after the s.e.c. failed to take action on its own. i felt the industry's heavy regulation and high profits were symptoms of an industry in serious need of reform. we then passed a credit rating agency reform act of 2006 which senator dodd mentioned. the act set forth clear standards for the nrsro application standards. it also gave the s.e.c. authority to regulate disclosures and conflicts of interests as well as unfair and abusive practices. unfortunately, the law we passed in 2006 did not have time to take root before the problems that they were intended to remedy took their toll: . sros doubled just

as the performance revealed, that such securities were not as safe as the rating agencies said they were. today we will consider a legislative proposal by the reg slags and others to revisit these. in determining whether new legislative steps were rekquire, some are still working their way through the system. every option should be on the table. one option is to remove rating mandates from regulations. another is material disclosure. we must also be mindful of unintended consequences. i strongly believe that the credit rating agencies played a pivotal role in the collapse of our financial markets. any regulatory reform effort must take that into consideration and i believe we will. thank you, mr. chairman. >> thank you very much, senator shelby.

as i mentioned, i want to thank our colleague, senator shelby, who was involved early on, he and paul sarbanes worked together on that matter and did great work. and he's been followed in that effort by jack reed. and i want to thank jack publicly here for the subcommittee chair dealing with these matters. and has worked very hard in developing proposals, which we invite all our colleagues to take a look at as part of our financial modernization bill. i want to publicly thank jock reed for his work any thoughts? >> i want to thank you for not only holding this hearing but your efforts to reform the financial institution regulation and particularly want to commend senator shelby. it was his leadership that first gave the s.e.c. the clear authority to begin to regulate the kpr rating agencies. in effect, the credit rating

agencies are so central to investor decisions that it's comparable of the good housekeeping seal of approval. to expect a municipal finance director to be able to do the due diligence to make sure he has the aaa-rated is asking a lot. we depend significant on the ratings. as evidence suggestions, part of our economic problems were a result of gradings not substantiated over the long run. what i believe we have to do is to give legislative support to the s.e.c.'s efforts to focus on transparency through enhanced disclosure and also counteract the appearance of conflict of interest. the legislation that i propose and in many respects is reflected in the administration's proposal would do that. there's one other issue i have included in my legislation.

that is to change the pleading standard in securities cases so that a plaintiff could at least reach the discovery stage with respect to a credit agency to see if in fact their behavior was reckless. we do not change the overall 10b5 standard which is a very high bar for liability, but effectively today under the securities laws, it's very difficult for a plaintiff to even get to discovery to see what in fact went on with the rating. and i think this was something that we should pursue. mr. chairman, thank you, and i look forward to the with witnes >> thank you very much, senator reed. as i said at the outsaid, instead of helping people understand risk, it was hiding risk too often and relying on

people, the dependancy people have. so with that, we look forward to your testimony. >> thank you very much, chairman dodd, ranking member shelby. it's a pleasure to be back here with you and other members of the committee to talk about the administration's plan for a financial regulatory reform. as you know on june 17, president obama unveiled a sweeping set of regulatory reforms to lay a foundation for a safer more stable financial system. we sent up draft legislation for your consideration covered by that proposal. in the weeks sin the release of that proposal we have worked with you and your staffs to explain and refine the legislation. today i'd like to focus on credit ratings and credit rating agencies and the role they played in creating a system where risk built up without being properly understood.

how these ratings contributed prove far too fragile. this committee has provided strong leadership to enact the first registration and regulation of rating agencies in 2006 under senator shelby's leadership and chairman dodd, ranking member shelby, senators reed and bunning have continued that tradition going forward. the proposals i'll discuss today build on that already-strong foundation of this committee's work. it's worthwhile to begin our discussion of credit ratings with a basic explanation of the role they play. rating agencies, borrowers now more about their own financial prospects than lenders do. especially in the capital markets where a lender is likely purchasing a small portion of the borrower's debt, it can be

inefficient for all lenders to get the information they need. lenders will not lend as much as they otherwise might, especially to smaller municipalities or will higher significantly higher rates. access to information and accumulated experience, at the same time, credit ratings played a key role, a key enabling role, in the buildup of risk in our system and contributed to the deep fragility in the past two years. the current crisis had many causes but the major theme was that risk, complex and often misunderstood built up in ways its supervisors, did not, could not, monitor, prevent or respond to effectively. rapid earnings from growth driving by innovation overwhelmed the ability to remain risk management systems.

rating agencies have a long track record of evaluating the risks of bonds, but evaluating structured financial products is a fundamentally different type of analysis. a right to the cash flows from a large bundle of smaller assets. certain asset-backed securities rely on the slicing up of potential losses. and this process relies on quantitative models that can produce and did produce any desired probability of default. credit ratings lacked transparency with regard to the true risks that a rating measured and the core assumptions that informed the rating and potential conflicts of interest in generating that rating. this was particularly acute for ratings on asset-backed securities where systemic risks are quite different from the more idio syncratic risks of corporate bonds. investors relied on instruments

and they saw those risks as remarkably similar despite the complex and different securities underlying the assets. ultimately this led to serious overreliance on a system for rating credit that was neither transparent nor free from conflict. and when it turned out that many of the ratings were overly optimistic to say the least, it helped bring down our financial system during the financial crisis. we do need fundamental reform. the administration's plan focuses on a series of additional measures in three key areas. transparency, reduction of ratings shopping, and addressing conflicts of interest. it recognizes the problem of overreliance and calls for reducing the ratings usage wherever possible. with respect to transparency, we would call first fors better

transparency in the rating agency process itself as well s stronger disclosure requirements. we would require transparency with respect to quantitative information underlying the ratings so that investors can carry out their own due diligence more effectively. mr. chairman, i see that my time is up. would you mind if i take a couple more moments to outline the key proposals? second, the use of an identical rating system between traditional corporate bonds and structured financial products allowed investors to use their existing standards with respect to ratings and allowed regulators to use existing guide lnls without the need to consider the risks posed by structures and unstructured products. we addressed this directly by requiring that rating agencies use rating symbols that distinguish between structured and unstructured financial products. the first point, transparency. second on ratings shopping. an attempt to shop among rating

agencies by soliciting preliminary ratings and enlisting the agency that provides the highest one. our proposal would require instead that an issuer disclose all of the ratings it had received so investors could see how much the issuer had shopped and whether its final rating exceeded one of those preliminary ratings. that should help deter ratings shopping in the first place. in addition, the sec has proposed a beneficial rule so that markets can assess the long-term quality of ratings. in addition, we strongly support a proposed sec rule that would require issuers to provide the same data they provide to one rating agency to all other credit rating agencies. to allow those agencies to provide additional independent analysis to the market and to improve the ability of competition in the marketplace in a beneficial, positive way.

third, with respect to conflicts of interest, a strong new transparency requirement with respect to payments. we would in addition ban rating agencies from providing consultant services to issuers that they also rate. and each rating agency would be required to disclose the fees that they were paid for a particular rating as well as the total fees paid to the rating agency by the issuer over the previous two years. lastly, we need to strengthen and build on sec supervision with a dedicated office, focused on compliance and a requirement that the sec evaluate the rating agency's compliance with their own rules and their own methodologies. in conclusion, we all know that markets rely on faith and trust. we need to restore honesty and integrity to our financial system and the plan that we have set forth before you for consideration would lay a new foundation for financial regulation that in our judgment

will once again make our markets both vital and strong. thank you. >> thank you very much. we appreciate that very much. and let me just say we appreciate very much as well the administration's continuing conversation with us in this committee about your ideas. we welcome them. i know i speak for all of us here. we look forward each week to the ideas that come up and the thoughts that are coming from the administration. as well as from others. as i said earlier, this is a committee that is open and it's a dynamic process. we want to hear ideas as to how we ought to move forward. let me begin by raising the issue of -- given the problems caused by faulty ratings and the need for strong federal oversight, i think we've all come to that conclusion. the question is how do you do this? we all recognize the problem. now what's the answer? there's a lot of different views on what the answer ought to be. i've talked to some people who raise the question of whether or not you even need rating

agencies. today given more transparency, the market in many ways could help you determine whether or not a given product is actually worthy of a aaa or something other than that. there are those who embrace that view. but i wanted to share with you a view that's been held by some in direct conflict with the proposal that the administration has given us, and that's to create a new office within the sec and to conduct the oversight of rating agencies. the council of institutional investors, it was prepared by professor frank, recommends creating a single independent credit rating agency oversight board to oversee registration and enforcement actions. such an independent board could

offer higher salaries and attract a staff of greater expertise. others have observed that the reg yldz could be moved to a systemic risk authority. describe if you would how the treasury determined would be best to oversee the credit rating agency. how is it you came to the sec choice? >> mr. chairman, i think that historically, the sec has had important functions in this area. this committee's action under the leadership of senator shelby enhanced that authority to the sec. we were attempting to build on that basic foundation in our legislative proposal. under our proposal, the sec could delegate some of those functions to the public accounting board as a way of recognizing their expertise. in our adjustment, the sec is also to attract quite highly talented individuals in this area and having a dedicated

office focused on this would advance the mission. >> let me -- this -- i'm going to raise the question here with you, which i was stunned by the question because i just assumed that this went on, but apparently it doesn't. credit rating agencies, i'm told, and they state they do not undertake to verify the information that issuers provide them in making a rating. this has led to a perception that the rating agencies take the issuers' statements at face value and can choose to ignore other information they receive or are aware of about the issuers when producing a rating. do you feel it would be appropriate to require rating agencies in formulating their ratings to consider information that they receive about an issuer and find credible from outside sources? what i find stunning, i just assumed that went on. i'm told it doesn't. i'm -- it's sort of a -- i'm answering my own question. tell me why you think there should be a different answer to the one i'm suggesting in my question to you.

>> i would never be so foolish. i hope. >> you shouldn't feel shy. others do all the time. >> let me just say, we've tried to draw a line in our proposal. we've tried to be quite clear that the government shouldn't be in the business of designing the methodologies for the rating agencies or validating them in any way because we think that will just increase reliance on them. we have been quite clear that they need to disclose whatever due diligence they do so there's transparency so that investors know when they get a rating that the rating company would say we didn't do any due diligence on this rating or the rating company would say the due diligence we did consisted of calling our buddy or hopefully when the transparency kicks in, the rating agency would have to say we did real due diligence. we had a third party. they can certify that they checked loan files. i think that with that level of transparency, it will be very

hard for -- harder for rating agencies to continue a practice of -- at least a mixed practice with respect to the due diligence. >> you said something in the first sentence or two that we don't want to dictate or require rating agencies to conduct their due diligence. forgive me, but i don't understand what you're saying at that point. if we don't require them to do due diligence, if we don't require them to at least consider information, credible information, that may contradict the information they're receiving from the issuer that's paying them, how could be have any confidence if we don't require that as a matter of public policy? >> i think there's room for lots of reasonable people to disagree about exactly where to draw the line on methodologies, mr. chairman. but i think the key principle is

we want to make sure there's transparency about whatever m h methods they use. we want to make sure the sec can examine whether the agencies have used the procedures they say they're using. >> they say they're relying on the issuer, the one that's paying them. they can have all of the transparency in the world. if you're relying on that information, that doesn't give me a great deal of confidence. >> it doesn't give me any confidence, sir. i'm not suggesting that. but i think that we should not inflate the confidence level that the rating agencies would have on the basis of that -- that level of due diligence and if the investor community can see, is required to be shown, that the kind of due diligence that's being conducted isn't really the diligence that ought to be due, i think it will have an effect on the process. >> senator shelby? >> it would take a long stretch, wouldn't it, to bring a lot of confidence back into what we

feel is been lost with the rating agencies, would it not? >> i would agree with that, sir. >> they have not in most people's eyes performed well in recent years. i think that's an understatement. nevertheless, the sec has exhibited a persistent confidence in these three firms, three firms with a sentiment that manifests itself in regulatory requirements that bless the organizational structure of those firms. there seems to be similar bias in your draft legislation. i hope not. what steps, if any, did you take, you and your team, to ensure that no particular organizational structure, approach to ratings or payment model, was favored over another and that the regulatory structure will accommodate innovative entrants into the --

i've always advocated, gosh, three firms nominate -- they don't have it all, thank god, have all the business, but there's not been enough competition there. you know, why should you just bless three firms? >> senator shelby, we would agree with you. there should be competition in this space. more entrants into the market, they should be done on a level playing field. we should have a diversity of approaches to a business structure so you have investor pay and issuer pay models that need to be accommodated in the system. i think all that is absolutely critical. >> something has gone wrong. we both agree with that. and so what we're trying to do is -- is have a basic new approach to it to try to do -- bring more transparency, a lot of transparency, eliminate conflicts of interest and all these things that were so rampant in this business. do we agree on that?

>> yes, i think the fundamental principles are embedded in our legislation. we agree on that. >> how does the decision to leave the nrsro ratings embedded in the regulatory framework consistent with the goal of not affording regulatory privilege to large entities? >> senator, i think that we share the goal of reducing reliance, both by private investors and by public regulators on the rating system. and in our judgment, that requires methodically and carefully going through each way in which rating agencies' ratings are used by different regulators in different contexts. there may be some areas where you can reduce reliance and other areas where you can eliminate reliance. there may be some areas where you can use the rating, but you have to require -- you should require independent judgment on top of that. in each of those contexts, it's quite -- in our judgment, it's

specific. we want to work our way through it. we're committed to doing that. the president's working group on financial markets has a team that's looking at this issue regulation by regulation. >> do you believe that one of the priorities of the sec -- one of the priorities, they have a lot, should be to straighten out the problems that we all deem necessary with the rating institution? >> i think it's -- it's one of the top priorities in reform along with making sure we have resolution authority, making sure we have a way of reducing systemic risk in the system and protecting consumers. >> one of the factors that led this committee to act in 2006 was the fact that the nrsro policy decisions were being made at the sec at the staff level rather than the commission level, as you well know. free-standing offices at the commission such as the office of compliance, inspections and

examinations have not always been subject to the same level of scrutiny as the main divisions. you propose an office to be created, asi understand it, deticadet dedicated to supervision. how would you ensure sufficient accountability to the commission? >> senator shelby, that's an issue i'd be happy to continue to work further with you and the sec on. in our judgment, having a dedicated office would increase accountability to the commission and to the congress because you'd know exactly who's responsible for that job. >> my last question, my time is about up, you also propose -- your proposal would authorize the securities and exchange commission to delegate reviews of nrsros to the public accounting oversight board. what is the pcaob's expertise that makes it uniquely qualified for this task?

would you recommend that the pcaob's board be structured to reflect the new responsibilities? >> senator, the -- >> they're getting into a new field here. >> there may be elements of supervision that could be delegated with respect to accounting methodologies and other matters where they do have expertise. and we have not considered restructuring the board to ac m accommodate that. i'd view that as an available option to the sec. >> thank you. >> thank you very much. >> thank you very much, mr. chairman. thank you, mr. secretary. the issue that chairman dodd raised with respect to due diligence has been broached by the second panel. one suggests that we instruct institutional investors that they cannot rely on ratings to meet their fiduciary obligations

unless there was third-party due diligence. do you have a position with respect to these two views or another view? >> the administration hasn't weighed in on the question whether there should be additional requirements outside of the rating agencies with respect to the purchasers of rated securitizations. i think that we'd want to be careful, again, not to take steps that would suggest excessive confidence in the ratings themselves. and anything we can do that improves due diligence by investors is likely to be in the right direction. but whether that needs to be a requirement on the purchaser or not, i frankly have not formed a developed view. >> one of the aspects of legislation i proposed is to at

least to adjust the pleading standards and effective ly, private action would be a -- a stimulus for a lot of due diligence. is that your position? >> in our judgment, this presented a complicated question. on the one hand, the -- changing the pleadings standards might increase the incentives for due diligence in the system. on the other hand, we were concerned that such a standard might increase reliance on -- by the investor public on the rating agencies and may provide further avenues for issuers to sue over corporate downgrades, which we thought would potentially pose a problem in the system. so in our judgment, this -- you know, this was a very -- a close

question. we did not include it in our -- in our legislative proposal. >> thank you. mr. joiner, on behalf of fitch, in his testimony said mandatory registration concepts are unnecessary and unwarranted and is not consistent with free speech principles and the proposal will force compliance -- new rating agencies and impede technology and innovation. how would you respond to these -- fit, the mandatory registration is unnecessary. >> in our judgment, the credit rating agencies shouldn't be able to opt out of hieig having standards. we don't think that financial institutions, credit rating agencies or other participants in the system should get to choose their regulator or not. and so in our judgment, having a high standard level playing field for competition was really

important. i think on the basis of the 2006 legislation, there is in place a system for encouraging new entrants into the cret rating agency process. registration is not going to be a significant barrier to entry. we think competition is a good idea in this space if it's on a level playing field with high standards. there's no race to the bottom. the competition is based on everybody playing by the same rules. >> finally, mr. secretary, in the testimony of the panel, there is a question about the rating symbols, distinguished between structured and non-structured products. they suggest the problem is not the investors do not know they were buying structured products. they either knew and were happy to get the higher yield or they didn't understand the risks that they were buying. essentially the problem, they suggest, is accuracy. again, how would you respond to that? >> i think the rating of a structured product is a

fundamentally different exercise from the rating of a -- of a corporate bond. the distinguished -- the distinguishing features need to be noted. it's not just the symbol that's used but the underlying availability of qualitative and quantitative information that we would require disclosure on. the package of those reforms, i think, will enhance transparency in the market and make it less likely that garbage ratings can be invented. >> thank you, mr. secretary. >> thank you. senator corker. >> mr. chairman, thank you. thank you for all of your effort in this regard. mr. barr, thank you for being here. you're a very pleasant guy, and i'm hoping that over time, we'll get this all in balance. i want to say, though, just in listening to testimony, it just seems a little schizophrenic in that, you know, this was the biggest regulatory failure in@@s

>> and basically taking what in the issuers were saying and in testimony in answeringist a minute ago you said the federal government should not be in the business of designing what these guys do, but on the other hand, as it relates to consumer protection, you guys want to design the products that product companies are offering. i find this almost an out of body thing when we're looking at trying to fix what led to this. we're doing almost nothing but transparency, okay? on the other hand, we're getting into actually telling companies what products they're going to offer. just sort of an imbalanced approach. and i don't want to spend long on that. offer. it's just sort of an imbalanced approach. i don't want to spend long on

that. do you want to rebut that at all? >> yes. we've had this exchange on previous occasions. in our judgment, we're not suggesting that the government is going to be in the business of designing products. the legislation provides the authority to say there's a product in the marketplace that is a standard product. a 30-year fixed-rate margortgag. the broker should show them -- >> i'm all for that. >> and so we're not in the business of designing that product either. we're saying there is a product in the marketplace and it's the standard product. how do we judge those? we have a -- in that context, we have a large group of -- of individuals who are not sophisticated investors, market participa participants. it's a fundamentally different context from the context of credit rating agencies where the basic backdrop is the

institutional investor market and sophisticated retail investors' participation. so you'd want to come up with standards that are appropriate to each of those marketplaces. >> well, i appreciate that. i do see, though, that you're basically keeping the same regulatory scheme in process and making people rely or pay for these. let me just -- let me throw out -- go down a different path. the commissioner in new york suggested recently that instead of the kind of scheme that we have now since insurance companies in particular rely heavily on ratings, that the insurance entities in the states had actually paid for the ratings and they should be made available to all and that way if -- if credit rating agencies don't perform properly, they'd be discarded but it would be a different way of looking at it. i'm wondering if that kind of thinking makes any sense from your standpoint.

