do that, anybody below that would palm criticism if he wants to send 40,000. that would be be the strong support. >> i didn't hear that was the message coming from the president. i think that is the message i wish, we expect it to be a ground troof. i don't think he can do anything else than that. >> combat troops, in addition to trainers. i don't think they ought to do something else. we need these troops. and it's very hard to say to the commanders on the ground, no, you can't use them. >> thing i thought i heard senator levin,, and they're capele of running their own defense. did you hear that as well?

>> i think it's a little bit of a gap. >> secretary gates said that any transfer of security to the afghanis was, you know, immue lent or -- you know, it depends on the regions in this treats. it's really a case by case basis. but i think the understanding in the mopt gone is different. that they be excited. >> you pressed this interview on the don't ask, don't tell policy, why is that. >> i think he made a process, there's a a lot of hearings. i think that they're not surprised it's been put off. but for him, they expected that

he's going have him. >> what about the rank and found and military. i think that we've found that a lot of tolerance for change. except the -- for the change. >> did you learn anything on the forthood discussion? >> that congress deaf flit -- definitely support this as oversight. that they really want to exercise the role in oversight. >> and it will happen toon. yes. >> well, thank you very much for being here this weekend. we enjoyed your questions. >> in 1989 judy shelton wrote about the coming soviet crash. in 1994, the international monetarily system. now she's talking about the u.s. economy. >> this isen precedenting

spending on any deficits and what i consider an unconscienable threat. tonight on c pan's q. and a. the speech the drawn up by the government and you lined this prortes for thing year. it's tonight live on c-span. now elliott spitter talks about investigating wall street.

>> this is about 90 minutes. >> thank you very much. thank you for that warm and inviting introduction. thank you for the entire endeavor which you have undertaken, it is obviously, critically important, it is something that essential to our nation's discourse right now. every day we see the head lines. we see the tension. we see the consequences of failures in the marketplace and government. and therefore vag conversation, a serious conversation about how to remedy this, essential

to what we should be doing. i will try not to be too lawyerly for the period that i am chatting up here. and i'm reminded of the last time, perhaps not the last time i was invited to speak back at harvard. there were four of us who were invited to be on a panel. and another illustrious classmate of mine by the name of jim kramer. you may have heard of him. he jumps out of the screen. he and i were a -- invited to participate. but there were some sessions prior to our session. so i was sitting in the back of the room. does anybody know professor arthur mill sner brilliant, brilliant lawyer. >> he said, ah, mr. spitzer,

you never showed up when you were a stufpblete he's having fun. he did his retribution. by the way, the audience was about 400 or so, most of whom were going to be asked to make major contributions. they were successful in their professions. the dean of the law school, dean clark was up in front. and he was doing his presentation. he saw me sitting at a table. he said, ah, mr. spitzer, nice to see you showed up. you never showed up when you were my student. this group of 400 people, i might want a contribution from these folks some day. i don't know how to handle this. then the dean asked me to go in front of the room. i said, look you've collectively heard from two professors that said i never

went to class? did it hurt my career? there are some students here -- i can just see the headline, spitzer goes to harvard, didn't go to close. let me be clear, you should go to class. occasionally you learn something. i just said that as backdrop. the other time i was -- i was invited to speak, it was also when i was attorney general in a case i will discuss in a few moments, it's this dynamic to have the analytical work to recommend stocks in the banking world. i'll describe that in a bit. but this case depended almost in its entirety on e-mails and the e-mails were probative unlike the bear stearns case that reached a verdict yesterday. these e-mails were overpowering. anyway, the analysts invited me

to speak at their annual dinner. i said no, they don't want me to show up. it was the only time my wife said are you taking security to you. she really thought i was going to be torn limb to limb. that evening, there were about 300 or 400 analysts. you would have lost 40% of your money. those were the ones that got their gold medal. i was about to deliver a speech. and i said, they're not going to like me anyway. i began by saying, it's nice to see faces to the e-mails. so i'm hoping you'll be a bit more friendly other than the folks are sitting in the front scribbling things down for headlines. let me tell you what i do want to talk about today. there are three distinct areas that i think we should focus on

that are critically important. the first is what are the parameters of government intervention in the marketplace? and needless to say that's a debate that's central to our politics today. what has been the response to the mediate circumstances. has it been what we need? and the third that perhaps follows from the first two is, i want to reflect for some period of time on corporate governance which is at the heart and soul over the last 15, 30 years and it has called for serious inquiry about how we might repair a governing structure that is central to our economy. are there rational and must there be? and how do we create smart parameters of that government intervention the marketplace? and the reason that i think we

need to think about this is that if you look at the titling of this lecture, which i came up with, to say, we need to put up a poster. here's a title. from anne ram to fineberg, how quickly it shifts. it's a good question. whether there's an answer, that's a different matter. but anne rant understands this articulate and forceful and powerful voice for libertarianism. for the notion na each of us can hole on to what she creates and the role of government needs to be minimized if at all possibly. we had an ideology in our leadership circles that embraced that. and it began with president.

many people think that he was absolutely necessary, a powerful brilliant and one of our more, no matter if you agree or disagree, one of the most effective president ever. but he created an agenda of anne rant perspective that controlled our discourse until about a year ago. and a year ago when the entire economic world collapsed when major column after major column from lehman to bear stern's. every day a new headline. we had ken fineberg. appointed by the president, determining how much we will pay the c.e.o.s of the companies. we have gone from finding

bureaucrats. somebody appoint bd the president determining how much somebody can get in salary and stock options. how can you explain a move across the political spectrum. and are there any reference points? is there any inteelect churl moring to makes us understand how and why? one thing the professor didn't mention, go to slate.com. i write every couple of weeks. and one of the things that i've said is that angry populace, which is the end of the spectrum. 180 degrees. angry populism is no better a guy to rational intervention than is anne rant oogs libertarianism. there's the aner that is just jumping out of the public these

days. and i think we understand it. we should sympathize with it. you see people have created the class -- clatkism. so what i want to do is suggest that we should try to frame the kind of information and ask yourself how should it be and where and why? and what i will do is try to articulate for you about three rules. the more foot note the more persuasive an article could be. i never bought into that. so i had three rules with a footnote. if first rule is the only

government can enforce rules related to entity and transparency. only government can do that. i will tell you a story that i think proves this. this was really -- it was one of those epiphany moments that really brought it to life. i'll harken back as the endless case. you understand there are people out there who are the supposed who go on tv that say, this is a great stock. they are recommending stocks. that's one piece of what invest ymingt banks do. and there is another piece where they do the underwriting. they raise the capital for the companies. you have two sides of the business. the underwriting and the analytical work. and what we discover was that in was -- let me rephrase that, we didn't cover.

