ability to deal with the outbreaks of violence, which i think we did very successfully, and to go on with the kind of training -- police, soldiers, reconstruction, and rebuilding. ultimately, this is about hearts and minds, about the attitude of the iraqi people. there was not a complete breakdown in law and order, though there were some nasty incidents, some british soldiers died. but nevertheless these were outbreaks. this was not a persistent disorder. there for the task of the british and other soldiers was to contain those outbreaks and to move forward in terms of reconstruction and training. .

>> during that period i had met him and he was the spiritual

leader. without him, and without his influence, his ability to restrain them from retaliating, and moreover, his ability to call the people. we would have gotten to that stage. >> he was an immense influence. i developed an enormous admiration for him. he seemed to be able to calm everyone down during a time when people would resort to violence that would deliberately try to end when the situation. it is in place that people should not retaliate. >> one of the problems was we couldn't really do the hearts and minds work when the security situation got bad. as we have

heard from many witnesses, this security is bad, you can't win the consent of the population by doing reconstruction projects and so on. so a lot of our quick impact work, a lot of our development work, became impossible because the security situation was slipping out of control. >> i wouldn't say that was a consistent picture across the whole of the south. there were places where it was extremely perhaps the work did not equally, during those periods there was still reconstruction work going on elsewhere. >> if we turn to the training of security forces, this fell into two parts; the police and the army. did you feel that the targets that, in the early stages of this operation, we were setting, approved at the highest levels in whitehall, for numbers to be trained were realistic or were they overambitious? >> i certainly thought at the time that we were not getting we, the ministry of defence, were not getting the kind of

help that we had expected, particularly so far as police training was concerned. >> from? >> again, part of the plan was that there would be police from the united kingdom seconded to provide that training. some went, but not nearly enough, and i don't think we had the capability to provide that kind of training to the extent that we wanted. >> you were in the lead on police training at this stage. >> yes. >> was your ministry the right ministry to lead work on police training? >> probably not, but, on the other hand, we were in the best place to at least coordinate that work involving others, but we didn't get as many people in to do the training as we had been promised. >> were the british the right people to be training iraqi policemen? >> i think so. i suspect being an iraqi policeman is probably rather different from being a british policeman.

>> that's what a lot of witnesses have said, that the whole structure and style of policing there is so different. >> but having said that and this may sound overambitious, but the ambition was to produce a very different kind of society than had examined hitherto. so trying to develop police officers who were not subject to financial or tribal or other pressures, i think was a laudable ambition, even if difficult to realise in practice. >> at what point do you remember the message getting back to you from the theatre that the police training really wasn't working? >> the message that came back was the one that i have given to you already. the message came back really that, "without more help from those who are more expert in this field, we are not the right people to do this job". >> but the army training,

although slow, inevitably was going better? >> yes, and i visited both a police training unit, and, on several occasions, army training and you know, i had seen some of that before because we did similar sorts of things in sierra leone and, to some extent, afghanistan. but i mean, there are several stages involved in this process. there are some very basic, almost raw recruit training that began almost straight away, and that was no more than trying to give people a sense of coherence and discipline. they were i remember they were presented with uniforms at one stage and that was a tremendous sort of sign to the men involved that they had made certain progress. after that, there needs to be further training in terms of responsibility, how you organise yourself 0 >> creating a new officer corps

because bremer had disbanded the old one? >> absolutely, and that is a much tougher process, because before you can and this obviously was the plan. before you can hand over an area or province to iraqi control, it isn't just enough to have soldiers who have been trained in the basics. you can train a basic soldier relatively quickly, but you have got to have leadership, you have got to have command, you have got to have people who can take decisions where necessary, and sometimes in quite difficult circumstances, and that does take time. >> thank you. >> i would like to turn to some questions about the balance between the uk military objectives, very much focused

in the southeast after the invasion, and our overall iraq strategy. you started our day with a threelegged stool. >> i'm sorry about that. >> there is in a sense a twolegged stool 5 they are not equal legs between our very direct responsibility for the basra box and those four provinces and our shared responsibility, indeed accountability, for the whole of iraq, very much centred on baghdad and the americans. we have a senior british military representative, who is nominally a deputy in the chain of overall command, but, frankly, given the disproportion between the american forces and ours, not with the authority that that might suggest. so there are several decisions that you had to make or endorse, about, sometimes, an american wish to pull up british forces from the southeast, either for a particular need or general reinforcement, and i wondered if you would like to say a bit about the factors that you had

to take into account when you are judging, for example a us approach to send our air assault brigade to baghdad, which you turned down, i think. what was in your mind? how did you judge it? >> i think there was a balance and i think to some extent i would have to recognise in a number of questions today that my focus was very much basra and the south, because that essentially is where british troops were and where they were mostly engaged. i'm not avoiding my responsibility as part of the government for what was taking place in baghdad and beyond, but i wasn't in the same way directly responsible for that in the way that responsibilities were allocated. but nevertheless, as far as the military part was concerned, when those requests came, i had to make a judgment, i hope consistent with the answers i gave to sir roderic a moment

ago, between, what did we need to do in the south and what was our primary focus there, and what contribution did we need to make as a good ally, as part of the coalition, to operations further north. i think that was not the only operation i turned down, simply because i felt that perhaps our priorities still remained in the south and that we had played our part. eventually, we did decide that, because the americans were conducting a major, a very significant operation, in and around fallujah, that we would relieve them of some duties i think it was in an area known as north babil. >> so these decisions, not to put too fine a point on it, were mistakes? >> i think they were, i think that it would have been better to have that stability in that immediate aftermath and i think that, to some extent, disbanding the army fuelled the insurgency in a way that made it much we

had to look very hard at the request. given that this turned out to be the case, that fallujah was a huge turning point in the american operation. they were actually able to make some real progress. >> there have been a failed attempt earlier that year? >> yes. the argument about them putting huge resources into this operation, and providing them with some cover, elsewhere was a powerful one.

we're still thinking about the two little stool. this is inside of public opinion. >> in terms of the answers that i gave up a moment ago, those kinds of revelations simply demonstrated that we were perceived by more of the population as being occupiers and as being the enemy. that made it harder to keep people on side in terms of hearts and minds.

>> we have discussed fairly recently in this evidence session, the deteriorating security situation, quite rapidly, april through august, et cetera. at the same time there was a british ambition 0 a government ambition, that our conduct of affairs in the southeast should be " exemplary" is the word that is often used. at some point, that aspiration, noble in itself, has to give way to the deteriorating reality. was that something that was consciously managed or was it simply a passive reaction to worsening events as we scaled down our exploration? >> i think one of the factors that led to the deteriorating situation undoubtedly, and i have seen regular reports about this, was the sense that we were not delivering, we were not providing the kind of support that people in and around basra expected. they thought things would change very quickly and we just couldn't make those big changes in time. i think we did a lot of good

work on a small scale and that undoubtedly helped, but i mean, i referred earlier to electricity. it was clear very quickly that the power station serving basra could not be repaired indefinitely. we could do what we could, but we couldn't guarantee that it would keep going and, therefore, there had to be a new power station, and that was a long and frustrating saga of getting the money approved, of deciding which company would do it. there was quite a debate about whether it should be an american company or a british company, and the money, in any event, wasn't coming through for it. so that kind of delay i think frustrated it not only frustrated the population, it certainly frustrated the guys on the ground who were having to deal with the consequences. >> i have got one other question. it is very much abou

looking to the future and lessons to be learned, but it would be interesting to hear from you about throughout your time as secretary of state and particularly during and since the invasion there is a military phrase "situational awareness". how was your situational awareness formed? regular briefings, situational reports, hauldown reports from generals as they cycled through. can you say a bit about that? every now and again you had to take a big decision. >> i don't think there is a single 76 process. it may depend on the individual who is doing the job at the time, but it is necessarily a mixture of expert advice from the people who have experience, whether they be soldiers or civil servants in the mod or beyond. i think there is a certain i always felt there was a lot to be gained by going myself, looking, asking questions, focus on what was going on at the time, and i made i'm not sure how many times i went to iraq, but quite a number of occasions in the time that we were there.

i think there is some context to this. i think i was fortunate, if that's the right word, that this particular operation came after afghanistan and came after sierra leone and came after our involvement in kosovo, because i think some of the decisions that had to be taken in relation to iraq were really very, very difficult in terms of a risk to lives, deploying fighting soldiers into a potentially very dangerous conflict. so you know, i do think that it is a mixture of all of those things that allow you then to have some confidence in the decisions that you take. >> the ministry of defence and the british military, they are very big beasts indeed organisationally and numerically. it would be very easy 77 to have the whole of one's situational awareness formed by their inputs. were you thinking of your role as a

cabinet minister as well as defence secretary at getting enough from outside that world of these two very big beasts on reconstruction, for example, on the diplomatic, as it unfolded, politics inside of iraq? >> i have always seen the position of any secretary of state as being in a sense the department's voice in the cabinet, but equally, the cabinet's voice in the department. so it is a twoway process and we have discussed resources. it is always quite a balance to be loyal both to a government trying to set an overall financial position, as well as to be loyal to a department that necessarily wants to spend more money, and that, i think, applies to a whole range of issues and it is completely relevant to your question, because there would be times when i would be saying

to the ministry of defence, "look, actually, the right people to deal with this are dfid", or, "we need to rely on the foreign office", and i think to that extent i made the comparison earlier to some extent with the americans. what the americans are not so good at is this sort of lowlevel cooperation between departments, where i think the united kingdom government is extremely good. 78 i came to the view actually that what the americans are quite good at and i think there are all sorts of constitutional reasons why they are better at it than we are, is is the kind

of top level clearing of decisions, in the sense that they have fairly regular meetings of principals, where the secretary of state, the defence secretary, the vicepresident, the president, the security adviser, or combinations of those people will get together and they will simply work through the various difficulties that have arisen between departments and solve them, and once they have reached a view, that's it, and things move on. i think our constitutional arrangements led me to the view that it was much harder for cabinet ministers who were also members of parliament, who have, therefore, responsibilities, not just in their constituency but actually to parliament in terms of debates and question time and so on, trying to get people together on a more regular basis is actually quite challenge. >> we have heard quite a lot of evidence, a lot of it from military sources, that they did not feel that the top hamper of british government was on a war footing. is that in some sense a reflection of what you have been saying?