>> i do think it makes sense to have a diversity of payment models and investor pay model and issue pay modles. once the rating occurs, there are concerns that the investors would have incentives to avoid downgrades on their holdings. but having a diversity of views, diversity of approaches within the same basic legal structure, makes a lot of sense. i think we need to reduce reliance by regulated entities on ratings, but i think it's going to take a process a good bit of time to figure out how to replace that function in the regulatory structure with alternative judgments that can perform a similar function. >> you know, i have issued bonds in the past and had rating agencies rate them. i do want you to know all of them were paid in full. but it is kind of an interesting

process that you go through. i mean, you -- you really do sort of look for the entity that's going to give you the rating and then you pay them an up-front fee. and then i -- and then you -- as the borrower, you sweat bullets ensuring you could pay everything back over time. i do wonder -- >> it's very old-fashioned of you, senator. >> thank you for that. i do wonder whether we should consider a different payment mechanism where in essence the credit rating agencies have been in the game over time and instead of being paid up front, they're based on how it performs. we talked about that with mortgage brokers and others who have had no skin in the game. and i wonder if you might comment on that and i think some folks -- some colleagues on the other side of the aisle have actually been promoting covered

bonds. instead of getting all of this risk off banks' balance sheets, they, in essence, are in the game all the way through. i'm wondering if you might comment on those two, and thank you for your testimony in spite of some of the differences we have and, you know, there's not time to enumerate all of those right now. i do look forward to working with you and others to come up with something that's in the middle of the road. >> thank you, senator. i think both suggestions hold out very good promise. one of the features of our legislative proposal would be to give the sec authority to require payments of the kinds that you've described for credit rating agencies. i think it's a terrific suggestion. and i think there's also enormous work that can be done with covered bonds. it's not going to be a replacement for securitization, but it's a promising avenue we'd be happy to work with you on. >> thank you. >> thank you, senator. senator warner. >> thank you, mr. chairman.

a lot of our colleagues have brought up the failings of the ratings agencies. this is perhaps non-pc, but there has been value from the rating aens ratinga agency, i think, back i my tenure as governor. there was sometimes validity in a rating agency when you're looking at state bonds and others that they did provide that independent arbiter service to kind of cut through the political clutter of both sides back and forth, that somebody could come in and assess what your state was doing, your locality was doing over a short-term or long-term basis. we did find usage of the rating agencies that they did do due diligence, something that clearly i find what the chairman said is pretty amazing as well that they did not in so many of

these corporate circumstances -- although, again, the idea of legislating that requirement, i think, mr. barr, you've raised some appropriate concerns about. with that enhanced -- put that government moral hazard thing that we all don't want to extend to a whole new set of organizations in terms of the rating agencies. i want to ask -- one is we've had mostly the issuer-paid funding model. the administration's proposal is that an investor paid funding model -- i know certain investor paid models are starting. do you really think that marketplace approach with an investor-funded rating agency, you know, i'm asking you to make a prediction now. do you think it will be successful? do you think the market will respond to that?

>> i think there's an opportunity, senator, to have a structure that has both models exist and thrive if there is the appropriate regulatory backstop of a level playing field. i think that the initiative to require an issuer to provide the basic information to all credit rating agencies when it provides it to one, so there can be true dissemation of information would help significantly in this regard if moved forward. and having a level playing field for that -- for that kind of competition on the basis of high standards and meaningful disclosure. i think there's an opportunity for that model to work. i think, frankly, we have so many challenges right now in restarting our financial markets, or securitization

markets, and in laying a new foundation that it's not clear yet -- >> i didn't -- and i do understand this question of whether we should be blessing the methodologies. it's a real hard issue. let me -- with only a minute and a half left, i'll go to my other question. you know, one of the things that we -- we use these terms aaa, aa, bb, what have you, but one of the things that i've felt that investors have not had, and i'm not sure i've had, is someone who's on the issuer's side and on the investor's side that we've ever translated that into what does that mean in terms of the actual percentage chance of default, number one, or the second category, even if there is a default, what -- what percentage of my investment could be truly in jeopardy? and should we, as we think about

this -- these therm terms think putting some commonly accepted standards around for investors. what is the percentage of default risk, what percentage of your investment are you potentially going to lose? 10%, 50%, 100%? we've talked about structured products and unstructured products. should be try to translate these letter grade ratings into actual percentage of risk of default or risk of amount of loss? >> yes, senator. i think that's absolutely critical to demystifying the process, making it more transparent. in our proposal, we fully agree with you, there should be in addition to the rating a report that describes the probability of default, the loss given default, the variance -- the reliability of the data, the underlying quality of the

assets, all the information underlying the symbol so that investors in the market can make better judgments about how to evaluate the rating itself. >> we would know what an aaa rating equates to in terms of both percentage chance of default and you've got $100 invested, what percentage of that $100 you could lose if that default takes place? >> that's right. >> all the way down to an individual -- >> correct. >> very good. thank you, mr. chairman. >> very good questions, senator. thank you very much for your thoughts on that. >> thank you, mr. chairman. secretary barr, good to see you again. >> good to see you. >> i'll say something that i think you'll find very unusual. my colleague from virginia was talking about working with the rating agencies as governor in our state, the state of nebraska, we have no debt.

i never worked with a rating agency in all the six years i was governor because it wasn't relevant. we paid for everything, even highways. so that's one way of approaching this. then you don't need rating agencies. kind of an unusual phenomena to pay for things you would actually have two choices. cut spending or raise taxes. and we could use more of that out here in washington. but i did work with rating agencies as mayor of lincoln as we would issue bonds. let me ask you a little bit maybe of a mundane question, but maybe an important question. as you know, there's been, especially recently, some articles written about first-amendment protection for rating agencies, historically it was viewed that they were issuing an opinion and therefore they had the protection of the first amendment if they were sued.

as you move down this pathway of additional regulationr as senator corker points out, maybe rating agencies need to have some skin in the game, if you will. do you have any thoughts whatsoever about whether that moves the rating agency out from underneath the first amendment protection? what would be your thoughts on that? >> senator, let me start by saying i'm not an expert in the first amendment. so my judgment, the judgment of the team when we're working on this, was that there is lots of scope for appropriate regulatory requirements on the rating agencies, including all the ones that we have in our legislation and a number of the other proposals this committee has considered that do not raise significant first amendment concerns. >> so you think they would -- and i appreciate you're not a first amendment lawyer. i'm not either.

even though i am a lawyer. but you're thinking that they still will be able to defend their lawsuits by saying we're protected by the first amendment because this is an opinion? >> senator, i don't want to -- i don't want to get too deep into this here again because i'm not an expert in the first amendment, but in our judgment, the range of proposals that we have put forth or that are in the committee drafts of -- of versions of this do not raise significant first amendment concerns in our judgment. and so i would not have put that on the top of the list of issues in the trade-offs that we've been discussing. i do not think that that is a significant issue in the trade-offs. >> okay. in your judgment, how have the rating agencies worked historically? we all know nothing was working very well over this past period

of time, but historically f you were to look at how they have done, what kind of mark would you give them? >> i think in many areas, the rating agencies have performed quite important functions with respect to corporate issuance and municipal bonds in many a a areas. they have significantly fallen down on the job in -- in those same basic areas. corporates and municipal, really straight-forward assessments that they have been significantly wrong on. and in the structured product area, i would say the evidence is really quite negative. >> here's my concern. and maybe it's a -- a question based upon what senator corker was asking you again. but it seems to me that one of the risks that we run here is that we so gum up this system

with additional regulations that, number one, no one could ever enter into competition. if you don't have a head start dealing with regulations, you're just not going to get in. so we exclude competition. and the second thing is i just worry that what we end up with is -- is literally a system where the consumer pays a heavier price for this. somebody has to pay for the regulation. there just isn't any doubt about it. have you done any cost benefit, any analysis of the impact on just the average guy out there who may be investing a bit of their retirement or whatever and the impact this will have? >> senator, i think unfortunately, the whole country is paying the price. every consumer is paying the price today of a significant failure of our financial regulatory system. so we're all paying for it now. i think we need to have a system in the future in which the level

playing field and high standards are established in a way that makes it much less likely we're going to blow up our financial system and cause this amount of harm to the average american homeown homeowner, consumer, small businessperson. so the trade-off isn't even close in our judgment. the kind of approach that we're suggesting here is not a heavy regulato burden, but it is an essential one. >> okay. mr. chairman, thank you very much. >> thank you. i think it's valuable, by the way, to have two former governors, two former mayors on the committee. while i think there's a difference, obviously, in terms of rating agencies when it comes to municipal or public bonds as opposed to private securitizations, it's a valuable piece of information. when we talk about rating agencies, there's a tendency for us to focus on the private side of this. but we ought to keep in mind the public entity side of this question as well. i'm glad you raised that,

senator warner and bob corber. >> thank you very much. thank you for your testimony. i believe that the proposal bans consulting fees by rating agencies and requirements disclosure of payments and certainly banning the consulting fees is part of the conflict of interest. we still have kind of the fundamental notion that folks are getting paid for what they provide and the possibility of shopping between agencies, getting a heads-up of what their rating might be. is there anything we need to do that's more fundamental in terms of having a different system for structuring payments for rating, doing it through a central fund that folks pay into or some other -- is there any ideas you seriously considered that would more directly take on the conflict of interest? >> i think, senator, we think conflict of interest did play a

role in this problem. we have a series of measures with respect to the banning of consulting payments, strengthening disclosure and management of conflicts, disclosing the fees paid by issuers, a look-back requirement with respect to the revolving door to make sure that revolving doors haven't influenced these structures. designation of a compliance officer, disclosure of the preliminary rating received to get at the rating shopping question that you described. and i think fundamentally, and i -- we share senator corker's judgment that having trailer payments could play a positive role in the basic structure, having a diversity of different business structures, both investor pay and issuer pay models, together with a requirement that the information provided to one agency is provided to all the others will have a significant impact on the conflicts problem. it won't eliminate it, but it

will have a significant impact. >> all of those are very good and well, but you didn't answer the question i asked, which was did you consider -- >> i'll try. >> did you consider the heart of the structural conflict of interest of having the payments go directly from the bond issuer to the -- and if you rejected such ideas, what did you consider and why did you reject them? >> we looked at a range of models that had been proposed from a -- switching back to a full investor pay model. we looked at the utility model that had been suggested. we looked at the roulette wheel model of -- of using rating agencies that had been suggested. in our judgment, each of those suffered from some significant infirmties. if you used the utility model, for example, you're roeally jus putting a government seal of approval on them. if you use the roulette wheel

model, you're reducing the incentives for meaningful competition and better ratings. if you go fully to an investor pay model, it's not obvious that the resulting conflicts are going to be on balance. so our judgment was better to have a diversity of payment schemes out there. let's have a level playing field with competition but on the base of serious high standards and let's provide information that's given to one agency to all the agencies so that there's a chance for them to show that their competitor isn't good at doing a rating. >> let's helpful. thank you. i'll have my team follow up to try to get a better understanding of the weaknesses of those other possibilities. we have in the structured products world very complex cdos and cdo squared that made it virtually impossible for anyone to determine the underlying foundation for what went into a cdo squared. and by that, i mean situations

where you had triple b bonds that suddenly you had aaa bonds coming out of those bbb portfolios, et cetera. and yet you're so far removed from whether they were liar loans, whether they had been -- the loans had been vetted in terms of the vinyindividual, et cetera, underwritten if you will. is there a level of complexity that should simply be banned in the interest of reducing systemic risk? is there a -- a level of slicing and dicing where -- the path is too messy from the buyer back to the foundation that essentially they don't make sense to allow in the marketplace? >> i think there are ways of getting at the basic problem of complexity in -- in alternative strategie strategies.

for example, the securitization skin in the game requirement improved transparency in the securitization structure. requirements are respect to transparency at the loan level for all investors and the underlying asset with respect to, say, a borrower's fico score, what the compensation scheme was. all of those are designed to get at that set of concerns. and better qualitative and quantitative information underlying the rating on such a structured product would permit investors to go underneath and say, well, the reason that they've assigned this rating is because their view of the cash flow distribution is this, their lost probability measurement is this, their loss severity measurement is that. >> i appreciate your response. i'm picturing what that sort of report might have looked like on

some of those cdo squareds. >> i wouldn't want to write it. >> i am over my time. and so thank you very much. >> tharnnk you, senator. >> thank you, mr. chairman. secretary barr, before getting into the subject of today's hearing, i have a question on a different matter. yesterday the "wall street journal" had a front-page article about a meeting last friday where secretary geithner attacked independent bank regulators for expressing their concern about treasury's regulatory reform proposal. were you at that meeting? >> yes. >> if you are, was the article accurate about what happened at the meeting? >> i don't have the article in front of me, senator. i'd say we have an ongoing series of conversations with a financial regulator on a regular basis. we have frank and direct conversations with them on a regular basis. >> if i give you the article,

would you refresh your memory? >> i'm happy to look at the article. i'm trying to describe for you the discussion, if i could. >> all right. go right ahead. >> the conversation that we had with them, the secretary made clear the regulators are free to defend their own agency prerogati prerogatives. he expected that they would. he asked that they keep in mind as they did that the fundamental goals that we all share to protect consumconsumers, to add systemic risk, to make sure the government had the tools they need to resolve financial firms in a crisis. as they expressed their differences that we work together in the areas where we do have agreement, we had a long conversation about the important roles of the council versus the independent regulators. we had a long discussion about microprudential versus mac

macroprodential regulation. >> the same type of discussion from secretary geithner and you with the regulators that you've had in the past? >> i don't -- i don't characterize the verbiage that was used, but i'd say the frankness of the exchange -- >> we're on television. i don't think you want to do that. >> senator, you know, you will not be surprised to learn that in treasury, there's colorful language that is sometimes used. >> i've been accused of that. i understand that completely. okay. let's get to the current thing. everybody agrees that the current rating agency model has failed. i think everybody up here does. especially for a complex structure product. there also seems to be agreement that better competition will improve ratings. how we get better competition is

a more difficult question, but we must break the hold of the top two or three agencies if we're going to fix the ratings. it seems to me that there are two changes that would go a long way to fixing the competition problem. first we should eliminate any regulatory requirements to use rating agencies so that they will only be used if they add value. second, we should require issuers to provide the same information about the securities to all investors and rating agencies, much like we do for public-traded companies with regulatory fd. that way, each agency will be able to compete based on the quality of their ratings and will break the monopoly of the issuer pay model. let me start first with the first point, that we should elimine >> in our judgment, we need to good regulation by regulation.

we agree with the basic goal of reducing reliance wherever possible. i think we need to go into the specific circumstances of how the sec and the bank agencies and other agencies use the ratings, in some context we can go to elimination and -- >> you do agree that there is a definite conflict of interest presently? >> i'm sorry in the rating agency -- >> when i would go to a rating -- i'm a private corporation. i come to rate agency, i need $200 million in bonds. they say, yes, we will do this. give me a bbb rating and then send me a bill for $250,000 for that rating. don't you think that's a conflict? >> i do think there are serious conflicts of interest present in the existing model. that is why we require a series of steps to reduce the conflicts, disclose the conflicts, manage the conflicts.

we strongly agree with your suggestion that than issuer be required to provide information when its gives it to one agency to give it to all the rating agencies. that's a terrific proposal. ... they can perform their own analysis of it. do you agree with that? >> i think that when -- i'm sorry. yes, when you give one rating agency the information, you should give it to all the other rating agencies as a way of enhancing competition. i do think that's an importa important -- an important part of the plan. >> do you think it's absolutely necessary for an agency to rate every security or bond that is sold to the public entities?

in other words, i'm -- the city of louisville, i'm building an arena, and i -- i applied to the irs for a portion of it to be tax-free and i go to this agency and they say, well, we can't do this. and all of a sudden, someone intervenes and all of a sudden, they found their ability to do this. and i think that's absolutely the wrong way to do business. and for -- for, you know, half a million dollars, we get $4 million worth of bonds that are 80% tax-free and 15% taxable. you think that's the right way to run a business? >> i think there are enormous inefficiencies in our revenue bond system in the united states. the rating process is one but there are many, many others. >> thank you.

