headed the criminal division warned that mortgage fraud was so rapid in this country that it was a potential epidemic and that if unchecked it would react in a crisis as big as the s&l crisis. did you take any specific steps to evaluate the mortgage that you were selling in the marketplace? >> we were not an originator of mortgages. we acquired mortgages. we are audited and reviewed and subjects. we have to do due diligence practices that we think were robust. the answer is, people can examine what our due diligence process work, but i have no reason to think that they were not robust. . there is no information that i ever had that would not change my behavior in some respect.

knowing now what happened, what ever we did, what ever the standards of the time work, it did not work out well. of course i wish we will not done what it took to not be in the positions we find ourselves. >> let me ask you a question about risk. in your testimony you talked about being rooted in accountability. and none of us know where things are going so you have to prudently plan for risk. prudently plan for risk. you had profit in 2008 but i won a question on this because it goes to the overall context of rest, and hopefully it will not be perceived again. at your firm, you triple your assets to $1.10 trillion, a growth rate of 29% when gdp was growing at 23%.

tangible equity was 6-1. it was 32-1 against tangible, common equity. and as a balance sheet matter, extensive hedging because of the significant leverage and the risk profile. at the end of the day, and i will press you on this, it seems to me that you survived with extraordinary government assistance, $10 billion in park money, a counterparty with the aig bailout. in your room for wanting to takyour given access -- he becaa bank holding company of the

weekend and had access to the top. --talf. you got some relief from mark to market rules. when you look at the amount of leverage that you had, and you look pitcher rapid growth, the you really believe that your risk management in the big picture was sufficient to allow you to survive but for that government assistance which i laid out? >> there is a long predicate to that question. we were much leverage to now. when you look at the leverage at the company was in, our high as water mark was about small. a lot of that included cash on our balance sheets. i think we did a very good job in having liquidity through the

period. you're asking me what would have happened without a considerable government intervention? i would say that it was a more nervous position than we would want it to be in spirit we never anticipated the government help. we were not relying on those mechanisms. about the extraordinary weeks after lehman brothers, which was the most tense week that there was. that is when we became a bank holding company. the next day we capitalized with warren buffett and the day after that we did a capital raise. we have access to the capital markets and we were not relying on that government help. the tarp legislation came three weeks later. that being said, i do not know it and cannot sit here and tell you what would have happened.

i know for sure that no one else knows either. i feel good about it but we were going to bed every night with more risk than any responsible manager would want to have, either on a business or for the system as a whole. risk, not certainty. even after the tarp was implemented, did that exacerbate the risk? no. but the question does not have to turn on which you have gone under but for? the world was unsafe, the government and regulator and taxpayers took extraordinary measures to reduce intolerable levels of risk to a much more tolerable level of risk. and the reason the press this is not to make you say uncle. what was done differently and more regulated commercial banks,

was extraordinary leverage. much of that money done overnight. i want to see whether there is a clear recognition that despite all the response on the fundamental basis, excessive risk was being taken, notwithstanding all the models that existed. >> as i said, looking now -- and everything is context-driven. i could not be more clear. after nine years in the context where we were -- look, how would you look at the risk of a hurricane? this season after, we had four hurricanes on the east coast, absolutely extraordinary, the estop the year before. rates are very low for risk --

versus the year before. rates are very low risk. after the hurricanes, rates went up spectacularly. they are lower again. the risk before hurricane, is it any different? >> acts of god were exempt. these were acts of men and women. these were controllable. >> i sit here and read testimony to the effect of reducing our balance sheet, raising capital, and clearly we are much less leverage now, and consequently i which we were must let -- much less leveraged than. even though we were lower than others and with cash and our balance sheets, we did better. but if you're asking me what i do something differently, knowing what i know now? how could you not? of course. >> i want to put into context the level of risk and the level of assistance. this is something i think no one

would want repeated again. let's now move to questions from other commissioners. i'm going to stop at this moment. i will move to vice chairman thomas. >> thank you, mr. chairman. i think context is important. you mentioned earthquakes and how familiar we are in california with earthquakes. i think as we conduct these hearings and talk about the problems that were encountered and how close we came to a catastrophe, the right now in haiti, by one of those acts of god, there is an enormous catastrophe. there are thousands of people -- and i think the number of deaths will shock a lot of people, if you never been to

haiti, in terms of the living conditions that were there subject to the death traps available. i think the general question that everybody wants to ask, and you said it four different ways, and i will put it in the overarching way, that if you knew then what you know now, what would you have done differently? that may or may not help us as we go forward. but i said at the beginning that what we have been doing is a lot like an iceberg. you can only see one eighth of it. 7/8 of it is under water and should go toward it. mr. chairman, i want to ask of these witnesses -- and it will be applied to all the witnesses -- that we have very limited opportunity to ask questions.

we would like to submit written questions to you and receive those answers. the other thing, this commission is also subject to -- if you knew then what you know now, which you asked different questions? we're only around for most of this year. we have to conclude our work by the end of the year. obviously, you start with fact finding and began coming to conclusions in collect those coalitions, and we will publish our findings -- coming to cope collusions -- coming to conclusions and collecting those conclusions, and we will publish our findings at the end there may be other questions that we might asked three or four months from now. in terms of submitting question,

i wanted to be applicable to the time that we are operating. i do hope that you would be willing to be available, notwithstanding not being available in person, to continue to assist us and our job of trying to explain to the american people what happened. is that something that is acceptable to you gentlemen? >> yes. >> yes. >> thank you. i know that there are a lot of people who want to be one of these -- in these coveted chairs in terms of having an opportunity to ask a question. those in the media in the room, i think we have an excellent example this morning in today's "new york times," and it was in yesterday's as well, of people who if they do not own they have of bailable eat by the barrel to decided that they would ask

their own set -- if they do not own they have available ink by the barrel, who decided-their own set of questions. we would ask you answer those in the "new york times," in writing, and then give everybody an american, mr. chairman, the opportunity to be in that same position. i think it is most appropriate to tell anyone who is listening, watching, or hopefully will read anything about this hearing today, that the opportunity to submit written questions, to his you wish that question to be submitted, it is an opportunity that ought to be available to all americans. to say anyone who wants to write me, bill thomas, fcic.gov we

will do the best that we can give you the answer. the greater number of people who ask and the broader the question, no matter how trivial in terms of some pundits point of view, they are questions that the american people want answered and i think that will be part of our job over this year to answer those questions. we may be back to you now with our questions but with questions that have been supplied to us by people who perhaps -- some of the questions we're going to hear today were not the ones that they would have asked. mr. chairman, this is relatively unusual because usually we would close the record after a period of time. given the job that we have and a time in which we need to do it, i would ask unanimous consent, mr. chairman, that every hearing

record remain open, that questions submitted irid there during the hearing -- i did during the hearing or to us -- i like it channel it to those submitted to us, if we open it up to an editorial, every day there will be a list of questions, but we can handle that as well. hard job fundamentally was to get to the bottom of what happened, but most importantly, explained it in a way that the american people can understand. we have assets with the gentleman in front of us an additional assets weekend -- we need to utilize every resource and helping americans understand what happened. primarily for the purpose, as you

our job by the end of this year is to be smarter, as the best questions we can, and to revive primarily on every american's opportunity to sit figuratively in this seat and asked the question they would have asked. that should be agreed to by everyone. i will then begin channeling those questions that come to less -- to us. thank you. >> allen now call on the commissioners for questioning. i'm going to stop -- i will now start here. >> i have a question for you

about 80. could you talk a little bit about when the government enabled 82 close of your exposure to risk @ aig? did anyone ask you to take less than 100 cents on the dollar? >> i never got a request myself about taking less. self -- myself about taking less. it did not come up in any conversation that i can recall. subsequently, somebody in my organization who was going back and forth with -- this was after the ad shi'a, a couple of months later, at the time whenever closing out -- when they were closing out the maiden lane ii, that these contain the inference

that he drew, would you be willing to take less? and he said he could not answer that question now. himself, at his level. he then said that it never came back up again to him. and it never came back to me. >> did he further that question up the chain of command? >> i can say that i did not get it. he might have told his boss. >> could we talk a little bit about your interactions with the regulators, in particular, when you think back on the events of 2007-2008, there were obviously a lot of people that participated in risk-management either internally or a externally regulators, there is internal auditors, and external auditors, people wonder board, did any of those in that these

are individuals raise the issue of the quality of the assets under balance sheet? >> we are a mark to market firm. we have businesses, important businesses -- we have distressed businesses and businesses that specifically go out and buy distressed assets. but they are marked correctly. our people would -- our auditors would say i do not like this asset or this asset. they would say is it appropriately marked? i talk to the auditors each time and they tell me we do a very good job. we not only mark them, we go out and get external benchmarks and go out and test the marks. we will today go out if someone came to us and wanted to sell us

a very distressed portfolio, lehman brothers debt, or anything like that, we would have a bid for it. that is our role in the market. they can get it off their balance sheet and we can get in on two hours, but it has to be marked correctly. that is the real issue. >> it sounds like you have a bit of discretion in that regard. it does not sound like there were a lot of challenges to the mark's you're making. >> there are huge challenges in the organization. >> i was referencing outside your organization. specifically the regulators. >> oh, no, they go over our books and records very specifically. they not only all that the marks but the process by which we get the marks. >> t think that in light of what has occurred, that they were doing a great job? >> i think they did -- i can, i am answering everything with the

scope of my knowledge. i don't engage with the audit process. i get a summary and talk to the audit partner. i receive it as a member of the board. but we are quite satisfied with our audit there. otherwise we would not have them. >> and the regulators as well? >> well, we went through a evolution of our reboant -- an evolution of our regulators. during that period we were regulated by the sec is our primary regulator. that was the institution that came in over the last two years with one main regulator, and that regulator switched when we became a bank holding company, which would have been in the fall of 2008. >> but it is their responsibility to help you determine what risks you may or may not be undertaking as a firm. is that right? >> help to determine what risk

-- i think a bit as they survey less and we in the first instance are always disclosing. it is an ongoing process, and this is the intention of the process, to be engaged, but then they look very quickly and if they did not like it, they would not let us do it. that is their role. >> there should be more surveillance in that regard and more supervision of the type of activities undertaken by investment banks? >> first of all, there has been a clear demarcation between sociology of our regulation before and after becoming a bank holding company. before that, with the sec, which was viewed as the provincial -- prudential regulator, our organization with the the fed --

with the fed, dozens of people come to work and our building, not as employees of goldman sachs, but as members of the fed because they work with goldman sachs prevail look at our processes and procedures. our regulation is different now. >> is there a yes in there? that there should be more regulation and more supervision? >> there should have been more than there was in september under the old regime. right now, given that we are still catching up, our first year under the fed, it feels much different and feels like a lot of regulation. and appropriately a lot. i cannot say now that it is not enough. >> the youth feel that things have changed from tibet -- for the better for regulatory standpoint? are they improving?

