review. i will turn back to for any closing remarks. >> i really appreciate the opportunity to talk to you. thank you again for joining this morning. i want to do stinky all the great supportive families back home -- i want soon thanto thanl the grief supported families back home. we are able to do what we do because of this kind of support. i appreciate the opportunity. . .

also this hour, the head of the federal deposit insurance corp., sheila bear, testifies about making oversight. and later we would get an update from the pentagon on the security situation in eastern afghanistan. tomorrow morning, the young america's foundation conservative student conference continues in washington.

we will hear from tony perkins of the research council, plus the radio host and a former ceo of godfather's pizza. our live coverage begins at 10:00 eastern. later in the day, the head of the federal aviation administration will talk about aviation safety and the challenges the industry faces. that is live from the air line pilots association at 1:00 eastern. >> it this week, the full senate debates the nomination of sonia sotomayor. coming this fall, toward on to america's highest court, the supreme court. >> senate democrats met with the president at the white house. then they spoke with reporters for almost 10 minutes.

>> this was a time to reflect on how far we have come in such a short time. we talked about legislation that as long as country. the first thing that we did and the thing we're working on now, which is health care. there was absolute unity in the caucus, different ideas were expressed, but every idea was that we understand that the four years and we're going to do comprehensive health care reform. we have four of five committees that have completed their work. everyone recognizes that we're going did do a bipartisan bill in any way possible. we do not want it to a partisan bill and we all our republican colleagues acknowledge that. we will continue to work with them as long as we have to. the american people want health care reform and we are going to do health care reform.

in spite of the loud, shrill voices that are trying to interrupt town hall meetings and everything, we're going to continue to be positive and work hard. there was a lot of experience in that room and we had someone who is leading us that we all admire so very much. the president did not get one standing ovation but several of them. he was really reminding me of the days when i was in football and the cuts gave you a pat tot. you came out ready to take on the world. we are ready to take on the world. senator dodd? >> we thank you and the president. this was very gracious. we're going to recommend that we do this every tuesday at the white house. but the president was enthusiastic about where we are and what was accomplished. and let me echo the leaders' words and the president's strong suggestion, that we get this job

done. as the leaders pointed out, off four of five committees that acted. i have a lot of confidence in max baucus. he had been through a tricky effort to reach a bipartisan agreement in the finance committee. i am confident that he can get that done. we're ready to sit down and mail are legislation and work with the house. the process is a dynamic one. we welcome people who want to come to our table and share their ideas, whether they be democrats or republicans, nurses or purses -- nurses or doctors, that insurance industry and the pharmaceutical industry, we welcome their participation. but we are determined to get this job done. we're going to be gone for a month. in that month, over 500,000 people will lee's -- will lose their health insurance.

we should come back with the purpose to bring back certainty and stability to the american public. so they no longer have to worry at night or that they have the opportunity for kerrigan and a trouble. i'm going to go for surgery and a few days. i have a great health care plan. i never worried about whether i have one. micaceous not be any different from any other american. when they need help, they ought to be able to get it in this country. but that federal health care plan does not mean that you should not have that same sense of security and confidence as well. i am confident that we will get that job done. >> this was an enthusiastic, comforting, warm reaffirmation and reconfirmation that health care reform is so necessary for the american people, and and we work together, we will get it

done this year. we agreed that it should be bipartisan, because that is more sustainable and more enduring. it is the right thing to do. the american people want us to be working together. and we've got to get the cost down. about 33% of our health care expenditures or waste. we have to bring the race thousand american families will not have to spend as much, american businesses do not spend so much, and the budgets are not hit too hard. we also have to dedicate our commitment to reforming insurance. so many companies are being denied coverage because of health status and so on. the bottom line is, we will try to get a bipartisan bill. it is the right thing to do for the country and the president thinks so. beyond that we're going to get health care reform passed this year working together. senator dodd and i have two a

separate bills. 80% of that is containable, which is very little difference. we're going to reform health insurance industry and we're going to get coverage for americans. it was a wonderful meeting led by our president, barack obama. one of the senators was saying, is all wonderful to hear him speak. it is like a symphony. he is so good and together and for all the right reasons. a great motivation by our leader to go out in the month of august and get this done for the right reasons because it is the right thing to do. >> what makes you think that you can get this done on a bipartisan basis? >> the preference this to do it

together. the american people want us to work together. the american people to not like partisanship. but the american people do not like cribs of people trying to kill stuff that should be done. we know that we have to reform health care system, and reform the health insurance industry, so we're going to get it done. >> if we were in nevada, we would take a lot of questions. >> any climate change legislation, senator? >> we discussed it. the chairman of the committee talked about energy legislation. we spent a lot of time on a lot of different issues. [unintelligible] >> we will pass cash for

clunkers. before we leave here. >> do you think you have the votes for a? >> yes. >> can he weigh in with more details on what he wants? >> as senator baucus said, 80% of these bills are together anyway. the president has been embodied in this from the very beginning. anyone who thinks that president obama and his people have not been involved in health care reform do not know what is going on. there is not a day that goes by that i do not talk to several people in the white house about health care reform. the same is true for the two chairman. [unintelligible] >> this is the right thing to do. when we go out during the august recess and explain with such conviction why this is the right thing to do, the american people realize that that is the case. polls show that when the american people see as insurance

reform, then it becomes quite popular. our goal is to explain what we're doing, why we're doing it, getting costs down, reforming the insurance industry, and making sure that people are able to keep their plans and have the choice that they want and have. when the understand that, it will work out quite well. >> [unintelligible] >> we are working on that now. i heard from but chairman's and we're working on that.

>> now we will hear from senator -- senate republicans on health care. senator mcconnell also talks about the cash for clunkers bill. from the capital, this is about 10 minutes. >> august is going 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 americans' health care system, but very broad differences of opinion about exactly how to go about that. all indications are at this point 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 are not interested in -- and have clearly express themselves, like we saw on the stimulus package. all this will be a good opportunity for all of us, regardless of our leanings, on how to deal with this issue. we can interact with our constituents and come back 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 tennessean is to tell me over august what they have been telling me in the last few weekends, at which is that we are headed in the wrong direction on health care. we need to start over and get it right. we get the mayo clinic, the democratic governors, the congressional budget office, and the chambers of commerce saying

that you were going in the wrong direction. that means start over and get it right. what we're seeing in the tennessee, when it is broken down to our state, it would provide a medicare cut for about 9000 seniors, about 1.6 million tennessee ends would run a significant chance of losing their employer insurance, and thus doesn't go into a new government-run program. 20 million -- 400,000 of those would go into a failing government-run program that already exist called medicare. we have about 135,000 businesses in tennessee that will pay new taxes. we need health care plan that americans can afford. when we're through fixing it, we need health care plan and it governor that americans can afford. that will be our objective. >> i have a town hall meeting in advance of the august break and i am looking forward to getting