>> thank you very much, senator. senator schumer is next. he stepped out. mr. secretary, with that, senator shelby, do you have a question or -- >> i'll just -- do you believe, mr. secretary, that -- that eliminating the conflict of interest, obvious to be me and a lot of other people by the rating agencies where they get paid for rating things, so to speak, and the cozy relationship there is very important in our regulatory overhaul? >> i think we have to tackle the conflict of interest head on. i'm not sure we can fully eliminate it, but i think we have to address it. >> how do we bring back what i thought we all benefited from for a long time in that -- that is securitization of mortgages. because for years and years, i wouldn't say every mortgage, you

know. but there was a lot of confidence in the securitization process. and the securitization process basically worked. basically worked. now it's, for all intents and purposes, very small, if not dead. how do we do that? do we do it with stringent ratings and trailing profits like senator corker eluded to earlier or what? how do we do this? because i don't -- i don't know if the money is ever going to flow until we bring some confidence back in securitization. maybe i'm wrong. >> senator shelby, i think it's a central question. i think in our judgment, one of the reasons why it's so critical to move on financial regulatory reform this year is precisely that. i don't think we're going to see a revitalization of our markets unless we have a new-found

regulation that permits transparency in the system, restores honest and integrity to the process that was so sorely lacking in the last bit of time. so i -- i think that, you know, in our judgment we need to move quickly on financial regulatory reform, we need to have transparency in the securitization structures, we need to improve regulation of credit rating agencies, building on the 2006 law. we need to make sure we take care of the systemic risk problem and consumer protection. we really have to move in a way that is demonstruable to the markets, that we're serious about reform. >> thank you. >> thank you very much, senator shelby. senator schumer? >> thank you, mr. chairman. thank you for holding this hearing. thank you, secretary, for coming. thank you, senator shelby, for asking that extra question. i appreciate it. i have a little statement with a little proposal in there and i'm going to ask your opinion of it.

the credit rating agencies es turned out to be one of the weakest links and those need to be fixed as you just said. what we found out was that ratings systems were filled with conflicts of interest. the worst of these conflicts were that issuers went shopping for ratings like they were shopping for used cars. if they didn't like the answer they heard, they went somewhere else because the ratings of the regulatory agencies, the ratings agencies had every incentive to help issuers structure their products to get the ratings they wanted. the result? ratings agencies rubber-stamped complex products they didn't understand as investment grade using flawed analytical models and methodologies with inadequate historical data that

didn't include the possibility of high mortgage defaults. we can't overestimate the impact this had on the financial crisis, losses in structured finance securities alone led to $1.47 trillion in write-downs and losses at the largest financial institutions, and senator reid, our chairman here has introduced a bill on credit-rating agencies and the administration has proposed new rules to address some of these conflicts of interest and the inability to evaluate ratings and they're important proposals, but i wonder if the message is getting through. last month, i read an article how moody's -- after mood's downgraded a collateralized debt obligation because of det fault rate of rose in the c.d.o. rose 7%, morgan stanley repackaged it into new securities with triple-a ratings. how can you get a triple-a rating on a c.d.o. that's been downgraded six levels?

where are the checks in the system? that's why i am proposing in addition to senator reid's bill and the administration's proposal which i think are very good that for every 10 rated products, the s.e.c. would randomly assign another rating agency to issue a second rating. i understand that issuers get two ratings but this randomly assigned rating agency would act as a check on the first rating agency. furthermore, this check would help discourage ratings shopping and other conflicts of interest inherent in the system. we would learn who is better at ratings and who is worse. and get rud of at least the conflicts of interest. i wouldn't want to do it for every issue, that's too many but just a certain amount. we propose one out of 10. maybe a little less, maybe more but a significant amount so we get a pool of knowledge and i think it would be prophylactic. if an agency knew there was a one in 10 chance when they got paid bite issuer that someone

else was doing an independent ratings, they would be more careful. so the ratings are too much part of our system to abandon them but it's clear the system as it exists is broken and i want to look forward to working which chairman dodd, senator reid on his excellent proposal and the administration to make sure that we can have faith that a a.a.a.-rating means what it says. so my only question to you, assistant secretary, is what do you think of this proposal of having the s.e.c. randomly assigning a second rating agency? that would be done, by the way, concurrently with the first and come out at about the same time. >> senator schumer, thank you for your longstanding work in this area. i would say we share the conceptual goal of having more than one agency rate issuance,

particularly -- it's a particularly acute problem in the structured-finance area but it exists elsewhere. in our proposal, we suggest that one way to do that consistent with the direction of the s.e.c.'s proposal is to require that every issuer provide full information about their issuance to all the other credit-rating agencies as a way of enhancing competition in the rating. there are significant incentives on the competitors to want to demonstrate their own prowess in rating in relation to their competitor who has been selected. i think that one tradeoff that one might consider with respect to an assignment process is whether that assignment might provide a kind of seal of approval to the rating that would not be intended. it would be counter to the general thrust of what the committee has been trying to do in this area, so that might be a

competing concern on the other side with mandatory as opposed to competition for the rating. >> yeah, but dance ok, two points i would make, my time is up, but number one, it would be done on a random basis and secretly. number one. and the pool would probably be a lot greater than just the big three. so you will have new entries with some incentive to just get it right and get it honest. and second, your proposal, of course, is not mandatory and simple giving the information, if everyone is in the same boat and there are just a few of them doing the same practice, might not prove to have the same discouraging effect of sort of paying for a good rating. that's what i would say. my time is up. but i would certainly want an answer in writing -- >> happy to work with you. >> to look at that. thank you, mr. chairman. >> thank you, senator schumer, i have conferred with the ranking member and mr. secretary, i

think we're ready to move to the panel. >> thank you so much for your time. >> i would like to ask the second panel to come forward, please. [captions copyright national cable satellite corp. 2009] >> booktv sunday. the future of the american conservative movement with direct-mail fundraiser richard viguerie, this weekend on c-span2. >> how is c-span funded? >> donations? >> federal funds, grant funds. >> maybe private contributions. >> honestly, i don't know. >> i would say from commercials. >> advertisement? >> something from the government. >> how is c-span funded?

30 years ago, america's cable companies created c-span as a public service -- a private business initiative. no government mandate. no government money. >> a discussion now on the sea-based component of the u.s. missile defense system called aegis ballistic missile defense. this comes a few days after the military reported a successful test of the system designed to destroy short and midrange missiles in flight. the george c. marshall institute in washington is the host of the event. it's about 15 minutes. >> a nonprofit public policy research institution here in washington, d.c. that explores science and technology issues and brings -- and hosts -- brings together groups like this and hosts forums to talk about issues where science and technology impact major public policy, of which missile defense has been a priority over our 25 years.

public opinion polls and surveys of public attitude over the years show a consistent theme. the public wants and thinks that it has ballistic missile defense and they want that and are growing to believe that the threats to their security, the direct safety of the american homeland and that of our forces deployed abroad from ballistic missiles is both real and growing in size and sophistication. the aegis ballistic missile defense system is one of our principal responses to that threat and it's a successful response. in 19 of the past 23 flight intercept tests, it's successfully destroyed or met its targets and those tests are of increasing sophistication and complexity to match the growing sophistication of the threats it faces. in addition, it operated successfully in a real-world context in early 2008 where it destroyed a dying u.s. intelligence satellite.

the question today is what has it accomplished and where is it going? it's my pleasure to have here today rear-admiral alan b. hicks, the program director of the aegis ballistic missile defense system, the sea-based element of the united states ballistic missile defense system under development by the missile defense agency, navy sea systems command facility. this will be the third time that admiral hicks has been with the marshall institute in two-year increments were we were discussing at the table, in 2005 in the fall he was here, in 2007 in the fall he was here and now in the summer of 2009. we're very glad that he is able to join us to provide an update on where the program is and where it is going. rear-admiral hicks commanded the u.s.s. cape st. george from august 1999 to september 2001. he has also served as the director for network systems and

aggression for the office of the chief of naval operations. he was selected to flag rank by the fiscal year 2002 flag selection board. he has served as the deputy commander of warfare systems engineering at the naval sea systems command and was commander of the naval surface warfare center. he's also held responsibilities in the pentagon as deputy director for combat systems and weapons in the surface warfare directorate at the office of the chief of naval operations. rear admiral hicks, thank you for joining us. >> good afternoon. it's great to be with you back at the marshall institute. i have always appreciated the opportunity to speak here to this group. i'm not sure the fact i'm back on my third go-round is a good-news story or not.

i think it is. it also shows my longevity. my hair has gotten grayer, but i did assume the job fairly lacking in hair so there is no change there but i am grayer, so i just -- i have adopted, keep cutting it shorter and adopt the high-speed, low-drag mentality that some do. i did acquire a tan this summer. i would like to say it was due to off time, but i just returned from hawaii where we just successfully wrapped up another test campaign, and if you got to work it's always good to do it at kaui at barking sands and in the sunshine of hawaii. it's been since late 2007 when i spoke to you last and also back in the previous december of 2005 when i spoke to you before. at that point, i had just relieved rear-admiral cape page late that year of 2005 as the

director of aedivis b.m.d., part of my discussion with you today is try to capture for you where we have been and where we're going and let you kind of judge for yourself where you think our successes are and where we're headed. as has been stated, we feel we're pretty successful. i will tell you that i'm that i am always the toughest critic of my own program. i think that's only by necessity because frankly, the stakes are very high in this mission area. whether i'm dealing with my own team in dahlgren, virginia, whether i'm dealing with my contractors or whether i'm dealing with the fleet and the ships, i constantly press the system because i do worry about making sure we deliver what we promised, and that the ships operate them to the utmost, and as some of you are aware, this

recent april, the chief of naval operations stood up a command called navy air and missile defense command which has ballistic missile defense as a subset of part of the core mission and that is to bridge that interface between the acquisition community, whether it's in the navy or in the missile defense agency and the war fighter, the fleet, and off that joint interface to make sure the correct equities are sustained, we get the right doctrine, the con-ops and so forth to get the job done. i'll be speaking to you some about that today. let's hope i'm not -- hey, good. this slide has not changed since i showed it to you in november of 2005. it's very similar. back then it was a stated supposition. today it's real. when i talked to you before, we

had no engagement ships in 2005, and then when i talked to you in 2007 we were down to a handful of engagement ships and very little inventory. to today, that we have 18 engagement ships with a 19th in availability as we speak and it will be available here in a couple of months. and we have interceptors in the inventory. and in fact, based on combatant commander requirements we have ships deployed today 24/7, 365 days a year meeting combat and commander requirements. additionally, we have proven ourselves in tracking in real-world events such as with north korea and with the iranian events, tracking ballistic missiles with our ships on station with the capability we field in, so we're proud of that, we're feeling the squeeze, combatant commanders for this. the more they see, the more they like it, the more they want of it, i'm under pressure to get

more out there, so capacity and of itself is a capability, and that is a lesson learned for me, is that it's one thing to declare you have a capability, but if you don't have adequate capacity then it's a hollow capability. so we're proud of the fact that very quickly, literally in two years, we've come from just a few -- a couple of engagement ships to the full b.m.d. 18 ships that we had promised a couple years ago and in fact because of the urgency have added three more ships to the inventory and are looking to do more, and i'll talk to that. we have additionally conducted many tests with either thad or with the g.m.d. system where we have been integrating into those systems and we are very confident of our interoperability with that. that is a good-news story. we have also made great progress as g.m.d. as part of a sensor for the g.m.d. system.

this slide generally hasn't changed. the elements that we told you back in 2005 of what we were effecting in the weapons system and the upgrades we planned are on track or ahead of schedule. we have the 1-a missile which has gone from testing to is in production today and being delivered to the fleet. the 1-b missile, we will fly late next year, which allows us to deal with the future threat. the 2-a missile which is a cooperative development i'll talk to you about later with japan is on track, but i will tell you, that program probably is the one that keeps me up at night the most. when we signed up for this program with the government of japan, because of the operational urgency, we signed up to an aggressive schedule. we signed up to a very ambitious program but we feel there was a need for it. i am extremely pleased by not just the government-to-government interaction between japan and the united states but i am very pleased with the progress we've made with the

industry-to-industry relationship between the u.s. and japanese industry teams, so that's a good-news story for us but it remains an aggressive schedule. when i talked to you in 2005, there is a change here. sea-based terminal in the lower-right corner was a program that did not exist. in 2007, we did a demo in 2006 called pac phoenix where the navy came forward and flew a modified with the minimal weapons changes and successfully intercepted a target in the pacific. we thep went forward, got the funding that was necessary to modify the sm-2 block 4 inventory to move forward to give us the capability and i'll show more about that which has led us to something beyond that capability which we call far term sea-based terminal. we went to sea recently on lake erie for this most recent test, she came out of shipyard ability and we have done the most extensive admonitions we've ever done with the b.m.d. signal

processer. this is the single most complex change to the aegis weapons systems that we have ever attempted, and i'm pleased to report she went to sea and successfully tracked the targets during the most recent test in hawaii. why is this important? that system is mated up with the 1-b missile and allows us to hedge for the future to deal with advanced threats. additionally, the other significant point here, we made with the navy a line to deliver open architect to go on board u.s.s. john paul jones in 2012 as she goes through aegis modification and we will take her to sea in late 2012 and go through a series of testings over 18 months to certify aegis open architecture combined with b.m.d. functionality so there is only one computer program on the ship, today we have a b.m.d. program and a standard fleet a.a.w. program, that's that's

not to mean the ship in a b.m.d. can't do a.a.w., in the future it will be one program, the ship will have total control and able to balance resources along with the radar upgrade to give it the capability it needs for the fleet. the other area i want to highlight here is back when i spoke in 2005, i couldn't, other than the number of ships, 18, i couldn't speak to inventory. it was t.b.d., today in 2009 that was the goal by 2015 delivered by end of calendar year 2015. if you look at pres-bud 2010 we're now up to 27 ships from the 18 we used to talk about in 2007. i will also tell you, that's inadequate for combat and commander needs.

we still have a tremendous demand signal for more missiles in the inventory that we're working with the budgetary process. you will also see here we're still on track to do the test firings of the sm-3 block 2-a through this fit-up program. fast forward. november 2007. handful of engagement ships. not any missiles in inventory. today ships on patrol can fire at missiles in inventory, we have successfully modified through today 47 of the sm-2 block 4 missiles with the navy where the navy picked up that cost share and contributed those missiles. they had been modified to do b.m.d. in the terminal mode. into atmospheric. and here you see the ships that are in the inventory today. they're deployable assets. they're managed in the global force management process along

with the missiles they carry. and we have an unceasing demand. so much so that last year, the missile defense agency actually would have been late of 2007, the navy and the missile defense agency got together and determined that we could come forward with three additional ships that would allow us to get more capability particularly on the east coast. because we thought the threat was from north korea at the time 16 of the 18 ships would be in the pacific leaving us two ships, the ramidge and stout on the east coast, and with the rise of the threat from iran, obviously that wasn't meeting the demand signal so right u.s.s. the sullivans out of florida is being modified as we speak, u.s.s. vela goff, a cruiser in norfolk will start modifications shortly and they will be on line and certified

for deployment this fiscal year. early in 2010, u.s.s. monterey, another cruiser in norfolk will be modified with b.m.d. capability and that was a joint cost share between the navy and missile agency to be able to meet combatant requirements. additionally we're looking at adding six more ships to the fleet per the defense secretary's announcement to the budget for p.b.10. we have not identified those specific hulls yet but we're in the process of working with the navy to identify specific hulls in their home ports and the date to get those six ships modified as soon as we can but our goal is to have those ships online and available to the fleet sometime in 2012. no later than. i like this slide. why do i like this slide?

i like this slide because it's hardly changed a bit from when i first started in this job. the difference is we used to talk about this notionally. notional capability. and the notional charts just because of classification. we use this kind of training and stationing today for ships. i don't have that many b.m.d. ships that we've helped contribute to the navy but the capability exists today with the block 1-a missile and aegis to do what you see in the mission set, whether we're queueing g.m.d. for the defense of the united states or whether we're defending hawaii with a ship off the hawaiian islands or whether we have a ship in the sea of japan or off israel, we're there. to meet the nation's requirements. that is a fact that is real.