what we argue to the public and the reason i make the point that we didn't discover it is that everybody understood it that there is an inherent tension when you have people in one business who are both recommending the stock to retail investors saying buy, buy, buy it, it's a good stock. and indeed when you pay these analysts more money if they succeed that this investment bank should be doing the underwriting. this is a flict. i don't think any rational personal would disagree with my taste on this. there's a fellow, jack. who became popular and notorious. you may consider it hazardous

to become a friend of mine. he is a friend. you know, you have interesting conversations when you're doing that. but he came with the most famous incaps lation of this. what used to be a conflict of interest, is now viewed as a synergy. think about that. what used to be viewed which is dangerous to people, which it created value. this was the way we ms. k this problem. consumers meaning who are buying these stocks and the e-mails were rather graphic. and they refered to -- and analysts would say p.o. you can imagine the world. i woumed never use a word like that. and yet at the same time there

were saying to people buy it, buy it. buy it. and your intentions were there. we amask these e-mails up up with respect with the first company was merrill lynch. but we are investment banks. and we put our case together. i got the call, we were at the point where we were ready to file of case. we've got to figure this out. i got a call from the lawyer for the really a stupendous lawyer. that's lawyer in new york. and he said to me -- he said elliott be careful" we have powerful friends. i think ok. i'm snot sure if that's an illegal argument. but i said, oh, my goodness if

only you had said weeks. it wasn't a smart thing to say. you're either saying to you you're a ranked tower. or you know, the visceral response of most people system to arch their back and say, do i have to hide for you. but either way it didn't accomplish. but that's not material. the lawyers came into my office and when you're a white color defense. they took the e-mails ow of context. and then you say no, they were you know, fabricated and then you say this person doesn't really speak on your company. you kind of go through. you go through this litany of

arguments. it's challenging and greater work. as for the acquittal yes, sir, that's how it works. they didn't make those arguments. they came to me and they said, elliott, you're right. you're absolutely right about what you've alleged. the tensions, the problems, but we are not as bad as our competitors. how was thear defense. they was nonet be a defense of the fact that they were going to promote it. why is that relevant top what we're going to talk about it. there this whole notion about them being honor amongst thieves. when i said tell me more it. it was like let me tell you what sp. i've terned defendant over the years, these guys were the

easiest flip you've ever done. or niced crime guys, they're tough. they know how to act. these guys are a part beat are saying what can we tell you. they understand that the business model that they had created was problematic. understand by virtue of this behavior of recommending stoms. they were trading horn to the market. but when the choice had to be made between market share. integrity and profits, they choose the wrong way. does that make them evil people? no. this is business. and -- look, it's that.

maybe i'm a little judgmental, maybe not. they had a choice make and they made a choice that would up hold our sbhegity. somebody else should do it. only government can do it. the market was driving thome a standard of tpwhave orwas that was the lowest common de nonnator. that's disrespectful. it would describe the intelity of the market and the only way to recess state the market was for government to come in and say something very simple. tell the truth. tell the truth. tell the truth about the about to stop. if it's a good stop say so. it was not about doing wrong.

there's a lot of people thinking ouff you -- of that. >> lying is an offense. that goes a little bit of what happened to the bear stern's the other way. jrges, they don't like it when somebody, you said you're the skateboard. losing money, we understand the market as soon. the problem was intentional deception. that's what was going. they were saying nobody can do it. i said when they said we're not as bad. these were ones they told me about. what you're really saying is you need andy -- industry wide

solution. i wasn't terribly sympathetic. if they're losing market share because they're being honest, so be it. we were going to deal with the others anyway. the truth about what they were saying is everybody should be held to that same standard. let's see if we can get everybody to agree to a common code of conduct before we go through the agony of making a case for the other banks. you know what, we couldn't do it. the other banks simply didn't want to play ball. we went through that exercise and we anounsed a global settlement. clwl it worked or not was another conversation. the point is relevant to this conversation only government could get these companies to tell the truth. competition and the drive to market share led them to be untruthful. i'm going to give you a --les you think this is a

conversation that only relates to the financial markets. i'm going to give you another story and tell it to you a bit more briefly that also pertains to this. we brought a case against a company glax sew smith cline. glax sew was marketing a -- glaxo was marketing a drug, an anti-depressant. it had been aproved for off-labelle marketing. and they were saying, it's good for teenagers. what were found out is that off the clinical test they had done, a significant number proved directly to the contrary. directly to the contary that it was not efficacious when it came to teenagers. again, the point was here was an enormous company withholding critically relevant data about what this narcotic, i guess it

was a narcotic did, what the side effects was to teenagers. it was not for me to determine whether or not this drug was good or bad for teenagers. trust me that's the last thing you want for a lawyer. but it was up to me to say, you need to default in your disclosures so that doctors and -- will have that determination. you cannot have with held from them fundamental data. when we sued glaxo. they got all upset. we said this isn't about money. we want you to change the way you act. we want you to create a website on which you will post the clinical data so that not i but docs and journals will make an informed judgment. they said, oh, we can do that. that was great. and that's part of a longer process which there has been a move towards a stub tantially

more movement when it comes to drug so that more is known about it. it's not just financial services. it's every sector of the economy. only government could step in because from glaxo's perspective, the more they could get that, the better it was. as i said, it's not for me to have that debate. only we could intervene and do that. here's where i'm going to add this rule, only we could add that. the only thing that the government could do, only government can really ensure that there's a competition. everybody and i'm going to -- everybody in business wants to be a monopolous.