out in the month of august across our state as my colleagues are. i want to hear directly from the people about how they perceive the impact of the things that are being debated out here in terms of health care solutions. it strikes me that the things that most americans care the most about right now our jobs. it is the economy. obviously the cost of health care factors into that, the availability of health care, access to health care all factors into it. the one thing we should not be doing is raising taxes at a time when the economy is in recession in a way that will cost jobs for the economy. most people are making the connection between the cost of many of these health care proposals and the trillions of dollars paying for financed -- financed by new taxes. i think the american people are appropriately focused, as they were in my town hall meeting last night, the issue being

health care and its impact on the economy, and when you have unemployment on the threshold of 10% and your economy is shedding jobs literally every week coming anything that we do right now should not be dilutive of job creation. based on what they have seen so far, the proposals would cost the economy jobs. but they need to weigh in on this. august will give us all an opportunity to hear directly from people in our individual states and hopefully we can come back in september and pushed that reset button and actually get back and talk about things that would talk about reducing cost and improve access and would not cost the economy jobs. [inaudible]

>> we'll talk about how the process the cash for clunkers. we anticipate it will be done before the end of the week. " we will negotiate over is the appropriateness of some amendments to the bill. but i would anticipate that the matter will be completed sometime before the end of the week. what i am predicting is that we will get a vote on the proposal sometime before the end of the week. [inaudible] >> what we can safely say is that the only thing bipartisan about the bills that we have seen if the opposition to them. clearly for -- health care bill

that ought to pass off have bipartisan support. i think we will continue to hope that that will develop. but a major overhaul of one sixth of our economy is not likely to enjoy anything other than bipartisan opposition. >> there are a series of amendments that i think our members things would improve the proposal. i would rather not speak to them on a but we will be discussing with senator reid the way to put together the senate agreement that will allow us to move toward completion. i will also have some talks on those amendments. ok, thanks. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009]

>> you are watching public affairs programming on c-span. up next, ahead at that federal deposit insurance corp., sheila bear, testifies about banking oversight. afghanistan holds elections this month and later we would get an update on the pentagon -- from the pentagon on the security situation in eastern afghanistan. on "washington journal," tomorrow morning, we will talk about the economy and president obama's visit to indiana. senator patrick leahy will take your questions about the sotomayor supreme court

nomination, health care, the economy, and the obama administration. the president of the business roundtable will focus on health care. and we will be joined by an idaho republican senator to look at the senate agenda this last week before the august recess. "washington journal" is live on c-span every day at 7:00 a.m. eastern. >> sunday, frank rich reflects on his years as a political columnist for the of what new york times." >> i senate hearing on the obama administration's financial regulation plans. we will hear about a proposal to consolidate two agencies charged with regulating banks. chris dodd of connecticut chairs the banking committee. this hearing is about two hours and 10 minutes.

>> i have informed our colleagues already that we are under some time constraints. we have a couple of votes around 10:30 before the senate. there is a meeting that begins afternoon that many of us will have to attend. so we're not going to make any opening statements. we agree to that this morning to get right to our witnesses. i know our colleague from tennessee would like that president. he has been dying for that moment for two years now.

no, it is the mayor spoke. we are not setting a precedent here but we will move in that direction. this strengthening and s streamlining this is a major subject matter. how many hearings have we had? 28 hearings since january on this subject matter, of our financial modernization and regulation. now this is a critical piece. we're going have consolidation of our financial regulators. i welcome our witnesses here this morning, all of you have been here before us on numerous occasions to talk about the various aspects of the financial troubles our nation has been in over the last few years. i want to make one point and i know all of you understand this. i believe you care about this as well. our job is not here to protect

regulators. our job is to protect the people who count on us and you ended system to provide a safety and soundness and stability of the financial markets. that is what this is all about. you get that and understand that but i sometimes things we need to clear the air a little bit so people understand what we described in the architecture. that will provide the safety and soundness that we're looking for. let me just turn directly to you, sheila, to start down this. all the documents and opening statements will be included in the record. we will try to be careful on the clock and we might otherwise be. we have some votes in an hour and have so we would try to move this along. sheila, we thank you again for being with us.

>> the yardstick for any reform should be whether it deals with that cause of the current crises and helps guard against future crises. we did not believe that the case has been made for consolidation. the ability to choose between the fayed and federal charter was not one of the causes of the current crisis. -- between the state and federal charters was not one of the causes of the current crisis. the simplicity of a single bank regulator is all luring but such proposals have rarely gain traction in the past because the supervision has worked well compared to the regulatory structures used for other u.s. financial sectors and to those used overseas. indeed this is evidenced by the fact that the saddam banking sector collapsed back into the healthier sector and u.s. banks, notwithstanding their current problems, entered this crisis

with stronger positions than their international competitors. as we looks at the cause of the crisis, it is the regulatory gaps between the -- no regulation of the over-the- counter contracts. to address these problems, we have previously testified in support of a council that would help assure coordination and harmonization of provincial standards on all financial institutions cannot account for arbitrage between the various sectors. we also support consumer protection across the board. but we do not see merit our wisdom and consolidating all banking supervision. it would be exacerbated by a single pegler -- the weakness of federalist -- the weakness of the financial system would be exacerbated by this. one of the advantages of multiple regulators is that it

allows this to be heard. there were strong concerns about capital that would have resulted. under unified regulator, it could of been implemented quickly and with fewer safeguards and banks would add entered this crisis which much so -- with much lower levels of capital. despite the single regulator approach, but final situation have all suffered during the crisis. moreover, a single regulator approach would have serious consequences for two mainstays of the american system, the dual banking system and deposit insurance. the dual banking system and there regulatory competition it generates helps the organization of financial activities. state institutions continue -- tend to be close to the

businesses and customers they serve. they held on growth in rural areas. mainstream banks are subject to market discipline because they know they are not too big to fail. they will be closed that they become insolvent. -- if they become insolvent. this could cause more consolidation in the banking industry had a time when there is a movement underway to all this. concentrating this could also hurt bank deposit insurance bergdahl loss of an ongoing and significant supervisory role would greatly diminish the effectiveness of the fdic lost mandate. -- the fdic's mandate. he would identify and assess access to the deposit insurance fund. to summarize, the regulatory reform should focus on eliminating regulatory gaps i have just outlined. proposals to create a unified

