that we can show people directly the power of this kind of approach. people should be able to see what exactly it is with other kinds of information being used. this was heresy a few years ago. i will say that when we first talked about it internally it was crazy, the notion that we would show users what we were using to target advertisements. would they be free to out? . .

>> would you think that the benefits outweigh the privacy, we get a 50/50 division in t$e surveys we've done. half the people feel it's privacy risks outweighing the

benefits and half believe the opposite. but i think that, as electronic healthcare is unfolding through the healthcare system. trust in the keepers of the electronic healthcare records is central. and we see that's when promises are made and explained as to limits on who will get to see health record without your explicit concept or data security provided to make sure data breeches of health information much in the news lately, will not take place. will the people we sou survey tt the system. there's a lot of quotes from the top of the electronic health records officials that without trust, the advantages of electronic healthcare records will never be achieved because people will not willingly give information or subscribe to health research using their

medical records with explicit notice and consent. i belief it's absolutely central aspect of the whole personal and electronic heat record developments. >> thank you. are there other areas that consumers are concerned abouá or sensitive about the use of their information or disclosure to others? >> i think financial in health is the top two. but i wanted to go back actually to if consumers understand first party and third party data õcollectors would they're behav change? one thing we found is that they're absolutely aware that companies are tracking they're behavior on-line. they're uncomfortable with it. but going back to the beginning of the panel, we also found they do that and that cost-benefit analysis in their head leads them a particular choice. also because they're confident there's some type of government

protection if the data that's being used about them goes too far. i would ask the question a different way in that, what would the consumer behavior what third parties were able to do with their data exchanges and networks collecting demographic and geographic, transaction information and (retty soon that's combined and looks c&ose o to personal information if they knew that and knew there wasn't a whole regulatory framework to protect them from bad uses. offers from medical, travel and i think that relationship to first party sites would then very much change and i think one of the things we have to address and i'm glad we're having this delay is there's this growing tension of usefulness of

displaying information advertising that's going to require the final market to reflect it closer and closer to pii and i think that we really need fair information practices to start talking about what that information - what kind of information should and shouldn't be collected and ultimately how it should and shouldn't be used. >> just a quibble because we throw around the third party on-line in this unique way and if we actually explained it to consumers their minds would explode. not sure any consumer would choose ups over fedex unless they were caring about if they somebody was responsible is what they care about. what happens on-line is we can see the third party things because technology makes it visible and whether or not it's

someone that has the right to do something with it or it's just a technology completely under controlled and because of the nature of the contract, we throw around third and first in ways that i think people would have no clue and it would make them melt down if they said hey guess what the website you've gone to is operated by someone other than the person that actually owns it. we should focus more on who's accountable and in control and responsible for what's going on and do they have the right to do something with it? we have lots of folks that are vendors and have right to do stuff and so we created confusion but need more clarity here so when we try to communicate with people we actually tell them things that are meaningful that they might actually make decisions based on. >> adam, i wanted to raise a question for you and give you a chance to respond so what's been said as well. i think you mentioned the real world scenarios that exist every

day and i guess a question i have is, if you were to do a study where the full extent of the trade-offs were made known you know could you do that in this goes to jewels point a little bit. could you provided a quite information that consumers would understand that would reflect the trade-off going on every day? >> it would help if we had consumers bargaining with something that proximated their own money and own real time. obviously gave them access to other types of relevant information that's often missing in some poles and surveys like what other types of tools do you use that might be privacy enhancing that would change the equation? whys there no mention of things like block plus with 67 million downloads in the last five years and is the number one downloaded

download in fire fox history. number two is know script so. people are obviously doing something. maybe fire fox users are a unique class but in the real world, they take privacy enhancing or security enhancing steps so those are the things that need to be worked into surveys and poles but that won't substitute what happens when people actually make a choice in the real world, just go back to the social networks examples and information flying around on networks that would have been unthinking to many of us generationing a. just a few years ago and some of us still raises sensitivities. i'm concerned what my kids put on-line and i take steps to try and minimize it and teach them why they should think through that situation. i think that needs to be taken into account. >> i wanted to raise a question from the audience and i'll paraphrase it a bit.

there seems to be considerable support for the view that consumers may not be fully informed as to aspects of data flow and what happens to the data. notwithstandi'g some evidence of deployment of add blocker plus and other tools. and given the lack of information that consumers have, about the benefits officer time activities should we really care about attitude evidence about what consumers may or may not feel? in other words, do attitudele surveys really matter if there isn't information. allen? >> if you lay the consumer privacy survey as long side larger surveys of consumer knowledge, it's quite consistent consumers are ill informed about

financial affairs and investments and home protection, about medical affairs and so forth, so the base has to be that we have a largely uninformed majority consumer population in the country. second point, would be that most consumers then get their signals from the organizations that they trust to tell them what to think about and what to do in that situation so. the consumer organizations or businesses or idealogical or aarp. et cetera and if that's your model, then you say how can you ma)q privacy relate to that? the other point i would make is the studies we've done show that the american public divides into roughly three groups when it comes to privacy. about 25% are intense will reject benefits and insist upon strong privacy protections. about 10-15 percent are privacy unconcerned and couldn't care

less becauáq the benefit is fine for them and they're not worried about their privacy and i like to say that for ten cents off they'll give you their ham family history and anything else you want. what's the benefit to me? what are the privacy risks presented? and fundamentally do i trust you or do i áhink law and regulation only will make me comfortable in this situation so when we talk about the consumer, i think it's useful to see a pattern that the american public divides into, what has been shown over 20 years of surveys to be a repeat in terms of the way the public divides on the issues. >> joe, do you or laurie want to add anything given to that? >> yeah, i think that on a number of levels you can interpret the data we've collected. iá's true that attitudes can be

critiqued as simply a point in time. buá we've also collected a lot of data about what people know okay in relation to those attitudes and what they believe in terms of what the governsq't does and if you lay those things won on top of another. people that know little believe the government does a lot and are very nervous. we then ask the question, if you found out that a company is collecting your information illegally what would you do. a side from the monetary amount we asked them what would you do to executives while something a little over 30 percent said they would get the company to train people and teach the people in the company about privacy issues and keep it, i should say a strong percentage wanted to put the people in jail executives in jail and i think it was 18 percent wanted to shut the cos(anies down. i don't think people on a jury

would really do this but i think what it does do is show a kind of frustration and anger peop&e have about these sorts of issues even while they believe that many companies are doing the right thint whether or not they know. they think the u.s. government is doing the right thing meaning protecting their privacy. one more point i'd like to make which is, we have done four times ask the question true or false in this sort of way, if a website has a privacy policy, it means that site will not share your information with other sides or companies without their permission in fact every time we've asked it. 75 percent of the people get it wrong. that is most americans don't realize that the word privacy policy doesn't mean a company will protect your privacy in terms of not sharing your information. and it seems to me that label i% detective and deceptive. it really doesn't mean what most

americans think it means. >> i want to move on now to disclosure as bit. i'll note, jewels you described what you andw-have worked on. allen tal)q" about google as preference manager and yahoos new efforts. i think at&t, new efforts as well. to bring additional transparency to information manage meant practices. i guess one question that raises is, how usable, how feasible is it to have these multiple different systems available depending on what service your % visiting to manager your privacy and is it something that consumers will really be able to navit(uq going from one site or one service to another? >> no, i think the answer is

industry groups need to adopt and standardize and if they're õgoing to have real meeting to the self regulatory programs that have been hammered out, the final step needs to be adopting a good standardized way so that every time a user sees something, it means, you know your data is at work and perhaps different businesses may do different things bind that, but that power button is the thing that indicates, think this is a smart interaction and let's be a little broader than this because it's know that the entire world, rightìc% day day is being a tended, lots of people talk about behavioral saik and don't take about marketing and there's billboards and we're in a world of smart interactions and quick paid and charge. but i'm getting something different than the person before being used in some robust use. i'd like the fact that my local

giants again on the folks looking to greet me is now giving me couponj as i use the scanner and i work through the supermarket and wondering, looked at the cou(on and i wasn't in the orange juice and i was wondering, it's because they know my shopping? or if they knew where i was. i was like i have no clue and if i saw a symbol whether or not which dash board was behind it. i get it. i want to use this or not based on i want to know who knows about my shopping and if i find this value or not. industry adoption and putting rules mind it that this is what it means. trust promises this. one effort by a couple of companies. will be nothing. if we're going to move, you know the vast majority of people and get it on the radar screen of consciousness, it needs a broad effort. >> laurie? >> yeah, so we've done a lot of

work at carnegie mellon learning how to communicate with people on privacy notices and going more broadly than behavorial advertising and we find that the traditional english language privacy notice is completely unpenetrated to most people and we've done studies where we ask them basic reading comprehension and see how long it takes them to figure out, will this company send you postal mail advertisements. so we've tried a number of different formats including the layered notices format and tried "tu)u$ and what we found is if u move to something that is cloáq) to what we call the nutrition label where you have this very simple format that everything is always in the same place, then suddenly people are able to actually use it to drive

information and you can give them policies from two companies and they can compare and tell you what's different. we've tried a variety and actually the gains from, do you put it in paragraphs or tables, you can get little gains here and there but the key thing is "táhey both use the same format >> are there particular elements you think consumers are most interested? would it be i share information with other unaffiliated companies example or are there other things more im(ortant with a nutrition label that should be included? >> yeah, so we've look at the survey work done over the years by many people including some of them at this table and it seems like, some of the hot buttons for people are really have to do with information sharing and the secondary uses of their information p'd then their particular sensitive data types

that are a hot button as well in the nutrition format label we came up with and you can check it out at privacy finder dot org and any website that has a privacy notice we automatically generate a nutrition guidq for them. we've tried to highlight areas that seem to be more hot buttons with consumers. >> allen? >> first, to get something that jewels said. to the question of whether or % not this is feasible. we don't necessarily know but % what we know is industry will have to getting to to do more together. to address some of these issues example i mentioned the per sis stent out for the only advertising offering and you know, one of the biggest that it works for google but what does it do for all the other information out there?

the great thing is we released it in open source form and a $acker that will remain nameless but is in the room took it and made it something that would work for a lartt number of other advertising networks and that's great. that's thing we need to do more of. the fact that there's a giant challenge here and to your earlier question about whether or not these attitudes matter on õthe part of consumers they absolutely do and they're a strong signal to industry that we have to do better here. it's a business imperative. it's difficult, i don't want to sugar coat it because you can look at laurie's fantastic work on nutritional labels and rep&ize how hard it is. it's not like vitamina. we don't have a recommended daily allowance of these things and they're not objectively measurable in a lot of ways so it's going to be ve)y difficult. i looked at her great paper agar' this weekend and if you

look at the labels that was listed it did include location. this is a dynamic environment with two things hapning all the time. we havq to find better ways to communicate with people. >> in addition to a standardized format, is there something more than that that can be done with respect to delivery. typically, right now you have a link at the bottom of your opening page that says privacy policy or privacy notice and we've heard from joe about what that means to many consumers. so how can we make the disclosure more effective. how can we have better transparency in terms of delivery. anyone want to take that on? >> one of the things we tested was what happens if you mouse over thq disclosure and you get simple sentence that says here's what's happening, and people got that even though 15 minutes before they had very little

concept of behavioral advertising. a simple brief sentence and then go ahead and find out more. i think that's consistent in with the self regulatory regime focus. don't point this to the private policy but something that's relevant here. to get back to my point about featureizing i don't think i've read, i probably have, but i think most of us may not have in the real world out there but yet we know books are being tracked and we're getting those based on the books we've done. it's in context. it's relevant to what i'm doing and that's feature we need to crack. how do i not give you that policy that my lawyer will in tis hpj every cove yat. can we give a little bit of leeway so someone can say, give users the gist. it's never exactly accurate and not going to have the 18 caveats but if we don't give them the

gist we have no hope. one of the interesting things from the focus groups is we verbalized why this add and users said i get what that mean bus why are you making me click to go find out what it is. if you have something to tell me, tell it to me here and then i'll decide whether or not i want more information so we have to avoid a little bit of here's what you should want to know right now with actually testing and hearing. it was remarkable because i thought that would be the obvious term, but they said tell me. what - why i have to click and go back. my browser won't work. let me know whether or not i want to know something and then i'll move on. >> consumers are a lot smarter than we give them credit for. joel? >> yeah. "ti think - well, i think one o the things that would be interesting to talk about would be if every time data is a pended to an existing profile in

with the running the risk of being ambiguous. third party data collector. most ad networks. every time they a pend they are bought to an existing profile it would be interesting to see, you know, what that looks like. how close it comes to being able to you know, actually point to which consumer is the information is being collected #rom and then making sure those have access to any information being collected about them. in going back to i think the disfunctions that need to be made and what information think google and yahoo should be commented for trying to be more transparent in adding it to the marketplace but i think consumer does actually have - there's a difference in consumers brains with google and yahoo as a search engine and as an ad

network. and dash board i don't necessarily know makes that distinction and let's them kind of understand how that information might be used differently when they're off of yahoo or gojtrj properties and i think everybody has said this as well. needing consistent information or consistent the need for consistency with the regard to transparency is crucial and i'm not sure the companies collecting the data have financial data to be consistent across the bop)d and that i way from this notice and choice model which i think has clearly failed because we "on't have clear disclosure into some type of framework or national standard to give consumers consistent information to make >> first joe and then adam. >> i wanted to second what she

said and actually, joel now too, about the point, it's very important it seems to me, to know what's going on at the point of the ad" being served because so many things happening now that may not be example ya$oo doing it or a network that pout a particular perájz in real time. right now what's happening is more and more people are dynamically served in real time based upon ad exchanges so your literally buying individual consumers computers rather than clusters or space or time. so that makes the challenge much greater but it also i think makes it very important to say, listen you're a dynamic person. your profile may not be what's in some back page somewhere but it may be available at thaá moment for that particular purpose. >> adam. >> let me cut to the chase i know we're short on time.

the ultimate issue at stake % here. we're talking about the need for more information. everybody agrees that generally a good thing for consumers but how we get there is the real challenge and we've had to ask dash boards and prove si tools and so on or going to for close that process with a one side fits p&l model and say his is how it should work forever more. i think we've all had the base about disclosure and things like product or information ratings for content in the field of child safety. we had a debate about should we have a one size fits all for rating on all television content? i'm not here to say that didn't work at all but look at the model that evolved with the internet with myriad tool as rich mosaic of tools that exists there that don't exist for

television. those are two very different types of models we choose and i think the latter one is something that has some lessons for us here. that we should allow and encourage more experimentation and more competition between these companies like cooingle and yahoo for better dash boards and information disclosures and seals. say let a thousand flowers bloom. õthat point adam. which is does it make sense to have even in the context of experimentation does it make sense to have certain things be consistent from one end to the other and jewels you mentioned the amazon example. consumers may understand information is being collectd to provide a guidance about books they may read, similarly there may be certain expected uses of

information that companies engage in. do you need to provide consumers with a notice end choice or additional information related to the fulfillment of an order for example pam millio'? or to let consumers know that information may be used for fraud detection? one way of simplyfying information of provided to consumers is perhaps to take some uses expected or anticipated uses off the table to reduce the amount o# information that consumers are hit with. and does that sort of approach make sense? >> uz a think a couple of different questions there but the question of whether or not to have a standardized disclosure or standardization of terms the. terms and notion they involve. getting back to something allen davidson said. look at the things out there that we're tryi'g measure or deal with. location based service and privacy surrounding that.

things that have compton market rapidly we didn't expect for. i'm for holding companies to the promises they make about the information they collect. that's where we need to be. live up to your promises. but the question of taking a policy as cross the board i think for closes experience innovation in this field and information is is the life blood and if we disclose it through the regulatory regimes that has profound ramification. >> industry ought not to work harder to figure it out if every car had a completely different set of controls we'd be in u big trouble right? thought it would work by combination of legislation and consumer information about what works at least my 5-year-old when she sets down to get a computer game she's nos generally what things to.

we joked about people doing coincidence things for today but it's these touch points that let there's a bill, law, i urge you to keep the whip going and use the different things because it's a messy echo system and sometimes industry leaders and you guys. >> joel you wanted to say something? >> in response to adam, we're not just tal)r'g about the internet anymore. i mean, television is becoming the internet. all you have to do is look at what various television cable networks and other entities are doing in canoo ventures and comcast lab percentages with collecting data. the same thing in coursing data through the internet rj beginning to happen in what we call television. these words are now metaphors that will have less and less

meaning over the next decades. all the data we're talking about. this is peanuts compared to what's going to happen 10-years from now and it's not just for advertising the news, the information and entertainment you get will be very based upon the profiles that you have. and i think the issue here confronting us not now not to make rash "ecisions how are we going olive in a society with those kinds of data that course under you without your knowing it or having control about it? do you want 60 minutes to be different from your neighbor compared to what you see based on what companies know about you and you don't? okay? do you want discounts to be different based on what companies knou about you and you don't? these are small things that exist now only in small % technology ways. add up some of the fire power and they're going to happen because the industrial logic points that way and that's why i

think we have to be worried about this stuff. >> allen, davidson i think you'll have the la last wor". >> i'll go back to what the chairman said when he posted the question is this the worse form of government except for all the others. maybe it is and this is one of the reasons why we have to get this right if 10-yearsing a we had sat here and said, there's a set of web-sites that will ask you to input all sorts of personal information. where you went to school and who your closest friends are right and then we'll share that information with hundreds of thousands of people. including thousands of developers we said that was crazy in terms of prohibited practices or that they were going to be location based web-sites asking you to share with all of your friends where you are at any given moment. we would say that's nutty. never let that happened. it is very dynamic environment. we have to be careful.

that said there's a giant business imperative all for us to get this right and we need to work closely together. i offer one challenge to the commission which is an area that we haven't talked about which is how government gets access to information because one of the things think i think consumers don't understand is for what circumstances we're forced to turn information over to the government. it's a consumer protection agency has an interesting role to play in helping us all think about that. thank you for having us. >> well i want to thank all the panelists. this has been a provacative and interesting discussion. we could clearly go on for another hour or two. there's many challenges ahead. i thank everyone for their participation today. [applause] >> let me add one note, one logistics thing. we have a limited a amount of food available out here.