that is in place today. aegis b.m.d. lots of talk and comments proven operationally effective. and cost-effective. is it operationally and cost-effective? i would contend the aegis b.m.d. is a good buy for the nation for capability. why do i say that? the nation has invested in an aegis cruiser, a 35-year life cycle for about what weissed to build them for, about a billion dollars apiece. we add -- even with the 401 configuration we're about $35-40 million plus the cost of a missile, less than 10 million and you have a b.m.d. capability. on a multimission platform that can sail the nation's oceans -- or the world's oceans for the nation forward, available with a

multimission capability. with the ability to defend themselves while they're operating forward. i think that's a pretty flexible, viable option for the united states for the defense of ourselves and our allies. we have gone through a very rigorous test program that started even way beyond -- before i came on board where we worked hard with the operational test agency. to make sure that we had the requirements as required and dictates in our test program and we have flown a lot. that's a fun part of the job, is getting to fly, although i admit there is a lot of pressure, it is -- some days when you're in the drudgery of the pentagon, this is what keeps you going. but we're very proud of this program, we're proud of the fact that we've got terminal defense capability fielded although it's not what we want for an end state we have the capability out

there but s.m.3 has gone through a very rigorous process which had been by d.o.t. and e. as recommended operationally effective. that's about as good a grade as you can get from those guys and i'm very proud of that and that was reported last october to the leadership in the pentagon. we have additionally supported icbm travelings, we have done two firings off japanese ships, we have a robust research program that was foundation for the block 2-a program with the japanese and we're very, very proud of this. you see down here listed f.t.x.06. we conducted that first shot off that campaign which will conclude in november is the first series of tracking exercises with that computer program that sets the stage for us to come back to sea in 2010 and do our first engagement test with the 1-b missilement again, it kind of builds on the whole philosophy of build a test, learn a lot, admiral wayne e.

myers bred into all of us in the aegis world about how to build capability to the fleet, but again, we're very proud of this, we're hoping to next year do ftf-15 which is where we will fire on a launch on a tattle track, a link track from a downrange ship against an intermediate-range ballistic missile threat. we're looking forward to the opportunity to do that test. it is not a stated capability of the current capability of something we're required to do, but we have a margin and design to do this capability and we want to do it as a stretch goal. and then obviously here late next year we will do ftm-16 where we will fly the 1b-1 missile with that configuration. if i can, i always like to bring -- everybody's got to bring a movie, ok? and last time i told you i would give you a movie and it would be a good one. this i think is better. it gives you a sense of what we do to build the missile and get

it to sea and go through flight-testing. the only thing missing which you can get out front with your videos is the music that really goes with it you won't hear today so you will have to deal with my narration. right now you can see at the weapons station in hawaii the sm3 vertical launch canister being loaded on lake erie, ship heading to sea from pearl harbor. from the get-go, we've used sailors operatings the system. no contractors. sailors operating the system. in fact. c.n.o., he said one thing that made him most proud about the burnt froth system is sailors pushed the button, not an engineer to take the satellite down. you can see him going through here, launch of the target out of the barking sands pacific missile test range in kauai. that's the tarp going through second-stage burn, ship will go through detection, you see here in the weapons system it's

passed through the search fence, the ship is set up by itself, planning for the defended area. captain ordering the engagement. launch in slow motion. missile accelerates to about over three kilometers a second. when it hits space. you will see the initial burn and then off it goes. that's the second and third stage shift and burn. third stage takes it into space. you will see nosecone ejection where the seeker will start looking, you will see the dax firing, the spread, that's the third stage and the nosecone following it. it's now in the a.i.r., you will see it coming into view with intercept. we do talk about an intercept of this type, intercepts in centimeters of what we're aiming

for. if we -- 5-7 centimeter system a good day. that's not much. if you've got a quarter, you've about got it. we talk about dead what we're aiming for in a particular spot on a target and we measure distances by pennies, nickels and dimes and a bad day a quarter. we're real proud of that fact. we've engaged multiple threats simultaneously. i will tell you this was one of the highlight days of my naval career was in shooting down two ballistic missiles simultaneously. high on that list was also shooting down a ballistic missile. we shot down a cruise missile simultaneously. you can see here the series of tests with the tests vs. unitary and secondary targets we've developed over the years and a lot of legacy here of good engineering rigor between the government and industry teams. just cannot be replaced, that kind of brain power. simultaneous here, japanese

flight-test. endoatmospheric test. you actually see the second sm2 block 4 hitting on debris because we destroyed it on the first of the salvo. another endoatmospheric test, this one actually occurred off hawaii also. where we literally pulled two ships off the fleet line, went to sea and did a short-notice test. we're real proud of our record here in what we've accomplished and the fact that we have ships deployed today with the capability. well done, drew. you have a job for another week. so operationally, realistic. passed the test. we have done the transition, the navy has the initial capability. burnt frost. december of 2007, we just

finished the first japanese flight-test successfully. during the buildup for that test, i got called by my boss, and he said, "hey, brad, is it possible for aegis b.m.d. to shoot down a satellite?" and at first i had a response i won't say in public. and i said, "sir, i don't know but i'll get back to you." so i grand the team and he said "hold this sensitive." so i grabbed a small group and i said, "ok," and we have part of the government team is the johns hopkins applied-physics lab who operates as a technical design agent for a lost the navy weapons system development programs. one of these scientists, a guy named dr. gary sullens had done a study on a what-if drill sowe

called gary back in laurel, maryland and said, "gary, can you pull that study out?" he said, "yeah, i can tell you the answer now. it's possible but it depends." that wasn't exactly the appealing answer i was looking for as the guy answered. he said "it depends the altitude of the target, the speed of it, what kind of orbit it's in." i called my boss back. "cannuv give me any details?" he said "no." i said my answer is it's possible but it depends." he said i was looking for a little more specific. i said "when i get something more specific." we both laughed. i figured that was the end of it. we had gone through a very aggressive test schedule in 2007 so we were frankly a little bit tired. we rolled back for the holidays all smiling, sent congo back home to japan, we're all feeling really good. then on the afternoon of the 3rd of january my world got turned upside down when i got the phone call. he said, "you're kind of on the

short list." i said "what the heck does that mean?" he said "you're on the short list for options of dealing with this decaying satellite." the beauty of this is it's a close-hold and you have to pull together a small team." i said "ok. "so on the morning of the 4th of january we got the team together and then we went on what i call it the six weeks from hell. we literally in the first weeks had to find what we needed -- in order to make the time -- the system is built not to engage a space object. we in fact build it to prevent the crew from engaging a space object. optimizing for a satellite intercept vs. a ballistic missile intercept, there are things you kind of want to tell the missile to do differently, so it is a weapons system -- when i mean weapons system, missile to ship to radar to the crew, a rebalancing of that dynamic from training to modification, so we spent the

first three weeks understanding what we were going to go after. dealing with agencies we weren't used to dealing with. when we got back through sociological, cultural barriers about sharing information, everybody was on board but i will tell you weigh didn't have a day off and we had some really long days, but the team -- this is the untold story, this engineering team that goes back with standard missile and aegis pulled together, we got an industry team with the sailors to do something reality pretty incredible in the first few weeks. once we determined what we wanted to modify in the system and in the missile, then we had to validate that, and i'll be very blunt. we had ships at sea doing tracking the satellite. we also used the ship in the corn field up in new jersey to track the satellite as it passed overhead to gather data, because it was not a stable satellite.

it was spinning, tumbling, it was just a really -- we're going to hit something -- we're going to hit a target within a target is the way we describe it, we're going for a one-yard diameter tank inside a large suburban. and the closing velocities were arthriticed about a little over nine kilometers a second, which was faster than anything we had ever intercepted before. also it was going to be a higher intercept than we had ever accomplished before. then we made the modification, started bringing the missiles off the line to modify the software in the missiles and we start doing the weapons system. validating that for ourselves then retraining the crew how to do this. all the way, protecting the information. i remember telling some senior navy leaders, "we're going to keep this a secret until we go to sea to do the event." they said "you will never pull it off." another highlight to me was until the ship sailed and they

made the announcement, the ships were actually pulling out of pearl harbor under way when they made the announcement in the pentagon and we were very proud, in fact we protected that information to give the government -- the nation's leadership that option of how they wanted to do this and allowed us to also deal with our allies to get the information out and the other embassies around the world to honor that obligation of what we were going to go do. so we went to sea and successfully did this event. it was a consummate team event. we used lots of other agencies, we used lots of sensors from other agencies to help us characterize the target. one of our guys came up with the analogy it's kind of like you're in the batter's box and you're picking the 3i67, you're going for that pitch -- picking the pitch, going for the pitch that you are going to hit in the strike zone and hit out of the park, we were successful, 153 nautical miles above the earth

and it was about about 22,500 miles an hour closing velocity, a significant event that we're very proud of what the team did. this slide has, other than a couple of minor words hasn't changed since i started in 2005. we are incrementally delivering capability to the nation. this is out there today. we're actually in the process of putting this in place. we're almost done with 361. we're down to our last couple of ships of that upgrade to give them both exoatmospheric and endoatmospheric capability and lake area with 401, if all goes well in early 2012 we will certify that computer program and 1-b missiles will be in production. far term, 50, that is where we merge with the navy's open architecture i mentioned earlier then we'll deal with 51 which allows us to fire the block 2-a

and 5-2 will be our far term seabased terminal program. in essence, we're spiraling capability. i hate, that's an overused term in pentagon speak but we literally are spiraling additional capability as we prove it to ourselves that it works, and also we work with the war fire to make sure it's the right thing they want in that prioritization. seabased terminal, as many of you may know, back years ago, in late 2002 -- late 2001, the navy area program was cancelled. we went into a limbo phase. the capability was out there for an endobased capability from ships and it was a dead program. we literally took a demo, which i mentioned pac phoenix back in summer of 2006 and then once we were successful there, proving

it could work, program got the money program and now we have a capability today. again, we didn't waste time, we got it out there and we're real pleased with how that is going and that is a joint m.d.a.-navy-funded upgrade. more robust capability, we're on the process to get it out there. if i read here the capability is being delivered by 2018. i would be the first to tell you is not exactly the date that the war fighter wants it. they want it yesterday. we're working on the plan as we go through the options for a sea-based terminal of what we can do to accelerate that capability, and once we get that first look done later this year we will report out and offer the options of what we can do to accelerate if possible. so the sm-3 evolution for

exoatmospheric, this slide has not changed. 1-a's in production. 21-h boosters, 13 1/2 inch, the only difference in this missile is the brand new kill vehicle. two color seeker all reflective, advancing the process and a new divert and add to control system. this is the missile that will become, we believe, the workhorse of the fleet in the sm-3 inventory in the future against the advanced threats that we're going to have to deal with. the block 2 missile which is the 21-inch missile which we call full-caliber round, this will max out the vertical launch system as we know it today -- in fact, we're going to go to a new lightweight canister to help reduce weight. this is cooperative development program with japan. that's why i tell people if you want to look how you can work with an ally and you want to establish a gold standard of cooperation, this is it.

. the nation of japan is so committed they put over a billion of their research dollars to help us develop this. we have worked out in the latest negotiations work share for the missile, who works on what. we have gotten through system design review so next year in about a year and a half we'll go to preliminary design review. and we're getting more and more refined cost estimates. the bottom line here is it's a very aggressive program but it gives us a lot of capability and we've got to do it because instead of three ships defending japan, you can do it with one ship. that's the kinematic reach of this missile. this missile gives the nation options for lots of things, including a land-based option for sm-3 if required by the nation. the 2-a will then come in with its whole new kill vehicle in later testing. we'll build a couple of these rounds before we transition to this round in flight-testing.

again, this round covers a lot of defended area. which is what you want. internationally, talked about japan as a gold standard, we have lots of relationships with countries on exchanging data and analysis of what it takes to do ballistic missile defense, and we're very proud of our relationships we've had, and i'll talk about who has participated. also i would highlight here who has purchased the aegis system. australia, south korea, japan, norway, to name a few. again, we feel that there are other ships -- other nations with sensors like the u.k., the netherlands, the germans that have a system capable of tracking, and i'll talk a little more about that in a second -- they just have to have the desire to want to commit to the -- in other words, they have price of admission, which is a

sensor that's adequate to be able to track and then allow you to engage a ballistic missile if you so choose. so if you look at cooperative development, we talked about this and i don't want to beat a dead horse but the cost of the program, and i used to talk to you all about, has gone up. the more we've refined what we want to put in this missile for capability and also what we want to control in work share in order to keep the risks manageable, it has gone up. for those of us that have been in the acquisition business for a while, early on, cost estimating is more of a art-science based on folklore than it is data. as you get the design -- what i have found is -- and i'm late to acquisition, frankly -- i came from an operational background in transitional acquisition late, what i found is if your requirements are tight up front the likelihood you will be

successful is greater but as you go through definition with the engineering and industrial team, controlling that definition of those requirements is very critical, and you're going to find a big delta, particularly where there is more high-risk technology, and certainly in this business it is high-risk technology, but what we've found in this one is we feel that before we get to the preliminary design review in another 18 months we'll probably be at the 80-85% confidence factor in our cost estimate which in acquisition parlance is pretty darn good. my responsibility and the program office's responsibility right now is with the government of japan to contain the requirement. so with the engineering community, so we bound risk and control cost. and deliver on schedule. i would say -- and i have seen in the 1-b development in space, if you can control cost and growth up to c.d.r., you're

doing a great job. because we generally, in the aegis sm3 world, once we get the c.d.r. we're only to 95% confidence level. we do a hell of a job controlling costs at c.d.r., getting to c.d.r., critical design review is always the challenge. controlling that bounded space to get that design tight, understanding the requirements, understanding the technology, get those technical risk risk levels down where you can understand what you are building and with the japanese program it's more complex. we're dealing with not just two nations but different cultures of how you acquire tech stuff. so a lot of it with japan is based on trust in the relationship. real trust. and i think that has been the thing that gives me the greatest confidence as this program goes forward. we have been in research and development with japan for nine, 10, 11 years now in ballistic missile defense. that confidence of working together and the relationships

we have, even though we may have different government pratches to how we do contracting and bring industry othat understanding of how we each do business and understanding how we get where we need to go is what gives me hope that this program will be successful. at-sea demos, we had a dutch ship sail all the way from the netherlands to participate in tests. we've had a spanish ship sail to participate in a test and obviously we've had the japanese participate and we will have another japanese test in the not-too-distant future, so we've had international participation. we have shown the sensors other than the aegis system are adequate to track -- detect and track a ballistic missile. talk to you a little about navy initiatives. navy and missile defense command stood up at the end of april which is a command about 70 -- will eventually get to 75, we're

over halfway there in the manning strong support by big navy to get it manned up with some of the best talent in the navy. we have former b.m.d. cruiser c.o., former destroyer ddgco, former combat systems officer on lake erie is on board, probably some of the strongest l.d.o. talent in the navy, limited-duty officer expertise in the navy in this program. good news. as i mentioned, we did a pop quiz test called pac bliss last year where we took some missiles that were old initial deployment rounds, which were going to go out of inventory, literally pulled two woships off the line and said we're going to go shoot a target short notice and they did a great job. we moved forward with sea-based terminal test where the navy helped foot the bill to get that terminal test off. that went very well off point mugu, the other important story

in navy initiatives is the navy has skin in the game, the navy has over a billion dollars in aegis modernization tested. with the closure of the missile defense agency with the navy and aegis modernization to get to combined b.m.d. functionality with the navy system is a powerful story. why? one, the navy's putting money toward -- real big money, not just missiles like sm2 block 4 and the modifications they paid for, they are investing real money that allows us to put b.m.d. on ships and they're in fact paying the procurement costs starting in 2012 for those b.m.d. upgrades. we're paying the developmental costs. they're paying the procurement costs. it is a true cost-share initiative to get b.m.d. capability. what else does this do for you? as the navy goes through modernization of the aegis

fleet, 80 some-odd ships, the ability to put a b.m.d. capability you can extend through the entire aegis fleet should the nation desire to do so, and frankly, for operational flexibility we need more ships. i did not talk about this before the last two times here but i get asked a lot what makes you guys successful? culturally, those of us that have grown up in the aegis standard missile community grew up in a rigor where the government had a strong team, in the program office and in the government labs combined with johns hopkins applied physics lab as a t.d.a. that is a tier of our industry partners so that together we have insight in what industry is doing and vice versa. industry it is will come -- wants to know the exact requirements to understand that trade space and the design. so having -- being able as an industry guy to walk in the program office and find out, ok,

this is what you have in writing, let's understand, let's camp out on the exact meaning of what you are trying to achieve whether it's in the missile or the weapons system, that is truly priceless. had we not had that strong relationship, burnt frost would not have been possible. because there was stuff we found on models on the government side on the six dop.l.o. performed we found differences and that ability to resolve those differences gave us insight into that designed trade space for something that wasn't in the core design, ie. shoot down a satellite, which we would not have found otherwise. details, details, details -- i was taught by admiral meyer and admiral george mienick, two stalwarts and advisors to me there is a million damn things that can go wrong in a missile, brad, they're so complex, and you better look at every detail.

weapons system is just as complex -- that missile is truly a work of art. tests as you intend to fight. fight as you test. absolutely. frankly, being an operator by training, i live and breathe it, and frankly, we've stressed the operational aspect. ships -- no-notice launches. we give them as big a launch window. we had one ship had them on window for three days, didn't tell them when. they had been on deployment. and they did just fine. never accept being hardware-poor. if you're going into a multibillion dollar development program and your infrastructure is hardware-poor -- in other words, not enough test infrastructure to test out stuff, not enough ground testing, controlled-vehicle testing, test vehicle, if you're hardware-poor you're going to fly at high risk. and i would rather stretch a

program schedule than be hardware-poor. because inevitably, you will pay for it later. anticipate change and embrace it. things are going to happen. technically, programmatically, maybe in guidance from the administration or within the department. figure it out, change and embrace it, do not compromise your rigor but be ready to embrace change when you get it. we have another expression. assess all the data all the time. the most recent test we flew two targets, we'll be going through that data for months, and we'll go right into our next test event this fall and we'll still be going through the date aalways looking for what we need to work on to fix. as painful as it sounds, i heard this expression once. it's true. i don't like living it but you do it. you learn more off of failure

than you do a success. it doesn't sound good, it's like a really -- you're biting into an apple with a worm in it, it's not a good day but i've got to tell you, it makes you get -- and one, it forces the engineering rigor of how you do failure, but it also causes you to be very reflective of what your processes are to make sure you are on track and check which is kind of what we did this summer with the most recent test. deliver as you promise. and by god, make sure it works as you promise in the design. if it doesn't, while you're working the fleet, you fix it. when you deliver something, you're going to keep coming back. the fleet inevitably over time will find things they want you to fix. be prepared to fix it. it's never closed out. you're going to find things in the weapons system, you're going to find things in the missile you're going to want to make better. make sure you sustain stuff correctly and you fund it. there is a cost of doing that.

