not to give full information and disclosure? >> of course not. >> you take credit for the decision but not a cover-up. no cover-up before november 24, and of course you are out of the picture from november 24 floor, is that correct? >> i am not trying to distance myself from anything. i may complete -- i take complete responsibility for the decisions i were involved in, including the decisions up to the 24th in this case. >> then you are aware of one hundred cents on the dollar. >> absolutely. >> and the risk that the post. you knew about that but you are not attempting to cover that up. >> of course not. . >> of course not. >> i believe either you made a

bad decision there or in fact there was the attempt to cover up one of the biggest backdoor bailouts in history. now you tried to frame it as you did it because you did it in the interest of the people and the failure of the system. i believe these are lame excuses. either you were in charge and did the wrong thing or participated in the wrong thing. participated in the wrong thing. it appears like when you were being confirmed, a lot of controversy surrounded your not paying taxes. you gave lame excuse then and i believe you are giving lame excuses now. my final question is, why shouldn't we ask for your resignation as secretary of the treasury? i didn't think you should have been secretary of the treasury when it was disclosed you didn't pay your taxes because that's

the highest financial responsibility position in the united states government. why shouldn't you? >> that is your right to that opinion. i have worked in public service all my live and have never been a politician. i served my country as carefully and ably as i can. it's a privilege for me to work with this president to help repair the damage that was here when we took office. i will do so as long as he asks me to do so to the best of my ability and with great pride in this country and in him. >> again, i think you are punning the blame and trying to position yourself. >> you don't know me very well. >> we are not getting the whole story. we are getting a lame story and a monumental backdoor decision of bailout for which the taxpayers will stay on the hook for huge amounts of money and even by estimates of the

treasury, there will be billions from this deal which either you should have been overseeing and you said you had knowledge of and you failed to take steps to further protect the taxpayer interest. you are either incompetent on the job or were not doing your job and that's grounds for removal. >> i was there and i know what i was responsible for. i take full responsibility and great pride in the judgments. >> the secretary may answer the question. >> he takes great pride. >> i do. i take great pride in the judgments. people have a right to disagree and go back and look at them with great care and analysis. i hope you will give the same care and judgment to looking at the decisions in retrospect with the benefit of hindsight that we

gave in making the decisions at that time. >> thank the gentlemen. it's my time to ask questions. mr. geithner, the new york fed agreed to goldman sacks demands for billions to settle counter party claims with aig. 100 cents on $1. goldman and aig were locked into the dispute and they would lose up to 2.5 billion. did you know at the time that goldman sacks concluded it would not receive 100 cents on the dollar in the event of default? >> i did not know and i don't know whether that's true or not. >> goldman said publicly they didn't need the government's money. it was fully hedged and would not be affected if aig defaulted. committee investigators learned that goldman's insurance policy

would not pay in the event that the u.s. government bailed out aig. goldman's protection would pay only in the event that aig default defaulted. they hadn't put that contingency. that failure put them at risk of losing the amount of disputed money when the government rescued aig. did you have knowledge at the time? did anyone at goldman admit to you or anyone working under you that goldman sacks was not fully hedged in the event the government took over aig and goldman was at risk of losing at least $2.5 billion if the government bailed out aig and opposed less than 100 cents on a dollar. >> congressman, i am not aware and i don't see how i could have been aware of the precise details of the hedging strategies of all those firms to

the event of a default by aig. we made a very careful effort to try to assess working with the supervisors of all the institutions and exposure to aig about the exposure. >> had you talked to lloyd? do you remember talking to him? >> in the goldman sacks case in particular because a lot of reports that were consequential, i asked what their exposure was and asked you to show me what the internal system reports showed about the committee. >> we will have a series of questions to submit to you in writing so that you will be given an opportunity to have an extensive answer. mr. secretary, when the government stepped in, there was one way for goldman sacks to get a piece of the 2.5 billion. that was if the new york fed voluntarily agreed to give it to them. if the new york fed had fought

for taxpayers, goldman would have lost money they didn't have hope of recovering. the new york fed had a lot of leverage. a lot of leverage to negotiate a reduction, but instead the fed took goldman sacks' position and settled it fully with taxpayer money. mr. geithner, under normal circumstances, goldman sacks would have had to sue aig in court to recover the disputed $2.5 billion to and settled for something less. isn't it true that they gave goldman sacks a better deal than they could have expected. any market player at any other time. >> if we had the ability like we have for banks to put them into

an early process, we could have done many things. under the laws of the land, we did not have the ability. we faced a simple choice. let aig default or prevent it. there was no way financial, legal, or otherwise we could have imposed haircuts, selectively default on any of the snugdss without the risk of downgrade and default. that is the only reason. they give a better deal than was delivered. at the same time giving no financial relooefr whatsoever to millions facing a foreclosure crisis. if that doesn't illustrate what the new york fed thought it was working for, i don't know what does. you may respond and my time is

expir expired. >> congressman, that is not true and unfair to the public servants. >> what's not true? >> what you said. >> what's not true. >> it is not true that the actions we took in aig were for the benefit of anybody but the millions of american who is at that point were suffering from the worst financial crisis since the great depression. the only way to help reduce and protect that damage was to fix the system and prevent catastrophic failure. that is the only motive that underpinned the government. >> i thank you very much. >> thank you, mr. chairman. mr. secretary, you talked about looking at these events with the ben fight of hindsight too. men who did were peter boone who is a researcher at the london school of economics and simon johnson, professor at mit. >> can you get closer to the

mike so we can hear? >> simon johnson, a professor at mit and sloan school of management. they wrote in the new republic magazine in the september 23rd issue, the fed may well mitigate our current crisis by sewing the seeds for the next one. in fact the fed has exacerbated the possibility of another similar or larger crisis. the way they put it, they said as a result unless real reform happens soon, we face the prospect of another bubble burst that will be more dangerous than what we have been through. i assume you know that the american people are very, very angry about the bailouts. the bonuses and salaries that have come about through what most people think is a big business. they feel this did you oply has been manipulated to allow

mind-boggling salaries and bonuses and allow very few to come out the free market system was not allowed to operate. it seems to most of us it is not capitalism to -- when government uses billions and billion was taxpayer money to prop up a few well-connected firms. that leads me to two questions. one, has the treasury informed any of these financial giants that we'll not follow too big to fail policies in the future and secondly, do you think we should limit the salaries and excessive salaries and bonuses that are being talked about even today in any of these firms that got

taxpayer bailout funds? >> that was a thoughtful question and you asked the right question. in a financial crisis, you faced this choice. you can let it try to burn itself out and let the damage spread to all sorts of innocent victims or you can act to prevent it. knowing that acting to prevent it created the risk that in the future they expect the government to step in and save firms from the consequences of failure that. is at the heart of strategy and financial crisis. to stand back and let it burn is irresponsible. it happened in the great depression and almost to the country. the moral just pragmatic, fair choice and this should be true if you are republican or democrat is to act to protect the innocent. as you said wisely, by definition that creates the risk that we sew the seeds for future

crisis. we all have a huge stake in trying to make sure we not just limit risk taking, but investors and equity holders and creditors and managers and executives do not run these firms with the expectations that government will be there again. we do not have for institutions like aig. in proposals moving throughout congress that we can end this expectation of too big to fail in government assistance. if you look at what we have done, we have moved very aggressively to pull the government out of these institutions to make sure we are not a day longer than is necessary to replace the public capital with private capital. we have done that by forcing disclosure and firms to

recapitalize precisely because we want to limp this and end this exceptional period as quickly as we could. that has been very, very effective in ways that people on the right and the left should welcome. on the right it mean that is the government is out much more quickly than anybody expected. on the left people should know that we have far more resources available to help address the long-term challenges we face as a country to reduce deficits and meet the things we have to do to fix what was broken in this do you mean they should be limited in any way? >> your time has expired. please come into the question. >> what happened across the country was terribly catastrophic it is judged by a team in a way of a huge increase in inequality in the net state been the in the financial

system, it was much worse. it helped encourage a level of risk taking that brought the system to the edge of collapse. though it is deeply important that congress legislate the reform that will change how bankers are paid. government cannot do it alone. it to bring to upper limits. i think that is very important to do. i hope you have support from the congress to have the basis to do that. >> i am well aware of your family's commitment to public service. it makes it more difficult in a sense to ask his questions. i honestly feel that the conduct of yourself and mr. paulson and not on the side of the american

taxpayer. conduct of yourself and mr. paulson were not consistently on the side of the american taxpayer. i will explain why and give you two examples. we had the situation with bear stearns. the world is on the brink. we have a disaster. we are worried the about the system melting down. with your support and mr. paulson and mr. bernanke, we forced bear sterps's shareholders from a position i think that was a high of $172 a share in january, we forced them down to $2 a share because the american taxpayer money was in the bailout. that was something we supported by the fed, by the treasury because we felt that because the taxpayer was bailing them out that the shareholders should not be held harmless.

you have a different situation here. slightly different. we have aig going under. these are credit default swaps. the money is going out to the counter parties. this is a pass through. the folks on the other side are goldman sacks. largely that's a principal beneficiary of all this. we don't negotiate a nickel, not a cent off of what they are getting. you are in the same position, supposed to be negotiating on behalf of the american people. you are saying oh, the regulations were different. let me tell you something. we were changing the rules every single day. we were taking action with the fed on the extraordinary circumstances. you had every opportunity, every opportunity to weigh in on behalf of the american people and make these people take a new

deal. make them take a cut. you scalped the folks on bear stearns two cents on a dollar they got. the folks at goldman sax got 100 cents on a dollar. that is unacceptable. totally unacceptable. you had the opportunity and i think it was a terrible decision on your part and also on mr. paulson's part and he is up later. we will talk to him. how do you expect to -- look. the thing about changing over to the obama administration, you have the same people who will rely on you. when you are in one job and the american taxpayer is relying on the other job. i don't see a conflict. i really don't. you could have done the right thing by the american taxpayer because their money was being put into this deal. it stinks to the high heaven happened here and i don't like it.

to top it off, the disclosure was not there. at the proper time to tell the american people and the congress what was going on. that is inexcusable and makes me doubt your commitment to the american people. it makes me doubt mr. paulson's commitment to the american people. i think the commitment to goldman sacks trumped the responsibility to the american people. >> i respect your opinion. i know you hold this opinion strongly, but i completely disagree. the american taxpayer would not be better off if the government made it possible to get more money. the american taxpayer would not have been better off if we had let aig default. none of us did anything. >> there is a difference between giving them 100 cents on a dollar and letting them default. you are creating new situations

every week. we are letting the folks go to the discount window and changing the rules day by day and had the banks at a position where we could have exercised a lot of leverage and you chose not to do it. >> i disagree with you and i try to -- >> doesn't mean we have to pay them 100 cents on a dollar or let them fail. there increments here and you never used that leverage. >> not this n this case. >> in this case exactly. under 13-3, we could have taken different steps. >> 13-3 was for people to understand. it was authority given to the federal reserve to protect the financial system from broad based runs to lend against collateral to make sure they could fund. we did that because of the catastrophic damage caused by decades of previous financial crisis. we used that authority because

we thought there was no other choice and -- >> when hank paulson said you are taking bailout money, he could have done the same thing. i yield back. >> if it would have been possible, we would have done it. why would i want to be sitting here before you today having to defend actions that look like they could have been avoided. there was nobody part of that decision. that would have been impossible. i try to be as careful as i can in explaining the reasons why it was not possible, but it comes down to the choice, if you are prepared to default, you can impose haircuts. if you can't accept the consequences of default, you do not have any leverage. it would have been vastly more

expensive to the tax bill and much more damaging to people you and i care about and wake up every day warning about if you let that firm fail. there was no choice between default and the restructuring of those contracts. they left the taxpayer. >> there was no shared sacrifice for goldman sacks and the american people. >> the gentlemen's time has expired and call on mr. turner from ohio. >> thank you, mr. chairman. mr. geithner, an answer to one of my colleagues, you previously stated that you had never been a politician. i want to assure you from your answers that you are absolutely a politician. let me tell you -- >> do you mean that as a compliment? i can't tell. >> one of the answers that trouble me about the issue in your written testimony of the team would be catastrophic. you go on to talk about the

insurance arms of aig. this is not the first hearing they had or other committees and you know we are aware of the independence of the insurance arms of aig. we have morris greenburg and the ceo of aig said the problems that came to a head did not originate in the businesses whichry main fundamentally strong. they had the head of the new york state insurance department, superintendent eric daenalo said this. before i go further, i would like to make one critical point. it is important for everyone and especially policy holders in the insurance companies to understand that the insurance companies which are regulated by new york and other states are solvent and have the funds to pay any policy holder claims. they had reserves and you did not bailout the insurance companies of aig, correct?

>> yes, but if the parent had defaulted -- >> we go through your answer that if aig had failed, the catastrophic effect of all of the insurance companies that were on edge, they weren't bailed out. >> that's not true. maybe this is helpful to go back a little bit. when aig came to us that weekend, remember the fed is not there regularly. they had no responsibility of authority over how they ran their business. that was the province of other regulators. it was inconceivable to me that this was a problem we would have to try to solve. we have all the people we could including the commissioner and his staff and other people could look at. >> did you bail out the life insurance part of aig? did you bail out the life insurance arms of aig? >> i wouldn't use that term. the actions we heard.

