicans on health care. mitch mcconnell also talks about the cash for clunkers bill which he expects will pass by the end of the week. from the capital, this is less than 10 minutes. >> good afternoon, everyone. obviously, august is when to be a very important month for all

of us to go home and have an opportunity to discuss the way forward on health care. i think there is a bipartisan agreement that we need to improve the american health-care system. but there are very broad differences of opinion about how to go about that. all indications are that the american people would like for us to slow down and try to get this right because of the magnitude of it. i think they're not interested and they have clearly expressed themselves already. all this would be a good opportunity for all of us, regardless of what orleans will be on how to deal with this issue, to go home and interact with their constituents and come back here in september with a stronger understanding of exactly where the american people might be on this most important issue.

>> when i go back to tennessee, i expect tennesseans to tell me what they have been telling me, that we are headed in the wrong direction on health care, that we need to start over and get it right. you have the mayo clinic, the democratic governors, the budget office, several chambers of commerce telling us that we need to get it right. when broken into our state, it would provide medicare cuts for about 900,000 seniors. 1.7 million would lose employer insurance. most of those would go into a government-run program duri. 400,000 of those would go into a

failing government program that already exists, medicaid. we are have businesses that will be -- we already have businesses that will be paying more taxes whe. >> i had a toilet town hall meeting last night. i am looking forward -- i had a teletownhall meeting last night. i'm looking forward to hear from the people how they perceive the impact of the things that being debated here. it strikes me that the thing that most americans care most about right now our jobs, the economy. obviously, the cost of health care factors into that and the availability of health care access. the one thing we should not be

doing is raising taxes when the economy is in recession in a way that will cost jobs to the economy. i think most people are making the connection of the cost of the proposal in the trillions of dollars paid for and financed by new taxes on small businesses which create two-thirds to three-quarters of all the jobs in our economy. last month, the issue is health care and its impact on the economy. when you have unemployment on the threshold of 10% and your economy is shedding jobs every week, anything that we do right now should not be diluted of job creation. i think that what the american people are concluding, based on what they have seen so far, is that the proposals that the democrats have put forth so far would cost the economy jobs. but they need to weigh in on

this and give us an opportunity to hear directly from our individual states. we can come back in september and pushed that reset button and talk about things that will reduce costs and improve access and will not cost the american economy jobs. >> had expected the cash for clunkers to play out? will there be a final vote by the end of the week? >> when i anticipate is that senator reid is talking about how to process cash for clunkers. i am understand that it will be completed by the end of the week. we will be negotiating over the appropriateness of some amendments to the bill. but i anticipate that it will be completed sometime before the end of the week. >> [unintelligible] >> i am predicting that we will get a vote on the proposal some time before the end of the week.

>> on health care, the democrats were at the white house today. [unintelligible] view think they really will have a bipartisan bill? >> -- do you think they really will have a bipartisan bill? >> the only thing that is bipartisan about the bills that we have seen is the opposition to them. clearly, a health-care bill that ought to pass on to have bipartisan support -- ought to pass ought to have bipartisan support. >> [unintelligible] >> there are a series of amendments that i think i

remember would improve the proposal. i would not like to speak to them on it. i will speak with senator reid about it and we will have to vote on those amendments. ok, thank you. >> you are watching public affairs programming on c-span. up next, we have the head of the federal deposit insurance corp., sheila bair.

afghanistan hold elections this month. later, we will get an update from the pentagon about the security situation in eastern afghanistan. >> how is c-span funded? >> i have no clue pierre >> may be from government grants. >> i would say donations. >> advertising for products picks public money, i am sure. >> my taxes? >> [laughter] >> how is c-span funded? the cable companies traded c- span as a public service, a private initiative, no government mandate, no government money. >> a senate hearing on the obama senate hearings financial regulation plan. we will hear about a proposal to consolidate two agencies charged with regulating banks. chris dodd of connecticut chairs the banking committee.

is is about two hours and 10 minutes. -- this is about two hours and 10 minutes. >> i have informed our colleagues that we are under time constraints. there are some boats that are coming up at 10:30 a.m. on the floor of the senate. many of us will have to attend at noon. we've agreed this morning to get right to our witnesses. i know that my colleague from tennessee would like that prospect. he has been dying for that moment for two years.

[laughter] >> when he was mayor, nobody spoke. >> no, just the mayor. we are not setting precedent. we just want to move in that direction. i just want to thank everyone for being here this morning trad. potential bank supervision is very important. we have had 28 hearings since january on this matter of modernization of regulations. this is a very critical piece. where and when to have the consolidation of our financial regulators. -- we are going to have the consolidation of our financial regulators. i will come our witnesses today. i just want to make one point. i know all of you at the table pretty well. and i know that you understand this. i believe that you care about

this as well. our job is not to protect regulators. our job is to protect the people who count on us and you and the system to provide the system and soundness of the financial markets. that is what this is all about. i understand that you get that and understand that. we need to clean the air and let people understand the architecture that will provide that sense of stability and so forth. let me start with you, sheila, and alaska to try to be brief. all of the documents and all of my colleagues o'opening statements will be entered into the record. we have some votes in an hour- and-a-half and we're going to try to move along as quickly as possible. >> thank you. today, you have asked us to address to the regulatory aspect of the administration's proposal

on whether there should be for the consolidation. the architect for any reform should deal with the fundamental causes of the current crisis. we do not believe that the case has been made for regulatory consolidation of stat ane regulatory charters. we see little benefit to regulatory consolidation and the potential for grave harm and greater risk of regulatory capture and dominance by large banking organizations. the simplicity of a single bank regulator is alluring. large swaths of the shuttle banking sector has collect back into the injured sector.

-- into the insurance sector. a significant cost to the crisis was the expectation of regulatory gaps. there was no regulation of the over-the-counter derivatives contracts. to address these problems, we have testified in support of a systemic risk council that would address regulatory arbitrage. we also support a new consumer agency to ensure strong rules and consumer protection across the board. we do not see merit or wisdom in consolidating all banking federal supervision. it would be exacerbated by his single federal regulator that embark on a wrong policy course. one of the advantages of multiple regulators is that it

permits diversity points to be heard. under a unified regulator, these could have been implemented more quickly and banks would have entered this crisis with much lower levels of capital. there is no evidence that shows that a single regulatory structure which better at avoiding the widespread economic damage of the past two years. despite the single regulator approach, other countries have suffered during the criseis. the dual banking system and deposit insurance -- the dual banking system is credited with spurring creativity and initiative. state-chartered institutions tend to be community-oriented. they provide the funding that

supports economic to growth and job creation, especially in rural areas. main street banks are also sensitive to market discipline because they know that they are not too big to fail and will be closed if they become insolvent. [unintelligible] concentrating the authority in a single regulator could hurt bank deposit insurance. the loss of an ongoing supervisory role would greatly diminish the effectiveness of the fdic possibility to perform congressional mandate. -- of the fdic's ability to perform congressional mandate. to summarize, the regulatory forms should focus on eliminating the gaps, proposals,

and reduced the effectiveness of the deposit insurance. there would not address the fundamental causes of the current crisis. thank you. >> thank you very much. i apologize, sheila, for not properly introducing new. i assume everybody knows who you are. i jumped in to that, and i apologize. don is the comptroller of the currency. we thank you very much. >> i appreciate this opportunity to discuss the administration's proposal for regulatory reform. the occ supports many elements of the proposal, including the establishment of a counsel for financial regulators to identify and monitor systemic risk and enhance the authority to resolve systemically

significant financial firms. we also believe it would be inappropriate to establish and consolidate a supervisor of all significant financial firms. the federal reserve already plays a part of this role. but the absence of a comparable supervisor for large securities and insurance firms prove to be an enormous problem. the proposal would fill this gap by extending the federal reserve holding company regulations to such firms which we believe would be inappropriate. however, one aspect of the proposal goes much too far, which is to grant broad new authority to the federal reserve to override the primary banking supervisor on standards, examination, and enforcement applicable to the bank. such override power would fundamentally undermine the authority and accountability of the banking supervisor. we also support the proposal to effectively merge dot if into the occ with the phase-out of the federal thrift charter.

by written testimony in the till to the question for additional banking agency consolidation, my first -- by first establishing the federal reserve or the fdic is the single agency responsible for regulating state-chartered banks. second, establishing a single provincial surrendered to surprise -- prudential supervisor to supervise all state banks. while there are significant potential benefits to be gained from all three proposals, there are also potential costs, especially with removing the federal reserve altogether from the holding company regulation of systemically important companies. finally, we support enhanced consumer protection standards and we believe that a dedicated consumer protection agency could help to achieve that goal. however, we have significant concerns with parts of the

proposal that would consolidate all the consumer examination and enforcement in a single agency which would complete divorcees functions from safety and soundness regulation it makes sense to consolidate all consumer protection rural riding in a single -- rule-writing in a single agency. but we believe that the rules must be uniform and that the banking supervisors must have meaningful input into implementing them. the rules would not be uniform because the proposal would expressly authorize states to adopt different rules for all financial firms, including national banks by repealing the federal pre-emption that has always allowed national banks to operate under uniform federal standards. this repeal of a uniform federal standard option is a radical change that would make it far

more difficult and costly for national banks to provide national services to consumers in different states having different rules. these costs would ultimately be borne by the consumer. the change would also undermine the international banking charter that has served us well for nearly 150 years. second, the rules do not afford meaningful input from banking supervisors, even on real safety and soundness issues. in the event of any dispute, the proposed cpa would always win. the new agency needs to have a strong mechanism to have supervisor at input into rule- making. it should not take examination and enforcement responsibilities from the banking agencies. the current process works well where the integration of consumer complaints and sensors and provide real benefits for both functions. moreover, moving bank

examination and enforcement functions to the sea fta would only distract it from its most important and daunting challenge. that is establishing an effective enforcement regime for the shadow banking system of the literally tens of thousands of nonbank providers that are currently not regulated or lightly regulated, like mortgage brokers. it to focus on this regulatory gap rather than already regulated depository institutions. thank you very much. >> thank you very much. i am happy to hear your testimony. >> before the history of the financial crisis is written, i am sure that supervisory shortcomings of all kinds will have been revealed. the crisis has also shown that

the framework for prudential supervision and regulation had not kept pace with changes in the structure activities and interrelationships of the financial sector. in a prepared testimony, i suggest it and try to elaborate the elements of an effective framework for prudential supervision, including a number of recommendations for legislative action let me confine these introductory remarks to three quick points. first, prudential supervision must be required for all systemically important institutions. it is noteworthy that in number of firms at the heart of the crisis had not been subject to mandatory prudential supervision of any sort. in improving the quality of supervision will fall short of realizing the maximum potential gains for financial stability. if important institutions can escape the rules and requirements associated with the supervisory process, that is so. second, there must be effective supervision of the companies

that own [unintelligible] large organizations increasingly manage their businesses on an integrated basis, with little regard for the corporate boundaries that typically define the jurisdiction of individual functional supervisors. there is need for close scrutiny between the banks and other affiliates within a holding company. it is not just straight for contractual ties, but managerial, operational linkages. the premise of functional regulations, the supervision within each individual firm has been delighted by the experience of the financial crisis. -- has been a debelied by the experience of the financial crisis.