79 >> as i say, i think in practice it is much harder to say i can recall the frustration sometimes where people would say, "you need to sit down with the prime minister, and jack straw, and perhaps clare", whoever was there afterwards, "and sort this out". the americans did that at a moment's notice. i can recall being in donald's office, the phone goes, the president wants to see him, he goes, whereas there were always some constraints on our ability to do that, plus but i accept this is equally true for the us, there are lots of other things going on at the same time. so although, we are understandably and rightly focused on iraq for the purposes of this inquiry, at the same time we are still conducting operations in afghanistan, there are a whole range, i'm sure, of issues for the foreign office, for dfid, which are absolutely nothing to do with iraq, but nevertheless people are still having to conduct daily meetings, do the work that is necessary to keep

those activities underway. >> thank you. >> sorry, if i can just interrupt, there was a cabinet committee which was very much the equivalent of the committee of principles, the dop, the defence and 80 overseas policy committee, but the problem was that it just didn't meet in the runup to the war for two years. so and then, after the campaign, actually a lot of meetings happened and we had the equivalent structure. so why was it possible to do it after the campaign, but not before the campaign? >> i think the meetings you are describing i mean, there were, in effect, meetings of principles. i'm not suggesting that the prime minister, jack straw, myself, cds, did not >> clare short? >> from time to time, but certainly in wider meetings as well. the meetings that you describe afterwards were i mean, they were big meetings. there were large numbers of people present from not only the departments that you by implication have already mentioned, but whatever the business department was called

at the time. i remember patricia hewitt was represented and a whole range of other people. the home office were there, so it was quite a big cabinet committee looking at the contribution that different departments could make to reconstruction. >> thank you. i think baroness prashar would like to pick up this theme. >> indeed. can i just come back to 8 you have painted a picture that things were obviously getting better and there were meetings and so on, but successive witnesses have said to us that the military and the civilian departments, in particular dfid, failed to deliver what was required of them. >> i think i have said that as well. >> yes, indeed. now, what was done to actually deal with that? because, in a way, the invasion itself was successful. you found the situation on the ground not as you anticipated, and the forces and the civilians, they were doing their best, so they were looking for support from the centre. so what mechanisms did you put

in place to make sure that these got better, i mean in terms of the relationships and so on? what steps did you take? meetings are one thing, but it is the practicality i'm interested in. >> i played my part, but essentially the prime minister, recognising that there is a risk of what i think was described at one stage of strategic failure, ensured that there were the kinds of meetings that we have just been discussing, where government was put on a war footing, although i think that's something of an exaggeration, frankly, but nevertheless, there was a sense in which we had to solve this problem, otherwise 8 we risked wasting the progress that had been made hitherto. so and he took a daytoday interest in making sure that when people said that they were going to do something, it actually happened. >> let me just read to you what keith mackiggan, who was one of the officials with dfid said, and it is a very interesting point. i would like your observations on that. he said: "the organisational cultural differences between different

departments made me wonder whether there isn't still a need for some kind of hybrid civil military capacity in whitehall which we don't yet have." >> i think that's not an unreasonable observation, and if i may to some extent suggest a lesson that i certainly learned, one of the things that the military have rightly emphasised, and in a modern world the ministry of defence have rightly emphasised, is the importance of getting quickly into a situation. i gave the example of sierra leone over a weekend. one of the problems we faced in a series of conflicts in the aftermath is getting civilian capability there in anything like the same timescale. if you think of kosovo, essentially an administration conducted by serbs, who left, to some 83 extent sunnis left the south and certainly abandoned their positions. even if they didn't go north, they went home. so you have got a vacuum, not of a military kind,

but of an administrative kind, and i think there is actually a role for some kind of what i would describe as civilian reservists, the counterparts of military reservists. people who are not going to wear uniforms, but they are perhaps trained, give up a weekend or two weeks or something, so that they 0 their commitment would be that they would be ready to go into a situation as and when needed, so that, you know, they would be people who would expect to be called upon in precisely this kind of situation, because the real problem is that i think all 5 >> but that is something dfid could do. >> exactly. all departments of defence, in a sense are used to the concept that you have got to get people quickly into a conflict, even if some of the countries that i can think of can't do it quite as well as we

can, that is part of the modern thinking, but then there is a sort of gap, certainly, that i have seen, where we are looking around for someone to fill that gap. now, i have described the military the military reservists filling that gap in the south in iraq, but 84 that is not an ideal solution. you actually need civilian expertise who can stay and do some quite important but nevertheless civilian jobs. >> what about these cultural differences? because i think part of the tension was the military wanting sort of short impact projects whereas dfid was looking at more sustainable projects. >> i'm not sure i'd characterise it in that way, because, actually, the money that was being spent on quick impact projects was coming from dfid, as i recall. what we were what, ultimately,

i was looking for was people from dfid on the ground, not only offering the money, but helping to deliver it. the real distinction was not between the kinds of culture in the different departments, the real distinction was between short and longterm. i think i have alluded already to the question of the power station. the real problem was that we could do so much on the ground with these kinds of projects. i went to see some of them. bridge building, sorting out footpaths, lighting for people in the dark, and so on. very basic things that certainly

helped smaller communities, but what we weren't sorting out were the big things, the big infrastructure projects. 85 i don't think that was a cultural difference. it was simply getting these decisions made and getting the money, and the money was supposed to come from orha 4 >> can i sorry. >> we have heard from a number of gocs from mnd (south east), saying that, looking to quick impact projects, they could not draw on much in the way of funding from uk resources, but that the american military had quite large stores that were under military control, and sometimes we managed to feed off those, but it was a different system. comparative merits, i wonder? >> as i say, i think quite a lot of the money did come from dfid directly or indirectly in the first place. there was certainly real frustration about some of these bigger projects as to where the money was going to come from, in the sense that the assumption was that it would come through orha and 9 >> the congress had voted us$billion. >> exactly. but getting it actually spent, getting hold of it was just enormously difficult.

>> can i come back to the impact of this on your own department, the mod? because, given the fact you were there for the long haul, was there a corresponding uplift in effort and resources that you were allocating within the department or was it business as usual for the mod? >> you mean in terms of the overall size of the budget? >> budget, but also the effort in terms of how much effort in terms of people and in terms of the support you wanted to give. how did you manage the mod? did you raise your game to actually support the military long haul? >> i think that is well understood in the ministry of defence. there is always a planning cycle, when people are deployed, that allows them to recuperate and to get back into their regular training, and that's part of the judgment that

has to be made in relation to how long units can stay in a particular theatre. so i think that that is probably better understood in the mod than in most places, simply because that's part of what they do on a pretty regular basis and planning assumptions are made in terms of how long it is possible for different units to remain in a theatre. nevertheless, it does have consequences, particularly, as we discussed earlier, fire strike, anything that adds to that burden, if you are operating at or near full stretch, is then very difficult. >> but because the planning postinvasion was inadequate earlier on, one gets the sense that you were always behind the planning cycle? you were planning as the events unfolded. did we ever regain the initiative? did we ever get ahead of the problems we were facing or were we always kind of responding as they arose? >> i think it is probably almost inevitable that the ministry of defence do that,

because they are always reacting to events. i don't think in this particular in this particular conflict i wasn't aware in my time that this was causing huge difficulty, although i am aware of precisely what you are describing, because when i first arrived in the mod in october 999, we were simultaneously deployed in both bosnia and kosovo and many, many particular support staff were simply being rotated from one to the other and we lost a lot of people during that period because they just said, "look, i'm not doing that. it is the same thing over and over again". actually iraq and afghanistan, certainly the war fighting part, actually is "

popular" is not quite the right word, i suspect, but that's what a lot of people join up to do. >> but are you then saying there are no opportunities to learn any lessons? >> no, i think there was quite a detailed as there always is after any operation, a detailed lessons learned process inside the ministry of defence. >> you identified those, but were these lessons actually learned during the course of the time you were there? >> i think those are probably longerterm considerations. i left in 2005, but i'm sure that work would have fed into and continued to feed into the kinds of judgments that are being made. i think it is clear that there is going to be some sort of defence review after the next election and i'm sure these kind of issues will be part of that process. >> but did you personally attach any importance to actually making sure the lessons were learned as you went along. >> of course, yes. >> what sort of initiatives did you take? >> i think i have given some examples. at the very sophisticated equipment level i was in no doubt of the importance of very sophisticated technology because i think that that is going to be the difference 89 in war

fighting for the future, which means that it is necessary to equip our forces with battlewinning technology if we are going to send them into conflict. i think that feeds through in all sorts of other respects, in terms of logistics support. i have talked about multiple chains of support for front line forces. it is a very different kind of world from the one that, in a sense, influenced thinking up to the end of the cold war, where far more territorial defence was in mind. so i think each of the conflicts that i was involved in, i think demonstrated the importance of relatively speedy response, of having multiple logistics chains, support chains, being able to operate at a significant distance away from home base, having smart

weapons and having the kind of technology that allows us to work alongside the united states. i mean, that's a small list, i can make a longer list of the kinds of challenges the mod will have to deal with when it goes into this defence review. >> we are coming towards the end of a long day. i think we ought to take a short break just for a few minutes, then sir lawrence has a couple of questions on resources and then that will be it. if we can come back in no more than ten minutes. >> thank you. >> well, to restart, sir lawrence? >> back to budgets. we went into a campaign with a certain set of assumptions in march 2003. we were there for six years. you obviously weren't secretary of defence for all that period, but you were there for a significant period afterwards. how did you find that you had

continuing discussions presumably with the chancellor about how you managed the budgetary position, created by iraq. how did you manage that process? >> i think it is right to say that we did not have any difficulty at all in securing the extra spending specifically for the operations. the treasury, i think, by then were used to the process that we had been through in relation to afghanistan, sierra leone, i guess prior to that in the balkans. so the extra money for operational capability was available. i indicated earlier some difficulties over how you sustain some of this equipment thereafter. >> but in terms of the extra funding 9 for the actual operations, what we discussed earlier, the relationship between the general defence

budget and what is necessary for specific operations, what about that side of the equation? how successful were you in maintaining a defence budget to provide the core, the foundation, for any future operations. >> as i indicated, when i arrived in the ministry of defence, there was a strong sense that the ministry of defence had been underfunded. i do not believe that that began in 1997. there was a strong sense that perhaps the socalled peace dividend had eaten too deeply into defence resources over a longer period of time, and that, in a sense, a strategic defence review was part of the process of trying to recover some ground, but albeit not as well funded as it could have been. >> so this is a continuing position you found yourself in.

were you able to improve the situation? >> certainly defence spending increased in the time that i was there. i daresay others in the department would question the extent to which it increased in the way that other departments' budgets increased, but nevertheless that there were there were there was extra spending available. particular disagreement with the treasury in september 003. do you recall that? >> i do. >> perhaps you could explain what it was about. >> i'll try. >> it is complicated. >> it goes back actually to the settlement in july, i think it was, 00. this is the complicated part. the treasury were moving towards a system of resource account budgeting which in a simplistic way meant that departments had to pay for

existing equipment as well as new equipment, so that there was an amount allocated for what you already held. now, for most departments, i suspect the two that were particularly affected by this were defence more than any other, but transport probably as well. but most departments this was a means of adopted from the private sector of bearing down on historic costs using existing resources more efficiently and more effectively. what i think the treasury probably overlooked in their settlement letter in july 00is that, because of a large amount of equipment that the mod held, it was 93 much easier for them to bear down on those costs and did so. it is one of the reasons why we judged the 00 settlement, as presented to us, was very favourable because we would be able to use our asset base far

more efficiently and effectively to release cash for other spending. >> so essentially, what this meant was you could take the noncash parts of the budget and transfer it across to the cash part 0 >> only subject to finding efficiencies. that means using the existing equipment more efficiently and therefore at a lower cost. that was the whole point of resource account budgeting adopted from the private sector, was to put pressure on departments to look much harder at their equipment, and if they had, for example, equipment that was no longer really fit for its purpose, to get rid of it, and, if they had older equipment that was expensive and tying up a lot of maintenance, time and money, make a tough

decision as to whether you really needed it. but i think what the treasury overlooked was that this gave enormous flexibility to the mod to do precisely what you have just described, and about months later i think the treasury realised that we were spending rather more than they thought we should 94 because of this flexibility, and the flexibility was written into the settlement letter. i have read about this in the newspapers. i don't actually have a copy of the settlement letter, sir john. i did ask for one, but it is not actually available. but nevertheless, i think it was clear what was happening. we were given this flexibility, the treasury didn't like the fact that we were using the flexibility, and probably around months later, they well, i don't think they put the brakes on, they told us we had to

stop. now that caused quite a lot of problems, because we had been spending at this higher rate, and moreover, we had quite a lot of plans for this future equipment based on the flexibility, because obviously this was something that would go forward as well as retrospectively, and we then >> i'm so sorry, slow down a bit. >> my apologies. we then had to look hard at our budget and make some rather difficult cuts in the future equipment programme as a result. >> how was this argument played out? because it did it was quite a challenge, not only to the budget, but to your role as the chief accounting officer? >> i mean, there were there was 95 a fair amount of correspondence, i think it is fair to say, in the immediate aftermath.

i don't think this issue was resolved for quite a long time because we were clear as to what the settlement letter meant, that was one of the reasons why i had welcomed the settlement because i thought that this opportunity was going to be available to us. the treasury insisted that we should have some independent assessment of both the rules and of our spending. probably sir kevin tebbit is a better person to ask about this, but i'm pretty confident that we were vindicated that the accountants brought in to look at this said that this was wholly consistent, both with private sector practice, and, indeed, with the rules that the treasury had established. as i say, i think in their enthusiasm for applying these rules across the government, i think they slightly overlooked the benefit this brought to the mod. >> now, lest this appear as a side issue, but part of one of the issues that was raised was whether the cuts or the deduction in your budget that would be expected of you would have any consequences for iraq, for our capabilities in iraq.