there's a list with local eateries outside at the registration desk if you do leave the building to get food. please keep in mind it takes time to get back through security and we'll reckon weave promptly at 1:20. thank you. >> yesterday the u.s. house created a bill to protection

regulations for the financial industry. presidená barack obama urges the senate to pass it's own version of the legislation and for both chambers to complete work on a final bill. following with the republican address presented by marsha black burn a member of the energy independent and global warming committee. talks about copenhagen and the pending kapono and trade energy legislation in congress. >> over the past two years more than 7,000,000 americans have lost their jobs and factories and businesses across our u country have been shut. we have all been touched by the strongest economic downturn since the great depression. the fiscal steps since january we've taken have helped to break our fall. the flood of job losses we saw at the beginning of the year slowd to a relative trickle last

month. there a little comfort áo people that remain out of a job and my solemn commitment is to work every da in every way i can to push this recovery forward and build lasting growth and foundation. that's why i announced private sector hiring steps. added boost to small businesses through additional tax cuts and access to lending they desperately need to grow. we'll rebuild more vital infrastructure and promote clean energy to put americans to work doing the work we need done. i calld for the extension of unemployment insurance and % health benefits to help those that have lost their jobs weather these storms until we reach a brighter day. even as we dig out of this deep hole it's important to address the recklessness that got us in this mess in the first place. some of it was an error of easy credit when millions of

americans bought homes they could not a formed and an assume housing prices would always )ise and day of reckoning would never come. much of it was due to the irresponsibility of high institutions on wall street. they gambled on risky loans and sought long-term loans with little regard for long-term consequences. it was risk management without the management in their actions in the absense of strong oversight intensified the cycle of bubble and bust and led to a financial christ sis that a disaster that could have been avoided if we had clear rules for wall street and exactly enforced those. we can't change the history but we have a responsibility to learn from it and take steps to prevent a repeated crisis from what we're still recovering and may u have less exposed to the

kind of break down we just experienced. it would bring new transparency and an accountability to the financial markets so the kind of things that happened would be fully disclosed and properly regulated and give us the tools that the failure of one large bank or financial institution won't spread like a virus throughout the financial system. we should never find ourselves banking bail outs or letting the economy collapse and currently consumer products investing in a new consumer financial protection agency. this age'cy would have the authority to put an end to mislqp"ing and dishonest practices by banks and stubts institutions that mortgage and autoand payday loans. these are all common sense reforms that respond to the obvious problems exposed by the financial crisis. as we've learned so many times

before, common sense doesn't always prevail in washington. just this week republican leaders summoned more than 100 key lobbyists to a pep rally and urged them to redouble to block meaningful financial reform. not that they neq"ed the encourage meant. the industry is already spent more than 300 million on lobby together influence the debate this year. special interests in congress say things like the consumer financial protection agency will stifle and frustrate innovation in the financial market. americans don't choose to be victimized by pages and pages of fine print and while innovation should be encouraged. risky themes that threat ten economy should not. we can't afford to let the same phoney arguments and bad habits of washington kill financial reform and leave consumers

voweler inable to another melt yesterday the house passed incorporation of many changes we need in the senate banking committee is working on it's own reforms. i urged both houses to act as quickly as possible to pass real reform that restores fair and free markets in which reck lessness and greed are towarded. reforms for businesses, investors and consumers alike. that's how we'll keep our economy and institutions strong and restore accountability to both wall street and washington. and that's how we'll safeguard everything the american people are working so hard to build. broad based recovery and lasting prosperity and renewed american dream. thanks. >> hi. i'm congressmp' black burned i have the great honor to represent tennessee district.

next week my and a number of col&eagues head to copenhagen, denmark's capital city where democrats and colleagues around the world will try to find level way. it will produce mandatory emissions limits that will destroy millions of american jobs and competitiveness for the decade to come. washington democrats want to impose a kapono and trade a bureaucratic nightmare that would make households and small businesses and family farms pay higher prices for electricity, gasoline, food and virtually every product made in america. this legislation is currently making it's way through the senate after passing house of representatives in june. president barack obama himself said as a result of this

national energy tax electricity prices would and i quote, necessarily skyrocket. his own department of energy has determined that millions of jobs would be lost. since democrats in congress have failed get a kapono and trade bill ahead of the copenhagen summit. õpresident barack obama took unilateral action this week to pile more regulation on the backs of families in small business in the name of combatting global warming. on monday, the president's e.p.a. administrator. lisa jackson took the first step toward imposing costly regulations on businesses for emitting carbon. my bill would stop the e.p.a.. just think of what will happen to small businesses and manufacturers hit with the skyrocketing energy bills especially when nations like i'd india and china don't agree to the mandatory emissions limits.

with americans facing double digit unemployment, there could not be a worse time for unilaterally disarming our economic growth. small businesses are already feeling anxiety and holding off on hiring. due to the prospect of this national energy tax. government take over of healthcare and other costly policies democrats have in the works. these aren't issues president barack obama, houáq speaker nancy pelosi and democrats in congress will talk about in open copenhagen. but republicans will. also absent from the discussion in copenhagen is the climate gate scandal. recently leaked e-mails reveal climate scientist have along track record of manipulating data to hide scientific q+idence to contradict the global warmi'g establishment to bully citizens and lawmakers into law killing

energy wasting job schemes. this raises serious questions about the democrats climate control plans. questions that deserve an investigation and not a rush to adjustment by the bureaucrats in copenhagen. republicans are all for clean water, clean air and clean energy, we just don't think we have to tax people out of their house and home to get there. that's why we have proposed an all of the above energy strategy "táhat says, let's put every cln responsible energy option on the õtable to create jobs, ease the strain on family budgets and clean up our environment. this is one of the series of common sense solutions republicans have proposed to empower families and small continue to rely on more spending, regulation and more government to try to solve every problem. nothing sums this u( more than the trillion dollar stimulus of

borrowing and spending that has failed create jobs immediately and keeps unemployment below 8% as promised. instead, more than 3 million americans have lost their jobs and unemployment has risen to double digits. given the opportunity to try a new approach. presidq't barack obama has proposed to more of the same stimulus spending paid for by borrowing from our children and grandchildren. it's time for washington to learn the hard lesson that families already know. growing debt only cripples freedom and spending more money that you have is no plan for prosperity. only republicans have provided a fiscal responsible blueprint for helping families and small businesses weather this crisis and get back on their feet. thank you for listening. >> this week on america and courts, three former u.s. solicitors general, paul clement

and drew days and kenneth star discuss duties associated with the job and what it's like to argue before the supreme court. america and courts today at 7:00 eastern on c-span. >> american icons, three original documentaries from c-span now available on dvd. a unique journey through the three branches of american government. see the details of the supreme court through the eyes of the justices. go beyond the velvet ropes into the rarely seen spaces of the white house. american's most famous home and explore the history, art and architecture of the capital. one of america's most tim symbolic structures. a three disk dvd set. order on-line at c-span.org. /store. on friday the house oversight

committee looks at bank of assistance played the deal. sheila bare general of the federal insurance deposit in corporation a'd head of the enforcement at the security and exchanges commission to discuss litigation against bank of america. this is about two hours. >> meeting will come to order. good morning and thank you fo) being here. the committees investigation into bank of america's acquisition of merrill lynch has resulted in an unprecedented look at mind the scenes of one of the biggest bail outs in american history. did the federal government force bank of america to go through with the merger? every bank of america senior

executive involved has told the committee that the government did noá force them to go through with it. in fact, they told us they decided to go through with the deal because they thought it was in the best interest of bank of america and it's shareholders. ken luis also testified that no one in the government did anything im(roper during this transaction. if there's still people that want to say the government forced bank of america to go through with the deal, they are turning a blind eye to the facts we now have before us. over the course jt this eight month investigation the committee has held five hearings, received extensive testimony from top executives at bank of america and senior government officials conducted numerous interviews issued to % unprecedented subpoenas to the federal reserve for internal

records and reviewed nearly $500,000 documents. most importantly, public scrutiny and over-site by this white tea has produced tangible results. today, two days ago bank of america paid back it's entire 45 billion dollars federal loan plus interest. in addition under pressure from the committee. bank of america agreed in september to pay 4 $25 million to the treasury department income pen saturation for toxic "táhe bank we see. but never paid for. in sum, our bipartisan investigation resulted in the american taxpayers receiving approximately 47 point 5 billion dollars. even in today's world, that is real money. and every member of this committee should be proud of our

efforts. and i take the time to salute you for your involve meant and hard work and it's been great. to get to this point, while we have thoroughly examined all the issues involved in the case i agreed to grant the ranking members request for one morq hearing to tie up some loose ends that he is concerned about. this will close the committee's full, fair and successful investigation of the bank of america, merrill lynch merger. on that note, i thank you and i yield to the ranking member of the committee, gentlemen from california, congressman darryl icer. >> thank you mr. chairman for holdr'g this hearing. i've already told the chairwoman that quite frankly i believe she's a the bookend of this investigation. she's the bookend because tim geithner has never appeared before us, she's the bookend

because in fact there never was really much there. bank of america is a regulated bank. moneys were made available on an extraordinary basis and have now been paid back to day in the short time of the chairwoman we as a minority will ask, where do we go from here? the security of our banks fdic insu)ed banks and the future of banks conveniently becoming banks in times of trouble and perhaps not in other times, are important questions this committee should ask not because of the #inancial services committee, but because we are the watchdog of the american dollar and american process and laws that are passed through the executive branch and it's affiliates must adhere to. mr. chairman, i'm deeply concerned that in your opening statement you quite understandably said the american people were paid back 45 billion

with interest over 47 billion. i must caution you the american people didn't get a penny back. that money has not come back to the american people. it's simply put back into the slush fund created under republi(p' president with tim geithner and hank paulson assistance and today not a penny is paid back % to the american people. that money is being recycled into do-good causes or whatever the president and this administration would like to do. mr. chairman, i look forward to us getting american people's money back as promised. we were told that in fact, we would be paid back all of our money and probably with interest. mr. chairman, unless that money comes back immediately when you look at chrysler, general motors aig that tim geithner now has said we won't get back. it's clear if all the other

moneys given to various organizations through a process of buying mostly preferred debt, if in fact all of that is paid back with interest, the offset of the money we now know we'll lose would bear us without considering interest as anything other than principal pay back. mr. chairman this is the book end. we have only a few questions for our esteemed witness and app)eciate here being here today. this is not the end of protecting the american money and not the end of this committees jurisdiction of ensuring the intent of law becomes the fact in law. with that, i thank the chairman and yield back. >> i thank the gentleman for his statement and maybe what we can do is some of this 47 point 5 billion use it to create jobs and job opportunities maybe that's good way to use it. >> mr. chairman i would appreciate a bill authorizing and appropriated that through congress and look forward to working with you on such a piece

of legislation which sour constitutional responsibility. >> thank you very much. >> mr. chairman, would the ranking member yield? >> actually- >> would the chairman allow me to just respond to something that ranking member said? >> very, very quickly. >> i at want the ranking member to know there's those on this side of the aisle to wanting to address unused tarp money ought to be thought of as that. >> this hearing conducted by the domestic policy subcommittee and they have done a superb job in working with us on this issue and i would like to yield five minutes to the gentleman from clevelp'd, ohio. the chair of that subcommittee. >> thank you very much mr. chair

and members of the committee. on december fifth, 20028 shareholders of bank of america approved a merger with merrill lynch. ken lewis, ceo of bank of america made a call to hank paulson initiating process that led to a 20 million dollar bail out and promise of government insurance for losses up to 118 billion dollars. the kro nol gi of events strained belief. was it true the financial information shifted so dramatically in that short amount of time or did top management know or should have known about the deteriorating situation of merrill lynch much earlier? did they fail to make necessary disclosures to shareholders. bank of american would be in legal jeopardy disclosing large losses at merrill lynch known or knowable before the shareholder

vote. the domestic policy subcommittee found evidence of possible security law violations at bank of american. bank of america unreasonable and negligently relied on internal 2008 forecasts created by merrill lynch that omitted how the cd o and other toxic assets would perform during the quarter. the former, merrill cfo admitted this forecast was not in fact a valid forecast. bank of america knew at the time, that the forecast was of questionable validity, however bank of america did not do any actual financial analysis to make-up for the merrill emissions. instead bank of america merely pulled a number out of thin air which was recorded on a forecast as the gut feeling of neil coty

the chief accounting officer. bank of america created an assumption that merrill lynch's nonliquid assets would break even spreading octobers bad over two months. attzrneys at bank of american recklessly did not question this information and a vised panic of america not to make further disclosures to shareholders based on the gut feeling and forecasts. within weeks reality scouted out wish full thinking. investments continued to lose large amounts of money. merrill lynch lost over 21,000,000 in just the fourth quarter. bank of america went wish together the government for rescue. when i asked ke' about this, he said he relied on add vice of counsel. protecting shareholders is often the responsibility of corporate general counsels and outside

counsel. subcommittees findings committee demand the question. where were the lawyers? the blaring omissions and inaccurate financial da a the in the critr(p& forecast so obvious that they should have alerted the attorneys to necessity of reasonable investigation before making a decision on bank of america's legal duties disclose. the apparent fact makes the decision not to disclose an egregious vio&ation of secures and egregious for these violation of securities laws. the stage for these violations set by former sec all the the time the other exotic instruments proliferateed financial markets. he discouraged formal investigations and large penalties against securities fraud. bank of america's conduct was

the corporate reaction to weak enforcement under chairman cox. chairman sha i ro is applaudd for trying to turn it around. in disclosure of the bonuses bank of america's failure to disclose accelerating losses to merrill lynch before the shareholder vote is more significant. indeed. those undisclosed losses, dwarf the amount of undisclosed bonuses. the reliance on council defense asserted by ken luis raises the broader question. will it allow corporate management to rely on the ad vice of council defense and then allju the council to avoid liability for their advice? investing public and now this congressman wants to know. where as thqscb.

as of yet, we don't know. >> thank you. new>> thanks for the statement and now five minutes to the ranking member of the subcommittee mr. jordan from the state of ohio. >> thanks for hold together days hearing. i look forward to exploring the role between the two. this committees investigation had important information to the financial crisis. as i said before all the action of the government officials took place in a time of significant uncertainty. . occurred after many of the nation's banks were forced to accept taxpayer money through the t.a.r.p. program. we know in october 2008, from testimony ken lewis gave at first hearing on this issue, that october 2008 meaning mr. paulsen and mr. bernanke and

geithner and ms. bair brought the ceos to treasury don't demanding they accept in exchange for money of the government's choosing. look forward to learning about mrs. bair's role in that meeting. meeting. this investigation occurred continued to reveal the unintended consequences and negative implications of the government's intervention in the private sector and hope the congress will apply these lessons as we debate the appropriate framework for our financial system as we move forward. with that, mr. chairman i thank you and yield back. >> thank you very much. we now move to our witness. we have with us today the chair of the federal deposit insurance corporation. madam chair, longstanding tradition with swear all of our witnesses in. if you would stand and raise your right hand. do you solemnly swear to tell the truth, the whole truth and nothing but the truth if so

answer in affirmative. >> i do. >> letted record reflect, you may be seated. let the record reflect the witness answered in the affirmative. you may begin with your testimony. >> chairman towns, chairman kucinich, ranking members issa and jordan and members of the committee, as requested by the committee, my testimony today will focus on the fdic's role and the decision to -- >> madam chair, do you want to pull the mike down just a little bit there. >> sure. as requested by the committee -- >> and closer, i think, too. >> as requested by committee my testimony today will focus on the fdic's role and the decision to provide assistance to bank of america. let me note at the outset that bank of america is an open institution and the fdic is very sensitive about any discussion of the condition of open and operating insured depository institutions. in midst of december 2008 in the wake of layman's failure, biva

announced it would acquire merrill link. it was approved by the federal reserve on november 26, 2008, and was to be finalized in early 2009. however, on or very shortly before december 21, 2008, the fdic was told by the federal reserve and treasury that b of a expressed reservations about completing the acquisition of merrill lynch. over the course of time it was clear officials from the federal reserve and treasury believed that systemic risk would exist ab sent and agreement by the government provide assistance to b of a. on january 14, 2009, the fdic received from the federal reserve a draft term sheet describes an assistance package, the principle elements of which were capital infusion in a transaction where the fdic treasury and federal reserve would share in a guarantee against certain losses. otherwise known as "ring fence" transaction. the fdic continued to analyze where and how much the exposures

were and how that specifically impacted the fdic. the fdic's board ultimately was persuaded b of a's condition is created a risk and the transaction would mitigate that risk and the risk to the deposit and insurance fund in a cost effective manner. the transaction limited the fdic's risk to a small portion of the covered exposures recognizing the fact that most of the exposures resided with the investment bank and not the insured depository institution. on january 16, 2009, the plan treasury capital infusion and the treasury fed fdic transaction were announced. in early may 2009, b of a asked the ring fest transaction not be completed. moving forward we have work continuously with congress the treasury and the financial regulators towards creating a more resilient, transparent and better regulated financial system. one that combines stronger and more effective regulation with

market discipline. one of the lesson swres learned over the past few years is that regulation alone is not enough. we need to establish an effective and credible resolution mechanism to ensure that market players will actively monitor and keep a firm handle on risktaking. we commend you and your colleagues in the progress you've made in moving towards providing the regulators with the tools to effectively deal with future crises. thank you and i will be pleased to take any of your questions. >> thank you very much for your statement. let me just state to the members, we're going to be really tight on the five minutes today, because five minutes really means five minutes. which means five minutes to ask the question and for the person to answer the question, because i promised the chairperson i would have her out by no later than 11:15, 11:20. we want to respect that and try to move forward. let me just sort of ask one quick question. are there step us think congress can take to avoid future bailouts of the banking industry?

>> yes. i think we have put a very high priority on a robust resolution mechanism. we have that for insured depository institutions and when smaller institutions start to fail they are put into a very severe resolution mech name requires shareholders and unsecured creditors to take loss, generally complete loss, for non-bank entitys or activities outside of banks this resolution authority does not apply and we think something very similar to the fdic process which is shareholders and creditors take losses, not the government, is very important, and we think that that, the house bill that is on the floor now moves very well in that direction, and we think it should be very clear and the resolution authority should specifically ban assistance to individual institution going forward and i believe that is sass in the house bill. >> i now yield to the gentleman from california, ranking member congressman issa.