that's how you make more money. nowhere in the 10 commandments does it say, thou shalt not by a monopolous. only one other piece of the role of government that we lost over the last 30 years was a drive towards effective market enforcement. because we had professor borg. but his argument was antitrust law is unnecessary. the market deals with it itself. i think now we can say that's fundamentally wrong. fundamentally wrong. if we don't have government enforce competition laws then we as consumers, we as an economy will lose the vitality and the creativity that competition generates. that's something that is critically necessary. and i know people love to say, did the microsoft case did it work or not. i would give you the best

example ol of that telecom. when at&t broke up the only choice that you had was do you want a black or a pink princess phone. i mean, that was it. now these old rotary things, it was a totally different world. once that monopoly was broken up, once people said, we can enter that telecom sector and do something inner creative. something better, we had this explosion. and i don't want to discussion that isn't necessarily what has led to every other piece like this, but it is amazing how far we have come in telecom because of that competitive spirit. rule one, only government can do these things. there's a whole lot more that government needs to do. and enough of you take eck 10 is the most popular no, sir school. you understand if you read matt

hughes textbook, the notion of externality. how many of you know the definition of externality. basically -- i'm going to give myself a little wiggle room. it is a positive or negative benefit that is not factored into the police between two private parties who are pricing a good assert. yeah? fair enough? and if that isn't factored by a price as determined by two individuals in the private sector and there is this consequence for society at large, somebody's got to adjust for that. the way you do that is by government imposing a tax or a subsidy or doing something that actually gets you into a different equilibrium point. it matters. why do i raise this?

because when i was in government, i was pretty general. we brought those environmental cases. we did it with a bunch of states. and it was great fun. i went down to washington one time. new york had sued a bunch of midwestern utility companies. and you know, these were utility companies who were burning a lot of coal. .

>> it does not come out in ohio. it does not even come down in pennsylvania or new jersey. it comes down in new york. i'm going to do what lawyers know how to do. i'm going to sue you. that is how we put the cost of cleaning this up back on the utilities, which is where it should go. that is how we move the supply curve. it all makes sense. this is how you bring the theoretical stuff to life. externalities' matter.

externalities is another area where only government can intervene to change the way the market behaves. i will give you another externality that most people do not think of this way, but it is. if you think of it as a metaphor, this will make sense. too much debt is a negative externality. that, when you have an individual transaction, may be viewed as ok. you can handle it. when you aggregate all the dead, all of the excess leverage in the economy that we have had for the last decade, suddenly you have what people call systemic risk. the whole system could shatter and collapse because you could not service that debt. there was not enough wealth generation to handle it. individual transactions looked ok, but somehow the aggregate affect crystallized it and metastasized, to use in medical metaphor, in a way that

jeopardized the entire economy. think of this as an externality. the reason the government has to intervene in terms of the debt markets is because too much debt is a negative externality just in the way co2 is a negative externality in terms of global warming. you can begin to see these are ways and areas where government house to intervene. the third argument, and i want to move quickly because we are at argument 3.1 and we have points to end three -- two and three. this is the most elastic of the three, but it is in a way, also the most important. it is what i call core values. there are certain core values that the marketplace and we will not address. i will give you two examples here. discrimination and minimum wage.

when it comes to discrimination -- ino, back when i was a professor, i got my undergraduate degree at wilson school and we had a policy steady about discrimination. there were people that wrote massive tree disease about how discrimination was inefficient and therefore, the market would get rid of discrimination. a company that would not hire men who were over 60 to all would lose out on a certain -- over 6 feet tall, would lose out on a certain investments and their margins would be lower and eventually they would go out of business. it is a very nice theory. obviously, men over 6 feet tall or not the typical group of discriminated against, but they made this argument based upon gender, race, and religion and a set in this -- discrimination is inefficient and, therefore, should disappear naturally in

the marketplace. the problem is, it just will not. you can look back after 200 years of market behavior and say, that reads very nicely, but it did not happen. discrimination continued, if not worse or better in different eras, because the social values and the social mores that drove discrimination based upon race or gender or religion overpowered the rational activity of economic factors. and the refusal to deal with people with whom you do not like for whatever reason was a more powerful motivator then, perhaps, the effort to hire the best person, or sell to the additional customer. that is what we have to deal with. as we did not begin to get rid of discrimination in this country until we passed laws that created a right of option, a way to soothe and say, you not discriminated against me, therefore, i will sue you. only with that type of government intervention did we

get rid of it. people have said, what is the economic argument for minimum wage? it shouldn't we let the market determine what the value of labor is? we have made a societal judgment that people should not work a 40-hour week and not have money to buy food for their kids. it is very simple. that is a value judgment that the market does not get us to. we have made that value judgment and i would say it is right. these two or merely examples of core values -- what is a core value? it is an elastic term. this is an area where you could have a huge debate and there is no proof one way or another, but there's some set of core values, may be politically determined, maybe not, that define us as a committee. and as long as we can understand those celt -- those core values and -- government intervention

to permit those core values is right. this is not universal. that solves every problem port addresses every subset of issues, but if you begin -- ok, and rand said we do not want government at all. these three principles begin to create a framework that says, government should be active in these areas and here is why. applying them is a very different matter and we could spend a long time on that. i will come back to the pay issue in particular in a slightly different context, but let's put it aside for now. the second-largest concern i want to deal with right now is the current crisis. have we dealt well with it? perhaps not surprisingly, my conclusion is that we have not. i will from this discussion in the following way. when our economic world appeared