>> i mean, i don't think that is the case, in fact. the forward equipment programme was affected, but i doubt that that would have had immediate 96 consequences for iraq, because this was this was we produced a white paper in the interim on i'm sorry about the expression, but networkcentric capability and about ensuring that we could do all of the things that i was describing before the break to the baroness, that we could operate at distance, that we had technology that we could rapidly deploy our forces. so this was about transforming our forces again to this kind of, not just expeditionary warfare but high technology warfare. >> but given that we are in a conflict that seems to be lasting for longer than might have been anticipated, it is relevant in terms of, for example, helicopters and looking

forward to what you would be able to provide our forces in the future. >> well, again, i don't want to overstate the position. i don't believe that it was relevant to helicopters in iraq. no doubt this is going back to 00/003/004. i suppose it is reasonable to assume that by now, had that budget have been spent in the way that we thought we should spend it, then those helicopters would probably be coming into service any time now. >> so your budget was still under a severe constraint? >> yes. >> i think that was the basic point, in terms of >> to some extent more so because of the way we had

interpreted the rules. >> that, i guess, was the point i was making. now, can we just look at these particular questions of helicopters? it is a critical resource. every military commander always says they want more. the numbers were drawn down in iraq after the initial combat operations. was there pressure to keep them there, to find more? >> as you say, it is always a scarce resource. we didn't face the kinds of problems in iraq, at least to the same extent the kind of problems currently faced by british soldiers in helmand and in other places, although there were some ieds, but there wasn't quite the same pressure. i think that military commanders on the ground, rightly, and understandably, always want more equipment and i don't think anybody would doubt that. it is part of the balance that has to be struck, particularly when you are conducting more than one operation simultaneously.

>> but the lack of helicopters meant 98 that it was the forces were much more dependent on using the roads. >> yes. >> now, you have mentioned that the ied problem was not >> i have simply said it wasn't as great. i'm not minimising it. >> it grew, i think was the point. so although we said we were not going to go into the detail of snatch land rovers, this is one reason why the forces were so reliant on snatch land rovers. >> that's right, yes, but again, i mean, bear in mind as well overall the security of british forces, british soldiers has to be of paramount concern, but also bear in mind that part of the ethos and a more recent tradition of the british army is to get out amongst the local population, to interact with them, to be seen, not to be hidden in very heavily protected vehicles.

so trying to get that balance right, i mean, is an extremely difficult one, and i don't envy those who are having to take those decisions today in relation to afghanistan. >> i mean, the consequence of relying on snatch land rovers, because there wasn't really much else that could be used, was that as a single source 99 of british deaths, this is one of the most substantial, the vulnerabilities of these two developments and ieds. were you aware of was this concern brought to your attention? >> i think it was beginning to develop at the time that i left the department, yes. >> but no provision had been made for an alternative, or it was going to take time for the alternatives to come along? >> i'm not sure that is entirely true. there was a programme for a range of armoured vehicles and i think included in that was a sort of more heavily protected

comparable vehicle. >> if we are there other areas in which you started to see actual resources possibly being needed in iraq, rather than sort of the steady drawdown? you have obviously talked about a very specific episode, but in terms of the general provisions for security for afterwards? >> well, i mean, i have already said that as far as the sort of daytoday operations were concerned, we never had any difficulty in securing funding from the treasury. if you are asking a wider question about what would i have looked to see in the general budget for the ministry of

defence, i probably could give you quite a long list. but that probably would be true of every secretary of state of every government department at any time in history. i mean, there were specific things that, you know, we would hope to have procured, but, for financial reasons, that was not possible. >> it is also a question of troop levels as well. >> yes, although i think the emphasis, which is often misunderstood, is was on specialists, on people involved in signals, communications generally, logisticians, those were the always the sort of shortage trades in the army, because most of the time their skills were very attractive to the private sector. if you can put in a mobile phone system in a place where previously none existed, possibly in secure circumstances, you are very attractive to a mobile phone company back in the united kingdom. so by and large it was those

kinds of highly skilled people that we were short of. >> and remain short of? >> and remain short of well, as far as i am aware, yes. >> just my last couple of questions. when we started talking about the budgets and we referred to the strategic defence review, that had a planning assumption that there was a medium operation of an enduring nature and you might be able to do other things as well, but there wasn't much provision for two operations. >> i think one large, two medium was the kind of formula 8 >> it is a question of what one means by large and medium. iraq would presumably >> one large or, not both. >> yes, in july 004, the prime minister announced the intention to deploy the arrc, headquarters arrc, to

afghanistan. did you envisage that this would mean a significant commitment for uk forces at that time? >> at that time, i didn't agree to it. >> would you like to say more? >> i believed that it was necessary to reduce our commitment in iraq before taking on what was a nato mission and i felt that, at that time, given our commitments in iraq, it was probably better to allow other countries to participate in that particular mission until we were in a better position to do so, and i felt personally that i mean largely influenced,

i think, by the experience i had had in the first part 0 of my period in the mod when trying to conduct two operations in both kosovo and bosnia, that it would lead to significant losses of our armed forces as people were simply being rotated from one theatre to another. >> so how was it that the prime minister was able to make that announcement? >> i don't think the decision was actually taken until after the election in 005, to the best of my recollection. >> that was the substantial deployment, but things were being set in motion. what was the military 3 >> i think my agreement to it was, as i say, conditional. it was not, "let's go and do this tomorrow". it was, "we can do this once we are in a position to draw down on our numbers in iraq". >> what was the military advice you were getting at the time on

this? >> well, i think to the best of my recollection, it was consistent with what i said, that they wanted they wanted to be clear that they weren't going to be involved in two substantial operations simultaneously. >> yet in practice that's what happened. 03 >> as i say, after i had left the ministry of defence. >> so just to be clear, to conclude, your advice while you were still secretary of state, was that it would be unwise, until we had got out of iraq or reduced our levels to a small number >> i don't think i would have used the word "unwise". what i was concerned about was the impact on our forces of trying to conduct those two operations simultaneously. i don't think i would have ever said it was unwise. these were always judgments that had to be made. but i felt it would have been better to draw down numbers in iraq before committing ourselves to a nato operation in the south of afghanistan. >> thank you. >> quite a long day. i think i'll just ask if any of my colleagues have any final followup questions usha? no. roderic? no. in that case, could i ask you and, indeed, give you the opportunity to say, are there any high level lessons learned, and, indeed, are there final comments that you would have liked to have had a chance to make and now can? >> no, i don't think so.

i have been grateful for the opportunity of setting out my thoughts and grateful to the inquiry for the care with which they have approached them. >> in that case, our thanks to you, our witness, and to everyone who has been here through the day, some of you throughout the day, i know. with that, i'll close the session, but noting that at 3:00 pm tomorrow we resume hearings with mark lyall grant, who was political director in the fco at the relevant time, and after that in the afternoon with sir david omand, the intelligence security coordinator. with that, i'll close the proceedings. thank you. >> today, in haiti, government officials said that the confirmed death toll from the earthquake has topped 150,000 in the capital area along.

there are thousands more debt elsewhere around the country and still under the rubble. here is a look at the latest search and rescue efforts. there you go, mate. >> the government has declared that the emergency phase of the search and rescue operation is completed. that means that some of the teams that have been here will start to leave. those teams are exhausted and the need to go home. >> try to relax as much as you can.

>> teams will remain in haiti to respond to any further signs of life that are found. there will also been recovering corpses and move the slabs and to help with the recovery effort. >> this does not mean the search and rescue is over, it means the emergency response phase with new teams arriving and with more work being done is drawing to a close. >> >> we are going to try to

find an ivy to. we are not starting a line. >> -- an idea to -- and iv tube. >> we did see some reports of people being found alive yesterday. of course, every day that goes by, the chances get smaller. as long as the teams are here, they will keep looking for signs of life and they will respond to any reports that are given, but we have to admit that as the days go on, the chances get slimmer.

>> up next, west virginia gov. joe mentioned gives his state of the state address. >> tomorrow morning, health and human services secretary kathleen civilians will give a speech in her keynote address. that is at 9:00 p.m. eastern on c-span to. >> tomorrow, remarks from james jones, national security adviser

to president obama on the administration's strategy in those regions. senator carl levin talks about his recent trip to those countries. that is live at 2:00 p.m. eastern on c-span. >> wednesday, president obama delivers his first state of the union address to congress, laying out his vision of the future of the country. the state of the union address, wednesday night. our coverage starts at 8:00 p.m. eastern on c-span. you can also listen to the presidential address on your iphone. >> in the nation's capital at across the country, listen to c- span radio. in washington and on ex-ixm rad.

>> and now, west virginia's governor gives the state of the state address. from the state capital in charleston, this is about 45 minutes.

crp programs. this is live on c-span. but the same firms have recorded a record profits and are handing out lavish bonuses. some continue to follow reckless compensation practices. this is because we have been irresponsible corporate coacher

where american ceos are awarded large bonuses and a generous stock options even when their companies performed poorly. this has been typical in the past 25 years. the total real compensation of ceos grew sixfold in this time. the case against the pay of american ceos looks even more powerful by recognizing that the typical american company receives -- american company had received more total compensation that the company head of most developed countries. clearly, american ceos are being rewarded over ceos elsewhere, even when per-capita income of the countries do not differ much. recent headlines have focused on financial firms, we cannot ignore other sectors. in fact, the five ceos all outside of finance or recently named the highest paid worst

performers. the ceos are taking one more pay despite the fact of their businesses have done so badly that their stocks have tainted and they have laid off many employees. -- their stocks have tanked and they are laying off many employees. as we work to issue new guidelines on executive pay, we need to ensure firms begin to better align with stockholder value. i suggest moving beyond a nonbinding shareholder vote on executive compensation. there is continued frustration with company boards editor fail to act in a response to a successful non-binding cheryl the resolution or watered down implementation of proposals. boards can continue to rescind board adopted policies under the fiduciary duty of obligations. i encourage open dialogue between church elders and management, but i do believe that shareholders -- between

shareholders and management, but i do believe shareholders need to control management in their firms. >> the senator from alabama is recognized for -- the representative from alabama is recognized for two and half minutes. >> mr. chairman, i think you have been very fair two committee republicans. you have invited witnesses that we have requested and often invited more than just one of our courses at certain hearings. of course, it is traditional that republicans get to call one witness at hearings. i have always appreciate your consideration, and i know my colleagues have, to. because you have always been accommodating of our request, the decision to deny republicans are witness choice for this hearing is both disappointing and puzzling. i am not sure what makes this hearing any different from any other one.

i would ask why we were denied our choice of witness. that witness was ed demarco. he is the acting director of the federal housing financial agency, which oversees fannie and freddie. and he is the person who, along with the treasury department, approved a $42 million payday for 12 executives of the failed gse's including $6 million to the failed executives. in this hearing, we assumed we would be permitted to examine a real-life case of excessive and unreasonable executive pay at the two companies that have received more extraordinary taxpayer assistance, over $110 billion and counting, than any others. but we were wrong.