together, we have acted to shut down the practice of converting charters in order to escape enforcement actions for adverse supervisory ratings. we are working together to ensure that all internationally active financial institutions are subject to effective regulation. the federal reserve is adjusting its approach to prudential supervision, particularly of the largest banking organizations. building on the experience of the unprecedented supervisory assessment program, we are expanding our use of horizontal examination to address risk- management activities of large institutions. we are creating an enhanced quantitative mechanism that will draw a multi-disciplinary group to create and evaluates and areas across large firms. these top-down analyses will provide perspective on the

bottom-up work of supervisory teams. the two perspectives will be joined in a well coordinated process, involving both the supervisory teams and washington staff. thank you all for your attention. >> thank you very much, governor. now we will turn to john bowman. >> good morning. thank you for the opportunity to testify on the administration's proposal. it is my pleasure to address this committee for the first time in my position. i will begin my testimony by outlining the core principles that i believe are essential to accomplish a true and lasting reform. i will address specific questions you ask about the administration's proposal. one, ensure the changes to

financial regulatory system addresses real problems. we agree that the system has real problems and need to real reform. but we must determine whether the proposal would fix what is broken. in the rush to address what went wrong, let us not try to ofix nonexistent problems. two, ensure regulation. one of the biggest lessons learned is that entities providing products to consumers must be subject to the same rules. under-regulated entities have a corroded and destructive impact on the system. complex derivative products, such as credit default swaps, should be regulated. 3, ensure that systemically important firms are effectively supervised and, if necessary, wound down in an orderly manner.

no provider of financial products should be too big to fail, achieving through size and complexity a government guarantee to provide its collapse. it should provide enterprises that are strong, industries, well managed, and can succeed and prosper. those who fall short of the mark struggle or fail and stronger enterprises take their places. enterprises that are too big to fail for a shortfall in the system. let me be clear. i am not advocating a cap on size, just effective, robust authority for properly regulating and resolving the largest and most complex financial institutions. no. 4, insure that the consumers are protected.

a single agency should have the regulation of products as its central mission. it should establish the rules and standards for all consumer financial products, regardless of the issuer of those products that is rather than having multiple products. the ot as does not support the administration's proposal to eliminate the office of the currency. [unintelligible] if you look at the numbers of failed institutions, must have been state-chartered banks whose federal regulators not the zero ots. you will see that the federal

government prevented the failures of the largest banks by providing open bank assistance. these institutions are not and were not regulated by the ots. the argument about banks shopping for the most lenient regulators is without merit. must have converted away from ots supervision -- most have converted away from ots supervision. we do not see any reason to cause major disruptions for the hundreds of legitimate and well- run businesses that are operating successfully. my written testimony contains detailed information that you requested about the proposal. thank you again. i would be happy to answer any questions.

>> i have to questions, if time permits. for decades -- and i have been on this committee for years -- we have had at think tanks and regulators and banking committee chairs. john, both parties recommended the consolidation of banking supervision. former have pst chairman -- former fdic chairman call the complex, outmoded, and archaic. in the wake of the last banking crisis, the clinton administration urged congress to consolidate the federal banking regulators into a single provincial regulator. we have seen administrations,

chairs of this committee, over the years, at various times in the wake of previous crises called for consolidation. we did not act. we sat back and left the system we have today intact. as a result, we have had some real costs. there has been regulatory laxity. we are now paying a very high price for our shortcomings. [unintelligible] my question is simply, putting the safety and soundness of the banking system first, is it really enough? should we not be listening to the admonition of previous administrations? people who have sat in his chair have recommended later consolidation. sheila, we will begin with you. >> as i indicated in my opening

statement, we do not think that the ability to choose between the federal state charter is a significant driver or had an impact on what led to the current crisis. tgwe do support emerging occ and ots. but that does not need to be a weak regulator for a strong regulator. i think it should be a reflection of the market. some of the restrictions impede the ability of those to undertake additional diversification. i would have to respectfully disagree as for what the drivers that when on this time

around. -- that went on this time around. compared to the other sectors, the banks held up pretty well. >> clearly, we are looking back in the rearview mirror as to what happened. that is a motivation, but it is not the sole motivation is not just about addressing the problems that occurred -- but it is not the sole motivation. it is not just about addressing the problems that occurred. the idea that we maintain the same architecture that we have had for decades is not only a question of what has occurred and whether the system responded well enough to it, but looking forward as to whether it will address problems.

>> i think it is a very important question. i'm very glad you're having these hearings. but i do not think that this is going to solve the problems that led to this crisis. i think that you have other models with a single regulator the performance is not particularly good. i think there is a profound risk. i think that having multiple the voices -- our commercial banks letter to fdic insured have not transitioned into that new system that would have significantly lower the capital that would have had going into this crisis, like what happened in europe and with the investment banks. we think that multiple voices can strengthen regulation. if you have a single monopoly regulator, there will not be

someone out there saying that we will have a higher standard or we will be stronger or we're going to question that. i think you should look at carefully at some of the european models. >> we are talking about a consumer product safety. why is that necessarily the kind of checks and balances we're talking about in the system? >> i cannot really defend the current system of some many regulators. it does not work in theory, but we have made -- but we have worked hard to make it work in practice. having said that, i think there's more you could do, if you were so inclined. you have gone from four regulators 23 prudential regulators in the proposal. you could go -- you have gone from four regulators to 3 prudential regulators in the proposal. you could bring in the holding

company regulation to the prudential supervisor. there are advantages and disadvantages in each of those steps. at the end of the day, if you put everything all in one place, it would probably be too much. i think that is probably a bridge too far. but there are things you could do to simplify things for the future. i do not agree with sheila that this -- i do agree with sheila that this was not the single contributing factor to the crisis. >> and john, do you have a quick response to my question? >> among the many reasons that members of this committee would not be happy to see the summer recess come is that there will not have to hear me say for the third time in a row that each proposal will have some advantages and some disadvantages.

as john and sheila have suggested, no one will sit down and write the system that we have now if they were starting from scratch. but having it in place, you have seen that there are some advantages to splitting bank supervision. personally, i would think that it would be very bad idea not to have the deposit insurer had a bank examination function so that the understand how banks are functioning before they fail and are then battered to resolve them. i think it is important for the federal reserve, as the central bank, as the holding bank supervisor, to have a window into how banks function would there be efficiency -- into how banks function. would there be efficiency gains in? probably. but we have already pointed out some of the disadvantages as well. >> i would agree that some of the disadvantages have been pointed but is the form that the current system holds of

multiple regulators because of the issue we're dealing with today? the principal cause, as the administration says in its proposal -- looking at high-cost loans, only 6% of them were provided by depository institutions that were regulated under the current system. 94% were provided by a shadow banking regulator. the focus really should be on filling the red -- filling the regulatory gaps we have today. >> for the record, i would think that, if you look at the record of the failure of the regulatory bodies, all roads lead to the federal reserve. they do not lead to the fdic. they do not lead to the controller. they do not lead to the community bank supervisor. just about all of them lead to the fed. let's be honest about it. i want to get into something

else. chairman bernanke has testified before this committee that this crisis has revealed that our nation's too big to fail problem is much worworse than many thout appeared after the fall of many -- than many thought. after the failure of many banks, it is apparent that the government will bail out any prominent company that will get into financial trouble. what steps need to be taken to restore market discipline and minimize the moral hazard created by the bailouts over the past year? is this a problem that will not be solved until the federal government actually it allows several prominent institutions to fail? we're going down a dead-end road with a the too-big-to-fail thing. >> we agree with you, senator.

that is while we have the priority focus to be on resolutions. we need a mechanism that can result very large financial organizations -- that can resolve very large financial organizations. we do not have that right now. i don't think we're going to get that restored market discipline. congress put something like that in place. >> i agree that we need a better mechanism to have a more orderly resolution to companies that get into trouble so that you can have more instances where you do not have threats to the system just by resolving them. i think they have to be upfront with capital requirements and liquidity requirements so they didn't get into that position and think you have more circumstances or larger -- into that position. i think you have more circumstances or larger chances where that can happen.

they have to be able to address that concern. i know that is hard. but i think you really need to do that. >> governor? >> i certainly agree with the utility of the resolution mechanism. but when you ask about market discipline, i think there's more that we need to do as well. the resolution mechanism comes at the end of the day. it comes at the time of failure. it would be better to create additional insensitivincentives that preclude the problem. i think we also need to be looking at alternative requirements for the capital structure of at least large institutions. there are a number of ideas out there that would require certain kinds of convertible debt to be in the capital structure of a company. that is good because there is market discipline, as long as it

is a debt instrument. the debt holders always want to be paid. if it gets into trouble, that debt will be converted into equity. it will create a buffer against loss and they will be subject to loss. i think that market discipline has a number of different avenues that we should pursue and market discipline itself should be pursued alongside of some other regulatory mechanisms. if i could, you know, i was not at the federal reserve. a few months ago. as i have said repeatedly, i do believe there is plenty of blame to go everywhere. but i do not think all roads lead to the fed on this. >> which do not lead to it? >> bear stearns, aig, lehman, fannie and freddie, there were a lot of problems in the system. before this crisis is over, we

will have seen a lot of failures and a lot of kinds of institutions. i do not say that to try to deflect any responsibility. in fact, part of what i was trying to say in my prepared remarks and in my introductory remarks was that i take seriously where things and did not get regulated as well as they should have and where the structure needs work. that is why we're starting to make the change we are already making cracks just for the record, who is the regulator, the -- are the making. >> just for the record, who is the regulator for the holding companies? it is the federal reserve. you are now in member of the board of governors. let's be honest about it. sometimes the bank is regulated by other regulatory agencies. -- let's be honest about it. >> sometimes the bank is regulated by other regulatory agencies. >> i do not have much time, but

i want to pick up on a couple of things. today's wall street journal had eight tough article dealing with secretary geithner when he met with a budget view, where he told the financial regulators that they should -- when he met with a bunch of you, he told the financial regulators that they should stop. i hope you will not quit. i think your honesty and candor here is very important. we recognize the role of the treasury to set policies for financial regulation, but ultimately, it will be the congress, this comedy, both sides of the house is going to set the tone and create the loss. -- and treat the laws -- and create the laws. does the testimony that you have provided today -- are those your

own views, such as it was, not any way influenced by a secretary governor's -- secretary geithner's tirade against to the other day? >> we provide -- we do not clearer statements to the treasury department. we take that independence very seriously. >> i do not think that anybody thinks we are not independent. it was definitely our testimony. >> i hope you're going to stay independent. >> the only people that i did discuss this with our fellow members of my board and the staff of the federal reserve. >> yes, we are independent.