>> we have a very tough regulator. i cannot tell you whether they have improved because it is a new regulator. we acceded to this regulator as a result of becoming a bank holding company in september 2008. >> i have one final question, mr. chairman. i was struck that you mentioned several times that your behavior either individually or as a corporation was really within the context of what is considered standard for the time. given that we're now in 2010, and we have unemployment at very high rates, foreclosures are high, many people are really suffering right now -- given that these are the standards of the times, could you please comment on your compensation and that of your senior executives? >> what i meant to convey is

that i am not sure -- again, i have not surveyed what the standards of the time work, but let me say -- and people will go back and test this and look -- i know that the standards of that time were different than what they are now. i was as the question, how would you rate yourself in terms of negligence and what you would have done. it would have to be compared to those standards. when you look back in hindsight, those standards should have been elevated. that could also be another source of incorrectness. maybe we should be in a part -- to reach -- we should have been a part of those that corrected that. again, that is how we would measure ourselves in terms of what we were thinking. now usps question. >> thank you for clearing -- for clarifying that. compared to where the country is economically, and in your 2007

annual report, that is listed as one of your core values. heidi rectify all of these days, given what is going on in the country economically? do you feel they chirk compensation adequately reflects your behavior, and if they can have a compensation structure and place that will reward people for taking the longer term view as opposed to maximizing the short-term profitability? >> commissioner, the last compensation we did in 2008 and we have not announced our compensation -- we announce the results for the year next week. but in 2008, the cycle which we already went through in the heart of this downturn, we took our firm-wide compensation and,

including people whose compensation is hard to take down because their secretaries and staff. our overall compensation when down about 15%, which was in line with our performance. the senior most people in the firm were down 80%. and then named executive officers, myself, the ceo, the vice-chairman, the cfo bonuses were down 100%. we took no bonuses. given the circumstances, that was quite appropriate. and so that as far as our structured, we of always -- we have always had our work, and if you look at our compensation, it always correlated with the results of the firm. as it did last year, and that is

something that emanates -- we have been a firm for 140 years, but it is only the last 10 years that we have been a public company. clearly everyone in the firm had all of their wealth, all their accumulated compensations in the firm, virtually, until they retired. everybody got paid with an interest in the firm. most of our senior people, their predominate compensation was in shares. and we've ratcheted that so that our senior committee is only getting shares. >> an interesting point about this changed your structure. there some that would say that now that you are a bank holding company, there is more incentive to take excessive risk because it is no longer partnership structure, and therefore the risk is shared by your shareholders, and necessarily our partners at the firm.

and i believe if not -- if you're not mistaken that compensation was not down as a percentage of your revenues last year. >> i think the firm's compensation was down in accordance with the revenues. i did not say in excess of revenues. there was an exceptionally close correlation. >> and the partnership structure? >> bair we still have the people in the firm that our partners get paid, all of their compensation in shares, and the most senior people, their compensation is in shares. and i am obligated to hold 75% of those until retirement. after my transaction with warren buffett, 90%. the people of goldman sachs have the results correlated with the success of the firm.

>> thank you for answering my question. >> mr. thomas, as a follow-up. >> did i understand that you are now providing compensation in part in shares? >> we always. >> you always provided. >> prior to having shares, partners only get paid interest that they had to keep in the firm, except for a stipend. >> in terms of the question was asked of mr. blankfein, could you give us a before and after if there is been a change in the compensation structure? ñiñr>> recently you sell the te0

and the federal reserve -- we have always had the following principles. they get a lot of the stock, 50% to 70%, higher for me. you have to own 75% of it. we have had certain callbacks. -- call backs. we do not have things like special changes, parachutes, severance packages. >> we have always paid a large portion of our compensation in equity. we have increased did up to 75%, which they have to hold. the only thing new we have done is put in a claw back provision. some of the bonus will have access up to three years of a

trade turns of that in the new year. we will be able to go in and take that back. >> that is a big change. >> you have a new position by you are not new. if you can tell me about yours. >> we had this tradition and our firm also. we can let it two years and actually claw back compensation. >> it is an ongoing change? >> it is part of our compensation scheme. >> thank you. >> thank you pra, >> and now senator gramm. >> thank you, mr. chairman. my questions go to the issue of incentives. incentives are the things that are intended to shape our direct

behavior and performance. we'll talk some about the forming of those incentives. i am thinking what are the underlying goals of those incentives. mr. mack, if you closely link compensation to performance. what of the primary elements of performance to which the compensation is linked? >> the first criteria, clearly profitability. as you go from profitability, you going to the sales and trading areas, which is where most of these questions are focused on. how much of the risk they take to have that profitable performance? how much interface they have with other senior members of the sales and trading operation to make sure communication is what it should be. we also look at the interface that we and our traders have

with our clients. and most important, one of the things that we look at is, how do our risk managers -- and these are risk takers -- how did they interface with our risk management team? these people report directly to me and not to sales and trading, but they oversee the soundness and safety of the type of risk that we do take. under that, we have a lot more resources into that process, and a number of people to work creating models to make sure we can monitor that risk. it could risk management as an example, you say to yourself, clearly what we have been through over the last few years, that individual needs to be paid not on profitability but needs to be paid on safety and soundness. is he or she doing their job to make sure that we're not taking on excessive risk, we have

liquidity in our risk positions? so when you say how do you pay? you have to go department by department. so many departments, like the i.t. departments, where we do a lot of work in building our models and the ability to measure that kind of risk we take and our balance sheet. they are paid differently but they are paid on what do they produce and how quickly they get it online and does it work? but broadly speaking, each group within the firm has certain groups, depending on they are supports, risk-management, or trading services. and again we go into investment banking, how we looked at each one of our banks. >> i got the question in the wrist area, most of the measures of performance our process. do you then go back and assess whether that process actually

resulted in greater or lesser risk, and that those outcome measures become part of performance? >> we definitely go back. one of the things we have done recently, sir, is create a separate risk committee of the board where risk management reports to them. risk-management, we look at those processes and a ball -- and evaluate them, but more importantly those are decisions that almost are instantaneous. as soon as a new risk comes on to the books, it is the responsibility of risk- management to analyze the impact it would have on our valued and risk. the answer to you is yes. >> my question is, from your testimony in the testimony of your other colleagues this morning, some of those decisions by virtue of time has

been shown to have been excessively risky and but the financial system -- contribute to putting the financial system in the shape that it is. have those actual outcomes of risk analysis, particularly where they were turned -- termed to have untoward outcomes, did they become part of the performance evaluation? >> they did. but again, as the chairman said, i want to be brutally honest. there was no question that we had not put enough resources into our risk management system. >> do any of you in your performance standards include aspects that are at external to your own firm? one of the justifications for your role as an intermediary is that for instance you are wise people in determining how to

allocate resources to the benefit of the overall economy of the country. to those kinds of considerations -- how much of your decision makers contributed to the economic growth, job creation, those things that affect the general economy, are they part of the performance measures? >> clearly, the paint that homeowners are going through and the people losing their homes, we have been very direct in our mortgage area to make sure -- i think they gave the statistics that we're 44% with all of our mortgages that we hold renegotiating the payments. in an aspect, the answer is yes. but when you look atñi some of e automobile companies whom we have loans to come of those loans are made based on how much risk we're taking.

we know those automobile companies or other companies need loans, but we also have a fiduciary responsibility to make sure that we about it -- we have done the hard you diligence. and it is not the same social pushed as we do in home once and our mortgage facility. -- in home loans and our mortgage facility. >> in terms of about a wedding -- and maybe i will turn this question to mr. moynihan -- as one of the potential sources of investment for growth, how the then relate those judgments as to the compensation of the executives and other personnel responsible for making those decisions? for instance, there is concern that may be an excessive amount of capital was placed in the

housing market to the detriment of other areas of the economy. is that a factor that is considered in your performance evaluation? >> i think the specific factor, i would say no. but in terms of generally how we do our financial plans and how we grow our business, we make allocations of capital and one of the goals of the executive or person working is to make that financial plan, so it indirectly factors in. but we do not specifically relate someone's performance into a broader question of how to allocate capital. >> in retrospect over the last decade, how what they did do you think your performance standards have been and the compensation that they have generated to achieving goals of your institution in the broader economy? >> i would sayñi that like my

colleagues, we could do a better job aligning in some areas -- the timeframe that at risk can be taken on, and we also do that through the holdback of equity and callbacks that we have in other areas where you make underwriting decision today and it turned out to be true later. it will continue all because i think we learned the lesson of the last several years that the nature of the underwriting takes time to figure out whether it comes true. we are trying to address that. >> one minute. >> one last question to mr. blankfein. your firm about 10 years ago changed from being a partnership to a publicly held corporation. now you have changed again to a

bank holding company. how would your approaches to performance evaluation changed, or have they, as you change the structure of goldman sachs? >> i think we tried very hard to keep the partnership ethic. there are elements of our compensation scheme that might be a little different to suit our culture and history. it might not suit everyone. for example, no one at goldman sachs gets paid solely at his or her own performance. not traders, not sales people, everyone gets paid on the basis of a firm as a whole, their business unit, and we take account of their performance, but the opted for us is to keep going with that spirit of partnership and cooperation and teamwork, and also by the way, an incentive for everyone to surveil everyone else around

them, because everyone is responsible for everyone. that would be a distinctive element of our structure. in terms of looking at it and scrutiny, we try to keep it. the big change is not becoming a partnership of becoming a much bigger global company, still called partners of goldman sachs and staff in beijing and far- flung places, whereas 20 years ago we were clustered around some american societies -- cities and maybe london and tokyo. >> has the percentage of your total revenue distributed in compensation to your partners changed as the legal status of goldman sachs has changed? >> in the old regime, everything that was left over along to the partners. they were effectively the

shareholders. but in the tenure saw was a public company, -- that 10 years or so as a public company, we said we would start looking like it would be about 50% and it has largely gone lower. for the good reason that our revenues have often gone higher. you did not need to pay as much. and the overall effort of what to do -- one of the problems we have is that what we do a lot for the economy is not like -- is not as invisible -- not as visible as an investment bank. we put companies together and launch new businesses but it does the really interface a lot -- it does not interface and up with the people who we will want to understand what our role is in the system. and until recently, we embarked on a program called 10,000 small businesses to get goldman sachs

to apply itself to that issue, to deal with something that is on a dimension that is close to what is needed for the current moment. >> thank you very much, senator graham. one question to mr. mack. succinctly, what is the pay structure an amount for risk management versus traders? management versus traders? >> i would say that we have been he can make the same kind of money that our best trader can make. >> that has not been historic? >> that is correct. >> thank you. >> each of you talked about problems in managing risks.

they talked about underpricing risk. mr. diamond discussed compensation practices and underwriting standards. each of the institutions you represent are heavily traded in it but the committee's bill -- are heavily traded in many communities. what is it about this traditional structure that failed us? where are the risks not uncovered in a moment? what specifically have each of you done to change your risk- management practices since the crisis? >> i think if i had to say one thing specific and we focus a lot of effort on risk management and senior risk managers.