>> i ask that -- go first. >> the gentleman from arizona. he nields to the gentleman from arizona. >> i yield. >> gentleman from california. >> okay. >> the gentleman's yeeding to me to be expeditious. madam chair, i want to be brief also and i've got just a series of short questions. first of all, from the standpoint of the fdic, looking back now, wasn't, forgetting about whether the merger was a good merger, all the other things that this committee worked on, wasn't the underpinning of the additional money, preferred stock as a form of loan, wasn't that, in fact, the most appropriate thing for the fdic to approve of so that the capital worth of bank of america would be undeniable? >> well, i think it's always hard in hindsight, to answer questions like that. >> actually i normally find it

easier in hindsight. i'd hate to have -- >> it may be easier in hindsight. i guess it's easier to re-evaluate decisions that were made. i think -- the distinction needs to be made between the insured depository ins sthugs had a strong capital position with other activities going on in the bank holding company. and so i think if you're looking just to the insured depository institution with exposure there's a question whether additional capital was needed. i do think that -- >> i'm not saying whether it was needed. it's clear that in hindsight, it's clear they didn't need it, because they've paid it back to you essentially without it being from actual new money in any large amount. they passed the stress test and they passed the stress test and said they could pay it back. so i know that part of hindsight is clear. >> right. >> but the real benefit of the $45 billion of loan, and i repeat, it was not -- it's not -- we didn't bail them out.

we didn't give them anything. we bought stock. we bought the worth of the company, and we got interest guarantee and the ability to get our money out ahead of everyone else. preferred stock is not all bad. >> right. >> but the effectiveness of it was to, if you will, over-capitalize the company in hindsight, but wasn't that essential lay good thing in that if there was no other benefit to t.a.r.p., the confidence of knowing that these companies, these particular banks were extremely well capitalized, not as to the stockholders but as to -- the depositors, wasn't that effectively the good thing that came out of this arrangement? >> well i think, yes. the capital investment certainly created a fortress balance sheet. that was the original intention of all of these capital investments under t.a.r.p. again we not, the only role we have is on the ring -- not the treasury. it was a treasury decision.

absolutely going to have a stabilizing affect, yes. >> the next question is the harder one. many banks and -- many non-banks decided to become banks conveniently in this crisis. >> right. >> many entities in fact fled to the fdic and the fdic finds itself with its funds, funds which are designed to ensure that we never have to actually put in taxpayer dollars, those funds are stressed right now. going forward, do you believe that in fact in the future people should be able to run to the fdic, run to being a bank, when it suits them, even if they hadn't been when it didn't suit them? >> no, i don't think they should be able to do that. absolutely not. >> is that -- a reform that you presently see on the horizon that would give you that ability next time to say, you better be there early or not come at all? >> well i think two things. i think we need a robust resolution mechanism so when entities get themselves in trouble, they don't get

government assistance. they get put into receivership. i think entities asking for assistance maybe won't ask for assistance so much, if they know that that is the reaper cushion. in terms of entities becoming bank holding companies and having insured depository, not just for that or fed lending facilities, there needs a systemic risk council that would decide and have the power to say to an entity that became a bank holding company perhaps later doesn't want all the reg tlags entails they still need to subject themselves and be subject to pro verbal supervision. they can't become a bank holding company when it suits them and escape it when it's not suiting them. >> thank you. i yield back. >> i yield back. >> thank you very much. i now recognize the ranking member -- i'm sorry. chairman of the policy committee. yes, mr. kucinich from ohio.

>> chairman bair, do you have any concerns that america may face yet another bank collapse? >> no, i don't, but i think there's a lot of work that needs to be done to continue the stabilization and the cleanup, and i think the regulatory reform efforts going on right now in kongs are absolutely crucial to that. >> do you think banks that are too bill to fail or too big to exist ought to be broken up? >> well i think there -- the problem with too big to fail is the same problem you had with fannie and freddie. an implied government backstop which feeds into risktaking. if shareholders and creditors think they have the up site and the got the couldn't down side that is going to contribute to this. we think that's the major crisis, hate to pound sound bike a johnny one know, congress needs to establish a robust and severe resolution. he niche that says they will take losses if these

institutions go down. right now they're happily you know, feeding extending credit and making equity investments and i fear they're not really doing their own due diligence in terms looking what's going on in the large institutions. do they understand the risks? do they understand, is plgt on top of those risks? i don't think we have market discipline now and we need that. >> do you have any kwern concerns banks may be over -- derivative markets? >> absolutely. financial institutions, i absolutely have that concern, yes. >> what can you tell the american people about the security of their bank deposits? >> they are very secure. that is one thing we have done very early on with a public information campaign. the resolutions smoothed. everyone's deposits completely protected as they always have been. there is no question the fdic has resources to deal with whatever may come. >> would you tell us what those meet resources are to secure security of deposits? >> we are full faith in credit

and have a treasury line and congressional commitment to back insured deposits. that's in effect for 75 years. right now we have required pre-pavement of assessments that's going to bring in another $45 billion at the end of the year which will bring our crash position probably in the it is a strong cash position. we can borrow up to $500 billion in cash if we needed to do that. i do not see the circumstance in which that would be necessary. >> i yield to the ranking member of the full committee. >> thank you. i will be brief. january 9 you determined that it was clear that officials from the federal reserve and treasury believe that systemic risk would exist absent the agreement of the government to ride the system to be a day. is it not true that the deal was

already done at that time? is that not what we have essentially discovered? >> i know that the conversations that occurred between the ons that already , occurred between the treasury and fed and mr. lewis prior to the time we contacted. i wasn't privy to those conversations, so i don't -- >> i realize we've been unfair to you on the tail end of everything and only if something was bank or about to become a bank holding company. >> right. >> let me follow-up with this question. specifically in your role at fdic chair, if you had a choice and you were told what would you like to do? when b of a said we're going evoke the mac or give us more money. it doesn't matter who stead but that occurred, wouldn't the fdic's position in the future be, go to congress, or go to the t.a.r.p. and bail out merrill lynch directly. this, if they don't want it and there's money needed, and

obviously there wasn't new management or consolidation in the merger at all, wasn't it really, go bail out merrill lynch, do whatever you're going to do with mer many lynch, they're not a bank and why should be be with me? isn't that see leshly you and future chairs position that you would prefer? >> well, we think it's important to act as one government. yes, but i have -- my first job and foremost job, present insured depositors and i can't with that, that time, about as 50 billion, bail out the entie economy and everybody else with the resources we have and i have to make sure we have credibility for depositors first and foremost. yes, investment banks are not secured financial institutions wound have been nices to have other mechanisms available, absolutely. >> as we're monday morning quarterbacking up here, if there is anything, and since we determined that chrysler and general motors qualified for t.a.r.p. money, if there's any mistake made, it was this very

lucrative merger that b of a is now happy about and touting, to be honest, when faced with the dilemma it was a merrill lynch decision, treasury paulsen, geithner, they should have made a merrill lynch decision relative to instead what they do, pushed it on to a bank holding company and a bank holding company then had a systemic risk problem, which fell to your doorstep and $45 billion of taxpayer money, albeit paid back, in fact, was put in play? >> well, yes. b of a was already a bank holding company. the situation where merrill lynch was not. through the acquisition got folded into the bank holding company structure and yes, significant benefits that accrued because of that, yes. >> on a lighter note. >> okay. >> yesterday this committee on a bipartisan basis moved for a common searchable platform, although not xprl, which you use, we mandate add common uniform platform with rigorous

structure so that there could be transparency either to those cleared or in the case of assets, or information available normally to the public, directly to the public. what is your experience and what would you guide us with in your case xprl and that kind of capability that it gives you to look down, and if possible even allow others to look down? >> right. i choose not my forte. we have been leaders in this area, i think we've had a good experience and i was certainly offer the people to give you a more detailed briefing on that, if you would like. >> last follow-up question and i'll yeed back. do you believe that this committee is on the right track when we insist that databases be common, robust searchable and interactive so that, in fact, when appropriate the american people can have transparency is? >> right. you may get me in trouble with other agency if i can follow

that a positive experience and i encourage others and this facility to this. >> thank you. i yield back. >> thank you. i now yield to the gentleman from maryland, congressman cummings. >> thank you very much. thank you for doing such a superb job. >> thank you. >> i recognize that the fdic's role in the bank of america bailout was different than that of your fellow regulators at treasury, and the federal reserve, but nonetheless, we have a responsibility to explore all aspects of this tainted transaction. in your written testimony you note that the fdic was notified of potential government assistance in the bank of america merrill lynch merger around december 21, 2008. you go on to say over the next three weeks a discussion continued about bank of america's financial condition and the nature of the assistance to be provided. you discussed the case with secretary paulsen, chairman bernanke and others on january 9, 2009.

and you were provided a draft term sheet on january 14. this is all correct i hope and i'm working from your own written testimony. is that right? >> that's right. >> my concern is the fact that in the past hearings in this committee we have heard about how ken lewis briefed his board of directors on december 22, 2008 and again on december 29, 2008, indicating at least $12 billion in fourth quarter merrill lynch losses would be covered by the federal government. i'm not asking you what happened at those meetings. i know you weren't there, but what i'd like to address is this -- do you have any reason to believe that ken lewis had sufficient basis on the structure of any potential deal to brief his board with such certainty? >> no. again, we weren't privy to any of those discusses and certainly the fdic had made no decision at that time about whether we would

participate and to what extent we would and how that would take place and whether it was necessary. >> based on your testimony, the government regulators were still reviewing the bank of america positions and working on whether a deal would occur well into the new year. certainly it doesn't sound like it was a done deal. does it? >> no. and, again, i can't -- we only a small piece of this. from the fdic's perspective, we committed to continue talking with the fed and treasury and examine the facts and analyze to what extent assistance would be appropriate. we had not made any decisions during that time period, no. >> this is not you saying. this is me saying this. one could read this as mr. lewis pulling a fast one on his board and, to get them to approve the deal. unless you want to comment, i will yield back. >> i think i'll stay away from that. thank you. >> thank you very much. thank you, mr. chairman and i yield back. >> thank you very much.

thank you for those questions. now i yield to the ranking member of the committee. mr. jordan. >> thank you, mr. chairman. chairman bair, let me, i've looked at your record and regulatory policy and very impressive. i'm just curious on a, in a broad context, are you, like i am, a bit troubled, frankly for me it's more than a bit, troubled by this, what i've called unprecedented involvement by the government in the private sector? whether we're talking president of the united states deciding who gets to be ceo of general motors. whether we're talking about the fact that we now have in the united states of america something i thought i would never see, but a federal government pay czar telling private american citizens how much money they can make, and bailouts and t.a.r.p. and second stimulus coming in on and on it goes. so just as a, an accomplished

professional individual, i mean, are you nervous about this general direction? again, this unprecedented involvement of the government in the private marketplace? >> absolutely. and we think better tools are needed for the government to deal with this in different ways going forward. we're very much opposed to, i believe the house bill does this, prohibits capital investments in banks, in financial institutions going forward. i think government ownership and financial institutions have created not only a lot of public outcry and cynicism, but also very difficult issues about what should be private entities and private sector decisions based obviously on some prudential regulatory standards but government ownership has created a whole list of problems and we would like to end that going forward. >> that being said, let me take you back. this, again, pointed out in the my opening statement was brout out when we had ken lou kniss

front of this committee several months ago. the meeting that took place in washington, d.c. ten days after the t.a.r.p. legislation was passed. it was passed, designed to go in, get the credit off the books straighten up the balance sheets et cetera. ten days later the nine biggest banks were brought to the nation's capital. according to mr. lewis' testimony, mr. paulsen, mr. brn band you were in that meeting and mr. lewis indicated he had no idea what the meeting was about, that they, that the meeting went with a piece of paper slid across the paper to the banks telling them how much money they were now going to take from the t.a.r.p. program whether they asked for it or not. and that they had to sign a statement saying they were in agreement to that. >> uh-huh. >> is his recollection of that meeting accurate is that in fact what took place? again, not ten days after we were told, the congress of united states was cold, that the

t.a.r.p. program, the money that was made available be used for something entirely different? >> right. we -- i was invited to attend that meeting. i was not involved in decisions about who should come to that meeting and who is going to get what. my role was confined to explaining the temporary, debt guarantee program and that was the only remarks i made to explain that program. and i did not opine or comment at all on the capital invechlgts piece. we were not involved in the decision-making and remained silent during that discussion, but, yes, these banks was strongly encouraged to take this money. >> going back to your answer to my first question, were you troubled that day about what you saw taking place in that meeting? in light of the fact you just said that you -- two statements already today. troubled by this unprecedented involvement of the government and in response to mr. issa's question, the government should act as one.

were you troubled by what took place in that meeting ten day afrs it had been passed for an entirely different purpose? >> yes. these decisions were made in the fog of war. these decisions had to be made very quickly and the situation was becoming more and more destabilizing and also there had been an international agreement to use a combination of liquidity guarantees, we were involved in capital investments to stabilize the system. i frankly, the idea of it took my breath away, and it was quite unprecedented in terms of the private sector system that we have, and so i was concerned and i have said -- >> was that the first time -- did you know what was taking place in that meeting or did you come into that meeting like ken lewis -- >> we were told in advance who was going to come and they would be asked or enkwurged to tame capital investments. absolutely told that in advance. i did not weigh in one way or

the other. i confined my troel explaining the debt guarantee program. i said in retrospect i wish we had. on troubled asset relief, we still need a program and would like to see perhaps congress authorize that going forward. that still needs to be done. >> if i could, real quick bp i appreciate what you said, chairwoman. this has been very helpful. if i could say one other question, mr. chairman. the talk this week is about using t.a.r.p. dollars for stimulus for something else out of the scope. >> right. >> again, i think it was done already. but i totally disagree with this. your thoughts if you would, on the idea of using t.a.r.p. money for second stimulus. >> well, i think you're asking me something beyond my pay grade, because i like to confine my public comments to areas i think appropriate fall with my sphere as chairman of the fdic.

i do think there needs to be more focus in terms of troubled asset relief. we still have toxic assets on the books of banks particularly the smaller banks really did not benefit from the capital investments. the smaller banks are a large share small business lending but there need to continue to work out and reserve against these legacy loans they have, it's inhibiting their ability to engage in new lending. we think it would be appropriate and consistent with the troubled asset relief program to try to deal with that problem. but beyond that i would not want to opine about other uses others might want to make of the t.a.r.p. money. >> gentleman's time expired. >> thank you, i yield to the jae from virginia. >> congressman connolly, i thank the chairman and welcome chairwoman bair and would ask you to move your mike closer. i cannot hear you because of the acoustics in this room.

i'm listening to my friend from ohio and he loves to use the phrase, this unprecedented as if we did not have the worst meltdown in seven years one year ago in september. but me ask you, wearing your fdic had, as someone with control of the depository institutions regulated by the federal government, what if we did not have this unprecedented integration? >> it was not pretty and it was not perfect. in hindsight with additional wisdom -- >> should we have done nothing? >> we had to do something and it destabilized the system. something needed to be done. >> so, intervention was necessary in your view? >> absolutely. >> this intervention that was

designed came from a point the headed liberal academic from an ivy league college, right? it did not come from a republican secretary of state and a republican administration did it? >> i'm sorry. what are you referring to? >> who proposed the idea of the t.a.r.p.? >> the tarp was proposed by, yes, by the treasury of the fed. >> oh. not a pointy headed liberal. by a republican businessman who was the republican pointed secretary of the treasurerly in a republican administration. is that correct? >> yes, that's my recollection. >> ah. >> if the gentleman would yield. >> no, i'm not going to yield. let me ask awe question. in your testimony, you say that you've got wearing your fdic hat a direct interest in both bank of america and merrill link, because they are depository institutions. is that correct? >> that's right. >> what -- >> merrill lynch is not. >> i'm sorry? >> bank of america.

the bank is a insured depository, merrill lynch an investment bank. >> i'm reading from your testimony. >> right. >> you assert fdic has a continuing stake in the financial well-being of those insured depository institutions. >> right. >> okay. so what was the view ever the fdic at the time the bank of america proposed to acquire merrill lynch? was that a good business decision? was that a risky business decision? >> right. >> were you aware of the fact that they had unprecedented losses, by the way, without unprecedented federal regulatory intervention? >> well a couple of things. we are not the holding company regulator. the fed is. we do not approve mergers answers acquisitions. the fed does. we're also not the primary regulator for bank of america. we insure them vshgts backup supervisory authority. in terms of the more intimate knowledge of that situation would come from the fe and the occ.

as backup supervisor frankly we must rely on the primary regulator. if there starts to be troubles we move in, but without red flags. and, no. as with those caveats i was not aware until we got these phone calls and started looking into it that the merrill lynch had such significant losses in the fourth quarter. they were quite profound. >> uh-huh. let me ask you, we have a bill that's pending before the floor of the house of representatives today that would constitute a major overhaul of regulation, and for the first time finally allow some oversight of the risky derivatives market, for example, and would in effect extend some federal oversite regulation of investment banking by any other name, not many left, that none of which existed previously. in retrospect, just given your financial expertise, do you think we made a mistake to

explicitly exempt derivatives of multi-trillion dollar market from any federal regulation? >> oh, absolutely. that was a mistake. absolutely. >> again, this unprecedented federal intervention in the financial markets in the case of derivatives since there is no such unprecedented federal intervention at the moment maybe in retrospect we should have had some? >> we absolutely should have had nor regulation in areas particularly in derivatives. no question in my mind about that. >> thank you. my final question, does the fdic had a point of view with respect to the extension of fdic that's contained in the bill that's pending before the house today? is that a good idea? to extend the fdic and finance that extension by having the big banks have an extra fee rather than taxpayers do it? >> yes. we do support -- we have said that for banks and bank holding companies that have insured depository institution wes would like to be the resolution authority. nor non-banks we'll let congress decide that.

and i think they decided they would like one entity doing it all, and, yes, we think that this should be a very robust resolution mechanism that provides no open bank assistance, no conservatorship, everyone goes in receivership. shareholders take losses and that's the process we use for banks and that's the process that works and so, yes. we think working kwaept needs for this fund should be provided through a risk-based assessment on the larger financial entities, and, again, this could be another lever, another tool to discourage excessive risktaking. >> thank you. >> gentleman's time expired. i yield to the gentleman from missouri. >> thank you, mr. chairman. madam chairwoman, thank you for being here this morning and just curious. now that we have some non-banks that are banks and lehman brothers absorbed by b of a, have you been in to examine that portion of b of a? been in to examine the bank

itself? been in to examine goldman-sachs and those folks since this all took place? >> we have -- i cannot comment on specific institutions. i will tell you generally what we are doing which is right now we have backup authority only for insured depository institutions. so activities outside of this, like investment banks even though they might be part of a broader holding company structure, we have no authority there. that is exclusive to -- >> goldman-sachs now a bank. is it not? >> no. because the insured depository institution is only a subsidiary of the larger bank holding company structure. this has been a problem for us. and another positive thing we think the house bill does is gives us backup authority over everything in the holding company. right now it's only over the piece that has the deposit insurance which is not the whole thing. >> do you think that there needs to be some ability to regulate and have oversight of these balance sheets liabilities? >> absolutely, yes. >> what are your plans to do that?