$6 million is at 15 times more than what the president turns and 30 times more than the cabinet secretary. on christmas eve when it was announced, these bonuses, one commentator said the taxpayer got scrooge. congress should step in. i and several of my republican colleagues on the committee have introduced legislation to protect taxpayers from having to foot the bill for any more multibillion-dollar tax packages. mr. chairman, i think the taxpayers are right. whether it is any financial company, if the government is heavily subsidizing that company, they have a right to ask. >> do you wish to continue? >> another 30 seconds. they have a right to ask, are my tax dollars subsidizing these large salaries?

and they certainly have the right to hear mr. demarco and find out why on christmas eve they learned they would be paying some tremendous bonuses. the legislation also expresses a sense in congress that each executive should return the executive pay in 2009 so we can reduce the federal budget. mr. chairman, i do appreciate your pledge to invite mr. demarco to testify at a hearing in late february, but i'm disappointed that the american taxpayers will have to wait another five weeks for an explanation from the obama administration about this christmas eve raid on the treasury to pay these executives. i yield back the bonds of my time. >> the gentleman consumed 3 minutes. there will be seven on this side and seven on that side. i recognize the gentleman from california for two and a half minutes. >> i believe in capitalism, that means shareholder control and

shareholder risk. that is why we ought to have pay on -- as we ought to have a say on pay and it ought to be binding. there is a special circumstance where company -- a company is too big to fail. at that point, they have quite the federal government guarantees. -- quasi federal government guarantees. at this point, they should be broken up. the gentleman from virginia is willing to allow the administration to do just that. until then, those that are too big to fail should reduce fees to recruit for the taxpayer of the benefit those organizations get from this implicit federal guarantee. the bill we passed in this committee and in this house does that. and with peters amendment, allows those firms to pay for the past cost of the too big to fail as well as provided for

the too big to fail problems of the future. it also makes sense as long as those that are too big to fail enjoy the implicit federal guarantee if they are qazquasi federal government entities or differed from those that wall street is familiar with. the best solution is for firms to voluntarily divide themselves so that they are not too big to fail. and we can go back to real capitalism, shareholder control, shareholder risk, and a congress and the federal government that does not have to concern itself with salaries and other aspects of internal corporate decision making. i yield back. >> pageant -- the gentleman has consumed, i believe, one minute, 20 seconds. that will redress on this side

with six and a half minutes. the gentleman from texas is recognized for 2 and 1/4 minutes. >> let me see if i can get this straight, we're going to regulate competition for companies that paid the tarp money back, but we approved a multimillion-dollar package for fannie and freddie, who will never pay any of that money back. that is what i call picking winners and losers and unfortunately in this case, the losers wind. since the american people on a majority of fannie mae, we need to see if we can recoup and get money back. but more important, we need consistent policy in this country. it is important to reflect on what is going on today. we're board to regulate companies, tell them what they can and cannot do, break them up if the some bureaucrat thinks they are too big. i am not talking about venezuela. i'm talking about what is going on in the usa. at the american people are getting tired of the government

telling them what to do. we're going to try to look tough on the financial institutions so we can appease the in your of the american people for committing trillions of their hard-earned money -- to appease the anger of the american people for committing twins of their hard-earned money. -- trillions of their hard- earned money. and what the american people really want us to focus on is, how can we raise their wages and create jobs for those who have lost theirs instead of focusing on issues that do not create jobs, and in fact, we're going to cause more americans to lose their jobs. we need to focus on raising taxes, growing government and while the stimulus plans. where the jobs you promised the american people? the american people send you a wake-up call on tuesday in massachusetts, mr. president. i hope you were listening. with that, i yield back.

>> the gentleman from kansas is recognized for two minutes. >> just like reasonable e,%k'7r!4 their executive compensation practices. one example involves a large celery for a lot -- a large salaries for fannie and freddie

executives. i joined chairman frank and others to vote to stop the unfair tarp pay practices unfair recipients. -- unfair pay practices of tarp recipients. finally, for firms to have repaid tarp, i dohe government should go in and set levels. the government does have a role in looking at the structure more broadly to enter risk-taking is properly aligned with rewards and does not pose a systemic risk. i look forward to hearing from our witnesses and i yield back our time -- my time. >> after of said the fees in the state of new jersey, virginia, and a stunning upset defeat in the commonwealth of massachusetts, i would have hoped that this administration and this congress would have

gotten down to drop #1, and that is, create jobs. help create jobs for the american people. instead, it really appears that the administration is set upon a venture in a scapegoat-ism. let's see if we can find an entity that is perhaps more unpopular than our administration in the united states of congress. thus, we have this launching of the assault on the investment community. or they're outrageous compensation systems out there? yes, i am not reached by late- night comedians who make tens of millions of dollars to be mean to each other. i am outraged by professional out -- athletes who make tens of millions of dollars and have -- and abuse their spouses and girlfriends. and i am outraged by compensation packages on wall street as well, but none are more outrageous than those who use taxpayer funds to reward the

executives at fannie and freddie. on christmas eve, this administration decided to take out all the goodies from the american taxpayer and hand them over to the executives of fannie and freddie, which are functionally owned by the u.s. government and hand them out to the two ceos, $6 million pay packages, 42 in dollars for the rest of their executives. we were paying -- $42 million for the rest of their executives. we were paying them tens of billions of dollars from the u.s. taxpayers. what they do with the taxpayer money is our business. but what people do with their money is their business. i have said privately and publicly that this is a committee is a reputation for fairness under chairman frank.

i am aware of his leadership or his republican predecessor in the seven years that i have been in here that the minority has ever been denied a request for a witness. we requested a witness, at the marker, the acting head of fha to ask a simple question. >> the gentleman's time has expired. do you want to take more time? >> i yield back the balance of my time. >> let me give you a consent for an additional 15 seconds. >> i was hoping that mr. markham could be your to answer the question why he has spent millions -- mr. demarco could be here to answer the question why he has spent millions of dollars in bonuses to pay people who have lost billions of dollars for the taxpayer. and unfortunately, for whatever reason, that request was denied. >> i read -- i yield myself my remaining time. i think it is 3 1/2 minutes, is that right? >> [inaudible]

>> i want to thank both the gentleman from texas about the comments of the fairness of the committee. i think this committee holds the record for the number of amendments that we are debating on the floor and the mark of time. but we do have one difference here. the members of the republican side have made the distinction between private-sector and public-sector entities when it comes to compensation. that is why i want to refer -- differ mr. demarco to a hearing we will have with mr. demarco. and i hope to have mr. feinberg and probably sheila their and others. i think it makes sense to separate out the issues -- sheila dara and others. i think it makes sense to separate out the issues between private-sector and public- sector. the question for mr. demarco is what we do about public sector compensation? i do want to welcome my republican colleagues to

converge into the notion that we should regulate the pay of fannie mae and freddie mac. this committee has twice referred bills to the floor which explicitly proposed restrictions on the pay of fannie mae and freddie mac and the republicans opposed it in committee and opposed it on the floor. even in the case of one of the bills, the one on private- sector, because it was not clear what the status was at the time in texas, mr. antar and offered an amendment to make sure everything was covered -- mr. hensley and offered an amendment to make sure everything was covered. we adopted the amendment. we have had two bills that have passed the house which explicitly authorized regulating pay of fannie mae and freddie mac, and all of the republicans on this diet is here voted against it, both times. i am a little skeptical as to why we have all of this coming up now. by the way, when we passed the bill that is a decree would have done it for republican funded --

for publicly funded companies, the bush appointee was strenuously objecting to it. it was the bush administration the first raised the objections of the bush administration holdover. i think this, we will have a hearing with mr. demarco and others over pay schemes for public employes in the next month. i know he is a man of great patience. and we as a very strong attention span. i do not think a month from now people of forgotten the questions that you wanted to ask. i also believe -- we have an embarrassment on the part of my republican colleagues because they do not want to do anything about the excessive pay in the private-sector, nor do they want to appear to not be doing anything about it.

so, they are changing the subject. by the way, we do not impose the specific limits on the pay in the private sector. we do say that the shareholder ought to limit radical pay. but the structure of those can't -- compensation packages often incentivize excessively risky behavior. and we have mandated that the regulators -- had they break even, tales they do worse. we will get to the public sector in a month. the denman has two and half minutes left. does the jump in which to use it? >> mr. chairman i would ask -- >> we have 10 minutes for debate. >> i would like to claim 15 seconds. >> the gem is recognized for 15 seconds. >> the executive compensation bill that the term refers to cover olives entities, private

and public and it covered all employees, not just top executives. it was a political response to aig, but was poorly written. and the senate has never taken up the bill and the last time i looked, the democrats controlled the senate. they realized it was a bad bill. >> as the gentleman yield? >> my time has expired. >> the german from new jersey is recognized for two minutes and 15 seconds. >> i thank the ranking member and chairman with regard to this approach request -- i appreciate the chairman's explanation as to why he thought we should segregate the panels in this matter, but that does not go to the, that i think the gentleman from texas made, that not one up here can remember the last time that they're a minority requested someone to come to the panel to be a witness and the majority refused

that appropriate request. as of now, the chairman has yet to fully explain why they refuse the request. as the gentleman from texas point out, they differ from these. they are under government control. the chairman of this committee has recently stated that they are "basically public policy instruments of the government." if there is one example, one case, one line of executive compensation that should be looked at, is where taxpayer dollars are being used and that is in the area of fannie and freddie. beyond this point, the area of executive compensation, there is a bigger issue to look at, and that is the christmas eve announcement when the administration took action without any congressional input whatsoever of the lift of the $400 billion cap on fannie and freddie is bailout and

authorized a limited taxpayer funds to be used for both firms over the next three years. again, we have requested a hearing on this, or the chair and to allow a witness on this and he has refused. meanwhile, however, the republican party has come back with their proposals. but they have been ignored. the republicans on this committee have put forward proposals to reform these institutions because it is in this be -- indisputable that fannie and freddie work the central and the mortgage meltdown that we have experience. they have helped ignite the economic and -- economic crisis that has left millions of americans unemployed. passing this legislation should be at the top of the committee's agenda as opposed to some other place up and to this point. >> the gentleman's time has expired. we will now proceed to the witnesses. repeat witnesses in every case, and were always welcome in this committee because they make very significant contribution is not just in testimony, but more importantly, in the debate over public issues in the country

and, indeed, the world. we will begin with professor lucian bebchuk, professor of law at harvard law school. >> chairman frank, ranking member and distinguished members of the committee, thank you for inviting me to testify today. first, -- i would like to make four points. the first, there is a growing acceptance among business leaders that compensation structures have provided incentives. they have encouraged financial executives to seek results even at the expense of an elevated risk of an implosion later on. let me illustrate this problem with the example of bear stearns and lehman brothers, the twin investment banks that went down in 2008. many commentators have assumed that the executives of this

firm's -- these firms [unintelligible] and they have confirmed that the risk-taking could not have been motivated by payer arrangement. a recent study did a case study of compensation of those two firms between 2000 and 2008 and we found that this assumes a fact is incorrect. we estimate that the top five executive teams of bear stearns and lehman brothers derived cash flows of about $1.4 billion and $1 billion respectively during 2000 to 2008. and these cash flows substantially exceeded the executive's initial -- initial holdings in the beginning of the time frame.