>> thank you very much. senator brown. >> i am a little surprised by senator shelby's question. let me look at this in a different way. the investing public and the the victims of the financial disaster, which is my whole state and most of this country, has a general understanding that the regulation of financial institutions fell far short. some have the belief that the most egregious institutions found an agency that was too easy on them. in washington, we call that regulators shopping. they thought that the government was too easy on wall street greed for whatever reason. i hear -- view. there may be some turf issues -- i hear it each of you. there may be some turf issues.

you are disputing major parts of the proposal. how would you explain to the american public what the next step is? how do we fill the financial gaps in the consolidation -- if the consolidation of regulators is not the right move? why would four very smart people playing a very important role not have more agreement? if you were talking directly to the american people, what we have to do to fill these gaps so that these kinds of a gracious and awful things do not happen again? >> i think there was arbitrage, but it was between the bank and the non-banks sector. there were hedge funds and other types of vehicles vs. in the

highly leveraged vehicles. on consumer protection, there were a third party mortgage originators. they were funded by wall street funding vehicles. they were outside any type of prudential or consumer protection standards and they were not within the purview of banking regulators. my role as the fdic institution , of that sector has held up pretty well. that is why you had so many fleeing to become bank-holding companies. that was the sector that was left standing. it is hard for us because our exposure has increased significantly. we have had to do the things we have had to do to stabilize the system.

as i testified before, the arbitrage was between the banks and the nonbanks. a systemic risk council have the authority to seek this. i do think that the arbitrage between the banks and the nonbanks sector was not among the individual types of bank charters. there are many community banks in this country. many of them to have a state charter. i do not think they contributed to this. you have seen traditional resistance among community banks to regulatory consolidation for fear that, inevitably, there would be a regulatory viewpoint that would be dominated by the larger institutions if everyone was lumped in together.

there is a valid reason for state charters. community banks tend to be more local in their interests and how they conduct their lending. to try to draw the issue into the much larger problems that we had with are the trust between banks and nonbanks and the lack of regulation in derivatives is misguided. . efforts on what the american public should focus effort. >> your thoughts? >> i agree with everything shall bear just said and to point out we also regulate@@@@u @ @ @ @ @)

that is what we are trying to suggest. we agreed that a strong federal consumer protection role writer to set a single set of rules for everybody. that is a powerful change. but taking that same step up and applying that to the enforcement of the depository institution to do that should state where it works well. all that effort should go on the examination and enforcement side to the non-banking sector where there really were substantial problems that have disproportion at higher levels of foreclosure. example, in your state and many of the stage for prevented in this room. >> thank you. >> thank you, senator.

i think, if you are asking what the public should be focused on, my suggestion would be, too big to fail. that is not the only problem, by a long shot, but to me it continues to be the central problem, the ability to avoid the moral hazard that comes with too big to fail institutions. as i said a moment ago, i think we need a variety of supervisor and regulatory tools to contain that problem, whether it is resolution, bringing systemically important institutions into the perimeter of regulation, making sure the kinds of capital and liquidity requirements that systemically important institutions have will truly contain on toward risk- taking. i think we are going to need a broad set of activities, but too big to fail was at the center, not the only cause, but what at the center of the crisis, and that is what i think we all need to focus on. the only other thing i would say quickly, it harks back to a colloquy you and i had a couple

of weeks ago when i was testifying, when you and i were talking but attitudes and orientation and how people in the congress and regulatory agencies and the administration think about issues and problems. it is not easy to insure against people losing interest in issues. but i think that is a role that in a system of government that has a lot of checks and balances, we have to think about. how do we try to institutionalize skepticism, institutionalize critical thinking, to look at developments in the financial world so that we don't just say that is just a market development, it must be benign, but instead being able to distinguish it intelligently between the nine, useful innovation and one hand and building problems on the other. >> thank you. >> thank you, sir. one of the advantages of a panel on this, you get to agree and dispel the notion that we disagree on some anythings. i agree with my colleagues.

but i would also like to focus on our veterans position between banks and nonbanks. the cftc provision goes along ways toward dealing with it -- cfta. you don't get to sell a product at a non-regulated entity under different terms of conditions from a different regulatory structure that you would and depository institutions or otherwise related entity. i think that is one of the critical components of the administration's proposal, to fix that gap. >> thank you. to recommend mr. chairman. >> senator corker. >> thank you for your testimony. i also, like most people did, read the story this morning in "the wall street journal" regarding the meeting on friday, and generally speaking, did it captured the essence of the attitude? >> you take that one. [laughter] >> very briefly, i just -- want to move on. >> it was a candid conversation

about the institutions, our agencies different views on the subjects. >> generally fair article? >> a lot of it was true. >> ok -- [laughter] i guess what i would like to get at is it is my understanding that the original draft had the national banking supervisor not being actually a part of treasury. i think we have seen today -- and we have known for some time -- treasury can exercise -- tried to exercise influence over organizations and my understanding is in the beginning, the banking supervisor was not a part of treasury. at the last minute it was put back in. i just wonder if one of the things we ought to be looking at is absolutely ensuring that this banking supervisor -- even more

independent than has been laid out. very briefly. >> may i respond to that? >> adulate this may surprise you, but i was a strong advocate of keeping it within the treasury but subject to the same fire walls we have now, which dose -- does give the agency is strong ability to operate independently. i believe creating a new board, if you have three other regulators still in existence and everyone has forced them i'd think it will confuse things. it is critical, however, you do have the statutory fire walls. that is a position that i actually advocated for. >> any different opinions in the panel? >> as an independent agency, i think the types of supervisory functions that occ and ots perform, and will look at them in terms of the front line

prevent -- prudential supervision of the banks we ensure. i think there are some merits making it independent. i think you do want to make sure it is as and solid as possible for an nea -- from any type of influences -- as insulated as possible for any influences. >> i think i have actually been very supportive of our chairman of the federal reserve. yet at the same time there is no doubt the federal reserve had some failing in this last go around. i read your 2005 federal reserve system purposes and function document. it actually does, for what it's worth a mistake that one of your responsibilities as maintaining the stability of the financial system and containing systemic risk that may arise in financial markets and providing financial

services to depository institutions. so i think it is fair to say that in essence you sort of did have responsibility there, and i am wondering how harboring all of that at the federal reserve would not alter, if you will, be a bit. i think all of us understand today that we need to be more concerned about systemic risk. i am sure the fed does, too. and i say this with respect to the organization. but obviously with concerns. i am just wondering what would be different if in fact the fed was a system of regulator, the system of regulator? >> first off, senator, i don't think there are any proposals on the table that would really make the fed a systemic risk regulator in a sense to be able to swoop in anywhere and anytime saying we need to do something about this. the proposal that we endorsed was making the federal reserve the consolidated supervisor of

systemically important institutions. i would say in direct response to your question, there is certainly a responsibility there. and i would certainly be the first to say that responsibilities at all the financial regulators, including the fed had, were not exercise as effectively as they ought to have been. but i would also say that when you give an entity responsibility, you do have to make sure you give it authority to achieve that responsibility to fulfil it and you have the mechanisms that would allow it to do the job. and when you have a circumstance in which large institutions which turned out to be systemically important, i think, in some cases come to the surprise of many, were not within the perimeter of regulation, it was obviously not going to be an easy matter to contain the activities of those institutions, including a lot of

the wholesale funding and a lot of the very tightly wound approach to securitization, that was a major contributor to these problems. so, i guess i would say, first, need to make sure that the appropriate authorities are present. second, as i have often said, there needs to be a real orientation of our regulatory approach more generally -- and i mean the system. and, third, the federal reserve i think needs to take more advantage of the comparative abilities that it has. that is why we wanted to move forward, to make use of the economic and financial expertise to provide a monitoring of and a check upon the on-the-ground supervisors. that is where the advantages lie and that is where you bring together. >> one last question. i know there is differing thoughts on too big to fail, but each of you feels that it is a big issue.