>> did you bail out the health insurance part? >> the actions protected those companies from the risk of failure. >> the testimony we received previously from those looking at those arms was that they were substantially sound and the catastrophic effects that you list, we would have all been concerned about. >> i disagree kpleemtly. people can come to different judgments, but the people who are responsible had no idea and you could note sprayed those companies from the companies that had taken risk. the tragic thing in the structure is they were so closely linked, they couldn't separate them. why would we not. if it was possible to separate the place that was taking the firm down to separate that cleanly, we would have done that in a second. much of what the management is trying to do today still 15

months later is designed to achieve that objective. they were tightly connected and the insurance supervisors who were responsible did not know the extent to which the financial basis of the insurance companies was so connected to the holding company and the aif narks had taken the risks. >> as we went to the bailouts and the funds received, one of the biggest concerns i had through all of the process, i believe when it becomes public and it hasn't yet. we don't have everything from you. this may turn out to be the largest theft in history. there were parties that were participating with the securities into defrauding mr. and mrs. american citizen receiving a loan that was negative in loan to value ratio

and a greater risk than was being reported as the mortgage-backed securities and credit default swaps were passed up the chain. do you have information of aig knowing that the loan to value ratios were inflated and the risks were being understated? i truly believe throughout this system that have brought down the systematic mortgage crisis system in the process, there was a significant amount of defrauding going on and people need to be held accountable. i don't think where you are bailing out, you take into consideration the bad apples. >> i completely agree that this country allowed under the laws of the land a terrible erosion in underwriting standards and abusive practices in mortgage lending and consumer finance. we should never have let that

happen. i hope you will join in preforms to prevent that from happening. >> hold on a second. let me say something to all the members. right now we have 30 something members that still do not have the opportunity to question. we are going to have to stick to the time. i want you to respect that. i notice a couple of situations where you went over, but when the red light comes on, that's it. i want you to know we are now moving to mr. quigley of ohio. i'm sorry. mr. quigley of illinois. is he here? >> thank you, mr. chairman. mr. secretary, can you provide for the record a copy of the refusal agreement you signed at the new york fed. >> i did not sign a refusal agreement.

i withdraw from the policies of the new york fed. my colleagues in washington and new york can attest to that. >> there was no formal agreement? >> no. as i said what i did is withdrew from and this was important to do. a sitting president in the new york fed be nominated secretary of treasury. i withdrew from that was the right thing to do at that time. thank you for clarifying that. a lot of people think the president of the new york fed works with the u.s. government. you work with the private banks that elected you. >> that is not true. >> can you supply the names of the people on the bed that elected you in 2003? >> that is a matter of public record. of course we can do that. >> connect to say something? what you said is not true.

i work in the public interest. they worked for the government. >> the people do not elect you. it is the individuals who sit on the board of the new york said that a room like you -- that elect you. >> it is more complicated than that. >> they are elected by their boards. it requires the approval of the chairman of the board in washington. it is a delicate balance of checks and balances. congress designed that. >> it is large private banks that provided it cheaper them -- provided it. i'm interested in your answer. goldman sachs was out for this counterparty arrangement.

it but me ask you. your chief of staff is the gatekeeper for access to you. could you please provide his name? >> his name is mark patterson. >> thank you. for whom did he work before you selected him as your chief of staff? >> he works for the president's transition team. d he work before you selected him as your chief of staff? >> he worked for the president's transition team. >> before that. which wall street firm? >> this is a matter of public record and you know the answer to this question. he worked for goldman sacks. >> thank you very much. you answered my question. let me say this. you have answered the question. you answered the question. thank you. the aig transaction was disturbing to many observers. why did your government not require the bank creditors to take the lead and bear some of the cost in any plan to stabilize aig? you in effect nationalized the

company and let the bank creditors off the hook. why did you as president of the new york fed not work out an arrangement to remove the london unit from the company rather than allowing the unit to infect the entire company. >> if we had the types of bankruptcy procedures we have for banks, it is possible that ultimately we could have done that. if it would have been easy and cheaper to separate the riskiest parts of the firm from the healthy profitable insurance companies, we would do that. in fact that is the core of the restructuring strategy they are undertaking. that choice was not available to us at the time. if it was possible, of course we would have done that. because we didn't have those tool, we did not have that choice. >> your phone logs from the subpoenaed material this committee requested which i

would like to insert in the record, thank you, mr. chairman. the critical period when the bailout occur and just after september 15th when the three major agencies downgraded. aig's credit rating, you made hundreds of calls. the most, over 225 to secretary paulson, then secretary of treasury. what firm did he work for prior to his appointment? >> he worked for goldman sacks. >> as i understand it they got most in counter party payments of any domestic institution, is that true? $14 billion? >> i don't know if that's true. >> the most was from an international firm, but goldman sacks was number one. you made about a hundred calls to ben bernanke, but the next number of calls, you made 103 to

a man named dan jester. what firm did he work for? >> as you know, he worked for goldman sacks. >> thank you. i will have additional questions with regard to who you phoned and we will place that in the record. thank you. >> can i say one thing in response? it's very important. congressman, you are suggesting that the people involved in this were not acting in the public interest and suggesting that they were working for the private interest and not the public interest. that is not true. i would never and i believe none of those individuals would ever be part of a decision like that and these were people of enormous integrity and operating under exceptional circumstances with no precedent, doing the best they could for what was in the public interest. it's important to say for the record. >> i must move. the gentlemen from georgia please.

>> thank you, mr. chairman, secretary geithner, when did aig if you can give usa i date. when did they call and say we need money? >> formally i think on that friday. i think it was the friday in september. the 11th or the 12th, i think. >> it was a friday in september. at the time there were advisers of aig that were also advising the new york fed. were you aware of conflicts among the advisers or were there discussions about what conflict this might bring about? >> when they came to us and started to walk us through their financial condition, they had advisers with them.

they were also in discussion with others who were not with us at that time. >> when did that dollar amount become after the discussions. at what point in time did a dollar amount drive that? >> the initial terms of the loan? we had that decision probably just on the eve of the formal agreement. >> okay. do you remember that date? >> the 16th is when we concluded this. it would have been just before that. >> let me ask, on the counter parties, when was that meeting with the counter parties to discuss what the payment might be to them? do you remember those dates? >> i do not believe there was a meeting with counter parties. what i asked my colleagues to do after looking at a range of

options is to approach them individually and try to negotiate consessions. >> there was no actual meeting where the counter parties were in a room? >> i don't think -- i would be happy to check the record, but i don't believe they brought them in a room together. >> when you say the colleagues, they worked for you and were under your direction? >> absolutely. they acted in my direction. >> you were aware of the 100% payment to the counter parties? as i said many times and we supported my decision to -- that's a yes. >> in each one of the meetings to negotiate, we weren't able to negotiate any of them down? these were separate meetings, i

guess. did you question the negotiating skills of some of these people? >> these were again very talented people with a lot of experience who knew how to do this and many had done this for a living. again, unless you can threaten default or threaten to pay below, you understand this. you don't have leverage in the transaction. if we negotiated with the threat, our concern was that would risque downgrade with the collapse. >> do you know if aig approached any of these people about any type of negotiations about what the sum may have been? when the government gets behind it, it takes away the skills. >> you are exactly right. if i'm not fis maken, aig had probably tried to do that before. i can't speak to that today. >> these people with these creative swaps were all bright people and knew the high risk of

what they were getting involved in. did they not? >> the tragic lesson is lots of bright people with lots of experience who should have known better made bets on the future of the country that assumed house prices would never fall. the judgments aig made were similar to the mistakes the agencies made. >> these people were making a lost money off of this. this was a high risk, high reward business, right? >> the people at aig? absolutely. >> it's obvious that aig is a bad deal for the taxpayers. is this deal being renegotiated and is anybody at the treasury working with aig to try to renegotiate this deal? >> it is a better deal for the taxpayer than the alternatives and is proving in many ways far better. as i said, the government is still exposed to substantial risk of loss.

we have a new board in place. >> we have one more question. >> the gentlemen's time has expired. the gentlemen from maryland is recognized for five minutes. >> as you indicated, the previous d main station came to the country and said we faced an extraordinary circumstance and fail tower act. it would hurt people on main street. innocent bystanders in the process. you took the action that you did and you properly said we need to learn the lessons from what happened. the administration and the congress have been working to do just that. here in the house, we passed a wall street accountability bill to try to do two things. number one, provide the fed and others with the tools to make sure you don't have a situation where a firm becomes too big to fail in a manner that it hurts

innocent people. 2nd, to make sure there is a fail safe. if that happens, there is a pool of money raised from the banks and not from the taxpayers to pay for the rescue. number three and the president proposed this, a fee on the biggest financial kmugzs to recover every penny of t.a.r.p. money. that includes every penny extended to aig and every penny extended to the counter parties. on the house we passed a bill and had an amendment offered by congressman gary peters of michigan. i have got it right here. it says that fee will remain on the biggest banks, not just to capitalize a fund to be used in the event of future problems.

they have to pay for their own. you keep that fee on until you recover every penny. i must say i was surprised. i wish all our colleagues on the other side were here. i was surprised this simple idea was rejected unanimously in a vote we had on this. that vote would have ensured it passed. that was a vote to make sure we get back every penny that the taxpayer gave. every penny that the taxpayer gave to the counter parties. if you can speak to the importance of making sure number one we take measures to prevent this from happening in the future, but just as importantly making sure we let everybody on main street that their money that they helped send to rescue the package will be recovered if we adopt the proposal on the house and the presence proposed. >> if congress joins the president in adopting this proposed fee, the american taxpayer will not be exposed to

a penny of loss for everything the government had to do to fix this mess. aig and everywhere else. that is not enough. we believe it is very important to make sure we work with congress to place constraints that prevent it from happening again. it was a tragic failure of the country not to act sooner to limit risk taking by some of the largest institutions where they are operating with not enough capital and no oversight. we have to make it clear that we were going to be able to let firms fail without costing the taxpayers money and costing collateral damage. i want to say one thing. the cost of the american people cannot be captured in the simple financial costs of the t.a.r.p. we were protected if congress passes the fee. the cost is much more damaging.s

of the losses under t.a.r.p. but we have a great responsibility and obligation to reform this system so they're not in that position again and the least we can do is to make sure the tax payers aren't bearing the direct costs that we took in aig and elsewhere. [inaudible]

>> that is exactly right. it is bigger than that. the specific transaction is the subject of so much attention. they are likely to earn a modest profit. the government is still exposed to some risk of loss. the break up the fee, the taxpayers will not bear a penny of the cost. >> their $60 billion worth of losses, 30.4 billion associated with this aig deal but we are talking about. there is significant loss to the taxpayers already prepared this new taxes simply by making up the revenue. mr. secretary, do support the protection act? >> i am not sure of the precise

legislative amendment you are speaking. do you support the volcker rolodex at. >> and rule? tely. that -- what the president proposed is that working with the bill that passed the house, which included a provision that i think mr. kanjorski authored to give the government ability to limit risk taking by banks, that we make sure those translating to limits that will actually prevent risk taking in the future. >> so it is consistent with hr-4173? >> absolutely. that bill and this is very important for people to understand, that bill -- >> i understand. i'm on the committee. >> -- included a provision that would give the government the ability to limit risk taking in

a way to help prevent future crises. >> wasn't it your legislative staff that really worked to change the kanjorski amendment? >> well, again, we worked closely with members of that committee on a whole range of those provisions to make sure that they met the intent -- >> no you're not answering my question. >> in that amendment, absolutely we worked with them on that amendment. >> you worked with them on that amendment to limit it in terms of its reach. >> no. we worked on it to make sure it -- >> okay. so in essence the volcker rule is something you support? >> yes. >> okay. you testified last month before the joint economic committee, quote, i would not support reinstating glass to goal and i don't believe the end of glass to goal played a significant role in the cause of this crisis. do you still stand by that statement? >> absolutely. >> how do you reconcile that belief with this rule that in essence limits or forces banks to divest in hedge funds and

private equity and all these other additional elements that is in essence glass to goal. >> what glass siegel did was to allow banks to underwrite equities and to engage in a whole range of other types of financial act siftivities, insu as well. >> it limited that ability, to be clear. >> and we support, as i think the bill that you started did support, it did actually provide authority to limit a set of activities so that the access to the safety net is not subsidizing excessive risk taking. it is a simple principle. does it dial back some of the reforms? it does do that, but it is not what people typically refer to as glass siegel. >> so it also says if you engage in a certain type of -- if you have a certain form, meaning a bank holding company, you have to adhere to certain rules,

correct? >> that's right. >> okay. you also testified before the financial services committee of which i sit last year that, quote, financial products and institutions should be regulated by the economic function they provide and the risks they present, not the legal form they take. >> that's right. i agree with that. >> and so you support a rule that says, based on a legal form you take, you have to adhere to these principles? how do you reconcile this? >> they're perfectly consistent. but let me state the basic principle again. >> they're perfectly opposite. >> no, what we're saying -- this is important for people to understand, if you are operating in the financial markets, you're helping companies raise credit, raise capital, you're helping them make markets work, you're prying liquidity to markets. shouldn't matter to us or the american people whether you call goldman sachs or whether you call jpmorgan. you should be subjected to a set of constraints on capital, on

leverage and how you're funded that limit the amount of risks you take. if in addition to that you want to own a bank and operate a bank, then there is a set of other limits that we think are good in the public interest so that, again, you can't take advantage of that access to the safety net to subsidize a set of activities that are not essential to -- >> but bankly you're saying, if you just simiply drop the bank holder label -- >> no, that would be a mistake for the country. maybe this would be helpful of me to say to you, we will work very closely with members on both sides of the aisle to make sure that this legislation results in a set of sensible constraint and risk taking -- >> that would be something new -- >> gentleman's time has expired. >> -- over the last 13 months because you have not reached out to republicans to be clear. >> that's not true. but i'm happy going forward that as we try to give the force of law, reflect them in regulation,

we do so carefully with full consultation. >> the gentleman's time has expired. and the chairman recognizes himself for five minutes. thank you, mr. geithner, for being here. i just want to remind my colleagues on both sides that the whole request for the bailout that had to be administered by the treasury department was at the request of then president bush. and, second, i understand your testimony that the people responsible for administering this made the best decisions they could under the circumstances. i just want to ask a couple of questions, though, that start with one of the statements you made, mr. geithner, about the effect of the actions taken has stabilized the financial system. i'm not here to argue that. the question i have is has it helped the broad main street economy? and there are many who believe,

and i'm among them, that wall street got out ahead of itself, got in the business of self-enrichment rather than financing american jobs, american entrepreneurs, and actually transformed itself from an entity that was about creating jobs into the greatest job killing machine in the history of the country. there is two things that i want to ask. one is the bank fee that president obama has endorsed, you see that as essential to have the folks who were largely responsible for the financial meltdown pay the cost so that it is not the taxpayers. is that correct? >> absolutely. in the reforms we proposed to the congress back in june, at the center of that proposal was a basic principle, which in the future government exposed to risk of loss the banks pay. in the t.a.r.p. legislation you refer to, there is an explicit provision that puts an obligation on me to propose ways to coupe the costs and we