one of our executive officers is a risk manager. one thing that we constantly learn from every crisis, 1998, this one, is the need for more stress capital. very often we go through the analytical process of what could go wrong verses what is the probability of that going wrong. they tend to discount the consequences too much. discount the consequences too much. i stress tests says don't tell me that this is unlikely. what it did happen? we learned after so many years in the market had given up enough time, not -- everything will happen. >> you have done that constantly. and now it is essentially the

ones like the treasury conducted? >> know it's like you read in the paper. you may read in the paper and you feel it's welling up in ec and the prices of some assets. it far enough rise and because we're positive about this. but we say, ok, what if, what are the knock on effects, what are our exposures to those places? what are our exposures to those places that had exposure to those places? assume that this happens. and we constantly through our risk community are doing those kinds of things which help us to avoid problems but also tells us what to do if something happens. it will not be the first time that we considered it. >> the stress test process would be audited in the usual fashion? >> note, this comes from our

internal process. >> mr. dimon. >> if you do business, you're going to make mistakes. hopefully they will be smaller and it will be pregnant your institution or anybody else. the process is very rigorous. you have a separate price group, and internal audit and an external audit, and reviewed by the fed, you can look at those things in day -- and you can be impressed by the diligence behind some of the process. we always did stress testing and you have to be prepared, but you should never be surprised. you don't know exactly what is going to go bad or what direction it will come from. when you look at a business -- we look at a whole balanced scorecard. if you're not financially

successful, you failed. it is a sink one on of doing business sine -- it is sine qua non of doing business. it is never determined by one metric. in looking back, as a business you have to look at what you did right and what you did wrong. if you are not continually analyzing and improving it you will not do better. i've already mentioned the biggest mistakes that we may. in mortgage underwriting, somehow we just missed that home prices do not go up forever and it is a sufficient to have stated income. >> you had done stress tests prior to the crisis. did you show one that showed housing prices falling? >> that was one of our biggest mistakes. we did not see home prices going

down 40% 3 that was not part of our stress test. -- 40%. that was not part of our stress test. >> mr. mack. >>ñi our risk managers sits rigt by our ceo on the floor. there is our real link with risk management in the firm. and this goes to the earlier question, i think with the federal reserve is our lead regulator, the amount of focus and scrutiny that we get on risk, not just outright risk but the systems around risk models, how we test the models, even to the point that we want to make an acquisition, they were involved and ask certain questions. it is very new in my 40 years with this new regulator. i would give high marks to our regulator on how -- i don't want

to use the word intrusive -- how diligent they are in our risk and how we manage risk. >> mr. moynihan. >> much like my colleagues, if u.s. what we thought we miss, it would be similar to what mr. dimon said. yes, we have the investment banking, but mistakes were made and the losses had been on credit cards and mortgages, and we kept originating prime into the economy and we did not do the testing saying what if housing goes down 40%. i think that is probably the best lesson that we have learned out of this crisis and we will apply. when you look at the commercial side, we had a practice that but on the consumer side we did not

have those kind of practices. that is what we have implemented and we will make sure we're diligent about it. >> you have stress tests for commercial assets and picking up your exposures. >> we've always had view of commercial real estate through the hard knocks taken in the late 1980's to be very diligent about what happened. i don't think the consumer side is ever seen this kind of -- has ever seen this kind of recession. >> i want to pick up on your testimony, mr. blankfein, were you said that almost all the losses that financial institutions sustained over the course of the crisis have revolved around bad lending practices, particularly in real estate. can you tell us what those bad lending practices are? what of the list of things that were bad? [inaudible]

>> in the consumer area, and other people with consumer businesses, much has been written about origination and jami returned to the testing, and he can pick up the cudgel and talk about the consumer side. on a more corporate side, i would say it had to do with leverage, and it had to do with terms and conditions. .

that lack of rigor on the transactional side i think had its counterparts on the commercial side and the consumer-lending side, with people are more familiar with. >> did you see it going down? if so, how did you handle your understanding? >> in all honesty, -- you cannot miss the fact that the covenants, with the benefit of hindsight, i wish i were not in the position of having to explain it, but at the time, i know other people have rationalized. gosh, the world is getting wealthier. things are more efficient. there is no inflation. things are going to do well.

and i think we talked, much of the world did, talked ourselves into a state of complacency, which we should not have gotten ourselves into, and which, of course, after these events we have gotten ourselves into, will not happen again in my lifetime. >> three minutes for the commissioners questioning, if he is interested. >-- the commissioner's questioning. >> i would like to ask you specifically, did goldman sachs do that? did you look at products that were rated highly? and you have highlighted it in your testimony. >> i think we did -- i would like to talk about some places

where we were scrupulous and where we scrubbed ourselves, but i think that there were some places where we did defer. the same when you say you cannot blame a regulator, you cannot really blame a regulator or a credit agency. that is our decision -- position to bear the consequences of. when i saw something had aaa, aa, i also must of been deferring to a rating agency. >> i would just like to ask mr. dimon to go back on your observations on how so many bad mortgages could be written in the united states. >> so it is really not a mystery. 80% to value loans. 95, 100, even higher.

the second thing is that you have to verify your income with either tax documents or pay stubs, and make sure that the income is there. there is more reliant on fico scores. -- more reliance. you never saw losses in these new products because with the prices going up, people are making money, and in addition to this, i think it is true that there were some bad products. as it turns out, i think option arms were not a great product. i think there were some unscrupulous mortgage salesman and mortgage brokers. there were people buying second and third home, as opposed to a place to live.

>> thank you. >> just a quick follow-up on my time, and that is that i mentioned earlier that the fbi made a clear warning. mr. dimon, you indicated in your testimony, i think again today, that most mortgage brokers -- brokerage originated lending from your practice, and you were seeing default rates of two or three times, but did any of you excise these from what your packaging and selling to the market? >> no. no, not that i am aware of. >> did you not have the data? >> we were laid in that process of securitizing product, and we

did sampling and testing, but we did not do that to anyoneñiiñke. ñrwhen we found faulty data or faulty mortgages, to put them back to their originator, and we did that. let's move on. >> i am a strong believer in the strength of the market system. although regulations are proper and necessary, despite the best efforts, and government regulators often need the expertise to monitor activities that create undue systemic risk. it is important for us to focus on creating market mechanisms that reduce the likelihood that

risk-taking practices will get added hand. experts have suggested the crippling financial crisis was partially caused by inadequate accountability for those responsible for financial instruments. the investment bankers to undertake the deeds were conducted due diligence, the lawyers who drafted the accountants. they are paid their fees in cash from the proceeds of the sale. the soprano financial consequence. this system places the burden exclusively on the purchasers, often retirement funds investing on behalf of citizens who work in lead time it does been

suggested this lack of accountability could be remedied if all the firms involved in the creation of a financial instrument had to "eat their own cooking." they require the peace not be taken in cash but in the securities they created. ed. the originators would receive their compensation on the same basis. if the same banker that led the underwriting was entitled to a $1 million bonus, he or she would receive $1 million worth of securities, union come 45 years, receiving $1 million in cash at the end. the originators would lose their expected in, and the expected

principal amount of their bonus. alternatively, some have suggested that investors should have a foot, during which time it security fail to perform, investors would be entitled to a refund. they are not intended to punish the responsible individuals but rather to improve the quality of the diligence exercise in the origination of the security, knowing that their financial future, just like that of the purchasing investors, is tied to the success or failure of the security to perform as they were sent to reform, and i would ask each of you if whether or not you think the volume of toxic securities contributed could have been materially reduced by some such a mechanism by placing responsibility where it belongs, on those that -- financial instruments. and i would respectfully request

that you attempt to answer not as leaders as four of the world's most profitable institutions, focused on maximizing your firm's' profits, but looking for potential remedies to avoid the situation. >> we did each hour of cooking, and we choked on it. -- we did eat our own cooking. that part of the industry, the housing market. number two, to be paid in stocks and bonds, i would do that. i think the issue with investors today, if we get that kind of payment, or in the past, when we have gotten payment, particularly with start up companies, we have been

criticized withholding back stock. a successful transaction. if i am paid in stocks or i am paid in bonds, that would not be an issue. >> i am not sure i understand that point. >> let's say we have the next apple computer company, whoever it may be. we do the underwriting. and we get a certain amount of stock. the stock was hugely successful. it went up dramatically. i think people would want to make sure that they have access to invest in stocks like that or bonds that also do well. the sec and the past has been pretty clear that when we distribute securities, and especially when they go up, we do not hold any securities back. so i think there could be a debate about whether we should be paid in equity or should we

be paid in fixed-income. >> when you engage in underwriting, simply an insignificant part in the securities themselves this would also permit you to just let the investors do. >> again, i would welcome that. i would think you have to give us some leeway. other than that, i would not mind being paid in equity. >> it undermines the whole notion of the concept, which is to place responsibility on you, the underwriting, the originator, the party who has the greatest access to the information, for the success or failure. >> if you are a very large

underwriter, and we had just gone through a week of records, inñi the corporate bond market,e would very quickly fill up our balance sheet, again, i am not opposed to it. >> or it might require more capital raising on your part to expand your business? >> possibly, and we have ratios. it could. the other part,xd you mentionedn the security does not perform, again, there is a short period of time. there are times when new information comes back, and there is a pushback, but to extend that over a long period of time, that is putting all of the risks on the underwriters,

and some of view may think that is the right way to do it, but that would curtail our business to radically -- dramatically and also hurt the capital markets. >> any mechanism to put on the originators >> directionally try to put more onus on the issue of originators is probably a good idea -- any mechanism to put on the original interest? -- on the originators? >> directionally trying to put more onus on the issue of originators is probably a good idea. we would an incentive to have a lower price than the higher price, xdbut that is neither hee

nor there. the overall theme should be, should there be some skin in the game? that should be a fee morts pursuing. what john mack brought up are things that have to be accounted for. you are not just someone tried to find the right thing between a seller of a security, the person needs the capital, and the investing public. those would have to be sorted through. in this process, most of the problem was, in my opinion, the cynicism of companies that held these positions, even though they knew they were toxic, and motivation. they did not know they were toxic. many tens of billions of dollars

it was a failure of risk- management, i think, rather than a failure of incentive. >> you have 20 seconds. >> would not be originated entities be in a better position to know whether the securities that the possibilities of becoming toxic? if you had evaluated some of the cbo's, which do not have been in a better position to know about them failing? >> you should be in a good place. i cannot think of a bigger incentive than having that accumulating on your balance sheet. we had that incentive, and it did not work. >> some of you have talked about clawback provisions. and any of you utilize your clawback provisions? and i wonder whether each of

you, since i do not have time to hear your answers, whether or not you applied the clock back to the people in your firms, without naming the particular people, but the clock back and what percentage of compensation that was, and if you can put that in writing, we would appreciate that. >> terrific. we are going to take literally a five-minute break. we will then get on with our business. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute]

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>> did you feel like you were at court today? >> i think in many ways, you know, we often have other things to do that are really important, to be able to participate and give our views. i think we are very lucky to have a chance. >> the pressure of the public? >> you know, i have not reviewed it yet. i am really not going to make a

comment on it. >> so much more now. >> there is so much going on with the economy, especially the u.s. economy, and i think progress has been made. we have put a lot of things in place to make sure that we know what is going on, but again, as long as there is high unemployment and people losing their homes -- >> when they read about this.