>> well, fortunately the accountants have done a lot of it already. we are implementing 156 and 167, requiring these off balance sheet exposures be count and balance sheet. so you have to hold capital and reserves against them. we will be finalizing rules next week to make clear that you need to hold capital in reserves from the regulatory capital that we will treat those as on balance sheet assets. on the derivatives area, the otc derivatives area i think congress needs to act on that, because of the commodity futures modernization act there is little authority. to provide product or market reg lace and we've been bork wek working with the sec to strengthen that and are generally supportive of that. >> you mentioned our banks are in great shape yet this last year or two we've had a record number of bank failures in a short period of time. >> right. i don't know that i said -- >> how many mo failures do you anticipate over the next year or two years? >> i think most banks continue

to be profitable, and, but there are clearly some under disstre and we do not publicly release or famed bank projections but it will go up and we think it will peak next year. >> your comment earlier also with regards to a lot of small banks have be to absorb some of these, they're a part of the ripple effect of some of the big guys here and are certainly under stress at this point. do you have any plans for forbearance for those folks to allow them to be able to withstand this and to outlive some of these problems that they're not going to be closed as a result of some of the actions of some of the big guys and while we had forbearance with the big foiks and helped them we don't have t.a.r.p. funds available for the small guys and forbearance for those folks the ones that will to suffer disproportionately to the other folks. it may not be a big deal to those folks, it will certainly impact a lot of small districts around this country.

>> well, congressman, by statute, if a bank becomes insolvent or can no longer meet liquidity demands it needs to be closed. there's a very well defined prompt corrective action procedure in the statute. we cannot provide open bank assistance unless there's a systemic risk, and then only if the fed and the treasury and the president agree. by statute -- >> with all respect, my question is are you going to have forebearance on the folks because of the unusual circumstance they find themselves in through no fault of their own. they don't have the opportunity like you just said for the t.a.r.p. funds, things like this. is there willingness on your part to look at these situations on a case-by-case situation and say the rest of the bank has been profitable. we're going to deal with this and work with them on this and not close them down as a result of that.

>> we have done that already. we released and were able to get an inner agency agreement on guidelines recent ly to allow banks to do loans. only if you have a credit worthy borrower. we tried to do that already. once the institution no longer becomes viable, there is no flexibility for forebarence. sometimes if it just denies the problem that exists and delays the closing it be end up costing the government more none. which is what happened during the snl days. for the healthier institutions that can make it, we are trying to give them flexibility to work these loans out. >> your time has expired. i now yield five minutes to the gentleman from louisiana. >> thank you very much, there chairman.

i would like to continue questioning concerning community banks. in louisiana many of the banking systems are community-based banks. and they are impacted tremendously by the financial overhaul that we are looking at. ma dad chair, can you provide me with the number of banks that have failed in louisiana. >> i do not know that off the top of my head. i can get that to you this afternoon when i get back to the office. >> probably it's either none or extremely few. >> i would really need to check. i'm sorry. but we'll have about 140 failures. it's difficult to know state-by state. i will get that information back to you very quickly. >> the community bank in louisiana they did not involve

themselves in the subprime mortgage mess. as much many of them were profitable in the past years while some of the big banks have failed. my question to you here is why are we making these small community banks who were successful, who operated within the boundaries of the traditional loan iing criteria, they followed the rules. why are we making them pay for the fault of the big banks through this tremendous overhaul process. >> i think two things. i think you're right. they didn't make these high risk mortgages. they did engage in commercial real estate lending. some of that was not prudent.

some of it was. because of the economy they're going bad now. as the economic problems continue, more and more of the failures are driven by that. but again banks mold hold certain levels of capital against their loans. if they can't immediate liquidity demands. if they can't have enough cash to do that, then they need to be resolved. and that is -- again, there's a well defined procedure in our statute to do that. i think this is right for smaller banks to provide assistance for continued need for troubled asset relief for the smaller institutions. we would be strongly supportive. our statute does not allow us to provide open bank institutions to large or small institutions.

>> it seems to me the small banks are being penalized for the action of the bigger banks. >> i am greatly troubled. i have spoken out about of the long time of the different treatments between large and small. the very large get the t.a.r.p. money get the support and the small ones get closed. going forward i would like to close the big ones, too. if we're going to have a free market system going forward, i think resolution regime needs to be able to work for small and large institutions. right now it can only work for the it work better for smaller institutions. with troubled assets relief, not so much capital to invest and is the problem. providing support to help them get rid of these bad loans, we are very supportive of that. we will work with treasury and congress. >> can you explain to me -- i

agree, the big banking institutions involved in the subprime mortgage loans, we need a mechanism for overseeing their operations. can you explain to me how regulating these smaller community banks, how would that improve our country's financial health when they have been following the traditional methods of loaning them o? how would regulating them improve our federal health? >> first of all, my staff just handed me a note about the figures from louisiana. there are none. we provide the figures from small and large banks because of

deposit insurance. if they get in trouble we always protect insured depositors. insured depositors. with that comes prudential supervision. that's been the case for over 75 years. moving forward my concern from a sup supervisory perspective -- and community banks have been relegated to commercial real estate lending and small business lending. they provide good support for their communities in those two areas. they don't have much diversification. going forward i would like to see if they can change that to help them diversify their sheet.

>> we have three minutes left on the vote. of course, we will return ten minutes after the last vote. i understand there's three votes. madame chair, let me thank you for coming this morning. we will now recess until ten minutes after the last vote. committee in recess. exchange commission. committee chair is about to take his seat. we're continuing to bring you

live conch coverage on c-span 3. >> our second witness is the director of the division of enforcement at the securities and exchange commission. it is committee policies that all witnesses are sworn in. if you would stand and raise your right hand. do you solemnly swear to tell the truth, the whole truth and nothing but the truth. if so, answer the affirmative. >> i do. >> you may be seated. let the record reflect that the witness answered in the affirmative. i am director of the division of enforcement at the securities and exchange commission. i became director on march 29th of this year. thank you for the opportunity to

testify on behalf of bank of america's acquisition of merrill lynch. the committee's invitation asks about the litigation against bank of america. because the enforcement action is ongoing, discussion of certain aspects pose a risk of negatively affecting our case. i'm happy to discuss elements of our publicly filed court papers. the complaint in our case concerns a november 2008 joint proxy statement that bank of america and merrill lynch sent to shareholders soliciting approval. it contains material faults and misleading statements. merrill lynch agreed not to pay yearend performance bonuses to executives prior to the closing of the merger without bank of america's consent.

they already consented to merrill lynch's payment of up to $5 billion and other bonuses to the executives. that is misleading and false. at the time we filed our complaint the commission sent a judgment for the court's consideration under which bank of america agreed to settle on terms that included payment of $33 million and the entry of an injunction prohibiting it from further proxy solicitation violation. as you know the judge declined to improve the settlement. the litigation is thus ongoing. the discussion is available in the litigation to further pursue the facts and to determine whether or not additional claims

are appropriate. in determines how to proceed, we will, as always, be guided by what the facts warrant and the law provides. with regard to the proposed settlement we believe it was reasonable, appropriate and in the public interest and also properly balanced to relevant factors that must be considered when assessing any summit. where a corporate issuer fails to meet statutory obligations, the need is paramount. the proposed penalties which would have been the second largest ever imposed would have sent a clear message that proxy solicitations must include the substance of separate, nonpublic documents. when the failure to do so resulted in emission. it clearly communicated to shareholders and the public that management had failed to keep the company in compliance with security laws and undercut the positi

position. these octoberives would be would have been in a way that did not place a burden on shareholders. although the penalty is a cig amount. it's not likely to have an impact on individual, innocent shareholde shareholders. you have also asked why our complaint did not charge individuals. the securities provision that governed statements are directed to those who solicit proxies or in whose names proxies are solicited. as such bank of america had a legal obligation that we allege it failed to meet to establish that individuals aided and abetted in proxy violation or committed fraud under securities laws it is necessary to prove we

did not believe we could insert it properly under the applicable legal standards. we have followed and will continue to follow any additional evidence developed wherever it leez. they will also continue to vigorously pursue penalties from individuals including corporate executives. in fact, as outlined in my written testimony the commission recently file ad number of enforcement actions against corporate executives charges violations of the federal securities laws and seeking extensive remedies. i look forward to answering your questions.

what does the sec believe bank of america did wrong? what do you think happened here that was wrong? >> mr. chairman, in our complaint we alleged that the proxy material that were sent to shareholders, which was the basis upon which they would decide as to whether or not to vote to approve the merger stated they could not pay bonuses without the consent of the bank of america. there was already an agreement that bank of america would allow him to pay up to $5.8 million in

exactly those kinds of bonuses. the proxy was misleading because it suggested that no consent had been given and no such bonuses would be paid without such consent when in fact the consent had already been given. >> i know you're a serious prosecutor. that's what we need in this day and age. what can we expect going guard in terms of aggressive enforcement against corporate wrongdoers? what can we expect from this point on? we're talking about a lot of money here. >> in the mortgage fraud area alone we have charged ceos, cfos, or other senior executives in new century, countrywide, american home mortgage, brook street securities, we charged hank greenburg and another official at aig. just in the recent past we have

gone vigorously after those individuals who we believe were heading in company that engaged in one form or another of fraud or wrong doing particularly with respect to mortgage and mortgage related products. we're working on streamlining the processes and making ourselves more responsive. but we are reinvigorated and rededicated to that effort. >> but you do feel that you have the tools to be able to do the job that needs to be done? no legislation or anything is required in order to be able to move forward with this aggressive approach that -- you know, the word around here is robust approach. >> robust, yes. well, we have a number of legislative proposals that we have presented, particularly

involving hedge fund registration, the creation of essential clearing party for derivatives transactions. more and better information on exactly the kind of trading and activity that goes on in some of these over the counter and opaque markets. in addition we've sought legislation regarding nationwide service a process and some other things to help make our job easier. we have sbties we're responsible for. credit rating agencies, that's before we get the hedge fund registration and despite those numbers, enforcement staff is 1,100 total. i think that additional funding would also go a long way towards helping us complete our mission. >> all right. thank you very much. thank you for your testimony.

i now yield to the gentleman from california. ranking member. >> thank you, mr. chairman. i know you were not on board on december 18th of last year. but are you familiar with the document dated december 10th, which was delivered to the fed on that date, which is called the fourth quarter '08 walkdown, so-called walkdown document? >> i do not believe i've seen that, congressman. >> mr. chairman i ask you now these be place on the record at this time. it's already in our information. >> without objection. >> december 17th, i believe it was delivered. it would not probably surprise you to know that it actually on page six it lays out those bonuses. mr. bernanke, mr. paulson had

that on those days in december. had you been in the room when this was delivered, in other words, you, the sec, would you have then been aware of the failure of the proxy in time to at least begin action at that point in december? >> well, you would would have to know exactly what was said in the proxy and then compare that to the information that was then available. >> but you knew that? you have compliance people. you are hand and hand and you get paid to make sure that the public is protected throughout the process of a merger. so let me ask you the real question, we're the government oversight committee and it is a double entaund ra because we oversee the government, we're also the government entity that oversees things that are outside of the government. in this case, the federal reserve, the treasury and i understand it, the sec was blocked out of that process and did not die -- did not get in

until january. correct? your agency was not informed about what the fed or the treasury was doing and you were not at these meetings. >> correct. >> from a standpoint of the security exchange commission, the respect that the treasury and fed should show in the future, should you not be at the table if tens of billions of taxpayer dollars are being thrown in to complete a merger? it at the moment that an executive looks at the clause and looks at breaking things up because things have changed or were not disclosed, would that not in your opinion be an absolute mandate for the commission to be in the room from that time forward? >> congressman, if it was a matter that impact on the sec, with respect to shareholder

disclosure, the answer is yes. >> this hypothetical is not much of a hypothetical. had he been in the room on december 17, if you had been in the room when they said that this would not go forward because there was material adverse effect, and on top of that you were aware of misstatements in the proxy -- would you have interjected at least your oversight, your opinion, and your demand for compliance to the law, which it was not? . . adhered to which it wasn't? >> well, i'm not sure i would have commented on whether or not a mac clause was properly invoked or not. >> but we already had testimony that if they invoked the mac, they have to go back to the stockholders. >> right. >> and the federal government came in with $20 billion. and there is some debate about

whether it was forced on b of a whether it was forced on b of a or if b of a demanded it. regardless of which one that is, at that point when there is new money, a mac clause or money in lieu of and on top of that material misinformation in the proxy, shouldn't you be in the room? and more importantly, if you are in the room, wouldn't you have acted to at least advise -- let's assuming you're willing to take on the fed chairman and the secretary of the treasury -- that in fact they're crossing lines at that point that should not be crossed, they're failing to disclose to the very stock holders, the public that you protect? >> well, if those events triggered a disclosure obligation we would certainly communicate that. >> for christ sake, we had five, six hearings. mr. kucinich has dedicated a whole wall of his library to this very question. and you're saying if? let's go back again. they failed to disclose these bonuses. it became -- the fed and the

treasury became aware of that. they also became aware that these losses were mounting and through a negotiation behind closed doors in which you were locked out, they negotiated additional money, now repaid, but additional money to make b of a go through this deal or to encourage or on their demand to have them go through. so all of that occurred with your agency locked out of the room. are you going to tell me today if there was something to be reported, are you going to say like sheila bair that was here earlier, yes, i would like to have been in the room and if i had been in the room or when i was in the room i wish i had said or done more? which is it? are you going to say the s.e.c. should darn well be in the room and be protecting stockholders, or are you going to say if, if, if today? which one is it? >> no, i'm sorry. perhaps i didn't make myself clear. >> i think i did. >> yes, you did, congressman, very clear. my only point was that we would certainly like to be in the room anytime there are discussions

that go on that affect shareholders and the entities and individuals that we regulate and protect. my only point was the more modest one, whether or not discussions about invoking a mac clause necessarily trigger disclosure obligations under the federal securities laws. >> thank you. thank you, mr. chairman, for your indulgence. we made the point that mr. kucinich and i have been wanting to make and look forward to, and we continue to follow up on it. i yield back. >> at this time i yield to the chair of the domestics policy subcommittee, the gentleman from ohio, mr. kucinich. >> at the outset of my friend from california, there is a distinction between what you're discussing and what our subcommittee has been doing. and that is that you're talking about disclosure events that occurred after the shareholder vote. our focus, in this subcommittee, has been about disclosure events before the shareholder vote. now, mr. khuzami, my subcommittee investigation has found that bank of america

relied on the november 12th forecast for fourth quarter 2008 created by merrill lynch, that omitted any forecast of how collateralized debt obligations, subprime mortgage-backed securities, credit default swaps would perform in the quarter. the former merrill cfo admitted to staff at the november 12th forecast was not, in fact, a valid forecast. bank of america knew at the time that the november 12th forecast was of questionable validity, in quotes. bank of america did not do any actual financial analysis to make up for the merrill omissions. instead, bank of america merely pulled out of thin air a number on november 13th, which was recorded on the forecast document as the gut feeling of bank of america's chief accounting officer. the attorneys at bank of america

and at waktle, lippen did not question the information. and they advised bank of america not to make further disclosures to its shareholders in advance of the merger vote. based on the information in the deficient forecast and a gut feeling. the november 12th forecast omission of any projection for losses and the cdos and other liquid investments and the implication of merrill lynch would break even in those investments for the remainder of the quarter was material to the advice attorneys gave bank of america. now when i asked ken lewis about this at our first hearing, he told us he relied on advice of counsel. protecting shareholders is often in the final instance the responsibility of corporate general counsels and theirout side counsel. the subcommittee's investigative findings demand the question where were the lawyers? the glaring omissions and inaccurate financial data in the critical november 12th forecast, so obvious that they should have

alerted the attorneys to the necessity of a reasonable investigation before making a decision on bank of america's legal duties to disclose. the apparent fact they did not mount such an investigation makes the decision not to disclose merrill's losses to shareholders an egregious violation of securities laws. mr. khuzami, in march, gao issued a scathing report on the effect of christopher cox's leadership of the s.e.c. in reducing corporate penalties and formal investigations at exactly the time that the cdos and cdss were proliferating to chairman shapiro's credit, she rescinded a cox policy and appointed you to reinvigorate the enforcement division. i am concerned that one pernicious aspect of the cox legacy may have survived, the unwillingness to pursue as gao wrote, quote, more complicated cases those with industry wide implications in favor of those seen as more routine, unquote. mr. khuzami, this is the test case. this is the case with industry