supervisor would undercut the many benefits of our dual banking system. most importantly, they would not address the fundamental causes of the current crisis. >> thank you very much. and i apologize, sheila, for not properly introducing u.s. the chairman of the federal deposit insurance corporation. i just jumped into that and i apologize. the comptroller of the currency, we thank you very much, a well-known figure to this committee, having served on this side for a number of years and now the sec. we thank you. >> i appreciate this opportunity to discuss the administration's proposal for regulatory reform. the sec supports many elements of the proposal, including the establishment of a capital monitoring a systemic risk, and

other issues. we also believe that it would be appropriate to establish and consolidate a supervisor of all systemically significant firms. the federal reserve already played this role for the largest bank holding companies. during the financial crisis, the absence of a comparable supervisor for a large securities and insurance firms prove to be an enormous problem appeared the proposal would fill this gap by extending the federal reserve holding company regulation to such firms which we believe would be appropriate. however, one aspect of the proposal goes much too far. it 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 went fundamentally undermined the authority and accountability of the banking supervisor. we also support the proposal to effectively merge with the phase-out of the federal thrift charter. my written testimony to respond

in detail to the options for additional banking agency consolidation by first establishing either the federal reserve or the fdic as a single federal agency responsible for regulating state-chartered banks, and second, establishing a single provincial supervisor to supervise all national and state banks, and third, transferring all holding company regulation from the federal reserve to the provincial supervisor. 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 regulation of systemically important companies. we also support standards and believe that dedicated consumer protect in -- protection agency could help achieve a goal. we have a significant surge with the parts of the proposed one

that would consolidate all financial consumer protection of rural riding, examination, and enforcement in a single agency which would completely divorce these functions from safety and soundness regulations. it makes sense to consolidate all consumer protection rule writing in one agency. but we believe that the rules must be uniform in net banking supervisors must have meaningful input into formulating them. unfortunately, the proposed agency fall short on both counts. the rules will 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 standards option is a radical change that will make it far more difficult and costly for

national banks to provide financial services to consumers in different states adding different roles. and these cost will ultimately be borne by the consumer. it will also undermine the national banking charter and the dual banking system that has served as well for nearly 150 years. second, their roles do not afford meaningful input from banking supervisors even on real safety and soundness in new -- issues. the proposed agency would always win pyridine new agency needs to have a strong mechanism for ensuring meaningful input into its rulemaking. finally it should not take examination enforcement responsibilities away from the baking agencies. the current bank supervisory process works well. it provides real benefits for both functions. moreover, moving bank

examination and enforcement functions to this agency would only distract it from its most important and daunting implementation challenge -- establishing an effective enforcement regime for the shatt a banking system of the literally tens of thousands of non-bank providers that are currently unregulated or lightly regulated, like mortgage brokers and originators. the agency should be focused on this fundamental regulatory gap rather than on already regulated institutions. >> we thank you for coming before the committee. >> before the final history of the financial crisis is written, the shortcomings of many financial institutions will have been revealed.

the framework of prudential supervision and regulation has not kept pace with the interrelationships of the financial sector. in my prepared testimony, i suggested and tried to elaborate the elements of an effective framework for prudential supervision including a number of recommendations for legislation. and he confined his introductory remarks to three quick points. first, prudential supervision must be required for all systemically important institutions. is noteworthy that a number of firms that part of a crisis had not been subject to mandatory prevent -- prudential supervision of any sort. including -- improving this will maximize gains for financial stability. second, there must be as effective supervision of the company's debt and insurance

depository, i gravitas distinct from the banks themselves. large organizations increasingly manage their businesses on an integrated basis with little regard for the corporate pounders that typically define the corporate world. there is need for columns scrutiny between the linkages between the banks and other delays within a holding company, not just big board contractual ties but also managerial, operational, and reputation all linkages. the premise of so-called functional regulation for supervision within each individual firm has been delighted by the experience of the financial crisis. -- has been belied by the spirits of the financial crisis. much of what needs to be done to improve our system of supervision was within the existing authority of the

agencies represented at this table. together we have acted to shut down the practice of converting charters in order to in minsk -- escape supervisory actions were ratings. we're working together to ensure that all internationally active 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 program, we are expanding our use of horizontal examinations to assess key operations and risk- management activities of a large institution. we are creating an enhanced surveillance mechanism that will draw on a multi disciplinary group of experts to create any value it scenarios across a large firms. these top down analyses will provide independent supervision

ory. it wasn't all but the supervisory team and washington's best. thank you all for your attention. all the power to discussing but agency and congressional initiatives. it will strengthen further are credentialed supervisors system. >> thank you very much. turning to our last witness, and john bowman, the director of the office of thrift supervision. >> thank you for the opportunity to testify on the administration's proposal for financial regulatory reform. it is my pleasure to address this committee for the first time in the role of acting director. i will begin my testimony by outlining the core principles i believe are essential to accomplishing true and lasting reform. then i will address specific questions regarding the intent -- the proposal. let me start with the principles. ensure that changes of address

real problems. the all agree that the system has real problems and needs real reform. what we must determine, as we consider the changes, is whether the proposal would fix what is broken. in the rush to address what went wrong, let's not try at dick's not existing problems or try at six real problems with flawed solutions. insure uniform regulation. one of the biggest lessons learned from the current economic crisis is that all entities offering financial products to consumers must be subject to the same rules. under regulated entities competing in the financial marketplace have a corrosive, damaging impact on the entire system. also, complex derivative products such as credit of all swaps should be regulated. three, insert a systemically important firms are effectively supervised and it necessary wound down in an orderly manner.

now provider of financial products should be too big to fail, achieving through size and complexity to an implicit federal guarantee to prevent its collapse. the u.s. economy operates on the principle of help the competition, enterprises that are strong, industrious, well- managed, and efficient. those that falls short of the mark struggle and failed. stronger enterprises take their praises -- take their places. when the government is forced to prop up failing systemically important companies it is in essence supporting poor performance and creating a moral hazard. let me be clear, i am not advocating a cap on size, it just for robust a party for properly regulating an resolving the largest and most complex financial institutions. insure that consumers are protected. a single agency said have the

regulation of products as its central mission. that agency should establish the rules and standards for all consumer financial products. regardless of the issuer of those products and rather than having multiple agencies and a lack of singular accountability. regarding feedback on the questions that the committee as we do not support the administration's proposal to eliminate the comptroller of the currency and the office of thrift supervision. transfering these employees into a national agency or for the elimination for the federal debt -- thrift charter. if you look at the number of failed institutions, most had been state chartered banks to primary regulator is not the at s. -- bthe ots.