>> well, it is zero. let me just talk about that here. look, i have to run. @@@@@@ five years, six years, but also most of us had put in clawback,

where there is some transaction that loses money the following year. you have the right to take that money back. i think firms are trying to respond to that. well, you know, again, i think we are in the environment that is so difficult that we can never start a perfect balance. the effort to do that, everyone is very focused. the principle of mortgages, homeowners and their loans, things are not working out. we have a very small origination, there is a real effort to keep people in their homes. i cannot come -- comment on the bigger companies, but there is an effort to do that. ñithis is part of the program.

so we are making progress on that. some are these are not going to be permanent and will not necessarily keep people from going into foreclosure. you have to start somewhere. we started, and we have been aggressive on it, and we wanted to be very sensitive. if we have to extend it, we will do that. >> as of now, you are not thinking about agreeing to write down principle? >> i think the most important thing is to try to redo -- it has begun to shake. try a response and continue to work with the homeowners to keep them in their homes. all right, you guys, i am going to take a break. i am going to stay here and talk to my guys. i focus on clients. i am the chair, and if i can

tell this committee or any of the regulators with some of the issues that i see, i would be happy to do that. >> bonuses, like you did? >> i think people have to make up their own minds. i do not know. >> was this the first meeting? >> i think a lot of people are going to end up coming year. thank you ñr

to keep them off of the balance sheet. they suddenly came off the balance sheet. that created a lot of >> and organization took down a lot. there were things they're off balance sheet. many, many statutory changes were made to govern organizations to make sure that they did not do things like that. how could that have occurred on such a magic scale.

not because these things have not happened before, but they have risks that were not showing, but it creates two problems. 1, when you have uncertainty about whether or not you are solving it or other people in the world are solving it. because of a regiment, we are required to put everything in, whether or not it is on our balance sheet. we make a commitment, and even before it is a security. we have to mark that commitment to market. it would not allow us to do that, but it created a lot of problems for some response to institutions. it created a wave of the financial markets, is security

about whether or not anybody can be trusted. >> while it's certainly suggested that risk-management may have lapsed, there is the interactions between the audit committee and the board, and the veracity, if you will, of the work that was being done to determine exactly what the quality of the book was, so to what apply the word "excessive" and instead of this, how do you take

such prudence? liquidity, and a lot of capital around it. you do not want to -- is the age-old problem. you do not want to fail to innovate on the one hand, and on the other hand, you do not want to bear the consequences. said that is a balance that has to be reached, -- so that is a balance. again, before the 100-year storm, that, i think, is going to be one of the most important uses of the information that is gleaned from the work that is commissioned, is how do we reset the balance but also to make sure that we do not go so

>> you think about innovation and managing the risk associated with it. you have seen a great deal in your time. >> they have to focus on complexity. it can be so complex, even though let's assume that i am a salesperson,

it continues to juggle and up, and you can continue to make it complex. i think one of the things that the regulatory framework needs to focus on is complexity. >> so can the regulatory framework adapt fast enough? we do need a regulator that is more resources and a bigger budget to focus on that. but, yes, they can do that. but, again, we have many different regulators. i would like to see some consolidation. i would like to see it something, not just here in the u.s. but tied to other regulators across the world and the global economy. i think there is a super

regulator. ñii have to tell you, the amount of questions that were asked, i find it helpful. it is a great check and balance. they say, let's tell you how to look at it. >> there is an old adage that if it sounds like too good of an idea, maybe it is, and perhaps some of this oversight is management's responsibility, not necessarily that of the regulator , so, thedimon, -- regulator, so, mr. dimon, how much do you put on the management team? >> let me say that i blame the management team 100% and no one else. this does not mean that we should not look at the gaps in

the regulatory system. if i were a regulator, i would say that there should be no gaps in the system. there should be new products that should always be reviewed. i do not think it is unique to financial-services. new products have problems, and there is time before people leverage up on it. i think most of these things can actually be fixed pretty quickly as you go through your work, and you see where everything was. a lot of the things we all talk about, mortgages, derivatives, they were not a secret. no one put it altogether. the money market funds have a problem, and that will cause a problem. it is not a mystery or a surprise we have a crisis every 5 to 10 years. without trying to be funny, i

was saying 5 to seven years. we should not be surprised, but we have to do a better job looking forward, better disciplines, eliminates some of the balance sheets, helping. >> one more. >> on a longer-term basis, some say that our country has had more of this capital diverted to financial engineering as opposed to mechanical engineering or electrical engineering or engineering of real products that, over time, really make the economy competitive. to what extent has the compensation structure of the industry attracted a way that has made this economy weaker from its perspective of delivering milk products and services into the marketplace.

>> i think probably a lot of this has gone to financial- services. macroeconomic, how it moves and why it moves. i do not know. i have a relative who has a ph.d. in physics, and he would not even want to get involved in something so mundane as trading, so i think there'll probably be a change over time. we have seen in google and technology, and the trend will probably reverse at some point. >> thank you. >> mr. thomas? >> can i ask a quick follow-up question? in terms of the complexity, more and more drive with the documents that the public deals with in terms of trying to put them, in relation -- so that you can understand them. i know that sometimes, it is

difficult to bring it in simple terms. but do not all of them focus on who gets what, when, and how? and you can permeate that in any way you want to, but there are some fundamentals that do not have to be there. sometimes, complexity is impressive. i mean, if i said "i hate you," you would get it. i am extremely strong feelings of animosity, some folks may not. the fundamentals are the same -- i had extremely strong feelings of animosity. talking about simplification, so that people can understand, or a kind of agreement that you're going to have a fraternity, which gets paid highly and has the jargon. i used to run a lot in government in which jürgeargon s

used in which to reduce the number of people they had to interact with. is that the case in terms of some of the complexity that you find mnow? -- now? you get paid more for 100 pages. >> no, it is not about 100 pages instead of one page. certain products answer certain questions or problems that someone is trying to solve for, so all of us, we are lucky to have very smart people, and if there is a problem that an asset manager has, or a pension fund, and you try to work with them to solve the problem as a result -- >> is each one unique? it is something about who gets what, when, and how. >> it is a combination, and my

uáq" this earlier, that some of these are tailored, but some can be used across many different fields of investing. >> and this costs more than the general. >> thank you, mr. chairman. >>ñpáhank you. mr. hennessy? >> thank you, mr. chairman. i want to focus on the too big to fail question. i think it is interesting that we are talking about risk- management with the four firms that survived, whether that was because of your risk-management practices. i am more interested in hearing about risk-management practices at lehman brothers and bear stearns and fannie mae and freddie mac, those as opposed to others that failed and went under. but i think the american people, we do not care about the risk- management practices at home depot or caterpillar, or even the biggest firms, like wal-mart

and chevron, because if those firms bail and go under, and they go away, their competitors swoop in, but i think a lot of the problem and a lot of the political blowback -- we could not allow the largest financial firms to fail because of the broaderçó consequences for the economy, so what i want to do is first focus on the perception of the too big to fail question, and a question for each of you, on both investors and managers and your board members, and that is in the fall of 2008, do you believe that investors that were investing in your firm where pricing in the possibility that the government might come in and provide assistance? that the government might decide that your firm was too big and too interconnected to fail? and then, the related question, that you talked with other members and board members, to the possibility of the

government coming in and rescue your firm, or preventing your firm from failing to enter into those discussions? i am much less interested in whether or not your firm was likely to fail as to whether or not the investors bought more firm was likely to fail to and whether you were discussing with others, well, if things get really bad, we can always count on the government to step in, and that is a question for each of the four of you. let's start on this one side and work our way over. >> in terms of discussions, again, i was not party to those discussions. as mr. blankfein earlier said, you would go to bed during the darkest days thinking, it does and does not stop, what will happen? in terms of your views, if you look at the spreads in the debt and comcent, august 2008 to the first quarter of 2009, they will

lighten things up dramatically, and therefore, investors would take a position that they were requiring a substantial multiple that they would require by the time the crisis -- an earnest. in some cases, they were as high as 35%. they were factoring in a deep discount. during these times, i do not think any of us in the industry thought about the ramifications of what could happen, at least restoring the system in some regard. >> i think lehman brothers allowed to fail, i think with morgan stanley was thinking they were too big to fail. as a result, the stock went down. if they had a view that that was not the case, i think lehman

brothers said a wake-up call to any investor out there that the government was here to help you and would get you through this crisis. at the board level, it was never discussed. if we get into where the japanese are not want to put in the money they invested with us, would we be bailed out by the united states government? it was never discussed. >> raise in the question because at no point before the crisis did the markets seem like it was too big to fail. -- raising the question. >> mr. dimon, would you move the microphone? i am getting signals. >> i cannot move any closer. i am saying that no part -- at no point was it too big to fail. there is the potential of failure, like any other company. even after they started feeling.

indymac, virtual failures in wachovia, bear stearns. even after the government did the stress test and said they do not want these things to fail, it was like they could fail. we never had a conversation ever about relying on the government to do anything. >> i do not recall any internal conversation among the employees or with the board about what we would do if we would fail. on the rodentia a big to fail issue, i agree about the sequence. nobody in our country -- company entertained that, and we did not behave that way. we are shareholders. we work for the shareholders, the equity. even the context of too big to fail, if you take bear stearns, that was, quote, rescued, that

failed, and all of the shareholders -- that is how we think internally about what constitutes a failure, so for our purposes, they rescue the debt, and equity goes, and that is as much of a failure as anything could be. the external, i think everybody contemplated that the equity could go to zero. that is because that was the pattern, and, in fact, it is interesting. there was the idea of big to fail noise that came out, that only came after lehman brothers, not before. it is interesting, because there are always unintended consequences. our shares did not go down to the lows until, for us, after buffett. we did our capital raised the week after the bank holding company at 123.

we went down to a low under 50. that was after we got capitalized privately and after the tarp, because at that point, people started thinking they will be quick on the trigger, the debt will get saved, perhaps, and maybe equity would get crushed. maybe we would get into a scenario of the kind of bear stearns, and so, in other words, that puts some pressure on the equity of our shares, which, again, went to those lows after the government in certain that money into the firms. >> thank you. a related question, and when we go to this direction now, the capital purchase program and the stress tests drew a line between the 90 or 20 largest firms and everybody else. do you think that drawing that line has changed that perception

in the market? do you think that investors now believe that, well, now because my firm was a part of a capital purchase program, because they were a part of the stress tests, because the federal government clearly stepped in and save at the minimum the financial system and, in fact, certain specific firms that there is an implicit put option in the value of your firm and the value of those other 15, 16 firms? >> i just want to say that there are only a few minutes. >> we do not behave that way, but that sentiment is in the eye of the person you ask, and maybe some people think like that. and, by the way, post-lehman brothers, which, by the way " was allowed to fail, and congress and the reaction to westering as these firms, i think that has gone a long way -- and the reaction to rescuing these firms.

