we do not teach our people in this country how to create new hypotheses. >> it is a little riskier to do that than the traditional kind of methods that can lead to analysis paralysis. >> we are going to take this topic up tomorrow morning, the role of risk and failure and how to embrace risk taking in the right way. let's leave that as a place marker for tomorrow's session. >> innovation is an illegal activity. let us not kid ourselves about that fact. the secret in sustaining innovation is to make sure that you have an open elite, that an elite reaches a point where does not become so established that cannot be dislodged. silicon valley is very good at creating an open elite. . .

british members of parliament make their case for reelection during "prime minister's questions." and then intelligence officials discuss the structure of the u.s. intelligence agencies. former federal reserve chairman

alan greenspan testified before the financial crisis inquiry commission today. the commission was formed by congress to find the causes of the financial crisis. here is part of mr. greenspan's testimony. this is 45 minutes. as i noted in my prepared remarks, while the roots of the crisis were global, it was securitized u.s. subprime mortgages that served as the crises' immediate trigger. the rate of global housing appreciation was particularly accelerated, beginning if late 2003, by the heavy securitization of american subprime mortgages, bonds that found willing buyers at home and abroad, many encouraged by grossly inflated credit ratings. the surge in demand for mortgage-backed securities was

heavily driven by fannie mae and freddie mac, which were pressed by the department of housing and urban development and the congress to expand affordable housing commitments. during 2003 and 2004, the firms purchased an estimated 40% of all private label, subprime mortgage securities, newly purchased and retained on investors' balance sheets. the enormity of these purchases was not revealed until fannie mae in september of 2009 reclassified a all right part of its mortgages portfolio as subprime and yet the effect of these gsc purchases was to preempt 40% of the market up front, leaving the remaining 60% to fill out domestic and foreign

investor demand. as a consequence, mortgage yields fell relative to 10-year treasury notes, exacerbating the house price rise. which in those years, was driven by interest rates on long-term mortgages. i warned the consequences of this situation in testimony before the senate banking committee in 2004 and specifically recommended that the gse's need to be limited in the issuance of gse debt and in the purchase of assets, both mortgages and non-mortgages, that they hold. i still hold that view. i u.s. subprime market grew rapidly in response to this demand, from global investor, gse's and others. for years, subprime mortgages in the united states had been a small but successful appendage to the broader u.s. home

mortgage market, comprising less than 2 1/2% of total home mortgages serviced in the year 2000. at that time almost 70% of subprime loans were fixed rate mortgages, fewer than half had been securitized, and few, if any, were held in portfolios outside the united states. by early 2007, virtually all subprime originations were being securitized and subprime mortgage securities outstanding totaled more than $900 billion, a more than sixfold rise since the end of 2001. the large imbalances of demand led mortgage originations to reach deeper into the limited potential subprime homeowner population by offering a wide variety of exotic products,

products that lowered immediate monthly servicing requirements, thereby enabling previously untapped, high risk marginal borrowers who purchase a home. -- to purchase a home. consequently, subprime mortgage underwriting standards deteriorated and subprime mortgage originations swelled in 2005 and 2006 to a bubbling 20% of all u.s. home mortgage originations, almost triple their share in 2002. the house price bubble was engendered by lower interest rates, but not the overnight rates of central banks. it was long-term mortgage rates that galvanized prices, and by 2002 and 2003, it had become apparent that individual country long-term rates were in effect, delinked from the historical tie to central bank overnight rates.

in 2002, i expressed concern to the federal open market committee, noting that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely. yet it did continue. despite the sends of i have two-yearlong tightening of monetary policy that began in mid 2004. in addition to tightening monetary policy and warning of gse risks, the federal reserve exercised oversight of consumer protection risks under the homeownership equity protection act and its general supervisory authority. in 2000, the board held hearings around the country on implementing its authority, focusing on expanding the scope of mortgage loans covered by hoepa on prohibiting specific

practices, and of educating consumers. there after, we adopted rules that lowered the trigger for hoepa coverage and increased consumer protections, including limitations on flipping, the use of balloon payments and the sale single he will premium credit insurance. more broadly, the federal reserve carefully monitored in the subprime market and adjusted supervisory policy to meet evolving marketplace challenges. in march 1999, the federal reserve issued its first interagency guidance on subprime lending, which addressed the variety of subprime mortgage risks, including the importance of reliable appraisals, and the need for income and other documents -- documentation. in october 1999, in 2001, and in

2004, the federal reserve issued detailed guidance addressing many of the loan features that have received recent attention, including prepayment penalties, low introductory rates and low down payment loans, among others. a summary of these initiatives is included with my written testimony. the supervision of the fed banking agencies, including the federal reserve, is an important reason why banks and bank holding company affiliates were not a significant originators of the most controversial loan products as non-bank affiliated companies that operated outside the jurisdiction of federal bank regulators. the recent crisis reinforces some important messages about what supervision and examination can and cannot do.

the forecasts of regulators have had a woeful record of chronic failure. history tells us regulators cannot identify the timing of a crisis or anticipate exactly where it will be located or how large the losses and spill overs will be. regulators cannot successfully use the bully pulpit to manage asset prices and they cannot calibrate regulation and supervision in response to movements in asset prices. for examine regulators fully eliminate the possibility of few fewer crises. -- future crises. what regulation and examination can do is promulgate rates that are preventive and rules that are preventive and that make the financial system more resilient in the face of inherently

unforeseeable shocks. such rules would protect automatically without relying on a fallible human regulator to predict the coming crisis. concretely, i argue that the primary imperatives going forward have to be, one, increased risk based capital and liquidity requirements on banks, and two, significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutionings making the trades. we will also need far greater enforcement of misrepresentation and fraud than has been the case for decades. if capital and collateral are adequate and enforcement against misrepresenting and fraud is -- misrepresentation and fraud is enhanced, losses will be

restricted to equity shareholders, who seek abnormal returns, but in the process expose themselves to abnormal hall losses. >> mr. chairman, could you try to wrap up? >> i will in just a moment. taxpayers will not be at risk and financial institutions will no longer be capable of privatizing profit and socializing loss les. -- losses. i thank the commission for the opportunity to submit these thoughts and look forward toupeetoanswering your question. >> good. thank you very much. so mr. chairman, i will start with a few questions and the vice chair and then we're going to go to the members, the lead members on this hearing. so let me pick up on some of your testimony, both your written testimony as well as what you have talked about today and i specifically want to focus on the area of subprime lending, which, as you know, and you've indicated exploded across this country from 2000 on, particularly in the later years.

and in your testimony, you point to the fact that the securitization of toxic subprime mortgages was a key driver of the crisis and of course, that securitization could not have occurred without the origination of those products. i want to focus very specifically on the actions of the federal reserve, could have taken, did or did not take with respect to regulating subprime mortgage products across this country, and specifically, i want to touch on something you mentioned, the homeownership and equity protection act and i have other questions about other areas in which you could have acted. so let melee this out for you. -- me lay this out for you. there was a whole set of regulations urging the public to act as well as information, which would have urged you to do the same. starting about 1999, a set of community groups began to visit with the federal reserve washing about predatory lending practices. in january of 2000, both hud and

treasury urged the federal reserve to use its authority under hoepa to curb abusive lending. the secretary of the treasury worked hard to put in place bet practices for subprime mortgage lending. in 2004, the f.b.i. warned that there was an epidemic of mortgage fraud, that if unchecked, could lead to losses greater than the s & l crisis. in 2005, the mortgage insurers wrote a letter to the federal reserve as well as other federal agencies warning that it is "deeply concerned about increased mortgage market fragility, combined with growing bank portfolios in high risk products poses serious potential problems that there were a number of internal actions. a staff memo in 1998 a report by the staff called the problem of

predatory lending in 2000, which the staff urged that loans be given to people without the ability to pay. the governor urged the promulgation of legislation. you noted that this was guidance, not legislation, which noted an awareness of the subprime problem, and you noted yourself innumerable meetings on a point of -- hoepa, and you said that we in the federal reserve were aware of highly regular subprime mortgage writing practices. why in the face of all bad did you not act to contain abusive, deceptive subprime lending? not act to contain abusive, subprime lending, why did you

allow it to become such an infection in the marketplace? >> first of all, mr. chairman, we did. there is a whole series of actions that we take, which i've outlined in the appendix, which you have and which i repeated some early in my testimony, but let's remember, in a document that you sent to us, which is a federal reserve document, it says in july 1998, the federal reserve board and hud submitted a report to congress on mortgage reform, that report concluded that improved disclosures alone were unlikely to protect vulnerable consumers from unscrupulous creditors. the report recommended that congress consider the need for additional legislation, the report made several recommendations for possible amendments to hoepa, such as

further restricting balloon notes, regulating the seal of single premium credit insurance, minimum standards for foreclosure. now, i sat through innumberble meetings on the issue of hoepa, and we had, for example, detailed requests coming from a large group of representatives in 2000 and i think it was seven senators, about a month or so later, requesting that we do a series of things. including taking the hoepa triggered down from 10% to 8%, and a whole list of things, which i won't outline here, but they are in the appendix. we did do almost all of the things that you were raising. and the consequence of that is that i think things were better

than they would have been, were they enough to stop the surge in subprime lending, they were not, and the reason for that is the extraordinary changes that were going on in the marketplace and indeed, the actions of fanney and freddie, which we didn't know about until september 2009, which altered the structure of that market from what was in, say, prior to 2002, a small, well-functioning institution. >> i want to press on this, because you didn't have the ability to regulate fanney and freddie and by the way, i've seen your members and we're going of to a whole day on them and clearly things did not go well at those institutions an over 100 become dollars of taxpayer assistance to them but i do want to note that you cited the numbers from 2003 and 2004, they were 13% of the private