propose that in the president's financial responsibility -- >> and i support that. i'm glad you're doing it. second, there are a number of us, well over 60, that are supporting a tax on wall street bonuses. and i just want to get your opinion on this and i'll give an example of the kind of conduct that was allowed to occur. it has been reported, as you know, in "the new york times" that goldman sachs had a department bundled subprime mortgages. it then had folks who advocated to the rating agencies to give it the highest rating possible. it then went to its trusted clients and sold those and then went to its trading desk and sold them short. is that the type of conduct that you think should be monitored and curbed by any financial regulatory monitor? >> congressman, i believe deeply that we need tougher rules, enforced more effectively and evenly, to make sure that

consumers and investors are not taken advantage of and the system is not so fragile that government has to step in the future and take this enormous risk of loss. >> let me just ask you about the bonus tax because i would be interested in this. firms like goldman receive t.a.r.p. funds. they receive low interest money from the open window of the federal reserve and, of course, goldman and other firms receive direct pass through payments when aig was bailed out, correct? and when mr. paulson, your predecessor, was on the phone requesting this money, this was not anything that you made the request for, he assured us that wall street had learned its ways. goldman and the other wall street firms are back to their old ways. they have been so successful and let's give them credit, they're good at what they do. the question is whether what they do is good for the economy and for main street. they have been able to set aside 140 to $160 billion. do you have an opinion, for

bonuses, they could have lent that out, could have added to their capital base and the third choice, they could have put it in their pockets which is the one they have chosen, do you think in view of the fact that much of their profit was made through taxpayer generosity it would be appropriate to tax bonuses as i suggest in my legislation, the 15% above 50,000? >> of course i would be happy to take a careful look at that legislation and talk to you about how best to deal with that. the basic principle that we support fully is to make sure the american taxpayer is not exposed to a penny of losses from the actions the government had to take under the t.a.r.p. authority. and i completely agree, as i said earlier, that we need to work with the congress to make sure we bring about fundamental changes and how bankers are paid so that they are not taking risks that could imperil the economy as a whole. doing that is hard to do right. we tried in the past, not very successfully, it is an obligation that shareholders and boards have too. but it is the government's responsibility in the end to make sure -- >> my time is almost up. where we would take the money

that was raised from that and put into small business lending and some are reduced lending to american enterprises. folks in vermont who run businesses ask me if those dies make so much money, how come they can't lend me any? >> i agree with you. if you saw in the paper today, we are close to proposing to the congress that we take a large amount of the resources that we have gotten back from banks, from the large banks and devote them to exactly that objective, making sure that small banks and small businesses have access to credit. >> thank you, mr. secretary. my time is up. and the chair now recognizes the gentleman from ohio, mr. jordan. >> thank you plrk chairman. mr. secretary, you are involved -- you said this many times, involved with the decision 15, 18 months ago relative to the initial t.a.r.p. bailout, you're involved in all that, you thought it was the right decision to make at the time. >> i thought it was absolutely

essential at that point. the country had no choice. >> and we had several hearings on bank of america and merrill lynch and you were involved in that decision. you were supportive of what took place with the merger of -- the acquisition of merrill by bank of america, yes or no? >> that is right that at that time i was part of an effort to try to find a solution -- private solution to merrill lynch to that point and i thought that that action at the time was necessary and appropriate, yes. >> and today you have said that, you know, you think the initial decision relative to aig and the payment to the counterparty, you think that was appropriate, you stated that strongly in your written testimony, you talk about this is in the best interest of the american people. >> i do. i do. >> we did not act to help form banks, we acted because the consequences of failing at that time in those circumstances would have been catastrophic to our economy, american families and american businesses. you think it was definitely the right decision? >> i do. >> and the staff that worked for you at the new york fed would be in agreement with that analysis,

that this was so critical, this had to get done, the sky was going to fall, the world was going to end if we did not do what you decided to do relative to the counterparties and the $6.2 billion spent. is that correct? >> i believe it is. but i think there are -- to be fair to say there were those among us involved in this, in each of the institutions involved, washington, new york treasury, who were deeply troubled by that choice, were not comfortable with this -- >> but you thought it was what you had to did at the time. >> i believe that, yes. >> you said in your written and your oral testimony this morning that this was critical to american families and american businesses. >> i believe that. >> it begs the obvious question, why the secrecy relative to disclosure? if it is that important, $62 billion, why in the heck not disclose it when it is happening since you subsequently have done that, why the secrecy and, frankly, why weren't you involved -- if it is that

critical, that important, why in the heck did you recuse yourself -- why weren't you involved? >> well, again, just to step back a sec, when the fed discloses this in march, i thought it was the right thing to do. and i think reasonable people looking back at this could say why wasn't that possible sooner? i think that's a reasonable -- >> why wasn't it possible in november when it was all going down? >> right. but all i can say is what i understand i was involved in and i was not involved in discussions about -- decisions about what to do with that particular transaction that contribu counterparties or the details. >> let me ask you this. do you believe the decision that was made by the folks who work for you at the new york you said this is so critical that the world is going to end. the meat hastening a deeply believe. it is very hard to put yourself in shoes that you did not occupy. -- and still have a clear sense

to buy it the actions. and not feel like and put myself in their shoes. i do believe that they acted with great integrity, a care, and richmond. >> mr. lynch was on the right trail. this is a pattern. use it to give a $700 billion. >> i didn't do that. >> york government came to congress. >> i understand. give us the money, we will buy the troubled assets. nine days later you were in the room. >> that is one of the most important decisions. banks, we're not going to buy the biggest assets. >> that was one of the most important decisions. >> understand the pattern. the congress of the united states was told one thing, ten days later an entirely different action was taken place. >> i don't think that's correct.

what congress authorized -- >> you don't think congress passed that bill because they understood that the money the taxpayers were going to put up was going to be used by troubled assets? >> i can't put myself in your shoes but the authority that president bush asked for gave my predecessor the authority to put capital in banks. and doing that -- >> here's pattern, mr. geithner, here's the pattern. the government comes to the tax payers and says we need more of your money, the world is going to end, we want it for a specific purpose and then do it for something else. they come to the taxpayers, we need more of your money and we're going to use $62 billion and don't disclose to the taxpayer what is go on. this is why we never should have traveled down this road, this unprecedented involvement by the government in the private sector. we have seen it with -- >> gentleman's time has expired. >> we see is now with aig. >> i thank the chairman. >> gentleman's time has expired. thank you. the chair recognizes mr. clay.

>> thank you so much, mr. chairman. and i want to thank chairman towns and issa for conducting this hearing. secretary geithner, several economists and policymakers assert that aig's ability to provide cash collateral to their counterparties was not relevant in designing their assistance package. what is your opinion on this claim, that it was not relevant in designing the assistance? >> i agree that the -- what was relevant and necessary was how to restructure this firm in ways to protect the taxpayer, to the extent we could, from the risk of greater losses. and our choice was at that point this very stark tragic choice, let aig default or not. and we thought that default itself would have been much more expensive. >> okay.

let me -- help me and help, i guess, help the american people understand, why was aig's ability to make payments to its counterparties for their toxic assets even a factor in determining the amount of bailout money to award them? >> for an insurance company or any financial institution to operate, they need to operate with a high credit rating. without that, they could not borrow money to function. they could not write insurance contracts because people would not believe they would have the financial wherewithal to back those commitments. so the rating is critical. if we were to have defaulted on any of those legal contracts, aig would have been downgraded. the counterparties would have the right to take more money, and to default on -- and to bring about the basic collapse of the firm.

so it is that stark tragic choice. if aig had not paid, they would have lost the rating and the firms would have collapsed -- the firm would have collapsed. if we had continued to lend the money for them to make those payments, the rating would have also been in jeopardy because aig already had a lot of debt at that point. the choice was to restructure them so we limited the drain of cash and left the tax pay we pa >> you are saying the counterparties would have had a right through bankruptcy -- >> a legal right to sue to recoup that claim. >> okay. did anyone involved in the concession negotiations ever suggest that aig's counterparties should not be relevant in their bailout packa package? did that issue ever arise among the negotiations or anyone that

you encountered during the negotiations? >> that is a complicated question, good question, but as i tried to explain in testimony, the -- what we're guided by -- what was going to be the best way at least cost to prevent a default and protect the system and the entire system was at stake then. and no firm in the country would have been insulated fully from the collapse of the entire american financial system. and our judgment was that aig's default would have materially raised the probability of that collapse. our choices were terrible choices, but they came down to what was the best way to prevent that outcome on the best terms for the taxpayer. >> so then that get to the point of being too big to fail. aig's tentacles were that widespread throughout the country and the world that -- >> exactly the right question.

there are two things that matter in this case. one is you had a set of firms like aig, huge, risky, spread everywhere, involved in a whole range of things. and you had a world that was burning. so, again, the first time since the great depression you had financial systems around the world really at the brink of stopping in their tracks. and it is those two conditions that are most risky. if the world had been stable, everything would have been fine, we weren't on the edge of the worst recession in generations, then we could have been afforded to be completely indifferent to the fate of aig or all of those institutions. but because aig was so large and so interconnected and because the system was so fragile, it would have been irresponsible to take the risk the failure would have dramatically amplified the pressures we're still living with today. >> did -- could you help

describe what the reaction was in the negotiations to the counterparties, pros and cons, as far as, you know, paying counterparties. >> we wrestled with lot of choices as i tried to explain in my written testimony. we thought about whether it was better to default, to impose a haircut, to negotiate concessions under threat of default. we thought about keep paying and watch that money keep running out the door with the counterparties still holding the underlying assets. we thought about negotiating over time, trying to stretch it out, see if we could find a better way to solve that problem. none of those options were realistic. none of them were feasible. they were not better than the choice we chose. and, again, if you -- i think you look back and take a fair reading of this, although the government is still exposed to substantial risk of loss, those losses are much lower today because of the actions we took

in aig and this transaction, which, again, people are so understandably concerned about, has put the taxpayer in a better position than if simply we kept making those payments or if we defaulted on them. >> thank you. >> the gentleman's time has expired. i yield five minutes to the gentleman from california, congressman bilbray. >> thank you, mr. secretary. we're supposed to do oversight and reform. we're trying to get information so that we can do the reform to make sure the next time this process comes up we have procedures and laws that address this. and so it is real important that we identify how this went so we can try to correct it and make sure it doesn't happen again. not only in march you knew that there was a so-called disclosure issue, but in february you had said in a speech that one of the major issues that you were concerned about is the lack of disclosure that was causing the american people not to trust the

system. now, i think we'll all agree that in layman's terms what the average citizen when they heard disclosure issue, they hear cover-up. now, why, in a system that is supposed to be open, the american people have a right to know where their money goes. why was there even a disclosure issue. why were we even discussing the so-called cover-up of the $160 billion, where it was going, in this process? why was that even an issue that as soon as you knew there was a problem there that somebody didn't clarify this? was that your staff had basically did not inform you that there had been this cover-up this disclosure issue, and did you make that decision or was that a decision made outside? because aig sent the information over. it was an internal process within the government itself that said we're not going to disclose to the public this information. >> my colleagues at new york fed, i think they put in the public domain a very thoughtful

explanation of the judgments they wrestled with and ultimately reached. and i know and i'm confident that their colleagues in washington spent a huge amount of time throughout those months trying to wrestle with how to meet the underable public interest in greater disclosure of these things and they ultimately, i think appropriately, came to the understand that they could and should put that information in the public domain. now you're exactly right, i have been a great proponent of greater transparency and the centerpiece of the strategy that we adopted to fix this mess in the financial system was to force the largest banks in the country to disclose for the first time to the public, to all investors, the scale of losses they might face in the event this recession was much more damaging than it proved to be. and that provided the basis for private investors judging who was strong, who was less strong, and deciding to put in capital in those institutions. >> were you told -- in other words, did your staff know the cover-up was there, disclosure

issue was there before you knew it was there? was the decision to -- >> again, i think as the record the committee has already put in shows there were discussions that were happening about what to disclose when throughout that period of time. >> were you involved in those discussions? >> as i said in my thing, i'll say it again, i played no role in decisions about what to disclose about these transactions to these individual counterparties. >> did your staff make the decision not to inform you or include you in that decision-making process? >> yes, they did, though i made -- >> would you -- would you want to know about that or would you prefer that you didn't know about it at the time? >> i think in retrospect i wish i had known, frankly. but after november 24th i appropriately removed myself from decisions about a whole range of policy issues the fed

was dealing with, but the people that were making those decisions in close consultation with people in washington and with legal counsel, are people of great judgment and enormous integrity and i have enormous trust and confidence, not just in their judgment, but in the quality of the decisions they made throughout that period of time. >> do you feel today that at the time they made the decision to do the cover-up, the disclosure issue, that they felt you did not want to know about it at the time? do you think they made a decision that -- >> i do not -- in my entire time there i was never aware of a situation in which my colleagues sought to shield me from something. i was president of the new york fed. i was going to be accountable for decisions made on my watch. but after the 24th, for reasons that i think are fair and right for the institution, i could no longer run those day to day

judgments and i withdrew from those and i think those were necessary. >> and your staff decided to shield you from the cover-up side of it too? >> no, i decided that i would withdraw myself from -- i didn't decide this alone. i decided this in consultation with the chairman of the board of governors of the federal reserve system and with the incoming administration to protect the institution from the unique conditions i was in then. >> mr. secretary what date did you know that that there was a cover-up, a disclosure issue, when were you informed? >> i only knew about these discussions about disclosure when they started to make -- to be in the public domain -- actually i don't know when they first rose to the attention of the congress. but when they rose to the attention of the congress, they were in the press, i was aware of them. >> the gentleman's time has expired. >> thank you very much. >> let me thank you, secretary geithner, for your testimony and, of course, we will now -- >> mr. chairman? >> mr. chairman, i would ask unanimous consent that all members be allowed to put their

questions in writing to the secretary and would ask that the secretary, if he would respond to them in writing since so many members were not able to ask their questions. >> without objection, so ordered. thank you, mr. secretary. >> mr. chairman -- >> mr. chairman, i'm not sure what the right point of order here is, but i recognize how tremendously busy the secretary is, but i also recognize the need for this congress and people on both sides of the aisle to be able to ask some questions. we have been waiting patiently here all day. i would hope that the chairman would do what is necessary -- >> i'm one that, as you know, you've been here long enough to really know me because i believe in openness and i believe in going as long as it takes, but mr. paulson has a problem with his schedule in terms of the amount of time he would be allowed. so if we continue, then he will not be able to testify. so i think that's the issue that we have to deal with. so that's the reason why we're cutting it because -- it was agreed that this would happen,

and, of course, i understand that several people that did not have an opportunity to raise questions. but what we -- what i would suggest is that you put the questions to the secretary in writing and he will answer because if not, then the second witness we will not be able to hear from at all and i think -- >> mr. chairman, if i could be so bold, my guess is if we were to survey or talk to the people on the panel, particularly the people who didn't have a chance to ask questions, i think with all due respect, we would much rather hear from the current treasury secretary than the past treasury secretary whose schedule is probably more flexible. >> the point of the matter is we have a hearing that has been scheduled and it has been structured. and i wish we could sort of stay here and allow everybody to do that, but the point is that i think in this situation -- >> mr. chairman -- >> -- i'd be delighted to yield to the gentleman again. >> i appreciate t you've been so fair and generous and personally very good to me.