these t big to fail institutions are not and were not regulated by the ots. the charge of shopping for the best regulators are also without merit. in the same way that the thrift charter is not part of the problem, we do not see any reason to cause any disruptions to the hundreds of legitimate, well-run financial businesses that offer to the american consumer. my written testimony contains detailed information it requested. it is about the federal reserve bridge all holding company. thank you project -- and how to be rapid answer any question. >> i will ask the clerk to put a

clock on for six minutes per member. i have two questions that i want to raise with you. and now will turn to senator shelby. we have had commissions and think tanks and regulators presence, and you'll remember sitting behind as with both parties recommending consolidation of federal banking supervision. vilsack in this chair for a number of years and declared it to be the most bizarre and tangled regulatory system in the world. the former fdic chairman caught dead outmoded and archaic. in the wake of the last thrift crisis, the clinton administration to urge congress to consolidate the federal banking regulators into a single provincial regulator. we have seen chairs of this

committee and other as already years in the wake of previous crises called for consolidation. and yet we did not act acted as crises. we sat back and basically left the system that we had in tact. as a result, we have had some real costs, ranging from inefficiencies and redundancies, to lack of accountability and regulatory laxness. we're paying a high price for the shortcomings. my first question, the current administration has proposed a consolidation and lays them place the three federal bank regulators. putting the safety and soundness of the banking system first, is this a really cannot our share will not be listening to the admonitions -- or should we not be listening to the admonition of those before it that recommended consolidation?

>> we don't think that being able to choose between the federal or state charters had any contribution in all to the current crisis. -- at all to the current crisis. we do support emerging oct and another agency. that is reflective of market occasions -- conditions. it is a reflection of the market and a lack of current market interest in the specialty charter to do just mortgage lending. some of the restrictions on the charter had impeded the ability of those to undertake additional diversification. how have to respectfully disagree in terms of driver support on this one does not time around.

i don't see that as a symptom of the fact that you have four different regulators are saying different charters for at ic insured institution. i think that a bank's compared up pretty well, compared to the other standards. >> many as the others to comment on this. clearly this mirrors what happened before. it is not the sole motivation or addressing the problems that can -- dog occurred. in a global economy, we saw the implications of what happened not only here but at in the world. the idea that that we would maintain the same architecture that we have for decades is not only a question about what has occurred and whether not the system responded well enough, but looking forward, whether it that this structure is going to be sufficient to protect safety and soundness in a different economic environment at the time

that these agencies emerged. that is just as important as looking back. >> it is a very important question. i am glad that you were having these hearings. i don't think that this would solve the problems that led to this crisis. looking in european countries would sink of -- with a single regulators, their performance was not good. i think having multiple voices -- we resisted that and we resisted that and we started down. our commercial banks did not transitioned into that new system would head -- which would have lowered the capital but would have had going into this crisis. we think having multiple voices can strengthen regulation and guard against problems. there will be another one saying that we it will have a higher

standard or question that. i think you lose that with a single regulator. you should look carefully at the european models. >> we're talking about a consumer finance the product's safety, and at -- and the the fed affair. why isn't that the checks and balances that we're talking about and the system -- in the system? >> i cannot defend the current system of some many regulators. it does not work in theory but we have worked hard to make it work in practice. and i think that there is more that you could do if you were so inclined. you have gone from four regulators to three provincial regulators in the proposal. you can go the next that have a single regulator for state- chartered institutions, bring you down to two. you cut a one regulator for the banks and bring in a holding

company regulation to the credentials 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 be probably too much. i think that is probably -- are things that you could do to simplify things in the future. i agree with she let that this was a -- that this was not a principle contributing cause to this crisis. but we have to think about the best system for the future, and giving those matters real plot is a good thing. >> quick response to my question. >> among them many reasons why members of this committee will not be unhappy to see this summer recess,, is that they will not have to listen to me say again that if proposal is going have some advantages and disadvantages. i do think, at john and sheila

have suggested, that no one would sit down and write this system that we've got right now if they were starting from scratch. but the system in place, and u.s. seen that there are red manages to splitting bank supervision. i personally think it would be a very bad idea not have a deposit insurer have a bank examination functions so that the deposit in silver understands how banks are functioning before they fail and are able to resolve them. it is also important for the federal reserve, as the central bank and as the holding company supervisor, to have a window and how banks function. would there be gains in having a single regulator? it probably would be. my colleagues to the right have already pointed out some of the disadvantages as well.

>> it is this the costs that we're dealing with today? the principal cause, as the administration says in its proposal, looking -- only 6% of high-cost loans were provided by depository institutions that are regulated in the current system. 94% for provided by-atom banking regulator. that is why the focus should be on killing the regulatory gaps that exist today and that really need to be filled. >> senator shelby. >> just for the record, if you look at our record here of the failure of the regulatory bodies, that all records seem to lead to the federal reserve. they don't need to the fdic or to the comptroller, 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 wanna get into something else.

-- i want to get into something else. chairman bernanke has testified that that too big to fail problem is much worse than we ever thought. the impact of a bailout of bear stearns, a at, chrysler, and gm, our markets have good reason to expect that the federal government will bail out any prominent company that gets into financial trouble. my question to you is what steps need to be taken to restore market discipline and minimize the moral hazard created by the bailout over the past year? is this a problem that will not be solved until the federal government actually allows several prominent institutions to fail? we're going down a road -- a dead man rode on the too big to fail a thing. sheila? >> our priority focus when i

testified before had been on resolution a party. we need a mechanism that can resolve a very large financial institutions in a way that is orderly and protect us from systemic risk but make sure that creditors and shareholders take losses. we will not have rest until congress does something like that implies. >> we need more orderly resolutions for companies they get into trouble were you do not have threats to the system just by rabat -- resolving them. we need more capital requirements and liquidity requirements that they do not get into that position. you'll have circumstances where a larger companies can be failed in an orderly manner. you need to maintain some complexity for the government or the entire system is threatened. you need to be able to address

that concern. i know that that is hard but i think you really need to do that. >> i certainly agree with the utility and resolution mechanism. when you ask about market discipline, there is more that we need to do as well. the resolution mechanism comes at the ended that day and the time a failure. it would be better to create additional incentives that preclude failure. we surely need more transparency and disclosure by financial institution, particularly the largest. as i -- as i -- as i have indicated, we need to look at alternative requirements of these large institutions. there are a number of ideas out there that would require certain kinds of convertible debt to be on their capital structure. that is good because the debt