wide implications where what is at issue is the performance of the attorneys and interpreting the nation's securities laws strictly or permissively. here's the case where the -- where at the s.e.c. shapiro breaks with the s.e.c.'s christopher cox. mr. khuzami, is the s.e.c. widening its investigation to include the issue of bank of america's failure to disclose to its shareholders the mounting losses at merrill lynch, known or knowable by mid-november, 2008, weeks before, weeks before the shareholder vote on the merger? >> congressman, we have been and are looking at all aspects of the activity with respect to the proxy statements including the fourth quarter losses of merrill lynch. >> is that a yes or a no? >> that's a yes. >> if it is a yes, then the work

of this committee has been worthwhile, because you now have a chance to do your job because we have done ours and the information that we have uncovered should facilitate your investigation. i thank the gentleman. i thank the chair. i yield back. >> thank you very much. now i yield to the gentleman from missouri, mr. luetkemeyer. >> thank you, mr. chairman. mr. khuzami, mr. bernanke and paulsen were negotiating with merrill lynch and bank of america and sort of came to an agreement, yet they didn't disclose this, didn't want to put it in writing the transactions that were about to embark on here and about to approve and had been working with. and my understanding is that at once they did that, that would have been a discloseable event that the s.e.c. would have been able to come in to and be a part of and have some oversight over. is this a -- what is your opinion of this transaction, how it all happened and this

unwillingness to put this in writing? >> well, congressman, what the law -- what the securities law require is that if that understanding had solidified to a material contract, then it would have been required to have been disclosed under what is known as form a case. bank of america would have had to make a disclosure if it rose to the level of an enforceable contract. and, you know, that's -- >> but isn't this skirting the law? by them saying we're going to have a little wink and nod agreement here and let's don't put this in writing, let's have a gentlemen's handshake on it. aren't they trying to subvert what is really the necessary part of a transaction, the disclosure to all of the parties involved? >> well, congressman, it wouldn't be appropriate to comment on my views of that in

light of the ongoing nature of the investigation, but certainly there can be circumstances where there is an enforceable contract, even though it is not formally written down in which case it may trigger the disclosure obligations. >> okay. following along then, the process, and if -- do you see something has happened here that you think needs to be changed in existing law? do we need to have something more clarified by the way that we have these transactions take place so that there is more disclosure? >> congressman, we sort of constantly review our disclosure rules and regulations to determine whether or not more disclosure or different disclosure is appropriate that process is ongoing now. the sarbanes oxley act required us to consider more real time or robust disclosure and that's a process that continues. we certainly take the experience

here and determine whether or not we should change our rules and regulations appropriately. >> okay. well, you still haven't said yes there is some things we need to do and they are -- can you fill in the blank there? >> the question whether or not events such as these should require more affirmative disclosure obligation is something that we're considering. so, for example, contracts or discussions short of a formal legally enforceable obligation, should that be disclosed even though all the term aren't finalized or interim results that may not rise to the level of a material impairment of an asset, the current standard, whether or not that should be disclosed. >> are you currently looking at doing that with your rules and regulations or do we need congressional action or what do you think we need to do? >> congressman, that's something we look at on a rig base us and we're looking at now. >> okay. as someone who has gone through this and been in the middle of

it and we're in the process now congressionally to try and do something with this too big to fail situation, what do you see that we're not doing with the legislations proposed that you think would be adventurous or a big aid to you or would be something we could do in the future to mitigate or minimize some of the things going on or have gone on? >> congressman, from an enforcement perspective, which is my perspective -- >> right. >> -- transparency and information is critical. we cannot determine if misconduct is going on in markets if we don't have complete and accurate and standardized information about what is going on. so, for example, registration of hedge funds which would require better reporting, and stronger compliance, and inspection authority would be highly beneficial. >> okay. the transparency and the registration is in the bill now, is that -- does it go far enough, too far? what's your opinion? >> if i might, i'm not sure i understand the full and complete

details of what is in the current version of the bill, so if i could have an opportunity to respond to you, i would appreciate that. but the same is true in the derivatives markets, we would like that kind of information. one case we brought, for example, recently involved insider trading which typically takes place in the equity world, in stocks, was actually going on in the credit default swap market. and yet we don't have nearly the same kind of information in that >> now call on mr. cummins, a very active member of this community. >> i have to tell you, as i listened to my colleague, congressman kucinich, he said our work is done.

it is a settlement submitted to the federal court in new york august 3, 2009. the settlement provided for the bank of america to pay a $33 million in fines for making false and misleading statements and proxy statements to shareholders. bank of america told shareholders that no year and bonuses would be paid to executives. put aside the fact that five. billion dollars was to be paid to executives of a company emerging line, the decision to

settle for $33 million struck many of us as being a perverse outcomes. government assistance, $20 billion of which was from this exact deal, and the securities and exchange commission let them pay a fine. and this is a piece that got me. pay a fine with our money, with taxpayers' dollars, does this strike you as fair to the taxpayer shareholders? does it fit your mission of protecting american investors? to me it is like you find somebody and then take somebody else's money to pay the fine and i'm trying to figure out where is the punishment in that? where's the enforcement in that? i mean if i'm sitting back, i say, oh, boy, i got a great day

here. got the public's money to pay the fine. everything's fine. i don't have to pay a dime. and then one of the things that i -- that i read about the settlement, once i read about it i fired off a letter to your inspector general, david coates, asking him to look into the settlement. i just read in mr. coates' recent semiannual report to congress that he is in the midst of this investigation and i look forward to his conclusions. one of the main reasons i requested the investigation was because i would not be the least bit surprised that in the aftermath of this crisis the fairer the securities laws violations are uncovered. and the violations may have occurred at a firm that has received government assistance. in that case, what is the calculus that is used to determine how to punish a company without penalizing the

involuntary investors in the firm the taxpayers. i want you to understand, i'm concerned about when we catch folks, what is the thinking that goes into the process of how to punish them? because to me, this was not punishment. and i'm glad the judge did respect it. i know you may not be able to talk so much about the case, but i assume you can talk about what goes into your thinking as the number one guy who addresses these issues and the only person that you answer to is miss shapiro, mary shapiro, right? you and straight up to her, is that right? >> that's correct. >> so help me with this. as a lawyer, i'm trying to figure -- i read this, i got so upset because i said it makes absolutely no sense. and i know you got a great answer for me. i'm waiting to hear it. >> well, congressman, let me take each of those. first, with respect to the

amount of the fine, the penalties that we assess have to be proportionate to the actual wrongdoing that occurred. and here the wrongdoing was not the payment of the bonuses, that may be excessive and wrong as a policy matter, as a corporate matter, a number of other matter, but from a pure enforcement point of view, it was wrong to disclose to shareholders that they said that they would not pay bonuses without bank of america's approval when they had already agreed to pay the money. so the wrong was the deprivation of information to the shareholders in deciding how to vote, not the fact that the amount of money that was paid was illegal or improper in and of itself. we look at the wrongdoing which was the -- >> i got that. they had a duty to disclose, right? >> if they -- yes, they have a duty to make sure the statements in the proxy are not misleading. so the number of $5.8 million or

$3.6 billion -- or $5.8 billion, $3.6 billion was ultimately paid, is not, i don't think, the measure of the wrong. the wrong was that they did not tell shareholders who needed all the information they could to decide whether or not to vote. so that was the starting point. then we look at the amount, and we looked at our precedent in the proxy violation area, the largest fine we had imposed was $38 million give or take or so in a case involving frankly more egregious conduct than this because it involved manipulation of stock and obstruction and other things in addition to the proxy violation. next we try and balance the benefit of the -- the benefit of the penalty versus the burden on the shareholders. so we recognize that penalties that we assess may come out of the pockets of share holders who may themselves have been wronged. so we try to balance. we have to still impose the penalties because it sends a strong deterrent message to

other corporations even other issuers that this kind of conduct will not be tolerated. the deterrence message is critical. it tells others they shouldn't do it. it says if you do it, you'll pay a cost. incentivizes them to fix their own problems before we come knocking, and it allows us to leverage our limited resources so the companies voluntarily engage in corrective measures rather than us having to go to each one of them. the lawyers read these things, the corporate executives reed the decisions, implement changes. so there is many good reasons to have the penalty, but we don't want to burden the shareholder more than necessary. that's a balancing that we look at under our penalty guidelines and we come to the best determination that we can. >> my time is up. thank you, mr. chairman. >> the gentleman's time has expired. the gentlewoman from california, miss speiers. >> thank you, mr. chairman. mr. skkhuzami, i am deeply troubled by your description of what took place. you said that the bank misled

the shareholders. the bank didn't mislead the shareholders. it lied to the shareholders. it was a ball-face lie. on a proxy statement, if you make a bald-faced lie, i think that you should have a penalty that is so strong that you won't ever do it again. now the courts seem to believe that $33 million was insufficient. who initiated the settlement? >> congressman, this was a settlement that was -- >> who initiated it? did s.e.c. go to the bank of america and say, let's settle this or did the bank of america come to the s.e.c. and say let's settle this? >> i don't know the answer to that, congressman. typically settlements result from a, you know, both parties

coming together and discussing the possibility. >> someone initiates it. and if you don't have the answer today, i would appreciate if you would make that available to the committee. >> certainly. >> all right. you based your decision on the fact that there was a precedent where $38 million was fined in another setting. now, you know that the s.e.c. historically when you were not a member of the staff was reducing its enforcement actions dramatically. in fact a recent gao suddeny indicated the enforcement actions had been reduced by some 80% and the disgorgement actions by some 60%. presuming those figures are indeed accurate, i may be off a little bit, you're basing a deon impose a fine on a very anemic s.e.c. that was not doing a good job of enforcing the law.

so i guess my real question to you is if something is substantive, if something is significant, if it is a lie, shouldn't the penalty reflect that? and i'm not -- i'm not accepting the fact that somehow because there was another fine issued before that that somehow should be a measurement when we know that the s.e.c. wasn't doing its job, and finally, your argument that somehow you got to balance what happens to the shareholders, if that's the -- if that's the deliberative process you're going to use, then the appropriate fine is never going to be imposed on companies that do, in fact, lie. >> well, as to your latter

point, the harm to shareholders who may have been victimized by the wrongful conduct is only one factor amongst eight or nine that we take into account, one of which is the importance of the deterrence impact of the penalty. so i don't want to mislead you to suggest that we only look at whether or not there is harm to shareholders. we look at a variety of factors, including most importantly the deterrent effect of the fine. >> let me ask you this. based on what the judge has said in this case, if you were to start over again, what would be the fine that you would believe would be appropriate for a proxy statement that had a bald-faced lie in it that shareholders relied on or perspective shareholders relied on in terms of purchasing the stock? >> well, actually, congressman, i think actually the judge's concern in his opinion had to do more with whether or not the fine was too high because he felt that it was falling -- the

burden was falling on shareholders who were victimized by the whereonful conduct, not that it was too low. but reasonable minds can have different opinions on that issue. my belief is the settlement we struck was fair and appropriate. >> so in terms of further negotiations, will there be another settlement offered up to the judge or will this go to trial? >> matter is scheduled for trial in early march and the case is proceeding. >> so there will not be any further settlement on this case? >> i couldn't predict the future as to whether or not the case will settle or not. right now it is proceeding in the discovery phase and is scheduled for a march trial. >> well, i would -- i want to understand that could you then go back and negotiate a smaller -- is what you're saying that the judge wants a smaller fine imposed? i find that absolutely unbelievable. >> no, my point was in the judge's opinion he indicated that he was concerned about the

penalty because he thought that it was -- it was being imposed on shareholders who were victimized by the wrongful conduct. >> it was -- his opinion was not based on the fact that the fine was too low? >> i don't remember it -- whether or not he used exactly those terms. but his point was more that the fine was -- sorry to repeat myself -- but the fine was falling on the shareholders who were victimized by the wrongful conduct. >> or maybe his focus was the fine shouldn't be imposed on the executives who misled the shareholders and maybe have it taken out of their salaries? >> he did say -- he did question why no individuals were charged, you're right, but he didn't suggest that the fine should be paid out of the pockets of individual or particular corporate executives. >> the gentlewoman's time has expired. i yield five minutes to the gentleman from ohio, ranking member on the subcommittee. >> thank you.

thank you, mr. chairman. mr. khuzami, were you here for miss bair's testimony and questioning earlier this morning? >> yes, i was. >> so you're aware of what she said and confirming what mr. lewis had told this committee about the meeting took place in october, ten days after t.a.r.p. had passed where the nine biggest financial institution were brought to this town including bank of america, told they were now going to have their bank partially nationalized and had to accept t.a.r.p. money and fine a form. you heard that all that testimony that she gave? >> yes. >> and i guess my point is, my question is, well, let me go back to this. and she -- her testimony to this committee a few hour ago was that that action by the fed, by mr. paulsen, by mr. -- treasury secretary paulsen and federal reserve chairman bernanke,

quote, took her breath away, when she saw, you know, what took place at that meeting. so now as we move forward, it seems to me that, you know, i guess your testimony, i apologize for not being here, i was at another commitment, you talked about shareholders being misled. but it seems to me that this unbelievable involvement by the government, the e-mail we have that has been part of the record in earlier hearings from mr. lacquer, federal reserve bank of richmond, we are talked about the fact they didn't want to discloseable event so mr. paulsen, mr. bernanke were not willing to put anything in writing about the willingness to help bank of america with additional t.a.r.p. dollars. i mean it seems to me that someone will look at this and say, bank of america, what was the government's culpability here in running this show and pushing for this deal, particularly mr. paulsen and mr.

bernanke? i mean, i assume you at the s.e.c. are looking at -- that has to -- in my mind factor into we look at all the relevant results, and all the facts. i guess that that would be my response. >> with the bank and management, they were not necessarily completely liable because they were acting on government directions. to the tarp money whether or not that had become a material

contracts that had to be disclosed under the rules and regulations. so that is certainly an issue. -- when did you guys first become aware of what was taking place here, the mounting losses at merrill lynch? when did you first become aware of that? >> unfortunately i wasn't there until march so i can't -- i don't know the answer to that question. >> why do you think, when we have the e-mail saying we don't want to discloseable event, why do you think there was a reluctance by the federal reserve to not have information be made known to the s.e.c.? >> i probably won't be appropriate for me to speculate about that. >> okay. mr. chairman, i yield back. >> thank you very much. i now yield to the gentlewoman from california, congresswoman

watson. >> thank you, mr. chairman. and thank you for this follow-up hearing. we have had several in the past and after listening to the testimony from the bank of america, ceo kenneth lewis, the federal reserve chairman ben bernanke, and former treasury secretary hank paulson, and officials at the bank of america, there is still strong questions and i know the intent of this committee through its chair is to get some of the questions answered. so we will know really what took place. and we want to hear from you the role of the government and what was played in the negotiations, the quality of the bank of america's due diligence process, and the motivation behind b of a's attempt to claim a material adverse change, or the mac, and

the adequacy of their disclosure to shareholders. can you package all that in and clarify it for us? i think this is, what, the third or the fourth hearing, mr. chairman? >> fifth. >> fifth. okay. let us hear how you would describe the roles that each one of these sectors play. >> well, congressman, as involving some or all of the matters that are currently under investigation, i have to be careful about my comments. with respect to the proxy that was sent out in connection with the merger, as we have charged in our complaints, we don't believe that the -- we believe the disclosure was misleading because bank of america did not disclose it. they already had an agreement to pay bonuses when they told shareholders that merrill lynch would not be paying such bonuses

without their consent but the consent had already been given. that's the case we charged. and that is the case that is preceding. >> let me stop you and i want to query these bonuses. ethically i don't see how the bonuses could even be in contention when we are bailing out too big to fail institutions with taxpayers' monies to try to capitalize these big institutions so they can save people's homes, et cetera, et cetera. is a bonus appropriate under crisis conditions that exist? i just want you to talk about bonuses and then continue. >> well, congressman, again, from an enforcement perspective, my focus is on what the law requires and whether or not the law has been violated.