away from the context of the big systemic risk like we had, i think any one of these firms can fail now in the context that we're in now a lot more easily than could have at that moment. >> ok, well, let me ask you a different but related question, which is, do you believe if one of your three counterparts here, if one of your three counterparts messed up, and that firm failed tomorrow, do you think that policymakers would step in and prevent that firm from failing? >> i think tomorrow, in the context of this environment, at some levels, the government would intervene. i do not think the equity holders, the shareholders would find any relief from that, but there would be something done because of the fragility of the system today, i believe. >> ok. 1.5 years ago, maybe not. >> all right, quickly, i think mr. dimon mentioned some sort of

wind down authority. is that important in legislation? >> mr. chairman, i leave the gentleman 3 additional minutes to be able to pursue the line of questioning. >> yes, i think similar to mr. dimon's comments, so we do not have been left to people speculating, there is a clear path forward, as has been in the fdic process for years and years and years. >> we would like not to have the it too big to fail context prevail. >> ok, but on the specific question -- we do not want to have the too big to fill context prevail. -- to fail. >> can you explain to me the difference in views? clearly, there was a view that

there were systemically important financial institutions. we now hear the secretary of the treasury, when you're the chairman of the fed, and we hear other people talking about systemic we important financial institutions, and higher standard -- we hear the chairman of the fed. and we hear other people talking about systemically important financial institutions and higher standards. what about the perceptions of the policymakers? mr. mack? >> again, i think it was incorrectly that somewhere in the future, one year or two years, clearly, any of these institutions could fail, i think, given how fragile the markets are, not just here, on a global basis. i think that is an issue, so as to go forward, and when i think

of ford, i am not just talking about the u.s. economy. -- and when i think of forward, i am not just talking about the u.s. economy. you could get there faster by pulling away this idea of a safety net, but it is more complicated than that. i think that regulators or leaders at the fed or treasury have more insight into what the global problems are and the risks on a global basis, and as they work through it, and there are a number of meetings going on right now, trying to figure out what is the right thing to have, i think down the road, this safety net that many believe, and i believe in this particular time frame, it is inflated. i think that will evaporate and will not be needed. what we always learn and not just through the crisis, these

markets are connected around the world, and some of them in one part of the world could have a huge impact on here in america or what we do in here impacting on somewhere else, but it will take a lot of work to do due diligence and come up with the right framework to remove the safety wernet, but i think that will happen. >> 15 seconds. there is a significant difference between the increase in perception if a firm will fail and whether or not a put option exists. it may be the case that your spreads increase after lehman failed, but investors may still be pricing and risks, the possibility that the government might step in and rescue your firm. thank you. >> mr. hennessy? >> thank you, mr. chairman.

i would like to focus on a couple of things, a few things, for all of you that relates specifically to what caused the financial crisis. the newspapers have covered this somewhat, but i would like to get this in the record. >> excuse me, mr. wallison, would you pull that microphone down toward you and then pull it up? >> i have got it. mr. blankfein, i just have to say that we w's have always envied you b's, and i now recognize the downside to being a b. i would like to get in the record, as i said. post aig, if they had been allowed to fail, what would the consequences for goldman, and why?

>> this is a subject that we obviously hear a lot about, so much about it that we put information on our website as to what happens. but we had transactions outstanding -- as to what happened. we had marginal arrangements with them. >> and these were credit default swaps? >> credit default swaps. the conditions eroded. they owed us a lot of money. they literally gave us the cash, in our possession, with respect to the mark to market losses. with respect to the difference, we held the cash. during the period, 32008, we were marking to market, as were our regimen, and we were one of

the most aggressive in that, because that was our regiments, and they became very slow in giving margins, such that there was a gap. as a result of our protocol, which does not allow us to take a certain amount of risk, we went out and bought our own protection against their credit, such that the combination of literally the cash that we had and the credit derivatives we had from other big financial institutions -- we also had a margin. we had the cash from them, effective recovering what would have been the loss. >> what was the total -- effectively covering what would have been the loss. >> what was the total? >> about $10 billion of exposure, against which i think we had $7.50 billion in cash, literally cash, and $2.50 billion of credit protection.

they would get the agency or government securities. >> what were these credit default swaps protecting you against? >> the default by aig. >> not the ones you bought, but the ones that aig was originally covering, what kinds of assets were they? were they, as people call them, toxic assets? were they cbo's? >> they were a lot of assets, and somebody doing business with aig, other parts of aig, including other things -- but to a point, i think the main part of it, cbo-like things. >> you are holding these? >> again, i do not want to get too far over my skis. >> but you answer these in

writing afterwards? >> yes, but i believe that we had -- protection to another counterparty, and a squad that protection from aig, so, in effect, we had no kind of equity risk, but we did have a credit risk to aig -- protection to another counterparty, and we had protection from aig. >> since goldman was regulated by the sec, which, again, i think was about 2004, your leverage increases substantially, from 2004 until about 2008. why would deleveraged increase after you became regulated by the sec? -- why would your leverage increase? >> the way we did deleveraged, the way we looked at it, under

our regulatory regime -- the way we did leverage, it did not rate every asset the same way, so, for example, with a balance sheet, much of that is cash, what is on our balance sheet, so we assign a very low risk to that, so we had notions of it being adjusted. the federal reserve, the bank holding company, as a growth deleveraged -- has a growth leverage cap. we never focused on it, and even at this moment, i do not think it is as important as some other things, because it is how much capital you have to have in cash. >> i fully agree, but it has been published in the newspapers, deleveraged numbers have been published in the newspapers, -- deleveraged

numbers -- leveraged numbers, and i am trying to get at this. . >> mr. mack, would you enter the same question? at least there have been reports that the investment banks became much more highly leveraged after the sec took over regulation and about 2004,

and imposed basel ii regulations. can you explain why these allegations are out there? >> i think it happened but i don't think was tied to the oversight of the sec. i think you had a robust period of low interest rates. people took more and more risks, but i don't see the connection. we would be more than happy to go back and look to -- look through our files and talk to our general counsel and give you a better answer. i don't think that was the trigger point. >> back to you, mr. blankfein. when was goldman first renault -- alerted the fact that there were serious problems with subprime mortgages? >> i would have to look back.

i wasn't at all focused on end until -- new don >> goldman was early to recognize the dangers according to reports, and began to use indexes to protect itself. >> know, first of all, we have research which we will make available that showed -- published research to the world that we were very negative on the housing market's going backed away before 2007 and 2006. our movement in the mortgage market was for us a matter of hedging in managing our risks, because as a syndicator of products, we were usually in the position of finding ourselves long, much like banks that had

problems and accumulated, our management protocols to sell down those positions or else stop at servicing clients to one of the syndicate those pools of loans. -- who wanted to syndicate those pools of loans. we wanted to moderate our risk, and you use the term, going short. what we were trying to do was get closer to home. we roll along, and every other financial to institution would have the stuff, we were trying to get back into risk. >> you said that residential mortgages were underwritten. i think you implied that one of the reasons was that there was so much money around and losses were not being suffered. and that is probably true.

but were there any other reasons that traditional mortgage standards, such as an 80% loan to value ratio and so forth, were eliminated, eroded over this to imparted -- in this time. ? >> i will be three additional minutes. >> time does go fast. >> i believe that the losses were going up. the whole industry, all of us saw those losses. economist will it get it and you see the same thing that i say, a low rates deal with and do a lot of housing speculation. i've always looked at fannie mae and freddie mac as being part of the issue and how it grew over time.

i do not blame them for the bad behavior of our underwriter banks but i think they were part of those problems. >> let me ask you about my limited time available -- in my limited time available, what is in your view proprietary trading? >> the rules of the federal bank, the national bank, are such that -- but that around. we conduct our securities companies much like our colleagues. >> that is not the bank. >> is part of the holding company. you can talk about it and try to define it, but i think when you

all set a position, if you're doing it for the firm, it is managing the risk. the challenges of about regulating proprietary trading in some of the bank holding companies -- what is proprietary and what is customer-driven? if we delay interest to help a metal customer, we have to offset that, because we cannot carry one side of the trade. we have to offset that. on the other side of the trade, it is proprietary. at the end of the day, is to manage risk so that we can provide that middle-market customer business. that will be the challenge. it is a very difficult task. >> i am trying to get that one

question -- is there a trading business, a proprietary trading business within the bank, rather than the holding company? >> i can answer that in a written submission but ours is in the securities company. >> thank you. miss born. >> thank you. i am going to address first the issues regarding the enormous and unregulated over the corner derivatives market. your institutions are four of the largest otc derivatives dealers in the world. the office of the comptroller of the currency has reported that in september 2009 you collectively held over-the- counter derivatives positions of more than $230 trillion in

notional amounts. your positions consisted of more than 33% of the world market in over-the-counter derivatives. mr. blankfein, in your written testimony you have stated that the standardized derivatives should be exchange traded and cleared through a central clearing house. you further state "this will do more to enhance price discovery and reduce systemic risk than perhaps any specific rule or regulation." i like ask your opinion that the role that over -- your opinion of the role that over-the- counter derivatives played in contributing to the financial crisis. >> i think you and i have different opinions about this. but i would say that the aspect of the over-the-counter

derivatives market was a very big concern and a bit worried, so much so that all lot of institutions -- all of the institutions here, i believe, working very hard that things would settle and that things would clear and that we started the process of creating these clearing houses well in advance of this particular crisis and really glad that we did. it was highly publicized that the federal reserve bank of new york created a program to make sure part of this was done well. that was a very big concern. as it turns out, my belief is that the derivatives market functioned -- over-the-counter derivatives market functioned pretty well under the circumstances. now the risks imbedded in that they had credit in them, people made bad credit decisions. and some of those credit decisions were in derivatives and some were in terms of

securities. but the derivatives market itself actually work better, i think, than we had a right to expect. and if you could call anything like the in the crisis, it was that it worked so well fannie and freddie, lehman, all had massive defaults with huge numbers of setting -- all setting, and in the benefit of hindsight, people were able to hedge their risks, protect themselves, and it worked very well, better than i would have thought. i don't think we should rely on -- i think that that was lucky. , regulators and legislators, are focused on making sure that the instrumentality and the pipes of clearing derivatives

are rim place, i think it is highly justified, since we did not have a specifically derivatives crisis. >> do you think that failure or near failure of aig was related to credit swaps? credit default swaps? and you think that having clear rining would have in any way ree the inherent risks and aig's positions? >> i think it may have helped a bit. i don't think it was the key thing. aig was bent on taking a lot of credit risk. they took it out in the derivatives market and by writing insurance against credit even spirit they took it by holding securities. it was a failure of risk

management, of colossal proportions. and there were derivatives in there, but it was -- those were merely mechanisms of taking credit exposure, to get paid for that exposure, and they took multiple vehicles and could have substituted other vehicles for them. >> do you think -- how would having a clearing house and having exchange trading of standardized derivatives reduce systemic risk? >> to the extent that you have -- the clearing house, to the extent that you are having the clearing house, the issue that you had within aig, or settling all over what mark to market should be for the smooth transfer of margin, we would have avoided. we got margin but it was hard to get out of them.

in a clearing house context, that would be easier to do. anything that is liquid enough and can be priced easily, to go through a clearing house, should. it is standardized so it can be liquidize on an exchange, then it should. i would not bash these because they survey useful purpose. if people want to hedge their oil, let them hedge their oil. -- what should be on an exchange, should be on an exchange. and those that cannot, the bilateral contracts between company should be surveiled. >> mr. mack, you indicated that you thought that clearing would

be a valuable reform efforts at this point. would you comment on that? >> i would be happy to, but as mr. blankfein said, it would alleviate some of the issues of saddling up with your counterparties. not to be redundant, but it would be very helpful. you had better discovery and shrink some of the notional amounts by being able to do that. i think it would go along way in helping us, especially in times of crisis, but away from that, it makes sense to do. a few years ago, we were able to put swaps business into the clearing house and has helped us on swaps. >> could you tell me how much -- i understand that only standardized contracts could be exchange traded and cleared easily.

and the spoke -- customized contracts, because they are not fungible group, are not amenable to clearing. could you tell me what percentage of the over-the- counter derivatives that your business is involved in are standardized as opposed to customized? >> i cannot give you an exact percentage. i can give you that information. predominantly they are standardized but i do not have that number of the top of my head. >> mr. blankfein, could you tell me what percentage of doris -- your business dealings are standardized? >> i would have to look. i would guess that our business mix is would be different from each other. we read different places in the market.