holders want to be paid and they note that if the financial institution gets into trouble, that debt will be converted into equity that will provide a buffer against losses and well still be subject to loss. i think that market discipline has a number of different avenues that we should pursue, and market discipline itself should priests -- should be pursued alongside other regulatory reckoned -- mechanisms. and i was not at the federal reserve until a few months ago. as i have said repeatedly, i believe that there is plenty of blame to go around everywhere. but i do not honestly think that all roads lead to the fed on this. >> which do not? [laughter] >> palisade bear stearns, aig, fannie and freddie -- there were a lot of problems in the system. before this crisis is over we're going to have seen a lot of

failures in a lot of institutions. i don't say that to deflect any responsibility. part of what i was trying to say in my prepared marks and in my introductory remarks was that i and everybody on the board takes seriously where things did not get regulated as well as they should have and where the structure needs work. that is why we are making the changes that we are already making their >> just for the record, who is the regulator -- the primary regulator of the holding companies? the big banks that got into trouble? you know that it is the federal reserve. you are now a member of the board of governors. let's be honest about it. >> that is absolutely true. in some cases the bank is regulated by other regulatory agencies and there are also -- >> but the primary regulator is the primary -- is the federal reserve. i do not have much time so i want to pick up on a couple of

things. today's "wall street journal" had an article dealing with secretary geithner are, when you met with him, where he told a financial regulators that they should stop. can you imagine a call here of the secretary? they should stop criticizing the obama administration regulatory reform plan. my gosh. i hope that you will not quit. i think that your honesty and candor here is very important. and we recognize the role of the treasury to set policy for financial regulation, but ultimately it is going to be the congress. this committee, both sides of the aisle, and the house, it's going to set the tone and create the laws. i appreciate you bringing this independent perspective with all kinds of pressure placed on you. does the testimony that you have given here today, that you provided, is that your own

views, such as it was, not any way influenced by secretary geithner's tirade against the other day? serious question. >> who are you asking the question of? >> asking all of you. >> congress requires and prohibits the treasury department from intervening in any legislative -- expressed to this committee. we did not clear our statements to the treasury department and we take that independent function very, very seriously. >> sheila? >> yes, i don't think anybody thinks we are not independent. >> we hope -- >> at some of the, senator. the only people i discuss this with our my fellow members of the board and staff at the federal reserve. >> senator shall become i think our testimony speaks for self -- yes, we are independent.

>> thank you very much. >> a little surprised by senator richard shelby's question considering the positions you have all taken. let me look at this and kind of a different way. the public has a general understanding that the investing public and the victims of this financial disaster -- as a genera understanding of the regulation of financial institutions, putting it mildly, fell far short. somehow the belief that the most egregious institutions found an agency that was too easy on them, and washington, we call it regulators shopping. they just think that the government for whatever reason is too easy on wall street agreed. maybe cynical way to look at -- and i apologize if that is the way you take it. if you see the president's plan

, the bank supervision framework, i hear each of you disputing major parts of that. how would you explain to the american public what the next up is? how would you fill the financial gaps of the red the taurus system if consolidation of regulators is not the best move? how do you explain to the public why four very smart people playing very important roles and are financial institutions, rigor-matory system, and an administration that i think has equally smart people that understand this, why is there not -- how do you explain in understandable terms if you are talking directly to the american people now and not to this committee, what we should do to fill those gaps so that these kinds of egregious and awful things don't happen again? starting with you. then i think there was arbitrage -- >> i think there was arbitrage, but between the bank and non- bank sectors, other vehicles vs.

higher leverage the misplaced capital requirements for commercial banks. on consumer protection it was third-party mortgagor regulate -- originators, not affiliated -- original loans being funded @@@@@@@ @ @ @ @ i think that is unfortunate that the word bank is used for everybody. my role -- we all made mistakes but the insured depository institution sector has held up very well. you saw in december so many fleeing to become a bank holding companies and trying to grow their insured institution. which is hard for us, because our exposure has increased significantly, we have tried to do the things we need to do to stabilize the system, but in this increased our exposure significantly. so i think that testified

before, the arbitrage between the banks and non-banks and have a consumer agency with a focus especially on examination of non-banks sector and system risk council that we have the authority to define system issues or systemic institutions whether or not a voluntary one to come in under the more stringent regulatory regimes we have four banks and bank holding companies, that they should be told they need to do that. so i do think of are the charts between the banks and nonbanks sector, not between individual different types of bank charters and certainly not between the choice of state of the federal charter, of 8000 community banks of the country, most do have a state charter, we regulate about 5000 of them. i don't think they really contributed to this but -- you have seen additional assistance community banks -- to read what rick and television for fear of franklin, which right here come inevitably there would be a regulatory the point that would be dominated by the large institutions, london together. there is a valid reason for state charters.

community banks from a state charter community banks tended be more local and their interest in how they conduct their lending. so i think to try to draw that issue in to the much larger problems we have with arbitrage between banks and non-banks and a lack of regulation of derivatives i think is misguided and it is not where we should be focusing 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 about a quarter of the nation's community banks, all different sizes of institutions. most of the problems did not take place inside of the insurance depository institutions that we supervise, which are the most extensively regulated parts of the system. and, of course, we did make some mistakes and the were some problems. we are not discounting that. that is not where most of the more. the second thing i would say, i think there are a number of very sound and strong proposal in

the administration's reform proposals which i do support, as i testified, just some places where we think it should be shaped differently. and carrying out our duty to provide our views independently, that is what we are trying to suggest. with cfts, we agreed to have a strong federal consumer protection rules writer to set a single set of rules that applies to everybody. a very powerful change. but we think taking that same step and applying it to enforcement and examination of financial and depository institutions to do that should stay with the bank regulators where it works well and it is that all of that effort should go, on examination, enforcement and implementation side, to the non-banking sector where there really were very substantial problems that have way disproportionately higher levels of foreclosures, for 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 entit 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 er 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. -- if we have to. >> i gather from the panel that in fact there is a sense that beyond maybe what the

administration is promoting, there is not a view that there should be any further regulatory consolidation. my question is, if we do not do that then there still seem to be the opportunity for regulatory arbitrage? the regulating companies would choose what they believe to be the most blacks regulator. so what mechanisms can we put into place to prevent that? for example, the administration cost restrictions that are proposed on the ability of a troubled bank to switch charters. is that enough by themselves to prevent our regulatory arbitrage that we want? i like to hear some of your ideas on that. >> i will start. i think first of the congress has provided some mechanisms to