is there a way we could vote on which direction to go on this? >> well you know, it is actually up to the chairman. but let me say what i would like to do. i would give a minute to two on this side and a minute to two on this side and that's it. we have to move forward. we have a scheduled hearing that is here, looking for certain -- >> would the gentleman yield? >> looking for certain information. in order to get information we need to talk to the present secretary. we need to talk to the past and, of course, we have others that we still -- >> would the gentleman yield? >> mr. chairman, i join you in that. >> reserving the right to object. i just want to say that any member of this committee has the ability to submit questions in writing. mr. geithner, in response to an earlier question, said that, you know in the interest of time, he would be willing to answer questions in writing. is that not true? >> absolutely, of course. >> so mr. chairman, anybody who wouldn't get a chance to ask a

question here could put it in writing. i withdraw any objection. >> let me say that we will go two on this side, two on that side, but a minute, remember -- >> reserving the right to object. >> yes. i don't know what you're objecting to. >> if you'll recognize me. unanimous consent request for two minute each. i would be happy to forgo my time for secretary paulson to ask secretary geithner -- >> i wish we could operate that way, but, you know, when you have hearings that are structured, they're not structured in the fact that someone would give up their time -- that's not the way we do it. so the point of the matter is that we accepted two minute on this side, or we move forward. okay. so that's what's on the table. so two minutes on this side, two minutes on that side. okay, you want to designate. >> i withdraw my objection. >> designate the two on this side, mr. connolly. you have a minute to raise one question with the secretary. mr. connolly from virginia.

okay. >> thank you, mr. chairman. and thank you -- >> can i ask for one minute. >> thank you, mr. chairman. mr. geithner, we have one minute, and one has the sense that some people in this room perhaps want to rewrite history and i understand given the history of why they might want to do that. in your opening statement, you talked about the need for financial regulatory reform. could you expand on why we need that particularly when it comes to regulating that which was resisted from regulation in the past like drierivatives and cret default swaps. >> i don't think it is a hard case to make. look at the wreckage caused by the crisis to say the system failed dramatically. and, again, the two most simple failures that happened is people were allowed to take risks without constraints. we let a system operate where systems that were huge and consequential operated with no adult supervision, with no constraints and brought the country to the edge of collapse. let me just say one thing in

common with the following firms, fannie and freddie, the largest investment banks in the country, a aig, a set of specialized insurance companies, a whole range of consumer finance companies, a bunch of -- they all had one thing in common, which they were not subject to a set of sensible rules to constrain the risks they had to take. what we pros to in financial reform is to change that. it is a simple imperative. that's not enough, though. because people make mistakes in the future. so we need to make sure when they make those mistakes that we can let them fail and failure can happen without catastrophic damage. we need to be able to contain the damage, isolate it, draw a line around it, put them out of their misery, put them out of existence without the taxpayer being exposed and we need to make sure that we don't have a system where the taxpayer is exposed to the risk of loss where investor and creditors live with the expectation that the government will be there again. and, again, that's something that is a -- i think we all have

a huge obligation, responsibility. it was the laws of the land that allowed that to happen. the law of the land that made it impossible for the government to act and i think we need to work together to change that. >> i thank the gentleman. i thank the chairman for his consideration. >> thank you very much. and now i recognize mr. fortenberry. for one minute. >> thank you, mr. chairman. mr. secretary, welcome. for last year and have we have been privatizing profits and socializing risk. and if the optic on the aig aren't bad enough, the counterparties to the aig who received 100% parody for their liabilities, seven of the top ten are form firms so cmt generalal had $6.5 billion of american taxpayer bailouts in effect followed by goldman sachs. you said this economy is crisis. this year goldman sachs will give $16 billion of bonus payments, about $500,000 per employee. this is really difficult to

understand why there wasn't, at first, a desire to have transparency in regards to counterparty transactions. can you address that, please? >> i'm not sure if you were here for that part of the conversation -- >> i was here for the entire time. >> but, again, the actions we took were necessary in the public interest, better than the alternatives, to help prevent catastrophic damage and if you are outraged as i think you should be about how the economy and our system was in this mess, i hope you will join with us in trying to work to make sure it doesn't happen in the future. this is not something that should be republican or democrat. there is a deep, i think, moral obligation we have to try to make sure we put in place reforms that will prevent this from happening again. . if the government had done that sooner, this would have been less damaging and a critical part of the failure was we ran a country, largest economy in the world, largest financial system in the world, without having the

kind of bankruptcy type powers we had for banks for decades. >> let's try to do that on a bipartisan basis, sir, please. >> i'm sorry, the gentleman's time has expired. and now i recognize the gentleman from illinois, congressman davis, for one minute. >> thank you very much, mr. chairman. and thank you, mr. secretary. let me just ask if you had to do it again, to do it all over, would you change any of the decisions that you made in the fall of 2008 to rescue aig and pay the counterparties part? >> congressman, as i think about this a lot, and one of the great things of our country is people look back and come to their own judgment, whether we made the best choices. but i am very confident that we made the best of a set of terrible choices, that there were no better alternatives. we did not have the option of

bankruptcy. we did not have the option of default. we did not have the option of selective haircuts. it would have been catastrophic to let the institution fail. we didn't rescue aig. we intervened so that we could dismember it safely wrought it wre -- without it wrecking the country and the system. i think the big mistake we made as a country and there are mistakes that we have to reflect on deeply for a long time, were why the government didn't act sooner to limit risk taking, why the government didn't provide competent authorities with the ability to contain risk taking and why we didn't have in place the kind of tools we had for a long time for banks to try to deal with these kind of failures. i think those were tragic mistakes. the lesson of financial crises is if you don't act sooner, things get to the point where they can cause catastrophic damage. and if you let it -- if you stand back and hope it will burn itself out, correct itself, it will be a good healthy adjustment for the economy, that can cause enormous damage. and it will cause enormous

damage not just to the american lives and people who will be living with for a long time, but to the revenue base of the country, deeply impairs the capacity for government to do things that are necessary, like -- that we need resources for, protect national security, make sure teachers can be in the schools, these things are deeply connected. if you stand back, and try to hope the market will fix itself, you court catastrophe. i hope we learned that lesson. should never happen again. >> thank you very much. >> the gentleman's time has expi expired. i recognize the gentleman from utah. >> thank you, mr. chairman. thank you plrk secretary. i was going to ask about the 18 phone calls you made to rahm emanuel, more than any member of congress. what i would ask you about is this idea that they're going to make prompts. i'm going to read two statement and request you a question from neil barofsky's testimony that is coming up. first one is, quote, on page 13, treasury's own t.a.r.p. financial statement estimates

that treasury will not be made whole but is rather projected to lose more than $30 billion on its aig investments. second quote, narrowly asserting that taxpayers will be made whole on maiden lane three, one part of the aig counterpart transactions without mentioning the huge losses treasury expects to suffer on other inextricably linked parts of the very same transacts is simply unacceptable. the american people deserve better. so my question, and hoping you can respond to those two statements, is when you refer to profits from the aig counterparty bailout are you counting the cost of the $35 billion in cash aig handed over to counterparties, or just the $27 billion they got directly from the new york fed? >> congressman, i think mr. barofsky and i agree on this and i said in my statement, i was very clear, the government is still exposed to substantial risk of loss on its investments in aig.

the federal reserve, in this transaction, i think more generally is unlikely to face any loss. that is a good thing. we should welcome that. but the government is still exposed to risk of loss. we don't know how large the losses will be. what you refer to is not a projecti projection, just an estimate based on current market prices. but the important thing, i hope you join me in this, if we adopt this financial responsibility fee, the taxpayer will not bear a penny of the burden -- >> sounds like a tax to me. doesn't sound like a -- sounds like a tax to me. >> call it what you want. >> i call it a tax. i wish you would too. call it what it is. >> again, in the law the congress passed, authorizing these actions, congress required the secretary of treasury to propose a way to make sure taxpayers are held harmless. we did that. i hope you will join us in supporting that because there is no reason why the american taxpayer should be exposed to a penny of loss in what we did in aig. we can mak]&vivivivivivivivi]&

>> the second witness -- the second witness for today's hearing is former treasury secretary dun der the bush administration, secretary henry paulson. mr. paulson please stand as i administer the oath. do you solemnly swear to tell the truth, and nothing but the truth? if so answer in the affirmative? >> i do. >> you may be seated. let the record reflect he answered in the affirmative. i'll ask the witness to summarize his testimony in five minutes and, of course, we know the procedure, you know, the yellow light means you have a minute left and the red light means stop and then, of course, we will have time to raise questions with you. you know the procedure. you've been through this quite a few times. so good to have you back. >> mr. chairman, thank you. and i will go through this

quickly. first of all, chairman towns, ranking member issa, and distinguished member s of the committee, i appreciate the opportunity to testify before this committee. i was secretary of the treasury in 2008. in that role i had the privilege to work with many talented men and women in government and the private sector who labored to pull our nation back from the brink of disaster. the decision to rescue aig was correct and i strongly supported it. and aig failure would have been devastating to the financial system and to the economy. today's hearing relates to payments to aig's credit default swap counterparties. i was not involved in any of the decisions made with respect to those payments, nor was i involved in any of the decisions about aig's public disclosure of those payments. those matters were handled by the federal reserve bank of new york and the federal reserve

board. they sought to make appropriate decisions on those matters and i am confident that this review will show that they did. i have limited knowledge on the topics of immediate interest to the committee, but will share the following observations. the rescue of aig was necessary and i believe that we and the government who acted to rescue it including secretary geithner, chairman bernanke and me, acted properly and in the best interest of our country. the reasons the rescue of aig was necessary are well worth examining. i believe they are representative of a causes of other aspects of the crisis and indicate where regulatory reform is necessary. there are three reasons we needed to save aig that stand out in my mind. first, aig was incredibly large

and interconnected. it had $1 trillion balance sheet, a massive derivatives business that connected it to hundreds of financial institutions, businesses and governments, tens of millions of life insurance customers, and tens of billions of dollars of contracts guaranteeing the retirement savings of individuals. if aig collapsed, it would have buckled our financial system and brought economic havoc on the lives of million of our citizens. second, aig was seriously underregulated. although many of aig's subsidiaries including its insurance companies were subject to varying levels of regulation, the parent entity was for all practical purposes an unregulated holding company. consequently there was no single regulator with a complete picture of aig or a comprehensive understanding of how it was run.

it was not until aig started to fail that regulators began to understand how badly managed it had been, and how much the toxic aspects of parts of its business had infected otherwise healthy parts. third, aig could not be effectively wound down. unlike failed depository institutions, which can be taken over by the fdic with little to no harm to the depositors or the gses, seamlessly placed in the conservatorship, there was and is no resolution authority available to wind down failing institution like aig. the only option is bankruptcy. a process that is simply not capable of protecting the millions of americans whose finances are intertwined with aig's. the government rescue of aig in

the fall of 2008 was directly shaped by these realities. we had to protect the economy and the finances of millions of americans. we could not have anticipated the magnitude of aig's problems and we had no way of letting it fail without disastrous collateral consequences. we had to intervene and i'm thankful we did. i do not mean to say that i'm happy we needed to intervene. taxpayer money should not have to be spent to save a misguided and mismanaged enterprise. but the fundamental problem lies not in how we intervened, but why we needed to intervene. we need to modernize our regulatory structure by creating a systemic risk regulator and resolution authority so any large firm that fails can be liquidated without destabilizing the system.

large financial institutions of this country will always play a role that is essential to our economic growth. but they must only be permitted to grow and interconnect throughout our economy under careful oversight and with a mechanism for allowing those connections to be broken safely. thank you, mr. chairman, and i would be happy to answer any questions. >> thank you very much for your testimony. let me say that you were deeply and aggressively involved in dealing with the financial crisis and we saw that with aig, of course, and bank of america and with the t.a.r.p. my question is why did you sit on the sideline and not use your considerable influence to call the ceos of the counterparties to get them to take a haircut? why wouldn't you do that? you are a person that was very influential in all of this, and

i can understand why you wouldn't do that. >> well, mr. chairman, as you indicated i had no involvement at all in the payment to the counterparties, no involvement whatsoever. now to explain this we worked very collaboratively during the crisis. there is a lot going on, coming at us from all sides. and whichever agency had the authorities took responsibility for execution. and this was clearly a case -- it was a federal reserve loan. they had the authorities to make it and administer it, and they had the technical expertise to do the restructuring. >> but, you know, i just see it a little strange that you would sit on the sideline and not help the american people in terms of -- you were so involved in the early stages and you -- i mean throughout the process, and

then to sit on the sideline at a time like this, i just find that -- >> mr. chairman, anybody that knows me know i wasn't sitting on the sideline. i was -- i was not involved in this issue. but i was involved in many other issues every single day of the week including weekends. so i didn't -- >> why not? why wouldn't you be involved in this? >> because this was a federal reserve loan. they had the authority. they had the technical expertise. and, you know, i said in my testimony, i have great confidence in the professionalism, the integrity, the motives, the abilities of the people that were handling this. so this was their job to handle and i was working on many other things which were in my bailey wick. >> why wouldn't you let aig go into bankruptcy?