as a result, unlike what happened with long-term shareholders, the executives net payoffs for 2000 to 2008 was positive. the second point i would like to make is that we cannot rely solely on existing government arrangements to produce the necessary reforms. to be sure, some firms have announced a fault in the compensation structures. an example, an indication that bonuses would be subject [unintelligible] but firms have not provided information that would enable outsiders to determine whether the cognex would be meaningful or merely cosmetic. this is an area where the devil is in the details. because the changes that firms adopt appear to be at least partly motivated by a desire to

appear responsive to outside criticism, there is a basis for ) following aspects of a -- an existing state that deserves the commission's attention, many publicly traded firms still do not have majority voting,

shareholders still lack the power to place the regular candidates on the corporate balance, many publicly traded firms still have staggered boards and many such firms have supermajority requirements that make it difficult for shareholders to change governments arrangements. -- governance arrangements. finally, in addition to strengthening shareholder rights, it remains important to have supervision over pay structures and financial firms as the provisions of h.r. 3269 would require. it would require that the subsequent supervision would drive talent away. however, the regulation focuses on structure, not on pay levels, and firms would still be able to offer pay packages that are

sufficiently attractive in terms of delivery. one of these it is the best insight in economics is that it is never sufficient to compensate executives using financial incentives. it is important to apply this established inside. -- incitsight. >> next, we have the professor from columbia business school. >> it is but a source of pleasure and sadness to testify before you today. i welcome this opportunity to testify in this important subjects. i am sorry things have turned out so badly so far. in this brief testimony, i can only touch on a few key points and many i elaborate on in my book "freefall" which was published just a few days ago. our financial system fail to

perform the key roles it was supposed to perform in managing society. a good financial system performs these functions of low transaction costs. we generated huge transaction costs as the section -- the sector garnered some 40% profits in years before the crisis. so deceptive were the systems of accounting of the banks had employed as the crisis evolves, they did not even know their own balance sheet, so they knew they could not know that of any other bank. we may congratulate ourselves that we manage to pull back from the brink, but we should not forget that it was the financial structure -- a financial sector that brought us to the brink of disaster. the systems up lead the economy to the brink of ruin are obvious. small and medium-size enterprises found it difficult to get credit even as the financial system was pushing credit on poor people beyond their ability to pay.

businesses pay 1% to 2% or more in fees for transactions that should cost pennies or less. our financial systems have not only mismanaged risks and greater problems -- products that this message to others, but they also failed to help ordinary americans face the risk of a of home ownership or the risk of inflation. indeed, i am in agreement with paul volcker. it is hard to find evidence associated with growth in many of the innovations and our financial system. underlying all of these failures is a simple point, which seems to be done. financial markets are in means to an end, not an end in themselves. we should remember, too, that this is not the first time that our banks have been bailed out, safe from consequences of their bad lending. market economies of work to do -- produce growth and

efficiency. unfortunately, the financial sector was misaligned and that is why the discussion of this incentive is so important. the consequences of the failures of the financial system were not born just by those in sector, but by homeowners, retirees, workers and taxpayers, and not just in this country but around the world. the impacts are massive and there's a reason why it is appropriate that congress should be concerned. the presence of externalities' is one of the reasons why the sector needs to be regulated. in previous testimony i have explained what kinds of regulations are required to reduce the risk of adverse externalities'. i have also expressed the dangers of risk-taking that can be curtailed. i regret to say that so far, more than a year after the crisis peaked, too little has been done on either count.

the two big to fail banks create perverse incentives, which also have a lot to do with what happened. i would like to focus my remaining time on executive compensation. as i said, there are key organizational incentives that arise from institutions that are too big to fail, too big to be resolved, were too intertwined to fail. one thing economists agree upon, incentives matter. even a casual look at conventional structures with payment focus on short-term performance and managers not bearing the full downside consequences of their mistakes suggested that they will lead to shortsighted behavior and excessive risk-taking, and so they did. let me try to summarize some of the general remarks i make in my written testimony that i hope will be written in -- entered into the record. floridian dentist played an important role. -- incentives play an important role. not only did they encourage a

short-sighted beater, but predatory behavior. proven -- short-sighted behavior, but predatory behavior. this is not surprising given the ample opportunities provided by creative accounting. multiple schemes provide the opportunity for deceptive accounting. the incentive structures encouraged distortion of information. the design of the incentives system demonstrates a failure to understand risk and incentives and/or a deliberate intent to deceive investors. i want to agree with professor bebchuk's view of the need for corporate governance. there are alternative compensation schemes that would provide better incentives, but few firms chose to implement such schemes. it is also the case that these perverse incentives failed to

address adequately providing incentives for renovations that would allow for a better function of our economic system. >> the founder and editor of corporate laundry. >> it is a real honor to be back here again. like professor stiglitz, i wish i had better news for you. in previous appearances, have called executive compensation both the sinton and the cause of the instability in our financial sector and capital markets. i regret to say the problem continues. yesterday, the supreme court told us that a corporation is a person with first amendment rights, but as was told us hundreds of years ago, a corporation has no soul to be damned, nobody to be kicked and that is why corporations essentially get away with murder in matters like compensation.

the boards of wall street financial institutions implemented pay plans that were in major and direct cause of a financial meltdown. these purported bastions of capitalism protected themselves by eliminating their downside exposure and taking their pay off the top. a second, rinse and repeat, they took a bailout money and campaign themselves as though they earned it. what they did before the bailout was counterproductive and misguided. what they have done since the bailout is an outrage, or as my grandmother would have said, a shonda. since the only restriction was base pay, everybody got a raise. wells fargo approved a 522% salary increase for the ceo from $900,000 to 5,600,000. -- $5,600,000. and they took the opportunity when the stock market was at its rock-bottom to load everybody up

with buckets of new stock and options. i'm predicting that the next time you have me back here to speak, we will be talking about how outrageous it is that they got in same pay packages again. but now was when they are happening and we will see the payout later on. the historic low prices on stock are resulting in enormous payouts in the overall market. i completely agree with what the members of this committee have said about tax payer money. this is taxpayer money. they're getting paid as though they aren't that many, the money that the taxpayers put into it. they're taking a piece of the top of the taxpayers' money. that is absolutely right. it is an outrage. the clawback that were required as a result of this committee's work are also being subverted, as professor bebchuk said. there is a lot of weaseling been instituted in the clawback saying that faith has to be required or some kind of emotion

or feeling or intention has to be required. clawback should apply a matter what the reason for the correction. otherwise, as professor stiglitz said, they create a perverse incentive. i ask this committee to lead the way into putting the end to the too big to fail concept. if a company is too big to fail, it is too big to succeed. or as the title of a new book by robert posen is -- puts it, too big to save. an executive should be paid by public servants. wall street board's and executives have abused shareholders through their pay plans. the imf has an important study linking lobbying expenditures and high-risk lending. in other words, it is another example of externalizing the risks onto everybody else and keeping the pay plans. they are not -- now doing the best to perpetuate this system

by pouring $7 million into reforms. this is another example of prejean in this response to shareholders and taxpayers. i hope that congress will work to subvert this effort on the overall market and remove obstacles to effective shareholder oversight of pay. >> thank you. let me begin the questioning. i want to give my republican colleagues credit. they fundamentally want to take attention away from the subject of excess of compensation, which is a legitimate public sector issue partly because as ms. nell just noted, they are paying money which they are able to out in part because of a significant public intervention. also, because there are effects on to the economy as all as to the way this is structured. also, the notion of the way we are fearing in the private sector sphere what we set the rules for corporate governance

is nonsense. corporations are a creation of the law, even though the supreme court thinks that god made them. and they can be regulated by us in many ways. they simply do not do what -- do not want to do anything that would interfere with that. i want to respond to one thing that the gentleman from alabama said. when i pointed out that the republicans twice voted against it in committee to give regulation over -- regulation power over fannie mae and freddie mac, which the republicans now want, he said that was in the bill for the private sector. there were two bills. he forgot to mention one. the first bill that came forward was a jar 64, which -- was h.r. 64, which covered only fannie and freddie. it had nothing to do with the rest of the private sector. page two of the bill, no

financial institution has received capital investment under the tarp c-span.org -- under the tarp or with respect to the home loan program. we have a bill that dealt only with tarp recipients, fannie and freddie and it put tough restrictions on them to be administered and they voted against it. it is not my fault. i think they got too much money over the christmas eve timeframe. i believe the remedy here is to, in fact, as i believe the committee will be recommending, abolished this current reform and come up with a whole new system of finance. that was a piece meal one. there were two bills and the republicans voted against both of them. one cover public and private sector. but one that they voted against was a debate was limited to tarp and fannie mae and freddie mac and they voted against it. if they want to bring the

senate, that is o.k. i guess for and the amount of compensation have any relevance to that argument, professor stiglitz?

>> obviously, funds are fungible and money that goes out to pay bonuses, it reduces the capital banks and to the extent that the money has been paid out in bonuses, whatever the form, reduces their ability to lend. how that is obviously much more significant amount. but let me just emphasize one point since we are talking about incentives. the intent of the president's proposal here is to change incentives, change the incentives of the banks to have excessive risk-taking. excessive risk-taking let the economy to being brought to the brink. >> [inaudible] >> that is right, the fact that the tax structure was based on the amount of liabilities that they had. it was a design directed at -- >> [inaudible] >> exactly.

>> [inaudible] what is the relationship between the board of directors and the ceo? currently. >> i know it is difficult for people who know what real elections are to understand that, but we use the term election when we talk about board of directors even though essentially the co controls who was on the board. these arrangements are often very cozy. it was not that long ago that the ceos of some businesses served as shares of each other's compensation committee. and the ceo is the chairman of the local university's board of directors and the provost is on his compensation committee, etc. it is a very closed circle. until shareholders can't replace directors who get it wrong, we will not -- can replace directors who get it wrong, we will not see a change.

>> thank you. the gentleman from alabama. >> ms. minow, you have heard the executive -- the german talking about executive compensation that republicans voted against along with many democrats. and you published an article in the corp. -- corporate library website entitled "right question, wrong answer" that was critical of the executive compensation legislation. and that was the legislation that chairman frank incorporated into the bill that he talks about criticizing us for not voting for. in the article you said, "i have the utmost respect for politicians and bureaucrats, but i also recognize their limits. the government should not want micromanaged pay. -- micromanaged pay." i happen to agree with that. could you elaborate about entrusting politicians and

government bureaucrats with the responsibility for designing compensation structure? " certainly, as i have said repeatedly before this committee, i do not believe -- >> certainly, as i have said repeatedly before this committee, i do not believe the government should set pay. i do believe in removing obstacles to promote shareholders to provide that kind of feedback. as i just said to the chairman, my removing directors to do a bad job, a of -- who do a bad job, i think the bill was necessary, but not sufficient. i do share a concern with members of the committee that some of the terminology in the bill was not -- did not give enough guidance. >> thank you, i appreciate that. obviously, the bill gave the treasury secretary really, cart blanche authority to define and reasonable and excessive compensation, and it was not

just for top executives. it was for all employees. i would vote against that bill today if it were before me. professor, -- if it caught? -- is it bebchuk? in the past, you have criticized executive compensation packages as being double their performance. in the baggage that was announced christmas eve, -- the package that was announced christmas eve, two-thirds of the $6 million cash compensation for each of the two ceos is completely unrelated to firm performance or any performance measure. would you agree that the latest gmc executive compensation -- gse executive compensation awards still fail to link to performance? >> the city you mentioned was published eight the number of years ago and was a careful

analysis of payment arrangements. at the time, it was about the chairman of the time, raised. i have not started the most recent decisions, and therefore, i have not been a position to answer. >> if $4 million of that was not linked to performance, you would still think that -- you would still have your same objections to the compensation packages? >> i do not think i can really offer a view about something i have not release added. -- really studied. >> miss minow, in your testimony, you decry compensation arrangements that widen the gulf between pay and performance and integrity and outrageousness. in your view, do the pay packages of fannie mae and freddie mac executives, most particularly the $6 million

awarded to each of the ceos adequately link pay and performance? >> i have been a consistent critic of the pay packages that fannie and freddie, going back before the financial meltdown. again, they have a corporate governance nightmare. you cannot be both a public and private enter side -- enterprise at the same time. >> does that need your definition of outrageous? >> they are not as outrageous as the previous pay plans at fannie and freddie, but i think they are wrong. >> ok, ron, but how about outrageous? -- ok, they are wrong, but how about outrageous? [laughter] >> if i'm calibrating the word outrageous, they are nowhere near the category of outrageous -- >> may be a class for instead of a class by the outrageous? >> exactly, they are troubling. how was that?