contain it regulatory arbitrage. a lot of restrictions that apply to national banks are made by congress to apply to state banks if they are going to get federal deposit insurance. that is an important factor. number one. number two, the provision you referred to i think is an important one, it is one in which the agencies have already tried to act. actually i was going to tell the chairman this, there was a break in the hearing in march where chairman bair turned to me and said we have to figure out a way to do something about entities trying to get different charters when they see enforcement action coming. launched -- to have agencies all reaffirm this charter converting ought not to happen unless it is a signed institution and unless you don't have the enforcement

kind of actions pending and you ought not to be will to use it to avoid supervisory ratings. a couple of instances of institutions shifting charters over the last few years has become reasonably well known, and engaged sort of flight from enforcement. so i think this was a very important gap to plug. >> anything else? >> i think it is very important. we have seen over the years a number of institutions come in number of situations in which people have switched charters to avoid supervisory actions. anatoly support the action we have taken. if we wanted to go forward and put some things in legislative language, i think that might be very good idea. just make sure we don't change in the future. >> i would agree. and we indicated and are written testimony. we are the insurer -- so once the insurance is granted if the entity decides to leadership we really don't have a role in

that. we particularly feel it is in our interest to make sure we want good strong -- prudential supervision and we don't want charter convergence to undermine the process. we would also have to work with you, and the center and i had a conversation about that, putting some of like that in the statute. >> i joined senator reid and that effort. >> senator addendas -- senator menendez, could i address the question? from one of the charter's acting being used as an example as an arbor try opportunity -- arbitrage opportunity is countrywide moving from the fed to regulation by ots did this 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 understandi 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 digná)k%@@ @ @ @ @ @ r@ we need the certainty that if they come in to help, it will be put in the present -- resolution. >> if an entity is listed on an exchange, wouldn't the securities and exchange commission have some kind of ability to examine all the aspects of that institution? i am looking at aig, for instance. >> generally is the holding company. that is what is listed. 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 at the federal level -- financial institution and specific read a letter at the federal level. quite close to what i have in

mind. you guys have someone addressed this in some of your other questions, but going back to what senator menendez asked in that he wanted to know if it could be laid out to seal these gaps by rulemaking or some other method, i am not sure i got an answer to that question i want you to share your thoughts as concisely as possible, because each one of you could burn for minutes at 50 seconds with one answer if you wanted, as to why this significant reform in this direction is not the direction to go. taking off your hat, as individual department leaders, because turf does not play a role -- if someone says i will disarm your farm, i would be upset about it -- but how would we get these gaps closed without something like this?

go ahead, sheila, and we will go down the line. >> i think the charter choice, if you will, was between being a bank are not being a bank, and being much less regulated in the non-banking this year. that is the arbitrage that need to be addressed. >> and what you're saying is that that cannot be addressed with one? >> no, it could not, because you'd be consolidating what we do with the depository institutions, but it would not expand beyond the heavily regulated -- -- >> could it? >> for things systemic in nature, you could do it with this risk council, some ability to look across systems and a dubose credential requirements regarding capital and leveraged to mitigate systemic risk. that would be across all sectors, not just for banks. >> 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%@@@@@b)'$')) and i believe that it should be this same. >> when countrywide came into your supervision, or the holding company supervisor and also for the banks. and the company that did the block of the subprime was a cow fate -- a california regulated mortgage in it. >> there were a number of state- regulated at companies. i don't remember the percentage of california versus other states. >> when you reviewed your organization -- when you inspected these holding companies, did you notice anything or did you 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. my question -- i will let you answer last, the governor could i think you have an opinion on this. but to the other panelists, if the federal reserve, following this advice by two very knowledgeable and experienced people, does not perform as the supervisor for a large holding companies, who would or should? do we have to create another entity? what is a general knowledge about that? >> that is right. the fed is the holding company supervisor for the vast majority, not all, but the very largest institutions. i think he would decree a new agency to do it. -- i think you would have to create a new agency to do it. >> you can put the holding

company supervisor and bank supervisor in the same entity. i think, frankly, for smaller institutions, a lot of institutions, were the only subsidiary of the company is the bank, there is logic to that. but where u.s. companies with a lot of different businesses engaged in nonbanking activities, that is where the particular expertise of the fed, because of its clauses of the capital markets -- its closeness to the capital markets, all that comes into play, and replicating that would be the most difficult challenge for any agency to recreate either separately or inside the credential supervisor. >> very cook it, because i have to give the governor -- >> i think you could replicate that. the difficulty would be in dealing with the state-chartered organizations, where you do not already have a right to little like the occ or to yes. -- 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 sometimes 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 harbor charge. >> it would help have them -- have the banks under the same regulatory agency? >> i don't, actually. for smaller companies, particularly those that only have a bank, a shell was no other amenities, right now the additional holding company supervision is quite modest. as the bank holding company picks up additional activities, if it does its own capital raisings or a small subsidiary, it has management from a holding company level, that is onwhen

that seems valuable. . ex 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, cane creating risk in an of itself, and that involves different kinds of activities, different kinds of regulated entities that are, as you say, moving things back and forth or acting in parallel, and forth or acting in parallel, and that is where i think y need a different approach which looks at the holding company as an integrated whole, supplementing, complementing the rigorous functional regulation that takes place in the subsidiaries. >> yes, please be very quick,

and i will get my second question. >> i do think there are times where there are activities in the bank and holding company that there are some types of activities but subject to due to different levels of supervision and we ought to fix that. >> we have suggested in prior testimony large institutions have their own resolution plans so that they could be acquitted quickly if they got into trouble, at a creek -- and a key to this is separateness of what is in the bank. resolution is very complicated with these large institutions because of the interrelationships between the bank, and it is hard to tell the difference. we also, in terms of -- there is a provision called 23a which is designed to restrict banks holding strings for the holding company. we have increased pressure to agree 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. >> i want to get senator bennett 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 to the level of becoming systemically risky, the fed 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 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 they engage in very bank-like function, and there is a safety and soundness issues like an underwriting standard, down payment requirements. that is not really a consumer protection thing in the traditional sense.

>> it goes to the, that senator bennett was making of making sure you have skin in the game. >> but part of the mortgage legislation that passed the house last year at, and standards that i would say were prudential standards that apply. that would be helpful for mortgage providers, but not necessarily all financial providers. there may be some instances where some of that is warranted. >> but what did senator bennett's approach that you originated a product and keep it in their -- it would put some requirements of safety and soundness on the institution? >> absolutely. >> i do think that the question of where regulation stops, how broadly the perimeter is cast, is an important one going forward. we know that we will not have the same problems we had a few years ago. if it will be new problems.