why not? >> if aig had failed, this was a huge financial organization, interconnections throughout the economy. if it had failed with the system as fragile as it was, i believe it would have taken down -- >> talk directly into the microphone. they're having problems hearing you. >> i would have taken down the whole financial system and the economy. it would have been a disaster. today, after all the act the ac that have been taken by the government, we still have this terrible 10% unemployment level. i believe that if the system had come down and failed, we could easily have had unemployment reaching or exceeding the 25% level we had in the great depression. we would have lost many additional billions of dollars and in american savings.

home prices would be much lower than they are today, so as unattractive as the government rescue of aig was, and none of us that supported that found that to be an attractive or desirable option, it was just much, much better than the alternative, which would have been economic disaster in this country. >> i now yield five minutes to the gentleman from california, ranking member. >> mr. chairman, i would ask that we go to the members who did not have an opportunity in the first round and, mr. chairman, i would also ask one thing, will you agree, since the secretary said he would answer our questions to join with me in ensuring that all questions are answered or that we bring the secretary back assuming he does not answer them for some reason? >> so ordered. >> thank you. mr. luetkemeyer would be next of those waiting. >> thank you, mr. chairman. mr. paulson, one of the things

that we're looking into here with aig, can you explain to me, is aig and their financial products, was that a subsidiary of aig or was that part of the -- their business model? >> i believe it was part of the business model. >> there wasn't a separate entity? >> it was clearly -- it was clearly at the holding company and it was a -- it was part of -- it wasn't part of an insurance business model, but it was sure part of the company's business strategy. >> because it makes a big difference if it is not part of the insurance part of the company, it is a subsidiary, you can let that thing go down and it doesn't affect the insurance part of it, which i believe it was, isn't that correct? >> well, i would say this to you, this company was so big and intertwined that it was -- if there was any way that the people who were working on this

could have found a way to just hive off and let one small part of the company -- >> would the gentleman suspend? mr. paulson, excuse me, we want to make sure that members can hear your testimony. and, you know, it is amazing what so much money in this federal government we don't have a better sound system. i'm going to need you to speak as closely to that motorcycike can. >> so to just be -- to just be clear there was no way to hive off and hand this will situation differently. there was a very few days to act to prevent bankruptcy with no winddown powers to let this company be liquidated and avoid bankruptcy. >> well, with you'll awl dall d if it is a separate entity, it could go on, sir. another question very quickly. in secretary geithner's testimony, he indicated that he

felt that contractually the contracts that we had -- the investments that were made by foreign banks and to aig that they were involved with needed to be adhered to and worked with. was the government a part of those contracts? >> i -- as i said in my testimony, i had no involve with the payment of any of those contracts. i just was not involved in that matter. >> so the government wasn't a party of the contracts then? the government wasn't party of the contracts? >> this was not something that i was directly involved in. i said that i have very much trust the motives and the abilities and the judgments of the people that made those decisions, but i wasn't party to them and i can't answer that question. >> that's one of the frustrations and i appreciate your candor. my frustration with the chair that we don't get full testimony and get all the questions answered, asked and answered so

we can come to you with what we feel is good information to get good back and forth here. i apologize to you. let me move on to something else. i know right now we're looking at and the president proposed some too big to fail sort of strategies to try and address the issue of too big to fail. where are you in this debate? what do you think about the proposals on the table right now, sir? >> when i was secretary of the treasury i put out a regulatory blueprint and i still believe that that is a way to go. i am very -- i think it is essential that we have winddown authorities, resolution authorities, so that any financial organization, no matter how big, can be liquidated outside of the bankruptcy process without taking down the rest of the economy. and so i think that is essential. and there are some parts of

the -- of the proposals up here being debated by congress which are the same as in the regulatory blueprint we put forward, a big one being the systemic risk regulator and i'm strongly in favor a systemic risk regulator. >> do you believe we need to take the risk investments that are part of some of many of the big banks now and take them off the books and a separate subsidiary for this, go back to glass stege stegele firewall th? >> that is not my recommendation. i believe that when you look at the -- at the crisis, what i saw in the crisis was that it was across a number of financial type of financial institutions, and the excess of risk taking, i saw, was not limited to one business activity. it was much broader than that. i think we need a broader approach. again, what i favor is a

systemic risk regulator and winddown the problems i have with what you're suggesting, sir, suddenly we have the taxpayers through fdic insurance on the hook for risk takers out here, i think, it's important that we take these things after the books and have a -- if it goes down it goes down and the banks and insurance funds and taxpayers as a howhole are not the hook for that. i think it's important we go down that road. what you've done with aig is use the federal government of the official underwriter of all investments in the world. if we're underwriting foreign contracts, investments, what have we done? we've gone down that road. i appreciate your comments. >> gentleman's time expired. chair, in keeping with the necessity of making sure members who do not ask questions the last round are given a chance to go first, we recognize mr. teerney. >> mr. paulson, thank you for being here this morning. you were in full agreement with

not allowing aig to go bankrupt? >> absolutely. >> i think back home people don't know where to give the credit for this. i think we need to give credit where credit is due if that's a good decision. people see mr. geithner as treasurer. in fact, these were decisions made in 2008. you were president bush's secretary of the treasury, correct? >> absolutely. >> and mr. bernanke was the head of the fed? then, of course, we had the new york federal reserve board participating in these conversations as well. so you're pretty much the group thad decided they should give $85 billion in september to aig. those are mostly the participants, am i right? >> yeah. we were -- as i said in my testimony i very much supported that rescue. >> in november it was the same group. you as president bush's secretary of the treasury, mr. bernanke and the new york fed@@@

use to get that $85 billion? >> they used their funds. >> their funds emanate from where? >> from the u.s. government.

>> were they frees from other banks? did they come from your treasury? where do they come? >> they come from the -- the fed obviously can print money. >> okay. and did they take money that they had from fees charged to member banks or print money to accommodate this $85 billion? >> you'd have to ask the fed that. >> you're not aware? >> i'd like them to answer that question. >> you may not like to answer the question, sir, but if you know the information i'm asking you to share with us, what is your best understanding of where that money came from? >> my best understanding is all dollars are green so those are ultimately taxpayer dollars and that was why -- >> we're painfully aware they're taxpayer dollars, sir. >> that was why the treasury was supportive and we -- we were very supportive of that transaction. >> we all understand the full faith in -- the promise -- taxpayer dollars we're painfully aware. i'm asking you whether since they didn't come to congress for

the appropriation, whether the $85 billion came from fees charged to member banks, newly printed money or some combination of the both. >> i don't believe it came from fees charged to member banks. >> okay. thank you. we got to the point where a decision had to be made about whether or not to let aig go bankrupt. later came to a point whether or not to pay the counterparties 100% of those contracts or not. once the decision made not to let them go bankrupt you lost leverage to argue in terms of getting -- being able to pay less than 100%. is that a fair statement? >> as i said, i didn't participate in the -- in those decisions regarding payment and i also said we didn't have the wind-down powers. >> okay. you were involved with -- i forget how many congressmen said there were phone calls between the new york fed and you. i'd yield -- 225 telephone conversations between the head of the new york fed and you during this period of time. so i think we might be fair in

assuming kblou you were discussing some of these party matters? >> we had a range of matters to discuss. we clearly discussed the rescue as i said, i did not have involvement and -- >> my final question. i need your help with this. most people at home draw the conclusion that not to allow aig to go into bankruptcy would have been devastating because the consequences would have been severe. it would be enormously helpful if you can put yourself in the position of the local bookkeeper for a medical firm or housekeeper or lawyer or teachers aide. how specifically could that individual been harmed if you had not made the decision to not allow aig to go bankrupt? what would have been the consequence to them? >> that's the right question, congressman, because they were the real victims. they would have lost jobs, would have lost -- >> how? how would that have happen? show me from the time you made the decision what would have

spiraled down to effect their lives. >> the gentleman's time has expired. the witness would be pleased to answer his question, i hope. >> okay. what i believe -- we were -- around the time of the aig rescue when markets were frozen we had a situation in this country where even blue chip industrial companies were having trouble financing. i knew we were on the brink that if aig had gone down i believe that we would have had a situation where main street companies, industrial companies of all size, would not have been able to raise money for their basic funding. and they wouldn't have been able to pay their employees. they would have had to let them go. employees wouldn't have paid their bills. this would have rippled through the economy. the -- today, congressman, we have after everything that was done, all the resources we have

10% unemployment. i believe we easily would have had 25% unemployment. today we have home prices that have dropped precipitously in some parts of the country. home prices would have gone much lower. aig guaranteed tens of billions of dollars of savings for retirement savings for americans. there would have been great losses. this would have been economic nightmare. >> thank you, mr. paulson. chair recognizes mr. souter. >> thank you. i have a variation of the same question you were going through. one of the problems we have is that it appears aig was treated differently than other companies throughout this whole thing in this sense that the holders of the debt were paid at par. which means that in effect the banks got 100% but, for example, gm creditors, small businesses all across america and other

companies that were let go, they got ten cents on the dollar, 30 cents on the dollar and it's part of a fact but a perception that that was unfair, that wall street was covered but main street wasn't, in debt. aig was different in what sense? now, i know, was it 120 separate finance companies and 80 insurance or is that flipped? something like that. in other words, it was a collection. >> a big complex collection of companies, correct. >> and that if the insurance divisions were separated, and came under state, part of the argument is state regulation. that they were so intertwined with the finance let me ask one other question before we get into details of that. you said bankruptcy wasn't an option but it also meant that did you try to put pressure on the people who held the debt to write down some of their debt? or once you made the statement we weren't going to let it fail, were they playing hard ball in

saying we're not going to write down anything? why didn't they get the same pressure gm suppliers had and everyone else to write down their debt? >> as i said, and this isn't me trying to suggest anything was done wrong. i had nothing to do with that. i was not involved in the negotiation. i was not involved with anything surrounding those payments, but i will explain one thing to you, which is fundamental for you to understand, is the government we have an antiquated regulatory system and the lack of necessary authorities. so if there was a bank there was a -- there is a way to wind that down, but this was -- this was a nonbank and there was -- >> i understand that. let me -- let me ask you, there's no way except the threat of real bankruptcy. and that if you're a bank and think you can negotiate at par and get a full percent and you don't have a threat of bankruptcy the question is, did

anybody threaten them? did anybody say -- did we in effect yield the debate at the beginning, they played hard ball and we had no way to do it that if in effect you would have threatened to say, we can cover the insurance people but the finance side over there you better negotiate down and that side will go bankrupt. you would have had to put cash reserves into the banking system so cover the fact the bankruptcy gone out. in other words, had they gone bankrupt and there was a catastrophic effect, which i believe, because i voted for t.a.r.p., a catastrophic threat, wouldn't you have had to put more money in the banking system but not necessarily at par? >> as i said, congressman, i didn't -- i wasn't involved in that so i can't -- >> you're saying the new york fed did that? >> i can't comment beyond what i said. >> at some -- when you got involved, once t.a.r.p. was there, the decision was already

made it wasn't going to go bankrupt. is that correct? >> when i -- first of all, i was involved in supporting the initial rescue. and then -- >> so you were involved? just a second. you were involved? did you advise the fed to try to get what they could and not -- >> well, what the fed -- the initial rescue was not the -- was not when they dealt with the payment to counterparties. so i supported the fed on the initial loan and then later in november the situation had deteriorated to the point and values and insurance businesses all around the world deteriorated to the point that this was a company that would go down without capital. and so now we had capital and -- and my team and i participated in making that decision. made the decision to put $40

billion of equity into aig. >> the problem that i have is it appears to me aig was treated differently so much so, even listening to that, it's like well, we put some money in initially and then we put more money in because they couldn't fail, where in the other -- everything from citibank to merrill lynch to everything else there were processes on money coming in, guidelines on it coming in and they used the leverage of the threat of bankruptcy to do that. then in this case it appears that it was different and partly is that the creditors of different. furthermore, that some of the critical information here was withheld from being public at the request of the new york fed. that had that been public people would have seen it and there was an attempt to even keep it quieter because that was critical, that information, to understand what was going on behind. it is extremely frustrating to

all of us on this committee. you can hear it in different types of questions about how this came to be and that we -- i don't think there's been a compelling case made that aig is unique. >> the gentleman's time has expired. i would say if mr. paulson wants to respond to the gentleman you may do so. >> i have no response. >> okay. i thank the gentleman. chair recognizes mr. kanjorski. >> thank you very much, mr. chairman. welcome back, mr. paulson. you really miss washington, i assume? >> you can't guess how much. >> i -- those -- i've listened to the comments of the secretary, your successor, and now you, and i'm listening to the members' questions and how much memory is lost in a year or 14 months from those faithful days in september and october. which all of us hope we never relive, but, in fact, we're very much significantly different

than today and the coolness of being able to answer. one of the questions i was particularly interested in, because i was very involved with that time and what was happening with aig. my aspect of having some jurisdiction of insurance. as i understand it, because of financial products in london, was without assets and had a tremendous involvement in counterparty positions for about $2.8 trillion and whose counterparty positions were starting to fail and they had to honor them, their initial internal decision of aig was to use the assets of the world's largest insurance company and they sought permission and it was pending and finally approved by their regulator, the state of new york, to take assets of the insurance companies, about $30 billion and use those assets to cover their exposed counterparty positions. now, if that had happened at

that time those insurance companies would have failed because their assets would have been taken, converted and there wouldn't have been enough to cover the counterparty position so it would have wiped out the insurance companies which, in turn, would have effected every insurance holder in the country involved with aig at the time and would have been a catastrophic collapse of the insurance industry. and notwithstanding the counterparty and derivative position. now, luckily the regulator in the state of new york didn't grant us permission to use that $30 million until much later when it was futile. at that point the losses on the counterparty positions i think rose to $55 billion and were climbing on a daily basis. that's when the infusion of funds that you talk about, adding equity to aig or the capacity through the use of government funds to cover those counterparty losses, they didn't cover all those losses and subsequently within probably 30

days another huge amount of money was infused into aig's various corporate structures to get some stability. and not that i could say nothing has changed from that, but that was the significant circumstances in this month or two months after september 18th that everybody was faced with, but as i understand it the federal reserve was the person with the checkbook under the instance, under 313 powers. they were just plugging that money in and it wasn't a decision made at the secretary's level of treasury or at the presidential level. it was a federal reserve regulator level who was making that decision and i dare say regulator not for aig but regulator that had regulation over some of the largest banking institutions in the world, that if they had been not -- if their counterparty positions weren't honored they would have immediately collapsed and that's what we were calling the