for us in the navy, it's not real hard to look at it this way. .

i thought it was the slickest ship i had ever been on. it is about an 80, a vessel that. i had a harpoon, but i could launch a surface if to surface missile. i had tomahawks, but look at the

battle space. i go to st. george and i said this is good all. i have a tomahawk, this is good. so my betis out here now. how what dvina be

i would contend the stakes are very high. train, train, train. it is all about stations. they are going to take these young men, defending tokyo. millions of people. what a difference in the mission. whether it is on japanese ships, you would be in all of these sailors and what they can do. it is truly incredible. the amount of effort and the

diligence they put into the mission. they are excited about that. now they think it is cool to be on these ships. it is a neat job. and it is a game changer. it changes the dynamics on how ships deployed. in summary, we are going to get more capable. japan is the gold standard on how to do this. if you are committed to this, go to japan. depending on what goes on with the review the summer, i suspect international -- in expect we will see movement on the international front. we need to inform based on analysis so they can make

decisions based on national interest. i am not selling, i am just showing you the data. you will make your own informed decisions. c.-squared. how you stay in control? it is a very complex control. being a surface warfare officer, it is tough enough to make it the joint. you are talking about thousands of miles of command and control that you have to command.

if anybody thinks something like this will go down in a vacuum, and there are not other things to be flying in the air while we are doing this mission, you need to go to reality. for the april event in north korea, north koreans were flying, u.s. air force pilot -- pilots were flying. that was one complex air space. it is a very dynamic c squared. i worry about that. we have to get it right. i have not heard one bit of storm. i will stand by for your questions.

when we are done, i will show you the video. thank you. [applause] what was the reaction of your intention to destroy --? >> my reflection on that is that several things came of the pentagon and white house. we would be transparent, this was a one-time event. did station decided there was a threat, not just the u.s., but the world. everybody we talked to from nassau to anybody, the likelihood this woodland in a populated area was not high. it was likely the tank would

come through the atmosphere in tax -- intact. hydrazine is very nasty. what impressed me the most about that is what i heard early on about how we will advise embassies. you always hear these my given things and i did not see that once. we started the strategy. once the president made the decision that we would engage, i did not see one deviation. however, first you make the decision. the second reason we held onto it was we timed the announcement to the embassies around the

world to coincide with the ship's -- we did not want the crews to strike. >> you must have felt some personal pressure. >> after about week #4, i went to lake erie and did a simulated engagement. i was confident we would be successful. as long as we did not wait too long. you start picking up the drag. as long as you did not wait too long, i felt confident. did i feel pressure? yes. i got to the point, admiral

mullins had arrived the night before for talks. i briefed him that night before we did the event. he said you don't seem nervous. i said i worried those three ships -- i said we were ready to go. i was more confident about this in some flight tests. some of these test really stretch the envelope. when you know you are on the edge, -- we picked the pitch. it is going in a 90-minute orbit, we picked that pitch. i felt confident with that. go ahead. >> the fm2 -- the cost

increases. you had 3.1 billion on your chart. it also said that the u.s. would pick up that extra cost. is it because that is giving it a problem? >> when we initially scoped the program with japan, the cost, and i would say -- one week ago by the independent costs, the cost system -- because of their relationship with japan they are very confident with risk. because of the complexity, we

have made decisions on how robust we want the designs to be. we made sure the requirement is very tough. we had made a decision that the program is going to be part of a different program office. we were going to build a kill vehicle that had commonality between the two-a and the --. one of the big cost drivers for us has been the cancellation of that program. that is our decision, that is an unintended consequence of that. it is clearly not a decision i would have one. we need to recover from that and go forward.

when we did initial estimates for this program in 2005, the estimates were based on some rough estimates. also what we could disclose between the work share between the u.s. and japan, each country. they're a model as to what they thought it would cost. frankly, i don't think it is a bad use story. week collapsed a multiple program and lost some scheduling, which affects cost. >it is a notional kasher between

the u.s. and the government of japan. if they have costs inside, their bare the burden. if it is on our side, we bear the burden. if we believe it is a kill vehicle, it is in a higher risk area. >the ballistic missiles, the tw- a missile i believe, changes dynamics. things like doing earlier intercepts its much greater.

the ability to deal with greater threats, i think it is so important to the nation we do this. it is important to japan and to me. i would say the same thing about the one-b. we kept the missile intact. the 2-8 with the exception of the booster, that is a brand new missile from and to end. the possibility of bringing that home is a lot different. i intend to be flight testing in 2014. >> from the tests that occurred in japanese -- in november from the japanese, is its pacific to

japan configuration? >> the failure we had on it last year was driven by -- the ship did a magnificent job. that was one of the best performing spy weapons. the missile flew all the way through. in the last two seconds of flight, the controls had a failure and we lost it in the last few seconds. that wasn't anything to do with the ship. the process we went through, the

failure review board process was exhausted. we brought in outside experts for a panel. it was excruciatingly exhausting. out of that, we came up with what we thought was a share of the cost failure. this flight this july was verified that our processes were in place we believed the missile would fly correctly. as we roll into the next test but the japanese, we restore confidence. i call it a vindication of how we do. nothing is ever free in this business. traditional missile programs if

you are betting 500 you will go in the hall of fame. we are doing better than that. >> weak fiewe feel there were se imperfections in the control system. it said, it was a bad day. we don't cherry pick about rounds. >> you don't --

>> we can even put more eyes on as we do our quality assurance. we will constantly look at it to make sure we have a right. yes sir? >> can you launch from a barge or a trawler? it is and that putting an -- a warhead over the content -- continental you knighted states? >> -- the united states? >> it has search fences up against a particular defended area, if it meets engagement criteria, it will kill it.

it is a capacity issue. how many ships do you want to put at sea? and then you want to convert them down. the commanding authority has to figure how to deal with that kind of an attack. it is what it is. it does not care whether it is firing off of a barge or from land. if it meets engagement criteria, it will tell you that there is a threat and you can engage it if you so desire. we are going to watch this very short video we just completed.

it is about a short to medium- range target. we launched two targets both the intercept targets, and the second one was a target again the lake area in the hopper, the idea with lake area was to do data collection and a simulated engagement. something that looked at the target, made the determination of a kill assessment. it is a new technology they are working on that helps support a weapon system. you not see it here, but the second stage after that, there

is u.s. as hopper, the launch their. it is about 5:40 p.m.. the second stages burning. it takes it to the edge of the atmosphere and then out to space. you will start seeing a shift from visuals, you will see it from our airborne platforms. for those of you who have been on ship and seen launches, this moves a lot faster than the normal missile you have seen. at slow motion you will see one here. that is the vent exhaust their. now the launcher. somebody asked me, said how long

does that-is that flame? i don't know. about 1 ft. long. this was done thursday. there is the intercept. we are looking for a kill on the payload part, 5 cm is what we were off by. the kill vehicle diameter is not the same as the thickness of the target. other questions? >> one of the options that was talked about by congress and the

administration was an option in case an option to aero three. we had done analysis of what a configuration would look like. that program is a very good program in the budget that starts the effort next year, funded by congress. additionally, there is part of the review, options for a land- based system street that can be used for --. it is a configuration that has a lot of merit as far as technical. we believe that it is something that we can make work. i had -- i had it at morris

town. we know how to do a land-based launch. this is not something technically in a bridge too far. is it what the nation wants? >> thank you for your leadership in this program. [applause] sunday frank rich reflects an 15 years of political columns for the new york times including his look at the future of the internet from 1995.

in his column falling 9/11. q and 8 sunday night on c-span. sunday a look at british politics from the bbc including the mp resignation scandal and the debate over military operations in afghanistan. sunday night 9 eastern and pacific on the c-span. effective medical devices spoken to the senate health care committee. we will hear about current loss of will restrict patients' from suing the manufacturers of devices. this is an hour -- 1 hour, 50 minutes. >> we will come to order. this hearing on protecting patients got from defective medical devices. senator kennedy championed this amendment, a bill that gave the food and drug administration authority to regulate medical

devices. in support of that, senator kennedy said at the time,"today the medical device industry plays a prominent role in medicine. many devices are used to sustain life. people grow more and more dependent on medical devices. we stand to benefit a great deal from them, but we must make sure they are safe and effective to avoid defects and death. " the need to ensure the medical device that patients depend on are safe and effective. we are here because last year in the supreme court case riegel v. medtronic, the court held on that the statute's purpose was to provide the safety and effectiveness of medical devices. the court said that this law pre-empts state court claims

when a medical device does harm. this means complete immunity from lawsuits from corporations that in danger consumers with unsafe devices. and negligent corporation cannot be held accountable and victims could not receive fair compensation, and thus consumers are at risk. this had catastrophic consequences for ordinary americans. take the example a man from illinois who was born with a hereditary heart defect when she was only 2 years old the doctor implanted pacemaker in her chest. at age 3 the defibrillator shuttered nine times. avery's parents had the defibrillator replace but medtronic told them that they would not cover the cost. avery's parents are still struggling to pay off the medical bills.

is every here today? good to see you. i like that daisy you have in your hair. or consider jed. he sustained a spinal cord injury in the service. he had his herniated disc replaced. instead of experiencing relief, jed like hundreds of other experience bouts of paralysis and pain. he has no recourse to seek remedies. today we will hear from an iowan who received 22 electric shots -- shocks in 53 minutes from a faulty medtronic defibrillator. he was forced into early retirement.

we will be hearing him testify today. interstate. we'll be hearing him testify here today. as a senior member of this committee i have worked hard along with others here, senator hatch and others, to ensure that the fda performs its job well. while the fda approval of medical devices is important, it cannot be the sole protection for consumers. i say that because fda approval is simply inadequate to replace the long-standing safety the long-standing safety incentives and consumer@@@@@@@ # fda system of approving devices is imperfect and unexpected problems do arise. last year, 15 devices were recalled and in 2009 there have

already been attend. the fda confronts -- conducts these process with minimal resources and does that have adequate funds to ensure that the devices are safe or have adequate funds to generally assure that devices are safe or to properly and effectively re-evaluate approvals as new information becomes available. moreover, the fda relies on manufacturers to provide information about their products. once on the market, the fda relies on manufacturers to track devices and monitor for problems. however, without the threat of any liability, there is little incentive for manufacturers to report problems to the fda or to the public. this puts thousands of consumers at risk of harm. indeed, thousands have already been harmed in instances where manufacturers knew of problems with the device, but withheld that information from the patients. in our system of justice, access

to the court system is critical to exposing dangers and bringing about remedies. through discovery, litigation can help uncover previously unavailable information on adverse effects of products that might not have been caught during the regulatory process. litigants can demand documents and information on product risks that might not have been shared with the fda. in this way, the public as a whole is alerted to dangers in these medical products. finally, preserving people's ability to sue when injured provides a very powerful incentive to manufacturers to use the utmost care. in short, the threat of liability is the safety net that helps repair problems when the fda or manufacturers fail to warn consumers properly. as the supreme court noted in another case concerning drug companies, the wyeth versus levine case, state tort suits

uncover unknown drug hazards and provide incentives for drug manufacturers to disclose safety risks promptly. i ask, why would we not hold device manufacturers to that same standard as we hold drug companies? i think sadly, the supreme court fundamentally misread congress' intent in passing the medical device amendments in 1976. the court's ruling however is not the final say on this matter and to quote chief justice roberts, in every area involving an interpretation of a statute, the final say is not with the supreme court. the final say is with congress. and if they don't like the supreme court's interpretation of it, they can change it. end quote. i might just at parenthetically aaside, we found that with the americans with disabilities act. when the supreme court in three cases narrowed the scope of the americans with disabilities act. in clear contradiction of what we put in our report language. when we pass a bill, we don't

put in every little single thing. we add report language to try to give guidance as to what congress' intent is. well, the supreme court just threw that overboard. they didn't pay attention to it and so we had to offer the americans with disabilities act amendments two years ago, it took us about a year to get them through and the order got through last year and president bush signed them into law. which we then overturned the supreme court's decisions to fully enlighten them as to what congress really wanted to do. so this is something that is not unheard of. senator kennedy as he did 30 years ago, is fighting to ensure that consumers are safe. he has introduced a medical device safety act, s.r. 512, which would reverse the regal decision. this bill is really about real people who have been led -- let down sometimes catastrophically. they have no way to hold those

who harm them accountable. i would yield to our ranking member, senator hatch. >> thank you, senator harkin. we appreciate the leadership you provide and miss our friend, senator kennedy. we welcome all of you witnesses here today. this is a very important hearing and this is a very important subject or should i say, set of subjects. mr. chairman, i want to start off by discussing the context in which we are holding today's hearing. as everyone in this room knows, congress is in the middle of debating and drafting legislation aimed at overhauling our nation's health care delivery system. obviously, we are somewhat divided over what is the best approach in this effort but i think we all want to see something done to reduce the health care costs in this country. as we all know, the medical device amendments of 1976, the mda we call it, established rigorous system of federal oversight of medical devices. under this system, devices carrying the greatest health risks are subject to premarket approval by the fda. during this process, fda

officials spend a tremendous amount of labor intensive time and hours reviewing a single device, consulting outside experts and analyzing the safety and effectiveness profile associated with the use of the device. i'm sure our panel will discuss this process in more detail so i'll just say that the fda's premarket approval process for medical devices is extremely rigorous and very costly to the manufacturers, and really, to those who hope for the benefits that can come from these medical devices, and as history has shown, the fda is exceptionally efficient. in addition to requiring premarket approval, the mda also requires those who manufacture and market the applicable devices to report to the fda on the implementation and use of all approved devices. these reports include any new and relevant clinical investigations and scientific studies of which the manufacturer knows or reasonably should know. device manufacturers must also report to the fda any incidents,

malfunctions or adverse events that may have contributed to a serious injury. the fda has the authority to revoke its approval and/or order a recall if it determines the device is unsafe under the conditions of its approval and labeling. in addition to these rigorous approval and oversight requirements, the mda included an explicit preemption provision prohibiting states from establishing or continuing quote, any requirement, unquote, which quote, is different from or in addition to, unquote, any federal requirement applicable to the device or which quote, relates to the safety or effectiveness of the device, unquote. this provision was common sense, given the rigorous and costly nature of the fda approval process, it was in the best interests of all shareholders, excuse me, stake holders, including patients and consumers, that the states be prevented from supplanting this

system with their own regimes. as we're all aware in last year's regal versus medtronic decision that my distinguished friend has mentioned, the supreme court held that this explicit preemption provision also applied to tort claims filed pursuant to state common law. this is not a surprise move by the court. it was an 8-1 decision that affirmed the position taken by the overwhelming majority of the circuit courts. yet i have to say the personal injury lawyers and their allies in congress have painted this decision as an unexpected change in the law in order to advance their pre-existing agenda to weaken federal preemption. the result of this effort is the medical device safety act. the legislation we're discussing today would alter the mda's preemption provision to state that it does not apply to actions for liability under state law. now, my opposition to this approach stems from many factors. first, i do not believe that randomly selected jurors have the necessary scientific and

clinical knowledge to perform the same level analysis -- and analysis as the review -- as the analysis and review by the experts at the fda. yet in essence, this legislation would supplant the findings of the fda with those of juries in state courts. this is not only bad policy from the perspective of device safety, it will also likely have a number of unintended consequences. once again, under the current system, device manufacturers go to considerable expense to obtain premarket approval, in part because they know that the financial risks of litigation are greatly reduced once the process is completed. however, if this legislation is enacted and manufacturers are required to ensure that they have approval of the fda as well as that of any 12 random people in any one of the states, the risks of marketing a device will

greatly increase, and the cost of these devices will go even higher. as a result, innovation will be stifled and fewer and fewer devices will be brought to the marketplace. additionally, we will inevitably see a rise in the overall cost for devices as a means to offset the cost to more frivolous lawsuits. as someone who tried these suits in the past, in my early legal career, or service, i have to say a high percentage of the lawsuits were brought to get defense costs. they were frivolous suits. they have been running up the cost of health care in our society beyond belief, and frankly, when there are legitimate lawsuits, there ought to be ways of being able to arrive at just compensation for those who have been injured. but most often or not, and since the costs of defense, i generally think of them as between $50,000 and $200,000,

you know, it's many times in the interest of the people to just pay the cost of defense rather than to defend the cases and take a chance with a runaway jury. now, this is not only a detriment to health care reform but not only will this adversely affect an industry that employs millions of people during a time of economic crisis, it would also harm patients as they will not benefit from the ingenuity and continuing advancement in technology we currently are benefiting from, the vast majority. that in my opinion will be the most devastating effect of this legislation. indeed, we have one of the most if not the most innovative and vibrant medical device industries in the world that provides life-saving solutions to millions of americans ask people all around the world every year. at a time when our unemployment is rapidly headed towards double digits, it would be a mistake