label security market in 2005 and they were negligible in 2006, but what i really want to say, you did have the ability to regulate the products currently in the marketplace and so, you know, i do want to make sure we're not rewriting or forgetting history here, and so i want to focus on what the result was of what the federal reserve did. you mentioned the guidance, and in fact, i know you issued guidance in 1999, 2001, 2004, 2006, 2007. of course, that was guidance to examiners, not binding, and most importantly, couldn't apply to the whole marketplace like hoepa could. it could only apply to those institutions you regulated and not all the independent mortgage lenders across the country. so it's good that you issued guidance, but i think that was more evidence that there was an awareness of the problem and a failure to act, but i want to specifically focus on the 2001 regulations, which you cited, and in fact, i think you said in your interview to our of staff, that "we developed a set of

rulings that have held up to this day" but here are the facts. the facts are you adopted those rules in 2001, and at the time that they were adopted, they were projected to cover 38% of the subprime lending activity in the country. when it was all said and done and an evaluation was done of those rules in 2006, not 2009, 2010, what in fact had happened is the rules you adopted covered just 1% of the market, so i return to you again, was there just a reluctance to regulate, was there just a belief that regulation was not the right tool to kind of con strain this level of abusive lending that ended up leading to the origination of product and then the mass securitization you talked about, because frankly without the origination, you couldn't have the securitization, but comment specifically on that 1%. are you aware that that finding was that the rules only covered 1%? >> well, look, mr. chairman, i

just go back to what i said in my opening remarks. we at the board in 1998, were obviously aware of the nature of the problems. remember that the federal reserve board is a rule-making, it is not an enforcement agency. we did not have the capacity to implement to the types of enforcement that the fdc has, hud has, the department of justice and consequently, we were -- we were extending what the rules should be and indeed, we covered as much as anyone could conceive of -- >> but if you had adopted those broader rules, the ftc could have enforced them and others could have adopted them. >> we did adopt a whole series of rules. >> but as i said, they only cover 1% of the activity. my view is and i want to move on to another issue, you of could, you should have and you didn't and i do think this is one area we have to explore, how this

contagion could have been constrained. there was the issue of examination non-bank subsidiaries. in january 1998, you formalized a policy not to conduct routine consumer compliance examines of the non-bank subsidiaries under your purview. the gao criticized that policy in november 1999. governor gram lick proposed that there should be examinations of consumer finance lenders, which would have covered, depending on the calculation, anywhere between another 12% to 18% of the subprime originations. it wouldn't have covered everyone by any extent. there was an august 2000 memo from dolores smith and glen loney of your staff, called compliance inspections of non-bank subsidiaries, of non-bank holding companies suggesting a pilot program. in 2004, the gao weighed in again, urging action, given the significant amount of subprime lending among holding company

subsidiaries, but again, no action, no willingness to go in and examine a non-bank sub suddenry, even though after your tenure in 2007, the federal reserve with the ftc and state regulators did launch a pilot and in 2009 began those examinations. why weren't you willing to go in and at least examine these institutions? >> well, first of all, let me just say with respect to 2009, regulation evolves over the years and i thought with the actions the fed took, in recent years, well after i have left, were appropriate, given the changing conditions, but let's take a second to give you a sense on how the decision-making operations at the fed took place. we have, of course, this 100 large, very sophisticated professional group in the

division of consumer and community affairs, we have an outside consumer advisory group, we had 12 community groups within each of the federal reserve banks, and we finally had the committee of the board which was pa committee on consumer and community affairs, which essentially oversaw the whole operation. that operation, as it worked its way through, would come to the board of governors with recommendations. now, all i am saying to you is that with respect to a number of the issues that, for example, governor gramlich, who i think is one of the best governors the board has ever had and a very close friend of mine, he was the chair of that committee and

indeed, we always look to him to decide which we should be doing, which we shouldn't be doing, because he had the most knowledge. he chose not to bring those issues to the board, so i can't say particularly why in individual cases, but frankly, i always thought his grasp of the situation was as good as anybody i have ever run into in the issue of consumer affairs. >> well, he was one person, but there were also others and there were staff reports. i mean, would you -- let me just ask you, would you put this under the category of oops? should have done it? >> i'm sorry, of what? >> would you put this under the category of oops, we should have done it? >> you know, when you've been in government for 20 up with years, as i have been, the issue of retrospective and figuring out what you should have done differently, is a really futile activity, because you can't in fact in the real world do it.

i think -- i mean, my experience has been in the business i was in, i was right 70% of the time, but i was wrong 30% of the time, and there were an all lot of mistakes in 21 years, so -- >> would this be one of them? would you put this in the 30% category? >> i'm sorry? >> would you put this in the 30? >> i don't know. certainly part of it i would. >> all right. let's do this then. i'm going to stop at this moment, i'll have additional questions, but what i'd like to do is now move to commissioner murin. >> oh, -- >> to my dear friend bill thomas. bill thomas. >> thanks to my dear friend, the chairman. you are in 21 -- i was in 21

from 1978 to january of 2007. i used to think timing was really important, now i think timing is everything. and so from your perspective and my perspective, looking back at it, and in this particular instance, probably more so than anyone i can think of, there are enormous number of would have, could have, should have's, from an enormous number of institutions in government and in the private sector. one of the things -- and you've written a book, the recent paper in front of brookings, the crisis, and in your analysis here, does a pretty good job of pointing out problems in a

number -- and you focus to a certain extent on government and not the private sector, but it's easy to do in terms of risk management decisions that were made, i want to try to focus in a slightly different way on your role as the chairman of the federal reserve. during a period that you and i shared in terms of an economy that in your attempts to stimulate, you were beginning to run out of basis points in the cupboard and we were real close to job owning, because that was all we were going to have left. and always, when you approach a crisis, you approach it from today, looking at tomorrow. it's unfair, as you said, but i'd like you for just a little bit to turn around. because you've categorized

concerns in the credit rating structure, the risk management structure, obviously the gses and i'm not going to ask you to assign a waiting, but i do want to ask you, since we're not going to be able to accomplish everybody we want to accomplish in the time frame as i said in my opening statements, would you be willing to respond to written questions, in part, based upon this hearing, but any other information that we might need moving forward, understanding consideration of time, place, and manner? >> most certainly. i'd be delighted to do so. >> thank you very much. >> in your testimony, you point to a lot of the causes. none of them, not the subprime mortgage origination, for the housing bubble, for the prudent regulation of large entities,

like cities that we'll hear from, are really the narrow focus, an even to a certain extent, broader focus of the fed. so in your words, what@@@@@@@ @ therefore the degree of fault that should fall on the federal reserve, during that period? >> statutory l.a., we had a number of different authorities. monetary policy, that is what the central bank does. we had supervision and regulation as secondary to the major issues. and we had to testify in some of our written documents, and the third one was systemic risk. tten documents, the third one was systemic risk, so there's a very broad mandate that the federal

reserve has and it's structured according to meet those particular mandates. we have an organization that is the best in the business, as far as i'm concerned, in the issue of monetary policy. i know of no better supervision and regulatory operation than exists within the total federal reserve system. and we're dealing basically with problems, by its very nature, which are insoluble that require us to make decisions about what the future will hold and as i mentioned before, if we get it right 70% of the time, that is exceptionally good, and i think that we -- what we tried to do is the best we could, with the date that that we had and all i

can say is -- data that we had and all i can say is did we make mistakes? of course we made mistakes. i know of no way that that can be altered under the existing structure and i make a special point, as you know, of trying to emphasize that the only type of regulation that works and in fact, works sufficiently and adequately, is those that do not require forecasts. >> is it fair for me to indicate that the thrust of your testimony was that the crisis to a very great extent was caused by the demand for subprime securities? is that a fair -- >> well, fundamental cause of the crisis goes back to the end of the cold war, which is pretty object scour, but it's a global crisis. you cannot think of the united states' crisis in any form without looking at the global context. >> i'm going to get in to that as we go forward, but the narrow

focus, and i do want to thank you for citing a book which i think is especially useful, reinhardt and rogof, in getting us down the history of memory lane in terms of the bubbles, but if you were focusing on subprime securities, weren't they certainly predicated to a degree on rising housing prices? first of all, let's remember that the subprime mortgage market was actually a very effective market in its early years. it served a limited population, homeowner -- potential homeowner population, which couldn't afford the 20% down payment that prime mortgages pride. >> i agree with you in the early history. i've looked at statements from

1999, as they were moving into this area a number of people lauded it, isn't that the story of all bubbles, regardles regar, whether they start of off with good intentions and somehow go awry and what we're trying to focus on in this particular bubble, what went awry? would you feel comfortable saying that at least some of the concern with the housing bubble was the fed's monetary policy or not hat all? >> i've tried to explain in some detail, in the brookings paper, i go through a lot of ec ecometrics, that a lot of things changed which made monetary policy ineffective in dealing with long-term asset prices, so you're asking -- >> i agree with you, i

understand the argument, i'm just trying to move down a line and clearly, capital, the savings rate, the change in the movement of money, and that had you -- it wasn't monetary policy in terms of your argument, because frankly, longer term yields would have been kept down by the inflow of capital, and long-term rates were kept below by international capital flows. but isn't it a minimally fair statement to at least say that if you had raised rates, wouldn't longer rates, albeit suppressed somewhat, still would have risen and slowed the growth of the housing bubble? >> i'm afraid that's precisely what we found didn't happen, and we -- >> and so even more capital would be flowing in, and it would have left basically long-term rates unchanged? >> well, you cannot explain --