to collapse and we have lehman brothers and bear stearns -- we all know the litany of financial institutions that failed sequentially -- there was absolutely no question that an enormous sum of money was going to be spent creating both solvency and liquidity. a huge amount of money was going to be pushed into the system. there was no choice. on that premise there was universal agreement. that was the easy part. the problem we have right now -- and i will go through the sequence of three questions that are the tough issues that follow from that -- the problem is that having done what was easy, everybody is cheering that we have succeeded. there was never any doubt that it would be trillions of dollars. when you look at them guarantees, the money we printed, all the stuff -- the number $24 trillion was thrown about. it does not even matter. it makes bernie madoff look like

small potatoes. in terms of iou's, it will be tough to pay back down the road. we knew we needed to put a huge sum of money in. we see the books and articles coming out recount in the day by day, -- recounting the day by day drama. that is easy. that is easy to do. here are three questions that really follow from that. one, who is going to pay for it? two, what reforms do you impose on the system at the moment when you have both the leverage to do it and the cry for it and, given the way politics works, the only opportunity to do it? because we all know that christie's last for 24 hours and when to pass the crisis, -- crisis lasts for 24 hours and

when you passed the crisis, status quo begins to reassert itself. and 3, how you underline what has been going on here. the first one, everybody says, that is kind of obvious, we all do the company's -- we all do. there were companies left with enormous bonuses. in terms of the statement made and the appropriateness of the remedies that should have been considered, but really were not, we had that equities on these companies that could have been forced to convert their debt to equity to be put in a very different position and held to a different standard. we could have driven the equity to zero in many of these companies that were insolvent because of all of the financial shenanigans that have been put in place, but we did not.

by not driving the equity to 0, think about the consequence to those who hold options in these companies who held those options, huge sums of money put in. the stock begins to come down as well, but once it hits 30, 40, 50 again, those options are back in the money. they will make out like bandits. that is the wrong metaphor. they will make out extremely well. the question is, should they have been put in that position? that is a discussion we did not have. the real argument about driving equity to zero is, do you wipe out those options and the option values that were residual and hands of these folks who created the mess? the answer is, we did not do that. why is it fair question to ask. who pays the issue and the fact that it went straight to the taxpayer was exemplified most dramatically to me in the aig context.

i have a little bit of history with them as a company, but that is irrelevant to this. when aig was being bailed out, the first transfer was $20 billion. out of the aggregate $182 billion over the course of a weekend because everybody said, if the carrigan departments are not made whole, things will go bad. that was rubbish. there was absolutely no foundation, no theory, no reason for those counterparties to get 100 cents on the dollar. goldman showed up and said, we want our $12.90 billion and as a charter party, they got $12.9 billion. when larry summers was asked at one. , why did you do this, his answer was, we are a nation of laws and there was a contract.

that is a silly answer. we were not a party to that contract. taxpayers were not a party -- not a party to the contract. aig was. we did not say to them, we are not going to make whole every counterparty to every contract. we said, we will do what needs to be done to resuscitate the economy and to make sure that sequentially, things do not get worse. the question that should have been asked -- indeed, if you look etcheat some of these docu, some of the low-level people said, we have to figure of what percentage we pay. they understood that was the relative -- the relevant question. the question was taken off the part -- off the table. goldman got a check for 12.9 million -- $12.9 billion. roughly the amount of their bonuses, so feel good.

your funding their bonuses. -- you are finding their bonuses. -- you are finding their bonuses. we will have to ask the question, why did we not negotiate that $12.9 million -- $12.9 billion? but it gets worse than that. how can you say that? because the fed and the treasury, who were being sent money is at the time, said well, we're going to take stock in aig. i do not want stock in aig. it is a worthless shel. anyone who says you are taking my $12.9 billion and giving it to goldman, i want stock in goldman. i do not want stock in a company that is a worthless shel. give me stock in goldman. they did not even think to ask that question. why that is, i do not know. but again, it comes back to the

question, who pays? the taxpayer picked up the entire bill and that was wrong. question no. 2, reform. here, this is worse than the payment issue. we are failing when it comes to reform. maybe there is some light at the end of this tunnel because quite remarkably on capitol hill, there are some better proposals that are being heard. i will not go through each of the little aspects of this, but too -- but "too big to fail is too big." -- but "too big to fail" is too big. when they get that big, they underperform. they cannot be managed. what is worse is that they do that in what used to be implicit and now is exquisite with the backstop of the federal taxpayer guarantee on their debt.

even at the zero crossed they underperform. it makes no sense. we should not be doing it. this was the argument that when these things were put together, it is once again, synergies. i will give you one piece. if you are investing in a deal and someone says there are going to be synergies, run the other way. it is one of those investment banking words that the moment you hear it, you know it is flimflam. synergies, only once in a thousand deals they actually result. at two big to fail is not -- too big to fail is not too big to fail. it is too big. there are just two people who fail to get back. larry sanders and timothy geithner. -- who failed to get that. larry summers and timothy geithner. i have been the wall street journal's fevered bidding process. turnaround is fair -- a favorite

whipping post. the turnaround is fair play. balt -- paul volcker has reached the same conclusion and he finally -- even though he was in the tent, more recently he has been saying this is wrong. alan greenspan, who, you read his autobiography and is one great acclamation for ann rand and he has come out and said that too big to fail is dangerous. the governor of the bank of england has said that around the world everyone has forged this consensus that too big to fail is the single biggest great -- the single biggest threat to our banking system. we have socialized risk and privatized gain. you cannot do that. if you do that, you'll get distorted investment patterns and this willingness to tolerate the risk that we got and that

enhances the destruction that we got. all of this is deeply problematic. we have also participated in what i call the regulatory sure raid. what is this? it is fun, a game lecture rates, where everyone in washington says, well, the ceos say, it is not our fault, we did not get it right. the regulators say they did not get it right because they did not have power and everybody runs to capitol hill and they write a new law. we did not need a lot -- new laws. we just needed regulators to use the power they already had. they did not want to until this crisis. they had all of the power. if you want proof of this, look at tomorrow's "new york times" and i'm sure it will be on their website. the federal reserve is putting in place new rules that will say that banks cannot increase credit-card fees without getting the consent of the consumer. that sounds like a nice idea.