meltdown. everything was going to implode and you had 4o@@@@@@@@ @ @ @ @ courtesy before i recognize mr. baucus. i want to take the liberty as chair to recognize students from

pottawa high school in ohio who are visiting the capitol and seeing their government at work right here. so welcome. you and your teacher. we're pleased that you stopped by for a visit. thank you. the chair recognizes mr. baucus of alabama. >> welcome, former secretary. secretary paulson, march 2009 -- march 16th was when aig -- the payments were made to aig or guaranteed. leading up to that you participated in several meetings about aig. is that correct? >> prior to march of -- >> 2009. >> prior to march -- yeah. i had a number of meetings about

aig as we were putting in capital. >> i knee one of the meetings, march 24th, my questioning of mr. geithner he mentions, secretary geithner, that you -- he said that you and he met with aig to discuss lehman's failure? >> to discuss what? >> september 14th. now, that was two days before -- >> oh, yes. you're saying -- so you're talking about 2009, march -- i think you're talking about september 14th 2008. >> that's right. okay. all right. i stand corrected. i am. that discussion -- you participated in some of the discussions about aig and their financial condition leading up to -- >> yes. that weekend of september 13th and 14th was the weekend when we

were -- had financial institutions together working to come up with a solution to prevent the failure of lehman, and it was that weekend that we learned also about aig and i had two meetings over the course of that weekend at the new york fed with tim geithner, with officials from aig. >> right. in those meetings was there any discussion of asking the counterparties to take less than 100%? >> was there any discussion of what? >> any discussion of the counterparties taking less than 100%? >> i sure don't recall any. we were talking about the financial problems that -- that aig had and it was clearly -- clearly had issues with counterparties. >> right -- >> they clearly had issues with counterparties because that was the crux of the issue, was a

ratings and potential ratings downgrade which would cause the company to have to post collateral and so that would lead to -- >> so their obligation to the counterparties was discussed? >> well, obviously that was the -- the issue. any institution that is facing failure -- >> sure. >> -- is going to have an issue with paying creditors. >> you know, once that intervention occurred then really the taxpayers, the u.s. government owned 79.8% of aig, more or less. is that correct, isn't it in. >> yep. >> that being the case, i see in this same 03/15/2009, this is skipping forward to march of

2009, secretary geithner e-mailed william dudley and edward and said where are you on aig counterparty disclosure issue? you know, are you for disclosing or not now? >> would the gentleman yield? could you put up slide one, please? so they could see it? thank you. >> what would your advice have been on whether or not that should have been a public disclosure of the counterparties and their obligation? and would the fact that really the taxpayers owned over 79%, almost 80% of the company had made any difference? >> as a general proposition i'm very much for disclosure, but i wasn't part of this. i had nothing to do with that decision, and i am not going to sit here now and second guess

others that were, you know, that i know people with strong integrity and good will trying to do the right thing. >> take a situation where you do have a company that's 80% owned by the u.s. government. would that -- would that tend to make you think that there ought to be disclosures of their obligation? >> the gentleman's time -- mr. paulson, the gentleman's time has expired but crow can answer his question. >> i'll be brief. public companies have disclosure obligations. so that's governed. those need to be adhered to. >> i thank the gentleman. the chair recognizes mr. cummings of maryland. >> mr. paulson, good seeing you again. mr. paulson, do you realize that a lot of the american people believe that there's a sort of

wall street club and that -- let me finish -- that you all play golf together and you have a lot of fun and then, you know, when the billions come around you're able to kind of distribute them. i mean, i'm just saying do you know that's how people feel? >> i sure do, and even though -- >> can you keep your voice up? >> i said even though i'm not a golfer, i sure know that's how people feel. >> yeah. when they see these deals going on then the next thing they do is they begin to look at where people worked. and then they see the relationships and then they say, well, you know, we don't have a chance because seems like they're kind of looking out for themselves but not looking out for us. and so, you know, you just gave a statement about transparency, and, you know -- i think one of the things that bothers people

is when they don't see transparency then they begin not to trust. when they begin not to trust it becomes very difficult for them to go along with any program. then when you put on top of that that they can't see themselves benefiting. i know that you mentioned that if we didn't do what we did and unemployment may have gone up to 25%, but it's hard for people to see that. you understand? >> yeah. i -- congressman, you've got to. people are very, very angry. i understand why they're angry and they're rightfully so, because they don't see the connection. they don't recognize what was done wasn't done for the banks. they were going to be the victims if we didn't step in. >> and so among the conditions in the t.a.r.p., aig as said by the investment senior's summary of senior preferred terms as

posted on treasury website. quote, the annual bonus pools payable to senior partners in respect of each of 2008 and 2009 shall not exceed the average of the annual bonus pools paid to seniors for 2006 and 2007. do you believe it was appropriate for treasury to allow aig to create any bonus pool for senior partners considering it had just found it necessary to extend $40 billion to the firm through the t.a.r.p.? >> i'm not going to get into second guessing decisions that were made at treasury about bonuses. i realize this was a very difficult decision because the taxpayer had a lot of money in this company. >> right. >> and this company needed to perform well and needed to hold

the team together in order to repay tax -- >> right. and the taxpayers were saying to themselves, look, these are our tax dollars. we worked hard for these tax dollars and now these guys who screwed up everything are getting bonuses. >> you're right. no one, me included, likes to see private business profit from taxpayer assistance. that makes people angry, and to me i just hope that part of that anger is not a diversion from what we need to do but is an incentive to fix the system to have resolution powers. never again will we have a company that's so big, too big to fail so the taxpayer has to put money in. that the company can be liquidated and wound down in a way that the taxpayer is not on the hook again. i understand there's that anger

out there and that frustration. i think it's very understandable. and i think there's a number of ways to do something about it, but the best way to do something about it is reform the system so that we don't ever again have to bail out a big institution, rescue a big institution. it could be liquidated if it fails. >> now, the -- with regard to the original treasury t.a.r.p. investment in aig, was this structured as a loan or as an equity investment? >> congressman, it was an equity investment. >> and was this in the aig parent holding company or in the individual subsidiaries? >> this was in the parent. this was a $40 billion equity investment because the company needed equity. >> and was it made subordinate to any other creditors of aig? >> well, a preferred is by definition senior to the common

and subordinated to the other creditors. >> and how does this compare to the various preserve investments in aig? >> well, this would be -- this is subordinate to the other federal reserve investments in aig because a determination was made -- the rating agencies basically said that you need to put capital in this institution or there will be a downgrade and then it would have -- they would have precipitated the failure. >> and why was it structured in this way? >> it was structured in that way because that's the way a preferred needs to be structured. that's where it -- it wouldn't have been capital if it hadn't been subordinated to the other -- to the other liabilities. >> i see my time is up. >> i thank the gentleman. chair recognizes mr. sterns from florida. you may proceed for five minutes. >> thank you, mr. chairman. mr. paulson, mr. geithner testified he refused himself during his counterparty

negotiation. did you know that while you were secretary of treasury? >> i knew that -- >> just yes or no? >> yes. >> you did know. did you know he did not sign -- >> geithner did not -- i didn't view him as a decision maker. >> did he call you up, advise you, that he rekuszed himself? how did he notify you? >> he told me on the phone that he did not think it would be appropriate for him to be viewed as a decision maker. >> did you know he never got a letter? all he did -- he testified that he recused himself. he decided. he put up a flag and said, i recuse myself. i'm not going to be involved with the counterparty negotiation. you went with the white house counsel and secretary of treasury and got a letter. he never got a letter. he never got a written confirmation of his recusal. did you know that? did you know he was doing it on his own by his own have list? >> i did not know the details. >> did you think a person who

would recuse himself in this crisis we had that he could go ahead and operate in his present job and not have a conflict of interest? gee, the chairman of the federal reserve is in this crisis, we're having the counterparty negotiations and by golly he's going to step aside and say he knows nothing about it. doesn't that seem sort of faky to you? >> no, it didn't, because i thought it was an extraordinary position we had to have a presently -- >> i understand that. the next question, he said in open testimony his chief of staff, while he was chairman of the federal reserve was a former employee of goldman sachs. did you know that? >> yes. >> did you call the chief of staff his chief of staff, former employee of goldman sachs during the process of the counterparty negotiations? did you ever call -- will i see your name calling him? >> his chief of staff was a former employee of goldman sachs. >> he worked for@@@@@

you're saying you were not involved. oh, yes, you heard a little bit about it, but on november 6th when they gave $62 billion to

all these parties who came in and looted aig, all you guys say you know nothing about it. yet it appears this happened. recently michael mcrathe, told the senate banking committee, he said, you know, if aig had gone in bankruptcy we would have taken care of it. we would have been an orderly disposition. this is what he said. aig's insurance operations and their other companies would have simply -- we would have simply bought up aig's insurance assets allowing a seamless delivery of aig's insurance obligation. so the question is, considering that the state insurance commissions would have likely seized aig's insurance subsidiaries, protected policyholders in an aig bankruptcy, why was it necessary to bail out aig with taxpayers' money based upon the testimony of the director of national association insurance commissioners? >> i respectfully disagree with him and i believe -- >> you disagree with athis guy?

>> i will say many people with years of experience had some regulatory responsibilities with regard to aig but this company was -- had a huge problem and it is case number one on what is wrong with our regulatory system. there was no single regulator that had a line of sight on the total company. so there were regulators that looked at different pieces of it and if the company had gone down it would have been a huge mess. >> is your testimony -- mr. geithner sort of implied -- he scares members of congress. he scares the public. we were all scared. he said if aig was not bailed out this country would have collapsed. he intimated our constitution would not have been able to be enforced, that there would be a revolution in this country. do you think it's at that extreme, if we let aig go bankrupt we would have had that kind of collapse and revolution spirit in this country? is that what your position is today? >> i've certainly never said that.

>> he implied that. >> what i have said is i believe we would have had absolute economic disaster. >> gentleman's time has expired. gentleman's time has expired. we now recognize the gentleman from ohio. mr. kucinich. >> thank you, mr. chairman. secretary paulson. thank you for being here today. in your testimony you state that in your capacity as united states treasury secretary you were not involved in any decisions with respect to payments to aig's counterparties. and that you were not involved in any of the decisions concerning aig's disclosure of those payments. i'd like to accept that at face value, mr. paulson, except the critical decisions concerning payments to counterparties were made after the passage of the emergency economic recovery act by congress at your request, and the emergency economic recovery

act made the treasury secretary responsible for the use of funds authorized by congress. negotiations on the counterparty payments by the federal reserve bank of new york did not begin until november 6th, 2008. the funding of the payment of the counterclaims is backed by funds made available under the emergency economic recovery act. so mr. paulson, doesn't it make it your responsible to know how those funds were used? >> i think you will find, congressman, and i think t.a.r.p. reported this, that the t.a.r.p. investment, the $40 billion t.a.r.p. investment was equity and those funds did not go into this vehicle where the fed -- >> so you didn't have any knowledge of the counterparty payment transactions? >> i did not.

>> are you telling us that? >> i did not. >> are you telling us that you were not aware of any of the discussions leading to the counterparty payments with any of the principals? >> that's what i'm telling you. >> as treasury secretary you had no role whatsoever on the decision on counterparty payments that you didn't ask anyone any questions, that you never expressed opinion on the matter, you were completely unaware of the nature of proposed transactions until it was consummated and no one asked you questions about how these emergency economic stabilization act, or the recoverying a funds, would be used to stabilize gig aig? the one financial institution worth any other -- you just didn't know? >> congressman, we asked a lot of questions about the $40 billion t.a.r.p. equity investment. that was something that was our job and it was our authority. >> did you ask about the nature of the counterparty payment? >> as i said, the loan, that was

a fed authority and they had the authority and the technical expertise to handle that. that was their job. we were consumed with other matters and had great confidence in them to carry out their responsibilities very professionally and well. >> you know, mr. paulson, known disputes that you worked very hard throughout the crisis. well known that you were personally talking with senior executives at all major financial institutions, on your now legendary cell phone, which i might add is in the museum of american history. how is it that you played no role in the handling of this aig relief? that you didn't have an interest in it? how is it that despite goldman sachs' extensive role as a counterparty to an agent for aig in the transaction, your extensive personal network of associations within goldman

which extended to several goldman alumni that you can say you didn't have any knowledge. by implication, no influence over the travns action? i don't understand that. >> well, i can -- can't be any clearer. i had -- i assumed that goldman sachs knew that goldman sachs, and i assumed most other were counterparties. i had no knowledge what the individual claims were and that was my concern here was not about counterparty claims when we rescued aig. my concern was about what was going to happen to the american economy and the american people. and, again, you need to understand when we worked together fed and treasury, we had different authorities, different responsibilities and there was so much going on that

we -- we had a lot to do and they had the authority and responsibility for dealing with the loan and -- >> the thing i have trouble with, though, is that the government gave goldman sachs, your former firm, a better deal than it had a right to respect. you heard the previous testimony here. i just -- it's mystifying how you, as treasury secretary, this could happen and you not really know anything about it and did you -- unless you recused yourself from any discussions about aig. or about goldman sachs. >> i didn't have to recuse myself because the fact was no one discussed it with me, consulted it with me. i was involved in other matters. this was a federal reserve authority and they had the technical expertise and that was their job. >> thank you, mr. paulson. thank you.