>> that's your argument, isn't it? >> i'm saying basically that you cannot explain long-term rates in the united states other than what is being arbitraged in the rest of the world as the paper in the brookings paper illustrates. in 2002 and 2005, the period when the bubble was emerging, that short-term rates, that is, the federal funds rate over which we had full chrome, did not affect long-term rates and that as a consequence of that, even though we tightened monetary policy starting in mid 2004, for a considerable period of time, we had very little to negligible effect on inflation in the home markets, which being is when the bubble is, so a simple answer to your question is --

>> give my self an additional five minutes, mr. chairman. >> simple answer to your question is the evidence does stipulate that it -- that we endeavor to tighten monetary policy, did not affect long-term rates as it always had at the beginning of the tightening cycle earlier. >> ok. if the 10-year treasuries on which mortgages are based, don't react to short-term rates, what was the argument for keeping the funds rate low? wouldn't make any difference? was it for another reason? >> yes. the funds rate was kept low because even though monetary policy delinked from long-term interest rates in that period, it still had a significant impact on short-term rates, and short-term rates do have an impact on the economy. the reason we pushed rates down

was in 2003, there was a very considerable concern that the type of deflationary processes which were underway looked very much like those that were occurring in japan and indeed, similar to what's going on today and we decided that we needed insurance against that in the short end of the market. that was the reason we kept rates down, until mid 2004 that is. >> as we're looking at attempts, obviously, we're dealing with the situation in which a number of institutions fail, both in and out of government and we're asking ourselves questions, does it make sense to consolidate supervision, to try to make sure that the left hand knows what the right hand is doing, is it better to decentralize it. what about transparency.

the whole question of the rating structure, third party analysis. in terms of looking at where people in office and in positions of responsibility are going now, monetary policy, bubbles, making sure that certain things don't occur again, including, i think, the fed in terms of recent statements that are made, if they're moving toward regulatory instruments to target the bubble and interest rates to target economic activity, isn't that to a degree a -- maybe a repudiation is too strong a term, but isn't that different than the policy that you thought was appropriate or is it that they're looking at that period of history that they went through and are talking about where they need to go and what's your assessment of that? >> i think it's mainly the

latter. it's difficult for me to know precisely what was going on in meetings, which i was not at, but the markets are changing all the time. and it is critically important for the federal reserve to keep up with those changes and in many instances, they change in directions and require actions which previously would have been inappropriate. >> and then just let me say that in the last large paragraph of your testimony, are you really -- in my opinion, that pessimistic about our ability to deal with the conditions we find ourselves in, because inevitably, it will always be something else? but to a certain sent, i mean -- extent, i mean, when you have a river that overflows its banks, whether it's the nile or the

kern river, building a dam seems to help by allowing a more regulated release? i got out of that last paragraph the only possible solution is capital and collateral at an adequate rate, and i take that look at citibank and we'll be hearing from them recently, in that every turn they were, quote unquote, adequately capitalized in all the categories. so it's easy to say that, but what does adequately capitalized mean? and yes, we're in the human condition, and yes, i cited a book which kind of puts us in a historical perspective, at this time it's different, but it isn't, but i cannot believe that we can't get an understanding of how we can mitigate and to me, it's always transparency, it's always someone who is disinterested, slowing down the process and examining it to a

certain extent. >> well, mr. thomas, you're raiding exactly what the be -- raising exactly what the issue is for regulators and that is raising adequate capital. i might just say parenthetically, that you're quite right, citi and everyone else was considered adequately capitalized. the major mistake in the system that adequate capitalization issue is a function of what your risk management system is, and as i mention in both the brookings paper and in the testimony, written testimony, what we discovered is that there was a fatal flaw in that system. we did not recognize it until we saw the outcome of what happened to the markets after lehman.

the lehman bankruptcy. but the issue of adequate capital is important because just think for the minute, if we knew what the actual number should be, and of views as to what that number ought to be, it's higher obviously. >> that will be a followup question in writing. if we had adequate capital and quid it's, whatever -- liquidity, whatever else we do would be adequate but not critical. if we had everything but but not adequate capital and liquidity, the system will fail to function. in short, i'm saying, we can solve this problem on the capital liquidity and collateral side as well as doing it in other areas like -- i say fraud and misrepresentation. in my judgment, over the last decades, has been inadequately enforced and that is a critical question. but how you structure regulation is interesting, important, but not critical to resolving this

crisis and preventing the next one. >> i think we'll hear from a number of folks offering testimony that fraud or behavior should have consequences and if it's illegal or criminal, something should result from it and it has been in my opinion, a >> the financial crisis inquiry commission continues its work tomorrow. you can watch that on our companion network, c-span2, and on our web site, c-span.org. they-long coverage begins at 9:00 a.m.. >> all this month, winners from our studentcam competition. they submitted videos on one of the country's strengths or challenge the country is facing.

watch the winners at 6:50 eastern just before "washington journal." for a preview of all the winners, visit to studentcam.org. >> we continue with the hearings of the financial crisis inquiry commission. in this part, they question citigroup as to how lending practices could have contributed to the 2008 financial crisis. this is about 20 minutes. [no audio] 1g1g;n;n;f=&

>> can we swear you win all along with everyone else? thank you. do you solemnly swear or affirm under penalty of perjury that the testimony you're about to provide the commission will be the truth, the whole truth, and nothing but the truth, to the best of your knowledge? thank you very much. this panel is about subprime and rich are rationed and securitization -- some pride -- subprime originations and securitization. we ask each panelist to give a five-man and testimony. there will be all like that goes on in front and you in at 1 minutes, it will give you one minute to go.

and read, when the five minutes are up. and with that, we are going to start with mr. bitner, and then go right to left or left to right depending on where you are setting. one of the reasons we are doing that is that mr. bitner and miss linsdsey that were part of the issuing mortgages. [no audio] there we go. >> my name is richard bitner, a 15-year veteran of the mortgage industry. additionally, i am the author of

"confessions of a subprime winter." a subprime lender." before loans for securitized, that entire process of originated in and servicing came from the same institution. since banks were heavily regulated, they were heavily motivated to treat borrowers fairly. mortgage securitization also fragmented the industry. instead of one institution that functioned in a troop cradle to grave men now -- mentality, it became diversified. mortgage brokers originated among, so any concern about it was the other companies

responsibility. investment firm so they merelied final products investors wanted to buy. the wall street firms securities and investors who purchased them claimed to beholders in due course which proited them from any liability when lenders and protecters act illegally. while entire food chain contributed to the problems. fragmentation allowed the players to point a cuestory finger at everyone else. with minimal barriers to entry and historically low interest rates, loan originators entered business by droves. by some estimates number of new loan originators working for mortgage brokers increased by 100,000 between the years of 2001 and 2006. during the early years in subprime lenders, subprime lending very few states had licensing requirements which meant barriers to entry were minimal. even when states began requiring licenses prerequisites were easy to meet and passing multiple

choice tests and having no felony convictions. level of fraud reviewed by lenders was unprecedented in my firm's experience between 2003, 2005, more than 0% of all brokered loan files submitted for initial review were somehow deceptive fraudulent or misleading. issue was further complicated by the fact little could be done to rid system violators. for example if the lender found a broker was acting i am brotherly, in fact committing fraud, the options for enforcement were minimal. many states did not have licensing requirements. those that did have weaken force standards. assuming there was a state licensing authority a lender could submit documentation in effort to rescind a broker's license. in many cases path of least resistance for the lender to place the broker and do not do business with list which meant the broke was effectively barred from doing business with that firm leaving them to go somewhere else to do business. determining a property's

value pose ad number of challenges for firms like mine. subprime lenders usually conducted second party review for broker ordered appraisals, frankly majority of appraisals were considered unrelikeable. to put things in perspective nearly half of all the loans we underwrote, that we underwrote were originally overvalued in our opinion by as much as 10%. interestingly our experience 10% was most an appraisal could be overvalued and be purchased. another quarter of appraisals were overvalued by 11 to 20% and remaining 20 5% of appraisals we initially underwrote so so overvalued they defied all logic. throwing a dart at a board while blindfolded would have produces more accurate results. if multiple properties in area overvalued by 10% they in turn are comparable sales for future approgramsals. the process repeats itself. we saw this on several

occasions. we close the loan in january and see subject property show up comparable sale in the same neighborhood six months later. except this time the new subject property was being appraised for 10% more than comparable sale six months earlier. in end i believe subprime industry willingness to consistently accept overvalued appraisals and significantly contributed to run-up in property values that were experienced throughout the country. to complicate matters further the mortgage industry experienced a gradual shift between what was not and not an acceptable form of risk. credit score had been compel indicator of loan performance its lee ooiblt was predicated holding other credit factors constant. concluding but not limited to borrower's rental history, job stability and cash reserves. unfortunately the industry's ability to apply logic underwriting a loan file would serve as its undoing. no other example more prevalent illustrating a point. identifying how a row ear's payment history history was verified. they moved from requiring a borrower to provide 12

months canceled red checks or verification from rental management company allowing for private verification. in other words a note from borrower's mother became acceptable form of rental history there should be no surprise loans defaulted at alarming rate. >> thank you very much. there will be plenty of time for questions, thank you. miss lindsey. if you can pull those mikes towards you and put them on, thank you. >> good afternoon. thank you inviting me to participate this afternoon. my hope for today's session is that i can bring a unique perspective to the, into subprime lending. i have a unique background. i grew up in the subprime industry. my father was a hard mon lender. i learned what fannie mae was 6 years old don't want to tell you how old i am but freddie mac wasn't around yet.