>> i would appreciate it if each of the witnesses could provide with information on the percentage of standardized contracts that your over-the- counter derivatives business has dealt him, say, for the last four years, please. >> could yield time on that point? >> i could a little. >> if we created the standardize versus what the ratio was of the last four years, don't you think it would change all the the next four years in terms of all whole lot more bespoke and you are standardized? -- and fewer standardized? it always works that way, doesn't it? >> a lot of the derivatives are

already exchange and clearing houses. we estimate that 80% would go into the clearing house. the idf that you lead this opening for over the counter, that as a way to put a lot of stuff in there. the royal army should be that if it should -- it could be cleared, it should be cleared. in a way that everybody is comfortable. >> i would like to see what our motivations are. i like things to go through a clearing house. the biggest problem we had was counterparty risk. it would suit us to have everything, not just our standardize, but it could be standardized to go on to those clearing house arrangements. the industry has been driving this. >> is born, back on your time. >> thank you.

have any of your institutions changed your operations in terms of the over to kranz -- over- the-counter derivatives dealings in light of what was learned through the financial crisis? mr. moynihan. >> i think the point about the counterparty risk, everybody in our firm did a lot of work on that, and the regulators have looked at it very carefully. that risk built up in a way that people did not anticipate. that is where we spent a lot of our time. not only the core economics, but on the credit risks and transactions. >> mr. dimon. >> other than being more vigilant, i think not a lot. but i would make one exception. we spent a lot of time looking at our exposure to other large financial companies so we would

be prepared if they had company since we have a lot of contracts with other companies. >> i'll like another minute to ask one follow-up question. a question that commissioner wallace and said. i would very much appreciated if each of you could submit to the commission information on your proprietary trading over the last four years, that is, that kind of trading that you are engaged in, whether it was speculative, the degree to which it was hedging your risk, and the revenues and profits for each of the last four years. thank you. >> ok, thank you, commissioner

born. mr. vice chairman. >> i wanted to thank all of you. we have a very difficult job and we rely on secondary and tertiary sources which makes it very difficult. your willingness to come in front of us an answer questions that we are asking, and i might tell you mr. chairman, based on our request, and i have some question specifically to some of you. i will not ask them now but we will get them back in writing and communicate with california, connecticut, and more coming in. this is going to be very useful to is. we want to assure you as we have that any information provided to us will be handled in the appropriate legal and protected ways, especially since it would be privy to the secrets

act. it is just that without your help in follow-up questions that we will ask to get some detailed understanding, that we can provide not just the rough picture of what happened, but a more nuanced, understood, in- depth picture of what happened. because quite frankly an argument that i made a lot and quit making when i was in congress it that you do not understand what i am that -- what we're doing in the context that we're doing. our job is to provide as mild and easy it form of education as possible how complicated this world is today and what makes it go around. your help in that regard is valuable -- is invaluable. we hope to get a timely response, but as we get nearer our time to exist, it will be a big push year in getting your responses. and i want to thank the panel

for their willingness to come and their openness in response thing and the answers you will be giving us over the course of the next eight months. thank you very much. >> thank you, mr. vice chairman, and members. you'll be glad to know that there is a little remaining time so i some follow-up questions. mr. blankfein, maybe you can suffer from meat had been being -- suffer from this, but let me preface by saying that if i die 51% right and 49% wrong, i will be a happy man. one of the issues we have to explore it is worse this purely a perfect storm or was this a man made perfect store in which the clouds were seen? that is why i'm talking responsibility. i will put aside my view -- i am troubled by your inability to

accept the probability of certainty picture firm would not have made it through the storm without vast federal assistance. but i want to turn to the situation of mortgage. many other firms as well, making subprime loans in 2001, but you securitized mortgage packages that had significant problems. 60%-20% defaults. maybe this is like murder on the orient express, everybody did it. i appreciate there was a cheap money. there was public policy driving this mortgage business, but you are not subject to the community reinvestment act. there were the standards at the time, but i hope that we would always try to elevate standards. but you're not just a market maker, your securitize in an underwriting packages of mortgages. it was clear that while the market was going bad, information about badly made

practices, if you kept moving this product on to the market. what is your responsibility when you put your name on a security to an investor to underwrite that early? did you fail in that respect in that you did not underwrite the loans that you then securitize then moved into the market? >> mr. chairman, what we did in that business was under righwrio the most sophisticated investors that sock that and spencer -- that sought that exposure. it is become part of the narrative that everyone knew what happened that every minute. we did not know at any minute what would happen next, even though there was a lot fighting and there was the report, but there were people in that market that thought that the housing

market was going down and there were others that thought that these prices have gone down so much that they are going to bounce up again. i remember being teased because at my shareholders' meeting in 2007, someone asked me what ending or weakened, and i said the seventh inning of the crisis. it turned out to be the second inning. what we were doing was creating prices. do i wish that we had done it? yes. >> i am asking a more direct question. was your due diligence adequate? deduced our loan tapes? in looking at what you're moving, the actual product, and in the 1920's, everything was different. wall street banks were selling bad latin american debt. at what point did you have the responsibility -- what is the

sense of responsibility? >> we have responsibility to be open and tell people what they have. good product that has the exposure that these professional investors are seeking. right now we would underwrite distressed product as long as we disclose to and help somebody move that product off of their balance sheet and give it to somebody, a sophisticated investor, knowing what the product did it, knowing it would give them that exposure. >> but you were facilitating the market in which products were being offered in the consumer market that were clearly unsustainable. >> for sure, it had that effect. by allowing that to turnover, and giving the dollars back to the originators in exchange for the loans, it allowed them to go out and originated more loans.

to that extent, we played a part in making that market -- all of us as indicators, and you do with the capital markets did, which is give people access to capital. >> apropos mr. mack's compelling statement about regulation recently, you have to step in and control is, is this an argument for very tough regulation of products offered at the ground level? because of the inability of the chain of securitization and a chain of private players to control the quality? >> i think nobody looking at what happened -- and the most horrible thing about this crisis is what happened to individuals and the mortgage market, as a consequence of behavior and the recession, i would say no one would argue that there should not be more protection and

safeguards and regulation of that interaction between finance and the consumer. >> all right. there is one minute left. the only final question is to you, mr. dimon. how the correct asymmetry -- i was in the private business, and if you lost, you lost. you bet big and you could also lose big. there is an asymmetry here where in the financial services industry, it seems that it's almost like you're at the blackjack table but you never get wiped out. the worst you can do is walk out with what you had. on the other hand, you can hit it big. it always tilts toward the biggest risk possible because there is no consequence for the biggest bets. >> there is a consequence. you can lose your job in your reputation. but you raise the issue -- you

ashley risk adjusted. you make an evaluation to the employee to their right thing for the right thing -- for the right reason. you're always assessing. but it is one-sided that we. the more senior that people become, the more stock they own in the company -- so they are responsive to the well-being of the company. they will pay the price of the company pays the price. when the company goes belly up, people did pay a price. >> even though a study said that even in those instances, people took out hundreds of millions and current compensation. >> but they should reduce some of those numbers. >> we will debate that after the session. members of the commission, members of the public, gentlemen who came before us today, thank you very much for coming before us today.

we appreciate it and we will be posing a written questions to each and every one of this. thank you. photographers, hold on a minute. folks. clear out of there, guys. hang on. >> the hearing is the recess. please leave the well. >> we appreciate your first to inform the public but we will take a 25 minute break and commencing at 12:45 p.m. we will look at the second session of this hearing. thank you all very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

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>> we are seeing big bonuses at a time where there is a huge unemployment rate. >> i think that companies doing well should pay their people a lot of money. >> are you going to be spending money to -- on lobbyists to block this regulation? >> i did not blame the regulators at all for what happened. the people to be blamed on the people in the management companies that failed. having said that, the regulators should see what they should have done better to avoid that.

lobbyists -- people have the right to raise issues. that is what democracy is about. most lobbyists are advocates with the facts. j.p. morgan chase has always tried to do the -- tried to provide the best information. i don't think that that is inappropriate at all. >> the president is proposing a new tax on banks. what do you make of that proposal? >> i am not releasing the proposal. i think it has leaked out so i am not sure if it there. i tax policy to punish people is a bad idea. but step away from that. we talked about enhanced resolution of a party, we should get close to that. it's hard for the industry to pay for the audit companies. >> but will those taxes be passed on to ordinary americans?

>> i do not know what those taxes are. but all businesses pass the cost on to their customers. >> how will he give people the win this fight? you said that size can be an important factor in determining whether or not banks survive here. a lot of people here in congress say that banks like yours should be barred from doing investment- banking. they should be smaller. >> a lot of people saying that glass-steagall coming down caused the problems. it was not a combination of glass-steagall -- and size, the investor was over it -- of roses. the size of the investment, that matters. jpmorgan does business and 150 countries.

we follow fortune 500 companies around the world to help them do what they do. we cannot be that small. there is a reason for size. thing you can have a debate. >> how worried are you about a public backlash over pay? >> people are saying that you guys do not get it. >> de you understand the anger?

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] [captions copyright national cable satellite corp. 2010] >> that cannot help but be determined on a case by case basis. we will thoroughly probed the individual situation to find if there are proper candidates, based on the timeliness of the information, the value of the information, and their agreement for terms and conditions. we will form a recommendation to the commission as to what benefit they will receive, and the commission will ultimately determine, as they do in all cases, as to what the proper response will be pierre >> will you seek joint subpoenas at justice?

>> we will have parallel agreements where they may be under cooperation with the justice department, and that should not pose a problem. these tools for us will be for those cases that are the vast majority of those cases, and we will do these alone, without the partnership with the criminal law enforcement colleagues. this is going to be particularly important in this case. is there one more question? no more questions? thank you very much for your time. >> president obama will be at

the capitol this afternoon to attend a summit with house democrats. the live coverage begins at 4:45 eastern. and we will bring a debate between the republican candidates for governor in the state of texas. rick perry faces debra medina and kay bailey hutchinson. tim kaine gave his last state of the commonwealth address. he was elected four years ago, but virginia governor's are limited to one term. he is also the chairman of the democratic national committee. this is 25 minutes. >> i present to you, his excellency. the governor of the commonwealth of virginia, the hon. tim kaine. [applause]

>> thank you very much. please, be seated. thank you very much. please. please be seated. do not encourage me. [laughter] my fellow virginians, i stand before you with many emotions to deliver my final state of the commonwealth address. the quick passage of four years has been bittersweet, but the most significant feeling that i have tonight is gratitude for those who have supported me during my time in public life

and pride at what we have been able to accomplish in this administration. let me talk first about what we have done, before i get to my expressions of thanks. when i was inaugurated in williamsburg, four years ago, i had a very simple message. virginia, leading the way. since i moved to richmond, i believed in my city and my commonwealth. i wondered why we were not seen as a national leaders the same way as we were in the early years of the american republic. susan dunn had the same question in her book, "dominion of memories." she questioned the leadership in the first 50 years of the nation's history and the decline

in influence thereafter. deep into the 20th century, the backward focus and the insular leadership, with the massive resistance to the racial equality, give us some -- gave thus far less significance than was reached by the founders. what better place than williamsburg on a rainy day, where patrick henry and thomas jefferson were inaugurated, to declare that virginia was once again ready to declare the mantle of national leadership. i can say this with confidence. virginia has achieved this goal. no state in america has enjoyed the success that we have seen in recent years. some of the remarkable for movement has been obscured by the very difficult national recession that we have been working on to get through since

spring 2007. but we are well-positioned because of the economic and educational and political leadership. the virginian economy, today, is one of the most vibrant in the nation. we are one of the top states in the nation in income, and we have one of the lowest unemployment rates. only new hampshire can claim this distinction. contrasting this to the virginia of 50 years ago, when personal income was in the bottom third of the nation. in the past four years we have recruited five fortune 500 companies to move their headquarters to virginia. two of them in the past year alone. and new investments in the longest recession since the 1930's. these opportunities have been achieved in all parts of the commonwealth.