>> well, do bonuses fall under that provision in the law? >> generally not. >> okay. >> except in this situation where they made a representation about what they were going to do about bonuses and that representation in our view was false. >> that was prior to the collapse, wasn't it? >> that was -- >> when people signed their contracts, as i understand, they had bonuses attached in there. but the whole condition has changed now where they have to comply with the provisions that were in the original agreement. >> well that's correct. the bonuses that were paid in this case were paid frankly shortly after the merger was approved. that's correct. >> would you continue on, please? >> well, probably not much more -- i don't mean to disappoint you, but probably not much more i would say on that topic. whether or not, you know,

bonuses are appropriate and the appropriate level and the balancing between incentivizing talents and retaining talent versus what is an appropriate compensation is probably something that is above my pay grade. >> i've heard that, say, to retain talent, that really goes beyond, you know -- i feel it is so absurd. i don't think, at this point, that you couldn't find a thousand -- or you could find a thousand people out there with tremendous talent. if that talent goes, there are people lined up. we are really being hit hard. i'm talking about my district now, which is los angeles, culver city, hollywood, people have lost their jobs in droves, lost their investments. talent is available, believe me. and so it is a phony, phony excuse. but in putting this all together, i feel there were tremendous failures on all

sides. would you agree to that? >> i think there is a lot of -- there is a lot of blame to go around. >> yeah. and my colleague, miss speier, said it was just downright lies that were given, and possibly it was done so that government could support b of a and give them more support in the merger. i'm really thoroughly disappointed that the people who were in place, particularly at the s.e.c. looked the other way. thank you. i yield back, mr. chairman. >> thank you very much. the gentlewoman's time expired. i yield five minutes to the gentleman from missouri, congressman clay. >> thank you very much, mr. chairman. and thank you, mr. khuzami, for being here. let me -- just a couple of questions. at what point should action have been taken to curb some of the activities of the big banks'

involvement in the securities market. there had to be some indication to the s.e.c. that some investment houses were stretched too thin without the proper reserves that come at a risk in this market. did red flags or alarms ever go off? what did you know and when did you know it? >> well, congressman, i didn't arrive at the s.e.c. until march of this year. so that's probably not the right person to ask that question of. >> how about the people that you work with now that have been there for years, did red flags go off for them? >> well, you know there was certainly systemic risks and a bubble that had occurred in the housing market and elsewhere that, you know, that resulted in the collapse and the excessive leverage and risk taking that we

saw. you know, it is -- what the commission saw at various points along the way, it is difficult for me to answer that question. we didn't have regulatory authority over certain areas, so it might be better if i have an opportunity to respond to you after today's hearing so i can give you a more full summary. >> i would love to hear from your colleagues in writing just what -- what alarms went off or whether the relationship was too cozy with the big banks, that they never wanted to cite them for risky practices. let me ask you in particular why did bank of america get only a slap on the hand when it was cited in 2006 for improperly

marketing auction rate security? why were they allowed to continue these practices, abusing false and misleading information in selling these instruments? in hindsight, do you think that b of a was given too much leeway? >> congressman, i would have to refamiliarize myself with that case. i'm aware generally of the auction rate securities matters, but as i sit here, not with the particulars of whatever action may have been brought in 2006. i would be happy to respond. >> would you respond to us and to the committee in writing on that issue also? >> certainly. >> okay. mr. chairman, i have no further questions. i yield back. >> thank you very much. before we close out, let me just say, mr. khuzami, i'm troubled by the question that the gentleman from maryland raised, mr. cummings.

you know, first in terms of -- it seemed to me that individual executives, the ones who sign off on the proxy filings should be the ones that are responsible so therefore why wouldn't they be the ones that you go after, you know, you fine them and they -- from the personal standpoint, because, you know, like you said, you know, taking out money, and then paying the fine, and i'm not sure that -- we get to where we need to go with that. the other thing that the general feeling is in terms of the community at large, they feel that the reason the judge sent it back to you is that you were not aggressive enough, that you did not pursue it in a fashion that he felt that it should have been. and, of course, that's the general feeling among people,

you know, if they say in the street as to what's going on. now i don't know whether that's the case or not, but i do believe that you really need to look at that in terms of because when i listen to the fact that they're paying our money, you know, that doesn't encourage, you know, people to do what's right. >> well, a couple of responses. first with respect to the payment of the fine, obviously any entity that receives t.a.r.p. funding or other money still has to pay that full amount back with interest. so whether or not a fine was paid with government money which can be fundable in an institution, but they had to pay back all the money they got from the government with interest, let me make that point. second of all, you're right, the judge expressed concern about not charging individuals.

we have shown a very aggressive posture of charging individuals and if you look historically at our cases, the overwhelming number of cases result in charges against individuals and not corporations alone. and i just mentioned some earlier today. but the particular issue in the proxy area is that the proxy laws impose the obligation on the -- the entity whose proxy is being solicited or on whose behalf it is being solicited. and those are the corporations. to charge individuals, you need a higher level of proof. you need to show what is called sienter, knowledge or reckless conduct, meaning a significant and substantial deviation from normal standards of care. and it is that difference in the legal standard that makes a difference in how we can proceed. there is a higher burden of proof with respect to the individuals and our determination based on the

record we had is that, you know, we did not have the basis to charge those individuals. now as we get into the discovery process, we may get additional information and we'll take that into account and in making our decision. but i don't want to leave the impression that we do not aggressively pursue individuals. we recognize the deterrent impact of charging individuals as much as corporate penalties deter people. nothing substitutes for charging individuals. and we do that across the board in many, many, many of our cases. >> let me thank you very much for your testimony. we appreciate that you shared with us. this is the end of many hearings we have had, and we hope that we will now be able to move and get the kind of confidence people really neat to turn this situation we find ourselves in around. i want to thank you again.

this hearing is now adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009]

>> the senate was in session today. joining us is jennifer with cq. the senate has been working this weekend. what happened? >> they came and this morning about a block and had a vote at 9:30 to limit debate on the omnibus appropriations bill that will extend funding for six different bills that were not enacted during the regular appropriations cycle, and the temporary bill that has until now been funding the government expires december 18. so we have a short window to get this finished so the government can go on at elevated levels, not the same levels as the last couple of years. >> can you tell us what the vote was held open longer than usual? >> this morning, a lot of the problems did not have to do with

it being controversial. it was more that the senators just were not there. senator lieberman is an orthodox jew and he often on saturday votes has to walk from his home in georgetown. he walked over and arrive at -- almost an hour had gone by. he was wearing an orange scarf and it was exciting when he cast the vote and people could leave and cash their flight, because senator macassarñr goal, she was waiting on the sidelines to see if she would need to change her vote to get the votes required to move forward on this bill. but leadership did not got to make change her vote. and senator byrd came in late, as well. so there was some hold up. >> so what was the outcome, and

what does it mean for the bill? >> 3 republicans, three democratsñi. this will move it forward. it is almost definitely going to be passed tomorrow at 2:00 p.m.. that is when the vote will start. that will be an adoption of the conference report, the on the bus, and hopefully people will have their fingers crossed that the president will review this legislation and have another temporary fundingñi because they are trying to focus energy on health care right now. >> is there any progress made on the legislation? >> health care is on hold right now while the budget reduce -- reduce -- reviews the new version where they are trying to

find language to replace the public option. so it needs to turn in some sort of score that tells us how much this will cost. there are not a whole lot of details on what the new plan entails, so they are just waiting. democrats are in a holding pattern, saying that in the next few days we will get the cbo reportçó back and they will deat in. republicans have been pushing, voting on amendments, and democrats want to focus and use this window where they cannot çóreally move forward to their advantage to pass the spending bill vote. ñrthere is a drug importation amendment that caught a lot of attention. it is a democrat amendment, but a lot of republicans supported, including john mccain, who offered an amendment to go along with that amendment.

today, the leadership said they wanted to vote on a lautenberg amendment. and the drug amendment would allow americans to import and buy drugs from other countries, and a lot of people in the pharmaceutical industry have said that this will be a risky thing and it could be dangerous for americans to have drugs that might not be regulated the same. it will be a cost savings to americans, and that is the major amendment right now. >> what is on the agenda? >> tomorrow, they hope to continue funding the government. >> as always, live coverage of

the u.s. senate on c-span2. timothy geithner on thursday said the government had to be careful about declaring victory too soon in the financial crisis. he also said the obama administration's decision to extend tarp until october 2010 was needed to successfully exit the program. the panel was created by the same law that established the fund in 2008. also questioned about the management. >> members of the committee, thank you for the opportunity to testify. we faced one of the deepest contractions, and we have now begun to turn this around. confidence in the stability of

the system and the security of savings has improved dramatically, credit is flowing again, the economy is growing, barring costs, housing prices have stopped falling in many parts of the country, and job losses have slowed down. however, this is a tough economy, and there are significant challenges. unemployment is high, commercial real estate losses weigh heavily on banks, impairing the ability to extend loans, credit is tight for small businesses. today, i want to outline our strategy to address changes going forward and how we will ultimately exit tarp. there are four elements. first we will terminate and wind down the programs at the peak of the crisis that were necessary.

in september, we shut down the program. we have shut down the program in the majority of investments made. second, we will limit new commitments in 2010 to three areas. housing, small banks, and credit markets for consumers and small businesses. we will continue to mitigate foreclosures for responsible homeowners as we take the steps necessary to continue to stabilize the housing market. we recently launched initiatives to provide capital and increase lending, and we are reserving additional funds for additional efforts to facilitate landing. finally, we will continue to support the markets necessary for credit flow to consumers and small businesses. third, beyond these limited new commitments, we will not use

remaining part funds unless necessary to respond with immediate and substantial threat to our economy stemming from financial stability. immediate financial threat to our economy from financial stability. a determinationly only make after consult wgs the president and chairman of the federal reserve board and submitting written notification to congress. fourth we will continue to reduce our financial stake in banks and manage our down other investments we will keep the government out of the business decisions of these companies and we will exit from our investments as soon as is practical and return ownership to private hands. this strategy requires a limited temporary extension of the authority provided by the congress under the emergency economic stabilization act. it would be irresponsible to do otherwise. the expected cost of the t.a.r.p. have fallen dramatically. while we're extending the program we do not expect at this point to deploy more than 550 billion in total. we also expect up to $175 billion in repayments from

banks by the end of next year. substantial additional payments thereafter and as a result we know expect the ultimate cost of t.a.r.p. will be at least $200 billion less than was projected as recently as the august mid session review of the president's budget. we now expect to make not lose but to make money on the $245 billion of investments in bank. we estimate the t.a.r.p. programs for banks will yield a positive return of over $19 billion. indeed banks have already repaid more than $116 billion in investments the stress tests of the financial institutions helped accelerate repayments by providing markets with the transparency and confidence necessary for banks to be able to raise capital from private sources. these programs as you know have generated significant income roughly 15 billion which has been used already to help pay down our nation's fiscal obligations. of course we do not expect all t.a.r.p. investments to generate positive returns unlikely we will be repaid for all over investments in

aig. gm and chrysler even there the outlook too is improved and you'll see newest it mass in the report we're issuing today. we'll continue to manage t.a.r.p. in transparent and accountable manner. erier this morning treasury published or maybe sometime today not sure it is out yet. published first annual financial statements for this program. these statements discuss in great detail the operations and impact and expected cost of the program. gao provided unqualified opinion of those statements included no material weaknesses in internal controls and this is a notable achievement for the men and women who have helped put in place this very important program in a short period of time. let me just end by emphasizing as you did the importance we continue to work to reinforce the process of repair in our financial system. it is absolutely essential to make sure we establish a strong recovery that have put americans back to work and it is very important because of the consequences kre -- kre yad by the actions necessary to put out this financial fire that

congress move to adapt a strong and comprehensive package of financial reforms and i've -- and i'm encouraged by the progress we've seen to. a lot of channels ahead to getting a strong package in place. i know you played a helpful role to bring strong insight to those choices and i'm sure you'll continue to work with us to make sure we have a strong package in place as quickly as possible. thank you. >> thank you mr. secretary. let's start with your statement. you say as part of the extension that you want to focus any new spending on housing small banks and supporting credit to consumers. small businesses. let me focus on the small business initiative i understand the importance of the initiative this is the one part of t.a.r.p. that may have a direct effect on unemployment or maybe the most easily traced effect on unemployment and that is if small businesses can borrow money then they'll be able

to stay in business. they'll be able to keep their employees or hire more employees. so i understand the importance of this and applaud that approach. but my concern is that last spring treasury launched the program to stimulate small business lending. i think it was not a success. later treasury announced a program to purchase up to 15 billion dollars in securities backed by sba loans and i believe it's the case that so far treasury has not spent a single dollar under that program and two months ago treasury announced a third program to support small business lending by providing low cost capital to community banks and as i understand it so far nothing has happened. so it's not news to anyone that small business lending is important. small businesses are closing every day. but treasury has now announced three plans and surely has not gotten the job done.

what's going to be different now mr. secretary? >> let me start by saying the economy would not be growing today without t.a.r.p.. unemployment would be dramatically higher today without the action we took to help save lives of financial system and open up the markets so broken. let me walk through the specific programs you pointed out. to get small business lending going again. small business you know they depend on banks overwhelmingly for credit and small banks provide about half the credit small businesses get from the banking system as a whole. small banks are among the most affected still by the challenges facing the economy as a whole. many of them are going to need more capital. those that need more capital are cutting back on lending and commitments and as you said that's affecting small businesses in. our judgment to address this requires a set of different approaches. we've actually been quite successful in bringingly quitty back to the securities markets important for small business lendsing the program has been very helpful. that's one reason why sba loans have increase sod much. the sba program providing higher guarantees lower fees

is also helping although those programs are small in total mag my tuesday b banks have been very reluctant to come, and the reason what is being referred to has not been launched is that the institution has been reluctant to come, and they will be subject to the risk of conditions in the future that will make it harder to run businesses. so we will have to find a way to mitigate the stigma and the fear of changes that will apply to them. that is something we cannot do on our own. that is going to require help from congress to deal with this concern. you're right to say that unless banks have access to capital, this will be a harder problem to solve.

>> i thought you started by saying you were going to wind down the capital purchase program, and then you were just talking about putting more capital in banks? i am confused. . were now confident we can wind down and put out our misery, but as he said the president announced a program for capital and small community banks a few months ago. that is important we are going to preserve that and we are exploring ways to build on that but for it to work, chairman, we need to make sure we need to make it more comfortable for banks to be willing to come.

>> let me if i can pinpoint, how >> let me if i can pinpoint, how can put hundreds of billions of dollars into the hands of very large financial institutions and what was effectively a matter of days, at 14 months in t.a.r.p. we are still talking about trying to figure out how to put much, much smaller amounts of money into very small financial institutions. >> it is not complicated but let's go back a little bit. we actually did not give the large banks a choice because it was necessary for the country that they have capital put in right away. justice second, let me say, but small banks, and we meet the capital quite attractively priced as many of you have pointed out, but they are reluctant to come. they don't want to come because they think it is a sign of weakness and not drink. even though capital is the best way they are reluctant. >> let me just--

>> as you said we have tried quite creatively many different ways to design these things to make them more attractive but we can't force them to come. >> so your statement here today is the reason why we have a problem with small business lending is you are making the money available to small banks and they just won't come? >> that is one of the problems and it is absolutely a central problem in this area. the basic credit crunch uc across many small businesses across the country today is partly as a result of banks pulling back a don't have capital to solve that. it is not the only thing you can do but to solve that-- >> thank you mr. secretary. mr. atkins. >> thank you madam chairwoman. i salute you very much for producing an audit of the t.a.r.p. program. i think that is great and that is something we have been obviously expecting and that is super so i look forward to seeing that later today. again. i disagree with you as far as how important t.a.r.p.

was for the situation today, basically this sine qua non of where we are with their meager recovery and anyway, and approbation of the program. but i want to focus on what all this talk from the white house and elsewhere, about job creation coming out of t.a.r.p. and things like this. what troubles me is what sort of parameters are you going to put a brown this. when you are talking about injecting money into small banks that are not really trouble but you are doing it for some of the reason i think you are very much drifting away from the intent of congress in passing fsob-- eesa i wonder how you will analyze this. >> t.a.r.p. was essentially about credit, recognizing that there is no roof without credit. the banking system is critical to the provision of credit.

what we have designed for small banks, for community banks, for small business lending in securitization markets opening up, housing more stable are central to the basic objections of t.a.r.p. and fully consistent with the authority congress provided us. >> i guess one thing and want to disagree with is eesa was enacted in a crisis atmosphere where people were afraid that banks are going to go under. were not afraid community banks are going to go under and obviously, i mean maybe we are, it depends on what is going to to happen in the future which is why i assumed you were keeping t.a.r.p. alive, to react, but your rationale of injecting money into it in order to spur lending is not a rationale of keeping them from going under. >> i wouldn't say it quite that way. again, capital is critical for lending. without capital, lending will

decline. lending is a viable business that has good demand for products and will not-- its oxygen will be deprived and it will risk failure and have to come back on-- >> you are talking about business, the lindy? you are talking about the bank. >> again banks are critical. they are not the only thing but they are critical to that. if you are a small business and you are unlucky in your choice of banking eurobank got exposed to a bunch of commercial real estate exposure that bank is fun to cut back in your credit and you'll have to cut back on payroll employment and it takes time to find another bank particularly in a system so traumatized by the crisis. >> part of that too is examiners and other people who through their scrutiny and this is a natural human reaction to over react to a crisis and questions may be need to be asked but through that sort of process it then causes banks to recoil of bed and not be so ready to land.

>> you are right about that. as commissioner neiman no's this is an important balance to get right. what happens in recessions after financial bums is banks may pull back more than is rational and supervisors may tend overreact so we have, these are independent of the treasury, but we have been encouraging supervisors to try to provide some more balance and the guidance to give to examiners across the country so they don't overdo it. they issued guidance to blanding ululation standards a few weeks ago. i think that is very helpful. they are looking at additional steps but you are right to emphasize the importance of trying to lean against overreaction by supervisors. >> so i want to go back-- gibbon netley you have all decided that it deserves some more funds. >> g is part of the institution but to the stress test early in the spring. s4 manning we identify

significant capital needs and for all those institutions we said if you do not raise capital from the private markets, if you are unable to be put to you because it is important to the stability of the system so the only thing committed to do back then and i think actually the ultimate will be lower than we anticipated back in june. >> apparently you have decided to inject more capital. >> no, somewhat less than the estimated in june. >> but the more recent round, where they have come back. >> no, in june when we released the estimates and the stress test, the estimated capital needs for the institutions we gave them a curative time to go out and raise capital from the private markets. overwhelmingly banks were able to do that. you see private investors willing to come in and increase their stakes in banks across the country now allowing the taxpayer to get out of those. it was never going to be

possible for g. all we are doing is committing to put the capital and recommitted at probably a slightly lower level than back in june. >> thank you. >> thank you. mr. silver's. >> mr. secretary, when t.a.r.p., wendy eesa was an active and t.a.r.p. began, my read of the statute was the purpose of t.a.r.p. was not to rescue a particular institution, even particular firms. it was to preserve the system. and, for the purpose in the statute was i think pretty clear about this. not because the system was a thing of beauty or because a particular concern for again those businesses but because the role of the financial system played in providing the resources necessary for the real economy to function.

in that regard, and stop me if i have got it wrong, in that regard it seems to me that you appear to be identifying, you when the president appeared to be identifying that aspects of the system continue not to be working adequately in continue to be needing more support. am i reading your words that you correctly? >> exactly. there has been a dramatic improvement in the overall stability in functioning of the u.s. financial system but parts of the system are still very damaged and broken. i will mention just three. housing markets are still overwhelmingly dependent on the temporary programs put in place by the government. commercial real estate finance is still very difficult as you would expect with an economy coming through such a large basic adjustment, and there's a significant risk of credit

crunch across small business in part because of the small things. they are still somewhat impose to the risk is that. i don't know anybody who could look assistant to the and say that they are not significantly impaired and did not a surprise given the scope of the damage caused by the crisis. this year there is on the economic case to use the authority provided and perfectly consistent with the objectives of the authority to continue work, but that is not the only reason we are extending dr. silvers. we still need to keep in reserve some the availability to respond if we are to face again a serious escalation of systemic concern. ag would be deeply irresponsible and prudent at this stage, only a year and to this recovery process, only three months after we first appeared, to stand back and walk away from the challenges ahead. that would leave the taxpayer at much greater risk of future losses. ultimate casa the program would go up, not down.

it would be prudent to put in place of limited qualified extension. >> now i may pick up on your expansion with the chair, there are under the t.a.r.p. 2 types of programs. you have programs where capital has been provided to firms who were then t.a.r.p. recipients and you have programs where t.a.r.p. fund said and injected into markets, in ways such as the talf in ways the various private parties that may touch those funds are not actually tower percipience. is that there characterization of one way of understanding the to come into range of programs you have? >> programs for individual institutions, t.a.r.p. percipience although they are because of the importance for the system. programs about market wide support to the capital markets securities markets are designed differently.