my father would show me how to vail eight a loan. i learned how to service loans, look at loans. look at properties. in biggest thing with hard money lending these were borrowers who didn't have good credit histories. so to offset that poor credit history they would the have a lot of equity in the property. we had three cs we looked at credit, collateral capacity. borrowers didn't have credit. later on in subprime they didn't have the credit but yet they didn't have collateral either. then we found out they didn't have the capacity. they would, they switched state the income loans. and they would just state whatever would qualify them for the loan. usually led by brokers because the brokers were the professionals in the industry who would know what they needed in order to qualify for the loan. those loans were submitted

to lenders like new century mortgage who then sold them to investors on wall street where they were packaged and resold into securities. i joined the new century as wholesale underwriter in 1997. i was kept on as part of a skeleton crew after we declared bankruptcy in april of 2007. i was kept there to help wind down part of the bankruptcy. i found the lending standards at new century significantly different than what i had grown up in the subprime lending industry. also i worked at beneficial mortgage from december of '99 6 until i was hired on as new century in december of 1997. beneficial was one of the original subprime lenders. they too would work with borrowers who had poor credit history and, they would offset it with the protective equity. so in other words, if the borrowers were going to detall -- default they would protect the portfolio so

borrow could get out by selling property or refinance or, possibly do something else in order to get out of their loan. as mr. bitner mentioned the growth in the subprime industry grew because of securitizations on wall street. before the banks like, beneficial, like some of the other local banks, they kept their loans on portfolio or would sell them off to fannie mae or freddie mac if they qualified for those loans. with the advent of the securitizations, loans were just sold in droves to wall street. there was a huge deman for the product because of returns. the problem with the returns though is they were based on a product that if anything hiccupped like the property values, they were going to potentially default. new century, was not able to originate loans without the

use of warehouse lines of credit. we didn't have our own funds to loan. we were not a banking inches. we didn't take deposit. so we got our money from warehouse lenders. these warehouse lenders provided us the ability to make loans and they were usually provided by the same people who would purchase our loans on wall street. there was such a huge demand from our product our loans were forwarded two or three months ahead of time. we had approximately, we were making at peak, approximately 20,000 plus loans per month. about $5 billion in product every month that was being sold and those loans were forward fold. one of the other things that changed was the originate to distribute model. a definition of a good loan used to be a loan that paid. it changed to a definition of a loan that could be sold. we did track the performance of the loans that we could because we would always say our loans performed better than the others. the problem with that we couldn't track all the loans

because like i said most of them were sold and we didn't know what happened to them. unless we were at the repurchase. one of the other problems was the loose guidelines. we had layered risk. we had people who didn't have credit. they didn't show the capacity, and they didn't have the collateral because they were at 100% financing. and then we added the interest-only loans. then teaser rates that would readjust of after two years. and it finalize my opening statement, this basically at end of the day we had a system that went into a ward spiral because of layering risk rather than mitigating the risk. and we just need to go back to core values of. thank you. >> thank you very much.

mz mills. >> chairman angelides, vice chairman thomas. members of the commission thank you for inviting me here today. my name is sues mills. head of mortgage group of citigroup the commission has asked me to review the acts of my group with an emphasis on securitization of subprime and alt-a mortgages. i ever written all link the statement for the record. let me address a few key points. this was part of an intermediation business, we purchase loans and sold securities to sophisticated institutional investors. our objective in purchasing mortgages was to securitize them and distribute bonds to meet the demands of fixed-income investors.

our rmbs business was smaller than other companies. a significant event was that unlike other firms, maturities leading up to the market this location, we did not operate on mortgage conduit on an ongoing basis of originators. in this sense, our investment they did not have a direct relationship with affiliated mortgage originators from which we had the ability to purchase mortgages directly. instead of originating and servicing mortgages in house as many of our peers did, we exclusively purchase loans from originators in the marketplace. . originators in the marketplace in arms length transactions. as a result we underwrote our own rmbs according to the guidelines of the loan

originators and not our own set of guidelines. our due diligence had two principle components. first, before ever purchasing loans from a particular seller we would evaluate the seller and their operations typically through an on sight review. if we were not comfortable with a particular seller we would not do business with them. them. secondly, with respect to loans that we were purchasing, we would perform a due . hat the loans met the originator's underwritingfied lines. to conduct this review we engaged third party diligence providers we actively supervised. once we aggregate ad pool of loans of sufficient size we would then securitize those loans. as a part of this process we submitted loan level information to credit rating agencies. to determine the dollar amount of bonds in each rating category for the rmbs we would market the rmbs bonds to investors, solicit feedback from those investors regarding the transaction and finalize the structure and pricing. our offering documents

described underwriting standards of originator or originators of the loans in the pool and also provided extensive nate tiff strattifications concerning the loans themselves. i understand that the commission is particularly interested in our efforts to monitor the mortgage market and detect fraud. our diligence review served as primariliry and i believe highly effect testify means we evaluated loans we purchased and securitized if we identify issues in loans of pool of mortgages we agreed to purchase including concerns about potential fraud we would perform additional diligence until we were satisfied that our level of diligence was appropriate. we would not purchase loans that failed to meet the applicable underwriting guidelines of the originator, or that violated any compliance regulations or that appeared fraudulent. we also monitored the performance of the loans that we purchased and we typically negotiated the right to require the seller of loans that experienced early payment default, an indication of potential fraud, to repurchase those loans. to assist us with these

efforts starting in 2006, we established a unit within finance to monitor the performance of the loans we securitized and to manage our repurchase requests. unfortunately, our diligence practices did not detect what we now know to be the most significant downturn in the u.s. housing market in generations. results of unprecedented housing collapse which led to the decline of value of all mortgage loans, many of our rmbs have not performed as well as expected. however, we continue to believe despite the financial crisis and collapse of residential home prices the securitization of nrn agency mortgages plays a vital role making capital available to institutions to enable individuals to purchase homes and we are encouraged we're slowly starting to see the mortgage securitization market return. for our part we at citi committed to applying diligence practices as we adapt our business to the changing mark place. i appreciate the opportunity to discuss some of those practices with the commission today and i look forward to answering your questions.

>> thank you very much, ms. millions. mr. bowen. >> thank you, mr. chairman. i'm very grateful to the commission. the light is on. i'm very grateful to the commission to be able to give my testimony today. if it wasn't for this commission, if it wait a minute for you, then my story could not have been told. my name is richard bowen. i was promoted to business chief underwriter for citi in early 2006. i had responsibility for underwriting for over $90 billion annually of mortgage loans. these mortgage loans were not made by citi. they were made by other mortgage companies and citi purchased them. and it was my responsibility to make sure that these

mortgages met citi's credit policy standards. during 2006, and 2007, i witnessed business risk practices which made a mockery of citi credit policy. i believe that these practices exposed citi to substantial risk of loss, and i warned my business unit management repeatedly during 2006 and 2007 about the risk issues i identified. i then felt like i had to warn citi executive management. i had to warn the board of directors. about these risks that i knew existed. on november the third, 2007, i sent an e-mail to mr. robert rubin, mr. dave bushnell, the chief

financial officer and auditor of citigroup. i outlined the business practices that i had witnessed and had attempted to address. i specifically mr. ruben about the extreme risks and unrecognized financial losses that existed within my business unit. i also requested an investigation and i asked this investigation be conducted by officers of the company outside of my business unit. my warnings to mr. ruben involved two different areas within my responsibility. the first one was called delegated flow. the delegated flow channel purchased $50 billion annually of prime mortgages. these mortgages were purchased one mortgage at a time. these mortgages were not underwritten by citi before

they were purchased. but the underwriters reviewed a sample of the files after they were purchased. this was to make sure that citi's credit standards were maintained. most of the mortgages were sold to fannie mae, freddie mac or other investors. even those citi did not underwrite these mortgages, citi provided warrants to the investors that purchased them. these reps around warrants guaranteed to the investors that the mortgages were underwritten to citi credit guidelines. in june of 2006, i discovered that over 60% of the mortgages in delegated flow were defective. and by defective i mean the mortgages were not underwritten to citi policyfied lines. citi had given reps and warrants to the investors

that these mortgages were not defective. and the investors could force citi to repurchase many billions of dollars of these defective mortgages. this represent ad large risk of loss to shareholders of citi. i attempted to get management to address this critical risk issue. i started issuing warnings in june 2006. these warnings were in the form of e-mail weekly reports, committee presentations and discussions. i even requested a special an investigation from the management that was in charge of internal control. and that investigation confirmed that we had very serious problems. and i continued my warnings through 2007. but, citi continued to purchase and sell even more mortgages in 2007. and defective mortgages during 2007 increased to

over 80%. i told you that my warnings to mr. reuben involved two areas of responsibility. delegated flow was the first area. the second area involved was wall street subprime. wall street subprime purchased pools of subprime mortgages -- >> mr. bowen can you try to wrap up as quickly as you can just because of time. >> wall street subprime purchased pools of subprime mortgages from other mortgage companies. and the underwriters were responsible to make sure that the mortgages in those pools met the citi credit policy standards. beginning in 2006, i witnessed many changes in the way that credit risk in these pools was evaluated. as an example, the credit decision on purchasing a pool of subprime mortgages was based upon the numbers of approved decisions given by the underwriters. in some subprime pools, large numbers of underwriter