why did they not do that by years ago? if they can do it today, why didn't they do it before? all of the things they have done that have already have the power to do. they had all this power. they just never wanted to use it. it will pass a new law. there will be a big signing ceremony and everyone will say that the fed has the power. they have the power and did not want to use it. it is the peter principle on steroids. people are promoted to the point of doing confidence. people are promoted to the point of incompetents. the incompetents creates a crisis and then they use the crisis to get more power. to get a promotion beyond the point of their incompetence.

this is what they're doing. if there were two entities and fundamentally at the heart of this crisis is the fed and treasury department. forget the occ, the fdic perhaps did better. there are a lot of the alphabet agencies out there, forget it. the federal -- the fed and treasury failed, completely and utterly. the fed, under the white house proposal, is going to be our systemic risk regulator. that is important. i hate to break it to you, they already are. they already have been. that is their job. that is what data supposed to be doing for 20 years -- that is what they were supposed to begin in for 20 years. remember the press conference, we're going to do stress test? that is a great idea. the banking regulators, what have they been doing until now? if you are not doing a stress test when you are a banking regulator, the only thing they

were supposedly doing was checking to see whether these banks were solvent or not. this is all a game. this is just restating the obvious. they already have the power to do this, but chose not to do it. i will read a statement, something our wrote in 2004. in an article talking about subprime loans. "these loans are foisted upon or worse with no realistic ability to repay them and they face the loss of inevitable default and foreclosures." that was in 2004. i am not a banking regulator. we were invested in subprime lending because back in 2004 we said there was a problem. i do not want everyone to misinterpret. both sides of this transaction are at fault. but the consequences to the banking and economy were clear. we tried to investigate it. we were shut down by the occ,

office of the comptroller of currency. they went to court to block us from inquiring. their mission was -- who were their partners in the courtroom? all of the banks. all the banks that got t.a.r.p. money. and all of the banks got bonuses. they stopped us from inquiring. but they did not want anything to be done even though they had the power to do it. and their argument in court was, we have the power. you do not. did they do it? no, they used their power to shut down other people who were trying to do what they ought to have been doing they lack the willpower -- at what they ought to have been doing. they lack the willpower to use the power. when banking is as exciting as it got with all the razzle dazzle, with all of the acronyms -- i do not pretend to understand it. i read these financial statements. it was gibberish.

i do not think anyone understood it. but everyone said, somebody must. nobody understood it. did was absolutely horrifying, what was going on -- it was absolutely horrifying, what was going on. third, in this issue of sequential questions relating to the current crisis jobs, we are in deeper trouble than i think anybody really wants to acknowledge. 10.2 is not 10.2. it is 17.5 when you disaggregate it did when you see how many people are outside a job, outside the employment structure. when you look at the manufacturing structure -- sector, when you look at the jobs that are basically just education and health care. they're important, but they do not form the foundation of a long-term and competitive and self-sufficient economy. but we are in a real dandy -- in a real danger the trend lines are a disaster.

i know people are desperate to find some glimmer of good news, but every time you see it -- the foreclosure rate is when to go up. adjustable-rate mortgages are going to reset next year at a higher rate than ever before. this is the failure -- when we give $12.9 billion and gave off trillions of dollars to the banks, we did not say to them, and do something useful with it. do something that will create jobs. instead, they went down and got involved in a proprietary trade. if they want to do that, hats off to them. but they should not do that with our tax dollars. that is the problem. [one person applauds] one person, that is great. everybody else in the room owns stock in goldman. [laughter]

the problem when it comes to jobs cannot be overstated right now. it simply cannot be overstated. unless we begin to invest -- there are great investment bankers out there. people who understood what investment making was supposed to be. to really rebuild the infrastructure of this nation i will give you 12 -- two numbers, 12.9 and 8. 1219, you have heard before, that is the number -- the amount of cash -- 12.9, you ever before, that is the amount of cash rebates to goldman. eight is the high-speed rail. $8 billion in total for high- speed rail. we all have felt for reels -- for years high-speed rail is critical from $8 billion total. we are not doing what needs to be done. god knows, we gave huge sums of money to resuscitate auto

companies that probably will not come back. why didn't someone stand up and say, we will buy 500,000 electric cars in 2013 from whoever builds the best domestically. i do not care who built it. make it here. we will by the electric cars. you can actually generate a profit because you have scale. also, the not been able to use a car unless you recharge it, the government should build an infrastructure program for recharging statement -- stations. we know we want to do it. we know we want to be leaders in that. r & r, the asian economies are way ahead of us. give the money to the sectors that will do it in a big and fundamental way. right now, we are not. i think that is deeply

troublesome to me. and a bunch of other ideas in terms of job creation. hopefully, the white house will focus on that today. we have not been focused on the money we have put into job creation. but the switch to corporate governance? -- let me switch to got -- corporate governance if we do not run our corporations properly, then we will not manage to get ourselves out of this pit. corporations run the economy, and they should. if you think about the first three rules that are articulated, the private sector creates wealth, not government. but government has a role. i tried to give you some pointers and some lines that would explain when and where and how, but it is not the government that creates value and jobs. it cannot and it should not. the issue with corporations -- i

will not give you a course in corporate law. that is what clause i did not go to. imagine if i had. -- that is one course i did not go to. imagine if i had. that would have been fun. you have a board and three facilitators. i hate to say it, but most of the people in this room are facilitators. who are they? lawyers, investment bankers and accountants. they say we want you to do this, we figure of how to do it. but we are bought, quite literally. and then you have shareholders. that is the chain of corporate governance. those are the decision makers. i will not spend time on the facilitators, but i will give you in two words were the problem is in all of this. they are two words that i will tell you -- i will tell you this little story. i have three teenage daughters

and at dinner one night we were sitting around a table and i said to them, what are your favorite words? my oldest one said, that is a pathetic question. really, truly pathetic. if you want to start a conversation with teenaged daughters, that is not the way to do it. if i had a fever word, i would not tell you anyway. -- a favorite word, i would not tell you anyway. [laughter] and then she said, but i do know what your favorite words are. and then she said, fiduciary duty. [laughter] that is kind of pathetic, but put that aside. the point is, put -- fiduciary duty is what embodies all of corporate governance. if you do not understand this notion of fiduciary duty, to whom you owe it and how to enforce it, nothing else will work. let's talk about corporate pay for just a moment. back in the mid-1980s someone did a steady.