they are troubling, but not outrageous. >> i appreciate it. >> i would like to take 15 seconds to say that my friend from alabama continues to ignore the fact that there were two bills, one on the private sector and the other zero having to do with tarp and fannie mae and freddie mac and heat he refd to do anything with it. there was a second bill, fannie mae and freddie mac and tarp and that is the one he voted against. but it is not my time. i yield to the gentleman from pennsylvania. >> i appreciate your opinions. very often, have had the occasion over the last six to nine months to make a speech in my district because i'm trying to reach constituents to understand the overall complex

problem of salaries and wages. as a given factor in my congressional district of pennsylvania, the average wage is about $13 an hour. i say -- and if you will supply 2000 working hours a year, that comes to and have -- annual income on average of $26,000. we have had several witnesses that appeared before my subcommittee and we have gotten down to the question of compensation and what we do about it. we could get into difficulty if we start deciding that we are the final arbiter of what a fair salary is. because quite frankly, i will confess, i do not know. if i were a brain surgeon and i need brain surgery, there is no amount that is to excessive until after the success of the

operation. but the reality is, some of these people have come. i was a little annoyed and at what can across with compensation. hear about $2.5 billion per year. and i pressed him because i was offended he only paid a tax rate of 15% because of the structure of his salary, putting them into capital gains as opposed to regular tax. and after about 15 minutes with great annoyance, he finally put his hand in his pocket and said, congressman, why are you picking on me? what did i do to you? i said, nothing, you happen to be a witness and i'm trying to extract information. and he said, i happen -- what i will have you know i am only

the 51st person in this country in income. there are some who make a great deal more. what is too much? what is too high? is $5 billion? is $50 billion? i pose the question because we always use numbers. and i go back to my congressional district of $13 pratt our wage. -- $13 per hour wage. and this gentleman is wage is $1,300,000, that is what he makes every hour of the year. when you do the mathematics of that, he makes 100,000 times the average wage of an average worker in my district.

how do we get a sense? regardless of what compensation we pass here or what we do on fannie mae -- they are chickens. what do they get, $6 million per year? that is peanuts when you compare this. should we be looking at -- first of all, what do we need to get to a balanced budget? because these people are not just earning and taking corporate money or profits. these people are not picking up their burden in society in proportion to their income, and as a result, now this year we are ending up with $1 trillion, $400 billion shortfall if we could -- that we could make up if we did not have these extraordinary ways of avoiding income. should we change this -- the tax structure, and perhaps get to a level feel that way, as opposed

to define particular people over whom we may exercise power and those that we can on? -- and those that we can't? >> i agree, the basic framework for thinking about equity should be through our tax system. incentives are related. because the question is, would they work a little bit less hard if they paid higher taxes? i think the answer is clearly, no. it would not have a significantly adverse affect. the issues i talked about, and some of the others, were the structure of the pay of the executives in these banks have strong effects. the reason we are interested in them is because those affects affected the taxpayer because it led to the economy falling apart. what they do impose costs on the rest of us, and therefore, is a

legitimate source of concern, as opposed to lots of other areas where people get high pay but it is not as much of a legitimate source of concern and the way we deal with it in the tax system. >> i think we have heard from the panel on where they think there have been abuses in the corporate pay structure. i would like to hear from the panel who is doing it right. where is the model? mr. bebchuk? >> i think there is evidence that firms who showed it right are stronger, where you have less arrangements to make it

difficult to replace directors. compensation in those firms@@@@

>> they are not paid for performance. they only have that in their name. >> i cover that in my written testimony. >> i think one of the things that concern me is when you start down the road of the government designing these compensation plans, what we are really doing is saying that there are a few companies out there, but the question is what about all the other companies that are doing it right? how do we justify the ones we pack? >> we are talking about the government -- we are not talking about the government prescribing what the guidelines should be, but giving guidance.

that -- if that happens, the firms that are doing it right will continue to do it right. those that are not, would hopefully improve their pay arrangements. >> the shareholder has the ultimate right, do they not? if that company was making too much money and the shareholders are not getting too much return, i would just sell my share of stock and move on. >> they provide you with no protection and insiders with no incentive. let's suppose the price is 100. you believe that if managed well, the company would be worth 120. if you sell, you would be selling at this to someone else.

you're concerned would be that you should be getting 120. that ability in no way provide you access nor makes it likely that you would be able to capture the 120. >> that is an out-dated approach. up to 70% of the stock is held by those that do not have that luxury of selling out every time because of transaction costs. everyone is stock. the question is, is it more beneficial to them, economically, and to pursue better pay than abandon it and leave? >> i do not think i can agree that people are stuck. if you own a share, you can send a message to the management. in fact, some of the larger investors can send a very strong

message. if a large investor moves a large block of stock, that sends a risk. why did he or she do that? to say that people are stuck is a little -- >> the data goes the other way on that. as far as large investors, you are right. they can ask for better. all we are asking is to make that more possible. >> can i make a general point? corporations are a creation of the state. we write the laws. what mr. bebchuk and ms. minow have been emphasizing is that we want to think about how we write those laws to make sure that our whole corporate sector works more efficiently. that has to do with the systems of corporate governance. what are those systems? that is what is that debate.

there is going to be one system or another. we can, i believe, create a system that is better than the current system. >> the gentleman from california. >> thank you. responding to the gentleman that was just speaking, selling the stock is an imperfect way to control things. first have capital gains tax, then transaction costs, and as the witness points out, they are getting a low price on the stock. finally, they have the opportunity to defend the proceeds into another company that has bad corporate governance and overpaid executives. i would like to start with an observation. it is obvious that with the establishment under attack, by populism that has not occurred in our lifetimes -- the results of massachusetts were not the dick three of one party, but a

victory for populism. -- where not a victory for one party, but a victory for populism. in order to arm the death star said that the empire can strike back -- so that the empire can strike back. whatever we say here today can easily -- can easily be drowned out by propaganda. i want to pick up on the comments of the gentleman from pennsylvania. i think this committee has done a good job on executive compensation when compared to the ways and means committee. that committee has allowed. >> the house, in fact voted for the bill. >> ah. >> they voted for

. . . ready managers and eight -- a 15% tax and hedge fund managers and you can compare that to the 20% rate paid by the gentleman's constituents in pennsylvania. you can see we do not have a fair tax system. i do not think the gentleman that makes $1 million an hour is going to work less hard if his after-tax compensation is reduced to $600,000 an hour. when we talk about compensation, we ought to talk about the entire package, not just bonuses. in this committee, we have made life a little difficult for top executives, particularly those who got tarp money. there is some social utility to

that decide the psychological benefits -- beside the psychological benefits. we have inspired these companies to pay back the money far more quickly than they would have. we are focused on those that are too big to fail, inconveniencing them to the greatest extent that we can. hopefully, that will inspire them to break up, so that we will have financial institutions, the demise of any one of which would divide the whole system. hear, we are talking about their compensation. last month, we impose fees on those of over $150 billion in size. i hope they will get the message and become medium-sized institutions. the problem i have is that in this effort to design compensation systems that do not incentivized excessive risk and properly reward performance -- i

am not sure we can do it. i hope that there would be none of these companies getting federal subsidies or federal guarantees, in which case, i do not think we have to do it. my problem relates to a circumstance to where you are trading " a portfolio. york a might be to have won a great year and get an enormous bonus because in this country we tend to tally things up at the end of the kelly -- at the end of a calendar year. then you get something valuable. that provides a good incentive unless you believe the risks you are taking will turn out poorly and will turn out so poorly that they dramatically affect the value of the entire company. that will inspire other executives to take equally enormous risks.

assume that someone is managing 1% of the company could no money. they do not believe their behavior will affect their colleagues. they choose to take enormous risks. the pan out. at the end of the year, they get shares of restricted stock. how are they losing incentive by giving restricted stock? i did not know if there is time for the answer. >> it is provided for corporate managers, providing them with restricted stock does not give them the incentive to take risks. the only way to do it would be to subject them to a call -- a call back or to put their bonus in a bank. they would suffer when their

own unit does not do that -- does not do good. >> before i make my comments i would ask permission to enter two studies, one on executive compensation, and the other on the credit crisis from ohio state university. >> they will both be entered into the record. the gentleman is recognized. >> thank you, mr. chairman. the american people were presented with a great outrage on christmas eve. this administration decided after billions of dollars of losses to announce on limited taxpayer exposure to government- sponsored enterprises and 2, simultaneously, for all of these laws that are causing the

taxpayers all this money, to announce a bonus structure for the the executives. as i said in my opening statement, i had hoped we would have an opportunity to ask questions of the acting head of fhfa, mr. ed demarco, about this. i know the chairman in his comments said we would have that opportunity in one month. perhaps i am patient, but i am not sure after the election results in the town a lot of massachusetts that the american people are patient. they want answers yesterday, not one month from now. i am disappointed again that the american people will have to wait one month to find out about the bonuses at the government- sponsored enterprises, fannie

and freddie. the questions i had worked for mr. demarco. i was going to ask, in light of the fact that companies have averaged $11 million in losses, how have the executives chosen to receive the bonuses. since mr. demarco is not here, i doubt this panel can answer that question. if someone knows mr. demarco and has insight, if not, the second question i had his wife were the bonuses to be paid in cash? -- why were the bonuses to be paid in cash? we have to make sure that the bonuses are paid in stocks. we have to have longer term besting stakes for everyone else except the government- sponsored enterprises. why cash for them, and stock for everyone else? i was calling to ask mr. demarco

that question. i assume you have not spoken to anyone that is qualified to answer that question on mr. demarco's behalf. i do not have to be convinced that there are pay structures that can be poorly devised that can cause companies to fail. i know that. i used to serve on it publicly traded company. i have some experience with these matters. i have studied some of these issues. i know that formally designed competition packages can fill. he did not have to convince me of that. you do have to convince me that any one company is too big to fail. if he did not bail them out with billions of dollars of taxpayer money, then you do not have to use the heavy hand of government

to impose pay structures. i know the chairman has brought up on a couple of occ@@@@@ @ @ >> and provided a role for the congressional oversight panel in policy panels. i assure you they were seemingly unqualified for the task. so again, i don't see why. the basic proposition is this. in america, the principle is what you do with your money is your business. what we do with government

money is our business. don't take money from the farmers, teachers and firemen to bail them out. it is not to place artificial limits on the american dream. it is to preserve freedom. >> the gentleman from kansas. >> thank you, mr. chairman. >> i think financial firms receiving taxpayer assistance should receive the most scrutiny with regards to compensation practices. the most troubling case was an edgy -- was aig, which provided bonuses after taxpayers invested billions of dollars to keep the company solvent. i ask the ceo of the company at the tide if he would encourage employees to voluntarily return their bonuses. he said he would, and executives paid back some of it. in december of last year, we learned it was only $19 million.

i wrote secretary dieter about this. -- i wrote secretary timothy geithner about this. if aig were allowed to go through bankruptcy today, i doubt those bonuses could have been paid. it is obviously frustrating for taxpayers. if it were not for them, aig would not be around to pay out those bonuses in 2009 and 2010. other specific things we should learn from the intervention with aig from the government? >> i think i would share your sentiment that taxpayers have not charged financial firms sufficiently to make up for the level of support that has been extended over the last year. more generally, i think we can

think about the tide that is being produced. it is being produced by taxpayers and financial executives. until now, taxpayers have not been charged. the ultimate result of that would be the financial executives. more generally, the financial executives might be getting an excess of fraction. >> do you have any thoughts, ms. minow? >> i do. in the future i hope we do not have to do a bailout, but if we do, i hope to impose some conditions. the first condition should be that you take a discount on any set of compensation for the amount that was subsidized.