-- it will be new problems. i thought that one of the important roles of the council, some kind of interagency council, is precisely to that i tend to issues that don't seem under anybody's regulatory umbrella 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 >> and we also have provided a lot of support for the larger institutions, as well, on an open-bank basis, so i think all of that needs to be taken into account. i know, senator, it is confusing. we have these mobile regulators, and it is confusing to explain to the public. on the other hand, we find it extremely important to have people on the ground at banks all of the time. it gives us a window to see what is happening in banking and what risks there might be. you are right. how we might be able to fix some of that up there and back a

supervisory process, but i think if we were going to shift to that model, and just go back, we would have to be more on site with our back up examination to keep those datapoint congenially -- those data points. that would add to the regulatory burden, so, i think by regulating state-chartered banks, that is very helpful. >> senator, if i could, just to add to the confusion. the ots is the backup. you have a federal regulator. >> 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.

we want to make sure we got those views on the record and press questions, as well, but thank you very much. hearing adjourned. [captions copyright national cable satellite corp. 2009] [captioning performed by national captioning institute]

>> >> afghanistan has seen an increase in violence recently. up next on c-span, we will get an update from the pentagon on the security in eastern afghanistan. and later, british prime minister gordon brown goes before a committee in parliament.

tomorrow morning, the young america's foundation conservative student conference continues in washington. we will hear from tony perkins of the family research council, plus a radio host and former ceo of godfather's pizza. our live coverage begins at 10:00 a.m. eastern. and later in the day, the head of the federal aviation administration will talk about aviation safety and the challenges the industry faces. that is live from the air line pilots association at 1:00 p.m. eastern. >> this week, the full senate debates the nomination of sonia sotomayor as supreme court justice live on c-span2, c-span radio, and c-span.org, and coming this fall, tour the supreme court. >> now, a pentagon briefing on the afghanistan 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. >> the general and his troops are responsible for security and stability operations in the major regional command east. this is the first opportunity to get an operational update from the general, who assumed command on june 3 of this year. with that, in general, i will turn it over to you for opening remarks before turning it over to the press.

>> well, thank you. hello, and thank you for joining us this morning in what is my first pentagon press conference as combines commander. -- combined commander. the 82nd airborne will replace the 101st airborne headquarters with the combined joint task force 101. during the transition of a ceremony at the airfield in afghanistan. the joint task force 82 has worked hard to build on the work of the 101st with the afghan national security forces with in the provinces of regional command east. of the predominant army, we have significant contributions from the navy, marines, air force, and special operations. the sailors, marines, an airman fulfil important needs across the operations -- and m&a -- and

airmen. here, far from home, brave men and women have given their lives for the cause of freedom in afghanistan but also to keep all americans safe and free. to their families, friends, and comrades, i offer our heartfelt condolences for those who have fallen. no words can diminish the grief that we feel, but i want you to know that all of us honor them for their service. we will remember them and you each and every day. many of you are familiar with the regional command east. the land area comprises 120,000 square kilometers, at the same size as new york or mississippi. most of the area is steep mountains and channeled to rain. even in the areas that are relatively flat, the high altitude is a limiting factor for a number of agriculture and commercial activities. 9.5 million people live in this

section in the east, and is within 75 kilometers of the border. -- and it is within 75 kilometers of the border. a significant number is quite isolated. in these areas, afghan forces are intimidated through violence and coercion. the security of the afghan people is our main for is, and we carry that out with close work with the security forces and afghan and others -- is our main focus. we see these. the true center of gravity is not the taliban but be willing support of the afghan people. here in the rc east, we are

working hard to anticipate and expose them. we are doing this by taking it proactive approach to seize and retain the initiative by pre- empting event and exporting opportunities. -- pre-empting events and exploiting opportunities. we strive to protect the information by, with, and through the afghan security forces. we partner our forces to build their confidence, capacity, and credibility, and we also learn from our afghan partners, many of whom are skilled and experienced soldiers and commanders. in the areas of development and governance, we are working with the counterparts. in my long career, i've never seen a more focused government approach pushed down to the lowest levels. for instance, we have one group, reconstruction teams,

agribusiness teams, district support teams, etc.. along our governance of production, we are working with civilian colleagues to collect the people to the government's -- a lot our governance and production. -- a lot our governance. along are development line of operation, along our governance. -- along our development line of production. working with other international organizations, it is also a big part of this effort. this month, the afghans would go to the polls to choose their next president. there are the first-time voters.

the afghan people are clearly making their choice for freedom. this is an afghan-run election, and we will not take sides. the elections will not be perfect. with this as a backdrop, i would be happy to take your questions at this time. >> thank you, general. andrew? >> general, this is andrew from reuters. you mention and use information as your primary line of operation. are you saying that is more important?

and can you explain what that means in practice? i am making a difference in roles between myself and my subordinate commanders, so that does make a difference in terms of the fight against the enemy. i do see the center of gravity as the people, and the people are the most important piece of this. what you call propaganda. it is really a holistic and the sense that i am talking about strategic communications and

messaging. this would includes psychological operations, etc., so it is an umbrella, but as you know, this is a war of perception, as well, and we believe it is important to emphasize communications in all that we do. here is my greatest emphasis. it is simply back we have a communications process here that speaks accurately and quickly to the different audiences. that is the primary piece, and that has to deal with accurate, trig folk information, good or bad, about as quickly as we can get it, because, again, it is a war of perception. there is our enemy and how quick they are in terms of strategic communications.

more importantly, we have to make sure we are accurately and hopefully, that will answer your question. >> general, abc news. general mcchrystal issued an initiative recently. can you explain what impact that may have had on the operations of your forces in the region since the directive came out, or has this been something -- have you followed a consistent pattern even before that directive came out? i will take the first part. general mcchrystal's intent, the center of that is the protection of the afghan people.

that is the intent of the order, and as you know, it deals with the measured use of force, primarily having to do with indirect fire and munitions that can cause greater property and personal damage. but, again, 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 any munitions and in particular large munitions. always with the view toward being careful that we employ munitions where we would not in danger noncombatants -- endanger noncombatants. we have been additionally cautious in this regard. i think in some cases, it may have slowed the pace of our refresh -- of our operations and that we take more time and allow a situation to develop to make sure we know whether or not

civilians are in the area. we may maneuver a little more to gain a more advantageous position, where we know that we can exclude any civilian casualties. we may, in fact, back off an accord in an area -- and cordon the area, so it impacts the sense of the pace of operations, but given the predominance of our force, we can have a tactical patients and still defeat the enemy. -- tactical patience. this is more important than the pursuit of an insurgent, and that is really the crux of but it -- of it. >> general, i wonder if you could talk and little about partnering -- a little about partnering between your combat units and the afghan national security forces in r.c. east?