decisions were changed. the decisions were changed when turn downed or approved. the pools were purchased. there were many other variances to citi policy. beginning in 2006, i issued many warnings to management. and many identified pools were purchased anyway, over my specific objections. thank you, mr. chairman. >> thank you very much. and there will be lots of time for questions. i really appreciate the brevity of all the witnesses. let's do this now. i'm actually going to start with mr. thomas, to see if you have questions you would like to lead with. i will defer my till the balance of the commission members. >> thank you, mr. chairman. first of all, thank you all for coming and, for anyone who grew up in california through the '50s, the '60s,

the '70s. '80s. '90s sets, a lot of this stuff is pretty familiar with us now especially following the last several years. and i'll address my initial questions to mr. bitner. ms. lindsey. what was the last straw? what made you walk away? was it kind of like the cannibals, start with the cold water in the pot and starting getting a little hotter and then eventually, you realized circumstances you were in? >> i think for me it was combination of a couple things. >> is your mike on. >> i believe so. >> closer then for me it was combination of couple things. starting a as early as two three. forget about the fact that have a subprime business model. we had a model, which makes wigets and, every month you're making more of them and making less and yet

you're also noticing quality of wigets you're producing is of a decreased quality. you're watching this trend. hey, can you tell them. what's that? >> can you sell them. >> we can sell them. . . >> we are saying this is an acceptable form of risk were a year or two ago this was not the case. in october 2005, several things happened. >> i want to nail down some points as we go forward. they were an acceptable level of risk because you were running out of the other mortgages that were more familiar to you and better quality? could you still do those, but not at the volume that you could

do these? >> whatever refer to as an acceptable level of risk is by looking at a matrix that was put out by an investor, whichever group was saying it. level of risk by looking at the matrix that was put out, whether with the citi financial or whichever group saying in order to get a 95% loan-to-value loan, the loan must now be meeting this criteria, so it wasn't a case of whether i had more or less of those that were available to me. it is just that the decision-making capabilities--. >> your targets change. >> targets change absolutely. what ultimately happened was a couple of things occurred. when we had record-setting month in terms of volume in terms of the number of loans we close. number 2 we also found ourselves in a situation where as we were looking at it from a risk perspective and analyzing the volume of loans that we did, we noticed we had also hit a record level members of state income loans, record number of hundred%

finance loans which was different from when we started. when we started in 2000 much as chairman greenspan alluded do we had a business model that was more of a minor part of the business center mortgage lending where the average down payment was 10 to 15%, stated income loans were only--. >> mr. bitner i have a a time limit as well you. what i want to focus on those of us who grew up in southern california were well aware that the first thing you try to do was to get get enough money to borrow from your parents to do whatever you can to get into a home because the home would appreciate. and that was one of your principle forms of saving. and that over time, you could then get equity out of that house and buy another one. these events were occurring because that was just the climate we were in. do you feel you have got into a point and i notice you are from texas, and there were savings and loan problems in california and savings-and-loan problems in texas and there was a way to apparently make the machine work

faster. did you see a level of what i guess we could call fraud at some point get the appreciation higher by virtue of the relationship between the !7!pzzi7s and the real estate >> what we are with the talking about is that the appraisal was ordered directly from the mortgage broker, not the real estate agent. one of the things i concluded -- my belief is that the broker did not need to apply any direct pressure to an appraiser. you placed an order in front of the appraiser and said "i need $235,000." if that a prisoner was not able to hit that level, they went to somebody else. >> i understand. need $235,000. if that appraiser was not able to then ultimately they went to

somebody else. >> and so, you did not sell your product and that is how you've made money, so people conform to a certain business practice to make sure they could sell their product? was there a degree of uniformity on how you begin to produce these mortgages? >> could you be a little bit more specific? >> there is a slow way, there is an old-fashioned way, there is a ccc way or the quickest way to get it done under the new rules. was there a general understanding that your job was to produce these so you could make money? and therefore you do it in the fastest, most convenient way possible? >> well, the easiest way to answer that. >> why did you get out of the business? >> why did i get out of the business? because my house caught on fire. you are going to go what does one have to do with the other? you have moment in your life when you look and start watching the house and interesting the house had the-- he start

questioning the validity of the work that you have an doing overtime and whether or not his parting value that it provided five years ago when he started the business and the answer to me was pretty clear, that it wasn't. >> do you think much of the self-examination and frankly what we used to call guilt was evident on wall street in terms of the continued desire to purchase whatever it was you were producing because when you step aside there were others who felt-- filled your shoes fairly quickly. >> i can't speak for all of wall street but i know when i left it certainly met-- meant that it was a little easier to sleep at night. >> okay. let me reserve my time and i will come back on the second round so everybody gets a chance to get into the questions mr. chairman. >> ms. georgiou.

>> thank you. my first question is for mr. bitner and for ms. lindsay. you reference the fact that some of the requests from your customers for the types of products that they wanted had evolved over time and i was curious as to whether you could comment on whether they are due diligence practices also in-- he fault overtime? >> i was primarily in charge of the fraud detection and prevention and i will say i did try to keep up with that piece of it. one of the problems that i had specific to fraud prevention was the advent of stated income loans, so in other words, if you couldn't prove the fraud, it became a business decision. the only time we had any teeth, risk management on the backend, was when we could groove defrauded when we had something in writing, when we could hand productions something and show them otherwise they would seek--

say prove it. show me it is a bad loan and then you couldn't and therefore it was a business decision and it would moveon. did that answer your question at least somewhat? >> it does. >> i very much agree with what ms. lindsay said. i would add to that point. let me is the example of the stated income loan because i don't think our processes and procedures changed any. it just became very much the sort of the same challenge. you get a particular documentation or file that comes in with the person who claims to be, to make an income that appears to be relatively reasonable for that particular occupation. there were ways we could check that. we could go to salary.com and other ways you could make sure you didn't have the strawberry picker who is making $450,000 a year. >> to the person purchasing the loans from you, they are due diligence when they came to look

at the products you generated did they change their due diligence practices over time? the city banks of the world? >> i don't think so. for what it is worth, i felt we had strong due diligence practices and didn't change relative to those types of loans in terms of what we were looking for because we still felt one of the reasons why those of us who have been lifelong in the mortgage industry and i came from the side of working from the investor before was at the end of the day the one thing that drove our opinion was our belief, can this person make islam? can this person make this payment at the basic level. if the answer is that we probably don't have a reason to be doing this loan. >> one short question, when you look back on this to think that there should've been some sort of regulatory supervision of your business activities and that of your industry specifically that segment that was not necessarily monitored by the federal reserve as a bank would he? >> i think the person who is investing the money should know what they are investing in. as a hard money lender myself i love my personal funds and i

grew up in the industry. i need to know the risk that i am taking, and know what it involves. i don't think the people ultimately invested their money in this new any, had any idea what the risks were involved, so i think that there should be some regulation to the effect of showing the investors, who at the end of the day are the ones who are purchasing the loans, the bond buyers or the retirees who are investing, i think everybody needs to understand what the risk is, so they can make an informed decision. in that respect, yes it definitely. >> there is a little bit of a conflict in that you both just dated you felt that the due diligence practices that were exercised by people that ultimately were either passing through these loans or they were end-use investors were adequate, but yet, clearly as we have seen, they didn't fully understand the risks that they were taking, and i guess-- is

that correct? >> that is correct and they had a set of underwriting guidelines so they were kind of following the guidelines but they didn't understand what the underlying risk was. i think we would run out of product, we would run out of customers with a certain product and they could no longer qualify because the property values have gone up so much so here comes the interest-only loans. it just kept layering the risks and the people-- it wasn't the wall street investors who are purchasing these who were taking the losses. they were passing them along, passing them down the line five or six levels, and that is where the money was coming from. so i just think the person who is ultimately investing in these needs to be aware of what the risk is. i think there are too many levels that it went through. >> thank you. >> you are welcome. >> to follow up really on that topic which is risk in the assessment of risk, both i guess from mr. bowen and ms. mills, perhaps ms. mills he could talk a little bit first within your

unit, what contribution or what importance did risk have in the way you ran your business? >> risk meaning the department risk or just the evaluation of risk? >> the evaluation of risk and then in particular where i'm headed with this is to try to determine to what extent your ability to understand the underlying risk of your business was related to your performance in your duties within your unit, so was your performance review based on your ability to determine risk? >> when we bid on pools of loans from originators, so people who were aggregating loans, we purchased, or we agreed to bid on pools of closed loans. there was on average a 30 day time period from when we were awarded the transaction to when we actually had to pay for the loans and in that dirty day period is when we conducted our

due diligence and are due diligence had two components when it came to long file diligence. we look at valuation so we look at the property. we looked at credit so we made sure the loan was originators to the originator guidelines and then we looked at compliance to make sure they didn't-- lending laws and sometimes we do 100% diligence. more often than not we would use a sampling methodology where we would select both randomly selected and adversely selected loans. the randomly selected loans were to just get a snapshot of is the pool as described on the low-level data filed that you got from the seller? the adverse selection was to try to identify the riskier loans in the pool and spend a little bit more time focusing on the riskier loans to make sure that in fact they were as described. >> but then when you get to the end of the year, when compensation is determined.