i know i would like to see a resolution mechanism in place, much like chairman bair proposes. mr. dugan, i don't understand how, if you continue to give treasury the ability to solve the problem with taxpayer money, if they deem it an important thing to do, i don't understand how it creates any market discipline. it seems to me leaving that they got line in place defeats all market discipline. i don't understand how you can cause those to measure up or how we can craft something that actually worked and calls people like the senator of ohio posset constituents and mine, which i think are different in thinking about some things, i think it would agree that is wrong but he would propose to keep it in place and i don't understand that. >> i think there are ways have

to limit it. presumptions to make it more difficult to exercise. i think there are measures to take up front so you don't get yourself in that position beard my only point, though, is this -- that position. my only point, though, it is this, if you need to take action to protect the financial stability of the system, i don't think we should tie the hands of the government able to do it in a moment's notice if we have to. i don't ever want to be in some of the weekend situations i was in last fall. we did have wreck -- mechanisms that ensured a wide variety of government was involved. people can second-best some of the judgments, but i really do not think it is a good idea to completely forbid the ability to address system and situations and crises of we have to. -- systemic situations and crises. >> thank you all for your testimony. i gather from the panel that, in fact, there is a sense that the

un may be what the administration is promoting, which is merging ots into the occ, there isn't a view that there should be further regulatory consolidation. my question is, if we don't do that, then there still seems to be the opportunity for regulatory arbitrage. weather regulated companies would choose what they believe to be the most -- regulator. so what mechanisms can we put in place to prevent that, to place to prevent that, to the restrictions of a troubled bank to switch charters -- is that enough by itself to prevent our regulatory all were charged that we want -- the regulatory arbitrage that we want? >> i think that congress has

provided some mechanisms to contain regulatory arbitrage -- a lot of restrictions that press -- that white and national banks had been made to apply to state banks that they get federal deposit insurance. that is an important backdrop. the provision that you just referred to is an important one, one in which the agencies have already tried to act. i was going to tell the chairman as. we had a break-in at a hearing in march were chairman bear turned to me and said -- where chairman bair said that day 04 enforcement actions -- eight seek to switch charters when they see an enforcement action coming. she thought that ought not happen unless it is a sound institution and unless you do not have the enforcement actions

pending. you ought not be able to avoid supervisory raising -- ratings. some institutions at shifting charters that have become reasonably well known, they engage that sort of enforcement. this is an important gap the plug. >> anything else? is it bad enough? >> it is very important. we have had a number of institutions and its relations in which people have switched charters to avoid supervisory action. i totally support the action that we have taken. if we want to put that into legislative language. that would be a good idea. we wanna make sure that we do not change it. >> i would agree with that and we indicate that in our written testimony. we're not the chartered entity, and if it decides to ship, we do not have a role in that.

it is in our interest to make sure that we have supervision and we do not want charter conventions to you -- to be used to undermine that process. we had a conversation about this a while back. we want to make sure that it is there. >> i will join senator reid in that effort. >> center menendez, if i could. one of the charter is being used as an example of an arbitrage opportunity was the choice by countrywide to move from one regulation to another. this was the march of 2007. was march of 2007. in doing so, countrywide brought approximately $92 billion of assets to the ots. we undertook extensive investigation by the fed, including fed bank of san francisco and others as well as state regulators within the

fed's holding company jurisdiction. granted the charter to countrywide. one of the things that seemed to be lost in the discussion is that the three months or four months before countrywide came before ots, citibank took two historic thrift charters totaling $322 billion of assets to the national bank charter from the federal thrift charter shortly after countrywide came, capital one took approximately $17 billion in assets from a thrift charter to the occ. i would suggest that the mere action of an entity, a business entity, choosing to chains -- change its charter on its business plan in and of itself does not necessarily suggest they are fleeing. i just wanted to make -- >> i appreciate that. let me ask a question. several big banks have come here and argue before the committee that we shouldn't have a consumer financial protection agency because it is dead to

separate safety and soundness regulations from consumer protection regulations. but that argument, at least to me, doesn't make much sense because safety and soundness regulations and consumer protection regulations are currently together in the same agencies. and that very system failed miserably to protect middleclass american consumers. . >> the fdic and the acc have no power to write consumer rules. we examine and enforce, so that

has been separated already. i think the bank regulators -- i don't want to speak for others, but the bank regulators are generally supportive of this. the choice was between being a bank or a non-bank, and being a mortgage broker with little regulation, you could original laws without anybody looking over your shoulder. aggressively marketing these teaser rate to 28's and 327's. the agency, this new agency, is providing rules across the board for banks and non-banks, and i think, as we have all testified, that keeping the examination enforcement function with the bank regulators for the banks and having this new agency focus its examination enforcement resources on the non-bank sector, where there is not much oversight at this point, i think would give the consumers across the board, whether they are dealing with the bank or non-banks, some base level of

protection, and the right to the making sure that those rules are enforced and adhered to. does that answer your question? >> to you want to get in? >> i agree completely with everything sheila just said. we have examples of a number of ways in which integrated safety and soundness and consumer protection supervision of supervisors has brought together problem -- race and found issues for both safety and soundness purposes and consumer protection purposes that otherwise would not have been found under the current system. we believe -- that the believe the examination and supervision function in place -- examiners are good looking and rules that are written, and to the extent that a new agency writes strong rules, they will be complied with by banks with this function better than any other alternative model. >> my understanding from the panel is that you are all in

support of the consumer financial protection agency? >>, senator, that is not true. the federal reserve has not taken a position one way or the other. >> are you going to take a position? >> i would not anticipate it. we were specifically asked, i guess we would at least discuss it among ourselves. i think our effort at this point has been to point out the virtues of integrated supervision and regulation of consumer products, along side of the obvious virtues of a separate agency. >> thank you, senator menendez. as senator bunning. >> thank you, mr. chairman. i am happy to see all of you today. after you kiss the ring of the secretary of the treasury, you finally got out of the room, and you are tear in person to testify -- you are here in person to testify, independently. that is nice to see that.

mr. tarlow c-span.or-- tarull.oi want go back to something you said earlier. he said the fed wants the authority and power to enforce. we gave you that 14 years ago, more than 14 years ago, actually. it is 15 or 16 years ago. and you did not write a regulation for 14 years to govern the banks that were under your control. or the mortgage brokers that were under your control. i know you're not at the fed. that is not a problem. the problem is that the fed had the ability to act and did not. so you might understand some of us not being agreeable to giving you more power when you failed

in enforcing the power we gave you. for your information, you can take it back to a chairman bernanke and the rest of the board and say, "it took you, mr. bernanke, two years after you became chairmen to write a regulation on mortgages, and it took chairman greenspan 12 years not to write in, so we are a little reluctant to give at the fed knew additional authority." i just happen to agree with chairman bair on when the rubber hits the road, they are there to make something happen. now, our panel is trying to figure out how to stop the robber hitting the road -- in other words, to prevent systemic risk from becoming too big to fail. that seems to be the major

problem. senator worker brought it up earlier today -- senator corker brought up earlier today, about we really need ideas, because we seem to have failed by not giving the authority to the right person, or the right person not in forcing the authority we gave them. my question to you is what additional authority to you think we should give the fed? >> senators, as you know, i agree, personally, not a board position, with you that the fed to too long to use its existing authority to enact the consumer protection associated with mortgages. i was referring a few moments ago, and i will allow the rate on and now -- i will elaborate

on now, to provide the authority to any systemic institution. as you know, a year and a half ago, that statement would have, in practical terms, it meant that a whole set of institutions -- the five freestanding investment banks -- would likely have been brought in by law to the consolidated supervisory situation. because of the financial crisis, and the fact that a couple of those institutions are no longer with us, and that others have become a bank holding companies, the immediate practical importance of the authority would not be as great as it would have been a year and half or two years ago. there is the possibility that an institution that has become a bank holding company in the middle of a crisis, in order to get the interim writer -- impr

imatur, would decide it is not like being a supervised entity and would -- >> we could prevent that. >> absolutely. and secondly, in the future, if other institutions grow or activities migrate from the regulated sector to other institutions, we would want and make sure that any institution which itself becomes systemically important would also be subject to consolidated supervision. that is what i've is referring to earlier. >> sheila, could you expand on the ability of the fdic to preempt -- in other words, to get in front of the foreclosure or the shutting down of -- in other words, looking prior to with your regulatory regime into

banks that you have under the fdic jurisdiction? in other words, preventing. >> preventing, exactly, and we all have things we wish we had done differently but i think congress did the fdic helpful new tools that were finalized in early 2006 to make risk-based adjustments to our premiums every charged for deposit insurance, because at least for insured depository institutions, this helps us provide economic disincentives to high-risk behavior, and this is a tool we have been learning and use it and will continue to refine, but it has been helpful, i think. the big problem -- the shortcoming we have found is that when these larger entities get into trouble, so much of the activity is now outside the insured depository institution, that our traditional resolution mechanism does not work, because we can only resolve that is in the insured institution,

which is why we believe it would be very helpful to us, as the fdic and collectively, to get ahead of this. first of all, it would be a strong disincentive to we need more regulation, clearly, of these large institutions, but we need greater market discipline, and the certainty that investors and creditors will take losses if they come to the government for help -- >> if an entity is listed on an exchange, would into the securities and exchange commission -- into the securities and exchange commission have some kind of ability to examine all of the aspects of that institution? i'm looking at aig, for instance. >> i think that generally it is the holding company -- >> correct, it is the holding company. >> i think the sec's regime is not on prudential supervision

but investor protection, and it is a transparency regime. they do not do safety and soundness overside -- oversight of listed companies. >> thank you. >> senator tester. >> thank you, mr. chairman, and thank you, panelists for being here today. i think we all agree that the gaps exist. i think we all agree that we still have not sealed those gaps up. and so, i guess, referring to the testimony from a gentleman on the second battle -- panel, he writes and recommends creating a world-class financial insufficient specific regulator insufficient specific regulator at the federal level -- very close to what i have been

mine. he lays out a system of critiques. you have to address this in some of your other questions. going to what the center menendez asked -- going back to what senator menendez past, ceiling these gaps by rulemaking or some other method. i am not sure i got an answer to that question. i wanted to share your thoughts as concisely as possible, because each of you could burn for men's and 50 seconds with one answer if you wanted, as to why significant reform in this direction is not the direction to go. taking off your hat as your individual apartment leader, because as someone said i was going to dissolve your farm, i would be upset with it. how can we get these gaps closed without doing something like this? why would this not be a good

idea? go ahead, sheila. >> i can, that choice, if you will was not up on banks as being a bank or not, and being less regulated outside the banking sphere. that is the irs charged that needs to be addressed. >> and you're saying that i could not be addressed with one? >>, no, because consolidating what we do for a depository institution. that would not expand beyond that heavily regulated area. it could for risks that are systemic and nature, you would be able to get this is system a choice, which would quit -- include the sec and others the ability to go across systems and require additional capital and leveraged where needed and mitigates systemic risk. that would be across sectors.