is it fairly uniform across your area? or are some units more closely linked to the afghan army than others, and what are your sort of goals, sort of expanding that in the months to come? >> thank you. that is a good question, and it is an important one to me, because as i look at the first principle of protecting the population, the second major priority that i have talked to my forces about is building afghan national security forces. within r.c. east, we are not partnered in an even fashion throughout r.c. east, and this is something we are beginning to plan with our partners and determine how to make some adjustments. that is primarily because of our forces and the positioning of the police forces or ana is just

not idea to get an idea partnership. a partnership to meet -- just not ideal to get an ideal partnership. the partnership to me, we will attempt to do that. we do that already in many areas, but not all. we obviously operate together continuously. i think that we are going to put greater focus on it now. we are working throughout the force but also in our planning. my view is that my back, essentially, is the backof the -- is the battle space of the army. as we consider the threat of the security of the people, we have to do that in a greater way than we are doing it today. it is pretty good, but i believe we can make it better, and over the next several months, in

particular, we will do that. in fact, today, we just concluded a two-day conference with our afghan national security force partners as well as our combined is security force that is responsible for their training -- our combined security force. we are looking for ways to improve our partnership. >> to follow up on that, do you need more forces in order to do the partnership properly, or do you think you have enough forces in r.c. east if you move people around and move headquarters around, etc.? >> i believe at this time i have enough to do the partnership in a way that i am describing. what we will need to do is just shipped some boundaries and shifted the ana forces, as well -- and shift the ana forces, as

well. i do see a need for greater capacity within the afghan national security forces in r.c. east, and as you know, and general mcchrystal has stated, we are looking to build capacity at a quicker pace than what is laid out now. >> general, this is joe. could you give us an update about the missing soldier who was captured by the taliban militants? what are the efforts that you are doing to bring him back? >> says the time that he went missing, we started immediately extensive efforts -- since the time that he went missing. we were trying to bring him back to our forces and to safety. we continue extensive operations

throughout our force and also with the help of our afghan partners and other agencies as well. i prefer not to go into any further than that, because i do not believe it is helpful at this time. over. >> general, is mike with cnn. i just want to follow up on what my colleague's question was -- it is mike. if i could point down to a simpler question -- if i could boil it down to a simple question. are you having more success with this directive? you say it is slowing operations, but in its most basic form, are you having more success in stopping the enemy with this new directive? >> in terms of success, i do not

really see a difference. we are operating a little differently, but with this operation in mind, we plan a building permit, as well. the other thing i will say is that there are a lot of i lotn r.c. -- we planned it better, as well. the other thing i will say is that there are a lot of areas in r.c. east. >> general, i am from bloomberg news. getting back to training question, can you give us a status update? how many afghans you have in training for the army right now, and are you also trying to police it? what are the members for that? how many are you able to sort of get through that program over a period of time? just to give us some figures on that?

>> i am sorry. i really cannot go into details on that because i am not responsible for that training regimen. another general does the training and the institutional training. i take over the training once the unit is trained as a basic combat battalion, for instance, or policemen, and then they come back out to r.c. east. we take the trenni from a basic level forward. we begin -- we take the training from the basic level forward. we work very hard on their leaders skills and their headquarters with the company, battaglia, and raids. -- their company, battaglia, -- battalion, and other. you would have to ask the other general about that. >> general, from reuters again.

i am wondering if you could tell us something about the tactics of the insurgents in your area? we seem to be seeing some more sophisticated attacks. can you talk about the current tactics of the insurgents in your area and whether you are seeing any development or changed in those tactics? >> well, actually, i will talk a bit about this, because their tactics differ in different areas of r.c. east. i will say though that your comment about the sophistication increasing, i look at this in r.c. east over time, in the last six or seven months and going into this summer that the sophistication is at best about even and maybe a little bit less in terms of their effectiveness. we have had, as you know, an

increase in the number of significant activities, but what i am saying is the effectiveness in terms of direct contacts and their skills is probably diminish some. -- is probably diminished some. in terms of ied i's, that creats a 70% of our casualties. there is an increasing sophistication there. we are seeing some of the ttp's migrate here to afghanistan, and they seem to be skilled in on what areas to use different types of ied's and initiation devices. that is my most difficult challenge in terms of tactics, and we are working that very hard. as i said, really, the fight is different in almost every area in r.c. east, and when you go up into the northeast, it is very

mountainous, a very different set of conditions there, and there we will from time to time seymour skilled fighters in terms of what we call in the ability to conduct those types of attacks, and in other areas -- from time to time we see more skilled fighters. i think we use the term "complex attack to speak too freely. as you move into another area and the -- complex attacked" -- i think we use the term "complex attack" too freely. >> you said you are seeing a lot of the same skills in iraq and that you're also getting 70 percent of your casualty's now from ied's. what is happening in terms of the inquiry ied's and the counter ied's?

-- in terms of the ied's? what is being employed now in afghanistan -- is it just a whole new batch of lessons that you are having to learn of their proof -- over there? >> no, predominately, we are bringing all the expertise from iraq, and from the experience here in afghanistan, to bear here. we have quite a good counter ied organization at every level here. i have one at the cjtf headquarters. we have exports from almost every field here working on this problem. -- we have experts from almost every field here working on this problem. the percentage of casualties caused by those numbers is staying about flat, along the line, so that is our expertise

and our countermeasures having an effect for the good of a soldier. of course, those numbers climb, and the number of unwanted will climb alongside it, and there are some tough things -- the number of wounded will climb alongside it. >> general, again, do you think the operation in the province had any impact on the situation in your area? have you seen it any militants crossing into the pakistan border? -- have you seen any militants crossing? >> i am sorry. the first part of your question, did you ask if the operations in pakistan have influenced you, or was it the operations in afghanistan on the southern part of my border?

>> and and the operation in the one province -- i meant to the operation in the one province. if you have seen any militants crossing into your area or into pakistan. >> i have not seen insurgents entering into pakistan as a result of the r.c. east. we do see that movement. right along the seam between r.c. east and r.c. south. we do see movement across the border there, and right arm on our area, but this is what the enemy as testimony -- customarily used. this is at the southern part. we are aware of that.

i cannot say that i saw an increase or a decrease as a result of the operations in the south. i think as they expand their operations that we will see an impact, and as commanders, we are planning for that, as well. >> general, when you captured ied cells, groups of militants that are 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 foreign fighters, and, obviously, in many cases, the foreign fighters are the ones that bring skills,