>> at this time, anyone who has not had the opportunity -- >> mr. chairman? >> i'm saying we have votes on the floor and, of course, we have four votes and that we, due to previous agreement with mr. paulson, that we're now going to allow him to go. >> mr. chairman? could we ask if mr. paulson could stay five more minutes to complete on our side? two people will split time? >> two? well, let me put it this way. who all has not had an opportunity to? one, two, three. mr. paulson -- could you give us another seven minutes and let me split 3 1/2 and 3 1/2? >> does that work? >> yeah. okay. we can work it. >> mr. chairman, i would be

willing to put mine in writing to secretary paulson if he'd be willing to respond within a certain given time rather than -- >> yes. mr. secretary, there's a request in terms of if we give the questions to you in writing you will respond? >> we will get back to you. >> thank you very much. okay. yes. >> mr. paulson -- >> let's see how we're going to break this down first. gentleman, yield. will the gentleman yield. you're going to give us additional seven, eight minutes? >> okay. >> okay. good. all right. so we'll break it down. >> it will be eight minutes, right? >> eight minutes. >> out were one of the top officers for goldman sachs, right? >> yes. >> some of the people that work for goldman sachs went to work for mr. geithner? >> i believe i know one. >> when you left goldman sachs and went to the treasury you

were there three years and you got $200 million in tax benefits because you didn't have to pay capital gains on $500 million worth of stock, right? >> i would strongly disagree with that. because -- >> well, that's what's been reported. >> let me explain. >> it's okay. you can respond -- i'll send a question to you in writing. >> okay. >> the concern i have is the same concern that mr. sterns has. you came before our conference very nervous saying, oh my gosh, the sky's falling. we have to come up with this money quickly. you were visibly nervous when you came before our caucus. then we have this bailout of aig and you don't know anything about it. mr. geithner had nothing to do with it. it just really boggles the mind that some of the biggest people involved in this whole thing from beginning to end had nothing to do with it. they didn't know. makes you want to think that some clerk some place was making these decisions. i don't think anybody's going to buy that. you and mr. geithner and others

were directly involved in making this decision. were you no? >> of course we were directly involved and i said it in my testimony. i heard mr. geithner's testim y testimony. i heard him say the same thing. we were -- i was very supportive of that decision to prevent the failure of aig. >> gentleman, who's next? mr. lync. >> thank you, mr. chairman. >> two minutes. >> mr. secretary, i need to make this happen in two minutes. you were essentially involved in the negotiations involving bear stearns when you insisted on a very, very low price on the mart of the bear stearns shareholders in order to protect the shareholder.

it's been reported you were supportive of $2 a share price in order to protect the taxpayers' interest. and yet in this situation with aig, and you were the ceo of goldman sachs back in 2006. there was a long-standing relationship there between aig and goldman sachs that you were well aware of. goldman sachs was a major counterparty on a lot of these credit default swaps with aig when you were the ceo at goldman. and that relationship continued after you left. you would have known that these people were -- that goldman was exposed here with these credit default swaps when the money went from the taxpayer to aig and through to your former company. and i guess the question that everybody has here is, why when you insisted on bear stearns taking a big haircut, why did

you allow goldman to be reimbur reimbursed, your former company, at 100 cents on a dollar in that situation? why did you not weigh in on behalf of the taxpayer? >> as i've said on a number of occasions i did not know -- i had no knowledge of the size of the claim of any bank and i had no involvement in a decision to make payments to the counterparties. none whatsoever. i was very supportive of the rescue of aig because a failure of that company would have been disastrous. >> especially to goldman sachs. >> the gentleman's time has expired. >> it would have been disastrous to the american people. >> the gentleman's time has expired. yield two minutes to the gentleman from ohio. >> i want to clarify the chain of events surrounding the

original request of t.a.r.p. dollars. you came to the congress, everyone on this committee and everyone in congress admit you came to us in september and said, we need the money to buy troubled assets, toxic assets. as everyone knows at some point you changed your mind. when did you change your mind and decide you weren't going to purchased troubled assets, you were going to inject capital into the banks? when did that happen? >> i came to congress on september 18th. >> congressman first voted it down october 3rd. when did you change your mind? >> it was our strategy when i came to congress to buy illiquid assets. >> when. two minutes. when did you change your mind? >> it was -- by the time -- >> before the vote on october 3rd or after the vote? when did you change your mind? >> i had begun considering putting -- putting a capital into the banks as one option as we got near the final vote, but i had not changed my mind yet on the strategy and i will say one other thing to you.

right up even after we put capital in the banks, which we were forced to do -- >> what is it? did you change your mind before the vote or after the vote? because we have the -- >> i changed my mind after the vote because i did not change my -- can i just say this? i did not change my mind on purchasing ill liquid assets unt until mid to late october. >> you are saying you didn't change your mind until after the vote? i want to point to a book that came out "in the fed we crust." page 226, 227. house of representatives rejected the bank rescue plan. mr. paulson ran into michelle davis in the treasury building. quote, i think we're going to have to put equity in the banks, he said. despite what paulson told congress, buying toxic assets was going to take too long. davis gave him a quick stare.

quote, we haven't gotten this through congress. he took the advice. you said two different things. you said i started thinking about it but you said i didn't make the decision until after. you sold the congress on the simple fact you were going to buy the assets. your spokeswoman directly contradicts that. >> congressman, let me answer the question. give me a minute to answer the question. the -- during that period when congress was acting the situation worsened considerably. as we got near the final vote i was beginning to be clear to me that we were going to need to think through other options but no -- long after -- even after he put capital in the banks -- >> did you express that time to the congress. >> gentleman's time has expired. >> even after we put capital in the banks it was still my intent to proceed with any illiquid asset purchase program until we got into late october.

>> let me ask you one october -- >> gentleman's time has expired. i yield two minutes to the gentleman from maryland. mr. holland. >> thank you mr. chairman, thank you mr. paulson. i accept your testimony that failure to enact a financial rescue plan would have led to, as you said, economic disaster. when you and the president, president bush, came before the congress in an emergency you submitted a plan that did not include at the time a mechanism to make sure that the taxpayer would recoup any dollars that had been extended to the financial sector. the congress at that time inserted a provision requiring the president, whoever that president may be, to submit a plan to recover those funds on behalf of the taxpayer. president obama has now done that in proposing a fee. my question to you is, do you agree that given everything the taxpayer did to save the

financial industry that in addition to taking measures to prevent this from happening in the future we should also make sure we put in place a reck nichl to recover the moneys that went to rauwall street and othe financial banks as part of the rescue? >> i do agree with that. the provision that was put in to the t.a.r.p. legislation envisioned, contemplated looking at a five-year window. at the end of that five-year time period, if the taxpayer hadn't recovered the money then there was going to be a tax. now, today as i look at the circumstance the money is going to come back from the banks in my judgment with a profit to the taxpayer and it's too early to tell about whether -- to what extent the money is going to come back from the rest of the program. i frankly think the taxpayers will end up being pleasantly surprised and much more will come back. my only question about the fee -- the tax that's being

suggested is, is it too soon to make that judgment, number one? most importantly i don't want that to take our focus off of dealing with what is a real problem. >> would you agree there should be a mechanism in place to ensure that at the end of the day the taxpayer is -- recoups 100% of the t.a.r.p.? >> that was the intent of congress and the right thing to do. i agree. >> thank you. thank you, mr. paulson. >> thank you, mr. paulson. >> congresswoman, i had agreed to stay for another eight minutes. it's been ten minutes. >> for that reason, i dismiss the gentleman who had the time to tell him his time had passed. and for the committee and especially for chairman towns, may i thank you for not only eight minutes but ten minutes. >> thank you. thank you.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> the participation and the presence of these countries is quite significant, and the fact that the secretary general was there today gives a basis for the engagement, and this is very welcome. in respect to whether we discovered this problem on the 25th of december -- we hosted the london meeting in 2006. throughout 2008 and 2009, the significance and the dangerousness of the situation -- the own strategy was up -- our own strategy was updated in 2009.

this was also about engagement on the ground. it is wrong to say that this is the beginning of a process. this process is continuing and that is what is the level of engagement that you see today. >> you have talked about a need for a cease-fire, and the problems in the north. did you get any assurance from the government that they may follow in the pathway and also agreed to a cease-fire? is there any kind of unifying assessment of the threat, if they really think that this threat comes from iran -- the u.s. government does not seem to share that. they are coming together on what the threat will be, so everyone will have a common approach. >> we were pleased by the

announcement between the people of saudi arabia -- and this should lead to the broader negotiations and a political dialogue that may lead to a permanent ending to the conflict in the north. i will let the minister speak for himself, but i believe that is the attitude of the government of yemen. they want to work with the people of saudi arabia to figure out if there is a way forward to resolve the conflict. on the issue concerning the outside interference, i spoke about this in my meeting with the minister on a bilateral basis. and there are a lot of issues in yemen that result in conflict. there are internal and external

forces at work. one of them that has not gotten the attention that this needs is that there are 800,000 refugees in yemen. think about the instability that this causes. we are trying to find a common basis for looking at all of the internal threats, and that external interference. i do not want to just this early and i respect the assessment of what is happening right now, but the bottom line is that there is a multiple-layered set of consequences -- set of conflicts that are caused by many different factors. i can only be ending with one statement by one of the ministers in the gulf, and he said that conflicts caused the

development problems, or did the development problems caused a conflict? i do not know if we will answer this question any time soon. but we have to address both of these. >> allow me to say something, if i may. the government of yemen has announced, previously, five cease-fires. we wait only to be prepared for another war. we are prepared for the cease- fire, that they are accepting these conditions. we asked them to stop the heavy arms and the fortifications, and liver grievances that they have -- these can be dealt with through dialogue. but unless they except these

conditions -- for the insurgency, we're not going to complete the previous mistakes. [inaudible] >> let me tell you -- you probably do not read things properly. he spent one year in yemen. when did this take place? >> i always know that it is very unwise to take an additional question. this has proven that beyond reasonable doubt. the harmony and unity that has prevailed -- this does not find

a way to answer this question. it is important that i say, and all seriousness, that all the evidence led us to make a very serious statement about the radicalization that took place. we were attempting -- the attempted bombing in london -- we are more vigilant about the way that the british higher education is used. we have seen no evidence that this was used in that way in this case. there is one important thing to say, and this is where the discomfort that you wanted to apply to your questions can possibly be avoided. in the end, none of the three

countries on this platform are interested in pointing their fingers at each other about where things may have gone wrong in the past. every country is wanting to take responsibility. the truth is that the global jihad knows no bounds. we are very vigilant about our own situation in the united kingdom. we offer no complacency about how we combined the virtues -- are combining the virtues of an open society with how we defend ourselves, with other free societies across the world. there are more and more partners engaging in this process, and we will work in an open way with the partners. i am delighted that the government of yemen is doing this with us. >> i want to ask one last thing. the question -- in the 21st

century, may be beside the point. the role of ideology does not know any boundaries or borders. the internet is an effective tool for radicalization, and we have evidence that a number of those who have been arrested engaged in or commit terrorist acts in the united states in the last month. they were in communication with people on the internet. they never met them necessarily in person, but they were highly influenced by the messaging. i give a speech about one week ago, defending the freedom of the internet very strongly, but also said that the internet is a neutral tool. and increasingly, we are having

to face whether this is the united states, or yemen, the threats that come from beyond the borders, that cannot be -- they are not connected to anything in a particular place. this is the accumulation of influence. we have to look more thoughtfully, and there is a role for the free media to play. we need a counter message for the young people, who are looking out for these voices of extremism. that is something that the government's need support in doing, both on the technological basis and in terms of the narrative of the media. >> thank you very much.

on a recent trip to afghanistan, a military journalist observed military operation. >> this is a 45-minute drive outside of kabul, outside of a former soviet air base that is the major focus for the entire war effort. the people that come into afghanistan -- they come through here. they either stay there, where they are sent out in helicopters, that deliver people to their final destination.

sending them out to the secondary area, or sending them out to the operating bases in the northeast. >> this is the focus of activity for all these areas that come in, to develop the region, and bring security to the region, and bring governance to the region, which is a key element of the people of afghanistan. they can sustain a future that is free of the taliban. what i'd do an airdrop, and we drop in food or materials, in an area that was devastated by flooding, when we go out there and bring them services like food and water, and materials to rebuild -- they are trusting us. when a child is injured, just the other day a child fell off

the roof. we went over and we brought the child to the hospital. we did this there, in the village. they will trust us and they will know that we are here to help them. when i take my aircraft -- and we go out to a village that is being intimidated by the taliban, with the people in the air and on the ground, those people trust us. they are no longer intimidated and coerced by an enemy who is trying to dominate them in no way that is very oppressive. that is the way that this space is winning the counter- insurgency. >> you have a great number of aircraft doing a great number of things, as they're going around,

looking for the enemy. they will come in they will drop bombs, and when they're asked, they will drop the bombs. >> so why is this airport important in afghanistan? >> overall, we have a distinct advantage, and we can use this to see certain vantage points, that we normally may not be able to do. the soldiers cannot see around corners and we can help with looking -- and the firepower is required to go into the fight. this may be enough to help everyone disengage. this is a combination of men -- of the technology with these advantages.

and we will allow everyone to withdraw. >> there is less of a risk of civilian casualties. >> we are here to support the ground commander. if they decide that the situation dictates the bonds to be used -- this is ultimately his call and we are there to support him. following the changing -- this does not affect what we do. we bring the bomb to the fight, or the targeting -- and we are there to provide that. >> this is the advanced targeting pod. this is what we used for the weapons systems, to look at the ground and be able to use that advantage to see things that the ground commander it is unable to say. we are able to track any and all suspected people that we

need to look at, following vehicles and people and buildings. this is the primary weapon in the fight right now, because we have the ability to provide surveillance and reconnaissance to the ground commander that he may not be able to do. with the advanced targeting, we are able to take the picture we are looking into the air controller on the ground so that everyone is able to get on the same page with the common, operating picture. we have to make certain that we are looking at the right thing to provide the ground commander with what they need. >> what is the advantage of having two people? >> one person can primarily be focused on flying the aircraft, and the other person is able to focus exclusively on the targeting an order to find the

enemy before the ground commander. >> the is using all the senses that are available -- and these other things that we were looking for on the ground. >> do you speak directly to the soldiers on the ground? do you have some kind of intermediary? >> we have a conduit that we are talking to on the ground. this is primarily to we are talking to on the ground. this is the 500-pound satellite guide -- and basically, the technology that we have with this weapon allows us to target in different ways. one thing we do is we will discover the makeup of the structure that is around the targeted enemy.

we can explode a little bit underground. we can minimize the damage to the civilian infrastructure and anything around the target that we do not want to damage. we want to leave as much as possible for the afghan people. we are able to minimize the civilian casualties. >> this is the gun that is deployed more and more in afghanistan. we can use this to precisely target, with low collateral damage, the small radius with bullets are hitting. we did not have to worry too much about the damage said is around us.