>> senator, i do believe you could do more streamlining, move more down in the direction you are talking about. we do not have an ideal system. but as you move down, there are issues you have to confront. if you want to have an effective deposit insurance corp., if you go for a long time without having any bank failures, they will not have a lot to do, and will know the system very well if they do not supervise banks. likewise, the federal reserve has some things to offer to the supervision, particularly the very largest institutions at the holding company level that are engaged in a lot of nonbanking activities, and to think that a banking supervisor would do all that as well without having a benefit raises questions. >> senator, i would say, trying to be succinct, that the most important gaps to fill it is making sure that every systemically important institution comes under the

barometer of regulation, and secondly, what we were discussing earlier, which is to say that the assurance that there be charter convergence motivated by efforts to escape enforcement and bad ratings, and just be clear, it would be a perfectly good idea for the congress to legislate on that matter so that in the unlikely event that our successors did not share the same view, that they could not go in the opposite direction back to any situation which charter conversions could be done for the wrong route reasons. >> i understand that, but what you're saying that is that a world class institution, a specific regulator, could work? >> i actually think that, as sheila suggested earlier in the hearing, that what we have learned in this crisis is that there were a lot of different models of supervision and regulation around the world. none of them performed particularly well. that seems to me more of a

lesson in than anything about a particular structure or anything else. none of them performed particularly well. >> i would pick up on the point that your concept is a world- class financial institutions a regulator. one of the lessons that we have learned, and sheila has mentioned it a couple of times, is that we have banks and non- banks, providing the same kinds of services in a different structure. if you are a financial institution, you have world class regulators, currently. if you don't, you are operating in a less than regulated or unregulated requirement for it if you wanted to close that gap, there is a process by which you can do that, starting with the cfpa, the administration's proposal. the difficulty is how that is carried out. we suggest as bank regulators that we can do it more effectively. but that is the start. you have to start looking at things like capital requirements, capital structure, for those who are not financial institutions.

>> ok, currently, have made any progress -- have we made any progress, and not necessarily -- we as a general group -- toward regulation of derivatives and credit default swaps and those sorts of things? are we in the same boat as a year ago? >> i would say that we are. >> everybody agree with that? >> yes, and that requires legislation to fix. >> are we concerned about that? >> yes. i think it's huge. >> mr. chairman, have you gotten recommendations from these folks are anyone else on how to deal with these? >> we are working on legislation that comprehensively deals with this, and hopefully we can do that and come back in the fall but that is the purpose of these hearings, to bring these ideas together. >> as anybody given concrete ideas --

>> written -- there have been all sorts of recommendations made. i will say, jon, that senator reed and senator bunning are working and an idea -- and number of our colleagues are working on various ideas to be part of a larger bill. >> i think it is someone could read it is somewhat distressing that, quite frankly, from my perspective, and i'm not an expert in this field at all, we have a lot of people trying to do good work, but there are still gaps, obvious gaps, and then at the banking level we have a myriad regulators out there and if i were a banker, i would be going crazy. i really would not know which person to be knowing who i have to deal with -- let's just put

it that way. and then if you take into consideration -- sheila, i think he said that community banks were not really a problem, but they are getting pressed as hard as anybody, as far as regulation goes. i think this is an opportune time, in the middle of a potential -- not a potential -- middle of a crisis to take a look at our regulation system and say let's simplify it. let's make it lean and mean and simplify it. i don't think that can happen unless we are willing to think outside the box and do things differently than we've done in the past. thank you all for being here. >> thank you very much. senator vitter. >> ms. bair, i wanted to ask you a few things that are a little off topic, but are important, and that has to do with the recent actions of the financial accounting standards board with regard to bringing certain things up at an off balance sheet, on balance sheet, and what impact the will have on

institutions. how will fdic to the consolidation of previously off balance sheets entities, and in particular, will the agency require additional capital for assets brought on balance sheet? >> well, yes, banks must follow u.s. gap, so if those of the accounting rules, the capital -- more assets are coming on balance sheet, then capital levels will be impacted accordingly. we still have concerns about the timing of all of this. we support the general direction of bringing this all back on balance sheet. but the timing still dismiss some heartburn, whether they need to be on this accelerated -- still gives me some heartburn, whether they need to be on this accelerated from work. the rules written now, as i understand, even if he retains some portion of interest, the whole securitization might have to come back on balance sheet, and keeping people having some

skin in the game. i think there are a lot of issues and questions about the timing, but we cannot control that. we cannot file letters and that is about it. but banks must follow u.s. gap. >> of the capital ratios set in law -- >> yes, they are set by statute. there is not a lot of flexibility there. >> not flexibility for phasing? >> not very much at all, no. >> senator, i think that traditionally, the leverage ratio follows gap completely. there can be variations, and at times, it has been more restrictive than cap. there is some flexibility to look at this and phase it in at some time. that is an issue that i think all the regulators are looking at now to address, try to address some of the issues the chairman just raised. but i think that the bottom line

is that this stuff is going back on the balance sheet and banks will have to hold capital against it. it is a matter of timing and how it gets things done. >> i don't think anybody is arguing about the fundamental issue, but i am concerned with timing and facing, because it could have negative consequences if we are here tomorrow overnight. what is the current thinking about how that should be handled? >> i think the regulators are still discussing how this affects regulatory capital. at the accounting rule becomes effective at the end of this year. beginning of next year. and how the regulatory capital rules respond to that is something that we are discussing and providing some notice to the public shortly. >> when do you think there will be fairly clear guidance for institutions about what to expect and what time table and what facing, if you will? >> if i had to guess, and this

is an interagency process, i would say weeks, not months. >> and i assume all the agencies and regulators involved are in discussions about this? >> it is an interagency role as cap requirements like this always are. it is a discussion among the agencies. >> does anybody else have comments about that? ok, that is all i have. >> senator reed. >> since countrywide was brought up, i want to make sure i have some facts right. it started off with the national bank subsidiary. you regulated the bank, mr. dugan, and the fed regulated the holding company? under your policy in case law, the subsidiary of the affiliated mortgage company was not subject to california law? >> so we regulated the bank, and

it did a portion of its business inside the bank. it did all of the subprime lending outside the bank, not in the subsidiary bank. >> it was subject to california law? >> but the bank itself was not subject to california law, and it is also where they did not do their subprime lending that caused them a number of problems. >> prime lending it was an entity that was subject to california -- a prime lending was an entity that was subject to california law, attorney general review, all that? >> at that time, before they switch charters, yes. >> did they do that, to your knowledge? what completed the use? -- what template did they use? >> you will have to ask the regulators. historically, there has been this anomaly where the banking

company gets heavily regulated, and the holding company affiliates were not subject to the same requirements for annual inspections, and that is a thing that needs to be fixed, and the federal reserve has been doing more on that area, but it is not the same, and i believe it should be. >> let me switch to mr. bowman. when countrywide came to your supervision, you were the holding company supervisor and also of the bank, i presume. and the company that the bulk of the subprime was a california-regulated market and it -- california-regulated mortgage entity? >> i don't remember the percentage of california as opposed to new york or other states. >> when you, your organization, reviewed and inspected these holding companies, did you notice anything?

did you inspect them, or just the fsb? >> we spent a lot of time with the fed and the occ earlier in previewing for what it was that was coming our way. we also convened shortly after granting the charter. the charter was granted in march 2007. we convened what i call a regulators conference, where we invited at had a regulators from many states come in and discuss with us some of their particular concerns, if any related to the operation of the if it's within a holding company structure, including new york, california, others. >> did that alert you to potential problems? >> yes, it did. it started to, sir. >> we had come a few hearings ago, mr. meltzer and doctor rivlin, who had a longtime association with the federal

reserve. their recommendation was that the federal reserve should get out of supervising entities and concentrate on the issue of the monetary policy, and perhaps other issues. behalf holzer -- i'll let you answer last, are, if you have an opinion of of this. but to the other panelists, earl sauropods follows this in by this and does not perform oral. federal reserve follows this advice and does not do this, what is your general comment about that? >> but that is the holding company supervisor for the bass majority of the large institutions. you would have to create a new agency there. >> i think that you could put all holding company supervisor

and a bank supervisor in the same entity. you could also do it for smaller institutions and a lot of institutions were the only subsidiary of the company is the bank, there is some logic to that. but where you have companies where you have a lot of different businesses engaged in non-banking types of activities, that is where the particular expertise of the fed because of its closeness to the capital markets, its international, central banking, all of that comes into play. replicating that would be a difficult agency to try to recreate it. >> mr. bowman, if you could be quick. >> you could replicate that aired the difficulty would be dealing with state-chartered organizations were you did not have a federal regulator.

-- do not already have a right to a little like the occ or ots. >> if the fed is the regulator, you have to be able to work with what is now the deference to functional regulators, which we have identified as a problem. you might want to put that into your answer, too, governor. >> thank you, senator. you know, people are attracted, particularly once people get out of government or who have never been in government, to need solutions that look great on paper. i think that anybody who has dealt with this crisis and financial supervision on an ongoing basis will tell you that the whole point about the financial sector of our economy is that it reaches everywhere and it affects everything. and if one is looking to a central bank to perform the dual

mandate given to it by the congress of trying to maximize employment and achieve price stability, i don't think there's any way that without having an awful lot of attention to financial stability. to achieve financial stability, one has to have an influence upon the major kinds of financial activities which are going on in that -- performed by the larger institutions. i think the interrelationships between monetary policy aims and goals of financial stability really undergird the case for our central bank and central banks around the world of being involved in supervision. point two, a graphic

illustration of what can happen when the central bank is not closely involved in supervision was observed a couple of years ago in the united kingdom, where, following the decision to have a single financial services at the ready with all supervisory responsibilities for all kinds of financial institutions, the bank of england, the central bank, was not involved in supervision at all, and when a significant financial institution, northern rock, failed, the bank of england was not in a position to be able to make judgments about the failure of the iraq -- failure of northern rock and within the system. you have a robust debate within the uk now as to whether they need to return authority to the bank of england in order to coexist, i assume, with the financial-services authority. there have been some proposals to put everything back into the

bank of england. i personally would not think that would be a good idea. you raise the question, the issue of the ability to get information and enforce where necessary. it is important, if you are going to ask an entity to perform a role consolidated supervision, you have to make sure that they have the tools to do so. now, as it happens, right now there is, and i have no reason to expect there will be, quite a good relationship between the fed and the controller with respect to banks within holding companies, but we need to make sure that sometim kinds of information that are not gathered in bank supervision or, for that matter, supervision of other kinds of regulated entities, insurance entities or other entities, can, if necessary, be obtained in order to provide the kind of supervisory oversight of the whole institution that you are asking about, or looking for.