for us to take some of the steps that are currently being discussed which include, on top of this legislation, taking billions out of the productive sector that employs thousands of americans to produce life-saving treatments to pay for an ill-advised massive government expansion and control of our health care system. making this proposition even worse is the fact that it's unnecessary. we all want to ensure that those who have been truly victimized by the negligence of another party are able to receive adequate compensation for their injuries. however, the current system, including the statutory preemption, does not prevent plaintiffs who have legitimate claims from being compensated. under the mda device manufacturers can only benefit from the protections of preemption if they followed the system to the letter. if they withhold or falsify information in their disclosures to the fda they will be charged with defrauding the federal government. similarly if a single device is

not built exactly to approved specifications or doesn't include fda-approved labels the manufacturer will be liable for damages. in addition, if a device is improperly planted or used the mda will not protect a doctor from being sued for malpractice. when a manufacturer is legitimately at fault, they will be liable under current law. when they are not at fault the mda provides a narrowly crafted safe haven from costly litigation. as stated this exceptionally narrow exemption has great benefits. the mda has allowed unparalleled advancement in medical device technology. due in no small part to the fact that the rules for safety and liability can't be rewritten in 50 different separate jurisdictions. if an acted the legislation we're discussing today would remove this protection and as a result, i believe it is the patients who are going to suffer. i look forward to hearing the testimony from our panel today and i hope that during this discussion, we can get to the

bottom of some of these issues. in particular, i'd like to hear some explanation as to why we should empower laymen on state juries to overrule the studies, analysis, and findings of our fda experts. in addition, i hope we can debate these issues looking toward the future and the effects this legislation will have on the advancement of medical technology. the increased costs to our already out of control health care spending and the lives of those who were benefit from such technology. let me just say that we're happy to have all of you here today. each of you has important testimony to give to us. we're grateful you take time to be here. i particularly want to mention mr. hunt, who is in my opinion the dean of all fda lawyers, who really understands this business as well if not better than anybody in america today. peter, we're very happy to have you here and we appreciate you taking time for what we know is a busy schedule to come and help us work through there and understand this better. but i've known you for all of my 33 years in the united states

senate. you're totally honest, a decent man. you also have written textbooks and have been literally the dean for all of us in trying to understand all the intricacies of the@@@@@@rr including the various sensible this act. we walked out and saw all those folks to were just praying that we would get that bill through. we both broke down in tears. i want to thank senator harkin 4 cochairing this committee. chairman of the committee. i again want to thank all of our witnesses for appearing and being with us today. thanks, mr. chairman. >> thank you very much, senator hatch. and we'll now go to -- i'm told

we've got a couple of votes coming up here very soon. what we'll try to do is go down the panel, and if you'd just take maybe five minutes to summarize, then when we break to go vote, we'll come back for questions and finishing up the panel. i just don't know exactly how soon those votes are going to be called -- maybe right now. i want to note for the record we have a new member of our committee with us today. their the first hearing of our distinguished senator from the state of minnesota. we welcome you to the committee. >> thank you. >> i want to say i started and that seat right down there, i remember back in the last century. >> the way he used to beat me up on television, i'm happy to see him way over there. >> it's great to serve with both of you. we welcome you, mr. change. you too, mr. first, start from my left, go to the right, over this way. first we'll start with dr. myzell, founder and director of

the medical device safety institute at beth israel deaconist medical center. assistant professor of medicine at harvard medical center. he has an active cardiology practice and directs the pacemaker and defibrillator service at beth israel deaconist medical center. received his md from cornell university, his mph from harvard school of public health, completed internal medicine in cardiovascular training at brigham hospital. and is the former chairman of the fda's circulatory system medical device advisory panel. dr. myzell, welcome. as for you and all witnesses your statements will be made part of the record in their entirety. if you could sum it up in five to seven minutes, i'd be most appreciative. >> thank you, mr. chairman, committee members. good afternoon. thank you very much for the opportunity today to speak about

the importance of the medical device safety act of 2009. i am a practicing cardiologist at beth israel deaconess medical center. i direct the medical device safety institute, an independent industry independent ant, nonprofit organization dedicated to improving the safety of medical devices. i served as consultant to fda center for devices in radiologic health since 2003 and previously chaired the fda's poe-market and heart device advisory panels. i hope that you will appreciate that fda marketing clearance or approval of a medical device does not guarantee its safety. in particular, manufacturers' responsibilities for product safety extend well beyond initial fda approval. the u.s. supreme court's regal decision eliminates an important consumer safeguard, the threat of manufacturer liability, and will lead to less safe medical devices and an increased number

of patient injuries. we are very fortunate to have the preeminent regulatory system in the world. the u.s. food and drug administration regulates more than 100,000 different medical devices manufactured by more than 15,000 companies. they receive several thousand new and supplemental device applications annually, and they are mandated by congress to complete their premarket evaluations in a timely fashion. thankfully, there are many superb fda engineers, physicians, scientists and public servants who work tirelessly to try to ensure that only safe and effective medical devices reach the american public. unfortunately, it is not uncommon for unanswered questions regarding device safety and effectiveness to remain at the time of fda approval. this creates the potential for a large number of patients to be rapidly exposed to a newly approved product in the absence of long-term follow-up data. for example, close to 268,000 patients had been immigranted with the medtronics

defibrillator before it was recalled in october 2007. we'll hear more on that later. it was then determine the wire was prone to fracture and a fracture of the lead which connects the implantable defibrillator to the heart may result in serious health consequences, including painful electric shocks or death. the medtronic lead was approved on the basis of no human clinical data. although medtronic began receiving reports within months of release, they did not recall the lead until more than three years later. an fda inspection report issued after the recall cited medtronic for "objectionable conditions" noticing they failed to implement appropriate corrective and preventive action procedures related to the company's investigation of the product anomalies. in addition, when the fda inspection team requested certain documents according to the fda inspection report, medtronic would not let the fda team view th. the delay in issuing a product recall, the fda citation, and

failure to provide fda with requested documents did nothing to eliminate medtronic's protection under the preemption doctrine. medtronic claimed immunity citing the supreme court regal decision and the u.s. district court agreed. the fda annually receives reports of more than 200,000 device-related injuries and malfunctions and more than 2,000 device-relate the deaths. it's challenging for the agency to identify patterns of device malfunction among the deluge of reports. the vast majority of recalls are initiated by the manufacturer but manufacturers have an inherent financial conflict of interest often measured in billions of dollars. in numerous cases manufacturers have knowingly sold potentially defective devices without public disclosure. during fiscal year 2006 alone, 651 recall actions were initiated involving 1,550 products reminding us fda product approval does not ensure

device reliability or performance. it is clear that medical device manufacturers have responsibilities that extend far beyond fda approval and that comes have failed to meet their obligations. yet the u.s. supreme court ruled in their regal decision that manufacturers could not be sued under state law by patients harmed by product defects from fda-approved medical devices. as a result, consumers are unable to seek compensation from manufacturers for their injuries, lost wages or health expenses. more importantly, a vital consumer safeguard, the threat of manufacturer liability, has been eliminat. implanted medical devices have enriched and extended the lives of countless people but device malfunctions have become modern diseases that will continue to occur. manufacturers have important responsibilities for product safety that extend well beyond fda approval. the idea that manufacture liability for a medical device should end at fda approval is a dangerous policy. additional consumer protections is offered by the medical guys safety act of 2009 are essential

to minimize adverse health consequences and to improve the safety of medical devices for the millions of patients who enjoy their benefits. thank you. >> thank you very much, dr. maisel. now we'll turn to professor thomas mcgarity who holds the long-endowed chair in administrative law at university of texas school of law. he has taught administrative law, environmental law and torts at texas law school since 1980. professor mcgarity received his ba in 1971 from rice university, his jd in 1974 from university of texas. after a clerkship with the honorable william e doyle of the tenth circuit court of appeals, he served as attorney vizner the office of general counsel of the epa. professor mcgarity has written extensively about administrative law and published "the preemption war: when federal bureaucracies trump local juries." professor mcgarity, welcome.

>> thank you very much, chairman and members of the committee. i'm happy to be here. i am very pleased to be here and to share my thoughts on this very important bill with you. i am, of course, expressing my own views on this matter, not those of the university of texas. the supreme court has frequently invoked what it calls the presumption against preemption in areas that are subject to traditional state regulation. and this reflects our federalist system where we have a federal government but we also have 50 state governments. medical devices were not regulated at the federal level at all until 1976, when the shield tragedy motivated congress to enact the mda of '76. the purpose of the statute was

to protect the users of devices to ensure they did not enter the market in the first place. the medical device amendments did have and do have a preemption clause in them. it does use the magic word "requirement" as the supreme court held in the regal opinion. that was no doubt added to the statute because several states were enacting their own regulatory regimes in the absence of a federal regime to fill the void. it is -- the statute lacked a savings clause for common law claims, no doubt because in 1976, it never occurred to anyone that the word "requirement" would include state common law, but supreme court in 1992 held that it did for purposes of that statute. and we've seen in the regal case

that it now has interpreted the preemption clause in the mda to mean the same thing. now, while the courts' reasoning is open to criticism, the point that you made earlier is that congress is in the position to fix this. congress is in the position -- is the ultimate decisionmaker when it comes to preemption. and i think, therefore, that taking up s-540 is a good idea for the reason that it preserves corrective justice for those who have been wronged. corrective justice is a bedrock principle of civil society that goes back at least as far as aristotle. the compensation of the common law provides corrective justice by requiring manufacturers of definitely designed or manufactured products to compensate innocent victims. now, tort law also provides an important back stop to the regulatory system by sending a

message to potential defendants to collect the data necessary to evaluate their products and to take action to prevent future harm. device manufacturers that conduct the clinical trials that are continually receiving the reports and to collect data from all sources are in a much better position than the doctors out in the field, than the patients certainly, or even the fda, to evaluate the safety of their devices. they're also in a far better position to do something about it once problems do arise. the manufacturers' incentive to comply with the common law duty reinforces, therefore, the protective function of the medical device amendments. now, what are the consequences of preemption? well, on very rare occasions congress has, in fact, explicitly preempted common law claims. every time it's done that that i'm aware of, it has provided

either a federal cause of action or some compensation regime to provide that important compensation function. when a court interprets the word "requirement" to preempt state common law claims, there's a void left. there is no corrective justice. it also robs the common law of its back stop role to back up the federal system, the regulatory system. now, there are other policy considerations as well. institutional confidence. yes, fda has expertise but it is also subject to capture. and fda approval is still relevant and often determinative. i would say most often determinative in common law litigation. fda has traditionally lacked resources. it can be manipulated by companies who defraud the agency. it is not the case that a party

who has alleged that he's been damaged because a company's defrauded the agency is entitled to compensation for that. indeed, the supreme court in the buckman case held that that claim is preempted. by federal law. so whereas the federal government may pursue the frauds, or fraudulent practices, it is not something that a defendant -- a plaintiff who has been harmed can seek compensation for. we have other functions. federalism, as already mentioned, an important consideration in our government. and the argument that somehow allowing compensation will overdeter companies just isn't supported by hard, empirical data. i looked in -- i can't find good, strong studies saying that, well, yes, we have fewer devices out there, fewer drugs for that matter, because people

are able to claim compensation when they are damaged. the decision to preempt common law is uniquely within the power of @@@@@@@@@s)n @ @ @ @ @ @ r)d iowa. after graduation, he worked as a golf course superintendent for 13 years. the next 28 years he worked for a turf equipment distributor. he is a victim of a faulty medical device and will speak to that. welcome. please proceed. >> thank you for having me.

>> i had a i had a painful life changing episode. my wife and i were driving to see our son and grandchildren in new jersey. on that saturday morning i was driving east of springfield ohio on in 70 in a construction zone when a device -- the device went off. we could not understand what the blue flashing was that i had seen. i tried to navigate the cart toward the shoulder of the road, the device shocked me again and again. my wife was calling 911. i don't remember how many times that device went off. all i recall is the excruciating pain and fear i was feeling. respondents showed up and took into a small hospital in london,

ohio. the device went off again in my head. they lifted me up off that gurney and drop me right back down on it. i remember i looked at a very experienced nurse, her eyes were wide open with concern. my wife, i was screaming so bad she had to go outside, she told me later. i had a big magnet put on me and i was transported to a columbus heart institute. i was exhausted and very scared, and i heard. medtronic said rep came into the room and read the device. he told us that it shocked me 22 times in 53 minutes. he added that it was an electrical wire lead problem, not the device. we had several doctors come in later that day, came into the room. one of them told my wife and i

how lucky we were that i had not wrecked the car. the lead replacement surgery was scheduled for monday, july 2nd. early that afternoon i was admitted and i was discharged. mary drove us on to our sons house and the entire way back to our cars -- our house. after this episode i found that treat driving on interstates and highways made me very anxious. it made me very tense and fearful of the device going off. i was afraid i might wreck some other cars, hit somebody, kill myself, etc.. this anxiety had a huge impact on me and my job. i had been an irrigation specialization -- specialist for 77 counties in iowa and other

states also. that is a lot of driving. i was no longer able to do my job. it also affected my personal life, this inability to drive. i had annual fishing trips planned for the fall of 2007, and they were both impacted. the first trip was to deer river, minn.. one of my fishing buddies drove all the way up there and back. while there, i experienced some chest pains, i thought, so i went to the emergency room. doctors concluded it was likely something else. my doctors looked at the zero swimmers and put me on antacid medications. about a month after that in october of 2007, the next

fishing trip, i was able to day for a day and a half out of a nine day trip. anxiety, fear, got to me. this same fellow drove me home, then went up to finish his vacation. it has affected our personal life also. mary and i can't take those trips to see the family and friends. after all this were in tension and anxiety and decided i needed professional help and i began seeing a psychologist who taught me some relaxation techniques. they seem to help call me down. also at that time i decided that the travels and pressures of my sales job was too much to handle, so i moved my retirement up to january 3rd of two thousand eight. i had several device checks,

three trips to the e.r. within six months of the league replacement. the majority of these visits was from meat feeling something was not right. one of my biggest questions was what affect the numerous shocks had had a my heart. any unexpected twinged or unusual feeling in the heart area makes me feel very tense and i am wondering whether the device is working properly. it is not a fun way to live. my hope is that no one else ever has to go through the pain and agony that i experienced with this lead, and medtronic held responsible for the problems it has cost for other patients. thank you. caused other patients like me. thank you. >> thank you very much for a very profound statement, mr. mulvihill. now we turn to peter barton hutt, senior counsel in the law

firm of covington and burming, specializing in food and drug law. he began his practice in 1960 and has been with the firm ever since. he's a lecturer at harvard law school where he has taught the last 16 years. from 1971 to '75, he was the chief counsel for the fda. mr. hutt is a graduate of yale university and harvard law school with a master of law degree in food and drug law from nyu school of law. mr. hutt, welcome to the committee. please proceed. >> thank you, mr. chairman. i appear before you today at the invitation of the committee to present my own personal views on section 521 of the federal food, drug and cosmetic act which provides for national uniformity in the regulation of medical devices. section 521 was enacted, of course, as part of the medical device amendment of 1976. as i relayed in think prepared

statement, the medical device amendments of 1976 and specifically section 721 were enacted or developed during my tenure as chief counsel for fda, and i was deeply involved in their development. the medical device bills that were forwarded to congress by president nixon in 1971 and 1973 contained no provision that related to the effect of the law or proposed law on state law. in august 1973, however, representative paul g. rogers, democratic member of congress from florida, who was chair of the house subcommittee on public health and environment, introduced medical device legislation that for the first time included a national uniformity provision.

on behalf of fda i strongly supported national uniformity in the requirements for medical device regulation, because it would strengthen the integrity, the credibility, and the primary jurisdiction of the agency. from then on, all medical device legislation considered in both the house and the senate included some form of national uniformity requirement. the final version was enacted as section 521, and it is that provision that would be amended by the legislation you are considering today that would permit product liability decisions by judges and juries that are inconsistent with fda decisions. mr. chairman, because of the time constraint, i will summarize my testimony with seven brief points. first, s-540 applies only to

devices that are determined by fda to be safe and effective under the rigorous premarket approval system. we call these premarket approval or pma devices. s-540 does not apply to devices that go through the simplified section 510-k procedures. second, pma devices are the life-saving and life-sustaining devices that represent the cutting edge of modern science. they are, for example, stents to keep arteries open. they are artificial hearts to keep people alive while they can get a real heart. they are the innovative new technology that should be encouraged, not hindered or discouraged. third, these pma devices represent only a small fraction of all medical devices.

since 1976, only about .05% of all medical devices have gone through the rigorous pma devices. the supreme court determined that the other 99.5% that go through the simplified 510-k process are not entitled to national uniformity. and thus, this legislation does not affect those. fourth, the pma devices uniquely require highly sophisticated judgment on safety and effectiveness, as senator hatch has pointed out. the mds and ph.d.s that fda spend more than 1,000 hours, over more than a year, to review each one of these devices. no one can possibly argue that lay judges and juries can do a better job.