it was business roundtable. -- someone did a study. it was business roundtable. they said, what is the ratio of the average ceo's compensation to the average worker. this was back in the mid-1980s and i think the ratio was something like 40 to one. a ceo earns 40 times as much as the average worker. people said, this is capitalism and the south things work. in europe -- and this is how things work. in europe it was more like 20 to one, but we had a more dynamic the comedy -- dynamic economy. since then, that ratio exploded from 40 to one to 550 to one. when i have this -- this conversation with ceos and others people say, you cannot argue to me that ceos begin 10

times more valuable to the company's then the average workers. clearly, the system broke down. how did this happen? there is something called spinning. it is not a dance or whirling dervishes. it is the process of when you do an ipo, what you call a hot ipo with a stock that is going to jump on the first day of sale. in the investment banks would give some of these hot stocks to the ceo's of their clients. why? to keep them happy so they would stay as clients. it would say, here is a bunch of stock, keep using us as your investment bank. when we were negotiating a global deal back in december of 2002 i said, that should not be permitted. that is a violation of the fiduciary duty of the ceo to the company. if the investment bank wants to give something of value to keep that quiet, it should go to the shareholders, to the company, not the ceo.

there is a word for this. it is called commercial bribery. it is an ugly word and that is why the word "spinning" was created. people were outraged. one of the currently extremely powerful regulators, you know, one of these peter on steroids the survivors said, and do not say to me ceos have no rights anymore. they were outraged that we said they should not get this additional layer of what was commercial bribery. that is what was creating this whole system, this violation of fiduciary duty so that no longer were the co's, the commerce committee's focusing on what really should be going on. the comp committee world was something that needed to be dug into. i will not replace the litigation with the ceo of the new york stock exchange, which was a good friend in many

respects and that unfortunately the pay issue cropped up. put that aside. anyone with questions about compensation is going to see that was going on was an outrageous the trail of fiduciary duty. hardee use of this? the issue -- how do you solve this? the issue of what to do is vexing. i will ignore for a moment the three facilitators, lawyers, investment bankers and accountants, other than to say the three areas of massive conflict that i believed needed to be investigated first were analyst, which we did come out second, the rating agencies that have now come into the vortexes and have been steady at in terms of the subprime debt. the aaa ratings are not even deserve. the third is an examined opinion letters. anyone in the room who has ever worked on an opinion letter that says that this company is a huge

amount investment, that narrows it to his azko that is as smarmy as anything else. put that aside. boards and shareholders are the only answer. boards have to become vital. they have to come alive. there to be chosen in a way that is fundamentally different. -- they have to be chosen in a way that is fundamentally different. the remedy usually is that shareholders choose the board members. imagine that, having the owners of the company actually decide who runs the company. and that voice against that is that shareholders will speak as a narrow interest group. yes, they are the owners. it is our company. the notion that shareholders are given power is crazy. we need a complete redefinition of board membership, board selection and ceo's have to have their wings clipped, quite

frankly. the relationship between co's and boards has led us down a very, very dangerous path. let me say this about shareholders. and this is the one that is in a way the most difficult. the problem we have with shareholders is that there is such remarkable liquidity in the stock market. you're saying, isn't that a good thing? of course it is. the problem is that when the could you create the problem is that when you do not like a stock will you do is that you trade out. the capacity to trade out and sell your position as opposed to staying there for the hard -- the long hard slog of reforming the company means that virtually no shareholders take on a much tougher task of reforming the companies in which they have momentary ownership interest. the critique in this way undermines the urgency -- liquidity in this undermines the urgency and argument for participation. there's a brilliant book about

this that you should look at. it really captures this dynamic of our decision makers will look at the various options they face when they see a product, whether it is toothpaste from a political party or a share in the company. how they will react to any of those dynamics. we need to overcome this. somehow we will figure this out, whether shareholders should be given additional voting power if they hold a stock lumber, which is also problematic from unintended consequence perspectives. there needs to be a way to give shareholders power to get involved. i will give you another example. who are the shareholders? basically, they are the borrowers of -- the bars of and bargainers for pension funds. the problem we have, mutual

funds do not get involved in management of companies. i will come back to the very first story of my parents up here on the panel. i mentioned at the beginning that one of the participants was the general counsel of one of the enormous mutual fund companies. at that time, the issue was whether or not they would disclose their proximate -- their proxy load. she was asked at the time, would you disclose how your company unloads its proxies'? and she said, no, i cannot because that would be too expensive. this was before the internet was quite what it is today. i turned to her and i said that is a ridiculous answer. it is ridiculous for two reasons. one, is so painfully falls that everyone in this audience knows is false. when you do that, there's something else you do not want to tell us. what is it that you do not want to tell us? what you do not want to tell us is that the reason mutual fund companies do not want to tell their shareholders how they vote

their proxies is because they almost always vote with management. why? because mutual fund companies make money by increasing their -- increasing the size of their assets under management and the assets of management are directly related to whether or not there tourism by companies to be the recipient of 401k business and if they do not recall defer to management, they will not be put on the 401k list. mutual-fund companies do not want to vote adverse to management. pension funds have never been activist. the claim they are limited by taft. whether that is true or not is something that we can look at -- should look at. there is a dynamism that we can look at from the largest purchase of print in the marketplace, the biggest depositories of equity stake holders. because we have done that, the co's and the board's are entrenched in the power. we are interested in this path -- we are down this path because