i don't personally anticipate that there is going to be lots of utilization of such a thing, but i think you do have to have that kind of backup authority. >> i have gone way over my time. i'm abusing -- >> just if i could very quickly responded on the functional by the latter point, it may go to for the way it is now, but the way the administration has proposed it has pushed it too far in the other direction. >> point noted. thank you, my colleagues. >> senator martinez. >> i want to ask about the proposal of the in administration regarding the elimination of restrictions to interstate banking for in state banks. communities in florida would be greatly concerned about that. i wonder if aggressive ranching

did that contributed to excessive risk-taking, which, i desire to increase market share, may have had a lot to do with the problems we have seen lately. eliminating branch banking -- how would that change the competitive landscape? >> senator, the fdic has not taken a position on a particular provision. we don't have a corporate position on it. >> i do not think it would be a good idea to reimpose limits on interstate branching. right now there are some limits left for doing your first branch into a state. but basically, the decades-long restriction on them gradually evolved over the year to prevent interstate branching, i think it did permit more diversification geographically, which is helpful in some circumstances.

i would personally not be in favor of for the limits. -- of further limits. >> i would just say that you alluded to certain the circumstances in which interstate operations became a problem. i think that can be the case. but that is where it is important to focus on business model of the entity in question, and it ought not to be allowed to engage in unsafe and unsound practices, whether they involve excessive branching that is unsupported by sound business plans or other practices. >> let me point out that thrifts enjoyed the ability to branch interstate without restriction. with community banks, my impression is that that privilege has had some impact, but i am not certain how great. >> my colleague from montana brought up the testimony from mr. ludwig, i want to go into

another area of his testimony that i found very interesting. he makes the point, and i'm sure he could make it much better than i, which he may get a chance to do later, but he would suggest avoiding a two-tier system that allows the largest too big to fail institutions over smaller institutions. he makes the point that perhaps it would be also two-tier regulators, the best light it is in one system and others in another. the--- to regulators in once -- the best regulators in one system and the others in another. and not treating a bias and the system that would be in favor of those institutions to develop over those that were not too big to fail. >> there are a couple of questions, one being weather should be tier one entities

designated as to begin fail, regardless of the occ and oversight. and weather as part of regulatory consolidation that you have a regulator based on size. we have concerns about designating institutions formally as tier one. i think you could probably say he was not, based on asset size, be -- you could say who was not, based on asset size, be systemic. if you don't have a right -- if you don't have a resolution system, it could be problematic. in terms of bank regulation, and like consolidated holding company supervision, -- are like consolidated holding company supervision, you should have a federal charter and state- chartered we have a fairly large state chartered entities. the charter choice, i think, is

a good one to have. you do want to have not given regulatory policies, but perhaps ones with -- more immediacy of it dealing with the state level banking supervisor is helpful. i would maintain that along the state federal charter as opposed to size limitations. >> i know we have a vote, and i don't know how much time have left, so i will leave at that. >> thank you. senator merkley. >> i wanted to start by asking the governor -- it is my understanding that some problems at citigroup and other major institutions result from moving risky activities back-and-forth between the holding company and national bank to minimize supervision. my question is whether by creating a similar structure, instead of the fed and the occ, it would be the fed and national

bank supervisor, whether we are creating the same risk in the new system of moving activities back and forth. >> senator, i think that under any system, you have got to have a set of requirements which apply across the system would to minimize the opportunities for regulatory arbitrage. that means within institutions and it also means between regulated institutions and non- regulated institutions. i would say, without talking about any specific institution, that i think there are certainly more circumstances in which institutions may have taken advantage of different applicable capital requirements, or bundling things in one form and moving them around the entity, and that part of what needs to be done is to take regulatory steps that minimize those opportunities. the senator was asking earlier

about -- senator vitter was asking earlier about bringing off balance sheet assets back on to the balance sheet. that is one way to combat regulatory arbitrage. >> do you think would make more sense to have a holding companies and the banks under the same regulatory agency? >> i don't, actually. with respect to small holding companies, particularly those that have only a bank -- it is basically a shell, and there was a bank, no other entities -- by now the additional holding company supervision is quite modest. as the bank holding company picks up additional activities, if it does any of its own capital raising, if it has even a small additional subsidiary, if it does management from the holding company level, that is when an independent scrutiny of those activities seems a

valuable. as you get to a bigger institution, even more complex institution, it seems that the task becomes more specialized, because you are looking not just at immediate impact on the bank, although that is important, because we are protecting the deposit insurance fund, but you are now also needing to examine how the whole entity is creating, can be creating risk in an of itself that involves all the right kinds of regulated entities that are acting in parallel. that is where we do need a different approach which looks at a holding company as an integrated hall, supplementing and complementing the rigorous functional regulation that takes place in the subsidiaries. >> please be very quick.

i have a second question. >> one area i mentioned earlier, there are times when there are activities in a bank and holding company that of the same tight but are difficult -- but are subject to different levels of supervision. >> we have suggested in our prior testimony that larger institutions have their own resolution plans said that they could be liquidated very quickly if they got into trouble. there would need to be greater legal separateness in the bank and what is in the bank versus resolution that is very complicated because of the interlacing -- the interrelationships between banks and non-banking entities. it is hard to tell the difference on time. and there is a provision which restricts banks' being used as sources for the holding company. it is supposed to be the other way around. . to -- the fed has the

authority to approve these requests to move more higher risk assets into banks where they are funded with insured deposits. in terms of the incremental step, we would very much like to have a statutory role in that 23a approval process. 23a approval process. >> i want to get senator in before the vote. senator bennett. >> probably given the time, this will be more of a statement that you can ponder that question that i want answers to. but i would like to get some answers later on. it will come as no surprise that i want to talk about ifc -- ilc. no one has discussed the ioc charter in their written testimony. the growth of ilc's has been one

of the great successes in financial services markets. they are the best capitalized and safest banks in the country. they were in no part a contributor to the financial crisis. they provide credit in places where it has not been available for comment niche markets, a diverse set of products, and the administration's proposal says to eliminate them. i find that incredible. we talk about lehman brothers, cit, all had ilc's and as they wound down, those with assets that were the crown jewels. the ilc's had the most value. and yet the proposal is to eliminate them and eliminate the charter.

you made a comment that the center of this crisis is too big to fail, and much of the discussion has been in that area of two big to fail. may i respectfully suggest that the center of the crisis is not too big to fail. too big to fail as a manifestation that came out of the center of the crisis, and to put it in very much layman's terms, the center -- the crisis was caused because of a game of musical chairs with respect to risk. and we build more and more risk into the system because while the music was playing, more and more institutions past the risk on to somebody else, thinking, to use the phrase that sheila used, "i have no skin in this game any more." of the skin being this particular instrument.

it starts with the borrower. he has no risk whatsoever. there is no equity in the house. he is getting 100% of loan. sometimes it is a liar alone. the broker who arranges the loan has no risk in the game, because he passes it on to the lender. the lender has no risk in the game because he passes it on to the gse. the tse has no risk, because with the rating agency that has no risk, it has rated it, and he can pass it on and securitized it to somebody else. at every step of the way, somebody makes money -- on a fee, a commission, whatever it might be. and when the music stops, it turns out that everybody at risk in the game, because the whole thing collapses. i would like to know a regulator

that can focus on that question, not how big you are, but where are you in this chain of musical passing on of risk, musical chairs, if you will? no more loans in the beginning. no more liar loans. brokers, you have to have some kind of risk if you get involved in brokering this loan, so that you will then, by market pressure, do your job better to see to it that you do not pass a bond with the letter maintains some kind of risk as the chain goes forward. the gse maintains some credit risk. the rating agencies, he will -- the rating agencies, you will get a risk. nobody had a risk, and the bubble grew and grew and grew, because everybody was making money with no exposure. that is the problem that i want to solve with this

restructuring rather than working around some of the turf battles that we have talked about. i will now go save the republic and you can respond -- [laughter] to chairman warner. >> anybody want to respond? >> i will just say a word, since this will be recorded. i actually agree with everything senator bennett said except that i think too big to fail played exactly into the narrative that he gave us, because when he was talking about the the gse's, some of the biggest institutions of all, regarded too big to fail, it was at the gse's is not the only problem, but it is a very important problem. i should be careful about speaking for people on the panel, but with respect to things like making sure that risks are properly assessed by

entities, and making sure that compensation systems in entities accurately reflect the risk and that employees are assuming, are important pieces of a reform package. >> i would say, speaking for myself, i would agree that, as i said, the ability to choose a state charter, a federal charter, we don't think is a driver or contributor to this process. we are not aware that the administration is going to propose that. speaking for myself, i do not see that they were in any significant way involved with what was going on. >> let me go ahead and ask my questions, and then i will call on senator schumer. spank you, senator schumer. -- thank you, senator schumer. i want to go back to where chairman dodd started. this question of a single regulatory depository read a

letter. some of you raised legitimate concerns. i know that folks on the second panel will perhaps have a different view. paul volcker has a different view. past chairs of had a different view. your point was valid, how you make sure you don't infringe on the insurance function. i think you can achieve that i have a backup authority and going in and checking those institutions, your ongoing role as an insurer and what senator corker and i have talked about, and expanded resolution authority. i also tend to think that the notion of an enhanced system at -- enhanced systemic risk council the would include the fed and treasury and the fdic and others would give you the ability to have those variety of voices heard and i would also just raise one other point, that we have talked in a lot --

talked a lot about the truck during -- the chartering and the ability to change charters, and that beyond that, you have raised a proper questions. each of you have a licensing division. there is a question of the selection of a charter when you are starting an institution. i guess my first question would be having that very nature of the taurus at the beginning, not switching midstream, but the selection toys at the beginning, -- choice at the beginning, doesn't that create regulatory arbitrage? doesn't that create the arbitrage issue? >> first, senator, sheila and i don't have any authority to trucker institutions. the banks we supervise are state-chartered.