fifth, allowing judges and juries to second-guess fda divisions on pma devices strikes at the very heart of the pma system. if judges and juries can ignore fda, why can't doctors, hospitals, and patients? and even companies ignore fda? s-540 fosters distrust and disrespect for fda decisions and undermines the public health protection that the pma system is intended to provide. sixth, product liability awards punish companies. there's no question about that. but they do not in any way contribute to safer or more effective pma devices. it is the inevitable adverse events that we know will always occur with a device that lead fda and companies to correct

deficiencies and improve the device. but by the time a lawsuit is brought and completed, the problem has been corrected and the safety issue has been resolved to the extent that it can be. if it's not inherent in the device. finally, i fully support compensation of people injured by pma devices. there's no question about that. but the solution is not to farm out fda decisions to juries throughout the country. the answer is not to replace national uniformity with national inconsistency and regulatory chaos. the jury system is nothing short of a lottery. some plaintiffs win big, others come away with nothing. it is an inherently unfair system. the goal of providing compensation can most fairly and

comprehensively be addressed by a statutory procedure like the national childhood vaccine injury act of 1986. under that system, unlike the product liability system, all patients injured by a pma device would be fairly compensated. and not just those who are fortunate to find a persuasive trial attorney and a sympathetic judge and jury. thank you, sir. >> thank you very much, mr. hutt. and now we go to michael roman. michael roman is from kirkwood, missouri. that's not too far from iowa. >> no, sir. >> he's a formula one racer. he's here to discuss his experience with a medical device that's enabled him to continue racing. welcome. >> thank you, mr. chairman. as well as members of the

committee. my wife susie and i come here today with a simple story to share with the committee. a story of help, hope and heroes. in 1994 while working in a hospital in st. louis, missouri, i had a knee arthro copy done to i had a knee arthro copy done to repair a torn meniscus and @@@@d three progressive amputations and the leg is now gone completely at the hip. i began to experience a phantom limb pain. it was very severe. i had increasingly large doses of medication. i have only a hazy recollection of the last decade of my life. i sought out all treatment opti it was during that time that i sought out any and all treatment options to control my pain.

these included a radiation, injections, implantable drug pumps. in 2000 we even tried a spinal cord stimulater. it's a device that electrically stimulates the spinal cord to disrupt those pain signals as they travel to the brain. the spinal cord stimulater we tried was based off of old pacemaker technology. and honestly, it was worse than the problem it was designed to treat. it replaced one type of pain with a new one that was far worse for me and my family. so back on the meds we went. finally, in 2005, i tried a new type of spinal cord stimulater. this one did manage to provide me with some relief. and hope for recovery. the precision plus spinal cord stimulater. this is designed off of technology that is from the cochlear implant, designed to help people hear again. this system allows me to manage my pain no matter what my

activity level is. if i'm watching tv or relaxing, or on the salt flats in beautiful utah trying to set a new record. once i got the device, the first thing we as a family did was, i need to get off the pain medicines. that's what we slowly started to do. i slowly started to get my life back. because i got it back, my wife susie is with me today. you know, in addition to our racing we travel all over the country and speak to pain patients and doctors about the treatment options that are out there. and it was as a result of these experiences is what allowed us to accept your invitation to be here today to talk about this. i think it's a very important issue. and during these, we've talked to many of our veterans coming back from conflicts in iraq and afghanistan. i do know how hard it is to seek out treatments and how scary it can be. and the technology i had implanted in 2005 was absolutely cutting-edge technology.

was it risky? it was. did i understand that the technology may n work? i absolutely did. did my doctor sit down and express to me not only all the risks of a normal operation but the risk of this product? we positively did. you know, part of our call to action was, what if congress had enacted this medical device safety act back in 2000? for me and my family, it would have been game over. it really does scare us to think where we would be as a family today if some researcher in 2002 decided the status quo was good enough. that the $60 million in investment made in developing, testing, and marketing the device and putting the cutting-edge fda product on the market, only to have that prodt's value systematically reduced by lawsuits, just weren't worth it. you see, there's millions of people out there.

some of them of your family members who one day might benefit from breakthroughs in therapy still in development. we need to think about these people and these families. parents, husbands, brothers. when we think about the consequences of this bill. do i want safe products? absolutely. for me, the question is a very simple one, senator. who decides? is it the fda experts or juries made up of people just like me, no particular expertise. and i think the hardest part is that juries see only that injured person. they don't see the thousands and thousands of patients that have been benefited from a technology. to me, the choice is clear. we need safe products. we need innovation. and i think the best way to do that is not through litigation, but through a well-funded, strong fda. thank you. >> thank you very much, for a very profound statement and about your experiences.

now, i don't know when we're going to start votes. but we'll start a round of just five-minute questions so we can try to get everybody in. whoever's running the clock, start me at five. there you go, thank you. thank you all very much for being here today. this is obviously a grave and extremely important issue and one that we are going to address hopefully soon. i wanted to start with mr. -- professor mcgarity. opponents claim that this law by reexposing the medical device manufacturers to liability would lead to a loss of innovation in the medical devices market. the kind of innovation mr. roman was talking about. is there any evidence at all to suggest this might be the case? >> i have not seen evidence to that effect at all. i think that a company will be looking forward to the market and lots of decisions -- lots of considerations will affect that

determination. but the likelihood that they will be sued if they do a bad job i don't think is one of the major considerations that play out there. and certainly, just looking at the objective evidence of it, i don't see evidence of that, no, sir. >> i want to try to understand something. mr. hutt, maybe i can get somebody else involved in this too. i want to try to understand the difference between drug regulation, fda drug regulation, and medical devices. wyatt versus levine, the court held the pharmaceutical industry doesn't preempt state court liability. the court held the fda has long maintained state law offers an additional and important layer of consumer protection that complements fda regulation. so, why are medical devices different than drugs?

>> well, let me try to explain that in several different layers. first of all, we're talking here about a statutory scheme that could be applied but hasn't been applied to drugs. so, on a pure legislative basis, they've been handled differently by congress at different times. that's just setting on the statutory basis. with regard t the difference between them, there's a huge difference between medical devices and drugs. for example, the standards for safety and effectiveness for medical devices are significantly different under the federal food, drug and cosmetic act. that was done purposefully by the people who drafted the legislation, and i was one of those who did draft the medical device amendments of 1976. and it was because medical

devices are contractions and drugs are fixed molecules. you can change medical devices. you can't change a molecular entity that is called a drug. so for a wide variety of public policy reasons, congress has seen fit to do things differently for these two types of very, very different products. >> so it's just that congress made that decision? >> yes, congress did. >> okay, so then obviously we can make a different decision. >> yes, there's no question. i don't disagree, this is not a constitutional issue. this is a statutory issue. >> all right. okay. so, really, the difference between drugs and devices is simply a difference that we have stated legislatively. >> well, there's an inherent difference in them also. >> right. . >> as i said, you can't change a drug. you can change a device. >> why can't you change a drug?

they can change the kelche chem >> then it becomes a different drug and it may lose completely the effectiveness. >> can you change a medical device without going through a premarket approval? >> no, my point is that device technology -- and this is a very interesting way that it's developed -- device technology is very well recognized, is an ierative process. we've had a description of how it developed over time. you can't change a drug over time. it is what it is. >> professor mcgarity. >> if i may, there's certainly differences between drugs and devices. the issue in wyatt versus levine had to do with the warning. the warning is much more like a device in the sense that it's an iterative process. that you can change the warning

if the prior warning isn't working or if something else has come up that needs to be changed on the warning. it is the very same iterative process. i would suggest the difference is not that great at all. >> i was reminded by my staff we change drugs all the time for kids. change them all the time for dosages and recommended treatments and things for drugs. >> that's changing the labeling. it's not changing the molecular entity which is the drug. you can change the device by adding something to it, by -- i always say by putting bells and whistles on it. you can't do that once you have a molecular entity, which is a drug. that drug is fixed. for all time. >> just seems to me they're changing drugs all the time but i have to think about that a second. i'm over my time. senator hatch. >> thank you.

one thing that i think needs to be made clear is everybody here wants to see people who are injured be fairly compensated when they suffer injuries resulting from another person's negligence. indeed, i don't think any of u want to prevent people who have been truly wronged from receiving fair compensation. and you've expressed yourself that way as well. >> yes, sir. >> seems to me though the mda as verified by the regal decision provides device manufacturers some level of protection from litigation, many avenues still remain open. >> that is correct. >> under current law, a patient can still sue a manufacturer if the device fails. >> it is a very complex issue, senator hatch, as to exactly where product liability would be cut off and would not. if the manufacturer follows the requirements of fda laid down in the pma approval, which is --

are very specific. they set exactly how the device will be made and how it will be labeled. if those are followed, then there could be no liability. but if they fail to follow them, then you're correct, there could be. >> okay. if there's a manufacturing defect, what about that? >> if that -- that would mean if you're saying if there is failure to follow the fda requirement -- >> right. >> that kind of a defect, yes. >> okay. >> but please, there's one thing that we have to all understand. devices like drugs often inherently have, you know, problems. have -- they don't act perfectly in everyone. and as a result, a drug or device that might save my life could hurt someone else. even though it's a perfectly good device or drug. so, the fact that it hurts

someone doesn't mean there's a defect. it may be working the best it can. it may save 999 lives and fail to save the 1000th life. that doesn't mean it's defective. >> if the device is labeled in a manner that's inconsistent with the fda's requirements, you can sue there? >> yes. >> okay. now, a device manufacturer may also be liable if they mislead the fda during the premarket approval process? >> not only would they be liable, they'd be criminally liab liable. it's a criminal violation of the act to in any way withhold information from fda or to submit false information. >> a patient can also be -- can also sue for position errors associated with an fda-approved device, right? >> yes. >> seems to me that instancis where a device manufacturer can truly be proved negligent or otherwise at fault for statutory

preemption in the mda has little or no effect. >> yes. >> okay. america leads the world? the development of innovative and life-sustaining medical devices. the entrepreneurial environment, which is very unique to this industry, is the backbone of what sets medical innovation apart from other countries throughout the world, around the world. in fact, the medical technology industry is one of the few that has actually continued to create economic opportunities for thousands of american families, despite the challenging economic environment. now, the decision to develop a medical device is highly risk-dependent. for many, it begins with an entrepreneur or start-up company competing to attract venture capital and other investments, to bring their product to the next stage. now, venture capitalists are risk-focused. when deciding to invest in a

promising medical technology, venture capitalists take many matters into consideration. such as patient benefit, intellectual property protection, and risk of liability. and any uncertainty in any of those elements can be a significant deterrent to investing in any kind of promising technology. now, i'm concerned that without the preemption and the uncertainty of the risk of liability, medical device development and innovation could be stifled. and you've indicated that you feel that way as well. >> senator h@@@ @ rr'"d . and the decision made by venture capitalists based on such issues as potential liability directly affect every one of those companies.

>> ok. >> thank you, mr. chairman. i will be brief. >> thank you, mr. chairman. and i'll be brief. i might not take five minutes because i'm not going to ask a question. i want to thank all of our witnesses. we've got assembled quite an expertise of experience and knowledge and personal stories. you know, several months ago we were in this room, and i have were in this room, and i have deep respect for senator harkin. debating tobacco. and at that point, the fda was the only agency in the world that could regulate tobacco. they're only ones that had the expertise. cdc wasn't good enough. there was no other agency. the fda was the only gold standard. they had the only brain trust of

employees that could wade through a complicated process. and a month ago we were in this room debating health care reform. in that health care reform debate, we talked about the need for more drugs, more biologics, more innovations. we needed better outcomes. we needed more investment to make sure the outcomes of the american people were, in fact, better. now we're here because of the results of an 8-1 supreme court interpretation of a law that was put in place in 1976 that all of a sudden, 33 i believe years later, this is the single-most important thing we've got on our plate right now. what's changed? well, i trust my colleagues that our goal is to only get

safe products to market. now, mr. hutt, you and i have been at fda, you twice as long as i have. we both know that's an impossible statement. >> yes, sir. >> and let me just read from your testimony, if i can. and i don't think you did it in your shortened testimony. and i quote you. those devices that are targeted in s-540, the proposed legislation would allow judges and juries throughout the country not only to impose requirements that are inconsistent with fda determinations, but to differ from one court to another. the result would be regulatory chaos. if anybody questioned why mr. roman is here, then that's the answer. if you have regulatory chaos, you have no investment, now have no innovation, you have no venture capital that's at the table trying to drive the next device. you therefore have no innovation. you decrease the outcome of

health incidents in the country. n now, the "new england journal of medicine" stated recently that 54 cents of every dollar paid to an injured patient is diverted to administrative costs. the majority of the administrative cost is the legal fee. it's becoming clear as to why we're here. it's because the supreme court has tightened where you can go to court and, more important ly affected their pocketbooks. now, mr. mulvihill? listen, i want to make sure anybody injured in this country is taken care of. and i don't question your injuries one bit. if there was a defective lead.

i think mr. hutt covered that when a manufacturer is negligent on something, if a manufacturer does not follow that prescribed by fda, if a manufacture r -- fa requirements are fairly clear. they're black and they're white. there is no gray area, i've found, in whether it's drugs, devices, or biologics. it is pretty specific on marketing, on labeling, on everything. company goes outside of that, they're basically open game. mr. chairman, i'm going to conclude -- i've got 40 seconds left -- i want to ask unanimous consent to enter it into the record, from the blind veterans association, a letter. i'll just quote one line. we therefore strongly urge ow you to oppose the medical device safety act of 2009. also, the american military society. deciding which new medical devices are safe enough to be sold in this country is the job

for doctors and scientists at the fda, not juries. the u.s. veterans hospice committee. our opposition to this legislation is driven by our strong belief in the need for greater access by these veterans to many medical devices used in the end of life hospice care setting. and lastly but not least, a letter signed by a number of companies. i'll just highlight a few. the american health care association, american insurers association, american tort reform association, the business round table, 3m, national association of manufacturers. u.s. chamber of commerce. their last line. for these reasons and others that are detailed in the attached letter from march, we strongly urge you to oppose this legislation. i would ask unanimous consent they be included in the record. once again, i thank our witnesses for being here. >> without objection, thank you very much, senator. senator hagan. >> thank you, vr chairman.

i just want to thank all the witnesses for being here today and especially the two men, the patients, thank you so much for your testimony. i just have one question, wanting to ask -- i'm not sure exactly who this is addressed to. for individuals who have a defective dwaevice, then you ha to go back to the hospital and have the device removed, and other payments. whether the actual surgery, the hospital, the physician. who pays for that? dr. maisel? >> i think that's an excellent question and a very important question in this era of health reform. the answer is that patients pay for that. taxpayers pay for that. because insurers get billed. in fact, the number one payor i suspect of medical device defects is the federal government, medicare. and some might argue that we have two cash for clunkers programs and this is one of them, where the federal government is paying for defective medical devices.

>> i think we're all concerned about costs and cost containment. and i think that that's a very big issue. yes, mr. hutt. >> senator, there is a provision in the medical device amendments of 1976 that authorizes fda to order the company to pay for a defective device and the requirement of it. >> does the patient individually have to petition or -- how does that process work for the fda to -- >> the fda can, on its own initiative, order that. or any patient could also ask for it. >> you mean like on a recall basis? >> on a petition basis. >> that's all, mr. chairman. >> well, then, i'll start the second round, then.

you can start me again on that five minutes. you know, i must say for the record that before regal was decided, the device manufacturers were subject to tort laws. in fact, there were many of them. it wasn't until the regal decision that the door shut. am i not correct in that? yes? >> no, sir. there were a number of court decisions before regal that held that the claim was preempted. >> there were a number of decisions that held otherwise. they were certainly subject to liability and they knew it while they were designing their product. >> before regal, the device manufacturers didn't know if they'd win or lose in a tort claim, right? let me just say for the record that the last year before regal decision, the last year before the top 25 medical device companies had a net profit of

$173 billion. net profit. so they were doing quite well. they were coming up with new devices all the time. even though they didn't know whether or not they would be subject to a tort claim or not. so it doesn't seem like innovation was stifled. i must also say, regardless of the difference between drugs and devices, we're getting new drugs on the market all the time. and they are not preempted from tort claims. mr. maisel, is it not true that after medtronic began receiving reports of these manufacturers, you state in your statement here, within months of initial market release, they did not recall the lead until more than three years later. an fda inspection report issued after recall cited medtronic for

"objectionable conditions" for failing to implement appropriate corrective and preventive action procedures related to the company's investigation of the product anomaly. now, dr. maisel, do you believe themeisel, do you believe the fda approval process is so good that manufacturers of these devices should receive immunity when they are faulty or cause injuries? you've been there. tell us about that. >> i think the fda does an exceptional job of evaluating medical devices and they are extremely thorough. i think the biggest issue i have is this concept that manufacturer liability stops at device approval. i try to outline in my testimony all the responsibilities of a manufacture manufacturer after the fda approves the device. they're still manufacturing the product. there are many compliance guidelines they need to follow for manufacturing. and it's simply impossible for the fda to monitor individual

coanies when there are 15,000 manufacturers and 100,000 devices being produced. so the idea that only those companies that get caught by the fda are the ones that are going to be held liable, i think is bad policy. it's also interesting to note that a u.s. house committee report in june 2006 noted the decline in enforcement reports and enforcement activity of the fda and the number of warning letters issued by the fda declined 50% between 2000 and 2005. every single office that the fda had to decline with the device center having the largest decline in the number of enforcement letters issued. so the concept we're going to rely on the fda catching manufacturers doing something wrong in order to support consumer liability is just a bad policy. >> but once you make a device --

well, let's see. i guess you can change the device. you can change them and stuff. if they make a change on a device, does it have to go all the way back to the beginning again and go through the premarket approval? >> manufacturers can make modifications, and they need to let the fda know about that and submit supplements to their pma application. >> so it doesn't go right back and go through the whole process again. >> that's an excellent point because the medtronnic defibrillator in question that we're talking about was fully a supplement application. it was not an original pma and that supplement application had no human clinical data. so they made a modification to their lead. it was never implanted in a human before approved by the fda. no human data was submitted to the fda to support its approval. the device is approved on the basis of bench testing in animal data, and then it goes into close to 300,000 patients. the question isn't why are we here.