>> in light of the concern that you stated that small banks have been receiving t.a.r.p. money which i find between the issue of reputational risk which i find that understandable concern, i'm not sure how congressional action could change that. in light of that, and in light of your description of the small business problem as a market problem, not a firm, not a particular firm that is weak here that is the issue. in light of that, are you considering taking the market support approach? maina take the market support approach rather than the firm support approach? >> you have to work on both channels of credit. you have the bang channel and you have the capital markets and you need both. and fatigue make the capital market channel work better to increase for banks to make pull the banks out of their uncertainty, but these are small

business credit. they are very small loans. the capital markets were never going to provide, in the past would not be significant providers that you have to work on both. >> my time is running out so i want to be clear what i'm saying to you. i'm not saying to you yuca nevitt public markets solution here. i am suggesting that if you want to move this money to small business quickly, that both from the perspective of getting the banks involved without making them into t.a.r.p. recipients and from the perspective of tapping small business-- banking expertise that you should be looking at structures that move money, and thirdly to avoid the problem that has been present and t.a.r.p. from day one of handing money to banks and not knowing what use is made of it, that the right way to do this is to do with banks as a manager of the process, rather than as an

intermediary. >> i generally agree with you. the problems out there generally lie in that realm. they still need to have risk on the table, because we do not think the government -- we could not do it through tarp. >> thank you. >> i would like to come back to the foreclosure mitigation program. over the last few weeks, there has been a lot of media focus on the 25% of those individuals that were in trial mods, and are not current on the trial mods. i would like to focus on the 75% of those borrowers that are making payments in a timely fashion a. -- fashion. january 1 will not only bring in a new year, but will be a fateful day for almost 400,000 homeowners whose trial

modification. expires -- trial modification period expires. however, less than half of these homeowners have submitted all of the required documentation. by some estimates, and i have talked to some of the largest servicer is directly -- half of this group that has committed all of their documents have yet to have their documentation decision or validated. validated by the service are. now given these numbers that i have stated it looks as if possibly over 75% of the homeowners who have demonstrated a willingness and ability to make timely payments on their trial mods may be eliminated from the program and once again facing foreclosure. now you have recognized the urgency of the situation by implementing swat teams at the largest institutions among other efforts to engage homeowners and

servicers to facilitate both the submission of documents by borrowers and the validation of that documentation by the servicers. so, fundamentally my question is, does this expected loan conversion rate implied that the original documentation standards are not set correctly and are too onerous or do you think that the standards are correct and liberalization what impact the integrity of the program? >> said we are working on this and on many fronts a we have taken a careful look at whether we can streamline the document requirements. we try to mobilize resources to make sure services are processing these and converting to permanent as quickly as possible. they can help to a better job of helping people benefit from current modification and i think we are going to make substantial progress in the area although there are lots of challenges. i just want to emphasize the what we have achieved so far.

almost three-quarters of a million americans now are benefiting from modification programs that reduce their monthly payments dramatically. on average $550 a month, $6,000 a year. that is a meaningful amount of support for income for some of the people hurt most by this crisis. we want those mons to be permanent and banks will not get a dollar from the treasury unless they convert to permanent months and we are using a tremendous amount of persuasion to try to make sure we get those conversion rates up to a reasonable level. >> but, and i agree with you those reductions are significant but if at the end of the year, this first group cannot convert to permanent modifications they will lose those monthly payments and now be faced with the same situation of being offered a maud buy the servers are which will likely increase those

payments for foreclosure action to proceeding so are you considering extending again, the opportunity for the trial modifications so that our worst who have not had documentation validated-- >> we are going to work hard to avoid the outcome you love this guy. we will make sure it reaches this many homeowners as possible and benefitting in real economic terms from this program and we are not there yet. but i think we are going to make substantial progress. >> okay. we look forward to some of your performance numbers being issued today. >> one of the virtues of the numbers we lay out is you can see performance servicer by servicer and everybody can look and see how many eligible homeowners are they reteaching and a number of these need to get their numbers up. they need to do a better job and they have the ability to do that. >> there certainly to the other

big issues around both negative equity and unemployment. you mention unemployment in your opening remarks. i appreciate the response from mr. ellison and as a follow-up to our last testimony to reduce some of the proposals that i had been promoting for quite some time with regard to emergency mortgage assistance programs and i look forward and thank you all for agreeing to meet separately on those issues. >> were right, those are two areas where there's a lot of ideas out there and ways we can help modify this program and you are also right to emphasize this program was not designed and this is a conscious choice we made not to start with the principal reduction and we made that choice because we thought it would be dramatically more expensive for the american taxpayer, harder to justify, create much greater risk of an fairness and our program was not designed to do that. our program is doing what it is

designed to do which is reaching many, many people across this country with substantial reductions in monthly payments and we are always looking at ways to try to help make sure this program reaches people who can reasonably reach. >> thank you. >> if i could mr. secretary i will do is pick right up on that point and that is the deliberate decision not to deal with negative equity because it has created an irony against the backdrop of the sub-prime mortgage crisis that started with zero down loans and 100% financing. we now are creating modified loans supported by the united states government that have 110% loan-to-value ratios, 20% loan-to-value ratios, 125% loan-to-value ratios. we have no experience with long-term payment of deeply under water mortgages, but the little bit of data that we do have available, about even

modestly under water mortgages, suggests that over the long term, second only to the question of affordability of the payment, long term, being under water on mortgage means that people are unlikely to continue to make their mortgage payments, so i want to push back on this little bit. are we creating a program in which we are talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term but just kick the can on down the road so that we will be looking at an economy with elevated mortgage foreclosures not just for a year or two but for many years? how do you deal with that problem mr. secretary? >> it reduces the basic overall obligation of mortgages. it does not increase and we a

people in these programs with very high ltv's able to qualify and it does bring down the overall burden. >> i'm sorry, are you saying you are doing principle reductions? >> no but the change in payment structure does reduce the basic value of the obligation in the mortgage but i think it is more helpful for me to say it this way. i think your right to point out the huge problem, the amount of negative equity presents for us, the question is what to do about it because that is a hard thing. what is driving this now principally, the whole foreclosure rate across the country is driven by what has happened with unemployment and what is happening to income of americans, and i think our judgment is the best things we can do now to help mitigate that risk is to help get the economy growing again, bring unemployment down has the can, put people back to work and make sure we are providing overall

stability to the housing market and we have seen actually better results on prices and expectations about future prices than many of us expected. we brought it down to levels are houses are much more affordable now and housing demand is actually picking up a bit. the question is not what he described as a problem. you have been eloquent and persuasive but the question is in addition to those actions we should embark now on the program where we are what would be dramatic additional cost to the taxpayer, helping relieve people of that obligation, and the problem in doing it apart from its expense is the basic sense of fairness and what did this to incentives in the future. now, but you are asking the right question. the question is do we have a solution that is there? >> i really would like to push back. you talk about relieving the homeowner. let's keep in mind this is about whether not the investor in these mortgages, some of them

making substantial profits during the glory days, should be required to take the losses when the mortgages that the investor then turned out not to be worth nearly so much as they had promised. >> through what means? >> one means would be to bankruptcy which doesn't cause the american taxpayer any money. >> that would be one means. >> another i am deeply concerned about is the extent to which the current programs the treasury advances sends a signal to investors and mortgages in the signal is, sit on the sidelines. you know, there's no reason to come to the table and negotiate these mortgages. you can wait for the u.s. treasury to offer a bribe to get you to the table to do what should it been in your interest to begin with. we all understand that foreclosures don't just destroy the value for homeowners. they destroy the value for investors themselves yet investors are hanging back. they are not engaging in rational write-downs that would

keep a good stream of payments coming from these businesses. instead, holding out for larger streams of payments and holding out for help from your treasury department. >> i don't think i quite agree with that. you are right it is one option in you and eloquent advocate of those reforms and as you know the president did for posen was supportive of, but congress was unwilling to act, in part because of concerns it would make it harder for capital to come back into the banking system and help support improvement in housing markets with broader returns. that is a judgment congress considered and shows a different strategy. i don't agree that the programs in place are working against this process to repair that will support. i think they are actually helping in actually we are seeing quite a lot of new interest and willingness and investors to renegotiate a write-down. we are seeing much more that than we saw before and that is encouraging.

>> you know, i have to say mr. secretary i lived through a big housing boom and bust down in southwest during the late 1980's. in fact i lost money on the house we had to sell during the bus. but the government didn't step in and help in the same way. the lenders had to eat the losses for bad investments that they got involved in and so did the homeowners. this was not a question of the taxpayer support there. >> this crisis as you know and i think you understand is nothing like that crisis. is much more dramatic in scale and impact, much broader effects on people across the country and i don't think there's anything from that basic in the past it would been helpful. you could take the view that it was a mistake to try to give the americans the ability to see a substantial reduction in their monthly payments and therefore improve the odds to get to keep their house. i don't agree with that and i don't think you do either.

this is actually program that is doing quite well in delivering a meaningful improvement in the basic financial economic position. as i said almost three-quarters of a million americans now and it has been part of what has been a quite successful effort to bring some modicum of stability to the housing crisis much earlier than many people with thought. >> thank you mr. secretary. i apologize to my co-panelists for running over by two minutes and i'm going to skip my next round of questions. mr. atkins. >> thank you very much, and i actually think that is a good rationale there and with respect to negative at whti i think it would be a mistake to start dumping money into that. i don't think there's enough money around, once you start getting into the issues of fairness and everything. i agree with that. wanted to turn, as far as t.a.r.p. goes to the access that we were talking about earlier

that you alluded to. the reason capital option, i guess he can call that the success of some sort, i was wondering how you foresee this going forward in the future. are you still planning on engaging negotiating price by backs before establishing an option? what is the current view of treasury as to how you are going to unwind this? >> i think it is possible that we are going to still see a mix going forward in part because many small banks will not be realistic approach but in the auction is a good approach and that gives a way to let the market determine the best price. we think that will help maximize return to the taxpayer. in close to the ultimate test of what these things are worth is

established by what people are willing to pay for them. i think it is an approach that will give better alternatives in this case, but it will not be possible for all institutions. >> as we go forward and talk about putting money in all sorts of community banks and others, what is the approach -- what is actually the decision making process of how the money goes andin, and what is received by e treasury? >> at the beginning, and i was not secretary of the treasury then, it was designed to make capital available on the terms of all institutions. some of the capital provided to the largest institutions was made available to other institutions. my predecessor and the supervisors put in place in the

latter process for joining viability to try to screen institutions. we're going to use that process going forward. we are changing strategy in some important ways. we do not believe it is necessary to keep the capital purchase program open for long. large institutions of their meaning program will provide capital will be for institutions between a certain threshold. we are trying to design and in a way to give a chance to spur lending by and make it more likely they come as a sign of strength and not a sign of weakness as we just discussed with the chairman but we are going to leave in place the basic bigel the stana to make sure we are not supporting a viable institutions. the supervisor in the process in which the superb-- all sorts of measures of rating and financial strength and there's nothing, as you know this is not a highly perfect process but it is better than the alternatives. >> i am sorry to go back to gmac

again. i understand at least on the call on us demond, that there is a negotiation going on, and i guess i want to try to understand who is actually the decision-maker? is it the assistant secretary allison or is it you as far as determining under what terms further extension of credit is given, doing the particular facts? >> the financial terms will be as defined in the programs. they are not differentiated terms. the question the head is really what plan for restructuring the new management of this firm embark on. we want to be confident that is one to be supervised and some basic pat dubai. again the incremental capital needs relative to what is identified under the stress test. those of the issues ahead. >> two of those board members are treasury picks or whatever. how much interaction do you have

with people on the board? >> we have what you would expect in not more than you fear in the sense that again-- >> my fears are rampant. >> i'm not sure what your fears are. our obligation is to make sure again that there is in place a plan for getting back the viability that has a reasonable prospect of working. we want the new management and board taking a fresh look that amount that to be as strong and robust as possible. at the same time of course we need to reassess what the increments of capital needs would be and that is the process we are undertaking now. >> okay, my time is up. thanks. >> mr. sellars. >> mr. secretary i would like to shift in terms of a fine down with the large banks. my "new york times" this morning tells me that something we all

kind of already knew, which is that city would very much like to return its t.a.r.p. money. citigroup argues they have lost cash and this is an argument they have made to this panel, and having lots of cash means they should be able return the tort money. i don't have your experience with banks but it doesn't strike me as exactly the right argument. >> i think you are right. >> can you explain to me with the criteria is for being able to return the money and what relevance if any having lots of cash has? >> a few critical point. is a good thing for the country that banks are eager to get out of the investments. it is healthy, necessary and desirable. it is a very good thing for the country that private investors are willing to come in and in effect take the government out of those positions. we are not prepared to have this money come back in the way that could lead the system or the

institutions with inadequate capital. if we did that that might seem good in the near term but it would be bad for the country as a whole because believe the system with too little capital so what we have done is to say we want you to go out and raise capital. this is for the system in general, raise capital from the markets, so you can repay the taxpayer with interest and that is what is happening. >> mr. secretary, do i have a right that the requirement is that he should be able to praise the entirety of the t.a.r.p. money, not allowing payments in stages. is that correct? >> i don't think that would say it quite that way. this is a difficult thing for me to do because under the laws of the land the supervisor is responsible for setting the terms of access, but-- >> you do know a few things about how they are doing. >> i do know a few things but the basic objective is to make sure that as we exit, which we are going to do as quickly as we

can were leaving the capital position of the institution strong rinna weaker. >> in this regard mr. secretary obviously bank of america is now in the process. it could be little hard to follow the steps in which they are doing it. can you explain, are they repaying all of the t.a.r.p. money and have they raised the equity capital to do that repayment in an amount that is equivalent to both the tip and the cbp? >> the good thing is i got a check for $45 million last month. >> i'm interested in what the source of the funds for the check is. >> it was put in my comment that i would be happy to let the fed responded the tell. i think it is out there clearly in the market. i think the details are all out there. >> but, the policy appears to be, according to what one reads

out in the public, the policy appears to be raised inequity. all of the money necessary to repay, not a portion. is that your understanding? >> i think that is generally a desirable approach, because clean-air exit is better than a staged exit. i'm not sure that is going to be possible in every circumstance but i think again it is a good thing when these institutions are eager to go out and have private investors come out. >> mr. secretary andrew, a reporter for "the new york times" to judging by his book seems too often no more than we do, has written about the bank of america's repayment, that ," it will take too long-- he expresses himself. he said basically two things. the fdic didn't think they should be allowed to repay and two the reason why they were so

eager to repay was so they could increase their executive compensation that could be offered to the successor and it would not inappropriate for me to do that. on the second question, i think you are absolutely right to compensation restrictions would be put in place for firms. they are very tough restrictions and they were properly tough restrictions, and for that reason, but for many other reasons, and again because you can do it in stronger in the eyes of the market. deese thanks rigor to, rhee pay and i think we should welcome that and encourage it and i expect to see it substantial bit more that ahead. >> i'm not going to press you to reveal perhaps what you feel is compliments but it strikes me as a matter deep concern at the fdic does not agree with along

the repayment because the bank is too weak. my time is about to expire so i'm going to express further thought then pressing e1 this. effectively, the strength of treasury and the regulators sense that the premature repayment on these banks are weak is that for the country. that is an extremely important thing. >> we would not allow that our support. >> i want to encourage and bolster your viewpoint there and i would be deeply concerned if those kinds of considerations were overridden the matter how well meaning, any desire to increase people's executive pay. >> again we would not support that and i think the agreement esau in that context strengthens the institution very substantially. the best test of that of course is what happens going forward

but to a private investors come in and be willing to put substantial amounts of capital as a sign of confidence and strength. >> superintendents neiman. >> we olick knowledge the crisis that was aborted by the impressive efforts, the multiprong efforts by the administration and other agencies and be here words, some of which you use this morning, lastly chairman bernanke characterized what we avoided as a global financial meltdown, magnitude unseen for generations, a second great depression cataclysm. as i stated in my opening, i think really it is imperative that the american public understand the linkage to the real economy as well as what really was avoided. could you share with us your descriptions of the sequencing of what could have played out with the failures of large

interconnected firm and a direct linkage to the real economy because they think that really is at the heart of assessing the effectiveness of the program. >> in september of last year for the first time i think it, seven years americans across the country were starting to take their money out of banks, banks that were strong, no connection to the weaknesses in the sub-prime crisis because they were scared about the security of their savings. we saw the economic activity around the world come to a stop. markets rose around the world. the value of american savings fell by more than 40%. people were faced with the process of having to work ten years longer. esol millions and millions of americans lose their jobs, thousands of businesses failed that did not need to fail, deeply unfair and the damage to the basic confidence of americans in the fairness and justice of our system.

deep loss of confidence around the world and our basic financial stewardship of this country. it is not something that is about a set of individual institutions. it is about the basic fabric of confidence in america, the basic security americans have in their future. when you allow that to suffer so much damage as you are saying, it takes a huge amount of time to repair that basic damage so financial crises are unjust and dramatic because they cause deep damage to people who were careful and prudent and had nothing to do with the crisis and the scars that creates are long-lasting and we are going to live with, for a long time, the challenges in trying to repair that damage. >> thank you for that. one issue that is also addressed in our report issued yesterday are issues around moral hazard and we have debate among the panel itself as to the extent that t.a.r.p. increased the risk

of moral hazard. i think moral hazard was almost built into the fact of the emergency efforts, the fact is will the government always be there. i think you just explain the criticality of why the government had to step then and why i think your position, which i also agree with, is that to address the moral hazard we have to address to big to fail and that is an imperative for our congress, which they are debating currently. is strongly agree that the need for systemic regulator and the resolution authority but i would like your views on whether we should be in effect allowing institutions to grow to such large nets and complexity to be characterized as too big to fail, and is in that time to engage in a debate in this country now that we all recognize that the safety net

that there is for institutions, the benefits that the financial institutions come in particularly depository institutions have from fdic programs, from the fed as a lender of last resort. is the time to debate what we want our institutions to be? are the social utilities that should be able to engage in speculative then high-risk activities? >> i agree with everything you said. a tragic choice in the financial crisis is to solve the problem come up put up the fire and protect the innocent and limit damage. you have to act. you can sit there and hope it is going to burn itself out and if you worry about moral hazard to much, as you saw, this is the story of the first 18 months of this crisis, deacons c enormous pain and damage, and what it takes to clean that up will cause much more moral hazard sophie care about to prevent panic from spreading.