i would say, though, and she can respond to this better than i, but i would say that because we have a similar regulatory requirements -- >> if he could do it fairly quickly -- >> similar requirements for all institutions, and the fdic has to decide whether to grant insurance to each depository institution, no matter wants to be in short -- to be in short -- there is a way to contain that kind of arbitrage all permitting a useful kinds that states engaged in. >> i would agree that we have a licensing function, and i would say that just because you have a choice when you begin operating, not necessarily arbitrage. there are differences with the charters and what they can do and how they can do it. some prefer to have a local,

state government regulation, even though we have a local examiners on the ground there. the fdic does grand deposit insurance to all of them. it has been after they have been in operation, where someone is facing a problem and they seek to change the charter to avoid a downgrade or enforcement action and move to a different charter. that is what troubles all of us a great deal. >> in terms of choosing the charter at the outset, the thrift charter is unique in terms of the kinds of business that an entity would want to engage in. people choose a charter based on the business plan. in terms of people switching charges because of some received favorable difference, there are 50 to choose from, 52 to choose from, with the federal charter you have two. anyone who is looking to avoid

some kind of supervisory enforcement action, as we've talked about here, we as a collective group have taken steps to avoid that, to make sure it does not happen for the wrong reasons. >> one, nothing from all of you, i think accurately reflecting -- one commong thing from all of you, i think accurately reflecting that the source of the crisis was from -- i would like to get all of your comments on -- would be consolidated into a single entity or maintain the current structure, how do we get our arms around this non-bank financial arena? clearly, what approach the administration has talked about is on the consumer and, specific financial products, coming from this array of institutions. another is if they kind of bomb

up to the love all of -- bump up to the level of becoming systemically risky, the fed would have oversight. what i am not clear on is should these non-bank financial sector have some level of dated a prudential regulation? i have not seen anybody propose , one, is it needed, and two, whether that day-to-day prudential regulation, in terms of safety and soundness, would land? >> i think you have a day-to-day separation because -- with the non-banks, you do not have that. >> should they have some? >> i think, actually -- no, i don't think you need to go that far. i think the consumer abuses for the small entities for more of a significant driver, the lax

underwriting, which then spilled over to the large institutions because of the credit situation that they created. but no, i don't think they do. if you have the ability to post credential requirements for systemic institutions or systemic practices, you don't need institutional -- >> the council for systemic and the consumer down here? >> i generally think it is a daunting challenge for the tens of hundreds of thousands of different financial providers to regulate them all around the safety and soundness, but i think the administration would do so and have the authority to do so for consumer protection. it does not get at what is a fundamental issue, the extent fundamental issue, the extent they engage in very bank-like it is not clear for a consumer protection thing in the traditional sense. >> that is the comment senator

bennett was making about making sure -- >> my point is part of the mortgage legislation that passed the house last year had some common standards that i think where credentials dander's the would apply that would have been helpful for mortgage providers but not all financial providers. there may be some instances where some of that is warranted. >> if you originated a product in had to keep it in there, that is not so much protecting the consumer. is maybe putting some requirements on the institution. >> absolutely. >> i do think that the question of where regulations stops, how broadly the career mentor -- perimeter is is going forward. we know we will not have the same problem we have a few years ago. it'll be new problems.

i would have thought that one of the important roles of an interagency council is precisely to attend to issues that do not seem under anybody's umbrella at a particular moment. at that moment. >> beyond just being whether there is systemically risky -- >> i think you pointed out the problem. you have systemically risky institutions addressed, and regulated institutions already regulated that are addressed, and then you have consumer. but even if you have a practice that is troublesome, there ought to be a mechanism for somebody making an evaluation of that practice, and if the council saw that if one of its members had authority to regulate, it could suggest it. the congress to think about giving some kind of the fall of backup authority to the council in the van --

>> very quickly, because the senator from new york is anxious -- >> the ability to regulate or oversee this group between the council and the cfpi. whatever scheme is brought up for past legislation, there are very creative people will look at that and they will find a way to get around it. whether it is at the state level or federal level or what ever else. people have a business model and they want to engage in a particular activity, and the preference is to engage in that activity with the minimum regulation. it is a difficult issue. >> i want to thank you all for being here. we have gathered here with one common goal, to make our financial regulatory system is strong enough to prevent another severe financial crisis from happening. i've read the written testimony. if i were in your shoes, i would

make the same arguments. but some would argue that there is a bit of turf protection here. that is natural, but should not be the dominant consideration as we move forward. .

>> there is more discussion in the systemic risk regulator. there is a good argument the insurer should be separate from the regulator because they are different concerns. so let me ask you this -- here are four arguments for a consolidated regulator -- first, a consolidator regulator would prevent charter shopping site bank cannot take its own charter and regulator. countrywide did that. remember that, mr. bowman? a hodgepodge of regulators as a conflict and create confusing burdens for the banks. we have heard from banks or told one thing by one regulator and another from another regulator, each of them had authority. third, a secret -- a single regulator could keep a track of dangers and development.

fourth, a single, consolidated regular could eliminate arbitrage and gaps. no bank could escape from being held accountable for violations of poor practices. my question to you is do you disagree one consolidated regulator would avoid these problems or have these four benefits even if you think other mechanisms might be better for the reasons? who wants to go first? >> i will start. i would say each of the four things you mentioned is an important thing. some of them, like avoiding charter conversion arbitrage can be avoided short of a single regulator. that's one thing we have tried to do already. the only thing i would add to what you say is that there are costs to going single regulator

route. one of the costs is that the fed loses some insight into how banks are functioning, how they are moving money and why the volatility of money is what it is. another potential cost is you have a single, all encompassing regulator and sometimes it loses perspective because it is the only game in town. >> i know the arguments on the other side, but you agree that these four arguments make some sense. >> i think a couple of them are strong. >> i would agree. those benefits are there and real and this is the right equation. you have to ask what are the costs. there are certain things the federal reserve brings to the table in terms of closeness to the markets and expertise from the open market operators that

would be difficult but not impossible to regulate, but that are real. second, as i mentioned earlier, it is hard to be good at it is it you -- it is hard to be good at it if you are not doing it all the time. >> i would just say that i think on the monitoring, if you look at the single regulator, they really were not any better. if you have a single monopoly regulator, that contributes to regulatory lax -- that regulatory laxity. it's not just a matter of picking bank charters, if you don't include securities common for of the graves dealers, and others, you still can't use a legal model that would fall outside of this. unless you put everybody out of this, you'll still have some degree of arbitrage. >> i would agree the single form of regulator has not proven to be any more effective in terms of what we have now.

i would also be remiss if i did not point out that since 2008, 79 financial institutions have failed. 50 national banks and 11 thrifts. i also need to point out that of t.s. and charter countrywide, -- ots and countrywide, countrywide was sold to bank of america. the ability we had to affect countrywide in that time was very limited. >> i have another question. this relates to the point mr. bowman just made. as you said, 54 of the 69 banks that failed this year are state- chartered banks. i guess it is a historical anomaly why the fed supervises state chartered banks and mr.

dugan supervises federally chartered banks -- when i first get to the banking committee in 1981, i didn't understand it. it just happened. let me ask mr. tarullo , most of the failed banks were not regulated by the supervisor or by ots. explain to me and this bair can answer as well. explain to me why the fdic and the fed should keep state- chartered supervision, particularly if we're giving the fed more responsibilities and other areas. if you think those functions should be kept apart, from the proposed national bank supervisor, why shouldn't at the very least merge fdic and the fed supervision of this state chartered bank?

>> can i ask the panel to try to answer quickly? >> i will ask unanimous consent that each panelist be asked to answer the question in writing. i did not realize we had a second panel and i was the last one here. thank you. >> it looks like we're going to have to reschedule the second panel, so i'm anxious for you to respond to the senator's question. >> mr. chairman, i am deeply grateful. >> the national banks would be chartered by the -- would be supervised by the otc as a loss

charter. members of the federal reserve system and would be supervised by federal supervisors by the fed and of their non-member banks, their fight -- their primary regulator would be the fdic. there are two answers to the question. one is that you suggest history. the controller was started in 1863 to create a new national charter which had a dual banking system ever since. i think chris unconcern on the part of state banking commissioner's that -- i think there is concern on the part of the state banking commission that they have had as their overseer of the federal level, the same entity that charters national banks. >> that is what we call in brooklyn tight. >> unquestioned. but the concern is whether or not there be the same treatment of national and state-chartered institutions.

second, are their gains from having the fdic and the fed supervising banks as well as performing other functions? i would suggest that the arts. >> -- i would suggest that there are. >> there are a lot more state chartered banks, so lot of these are very small institutions. >> a lot of the bigge failures were not under mr. bowman, but his predecessors watch. >> we have provided support for larger institutions and i think it needs to be taken into account. i know it is confusing that we have these multiple regulators and it's frustrating because it's hard to explain to the public. on the other hand, as a deposit insurer, we find helpful to have bank -- that people in banks all the time. it gives us a window into what is happening and what emerging risks that might be. we could perhaps fix it up through a back up supervisory

process, but if we were going to shift to that model, we would have to be must -- we would have been much more robust. with have to keep this data points continually into the risk assessments. that would add to the regulatory burden. supervisor perspective that we give that to state charters banks is useful to that function. >> if i could add to the confusion, the ots is the backup regulator for the state chartered associations. so you have a federal regulator at the state level. >> i would like to thank the panel for a very interesting morning and one that has been very helpful. i want to apologize to the next panel. i understand staff will be back to about rescheduling. we want to hear your views and a dozen of the views from the second panel were perhaps more

sympathetic to the single depository regulator and we want to get those views on the record and get a chance to ask questions. thank you very much to the first thank you very much to the first panel and we will reschedule [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009]

>> afghanistan holtz election on august 20. they have seen an increase in violence recently. next we will get an update and the pentagon and the security situation in afghanistan. after that, senate democrats and republicans talk about health care legislation.

on washington journal tomorrow, we will discuss the economy and president obama's visit to indiana with emil corwin. patrick leahy will take questions about the sotomayor nomination the president of the business roundtable will focus on health care. we will be joined by idaho republican senator james googled said the agenda before the august recess. it is live on c-span every day at 7:00 a.m. eastern. >> sunday, we reflect on 15 years of political columns for the "new york times, ," includig his column.