>> is it tough to use this weapon? >> this can be challenging at the ankles in which we are pointed at the ground. this was built initially for the air configuration and there is aid to decree rise. this does allow us to get into this close, when they are in close contact with the enemy, we can use this wherever we wanted to minimize the amount of damage. >> this is the basic survival vest. there are a lot of items, radiators and the things that we may need. we have the harness that we connect to the aircraft with, and again -- this is really what is going to attach to the parachute. and finally, we have a suit to help us with the gravitational

forces that we will see in flight, when we are going fast. we need this in this environment -- and we sustain the most force is when we are going from the air to the ground. we are pulling away from the ground. this is going to help us along with the physical work out stuff. that is helping us so we do not pass out from the force. this does not happen much in afghanistan, but we want to have this anyway. >> you will see this in many of the air force fighters. we have a light that we use that night, and i will show you this in a moment.

this is one of the best weapons that we use here at night to seek on the ground. >> for some of the missions at night, we will take these goggles out. the sellout -- this allows us to amplify the ambient light, and the only sort of drawback is that these can get a little bit heavy after a few hours, and you have to weigh a little bit. basically, looking through this, any tracers or anything like that, this is the first clue that something is going on on the ground. >> do you ever get a chance to

interact with the people but you support on the ground? >> sometimes we see people who are coming back or recuperating, they will stop by and then they will talk to us and they will thank us -- they will thank us for the support that we have given them, and they may give us the outcome of some of the missions. this is very rewarding. >> sometimes we do nothing but search locations, and other times, things are picking up. this gets very busy here in the short amount of time. >> tell me about the most memorable mission. >> one day, we were trying to find a location, and they were taking small arms fire from the hills. they're trying to get out of this location, and they had me

drop the bomb on the hillside. the enemy activity was over and they were able to get out of there. another mission was watching when the ied went off. the whole platoon was hit. we did a show of force, knowing we were there, and to stop it or we will kill you. they left, and everyone was able to get out of there. i was able to visit the people who were injured in the hospital. they said the show of force was more frightening than the device itself. >> do you often get to visit the people that you support? >> sometimes they do not make it

through this hospital. it is great to see them. >> winning the hearts and minds of the afghan people -- and not killing the civilians. how do you emphasize protecting the civilian population when you are doing airstrikes? >> this is a good question. we do everything to make certain that the enemy, that is trying to put us in the dilemma, by using innocent people as human shields, we can never allow them to draw us into battle. the enemy will fight from a village. they will bring women and children into a house, and they will shoot from there, knowing that the women and children are there. what we do is we will do everything to avoid those

situations where innocent people may be involved. obama -- rightly so brought a new way of understanding what is going on here. business as usual, the american way of fighting a war changes. this changes such that we take more care to make certain that not one as a person dies if this is at all possible. >> i have to ask this. fighter pilots enjoy growing mustaches. why is this? >> this goes back to vietnam -- we would always grow moustaches. one man said his mustache. and he got shot down.

he did this again and he was shot down a second time. >> i saw someone wearing a fake mustache this morning. this was a woman. >> the freelance journalist it -- the free rat -- the freelance journalist was in afghanistan and in the upper hand corner of the home page -- you can see these videos. >> on c-span, the annual state of the union address of president obama, with the republican response from bob macdonald. -- mcdonnell.

we will get reaction from members of congress, and then we will have a senate foreign relations committee hearing on haiti. today on "washington journal," members of congress will give their feelings on the state of the union address. we will also have reactions from the editorial page writers from across the country. we are live, beginning at 7:00 eastern time on c-span. and afterward, we will go to a capitol hill hearing on the relief efforts in haiti. among those who will testify include the envoy for haiti. >> this weekend on "book tv."

how changes in the middle east may and extremism, and on the politcal cartoons of dr. seuss. the neocons and presidential foreign-policy going back to the nixon administration. get the latest updates on twitter. the sergeant at arms: madam speaker, the president of the united states.

>> madam speaker. the president of the united states.

the president: thank you, thank you, thank you.

the speaker: members of congress, i have the high privilege and distinct honor of presenting to you the president of the united states. the president: thank you, thank you. thank you. thank you. thank you very much. thank you. thank you. thank you very much. thank you. thank you very much. thank you. thank you very much. thank you.

please. madam speaker, vice president biden, memberses of -- members of congress, distinguished guests and fellow americans, our constitution declares that from time to time the president shall give to congress information about the state of our union. for 220 years our leaders have fulfilled this duty. they've done so during periods of prosperity and trank quilt and they've done so in the midst of war and depression, in moments of great strife and great struggle. it's it's tempting to look back on these moments and assume that our progress was inevitable, that america was always destined to succeed. but when the union was turned back at bull run and the allies first landed at omaha beach,

victory was very much in doubt. when the market crashed on black tuesday and civil rights marches were beaten on bloody sunday, the future was anything but certain. these were the times that tested the courage of our convictions and the strength of our union and despite all our dwegses and -- divisions you and disagreements, our hesitations and our fears, america prevailed because we chose to move forward as one nation, as one people. again we are tested and again we must answer history's call. one year ago i took office amid two wars, an economy rocked by a severe recession, a financial system on the verge of collapse and a government deeply in debt. experts from across the

political spectrum warned that if we did not act we might face a second depression. so we acted immediately and aggressively. and one year later the worst of the storm has passed. but the devastation remains. one in 10 americans still cannot find work, many businesses have shuttered, home values have declined, small towns and rural communities have been hit especially hard. and for those who had already known poverty, life's become that much harder. this recession has also compounded the burdens that america's families have been dealing with for decades. the burden of working harder and longer for less. of being unable to safe enough to retire or help kids with

college. so i know the anxieties that are out there right now. they're not new. these struggles are the reason i ran for president. these struggles are what i've witnessed for years in places like elk heart, indiana, gailsberg, illinois. i hear about them in letters that i read each night. the toughest to read are those written by children asking why they have to move from their homes, asking when their mom or dad will be able to go back to work. for these americans and so many others, change has not come fast enough. some are frustrated, some are angry. they don't understand why it seems like bad behavior on wall street is rewarded but hard work on main street i

-- isn't. and why washington has been unable or unwilling to solve any of our problems. they're tired of the partisanship and the shouting and the pettiness. they know we can't afford it. not now. we face big and difficult challenges. what the american people hope, what they deserve, is for all of us, democrats and republicans, to work through our differences, to overcome the numbing weight of our politics. for while the people who sent us here have different backgrounds, different stories, different beliefs, the anxieties they face are the same. the aspirations they hold are shared. a job that pays the bills a chance to get ahead, moe of all the ability to give their children a better life. you know what else they share?

they share a stubborn resilience in the face of adversity. after one of the most difficult years in our history, they remain busy, building cars and teaching kids, starting businesses and going back to school. they're coaching little league and helping their neighbors. one woman wrote to me and said, we are strained but hopeful. struggling but encouraged. it's because of this spirit, great decency and great strength, that i have never been more hopeful about america's future than i am tonight.

despite our hardships, our union is strong. we do not give up. we do not quit. we do not allow fear or division to break our spirit. in this new decade, it's time the american people get a government that matches their decency that embodies their strength. and tonight, tonight i'd like to talk about how, together, we can deliver on that promise. it begins with our economy. our most urgent, our most urgent task upon taking office was to shore up the same banks that helped cause this crisis. it was not easy to do. if there's one thing that has unified democrats and

republicans and everybody in between, it's that we all hated the bank bailout. i hated it. -- i hated it, you hated it. it was about as popular as a root canal. when i ran for president, i promised i wouldn't just do what was popular. i would do what was necessary. if we had allowed the meltdown of the financial system, unemployment might be double what it is today. more businesses would certainly have closed. more hope -- homes would have surely been lost. so i supported the last administration's efforts to create the financial rescue program. and when we took that program over we made it more

transparent and more accountable, and as a result, the markets are now stabilized and we have recovered most of the money we spent on the banks. most, but not all. to recover the rest, i propose a fee on the biggest banks. now, i know wall street isn't keen on this idea. but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescue them in their time of need.

as we stabilize the financial system, we also took steps to get our economy growing again. save as many jobs as possible. and help americans who had become unemployed. that's why we extended or increased unemployment benefits for more than 18 million americans, made health insurance 65% cheaper for families who get coverage through cobra, and passed 25 different tax cuts. let me repeat. we cut taxes. we cut taxes for 95% of working families. we cut taxes for small businesses. we cut taxes for first-time home buyers. we cut taxes for parents trying to care for their children. we cut taxes for eight million americans paying for college.

i thought i'd get some applause on that one. as a result -- as a result, millions of americans had more to spend on gas and food and other necessities, all of which helped businesses keep more workers. and we haven't raised income taxes by a single dime on a single person. not a single dime. because of the steps we took, there are about two million

americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. tens of thousands are cops, firefighters, correctional officers, first responders. and we're on track to add another 1.5 million jobs to this total by the end of the year. the plan that has made all of this possible from the tax cuts to the jobs is the recovery act. that's right. the recovery act. also known as the stimulus bill.

economists on the left and right say this bill has helped save jobs and avert disaster. but you don't have to take their word for it. talk to the small business in phoenix that will triple its work force because of the recovery act. talk to the window manufacturer in philadelphia who said he used to be skeptical about the recovery act until he had to add two more work shifts because of the business it created. talk to the single teacher raising two kids who was told by a principal in the last week of school that because of the recovery act she wouldn't be laid off after all. there are stories like this all across america. after two years of recession, the economy is growing again. retirement funds have started to gain back some of their value. businesses are beginning to invest again and slowly, some are starting to hire again.

but i realize for every success story, there are other stories, of men and women who wake up with the anguish of not knowing where their next paycheck will come from, who send out resumes week after week and hear nothing in response. that is why jobs must be our number one focus in 2010 and that's why i'm calling for a new jobs bill tonight. now, the true engine of job creation in this country will always be america's business.

the government can create the conditions necessary for businesses to expand and hire more workers. we should start where most new jobs do, in small businesses. companies that begin when -- companies that begin when an entrepreneur -- when an entrepreneur takes a chance on a dream or a worker decides it's time she became her own boss. through sheer grit and determination, these companies have weathered the recession and are ready to grow. when you talk to small business owners in allentown, pennsylvania, or in ohio, you find out that even though banks on wall street are lending again, they're mostly lending to bigger companies.

financing remains difficult for small business owners across the country. even those that are making a profit. so tonight, i'm proposing that we take $30 billion of the money wall street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat. >> i'm also proposing a new small business tax credit, one that will go to over one million small businesses who hire new workers or raise wages. while we're at it, let's also eliminate all capital gains taxes on maul business

investments and provide a tax incentive for all large business and all small business to invest in new plants and equipment. next, we can put americans to work today building the infrastructure of tomorrow. from the first railroads to the interstate highway systems, our nation has always been built to compete. there's no reason europe or china should have the fastest train or the new factories that manufacturer clean energy products. tomorrow, i'll visit tampa, florida, where workers will soon break ground on a new high speed railroad funded by the recovery act. there are projects like that all across this country that

will create jobs and help move our nation's goods, services, and information. we should put more americans to work building clean energy facilities and give rebates to americans who make their homes more energy efficient with support to clean energy jobs. and tone courage these and other businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs right here in the united states of america. now the house has passed a jobs bill that includes some of these steps.

as the first order of business this year, i urge the senate to do the same and i know they will. people are out of work. they're hurting. they need our help. i want a jobs bill on my desk without delay. but the truth is these steps won't make up for the seven million jobs that we've lost over the last two years. the only way to move to full employment is to lay a new foundation for long-term economic growth and finally address the problems that america's families have confronted for years.

we can't afford another so-called economic expansion like the one from the last decade. what some call the lost decade. where jobs grew more slowly than during any prior expansion, where the income of the average american household declined while the cost of health care and tuition reached record highs. where prosperity was built on a housing bubble and financial speculation. from the day i took office i've been told that addressing our larger challenges is too ambitious. such an effort would be too contentious. i've been told that our political system is too gridlocked and we should just put things on hold for a while. for those who make these claims i have one simple question, how long should we wait? how long should america put its future on hold?

you see, washington has been telling us to wait for decades. even as the problems have grown worse. meanwhile china's not waiting to revamp its economy, germany's not waiting, india's not waiting. these nations -- they're not standing still, these nations aren't playing for second place, they're putting more emphasis on math and science, they're rebuilding their infrastructure, they're making serious investments in clean energy because they want those jobs. well, i do not accept second place for the united states of america.

the president: as hard as it may be, as uncomfortable and contentious as the debates may become, it's time to get serious about fixing the problems that are hampering our growth. now one place to start is serious financial reform. look, i'm not interested in punishing banks, i'm interested in protecting our economy. a strong, healthy financial market makes it possible for businesses to act -- access credit and create new jobs, it channels the savings of families with investments that raise incomes. but that can only happen if we guard against the same recklessness that nearly brought down our entire economy. we need to make sure consumers

and middle class families have the information they need to make financial decisions. we can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy. now the house has already passed financial reform with many of these changes. and -- and the lobbyists are trying to kill it. well, we cannot let them win this fight and if the bill that ends up on my desk does not meet the test of real reform, i will send it back until we get it right. we got to get it right. next, we need to encourage

american innovation. last year we made the largest investment in basic research funding in history. an investment that could lead to the world's chief -- cheapest owe slar -- solar cells or treatment that kills cancer cells but leaves healthy ones untouched. and no area is more ripe for such innovation than energy. you can see the results of last year's investments in clean energy in the north carolina company that will create 1,200 jobs nationwide helping to make advanced batteries, or in the california business that will put 1,000 people to work making solar panels. but to create more of these clean energy jobs we need more production, more efficiency, more incentives and that means building a new generation of safe, clean nuclear power plants in this country, it means making

tough decisions about opening new offshore areas for oil and gas development, it means continued investment in advanced biofuels and clean coal technologies, and, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in america. i'm grateful to the house for passing such a bill last year

and this year -- this year i'm eager to help advance the bipartisan effort in the senate. i know there have been questions about whether we can afford such changes in a tough economy. i know that there are those who disagree with the overwhelming scientific evidence on climate change. but here's the thing, even if you doubt the evidence, providing incentives for energy efficiency and clean energy are the right thing to do for our future because the nation that leads the clean energy economy will be the nation that leads the global economy and america must be that nation.

third, we need to export more of our goods. because the more products we make and sell to other countries, the more jobs we support right here in america. so tonight we set a new governor doyle, we will double our exports -- set a new goal, we will double our [applause] [applause] to help meet this goal, we are launching the national export initiative, that will help