>> my own personal compensation? >> s.. >> i don't know exactly what factors went into my own personal compensation. i know the people that worked for me, their compensation was based on the way they did their job, whether or not they were performing adequately and up to the standards i maintained. it was based on the profitability of the business and it was based on the profitability of the firm. >> was there a revenue component to its? >> yes, that is what profitability is. >> a arguably profitability is after you take losses or any kind of responses-- expenses related to the revenue stream. >> there was a can't often we knew how much money the business made at the end of the year and there was a bonus pool allocation amongst the various businesses, and my management decides the final word on who got paid what. i didn't have the final word, i

just made recommendations. >> was risk discuss with you during a time of your performance evaluation, risk to the firm, riggs to your unit? >> i can't remember specifically. because their business model is one of intermediation and that we buy loans and we distribute von tinley think that we disclose the risk to our investors and offering documents, which we believe are compliant with all required securities laws and we sold bonds that had ratings, there was risk that was monitored and maintained on the trading desk itself. i am not a traitor so it was not my responsibility to manage the risk of the firm. >> when you interact, you have had some interactions i believe with the sec and federal related to your business unit as part of the fact that the regular dated body that hotties the investment bank would be the sec and not so much the federal reserve. is that right? >> i've only had interaction

with venrock. >> could you talk about your interactions with regulators in terms of the kind of interest they might have had when they were evaluating your business and its importance to the of-- parent company? >> my interaction with venrock was related to some inquiries that they made, transaction specific so they had some questions on some securities that we had issued off of our shelf, and i had some meetings with our council and then i had one and face meeting with finra where they asked me questions about the deals that they had questions about. they were specifically related to issues with the reporting of delinquencies and was i aware of situations where delinquencies may have been misreported on remittance reports. >> when you think about the regulatory regime that governs the investment bank, is there any discussion within the firm about how that relates to the overall safety and soundness of

the parent company? was that discuss? >> those are not discussions i would be involved in. >> thank you. mr. bowen if i may? you stated in your testimony that there were a number of practices that you had raised with regard to the quality of the loans that were being generated in your unit. if you could talk a little bit, a similar line switches to what what extent was there regulatory oversight of this issue to your knowledge and to what extent they can do to feedback to management or did management relate to you the importance of that to the parent company in total? >> i did not interface with any regulators. underwriting was considered to be a part of risk and i escalated all of my concerns up through the risk structure as my manager did. as it relates to the quality of

the loans, again, as i indicated when i took over this responsibility in early 2006, i was charged with ensuring that the mortgage loans that came through my area were underwritten according to citi policy guidelines, and i attempted to follow through on that. and identified those that came through my area that did not meet that criteria. >> and, do both of you report up to the same risk management unit? >> i reported up >> i was in a completely different part of the organization. >> the concerns might not have been shared within your two divisions, if there were any concerns about the quality of the underlying assets? >> i do not know.

>> i do not know where rest intersected from the two businesses. >> thank you. >> thank you. >> thanks, mr. chairman. i have a lot of questions for all of you. i would like you to be as concise as you can be. i will try to make questions that do not require a lot of expansion. a me start with you and then go along the line. what you described in your testimony was an industry engaged in what might be called mortgage fraud, defrauding lenders and possibly investors with the quality of the things that the industry was selling -- not you personally. did you ever come across predatory lending? >> i would say i think we experienced it in terms of watching loans that i knew that we denied, which i thought was a

blatant effort on the part of a broker to act in a predatory manner. denied, which i thought was a blatant effort on the part of the broker to act in a predatory manner within subsequently taken to some morals and eventually gearing it was closed with another lender, yes. >> but in terms of percentage, of what i would call making, taking advantage of the naïveté perhaps or the greed of the lender or the investor as compared to predatory lending, that is taking advantage of the borrower, what relative percentage would you see there? >> i don't know that, given the microcosm of the world that i live than that i would be accurate. i could give you a best guess, 10 to 20%. >> when you sold a loan did you make warrantees? >> absolutely. >> did loans get returned to you? >> yes and it was required for

repurchasing. >> what percentage of loans were returned to you and can you generalize between the kind of institution that did return them? >> absolutely. the repurchase requests were fairly small. they were consistent in terms of guidelines. the first payment default, borrower did not make their first payment. in the case of countrywide they had our worst of that at the bar went as late as 90 days in the first one near the loan was on the books but in most cases it was because of some sort of a case of fraud. typically if a borrower was behind on their loans and loan would go through a strict quality control process and it was usually the next level of investor so specifically for me that was gmac and household finance, city financial and countrywide. >> they would return those loans to you. what percentage were returned? >> small, maybe two to 4%. >> despite the fact that they were poorly underwritten. >> no, no, no know you are

talking about my underwriting qualities. remember i was the broker. >> i accept your correction. but these were risky loans. >> the were sub-prime loans, of course. >> nevertheless the returns were relatively small. >> the repurchase requests. >> they probably weren't as risky from the point of view of the underwritten qualities of the loans? >> i don't believe they were necessarily any more risky. i believe we had a strict diligence process. trying to make sure that they were vetted out for that. >> you talked about loans to wall street, a lot of the loans i think he said went to wall street. are you aware that fannie and freddie were buying loans? did you ever come or were you aware of where your loans ultimately went when you sold them? >> i don't know i would say my phones directly went to wall street. i guess you can call citi

technically you could call that a wall street firm. so i apologize, what was the second part of the question? >> were you aware if any of your loans went to fannie mae and freddie mac? >> know i was not aware once they got sold to the investor. >> were you aware that fannie mae and freddie mac plus fha actually help more or guaranteed more sub-prime and all-day mac loans in 2008 that is to say on their books in 2008 in wall street? >> i was very familiar with that or can this be how did you become familiar with that? >> i run a somewhat respected media outlets that reported on that. >> were you aware of the time you were making these loans? >> you are talking about 2008? i had exited the industry at that point. >> when you were in the industry were you aware? >> by 2006 it came to my attention. what i left my organization and joined a different firm i notice things like the community homebuyer program which if you look at it from fannie mae's

underwriting, we underwrote to our major investor's. >> thanks very much for your time on this. ms. lindsay, can i ask you a few questions? were you aware of what companies were buying new century loans and you know what the loans went to wall street or the gse's? >> we did have some that went to the gse's. i went with-- met with representatives to show them what we were doing in order to prevent fraud. but, yeah we have pretty much every wall street investor who was securitizing buying our loans. >> did you actually sell loans directly to fannie and freddie or was it to a conduit that eventually went to fannie and freddie? >> i believe they bought them directly. i believe they put them in a security specific to our loans. that was my understanding. >> that is to say your loans. >> new century, sub-prime.

>> new century put them in a pool and they eventually got to fannie and freddie? >> yes. >> through some intermediary or directly? >> i believe it was directly. i read in one of our sec filings that we completed a securitization to freddie mac. i believe that was in 2002 or 2003 and then i met with fannie mae affably around 2003, and i'm not sure, but i know they were buying our loans and i don't believe it was there a conduit. >> now, you spoke during earlier testimony about the fact that as prices increased it became much more difficult to make loans to people who are at least to sub-prime borrowers and maybe even prime borrowers. i suppose you are aware of the expression of the affordability gap. >> yes. >> is that what you think you were in countering at that.? >> yes. >> in other words, would you explain the affordability gap to

us? >> basically the housing prices soared so much that they exceeded the normal income. i am not sure what it is called, the income allocations for specific areas. and i can't remember what it is called, but. >> you are talking about fannie and freddie though right? they had a certain loan limit. >> i am sorry. >> i'm talking about the affordability gap, that is to say prices got so high for loans that many people could no longer qualify for a 30 year loan amortized over the 30 year period. they wanted interest-only loans. >> yes, exactly so yes that was the advent advent of the interest-only and just kept expanding the limits. we also started doing a 40 year loan to stretch it out a little bit more, so yes we kind of accommodated the snowball started going down the hill and it got bigger and bigger.

>> let me ask you the same kind of question i asked mr. bitner and that is most of what you are describing in your testimony and in your prepared testimony and so forth is something close to misleading investors or possibly the buyers of these loans or the lenders that were buying the loans. did you encounter any predatory lending? >> it was my understanding that the people who were buying the loans were the ones who approved the guidelines and they were the ones who said we will take that risk, we will buy that 100% interest-only loan for whatever reason. i have no idea why somebody would want to do that but apparently they did. >> but did you encounter any loans in which there was advantage taken of the borrower rather than a blender or the

investor? >> we ran across that occasionally. >> how often would that be? >> it was pretty rare. as mr. bitner mentioned, if we ever saw it we would decline it. every once in a while we would have somebody from one of the local law enforcement agencies contact us regarding predatory lending or we would contact them if we knew of it. but a very small amount. >> were these loans high interest loans or were they normal and just loans? >> they were all sub-prime so they were higher than a traditional bank loan. >> how much higher? do you recall? >> depended on the product, at least two or 3% depending on the product. there was actually one time in our history that the sub-prime interest rates were lower than the prime interest rates for about two months so we had a lot of people coming to us for loans because we could get them done quicker than the traditional bank good and the interest rates. >> and there was a lot of competition for those loans. a tremendous amount of competition, that's right. i'm sorry i can't take more time with you ms. lindsay.

maybe there will be in addition to the question period later but i would like to talk to ms. mills. mr. bowen and you were at the same institution. your descriptions of the risk management in an institution are wildly different. can you explain that in any way? >> i can only explain it in the context that we worked in businesses that had have different business models, and being a part of the investment bank and working for a broker-dealer and working in the fixed income division, our job was to meet demand from our fixed income investors and there was tremendous demand from our investors to buy mortgage-backed securities, prime or all-day mac or sub-prime, so in the context of us being a market maker, and an underwriter of securities which is our primary business, we either underwrote securities or we bought whole loans and issued than. >> your investors were?