>> now a pentagon briefing on afghanistan's security operations. we will hear from the u.s. general in charge of forces along the afghanistan/pakistan border. this is 30 minutes. >> can you hear me? >> i can hear you. >> today our -- we are doing to the tax -- a task force [unintelligible] this is our first opportunity to get an operational update from him who will soon commence in june of this year.

i will turn it over to you for opening remarks. >> thank you. thank you for joining me this morning. this the first pentagon press conference. two months ago, the headquarters replace the hundred and first quarters. during a transition of authority, since then, in a joint task force 82 has worked hard to build on the work of the 101 with officials and afghan national security forces with in the 14 provinces of a regional -- a regional command. although predominately army, we have contributions from the navy, marines, air force, and special operations.

these people build critical needs to read the command raging throughout the entire spectrum of operations. the one to begin by paying tribute to our fallen heroes. -- i want to begin by king to be to our fallen heroes. they have given their lives to keep all americans safe and free. to their families and friends, i offer my condolences. no words can diminish the creek -- the greek you feel. we honor them for their service. we will remember them and you each and every day. many of you are familiar with regional command east. it comprises 125,000 square kilometers, the same size of new york. even in the areas that are relatively flat, the high altitude is a limiting factor

for a number of commercial activities. most will live in the areas near the pakistan border. the population lives mostly along the road. a significant number is quite isolated. in these areas, forces tend to intimidate through violence and coercion. here, our main priorities are to protect the population, help build the capacity to service people, and to help enable development to improve the lives of all afghans. the security the afghan people is our main focus. we carry that out through close partnering with government officials and national security forces. i keep a part of our approach as information as we see as the key domain to counterinsurgency. the true center of gravity is not the television -- of the

talbian with the support -- the taliban but the support of the people. they are taking a proactive report to seize and retain the initiative by pre-empting events and exploiting opportunities. we see the line of operation. along our security line of operation, we strive to protect the population by with and through the afghan security force. the partner our forces there every level -- through every level and we learned through our afghan partners, many of whom are skilled soldiers. in the areas of developing governance, we are working closely with our counterparts. i have never seen a more focused government approach pushed down to the lowest levels.

we have integrated civil military action the construction teams, development teams, etc. along their governance line, we are working with civilian colleagues by linking local leaders to government resources through accountable measures. this will be critical in a blur. along our development line, we partner with the state and other u.s. government agencies as well as the afghan government to build sustainability. mutually supporting efforts with the un and other international organizations, we are also a big part of this effort. this month afghans will go to the polls to decide the next president. the elections are one of the most important things that happened during our deployment.

many are registered as first time both actors for the upcoming election. the first time voters for the upcoming election. they are making their choice for freedom. this is an afghan run election. we will not take sides. we have an important role to play. we have troops to support the national security forces through this process. the elections will not be perfect but our outcome will determine who leads it for the next five years. it is a backdrop, i will be happy to take your questions at this time. thank you. >> thank you. injured? >> -- andrew? >> are you saying it is more

important than fighting in protecting the population? can you explain what that means in practice for your operation? can you provide reassurance about the differences between information and propaganda? >> yes, as a talked about that -- the four lines operation may have come information is the primary line here. i am making a difference between myself and my subordinate commanders. that does make a difference in terms of the importance in the fight against the enemy. a d.c. the center of gravity as the people -- i do see the center of gravity as the most important part of this. i do differentiate between what you call propaganda as a look at information operations.

it is holistic in the sense that i am talking about strategic communications and i'm talking about information operations in terms of the military term of that which would include psychological operations. it is an umbrella. this is a war of perception as well. it is important to emphasize communications and all that we do. it is simply that we of the communications process routine here that speaks accurately and quickly to the different audiences. that is the primary piece. that has to do it accurate information, good or bad. it is a war of perception. there has been a great deal of discussion about our enemy and how could they are in terms of

strategic communications. they do not have to worry about if it is accurate or true. most of the time they are not. we have a tough job here. we have to be fast. we have to make sure we are accurate. >> abc news. there was issued a tactical directive recently. can you explain in fact it may have had on the operations of your forces in the region since the directive came out? have you followed a consistent pattern even before that directed? >> -- directive?

>> the center of this is the protection of the afghan people. that is the intent of the order. it deals with the measure of use of force, primarily having to do with air power, in direct fire, and emissions that can cause greater property and personal damage. it is the measured use of that in order to protect the afghan people. in terms of the impact on operations, we have been very deliberate about our use of ammunition -- emissions, and particular large commissions. we have refocus our efforts as a result of this. in some cases, it may have slowed the pace of our operations in the sense that we

take more time. we allow situation to develop. we insure we know whether not to endanger the area. we tried to gain a more advantageous position where we know we could exclude any casualties. we may back off and then call out the enemy. it impacted in the sense of the pace of operations. given the dominance of our force, we can still defeat the enemy. the protection the people is more important than the pursuit of an insurgent. that is really the crux of the texaco -- tactical director. >> i wonder if you could talk a little bit about partnering between your combat unit and the

afghan national security forces. is a fairly uniform across your area or are some more closely linked to the afghan than others? what your goals on expanding that? >> that is a good question. it is an important one to me. as a look at the first principle of protecting the population, the second major priority is building the afghan national security forces. within ours we are not partnered in a cohesive fashion. we are beginning to plan their partners and determine how to make adjustments. that is primarily because the

positioning of our forces and the positioning of the ana or police forces is just not ideal to get an ideal partnership. partnership to me means that we in every case the weekend, co- located. we are going to it that -- we are going to attend to tdo that. we operate together continuously. i think we will put greater focus on in now to begin working at every level together throughout the force and also in our planning. my view is that my battle space is the battle space of the commander of the national army. as to develop our plans, execute our operations, and consider the threat and security of the people, we have to do that in a greater way than we are doing today.

it is pretty good. i believe we could make it better. of the next several months, we will do that. -- over the next several months, we will do that. we just completed a two day conference with our national security force partners as well as with our combined security force that is responsible for their training. we were considering the options and the way we could improve our partnership. >> do you need more forces in order to do the partnership properly or do you think you have enough forces if you move people around and move headquarters around? >> i believe that this time i have enough to do the partnership. what we will need to do is shift

some boundaries and a.n.a. forces as well. in terms of partnership, i do see a need for a greater capacity within the national origin afghan national security force. we looked toward building their competency and capacity of a quicker pace than what is laid out now. >> could you give us an update of the missing soldier who was captured by the taliban militant? what are the efforts you were doing to bring him back? >> since the time he went missing, we started immediately to locate and bring private

black back to our forces and to cp. we continue -- and to safety. we continue with the help of our afghan partners and other agencies. i prefer not to go into it any further, because i do not believe it is helpful at this time. >> i wanted to follow up on my fellow colleagues question about the directive. are you having more or less success in getting the enemy with this directive? he said it was slowing operations. are you having more or less success in stopping the enemy with this new directed? >-- directive?

>> in terms of the success, i do not see a difference. we are operating a little differently. with this in mind, we plan a little differently as well. the other thing i would say is that there are a lot of areas i operate that are very rural with very sparse populations. as a result, in most cases the directive has no population. >> getting back to the training question. can you give us how many afghans yet had in training for the army right now? are you also training for the police? what the numbers for that? how many are you able to get through that program over time?

can he give us some figures on that? >> i am sorry. i cannot go into the details. i am not responsible for that training regimen. i take over the training once the unit is trained as a basic combat. then they come back out to us. -- the training from the basic level for work. we are at defining their collective skills and working hard in their leader skills and their headquarters. those are our focus areas. the pace of trading -- training,

you'd have to go to the other general for that. >> i wonder if you could tell us something about the tactics of insurgents in your area? we seem to be seeing some more sophisticated attacks. we are seeing reports of those recently. can you talk about the current tactics and whether you are seeing any development or change in this tactics? >> i will talk a bit about this. the tactics of different in different areas. your comment about the sophistication increasing, our look in this in the last six or seven months -- the sophistication is best about

even or less and turns of the effectiveness brita we have had a -- in terms of effectiveness. we have had an increase in activity. this has to do with the context. in terms of other tactics, it creates 70% of our casualties. there is sophistication there. they migrate here to a afghanistan. they seem to know what areas to you -- to use different devices. that is my most difficult challenge right now in terms of enemy tactics. the fight is different in almost

every area. when you go into the northeast, mountainous and close fighting in a different set of conditions, we will see more skilled fighters in terms of what we call the ability to conduct a complex attack. other taxer generally not as skilled. -- a tattacks are generally nots skilled. >> on the same topic, you said you are seeing a lot of the same skills in iraq and 70% of your casualty's are from ied 's.

what is happening in terms of the counter-ied effort? are there lessons learned from iraq in terms of what the u.s. has learned being employed now in afghanistan or is it just a whole new batch of lessons that you are having to learn again? >> predominately, we are bringing all the expertise from iraq and to the experience here in afghanistan. we have quite a good counter- ied organization at every level. i have won the looks of all the different ones we have -- i'll -- i have one that looks from different areas. while the number of ied's is going up, the% of casualties

caused by those numbers is staying about flat. that is our expertise. -- expertise in countermeasures having an effect. there are some tough things here that we are dealing with that we dealt with in iraq. there are still technological solution problems to be solved. >> do you think it has had any impact on the area? heavy seen any crossing into the pakistani border? -- have you seen any crossing into the pakistani border? >> i am sorry. you asked whether the operations in pakistan or the operations in

afghanistan? >> alamance they operate -- i meant the operation in the province and what it is had any impact in your area. >> i have not seen insurgent entering into pakistan as a result of this. we do see that movement next year 5rc east and rc south. we do see movement across the border. this is an area that the enemy has traditionally used to run the scene between our commands.

that lies at the southern part. we are aware of that. i cannot say i saw an increase or decrease as a result of the operations in the south. as they expand their operations, i think we will see an impact. we are planning for that as well. >> when you captured ied groups who were planting bombs, have they turned out to be homegrown afghans or are they from pakistan or other foreign fighters? >> for the most part they are afghans. we do see some point in -- for

an fighters. using their the ones that have the higher skills. they are not in great numbers. in the last 60 days, there are those that we have captured or killed here that were some of the facilitators for the main ied leaders. the great majority of those are afghans. >> i can ask you about the pakistani military operations. i heard an impact -- [unintelligible] has there been a greater impact in other provinces? >> we had seen a decrease in the

cross border activity throughout rc east as a result of the operation. this is most notably in the cone konar. there was not only the operations of pakistan but on our side as well. it did have an impact on the enemy's ability to remove the fires across the border and having difficultly resupplying. in the south, while it is not a full-fledged operation, they are operating there. we had seen somewhat of a reduction of cross border activity there as well.