it is a paradox. if you care about moral hazard, you should be against the fire station. if you don't have the ability to act, as you saw, the damage is so dramatic that government will have to do more which much greater cost of future incentives. -- we are having a debate about too big to fail. we are imposing a sweeping set of authorities and constraints that will reduce the risk that banks in the future take on -- they take on so much risk that they can impair the system. we are imposing an ability to allow them to fail with less damage to the system. we're having that debate now in the congress. >> mr. atkins? >> but wanted to pick up that thread. to really talk about ways in which going forward now with the remaining months of tarp.

my friend from the united auto workers here has been very -- of course, supportive of tarp. $80 billion went to the gm chrysler. >> i don't work for the united autoworkers, i don't know who you are talking about. >> i guess one thing i wanted to focus on was -- as far as treasury's use of funds going forward and how it will be allocated has implications. be allocated. i think that has implications, dimensions the proposals, the administrations proposals for new statutory authority for resolution and for systemic risk regime. and basically i guess the way ifq the resolution authority is really just the codification of t.a.r.p. for the years to come

because the flexibility built in. we will review how the treasury has interpreted t.a.r.p. over the last year and now by the sounds of it if we are talking about job creation or whatever else is coming out from the administration. exactly what sort of uses are you going to put these funds to because you have said sort of both sides, now you want to keep some in reserve, you put some in community banks and i guess i don't really understand. >> let me start with the job creation question and let me say it as well as i can. because of what we have been able to achieve in terms of stability in the system, there are at least $200 billion in lower costs ahead. that-- >> because of? >> because we have achieved so much improvement in stability and not now believe that is going to be necessary to suspend

a substantial amount of resources because a substantial is gone up substantially. the savings reduce the budget deficit. they go to the budget deficit because you cannot use t.a.r.p. to fund an infrastructure program. you cannot use t.a.r.p. to provide a tax cut to small businesses. you can use t.a.r.p. to incent green energy efficiency products. this are choices congress is going to have to make. what we have done the because of the careful stewardship of this program is dramatically reduce the expected costs much lower than anybody anticipated, not just the beginning of last year but in august. that gives the congress and presidents and choices to make about how to use those resources and i believe it will be a strong case for doing that for using some of those resources to support targeted measures that can help get the job creation back more quickly but there's going to be substantial

resources to reduce our long-term future deficits. i want to come back for you began just very quickly. the resolution authority we proposed is nothing like permanent t.a.r.p. and i want to make this very clear and i would not support that for reasons i think he would agree with. what resolution authority does is allow the government to, in effect, taking institution that is mismanaged itself to the edge of the cliff and in effect put it in receivership and wind it down. not save it, not give it a chance for redemption but to sell and wind it down safely at less cost to the taxpayer, less damage to the public. it is not a chance for redemption. >> the problem is there's so much flexibility. >> i don't think so and again this is very important. the challenge in these things is getting the government some authority to contain financial panics but that has to be very-- [inaudible]

>> coming into this crisis united states of america, president of the united states, the only emergency authority he has to contain the panic himself in this case, the executive branch before t.a.r.p. was passed in the fannie and freddie legislation was passed was in effect declare a bank holiday and closed markets. that was that. actually very limited, but the panic continuing authority was here for mergence east think we need to limit discretion in the case. >> okay, i think, going back to basically this goes back to the issue of t.a.r.p. as a revolving-- >> let's talk about that. >> i would like to have an opinion from the general counsel of the treasury addressing that issue which i asked for back in september and haven't gotten yet, because i think that is germane to what we are talking about as far as how much money has been saved and is going to be reallocated.

>> we provided to many city members of congress webb's nordby happy to copy this things that congress designed this with that basic feature. it was wise to do it. >> that is different because i disagree with that. i think it calls into question-- >> there has been no challenge from congress. >> alright gentleman. mr. silver's. >> i would like to just make an observation because my colleague miss characterize whom i work for. i work for the afl-cio. united autoworkers-- i do not work for the united autoworkers. i don't have that honor, and but i feel very, very strongly about the dignity of people who work hard physically for living, and

i think that is often not properly honored in washington. mr. secretary, i would like to touch on, come back to the big bank issues. i am just confused about something and perhaps it is just that i'm not reading closely enough but we pass notes back and forthwith this stuff and they are confused as well. behnke of america has $45 billion in t.a.r.p., in preferred stock. held. bank of america had a public offering of $19 billion but what is the source of funds for the remaining $45 billion the federal government receive from bank of america? the remainder of the 45 billion? >> i think probably i should give you in writing which i would be happy to do. >> there isn't any other equity

offering is there? >> it is a little more complicated than that and this is important, leads the capital position of the institutions stronger than it was before this, not just in the eyes of the supervisors which is very important and this is what they all agreed on but also in the eyes of the marketers and the creditors. >> are you saying the comment about fdic is incorrect because he said they all agreed on it. >> i was trying to stick with my line which is i'm not going to comment on this issue. , who i believe that it is very important. in of the supervisors believe it is important to make sure that as we exit, i think they share that view and i am glad they do. >> okay, perhaps mr. sorghum is wrong. stronger not weaker, i don't have all the numbers in front of me or can run them in my head but to what extent if any are the funds for the repurchase of

the bank of america preferred coming from internal earnings? >> i don't think they are, but again i need to go back and reviewed the numbers in detail. again, let's focus on the stuff critical to the financial position of the firm, so the best way is to look at their common equity ratio to assets before the repurchase and after. that measure, which is probably the most valuable measure of financial strength is stronger with repayment, not weaker. >> what i am concerned about-- >> the quality, another way of thinking about it, the quality of capital that has the strongest source of confidence-- >> of course it would be stronger because they have raised, and in payoff for fur. >> that is it, it is the basic

strategy and is a good strategy. >> but that of course would happen even if the bulk of funds raised by it something other than the public offering. it concerns me that the basic standard appears to be a good one which is if you want out of t.a.r.p. you've got to be able to raise the equivalent amount of t.a.r.p. funds in new equity of the t.a.r.p. fund you are paying back. >> that is not quite the standard. >> explain the standard then. >> again, this is a discussion we should have with the supervisors because under the laws of the land-- >> i know but you know with fairmount about it and you were the only one here today. [laughter] >> i don't think it is as complicated as you are making it. it is a simple thing. common equity before repayment, after repayment, a higher after repayment. it is good for the system. >> it is not clear to me if the

common, if you have raised little bit of common equity that mausolea loud prefer to be paid back with cash that comes out of earnings-- >> i don't think that is right but i would be happy to ask the supervisors and i'm sure they would be responsive to lay down in detail but we are happy to provide an authoritative report. >> i hope to keep insisting in the future, i can't change with you done with bank of america but i hope he keeps insisting in the future that you have to be able to have the strength to raise the equivalent amount in the public markets and the equity, common or preferred that you are paying back for t.a.r.p. money. >> superintendents eamon. >> i would like to go back to the original dialogue regarding supporting small business lending through expanding capital investments in community banks and i am on record as

strongly supporting those initiatives, and i also agree with your assessment of the reluctance of community banks and in particular to participate and i think you identified the primary reason for that reluctance, being a stigma. one way to address that reluctance and stigma is to issue those details regarding the program. focusing on eligibility requirements, criteria for approvals, details about the approval process. i think greater transparency in the program in the program was announced i believe october 19th so we are approaching almost two months before the details are issued. i think greater transparency, a full disclosure of the eligibility requirements-- is there a black box that is going

to determine eligibility, would go a long way in addressing those concerns and reluctance on the part of the bank so any further insight on how you intend to address those concerns of the banking community as well as any projections as to when we may see more details about the application in the approval process. >> again, happy to try and do that. you are a supervisors do you know some of this is tough to beat-maggie can't reduce it to a clear simple set of criteria. is not just about stigma though. is partly the concern about and that is a big part of the deterrence. >> let's talk about lessons learned in developing the details for the program. what are the lessons learned from a large bank capital investments that can now be employed to the smaller bank

program? i was glad to see that the l1 of the program would include a detailed lending programs to be submitted as part of that the application as well as ongoing reporting requirements. >> we think that would help. i can't tell you though whether that is going to be sufficient. i think you understand, you can't, we don't want to have the government forcing banks to lend and have quantitative-- fallen so much in the aftermath of a recession, but we think it is a promising approach. i think as you know we are also improving substantially this survey we put in place that would allow banks to report on how they use the funds and what actually happens in different categories of lending and i think that should >> it raises another important

point. can you share us your evaluation assessment in bank lending in terms of originations and bank balances? >> you have to look at overall credit to have a good sense of risk. the overall price credit has come out a lot. bank lending is still falling for reasons you all understand. falling from the securities markets -- it has increased very dramatically. credit is still falling. no surprise in that, of course. in a recession, because the economy has slowed so much, the man would fall quite a lot. the pace of decline is slowing. if you look at surveys of what businesses are seeing, they did not cite credit as the principal problem they face. mostly what they face is lower demand for their products going forward. >> when we hear that banks are

maintaining large balances at the federal reserve, is that something the public should be concerned about, or are we looking at -- >> that is just a necessary consequence that the fed is taking to bring unemployment down. . . unemployment down, and banks are still somewhat cautious looking forward but there is much more capital and the financial system today in the overall system is in a much stronger position to support recovery as recovery takes hold. there are a bunch of charts in my testimony that report on these survey based measures of credit conditions and provide credit conditions and provide helpful trends we see so i would say dramatically better than it was, quicker than we would have hoped but still pockets of the country still very vulnerable to damaging contraction in credit. >> thank you. mr. secretary we are talking a great deal here about systemic risk and of course systemic risk

is what we were talking about a year ago when we got into the business of bailing out large financial institutions and particularly with aig. i read the november 17 report of the inspector general for the troubled asset relief programs report. as you know he was quite critical of the actions that you took, in negotiating with the ultimately with counterparties for the aig financial instruments. now, i was struck by two quotes in here. he says that the federal reserve and treasury officials defended the rescue of aig on the grounds of the company's failure "to pose considerable risk to the entire financial system and would significantly intensify an already severe crisis in contributed to a further worsening of local economic

conditions which has been the standard story for well over here but the report also states that you told sigtarp that "the financial condition of the counterparties was not a relevant factor in the decision to see to it that goldman sachs and other counterparties were paid 100 cents on the dollar. i have to say these two statements appear to be at odds with each other. >> let me try to explain. systemic risk is a complicated, difficult thing to assess and measure. the risk to the system from aig's collapsed is not particularly reflected in the direct effects on its major counterparties. the things that bob protection from aig. the direct effects and this is true for lehman and all the other financial systems that direct effects of that failure were not particularly significant. what was significant for the system as a whole with the

broader collateral damage that would it have happened in the event of a failure so what you saw after lehman for example is a general pullback or classic run on the entire system. asg presented exactly that type of risk but on some with a much greater skill because aig unlike lehman, unlike bear stearns had written a bunch of different types of savings vehicles to the retail community across the country and around the world and if those, if those policyholders have lost confidence in the system as a whole than the damage could been much greater so it sounds like of course the entire system was at risk and if the system has collapsed no institution in the united states or around the world would have been intolerable to the collapse. >> mr. secretary if goldman sachs could have withstood these losses-- >> only the direct effects. is not the right way--

>> they still could it paid off all the parties in turn that they owed money to. this will not cause goldman sachs to collapse. >> chairman, you understand this. when you decide it is necessary to prevent default, you prevent the fault. if aig had not met its contractual obligations to its counterparties it would have defaulted. it would have been downgraded and the company would have collapsed and would have been to what they did in the worst financial storm in generations. there was no feasible way to selectively default on its counterparties without bringing the whole thing down. >> mr. secretary, we did not step then and back up all of the counterparties, all of the trades. we pick aig and aig alone. and backed up 100% on the dollar in repayment.

.. >> you are telling me that these counterparty obligations, these financial instruments that are bought by very sophisticated parties will be treated effectively like deposits in checking accounts. >> absolutely not. >> they end up effectively with 100 cents on the dollar. >> you have to distinguish two things. first of all, there is no other way in the context of that storm to protect the economy from that failure. looking forward in the future, we do not want to have a system in which looking forward -- this is why we need resolution authority. a system looking for work the, this is

why we need resolution authority but we do not want investors in the future where the firms these particular firms to live with the expectation. that is the challenge by financial reform is so necessary. now, chairman, nothing would have made me happier in that context to have a different set of choices, but until all of the land the authority we have for the tragedy of the country we had no other choice. it's been a kid did have a choice before you moved in and that is it could pay 90 cents on the dollar, 85 cents on the dollar -- >> i don't know why this is so complicated -- >> it is complicated. >> but it's come down to the nature of choices. you either prevent default because the fault would be cataclysmic or you don't. when you provide -- when you prevent default, you are doing so so they can meet their obligations to everyone the of contractual obligations to. if you select redefault on any it will come crashing down. that is the consequence of the system we had going into this crisis. that's why we want to change. that's why we want to change the

system. some of mr. secretary, i come from abroad of chapter 11. people negotiate all the time and they do not bring down their entire system. >> and you're a national expert on this based on the issue but that's why things are different. aig is effectively -- >> aig was not a bank. i'm out of time and i've done it to myself again. i apologize. >> this is very important to have come important debate to have. >> go at this, mr. secretary. >> [inaudible] [laughter] >> go ahead, mr. secretary. >> and you know this, i know you understand this. financial the institutions the concourse has recognized for a long time needed a different type of bankruptcy regime than we have four other companies. now, aig is not a bank. but in affected operate as a bank. it borrowed money, it operated on a leveraged and without capital to support that. for the same reason we have a different type of bankruptcy for banks for many, many decades.

we need one for complex financial stopper lee just like banks. now, in bankruptcy you have lots of choices. you can negotiate all sorts of different treatments in this context and we still would be helpful for the country. we want is a bank type of resolution regime that gives the choices that we've had for banks and four in a sense colossi bankruptcy's the we did not have that for complex large financial institutions and that is what limited choices. >> we may disagree about whether or not we had it but we would certainly agree we do need a system in order to be about to liquidate large financial institutions. where we may draw a very sharp difference is whether or not we should ever be in the business of doing that after the fact, and going back and effectively guaranteeing transactions with mullen bank institutions -- >> we feel the same way -- suggests winder stand do you feel the same way about the fdic guarantees pimply september? because, because the guarantees -- again, you would never, ever

want a country in a position you have to guarantees, temporary, whenever the price because, because of the moral hazard risk. but in a financial panic there is often no other way to stem the risk of much greater damage to the innocent. >> mr. geithner, there are consequences to doing that because now markets understand that you may at any point decide that anyone is large enough and that their debt should therefore be backed up by the u.s. taxpayer. >> well said, and no one feels more strongly about that, and that is why even in the midst of the steep crisis we propose sweeping reform that would give a better choice is in the future. i could not feel more strongly about that. >> thank you. i apologize to my fellow panelists. mr. atkins. >> no, it was a very fruitful discussion i thought. and i note next month we will be drawn into aig as a topic, and so i look forward to that as well.

but i just wanted to turn back to i think part of the problem especially last year was predictability, transparency of the government's actions were. and also with respect to what balance sheets and other things work consisting of and that sort of made the marketplace itself on easy and i think that is part of the same thing i wanted to discuss now is the predictability of who gets what and who does what to whom and that is what i was trying to refer to as far as audit programs. i wasn't disparaging working man that there is a huge perception out there that other unions got a great deal out of that rescue package that was negotiated earlier this year. but that dovetails into the situation of small businesses that we've been talking about. a lot of the problem in today's business environment is an uncertainty as to what the future holds.

the administration is talking about, and the congress is talking about huge tax increases, huge, new expensive health care plans, new owners environmental regulations being talked about. and then looming deficits of course, you know, far into the future, not even counting the off-balance sheet obligations in the united states government, which some people put at 100 to $0 billion or more. so nobody basically can plan for anything, and that affects borrowing, and that obviously can affect lending. so, at the same time now we are talking about the -- you were talking about the stigma of participating t.a.r.p. among some small banks, and people because of things like people are -- have been leery to purchase it in the private public partnership because they don't want to get close to any sort of government control of their business or influence. so i guess my main question is how are you going to inject more

predictability into the system? you're talking about this vague notion of limiting aig to $550 billion or so and then focusing on small businesses and housing and other -- let can't remember the last part, anyway i will leave that to you. how exactly are you going to put these funds to work? what is the general plan? >> there is a cable attached to my testimony that gives a very detailed estimates on what we think a reasonable estimate as a future program is very clear and the programs have very clear and transparent positions and one of the things we did from the beginning is put the specific terms of any contract in the public domain for everyone to see. so i think that will be very effective and very clear and making sure what the limits are going to be on these programs and what the precise term is one to be. you are right that business

across america still faced a lot of uncertainty, a lot of uncertainty how strong the recovery is going to be and they face some uncertainty with the name of the game is when to be going forward and that is one good reason why you the congress's plan to bring to closure the health care reform for the system and the broad changes ahead on energy policy and things like that. it will help reduce uncertainty and help improve confidence. businesses want to know what the rules of the game are, so i think i agree with you on that. you want to bring clarity as quickly as we can. >> i guess again going back to the resolution of 40 you're asking for i think that will just perpetuate the lack of clarity -- >> relative to what? again, let's think about the choice ahead. do you want to go back to a situation on which the united states it cannot be good for us to court that disaster again. >> to describe this