we have not taken a hard look. just one in three that i hope the angelina's commission, which is supposedly analogue to the core commission of the 1930's after the 1929 crash, the inquiry i would love to see them undertake is, what was the information flow? two different lines of information flow. one, up to the board of the major banks that felt -- that failed. what were they told about the creditworthiness of of their positions? i will be two possibilities. i am sure there are more than this, but one possibility is that they were not told anybody -- anything about it. i will give you three possibilities. one is that they were not told anything, which tells us the level of involvement. the two, they were told that we are in a credit or the position, so do not worry about it. 3, there were told we are in jeopardy, but did not do anything. understanding what they were told will give us a better understanding whether corporate

management it was kept in the dark, did not understand it, or understood it and did nothing. we have got to answer the question and i do not think anyone has yet undertaken that inquiry. the same should be undertaken for the fed and the treasury. what did the new york fed, which is the single most important regulator of banks, what did day and the treasury department know about the debt and situation of these banks and what did they believe? those are the two critical kingery -- inquiries. there are 10. of one to leave you with. one, only government can enforce transparency in the marketplace. tebo, self regulation is a failure. third, too big to fail is not too big to fail. fourth, [unintelligible] 5, we have got engaged in peter on steroids. sixth, this should never be based on a straight lines. things do not go on -- in

straight lines. either that when i was very young in investment banking -- i learned that when i was very young investment banking. anytime someone tells you there's a straight line in a business model, it is broken and that is how we were investing. housing was always going to increase at twice the rate of inflation, right? that is what got us into trouble. seven, short -- and taxpayers are at the short end of the stick. eighth, risk is real. the single best book i've read about this stuff, "the short history of financial euphoria." and he explains it in detail. no occam has ever been created to get rid -- no alchemy havohas ever been created to get rid of risk. how have we de-leverage? the government takes all of the

risk. now the taxpayers of all this money. it should not have been done that way. 10, the only way to get corporate governance in god is to get the shareholders as the owners of -- to get coverecorpoe governance involved is to get the shareholders as the owners of these companies involved. thank you all for being here. it has been a joy. [applause] >> now we have time for questions. the way questions work is you have one person asking a question and one person on deck. i will be getting a microphone and a person on deck while another person is asking a question. please raise your hand if you want to ask a question and i will get a microphone to you.

>> i teach public policy over at the kennedy school. thank you very much for a brilliant presentation. on policy, almost all of your talk was about smart policy measures on regulating the financial sector and corporate governance. i do not think i have -- i disagree with any of them. >> thank you. that was a good question. what is next? [laughter] >> throughout, you expressed frustration about why very few of these policies are even being in dance -- are being advanced, even in this moment of crisis. maybe a more fundamental problem is the politics of getting smart policy done. and a crude version of that is the response when you called the guy at bear stearns, i have friends in high places. the slightly more sophisticated version of that is the problem of interest. there are few investment banks and a lot of taxpayers. the question is how to solve the

political problem that can advance the policy project that you laid out. there are at least two strategies. one is to use the moment of leverage that we have to implement some laws that would create insulated agencies, at agencies that are more insulated from those concentrated interests. so, we would choose to use the power, the power that you said they already have to enforce when in the past they have not. that is a d-politicizing strategy, putting up a fire walls. another strategy would be too politicized strategy, something you distance yourself from a little bit at the beginning of the talks, as the engine to pull the project -- the policy project forward. >> you are right. the difficulty is a fluctuating these ideas. the first threshold is, can you get the people in washington in position to change policy to

embrace a vision that weight -- that they may disagree with, which is fine. that is step one. but implementing it is step two. i will give you a book that captures the spirit is really boring, but brilliant. it is "the rise and decline of nations." he describes how special interests, the entire array of special interest -- politicians are their own special interests, whether it is unions, ceo's, whoever it may be. they manage to take over society and create arteriosclerosis or you need to have your heart redone. his answer to that was the only mode -- in moments of major crisis where society can step back and say this is a terrible thing to waste. the reason is that only in crisis can you hope that there is the political will to push

back against incredibly powerful vested interests. that sounds like an ugly term. during the time of president reagan through the crash, people believed that what they were doing was right. they were not corrupt intellectually. they just believed it and they were wrong. we have to persuade them of a different view and get them to put in place. i think we are succeeding gradually. as i said, too big to fail, there is an emerging consensus that does not yet include timothy geithner and larry summers, but i think there will be forced to cater to this. over time, we will get there. -- we will get there together. the public has to stand up. when i used to go to washington to testify, we were doing case is about mutual funds and insurance companies and the rest. everybody have the same view, which was, let's keep things the way they are. we will ride out the crisis. hopefully, the courses will be

different -- the crisis will be different. >> you spoke about a value judgment costs. you said minimum wage is a value judgment. how do we hold our peers accountable and their value judgments? when a cop -- congressman went down from new york and refused to subpoena countrywide and that sort of thing, when you turn around and use your political power to prosecute your enemies, what sort of mechanisms can we put in place to make sure that our political leaders are not motivated by personal gain? >> let me correct the record because facts matter. with respect to what you said about prosecution. the facts are that public information was given about abuse of his using the public plane to go to fund raisers and

the question was whether or not that information was obtained by press officers properly or not. it was public information, accurate information, ask for by a reporter. indeed, the fellow is on trial for millions and millions of dollars. you will see in the record that we did, in my view, is unambiguously correct and i will argue that any day. the question in the answer is you vote. voting works. that is where shareholders have to vote and in the political context, voters have to vote. we do not concede the power that you have. obviously, in the political context, everybody gets exercised at the moment of election. in the shareholder context, that is what i'm saying. pension funds, mutual funds,