>> i want to emphasize the fact that when we turned over money to these banks, we did not do two things. we did not give them money to their behavior, not just with respect to the issue of compensation schemes, but also with respect to lending. that is the reason we were giving the money. it relates to jobs, which has come up here on number of times. in fact, compensation that went out meant there was less money inside the banks and therefore less willingness to lend. the second point is that the u.s. taxpayer was not compensated for the risk. in some cases, we got repaid. we ought to look at the transaction that warren buffett had with goldman sachs.

that was an arm's length transaction. that would have been fair for the tax player to reflect those terms. we would have gotten back a lot more. >> all i want to understand how the success of lending contributed to the financial crisis. if this relies -- this relates to consumers that maxed out credit cards. is there anything that the government can and should do in the future to prevent a mind set from taking hold and exposing our financial system from another crisis? professor bebchuk? >> we need to regulate those to a lower level. something short of that is imposing levies.

that is a useful approach. it could be useful going forward regardless of the issue of making up for the past actions of the taxpayers in terms of charging financial firms for the risk of larger liabilities. >> thank you. ms. minow? >> i agree. >> mr. stiglitz? >> it is important to affect the incentives. if you have the incentive for excessive risk-taking, you will do it. those are also at the organizational level. that is why it is so critical. even when we affect incentives, we will never do it perfectly. sweet constraints on leverage, behavior's, products, derivatives, and finally, for

our system to work there has to be transparency. the way the system is set up, it is impossible for capital markets to exercise the discipline that is needed to make our system function well. >> thank you. >> the gentleman from california. >> thank you. i would like to throw out a few thoughts. i am going to suggest to you that the executive compensation issues on which we all agree, the excessive risks, the short- term focus, are more the symptom than the disease. if we treat the symptom, we will be at best ineffective and at worst counter-productive. that includes bills that were talked about from last year and a year before.

to get at the root of the problem, there are two things. one is the ability, the greater ability for shareholders to express their displeasure with executives through the board by having an alternative a board of directors given an appropriate threshold so that ability is not abused. that would be one suggestion, get to the root of the problem rather than micro-manage the pay. it is the shareholders a greater ability to express displeasure, in a way that i think is more appropriate. secondly, and i know the chairman is going to have a hearing on the subject, the short-term focus on pay is perhaps a reflection of the short-term focus of the market.

maybe the problem is not the pay, but buy and hold is dead. we focus on quarterly earnings. i, too, focused -- worked on a publicly traded company. everything was about this quarter. the whole world revolves around this quarter. next quarter, next year, be damned. the short term pay and excessive risk-taking is simply a reflection of the short-term focus on the market. perhaps, we should be looking at other things we can do to change that short-term focus. one thing i suggest is going to semi-annual financial statements rather than quarterly. there may be other things. i would love to hear the panel's thoughts. >> on the first issue, a completely agree with you.

it is the main issue of the book published five years ago. it is a symptom, and manifestation of underlying corporate governance problems. all the problems that you have discussed is changing government's arrangements so as to produce better compensation out comes rather than micro- managing and dictating them. >> i agree with your second point. that, has been a long-term problem, but it has gotten much worse. one way to do that is a tax policy. i think we had a capital gains tax structure that encouraged longer term holding and discouraged short-term holdings. that is one of the few things we can do to move in that direction.

>> what we define as long-term? >> i would define longer than one year, two-five years. i would recognize that while the reforms are a part of the route that we have to deal with, we are always going to be in perfect on that. -- we are always calling to be not perfect of that. when it comes to institutions, which can put at risk tax payer money and our whole economic system, we have to not only get at the root causes, but we have to actually try to effect the actual behaviors'. that is for those that affect a risk. that might be more broad than just the banks. >> this is a very important

question. i am going to allow miss noll to go beyond -- ms. minow to go beyond. did not the concern with the light. >> thank you, mr. chavis. i think -- mr. chairman. i think one relates to the other. it is important to remember that the financial institutions are very large shareholders themselves. they look at their own quarterly performance in terms of the money that they invest and that creates a vicious circle. callbacks is one way to address that as an issue. if you know that tenders into the future, if your numbers are revised, you will have to give the money back. becky's people focused on the long term. with regards to the issue of the holding. , i want to -- holding time, i

want to remind the panel that they will not be affected. >> i am attracted by the notion of not requiring quarterly reports to go to semi-annual. if the gentleman would not mind, i would want to know your view on that. >> there is something charming and poignant about making that suggestion in the world of twitter and instant messages. everything else is becoming faster and trying to slow that down. i think that one way or another, investors will get day-to-day information. we are close to a point where a company financials which are available on a real-time basis, will be available to everyone.

i am not sure that solves the problem, but i agree that it is the right question to ask. >> we will discuss that another day. i just want to ask, you said that someone, if it is restated, i do not know how that changes the short-term focus. if i am paid entirely on what happens in the next 30 days, that would change the focus on accounting, perhaps. if the consequences of that decision are very bad for the long term, you are not going to colodny back. that does not change my behavior. >> it is not based only on accounting statements. if it turns out that the performance loses, it could be

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the access that is not per boarded -- that is not rewarding conduct, but is rewarding actions that are taking money from the middle-class and the real economy. it is certainly undermine all we need to be doing to build a sustainable economy that works for the middle-class. i have a couple of questions. is this focus part of a bigger problem? i do not want to regulate compensation. i would much rather the markets regulate compensation. the way the market is supposed to work, there are competitive forces in place. competition squeezes' problems and costs, including compensation. despite the fact that there are 8000 banks, and who knows how many other entities were doing bank-like things, profits in

that sector ballooned to more than 40% of all corporate profits. compensation was more than twice what ordinary americans were making. our competitive forces working, and why not? second, of all of the institutions that failed in the financial crisis, the board of directors needs to be near the top. there was an article that looked at what has happened to the board members from all the companies that have failed, and found out they have gone on to serve for other boards. they were not tarnished in any way. there was an article in the "in new republic" that was critical

of tommy francs for not having captured or killed osama bin laden. without agreeing with everything, there was a reference that he had now retired and joined the board of directors at bank of america. that gives you the impression that boards of directors or more a part of celebrity culture. what can we do to make it a full-time job and not have people that treated as a celebrity appearance? >> i think making directors full-time employees is not a good idea. that would make them insiders. that would make them more dependent on the firm. what we need to do, the most important thing, is to make them

independent shareholders in a way that would give them the right incentives in the kinds of government arrangements we were discussing. that would produce such an outcome. this would not replace market outcomes, it would just enabled the market work better. >> i want to make two comments on what you just said. 40% of all profits in the financial sector -- you have to remember that all of that were not real profits. that shows that the difficulty of measuring performance in the financial sector. they have an enormous discretion. that loss is making more and ported the issue of the long- term perspective. there is something about the

sector in which there is imperfect competition that leads to above normal profits. there has been a large increase in concentration in the financial industry when it comes to particular issues like credit cards, it is clear that they are engaged in non-competitive practices that allow them to garner those profits and then, obviously, to use those and distribute them to the officials. >> i feel very strongly about it. my company rates board of directors. we have encouraged our company to raise the rates. i will continue to try to do that.

when i first came into this business, o.j. simpson was on an audit committee. we have made a little bit of progress. >> the gentleman from new jersey. >> thank you, mr. chairman. good morning to you all. regarding your point, professor stiglitz, that warren buffett had an arm's-length transaction with goldman sachs, why you think the american people did not have the same transaction? >> they were very much taken in to the view that they wanted at that point -- to give money to the banks. they thought it was imperative that the banks be given money so that they could return to the usual role that they had had. they were captured by the

banking system. it was a very big mistake. >> do you see improvement with federal officials at the moment in this area? >> if i look at the legislation and the proposals that are being discussed, i see a marked change. if you look at the bailout's that occurred in january, february and the beginning of this year, they were as bad as those that occurred earlier. >> that is my point. i begin my question with what occurred at a prior time. what i have seen so far this year, there does not seem to be a need for change. we the people, were on one side,

and warren buffet with his arm's-length transaction was on the other side, a much more preferable side. it seems to me that we ought to learn from mistakes. so far, i have not seen a learning curve in this regard. ms. minow, your comments? >> i have seen a learning curve. i think the initial transaction was made at a moment of pure panic. it reflects that. i think that the subsequent negotiations, particularly the administration's proposal shows that some lessons have been learned. >> regarding freddie mac and fannie mae, how could bonuses have been given in your opinion as a matter of public opinion? >> if these people could be

embarrassed, we would not talk about them. the court of public opinion and does not seem to matter to them. >> what should we do to make sure this does not happen again? >> i support the chairman's notion of read-starting the entire concept. >> professor stiglitz? >> i think we need to re- examining the whole structure of fannie and freddie -- the concept of something that was in the private sector, which is what they were, and yet seem to have this public role. it is a peculiar mixture. it was a system of governance that was almost bound to fail. >> has my time expired?

following up on congressman campbell, is it not true throughout the whole society? people cannot let me finish a sentence. >> will the gentleman hurry up? >> i cannot be as witty as the chairman. how're we going to overcome this? ms. minow? >> it is the nature of humanity, i am afraid. we do have some structural perversities that can be regularized to calm things down. >> we will never perfectly overcome it, but i think some of the things we have been talking about are ways to mitigate some of the consequences. we have to recognize that in some ways, things have gotten

worse. that shows that what ever it was was not inevitable. there are changes that do affect the extent to which there is that shortsightedness. >> the gentleman from texas. >> what we are seeing today is the irony of ironies. most who oppose raising the minimum wage to $7.25 an hour were supporters and are supporters of maintaining a bonus structure that creates systemic risk. the public may not understand systemic risk and proprietary trading, but the public does understand this -- it took us 10 years to raise the minimum wage to $7.25 an hour. if a person, and there is such a person, gets a bonus of $69.7

million, it will take a minimum- wage worker 4622 years to make $69.7 million. 4622 years. the public understands that when you explain that the ceo or the ceos of the bigger companies make more in one day than a minimum wage worker makes in a year. this ceo has reason to envy the hedge fund manager who makes more in 10 minutes than the average worker makes in the year and only pays 15% capital gains, not ordinary income. i support people making bonuses as large as they can make, as

long as they do not do it on perverse incentives that creates systemic risk. that is what all of this is about. let people make as much as they can, but let us not allow them to create perverse incentives that will bring down this economy. enough already with the notion that we should let the economy collapsed. if we had not built up aig, and i did not want to do it, i had to hold my nose and close my eyes, but if we had not build them up along with the auto industry and bear stearns, which the world be a better place today, ms. minow? >> i think we could have done a better job of building them out, but i think we should have. >> with the world have been a better place? >> no.

>> i agree that the way we bailed them out -- >> left a lot to be desired? >> i think at the time the perspective was -- >> would the world be a better place today? >> my speculation is that the world would be a better place if we would like aig fell, -- sale, but we needed to have some kind of bailout for some of these. >> mr. bebchuk? >> i think it would have been better had we done a partial bailout. >> if we had taken a laissez- faire attitude and let things

go, with the will be a better place? >> it would not have been a better place if we just took our attention away from the firms. >> let the world go wherever it is going? >> there would have been a worse outcome. >> did you understand that there are members of congress that are saying that we should have let things go? can you understand where we would be if we had done nothing? is it responsible to do nothing at a time of crisis like this? >> i agree that it is irresponsible. >> is it irresponsible? >> it is not the right thing to do. >> i will help you. it is irresponsible. we, at some point, have to become adults about what we are

dealing with. we are talking about perverse incentives that create systemic failure. give me an example of a perverse incentive that creates static filly. >> certainly. in the sub-prime industry, individuals were paid on the number of transactions rather than the quality of transactions. they had a perverse incentive to create as many transactions as possible. >> i would ask that each member give one example of perverse incentives. >> the fact that people in the financial sector's were -- of the financial sector were measured risk-taking or as a result of greater efficiency. >> the fact that the top executives of bear stearns and

lehman brothers were able to get large bonuses based on earnings, which they were able to keep even though all of those earnings were evaporated. >> thank you, mr. chairman. >> the gentleman from missouri. >> i have a number of questions, i will try to ask them quickly. before i ask the questions, i was a part of this committee in 2005. my recollection is that mike was the chair of this committee and our current chairman was the ranking member. one of the first things that we dealt with when i came on this committee was some proposed reform -- maybe both the former

chairman and the current chairman, dealing with fannie and freddie was proposed. i was talking to reporters two days ago that says that one of the problems in washington is that the truth does not matter, it is whether or not you can say a lie over and over again so that everyone buys it. my concern is that history has been distorted because the former chairman proposed trying to deal with the issue of fannie and freddie's compensation, and as i recall, they did not get any support from the white house. if i have misspoken, i would like to be corrected. >> the " in the -- de remarked

in the "financial times " was that he received the one hand salute from the white house. >> the gentleman from new jersey and the gentleman from texas deride it. i voted for the bill in the house committee. when it got to the house floor, the republicans added something and i voted against that. >> the point i was trying to make, as someone said earlier, transferring the conversation to fannie and freddie, that we have not tried to deal with fannie and freddie. i want to try to clear it up.

as a supporter told me, it does not matter. people hear over and over again that president obama started the bailouts. where i want to go now is that too big to fail is a problem. they understand that they have what it takes to take what we have. if that is the attitude that they have, we are going to lose. my questions are, and i do not bill -- and i do not know the answer, did the firms with better compensation performed better? those with better compensation structures, did they end up performing better? do any of you know that answer?