west vaco in richmond, allpha natural resources, rolls royce in prince george, orbit alon thng the eastern shore. we have been recognized eight times as the best date for business in america by business organizations like forbes.com and cnbc. with the port of virginia and the airport, there is a newly retooled development system and the largest percentage of technology workers. there is no reason why we cannot hold on to our position of economic dominance for many years to come. in education, 50 years ago, the

system was not a model. despite the fact that jefferson was the first american to put public education at the center of public policy, the local schools were fighting to keep students separated by their race, with encouragement from the governor's office, and the higher education system only gave limited opportunities to minorities and women. because of the great strides in recent decades, we are ranked as one of the top five states in overall educational quality, recognizing the commonwealth in 2007 as the place where a child born today is most likely to have a successful life. our high schools are third in the nation in students passing examinations and power latino students leave the country in elementary school performance.

early childhood education has particular power and we have expended -- we have expanded education by 40%, meaning that thousands more virginia children are able to receive a strong start in life. as a result of these programs, and reading innovation strategy is that you have approved in recent years, we have increased the passage rate of the students on third-grade reading tests, which is crucial for the later success in education and beyond. we have grown technical education programs throughout virginia. it gives me a lot of pleasure to see our children and earning industry certifications, over 20,000 last year which is over the 5000 we had when i became governor. the new technological diploma, or the new career and technical

academies. finally, even in a difficult time, the higher education system is clearly one of the two or three best in the nation. and the capacity to serve more students has been passed by the passage of the largest package for higher education construction, all -- and all of the commonwealth, colleges are expanding their ability to educate students to meet the workforce needs of the state and undertake critical research. the bond package is treating construction jobs and building a platform for greater economic success, tomorrow, through expanded education. and as i am speaking of higher education, i have to take this opportunity to give my applause to the newly named president of the university of virginia, teresa sullivan.

to lead one of the most historic universities as always -- is easily worth celebrating. the university did not allow the mails as students when she became -- when she began her education. we are the best-managed state in america, according to government magazine. [applause] we're one of the few states with the triple-a bond rating for the fiscal stewardship, and as we have spent billions of -- we have lost billions in state revenue, we have made huge steps forward in the areas of state government. we have cut the infant mortality rate in the last three years by almost 15%, and have reformed the mental health system.

we have invested more than $1.1 billion in streams and rivers in the chesapeake bay and we are maintaining the oyster populations that so many virginians to tandon. we have restored more voting rights than any previous administration and we have banned smoking in restaurants and bars. we have tripled the participation of minority business owners and women, and we have permanently protected more than 424,000 acres of open space throughout the commonwealth. [applause] this significant acreage, which is more than twice -- which is more than twice the size of the

shenandoah national park includes working farms and forests and this also contains public land. working together, we have added three new state parks, five state forests, 13 new natural area preserves, five new wildlife management areas and protected 25 civil war battlefields. never before has this commonwealth moved so aggressively to protect the natural beauty of this state so that this generation can enjoy the same resources that we cherish. with the finalization of a plan to preserve 350 acres in the chesapeake bay watershed, which will be announced as soon as the deed is filed, we have strong momentum to continue this effort. the last four years have seen some amazing advances,

especially given the difficult circumstances we have been facing together. we have had to leave the commonwealth through the most challenging economic climate since the 1930's. together, we have met the challenge through hard work and innovative government, and we are in a unique position because of these efforts. to be certain, there are significant challenges still ahead. because of the positive effect of the federal recovery act, the national economy went from losing 800,000 jobs one month, to less than 100,000 jobs per month. we all know that more work remains to bring back robust economic growth. and as we deal with this incredible national challenge, and the effect that this has on virginia, we have other issues to contend with. i believe the biggest challenge

facing us going forward is the gridlock in transportation investments. i was hoping to solve this as governor but i could not convince you that we needed to invest money in roads to maintain the competitive edge. to be certain, we made progress in the last four years with the smart-growth strategy is to mitigate congestion and we did smart work to give public transit solutions, including the metro rail to the airport. but we still have too much congestion in northern virginia, too many sub-standard bridges, and to many communities with insufficient transportation to generate new jobs. the aging infrastructure cannot continue to meet the needs of virginians. the midtown tunnel is more than 60 years old. we cannot evacuate if a sizable

hurricane is threatening hampton roads. we have a number of projects built with public and private agreement, but we have failed to invest or have upkeep or made beds with the road system of this size. the only significant accomplishment that virginia can claim in terms of road funding is that we eagerly accepted infrastructure money from the federally government package. i was happy to help the president who cares about the infrastructure needs of the state, but those dollars will be gone in 2011, and we must have more dedicated revenue for transportation needs. i submit that the largest obstacles to solving the transportation needs is the philosophy that it is always wrong to raise taxes. thank goodness that previous state leaders did not hold that view, because if they had, we

would have no community college system, dirty rivers, and a lackluster public education system and fewer roads. virginia has a favorable tax code -- tax burden, and we must keep it that way. but no nation can maintain their economic edge with a declining infrastructure. we need the leadership to find a path to a responsible advance in rhode investments. another challenge is to keep the higher education system at the position of national preeminence. 50 years ago, the adult population received degrees at less than half of the national average. today, we are well -- well above the national average, in the number of citizens with a college degree. we are the only southern state making this claim. but higher education has flattened out in the last few decades.

although this is good by american standards -- standards, most nations in the world are educating their populations to date. we have a huge gap to overcome to maintain our competitiveness. and we face another problem as tuition is now higher than the national average, effectively reducing access to many students who are most in need of educational and advances. i presented a budget in december, and by eliminating the $500 million annual car tax subsidy, creates the possibility for direct more resources to expand into higher education in the future. after four years of this job and working to lead virginia to accolades for fiscal stewardship and business, i

believe i presented you with a budget that will create the opportunity for the four- looking investment that virginia needs. i know that you are dealing with what to do with the budget in the coming legislative session. the state is near the top in virtually every meaningful category in this country, but the competition is intense and if we do not move forward, the commonwealth will move backward. let me conclude with a few simple words of thanks. they really cannot capture the depth of the gratitude that i feel for the opportunity i have had to serve the commonwealth. i want to thank you, the members of the general assembly, for your willingness to sacrifice. very few people can understand the depth of your sacrifice.

serving in the oldest continuous legislative body in the western hemisphere. i applaud the feeling that lets you do this job and i thank you for your kindness over the past four years. to the public employees of virginia who are in the room tonight, you do the hard candy and glamorous and everyday word of serving our fellow citizens. i offer my deepest respect to you. i am aware, after 16 years in public life, that the things that you do are nothing short of extraordinary. i want to recognize the rescue team that is on their way to haiti, to offer their support in the aftermath of the devastating hurricane. -- the devastating earthquake. [applause]

and as we think of them, we should also think of all of the virginians in harm's way, those in the military and the air guard, who are all over the world, protecting us. this is part of the public employees to keep us safe and educate our children. the last years have been difficult on public employees. no raises, sizable layoffs that have increased your workload. and the increase in the need for services because of the demand during the challenging times that we live in. i see the optimism and the concern everywhere that we travel and i am very proud of all of us. i want to thank the team of secretaries and governor's office staff for being at the helm during the very turbulent

times. new leadership has been exemplary. to the citizens of virginia. [applause] to the citizens of virginia, you have welcomed me into your homes and businesses in times of triumph and tragedy. i have visited the schools and churches all over the commonwealth and i have to say that you have inspired me, with your resilience during these challenging times and your creativity and your gracious spirit. no doubt as to why we are in good shape today. i want to say a special thanks to the citizens of richmond. you got me started in 1994 with about four city council.

16 years later, you are still my strongest supporters. finally, to my wife and children, to my extended family and my wonderful group of friends, you are my strength before -- you were my strength before thought about political life. [applause] you supported me through the joys and the trials, and the sacrifices of public service. it has been a joint effort every step of the way. i thank you with all my heart and i cannot wait to see what the next chapter is holding in store for us. i will mention something that recently happened that sums up

my feelings. when we unveiled my fortress -- will be unveiled my portrait, they were surprised. i was not wearing a jacket, just a shirt and tie. i am standing where i want to be standing, on the banks of the james river. they were surprised i was smiling in my portrait. one of the members of the press came to me and asked me, in all serious, -- all seriousness, with all of the challenges that you face, you are smiling? of course i am is smiling. there is no higher honor than to serve as the governor of the commonwealth. i have had the full experience of serving in the best and worst of times. playing harmonica with bluegrass bands, kayaking to the barrier islands off of the eastern shore. visiting the guard troops in

iraq and afghanistan, and welcoming queen elizabeth back to this chamber. comforting the families of law enforcement personnel who were killed in the line of duty. and speaking to the faculty that knew the people who lost their lives on one of the most tragic days in 2007. i pray for strength on the hard days and i am honored to play my small role in virginia history. i am is smiling because as i finish my time as chief executive, i am proud of what we have accomplished and i am happy to place the reins of a successful state in the hands of bob macdonald -- mcdonnel. i look forward to working together with virginians as we lead this nation for years to come. thank you very much.

[applause] [applause] >> and now, the governor of iowa, chet culver and his state of the state address. he spoke about the flooding in the state. from the capital, this is about 40 minutes. >> thank you, thank you very much. thank you. thank you very much. thank you.

thank you. thank you. thank you very much. a special welcome to chief justice turnis member, is of the court and my fellow elected officials, my extremely capable partner and friend, patty judge, speaker murphy, leader c mccarthy, and -- mccarthy, and to the of the assembly, thank you for allowing me to address you this morning. it is my privilege to be here. [applause] i am happy to be with you, for this extraordinary, 80-day session. there is much to do and no time

to waste. we face some big challenges, and challenges that we did not create. on the one hand, we continue to recover from the natural disasters that are historic in scope. the fourth-worst natural disaster in the history, and the ongoing--- national recession that continues to affect every family in iowa, and every business, and every aspect of the state government. but we can continue to address these challenges, head-on, with resilience, optimism, determination, and good, old- fashioned hard work. we're also of people of great faith, a faith that teaches us that with the help of god all things are possible.