hedge funds, small investors have to flex their muscles -- their muscles because only shareholders can, in fact, change the way corporate management is run. >> [inaudible] i have a question about the third-party loans you were discussing the relative to aig and the investment banks. you mention that the government picked up 100 cents on the dollar for investments for goldman. my question is, i happen to agree with you that the government should not have paid the 100 cents on the dollar, but have they elected to pay much smaller fraction, many of these banks would have reported larger losses and needed bigger bailouts. >> what could have been done is the government could have said, we will make hall and -- what was paid with the notional value of those contracts and it was much greater than what was going to become due. goldman, at the time that it was made, said we die even need it

to maintain our liquidity position. the fed could have said, for instance, we will be there to make sure nobody suffers, but we have to work out what these contracts are worth and we will begin with the most valuable, the largest aggregate dollars. some of them were very small, but the ones that were as enormous as $12.9 billion, they could have gone to those banks and said, how much you really need to make sure that you are not unstable? the government at addictive at that point was not to make good on the -- the government objective of the point was not to make good on the contract. what we needed to do was make sure there was not a falling domino effect on the economy. if they say, we do not need anything to be stable, then they took a risk and made an investment and they have to pay the price for that risk. that is the way after priced at risk. -- the way they have to price that risk.

they did what was rational. they just got bailed out by taxpayers even when it was an unnecessary. [inaudible] >> [inaudible] i wondered whether the fact that when a lot of officers companies are paid, at least partially, in stock options, creates an incentive to manipulate the value of stock. could you comment on that generally? >> the answer is yes, but -- and here is why i say but -- the answer is yes, analytically, you are absolutely correct. when you are paid in options, what you care about, are those options going to come into the money? here is the conundrum. one of the debates about corporate competition -- it has gone to minicycles.

at one point, -- it has gone through many cycles. at one point, people were giving cash payments. then they said, that does not give an interest in the company. then we will give them options. but then we give them options and we said, that leads to manipulation the most powerful law in the world is the law of unintended consequences. there is no easy answer to this. ken feinberg, who was incredibly smart, is trying to push us in the direction of some cash, some options, but options that are not reset. the real crime with options is that they were granted and when the stock went down, they will reset them so that they have value anyway. it was head, you win, tails, we lose. they were reset so that they would always make money. that is analogous to the socialization of risk, privatization of gain.

options are a piece of it. options that invest long term, perhaps five years, options that do not reset. those are the answers that people are coming to. in answer to your question, if you ever find it manipulation, a claw back that says you give back everything. >> thank you for your talk. i really enjoyed it. >> thank you. >> i wanted to ask you about -- you make this point about how integrity has to be, integrity does not work with market forces on its own. and the government has to be involved in creating a set of rules that effectively create the behavior that we want in society. i was wondering if there are any examples, workplaces that we actually do see markets and

reducing the national -- the natural competitive forces -- and we do see the natural competitive forces actually working and reinforcing the creative behavior in leaders and companies that we are hoping to actually generate, the type of transparency that you talk about. >> this gets a little circular because i would say, yes, we see it all the time. markets work. this is the debate i used to have with the wall street journal. i am the one who defends markets. the u.s. to understand what the market is. it is a system of -- you have to understand what the market is. it is a system of rules with methods of enforcement. enforcement is necessary. you will not get results unless government steps in. you see it when there is greater transparency. when you begin to get scale and distance the opportunity to gain the system increases. the open outcry system for the -- in the stock market, for instance, where you actually saw

people standing next to each other with an auction system -- an auction is as close as you get to a perfect market system. there is fictitious bidding, etc., but that is where you see it on greater and greater scale. you need greater powers to make sure that the rules are observed. >> can one say that profit is actually aligned with transparency? >> not always. it can be, but it could also be aligned with, as we said jamaat analyst who wanted to manipulate the value of their stock. it could be aligned just as easily with gaining the system. >> i am a student at harvard business school. i feel like i'm the only one here. i really enjoyed your analysis. i think it is a spot on as well. >> thank you. >> maybe this is just because of

my educational training, but with the analysis part being right, their recommendations sounded very lawyerly. they should not be allowed to do that, etc. i would be curious in designing systems, what are the one are two things that you think we could do that would fundamentally health organization's realign themselves, beyond making things illegal. if there's something structural that we could do to the system. and maybe quarterdeck, you spent a lot of time -- and maybe corps to that, he spent of time looking at companies. i'm wondering if there's something different about the ones that you thought maybe there was going to be something wrong, but it turns out they were operating just fine. >> that is a great question. i'm not sure if i can give you the latter part of the answer. the ones that were operating properly. but is an important question

that should be answered. i could answer in platitudes, but nothing that i have thought about in terms of the specific answers. again, i think is scale. i would come back to too big to fail. this is not a lawyer analysis. this is in -- a baking analysis. -- this is a banking analysis. we have now concluded that we need to slim it down and rationalize and come back to a more atomized banking sector and that will -- that scale will increase the problems that we have encountered. >> he mentioned a number of rigs the tory agencies that dropped the ball. -- you mentioned a number of were given tory agencies that dropped the ball. -- a number of regulatory agencies that dropped the ball. is there any way of getting around this? our company is always going to

be the ones that are most interested in perverting regulatory agencies? >> you have some instances of capture, such as the occ been dominated emotionally by the banks. i think the current control of the currency really saw the things through the prism of the banks. the obama administration continues to upset -- have upset did -- have accepted this position. it is partly industry capture. i do not want to speak ill of government workers because i have spent at least a half to two-thirds of my career in government. but certainly, you do see it oxidase goal perspective in certain d.c. agencies -- you do say lackadaisical perspective uncertainties agencies and with lawyers -- and with lawyers doing battle with the private sector equivalent. they get out on.

-- outgunned. i think is a combination of all of this. >> tomorrow on "washington journal" walter pinkus, a national security reporter explains out the different intelligence agencies within the administration communicate with each other. bruce micklethwait, chair of the territory commission, it discusses the future of the postal service. eric olson from the pew charitable trust talks about a report on food bought -- food borne illness and the impact it has on the u.s. "washington journal" livas 7:00 a.m. eastern on c-span. ." [no audio