>> our investors were institutional investors, sophisticated institutional investors typically pension funds, money managers. >> they bought rackley from you? >> fannie mae and freddie mac? what percentage to fannie mae and freddie mac? >> i don't know. >> can you give us a ballpark? >> i would have to follow a. >> can you provide that later? i would appreciate it very much. you said in your testimony you underwrote to originate standards not citi standards and this is interesting because mr. bowen's group wrote to citi standards. why was there this different business model? why would a customer want to loans underwritten to the originator standard instead of citi standards? >> we mostly bought from large low capitalized originators, who were known in the market, and so there was an acceptance of new century's guidelines or america

west guidelines or wells fargo's guidelines to so when the offering document for the prospectus we would be technically the issuer but we would describe the originators guidelines. >> you mentioned three companies that were largely sub-prime lenders. >> they were large counterparties of hours a. >> you brought from them? they were the originators but they were largely some prime, at least they were. >> the pools that we bought were sub-prime pools. wells fargo originates many different kinds of loan so we don't want to stay. >> your buyers were actually perfectly happy with the originators, standards of underwriting? >> i don't know i would use the word happy. >> they were accepting about the what what they bought were securities, so they bought aaa down to bbb and then. >> you had gotten the ratings, but the underlying loans they understood to be sub-prime loans

bought from these well-known sub-prime originator's. >> as did the rating agencies. >> okay, thank you very much. ai go on now to mr. bowen? what percentage mr. bowen of the mortgages that were improperly underwritten where prime mortgages and what percentage were sub-prime? or could you make a distinction between them? see there were different channels that originated each. the largest volumes were on the prime side. >> so, let me ask this. win the ms. miss underwriting, like ms. underestimating, wendy ms. miss underwriting occurred, did it occur more frequently with the sub-prime or with the prime, or did it not matter, it just happened generally? >> i virtue of the larger volume and the prime side, the absolute numbers were certainly greater.

>> okay, so the percentages would have been about the same but the numbers were greater because there were more prime loans. >> i cannot make comparison. >> understood. that is perfectly good. do you know of any difference between the reactions of the gse's, fannie and freddie and the reactions of the wall street firms to improperly underwritten loans? >> i did not interface with any of that area a. >> so you would know if investors forced citi to repurchase or whether the gse's for city to repurchase? you were aware of the risks that citi was taking because of a possibility of repurchase but you don't know whether it actually happened to? >> no, that was a different area of the organization. >> do you know the actual delinquency rates on these loans that were improperly underwritten? >> on the prime side, there was

reporting that was developed at the end of 2007 that did indicate, and this was the first reporting to my knowledge that had been developed, that did indicate a significantly higherd that was solely on the prime side. >> thank you. that is interesting. i only have one question. your memo to robert rubin. >> let me yield additional -- >> i just need a minute. >> i will give you too. >> thanks. this was an extraordinary document that we have been privileged to see. it was quite candid. rubin, an extraordinary document that we have the privilege to see, and that was quite candid.

did you ever receive a response from anyone? >> at what point commissioner? >> that is a good question. from that time until the time you left the institution? >> from the point, and i am attempting to clarify, from the point at which i sent the e-mail to mr. ruben? >> right, that e-mail. >> i sent the e-mail on november the third. i received a very brief phonecall on tuesday, november the sixth i guess. from a general counsel within the company. he said that they had received my e-mail, they take it seriously, they were doing some background investigation and they really didn't need to talk to me at that point in time. i sent to follow up e-mails to general counsel.

one in november and one in december of 2007. ..

>> physically or from their employee? >> are you a lawyer? i would say their employee. >> i left the organization officially january the 23rd of 2009. >> so you were there about a year after the point where you had that conversation with the general counsel's office? >> i was not there physically. >> oh, okay. please, would you enlarge upon this a little bit so we can understand what you mean by this? >> can i make an observation? i do not believe that a subject that we should be discussing our specific employment matters, mr. wallison. >> all right.

i won't ask any further questions. >> thank you all for your indulgence in answering my questions so quickly and with such concision. >> mr. georgiou. >> thank you. i guess to initially to mr. bitner and ms. lindsay, what incentives were there on the part of the originating brokers and others involved in the origination to deliver higher interest rate loans, if any? >> it was standard operating procedure that a broker could become as it is one of two ways. they could either charge the borrower an origination fee, and/or they could sell at above market interest rate that by doing that they would be paid a yield spread premium. typically up to a maximum of 2% of the loan amount in most cases is the maximum upside for them.

>> when you say he'll spread premium, that is above the amount that they would otherwise receive as a brokerage fee for originating the loan? >> that's correct. a quick example, today's rate may be 7%. if they sell 7.5 present, they may be paid an additional%. >> who pays that additional about? >> that come strictly from the letter. in this case companies like myself and news into doing business directly with a broker. and would you then pass that additional cost on to the ultimate purchaser of the loan? >> well, that would have been factored in, yes, to the ultimate the i would have been able to obtain by selling the loan than in bulk to the larger investors in the food chain. >> now, let's assume for the sake that the broker gets a higher fee for originating a higher interest rate loan. say at the high end where they are getting 2%.

would there ever be any circumstances under which the broker, anybody would go back to the broker in the event that that person who signed onto that loan were not able to perform under its? >> well, boy, i wish we could have. that's where the rubber meets the road to pick the average broker typically meant that a net worth of an organization of around five to $25,000. good luck getting blood out of a turnip. so the answers we would have loved to, but the practicality is it couldn't have been done. >> and now did you charge a differential fee going up the chain basically from your company to whomever it is that's reselling them to? did you charge a differential fee for having originated alone that charged higher interest? >> i'm not sure if i do than what you mean. >> i mean, did you -- u.

buffalo, you sold alone. did you get an additional amount for having originated higher interest rate loan? >> certainly the end of the day, they would be of greater value to myself or any letter that was trying to some in the open market, yes. >> and now, there's been discussion that some of the wires had recourse back to you in the event that there was an early payment defaults, or fraud. and was it your testimony that 2% of the loans were repurchased? >> roughly in that range. less than 5%. >> okay. turning to you, ms. lindsay. did you in seven mortgage brokers to provide loans at higher interest-rate? >> yes, we had a rate sheet. so the brokers could basically pick their rates that they were

doing there supposed to discuss it with their clients, the borrowers, and they would have what's called pardon, meaning the broker doesn't pay -- the barber doesn't pay and the letter doesn't pay the broker. and then in the same token, the borrower can also buy down the rate at a discount. so it can go either way. if it is a lower rate the borrower would pay for the. if it was a high rate the lender would pay the broker for that. >> the lender in your case being new sentry? >> correct. >> and would you in turn, of course, al qaeda had a price from whomever you sold it to? >> yes. how we had our loans were in bulk sale. so we would sell $100 million at one or 2%, depending on what the market would bear. >> i'm sorry, one or 2% -- >> of the whole package. we would package them in one big ball. $100 million, and some investor would pay us one or 2%. in the early days we would get as much as six and 7%.

but later on it was one to 2%. >> and you get that as an up front fee when you sold a loan? >> yes. so if we have $100 billion, the investor would wire us a check for 2% over the $100 million we would send them all the loves. >> you would be able to sell the highest interest-rate loans -- >> yes. >> at the higher priced? >> yes and investors will look at that and evaluate what price they're willing to pay us. that was probably the difference between the one and 2% after going to pay on a full package. >> commissioner wallace and asked you about whether there were predatory lending practices, which would be practices that were intended to take advantage effectively of the borrower as opposed to mortgage fraud, which was by the borrower against the lender or the investor at the end of the day. werther practices that could be

characterized as predatory and that they attempted to steer borrowers to higher interest-rate loans who might otherwise qualify for lower once? >> not that i'm aware of. i'm sure it probably happened that we had about 7500 employees in our organization at one time so i'm sure that some people did. it was discouraged. we had our policy and procedure. we had our fair lending grew. we had a compliance group, and we would talk about predatory lending, and for example, we would look at somebody's income potential. so somebody was of retirement age, for example, we would not put them in interest only loan, or in some sort of an adjustable-rate mortgage. so we did do things to discourage anything that would appear to be predatory. >> mr. bitner, can you respond to that? >> i can give you an example of that. i think an example, the use of a

specific mind that a 620 or 640 credit score. we would question to ourselves why did the broker not take this long and perhaps run it to fannie mae or freddie mac's automated underwriting system because it appeared it is very possible they could of got a slightly better rate and a better deal for the borrower to do. what we so i think with such a large influx of new originators who came in who are so heavily called upon firms like mine and others that i think the path of least resistance for people are nazis in any in the industry was happy to say i'm going to send to whoever i am, and they will take it and turn it quickly for it. turned alone quickly around and we will close it and will make our money and go down the road. i think we started seeing a lot of that type of thing where a borrower may very well have gotten an industry that could've been three quarters of the point or a point that even better with a little greater diligence on the part of the broker. >> how is it that you capitalize your company be buying all the huge volume of loans?

did you have any warehouse last we were? >> idea. when energy industry, the dollar amounts that were used to fund the coming like mine were substantially less than they were maybe by the time i exit the industry in 2005. loans from parents and a right of other things to capital is a company where several hundred thousand dollars that got me into the business. >> but you had a line of credit available to you from somebody to actually provide the loves. >> correct. through cities warehouse division and gmac, great. >> what do they charge you for that privileged? >> i would have to go back and remind myself but i think it was one was a libor based, plus a couple points. and typically 50, 25 to $50 transaction fee per loan. >> would they then by the party

that provide the warehouse line of credit customarily by all the loans that you originate pursuant to its? >> well, it depended. in this case with the gmac which was our largest investor, they were also our larger warehouse line. they offered us better terms if we were able to use both the warehouse line and sell the loans to them. >> okay. i guess turning to ms. mills, if i could. how often did you require parties from whom you bought the loans to purchase the loan back because of early payment defaults or any other provisions that you had any agreement? >> initially when we first started to purchase large blocks of loans the last number i remember is 20% of defaults. we dealt with larger

institutions, so we would not have bought loans directly from a firm. we did not buy loans from mr. bitner's firm. if we bought loans from them and we had early defaults we had a system that track them. we had a unit that worked with all of the firms we bought loans from. we pursued these repurchase requests. it was somewhat of an iterative process. would send a notice that says they did not make the payment. >> they were not happy? >> i know this is going to be difficult to answer and maybe you cannot. how often were you able to enforce these buy back provisions? i take it you could only enforce it from people who were liquid and adequately capitalized down the chain, from who you had bought these loans.