[applause] >> with god's help, all things are possible, and there is no challenge that, together, we cannot overcome. these are the values of iowa that we can all embrace, no matter what part of the state that we come from, the political views, or the station in life. despite the obstacles that sometimes get in the way, we continue to look forward, not backward. the people of i will believe that the 21st century will be

our century. so for these reasons, i am happy to report that the condition of the state is resilience, because the people of iowa are resilient. [applause] we have never stopped in our work for the people that we have the honor to represent. to address the state wide challenges, of the double challenge is related to the

economy, related to the natural disaster, we signed a statewide infrastructure and job creation initiatives, and a vote on this was a vote for flood victims. a vote on this was a vote to rebuild the economy. this was a vote for businesses, and communities, as they struggled across the state to get back on their feet. so i want to be clear. i am proud of the fact that we have made a difficult decision that was necessary to put the state on the road to recovery. i am proud of the fact that on my watch, we have earned the highest possible bond rating for good, fiscal management. [applause] i am proud of the fact that we

have balanced the budget, three years in a row, without raising taxes on the hard-working people of iowa. and speaking of the budget, some politicians, and armchair quarterbacks are confused about the current budget situation. we will end the confusion. today, the budget is balanced. it has been balanced every single day that i have had the privilege to be the governor of this state. [applause] additionally, because of the cost-savings initiative, the budget, this morning is smaller than it was the day that i took office.

and this did not happen, as you know, by accident. this happened by making the tough choices, managing the budget -- managing the budget responsibly. here are the 10 steps i have taken to manage this state to the economic downturn. first, in 2008, i cut spending by 3%, froze hiring, cut employee travel, and reduced the insurance cost by $20 million. in 2009 i instituted a lean government initiative to further cut spending by 10%. this saved a half-billion dollars. i cut my own payment by 10%, and ordered the state department directors to do the same, and mandated that the -- 3500 non-

contract to employees take furlough days. to further cut costs, i signed an executive order to approve -- to improve the efficiency and eliminate redundancy, and identify wasteful spending. this will save $140 million next year, and a half-billion dollars during the next five years. and then we took a huge step and negotiated a cost and job- savings agreement with two of the largest unions. the state police officers -- fortunately the members agreed to sacrifice for the greater good. i want to salute these men and their members for these historic measures. [applause]

this demonstrates that when we come to the table, in good faith, we can meet these challenges. finally, we have done all these things to balance the budget, and protected our priorities in renewable energy, workforce development, early childhood education, health care for children, and public safety. but there is another priority that we must always find time to find, and the money. as you know, in the coming months, 3500 when -- 3500 men and women of the national guard will go to afghanistan. as the commander in chief, it is

my duty to make certain that they are prepared for service. the 3500 soldiers represented the largest single, overseas deployment, since world war ii. we must give them every tool that they need to complete their mission, and come home safely. [applause] these brave men and women, they have turned our support. that is why i am asking you today to pass a supplemental

appropriations bill early on in this session to restore some of the cuts to the department of public defense. no family better understands the importance of preparation and training than the mills family. timothy mills is now in iraq and his wife and children are with us today, and she is joined by the leader of the national guard. please join me in thanking them and their families for their sacrifice and their service. [applause]

now want to talk about the budget for next year. the budget i will submit at the end of the month will be balanced. and it will effect -- it will reflect our values. here are my top legislative priorities for 2010. number one, my top priority is jobs. job creation. retaining jobs. these are incredibly important things, so i am asking you to fully fund community college training programs and adequate funding for work force development. we can give -- we can keep these offices open all across the state and give people the services that they need during these challenging times. and reading more green-collar jobs. i asked you to find the iowa power fund once again. to create more jobs, invest

further in infrastructure, and stimulate the economy and continue the flood recovery efforts. i look forward to working with you to allocate the remaining $100 million of the initiative in fiscal year 11. i am asking you to enact the remaining recommendations pertain to in my government efficiency report. this will require legislative approval, and we will be able to save more than $200 million next year, and nearly $1 billion over the next five years. these are common-sense ideas that will allow us to streamline state government operations, offer early retirement to some state employees, and a four-work day to others -- a four-day-work week to others, strategic purchasing across the enterprise of state government,

and eliminate redundant and unnecessary information technology services. [applause] #3. fighting efficiency in state government is only the first that. a major reorganization of state government needs to be the next. i think it is time for all of us to rethink the way that state government does business. let me be clear. we are talking about real reform for the 21st century, not short- term cost saving. this will move us closer to the kind of smarter, more efficient government that is the goal, and that the taxpayers deserve. i look forward to working with you during this session to do this. last session, we signed recovery

assistance that offered immediate and long-term support for people affected by the flooding. this included finding the office, that thanks to the lieutenant-general, was recently recognized as being a national model for effective flood recovery. i am asking you to fully fund, once again, the rebuild iowa office next year. we have said -- successfully secured $3.6 billion in state and federal money to help iowa rebuild from the devastation of the storms and tornadoes from last year. these efforts are working. 3000 people in iowa who lost their houses are guaranteed the funding necessary to buy a new home.

finally, i hope that we will be able to work together to commit a portion of the remaining funding, specifically for flood recovery projects across these states. i respectfully ask you to explore every option that is available, including transferring money from the road fund to make certain that we adequately fund the department of public safety. we have done this before. i believe that we can do this again. and as you know, in an effort to save taxpayer money, and increase transparency, we have recently completed a review of all the tax credits in iowa. last year, -- last week, the tax credit review panel released their report. i asked you to do everything

that you can to make these credits were as the legislature intended. -- make these credits work as the legislature intended. [applause] let's talk about honoring the most important responsibility as the people of iowa, the duty as parents and shepherds of the children's future. speaking of children, my wonderful children, are here with us this morning along with the first lady. i would ask that you welcome them to the chamber. [applause] you know, i am proud of the fact that working together, we have made a long-term investment in

the health and the education of all the children in the state. despite the challenges that we have had in the last three years, we have expanded health insurance to 52,000 children in iowa. [applause] this investment now makes us number one in the nation when it comes to providing insurance for the children. this session, we must continue this important investment. we must also do all that we can to expand access to early childhood education. we have helped more than 12,000

kids, in 175 school districts, get a quality preschool education that will prepare them for the competitive 21st century economy. [applause] my budget request will include the last installment of the four-year, $60 million investment to preschool. to make certain that everyone in iowa can compete in the new, global economy, i asked you to pass the legislation required to allow us to compete for the race to the top. we stand to receiveçó $175 milln

and this will allow us to be more innovative in the classroom, and building the education infrastructure that the students need, turnaround the underperforming schools and allow more parental choices. let's make certain that we do not miss out on this great opportunity for the students. let's make certain that we remain on the cutting edge in education reform. an i am asking you to pass legislation that requires school districts to send down a portion of the cash reserves, instead of shifting the burden to local, property-tax payers. as governor and a former teacher, my commitment to education transcends even most difficult budget challenges. i will fully fund allow old- growth at 2%. we are not only going to set this, we will be finding that

this session. and, on top of that, i will be asking you to dedicate at least $100 million from the reserve to restore some of the recent cuts to the schools. this will be a short-term shot in the arm for some of the schools, especially in the more rural districts, which are already facing depleted reserves. i also want this to do all that we can to support to me -- to support community colleges. we have some of the best in the country. speaking of the best in the country, was it not great for iowa state and iowa to windows bowl games this year. -- to windows -- to win those

zero games this year? -- those bowl games this year? [applause] i want to congratulate the coaches and players, the fans, for all of their support. this was a great thing to have those teams be the winners in the bowl season. i also want to welcome the president of iowa state university, two members of the board of regents, and i thank you for your service to the state as well. [applause] as you can see, we have a lot of

ground to cover in a short amount of time this session. but nothing that we do here is more important than doing our part to help create and retain good-paying, private-sector jobs. and i want to recognize and thank those who have the courage and foresight to stand up and join me in passing the initiative in the last session. this was an important step. let's remember what ijobs did, and why people across iowa support this. this is fair and equitable. every county will receive funding that can be dedicated to the high-priority infrastructure projects of their own choice. the process of getting the funding to each of the 99

counties is transparent and merits space. the bipartisan board is compromise the people who have given their time and expertise with one goal in mind, to award the funding according to the spirit of the law. we do not use public funding to build bridges to know where. -- to know where -- to know whnowhere. we also have a history here, as the past administrations have used their constitutional authorities to bonn for capital investments. ijobs and investment in the future which is unprecedented in its scope. the bonds will be paid back at a

historically low interest rate, through gaming revenue and not by raising taxes. [applause] not one penny of the funding will be used for state operating costs, and in other words, we are not bonding the payment. [applause] in the short term, this is creating jobs. in the long term, this will strengthen the economy and we will be able to speed up the flood recovery effort. we have made a major investment to modernize the entire state infrastructure, to approve -- to improve the rail and road and bridge system, recovering from the worst flooding in the

history of the state, and protecting the communities from future disasters. additionally, this will allow us to invest in the renewable energy and telecommunications networks across the state. we have kept the promise to the men and women who have served in the military by expanding and renovating the veterans home in marshalltown. we will have the nicest and most advanced veterans home in america, and the veterans deserve this. [applause]

here are some of the examples of what ijobs mean for iowans. the most hard-areas, there are 54 projects under way, for a total investment of nearly $100 million. in butler county, where parkersburg was struck by an f- five tornado, there are 14 projects under way, close to $3 million. this is a long list. every single county will benefit. we now have approved 1400 projects and invested $530 million across the state. these things matter.

just ask the people who are impacted by the flooding. ask the people what they think of the new fire station, after what they had before was lost in the flood, with the people of fort dodge, whose community colleges will be renovated. finally, we have used the funding to help complete the university of iowa, to help them secure the finding that they need to help them with the security efforts. because of the $100 million commitment, they have the funding to help them rebuild the auditorium and 11 other buildings that were lost by the flooding. [applause] we are literally rebuilding the

state, and the economy at the same time. the focus on building for the long term is now paying big dividends. we have the eight fastest- growing economy in the united states. that is no. 8. we were recognized as being the fourth-best place in america to do business, up from no. 9 last year. and, we are now no. 1 in the nation in terms of low-cost for doing business, in all 50 states. and there is more. two weeks ago, according to market watch, des moines was named the no. 1 city in america

to do business. these are not just statistics. they are the tools that we will need to help us continue to attract good-paying jobs, and encourage existing companies to expand here. i am proud of the fact that we have worked very hard to bring new jobs to this state. 3500 new jobs that pay well, google, aviva, and -- these are very exciting projects but they are just the tip of the iceberg. private industry has brought $7 million in new capital investment to this state. the business climate, even during the difficult recession, continues to outperform the

neighbors, putting us on the clear path to recovery. [applause] in an effort to make certain that we do all that we can to continue to keep moving forward, and prepare the state for a bright, economic future, i will join the lieutenant governor over the next several weeks to do all that we can to highlight the great things that are happening, to talk to local business leaders about what we can do to move the economy forward. let's talk about the green- collar economy of tomorrow. today, there are 8000 new green- collar jobs in iowa, and we have

invested in 26 research and development projects and the second and third generation projects will help us to secure the energy future. they have also attracted $200 million in private capital because of the interest in so many of these breakthrough technologies. [applause] the power fund is allowing us to become the silicon prairie of the midwest and the renewable energy capital of the united states. we are now -- [applause] we are now leading the way, generating 15% of all of the power from renewable sources.

in just a few short years, we will become one of the only states in the nation to be an exporter of energy. [applause] in closing, i believe that we should never lose sight of the fact that everything that we do here in these chambers are about real people. çóand those people are countingn us, every day, to help them, especially right now. the people of this state are very resilienct.