>> this is a subject that needs to be investigated. it is not a straightforward question to answer. what does it mean to be compensated better? if you believe that better compensation is one that provides less incentive to focus on short-term, then, you have to measure those dimensions and define how they have looked at the performance. that has not been fully done. >> did you not think that would be a worthy project? >> definitely. >> part of the problem is that all of the big banks, those that are too big to fail, had similar compensation structures. you would not be able to get clear results. the differences were not big enough to overwhelm the perverse incentives that really dominated the whole industry.

>> i was wondering if you could do an overlay with what happened with the mortgages -- with the mortgage companies that did not go into the sub-prime scam. now if you look at their books, they did better. the question that i raised is based on what i have seen with that industry. do you think that in particular, the wall street investment banks will change their compensation structure without congressional legislative the encouragement? ms. minow? >> as i discussed in my testimony, the fact that following the bailout over the

last year, they have essentially poured gasoline on the fire of excessive compensation. it's just to meet a need a much stronger message from congress. >> i agree. there will be some cosmetic changes, but the question is will the depth of those changes be anywhere near sufficient to address the kinds of concerns that have been addressed this morning. >> my final question, in talking with and investment bankers in my district in kansas city, missouri, i found out that with investment bankers like to do -- not the people that are trying to make the deals, but the executives, is give bonuses that stretched over a number of years. my assumption is they give a bonus, and then they invest what they gave.

i am wondering whether or not that kind of system should be outlawed. they do not want to give all compensation and cash up front. they want to stretch it out. do you understand what i'm saying? >> they are very creative in trying to subvert the intention that we have been concerned with -- getting better incentive systems. one of the concerns is that if you look at more details across corporations, much of what is called incentive pay is not incentive pay. it is a sure way. if you look at overall performance and overall compensation, they are much less closely linked than the name.

that suggests that the evidence in the aig case, they changed the name from performance pay. they are very clever. they are undermining what we are concerned about. >> i'm not try to suggest that they are trying to trick. thank you, mr. chairman. >> thank you, mr. chairman and to all of the witnesses. i think my colleagues for their questions and the discussion we have had since then. it has been very useful, but thought-provoking. this whole issue is difficult to get your arms around. if you know, despite the financial crisis and the resulting bailout and further

diffusion of cash along the way, here we are again with public outrage and wall street handing out a record $140 billion in bonuses. when we take a look at that kind of money, and try to put it in perspective, according to the " washington it examiner" it is vastly more money than we have pledged. -- that we have pledged to haiti. it is no wonder that hard- working americans, those who thought that we need to bail out wall street, and understood that

it was their money that went towards that, nevertheless wanted to say something other than banks buying up banks and handed themselves bonuses as a result of trading activity rather than making those loans or renegotiating those mortgages. families understand that they have lost jobs and homes and bankers are still getting billions of dollars. we have not getting -- we have not gotten all hold over all of the issues that brought us to this day. i listened to the bankers and sometimes they tell me that they are offended that we are even talking about regulating bonuses. we did not understand that they are the best or the brightest. it needs to be that for retention. i get offended when they tell us that they are the best or the

brightest, because i happen to think that there are a lot of people that are very bright, and in fact the best, are involved in public schools, or our hospitals, or social workers, and they seem to work for very hard with substantially less pay. i serve on the homeland security committee. we had michaele and tareq salahi in last week. they were all well dressed and made up. they struck me as incredibly self-centered and without regret. , that -- just let the people that say we should not touch their pay. they do not get how angry americans are. people in ohio believe that pay should reflect your productivity and they do not get that when you ruin an economy,

you should get these kinds of bonuses. i know we have been few times at advice do you have for us so we can compensate people and tried to define performance and if the issue it is -- the central issue is board government. if the boards have this attitude that we all deserve that in the financial sector, that kind of compensation, how do we really get into changing the practices both in order to protect us from further damage down the road and to have a better handle on corporations and their governments? >> the focus on the post-enron reform legislation, sarbanes and oxley, has been on the supply side of corporate governance.

we have not really focused on the demand side, what the demand side, what shareholders have to do.

economy and taxpayers' money have to be regulated in a whole variety of ways. and the second point is that the tax structure as a whole has to be designed better to address the sense of equity in our system. arguments have been raised or more progressive taxation or that taxing capital gains would have adverse -- adverse incentive effects are just wrong. we could get a fair tax system that actually would encourage greater efficiency. >> i would put the 140 billion figure that you mention in context, not just comparing it to homeland security budget, but i would compare it, would be the most relevant comparison, to what shareholders have received

in the period and what taxpayers received. what is disproportionate is the $140 billion relative to the contribution of the financial sector to the performance of the economy over the last decade. if you look at the numbers, d.c. shareholders in the international sector over the last 10 years, somewhat negative returns over this long period. we know about taxpayers. what we need is to reallocate the pie, so to speak, in a more efficient way between shareholders and taxpayers and the executives, and the way to do it is for shareholders -- so they can claim their share of the pie, and for taxpayers to begin going forward charging banks adequately for the support taxpayers are providing. >> the gentleman from

california, mr. campbell, and the gentleman from michigan -- corporate governance. we tried to minimize -- we are going to get into the corporate governance issue, and it includes, by the way -- one with jurisdiction blade is, i do not think i can summer the assistance secretary of labor. but we will continue with one of the things the sec did, which is to require all of these institutions publish how they vote. it was imposed on the mutual funds and we think it should be imposed on an eight fiduciary. if you are the owner in your own right, you have a privacy right. but if you own shares as a fiduciary i hope we will pass legislation that would require to make it public how you vote. i think that would be useful.

>> no question. i would be delighted and i hope you will allow me to testify in support of that. >> we will be inviting people. before the last question, one other question -- talking to the gentleman of alabama for like two minutes. there have been two arguments on compensation. the rest of the world is getting tighter than us. now the argument is, we will do something else. we will go into some other profession and what you be sorry, all of us people will no longer be trading cds's with each other. my response is, i am not sure where you will go. two, what if they did? if an effective fewer of the very brilliant people that the gentleman from ohio were referring to decided there was no longer enough money to be made in bond trading and went into other lines of work, would that be a social loss? not that we would drive them away or it is there any

byproduct? >> i was very supportive of the remarks he made on the subject earlier this week when you talk about scheduling this hearing. in my written testimony i said, i would love to see the demand curve on that one if all of the wall street guys a russian to the market. >> if there is a demand, what is the social laws? >> i addressed it in my written testimony. not only is there a misallocation of financial capital, but misallocation of human capital that is costing our society even more than that. i think it would be a good thing for our society to reallocate this human capital. >> a very interesting study from harvard and a track what happened to harvard graduates over a long period of time and a report that a huge increase in the fraction of the class, best

and brightest, they go into finance -- 30 years ago, larger numbers were going into science, engineering, medicine, and so forth. this partly reflects the response to market incentives. now that we are reconsidering the contribution of finance, we might conclude that having a smaller fraction going to finance might not be a bad thing. >> i do want to say this. i think we are dealing with executive compensation and i think one thing that does trouble most americans and members on both sides of the aisle is that some of the very large banks do barrault with very cheaply from the fed, and that is taxpayer subsidized in one way or the other.

whether they invest them and kick treasury bonds or carry trade, or whether they use them to trade and make additional profits, the zero regional premise was that that money would be loaned. and it is not. i will say this -- the flip side of the argument is they are using those trading profits to cover some of their lending losses. in some ways, that makes the banks stronger and it may avoid the government have to come up and pick up liability. that is one of their answers. the other -- they are not lawyers, they can't find bars that are qualified. i talk to people back in alabama and they say when they deal with

large banks and they say they are not interested in learning some 1 $200,000. they are interested in $100 million bills. i think that is a real problem, particularly as banks get bigger and bigger, they are not lending on main street -- they are lending to large corporations so smaller businesses cannot get loans. i do think the american people do believe that being able to borrow cheaply from the fed, and some of the guarantees that been extended, that that money is finding its way into a compensation, which gives the appearance of being excessive. so, i think these are valid concerns. and i also -- i will close with this, and i think it is a concern we all have. when they do this trading, they tend to be going back and doing what got them in trouble in the first place, and that is

speculating, leveraging,, and what happens -- do we get right back to the problem we had? and if we are going to get in trouble, they say, you know, you don't want us to make bad loans. that's true. we also don't want them to make trades that are risky. if anything, the trades benefit themselves -- proprietary trades -- where as lending at least it's in the economy going. >> if they can make enough money doing everything but lending that may be a contributing factor. we will have an all day hearing on friday, february 5, with bar wars and regulators and lenders and we want to get into the question. it is a bipartisan concern and i think it is legitimate to enquire to the extent to which other opportunities to make a lot of money displays lending either directly or indirectly. am i do think one answer is to look at whether they are lending -- >> i think one answer is to look

whether they aren't lending and if they are not lending, the government, if they are going to make money available at all to be those institutions' lending, and landing o >> brian win, president of the electric drive transportation association. washington journal, live at 7:00 a.m. eastern here on c-span. >> later today, a couple of programs on afghanistan and pakistan. first, remarks from james jones

on the administration's strategy in those reeg ons. starting live. more from senator karl levin beginning at 2:00 a.m. >> wednesday, president obama with his first state of the union address. his palestine to deal with issues such as unemployment and healthcare. wednesday night, our coverage starts at 8:00 people eastern on c-span. can you listen live on your i phone with the c-span radio app. from the nations capitol and across the country, listen to c-span radio. also a free app for your i phone.

c-span radio, covering washington like no other. >> this week on "q&a," college students from around the coirnt talk about visiting washington, d.c. and how this experience may influence their future. this is sponsored by the washington center, a non-profit organization started in 1975. >> seated next to me, mike smith, the prefts washington center and a room full of college students. before that, tell me about the washington center. >> thank you. we are now 34 years old founded to provide an opportunity to college students to come to washington or to spend a sex he is center long internship working for government, or

private corporations or one tore two week sex far programs. >> why do you do this? , not the center. >> i've been here 33 of our 34 years. it's been a labor of love. we believed early on, the founder and myself that started the organization that it was really meaningful and could be a transformational experience for college students to partake of these kind of programs in washington, d.c. >> how many students each year? 1500-1600 for interns and another,000 for sex fars. >> who pays for it? what kind of out of pocket expense. >> for this program, in the $1200-$1500 for two weeks including housing.

>> where were you before you did this? >> i had two jobs, i was working as a counselor in a junior high school and managing a restaurant on cape cod in the summer. >> what's the best thing a student can say to you after a week or two? >> this changed my life. i'm going to get into public policy or i'm going to vol untier more or change%v major. something transformational typically happens to students coming through. >> students wanting to get involved, what do they do. >> twc .edu. we have a full time staff of 75 people here in washington. >> i want to get back to the students now and open this up, alexandria, you agreed to be