it's obvious why we're here. it was inevitable that something like this would happen. >> okay. now you just told me something i did not know. you are saying that a device manufacturer like this medtronnic defibrillator. when it went through the whole premarket approval and everything. it was approved. later on, they made a change to it, but it didn't have to go back and be approved and they did no human trials? >> it did need to be approved. the original pma was submitted around 1992. the supplement that approved the fidelis lead in question was approximately supplement 25 or 30, somewhere in that range. and each of those supplements goes back to the fda for consideration. but supplements often do not require human clinical testing. and so you're now looking at a lead 15 years removed from the original pma and there's not a lot of clinical data submitted to support its approval. >> the idea that lead is going to function perfectly well and the manufacturer will never be liable for it seems an

interesting policy. >> thank you. i'm a minut >> it the have any comment about anything that has been said so far? >> a supplemental pma, which is required for any change of any kind is required to be approved by fda using the same standards of safety and effectiveness as the original pma. i do not want there to be any confusion about that. fda looks at the entire pma when the supplement is submitted, and either approve the device as changed as safe and effective or not. so there is no distinction between the original and the supplemental pma. the fda in this instance, perhaps incorrectly, i do not know the facts, but what they

did was, they looked at all the data on safety and effectiveness in humans. they concluded that the new lead did not require additional human data. data. now i am not a scientist, and i cannot say they were right or they were wrong. dr. maisal is more qualified than i to make that judgment, but i don't want there to be any confusion about what the process was. >> okay. mr. mulvihill, did you sue because of the difficulties you went through or -- >> when this first happened, i did not intend to sue. i liked my doctors in davenport, iowa. i didn't know there had been a problem with the leads. i wasn't told that. in october of the year that i had my problem, four months, five months later, whatever it was, a friend called me and said

did you see the paper about medtronnics, fractured leads. i said, no, i hadn't. i was thinking about it. i looked at it. my wife and i discussed it. i didn't do anything for a good, long time. it was the end of january, first part of february before i contacted a firm and they agreed to take a lawsuit. >> i see. okay. now mr. roman, i understand you'll be going right from this hearing out to the bonneville plant in my home state of utah for the bonneville speedweek to try to set your fifth land speed record. >> yes, sir. >> i don't want to call you nuts, but we're very proud of that. >> thank you very much. and i think one of the things we're most proud sufficient the second opportunity the family has been given. one of the things we've tried to do is incorporate the military

warrior. marines are first. i get a lot of grief for this, by rule is first in, first to win. i'm not up for argument. we'll take the u.s. military with us and go set some records. >> i want to wish you the best of luck in your endeavor. you stated that the first final stimulator did not work for you and the technology from the second implanted stimulator pushed the envelope and was risky. after considering all those factors, can you tell us what made you still decide to get the second device and have you had any regrets since you got the second device? >> plain and simple, sir. family. i wanted my family back. i wanted a chance at a normal life, and, you know, the original trial didn't go well with the first stimulator. it was like being electricuted. i felt from my rectum to the top of my head, it felt just pounding and, for me, it didn't work. go out five years later, the

morphine levels are now up to 300 milligrams of morphine a day. i'm hallucinating. suicidal thoughts are pretty constant, and, for me it was desperation. >> a matter of quality of life. >> i just didn't know where else to turn. the remarkable part is during that time how technology had changed. and it was like night and day when they turned this system on because it was based on the cochlear implant technology. it was very smooth and i could steer it and control it a lot more than the pounding electrocution i felt. >> i'm really glad you did what you did and i'm glad you have that response. mr. gmcgarity, i have a lot of respect for you. as you can see, you and mr. -- differ quite a bit. i'm as concerned about these issues as you are. on the other hand, i am concerned about having the best

medical devices we can find. and i do know -- i do know there's a balance here that has to occur. i don't think any of us want somebody to be hurt by medical device. it's truly the thought of the company or anybody else for that matter. it's a tough area. these are tough, tough decisions. but my time is up. i was going to ask you a whale of a question, but -- no, that's fine. i just wanted to mention that i have high respect for you. >> why thank you. >> well, i have one other thing i'd like to pursue and i'm just thinking about this. i am informed -- the fda does not have subpoena power, does it? >> no. >> no, it does not. >> so let's say -- let's just think this through a second. if a device manufacturer knows

now under riegel that they are not subject to tort lawsuits, therefore, they're not subject to discovery that would go on in a lawsuit, and if fda doesn't have subpoena power, and let's say that, you know, yeah, i was thinking about this because there's a case here. warner-lambert kent, which you probably know about. manufacturers who commit fraud on the fda are not immune from lawsuits. well, okay. let's say that a device manufacturer doesn't submit all the information to the fda. the fda does not have subpoena power. therefore, they approve it. it goes on the market. people are injured. there's a recall. but because they cannot sue, you cannot get discovery to find out whether or not they ever even committed fraud on the fda.

so i hope i made myself clear. if a device manufacturer commits fraud on the fda, puts the device out there but -- and injures people but they cannot sue and can't get discovery to get at these documents, then you will never know whether or not they committed fraud on the fda or not. what's wrong with that line of reasoning? >> first, senator harkin, you asked me a very sort of specific question. fda does not have subpoena power. but any fda inspector has the authority to obtain records inspection by visiting the company and they can demand any form of record relating to information on safety and effectiveness in the files of the company. they have 100% authority to obtain that. moreover, and this is extremely important, it is a violation,

and regarded by fda as the most serious violation if a company that fails to submit all the relevant safety and effectiveness information as part of their pma. and i can assure you when i was chief counsel, the one area that i always considered criminal sanctions was the failure of a company to report things they were required to report, either with the original application or after a drug or device was marketed when there are also reporting requirements. fda's criminal authority is the strongest criminal authority under any federal statute. it does not require knowledge or intent by the company or the individual. it is what we call strict

criminal lib ibl and fda does employ that whenever there is proof that someone violated those principles of reporting. >> mr. maisel, could you address yourself to this? >> sure. i will read a quote from the fda inspection report, page 13 of a 25-page report. this is the fda. when we ask to see some in-process field product inspection reports, we were told they were not able to let us view them. that's the fda on the medtronic issue. >> how can -- >> i'm getting two different things coming to me, and i can't handle this. >> the company may have said that they didn't want to give it to fda. but if they didn't give it to it, that's a violation of law, period. full stop. >> i think the point or the -- >> so my question -- if they wouldn't give them the information, why didn't the fda

demand it or what could they have done? >> fda could demand it, and if the company refused, fda could bring a lawsuit. >> a lawsuit. >> yes. they could penalize the company. they could seize the offending illegal products. they could enjoin the company against future violations. they could bring a criminal prosecution. >> on this case, it's the fda's fault they didn't get this? >> yes, that is true. now dr. maisel made a point earlier that he and i are in complete agreement with. fda needs complete appropriation. the statistics, for example -- >> they're not going to give them that. >> the statistics he quoted were from a few years ago of the downturn in fda inspections and other forms of enforcement

action. but in the last two years, fda appropriations have increased by $900 million from $1.4 million to $2.3 million, and it was precisely because the fda science board report of late 2007 said that the agency was being starved to death. now they've got the funds. >> i deal with fda a lot on another hat i wear, agriculture. they don't have the resources to monitor all the things we asked them to monitor. >> not everything, i agree. >> that's for another discussion. do you have any other -- >> on this issue. see, my point was whether or not you could ever get to the bottom of whether or not a company gave all the information to the fda in the first place or not. and if you don't have a lawsuit -- you understand what my question was? >> i do, and i think you've well

summarized the issue. the fda does not possess the authority to, quote, demand documents other than to ask for them. but if they don't, then mr. hunt says they should sue them. that's as i understand. >> that's back to the future. that's where w were before the medical device amendments back in the 1950s and 1960 when the fda regulated devices by trying to take them to court one at a time and spent a lot of money and it was very inefficient. >> so you're saying it would be -- it almost -- i wouldn't say next to impossible but since you have 15,000 manufacturers out there, is that what you -- >> correct. >> that would be hard for them to -- if they demanded, let's say, 50 of them or 100 of them, would they have the personnel then to go and lawsuit every single one of them at fda? >> i think you know the answer to your question. >> yeah. >> i don't know where they get the money to hire these high priced lawyers and these big law

firms. i'm just kidding. >> senator in my experience, it's a rare event when a company declines to obey the law and provide the documents that fda is entitled to. >> i would agree with that right now, but under riegel, if they can say, my gosh, we'll never have to give those documents up, it would be a rare instance for fda to ever take us to court to sue, and mr. mulvihill can't sue us now and his lawyers can't get discovery to get those documents. hey, you know? >> senator, their lawyers are going to tell them if we don't produce these documents, we can go to jail. the ceo can go to jail. that's who fda brings criminal prosecution against, not some low-level people. there were two supreme court decisions. one in 1944. one in 1975. upholding fda authority to bring

criminal prosecution against the highest corporate officials because they are ultimately responsible for the actions of the company. >> mr. mcgarity, i went over my time. >> just a couple of points. one is, yes, that might happen, but it doesn't. you don't see that many criminal prosecutions. hopefully it's because it doesn't happen that often, but the fact of the matter is the underlying fact of the matter is that when we get this information about what was going on in the drug company files, in the device manufacturer's files, it's not because fda inspectors got it. it's because a plaintiff is sued and we've had discovery. we've had depositions taken. we've had sometimes a whistleblower within the company come forward with that information. but it's not because fda turned it up. >> let me just say this. we've had extensive experience with the fda, and they don't

miss much. and the constant complaint is i don't know the instance -- i have heard that same point that you have made about medtronics, but if they had wanted those materials, they would have gotten them. i do not know what the reason is behind it. maybe they did, i do not know. i understand this legislation deals with the mission of the fda as regards medical devices. the device manufacturers have to go through an extensive review process and analysis with talk -- top experts of the fda. marketing requirements and even after the device is on the market, they have to report back to the fda on the implementation and use of the device, including any adverse events.

so what we're dealing with is a bar that is already set exceptionally high. this legislation, it appears, would allow panels of randomly selected jurors with no expertise at all in the field or any aspect of it to overrule this entire process and create whole new standards of suitability and market readiness for medical devices. now does this legislation not suggest -- let me ask you this, mr. hutt. does this legislation not suggest that a jury of 12 layman is better able to determine the future use and availability of these highly effective devices? and if so, what could be the justification for that? >> that is precisely my concern, senator hatch. fda is not perfect, but certainly a jury is going to be

less perfect in determining what is a safe and effective medical device. >> the ultimate goal is to get the very best devices we can to really help people, like mr. mullvihill, like mr. roman, in ways they've got to be helped. and we've kind of split the baby here. is that a fair appraisal? >> i agree with you. one of the best parts of the medical device amendments of 1976 was an innovative provision under which advisory committees would be convened for every pma device to make certain that outside independent experts agreed with fda that the device is safe and effective. and doctor maisel, who has chaired one of those committees and has obviously spent a lot of personal time for which i think all of us should thank him. it's that kind of work that

makes the system work. that's the way that fda confirms whether a device is safe and effective and has sufficient data to go on the market. >> okay. mr. mcgarity. you argued the common law serves an important deterrence function and to some extent, i suppose i agree with that. specifically you stated to the extent the compensatory and punitive damage awards imposed are greater than the cost of avoiding the harm, a rational company will take protective action to prevent causing damage in the future. now i see some problems with the application of this reasoning to highly regulatedreas like medical devices. fda regulations make unilateral changes in labeling, design or manufacturing processes virtually impossible. so while it's a convenient --

it's a convenience to argue that a device manufacturer would simply and quickly update their product whenever they hear about a possible risk, the current system does not allow for this and for good reason because the initial process is so intensive, and sometimes intrusive, it only makes sense that any subsequent changes to a device receive similar scrutiny. even if the law allowed for changes to be made so easily, how could a manufacturer ever be confident the action they took would be sufficient to avoid a plaintiff suit? one thing we can learn about the trial bar is there is no shortage of legal theories on which to file a lawsuit. in your view is there no benefit to offering limited protection for manufacturers of such highly regulated products to ensure the advancement and availability of these life-saving products. >> i think that's a very good

question, senator hatch. and the answer, i think, goes to the nature of the common law. you alluded to it on several occasions this afternoon. the negligence standard is fairly uniform across the country. the standard of defective product. there are some minor variations in the state, but it's a standard of care that we ask a drug or device manufacturer to come up to. when the manufacturer anticipates that they might be held to violate that standard of care in the future, one hopes that that affects their decision. particularly once the device is out there on the market. the fact is true they have to go back to fda for approval if they want to change their device. it is also the case,

particularly when it comes to the label or the warning on the device, that when you go back and say i discovered a problem with this device, it's not as safe as it needs to be as i've discovered from reports or whatever that have come in to me. and i want to fix that and make it safer. fda doesn't get in their way. fda doesn't say, oh, well, we wouldn't want you to make it safer. if that's going to take too much time or too much effort. they tend to not get in the way of safety enhancing approvals. but you're right. they do have to go back to fda at some point to get that approval before it actually changes things. when a jury holds a defendant liable, they are not issuing an injunction saying that you must do things differently. they are simply holding the defendant liable in that

particular case and the defendant then takes that message and does with it as the defendant thinks proper or appropriate. >> well, in most instances, product liability lawsuits are resolved in the courts long after the safety issue is over. because what happens is through various mechanisms, first doctors report problems with medical devices. they report it directly to fda. second, some doctors or patients report it directly to the company. as soon as those reports come in, any intelligent company starts to say, what do we need to do? is this inherent in the product, like mr. roman was talking about with his first generation product that it's just the way it is. science and technology can't improve it any better.

but if there is a way of resolving , that's done immediately. and fda and the industry will cooperate. i agree with tom on that. but the point is that all that occurs before any product liability lawsuit arises. the product liability lawsuit punishes the company. it doesn't increase the safety or effectiveness of a single device. >> one last thing. there are a lot of small companies that come up with some very, very creative products. what effect would it have on that process? that's what i'm concerned about. there are huge big companies that might be able to withstand some of this. but the innovation and entrepreneurial makeup of our country, it's generally the smaller companies that come up with these devices. and i don't want that

stallified. >> yes, sir, i agree. >> mr. chairman, this has been a very interesting hearing. and i want to compliment each one of you as witnesses. each one of you has contributed a great deal to us. i wish i had really totally definitive answers to solve the problem of the three witnesses on our left and yet still be able to have the devices for people like you, mr. roman, who, really, had a miserable life until you were able to get that device and get it to work. >> second chances come in all shapes. >> well, i would just say when the top -- what did i say? i had that figure. when the top 25 medical device companies had a net profit of $173 billion before the recall

decision, i don't think innovation was stivled at all that at time. >> for the small companies, that's for sure. >> they made a lot of money, orrin. >> yeah, the 25 companies. there are thousands and thousands of companies. many of them are very small. that's where a lot of the innovative ideas come from. they'd be stifled if we went to -- >> then i'll say this for the record. i don't care how small they are. i don't care how small they are. they better meet the most stringent standards of safety and efficacy. i don't care whether it's a drug or a device. >> i agree with that. >> and if they don't adhere to that, and if it injures a person out there, now, again, it has this whole idea of preemption. and as a lawyer, i've looked at this a lot in the past. it just seems to me that there was always, i thought, a presumption against preemption in the law. presumption against preemption. quite frankly, it's my reading of a little bit of the history

of this is that the fda's position, until the early 2000s was basical lie's presumption against preemption. but that all kind of changed. and i think it's up for us as the legislative body to decide. >> to borrow your words if they don't adhere to that, they may have some liability under current law. >> under criminal law. >> both. bo both. >> if they're preempted, how are you going to get into court? >> if they don't abide by the rules the fda sets up, they may have some real difficulties. >> you are right. >> i know i'm right. >> but the problem is without discovery and stuff you won't be able to get that information, and that is -- >> they'd be able to have that stuff. >> that's the conundrum we have here with this issue. and you say, well, the fda can go after him criminally and perhaps get that. but you just can't do that on every one. and the risks, you know,

companies take risks. investors make risks. well, the odds are maybe 10,000 to 1 that you'll never have to do this. >> well, that's pretty good odds. i'll make a lot of money off that. >> we thank you all coming. >> well, just a minute. i haven't adjourned this hearing yet. and i do have the gavel. >> i was just trying to leave and in a gracious way. >> i just want to ask for the record. i have two things to put in the record. one is an editorial from the "new england journal of medicine." new england journal of medicine. when did this article appear? march 2009, "new england journal of medicine." in which they said that -- i won't read the whole thing. as the law now stands, failure

to warn and design defect lawsuits are preempted for medical devices but not for drugs. this perplexing state of affairs defies all logic. to address the inconsistency and to improve the safety of medical prtd products, they went on to talk about the bill. patients and physicians deserve to be fully informed about the benefits and risks of medical devices and the company is making the devices should be held accountable if they failed to achieve this standard. we urge congress to swiftly pass this legislation. that's new england journal of medicine. i had another article. by margaret jean porter, chief counsel. well, she was chief counsel. former chief counsel of the food and drug administration. and i just have one quote from that. although the agency, meaning the fda, had not formally expressed its position on the issue of

preemption, it's clear from the views it expressed in many other contexts that it did not believe that state court claims were preempted under the medical devices act, mda. indeed, this is the prevailing view and n the legal community until the early 1990s. no arguments were put forward that there should be preefltion of these claims. so i just ask consent that those two articles appear in the record. oh, i'm sorry. i'd like to also submit eight letters from victims of faulty medical devices also encouraging us to pass the medical device safety act. now i would just say, if i thought for any amount of time that this would really stifle innovation, i happen to be for innovation. i happen to be for new devices. i happen to think these are good things. but