>> in our business model we only dealt with well-capitalized institutions for a lot of the reasons we are talking about today. we placed a value on warrants we got from the sellers when we bought the loans, but we felt it was important that they have capital to back it up. we were fairly successful in getting firms to repurchase early pay defaults until those firms went out of business. >> then you were stock. somebody was stuck. >> we were stuck. >> were you involved in the securitization thereafter -- after collecting all those loans? where you in the process of structuring them as rbms? >> not only did we perform diligence on the whole loans, but once we owned the loans we work with our trading desk in deciding what loans could be securitized. . . we owned the loans, we work with

our trading desk in decide what loans would be securitized, and it was my group to work with the rating agencies and the lowest and the accounts to put together the prospectuses that were used to sell the seekers to our investors. >> so you're the perfect witness answer the question i'm about to ask. that the last year and when we had some of the heads of these organizations before us and recently, i have been sort of reflecting that perhaps the system might have worked better if a variety of people along the way had additional skin in the game, if you will, or had to beat their own cooking was the term that i use, where maybe rather than take all their fees rather than take all their fees in cash at process, including the mortgage brokers, the intermediate purchasers, the purchasers, yourselves, you know, the lawyers who wrote the prospectuses, the investment bankers who got paid on the

underwriting, the credit rating agencies, that maybe they ought to take any actual security themselves a portion of their fees so that they are actually long in the security. and that maybe under those circumstances they would have a greater incentive to do a appropriate diligence and to be certain, more certain, that they would perform in accordance with the representations that they made to the investors. have you given any thought to that question, or anything similar? do you think that citi could operate your securitization of these mortgages if you got paid at least in significant part in the security and self? >> in the context of when we purchased loans as a principle, and then securitize of those loans, there was always a risk that we would wind up not being able to sell all of the bond. and would have some of the bonds left in our position. also when we did subprime securitizations, there's a component of the securitization

where it's an equity piece that there was no market for, that we wound up owning in almost all of the transactions where we bought homegrown. >> would that be in cbo's? >> no. >> the first round can you still couldn't sell a portion of those. >> it's called equity off of the name. ninjas net interest margin security. >> but isn't that like 2% of the offering. it very depending on the loans that are in the particular securitization. >> but you would charge maybe 7% underwriting fee off, just these issued a billion dollar art in bs. i mean, you customarily get a 70 million-dollar fee. >> i'm not sure where those number are coming from but in the context of us by call loans and selling bonds the only way to business makes money is if you sell the bonds for more than you paid for the loans. >> okay. all right. so you're saying that your pricing -- so openly, but i

thought the impression i got was that you have pretty ready and willing buyers for these bonds, is that not her? >> we did, but dependent on market circumstances or investor appetite, it is possible that we would have bonds left interposition. but we are a market maker and we bought interposition all the time and bonds that would buy on the secondary market. >> you wouldn't acquire them without the intention ultimately of selling? >> it was always our intention to distribute. >> okay. i guess -- >> we like some additional time? >> just a minute or two of. >> i will yield you too many. >> thank you. >> three minutes. >> and i take it your compensation or your groups compensation i guess somebody touched upon this already, probably heather, but dependent to some extent on the amount of revenue that you generated through the securitization process for your group, is that right? >> i believe that is a component, yes. >> deed you ever -- did any of

these securities ultimately fail in the hands of the investors? if you know. >> failed is a difficult word to use, because it's not a pass/fail said no. >> how about lose i? >> i can tell you they've lost five and a performed worse than we expected. >> now i any time did they come back to see? >> as a market maker, you always have the possibility that someone that you sold bonds to comes back to you and says i don't like this bond that i want you to buy it back from the. >> but how often did that happen? >> i'm not on the trading desk. i couldn't answer that appropriately. >> let me ask you this. if you are country and your incentive compensation of your group was dependent on the origination fees of creating the securities, do you ever have an occasion when they didn't perform as well as expected of any clawback optimization that

went to the group? >> that's not a citi policy as far as i know. >> i guess, mr. boone, i guess i'm not entirely certain i understand, thank you very much, ms. mills. i'm not certain i understand the different area that you had. you had an area that was reviewing the acquisition of loans and for what purpose that's a? >> i was business chief underwriter of the correspondent area. we actually purchased loans. that part of the organization did not originate mortgages. other mortgage companies originated those loans, and they were purchased by citi. >> for what purpose? >> again, it was my understanding on the prime

inside, most of them were sold off to investors. >> with a securitized? i guess they were. >> i was not on that side of the >> you could watch the proceedings tomorrow live on our companion network, c-span2 and on our website, c-span.org. coverage begins at 9:00 a.m. eastern time. coming up, british members of parliament make their case for reelection ahead of next month's vote during prime minister's question. then, a discussion about reorganizing u.s. intelligence agencies. the financial crisis inquiry commission looked into the causes of the 2008 economic collapse.

>> president obama will be in prague tomorrow morning with the russian president to sign a treaty negotiated to reduce nuclear weapons stockpiles by about 30%. you could watch live coverage beginning at 6:00 a.m. eastern time here on c-span. later, the anti-nuclear weapons group, global 0, holds a discussion about the historic agreement. coverage begins at 10:00 a.m. eastern. this is the last prime minister's question before the general election in may. gordon brown lists his achievements in the economic recovery. david cameron criticizes the government's proposed increase in the tax. a third candidate says another party is serious about reform.

this is 30 minutes. operationally independent and its job is to protect the interest of the u.k. taxpayer. >> order. questions to the prime minister. sandra? >> mr. speaker, i'm sure the whole house will join me in paying tribute to the two british servicemen who've lost their lives in afghanistan and the last week. from first battalion guard, michael sweeney and from third battalion the rifles rifleman mark turner. we owe them an image of old debt of gratitude. they were both engaged to be married, and our thoughts are with their loved ones and their families. mr. speaker, it is because of all our brave men and women in iraq and because of them are country and families is safer and more secure. i think at this time it is right to remember all who have given their lives in iraq and afghanistan, and all those who serve in our armed forces. i spoke to president karzai and

then president obama yesterday. our security forces will be increased by around 500 in afghan security forces, providing greater security for people in the region. and support to our troops. mr. speaker, we are reminded the of the sacrifice today made by our emergency services. we send our condolences to family and friends of the two brave firemen who died last night. we pay tribute demonstrate by all our emergency and public servants. mr. speaker, this morning i had meetings with others in addition to my duties in a house. i shall have further such meetings later today. >> stand on for? >> met at my condolences to all those who've lost their life for the service of this country. mr. speaker as he is reelected will the prime minister stand that he will not take a pound out of the economy? >> mr. speaker, the big issue is

whether we can secure, whether we can secure an usher the economic recovery to withdraw 6 billion pounds from the recovery now would put jobs at risk, but businesses at risk and put our address. we cannot cut our way to recovery, but we could cut our way to the double-digit recession. mr. speaker, in 2011 we will use the rise in national insurance to guarantee that we have our policing, guarantee we fund our schools, and to make sure that the health service guarantees of cancer care, these are guarantees that will be kept because of the decisions we made. >> david cameron. [shouting] >> thank you, thank you, mr. speaker. can i join the primers in paying tribute to guardsman michael sweeney and to rifleman mark turner who have been killed in afghanistan in the last week. 280 bridge servicemen and women

and m.o.d. civilians have lost their lives will serving in afghanistan. and as we prepare for the end of the parliament, we should remember the sacrifices they and their families have made and acknowledge the huge debt that we all owe to our armed forces for the bravery they show day after day. i also join the primers in paying tribute to the two firefighters killed while attacking a fire last night. as mr. speaker, this is the last prime minister's questions of this parliament it is the last chance for the prime minister to show that he is accountable for the decisions he has made. [shouting] >> will he start by admitting that when british forces were sent into helmand they did not have sufficient helicopters to protect themselves and get the job done? >> mr. speaker, i do not accept that in any operation in which we sent, to which we sent our troops that are commanding officers gave wrong advice and told us that we -- and told us

-- [shouting] >> they were not properly equipped. and every time in every operation we asked our commanding officers, are we able to do this operation, and are commanding officers have said yes, they can. so i have to say to him that we have done our best to equip our troops and we will continue to do so. it is right that i take full responsibility, but i think -- [shouting] >> but i think the advice of our commanding officers and advise of our commanding officers is very clear. >> david cameron? >> the answers sums it all up. take no responsibility and always blame somebody else. [shouting] >> why can't he just admit something that everybody knows to be true? there were not enough helicopters. let's listen to the colonel, former commander. he said this, repeated demands for more helicopters fell on

deaf ears. increase risks for my paratroopers. but as he put the decision-makers, yes, the ministers, they were the one driving into combat when they should have been flying into combat. the foreign office minister that he appointed said as late as last year and i quote, we definitely don't have enough helicopters. presumably the prime minister will tells all these people were just a seat. >> mr. speaker, mr. speaker, we have increase the number of helicopters in afghanistan. we've increased the flying time by more than 100% that i think he should recognize their adapters so they are now in afghanistan, he's also recognize, he should also recognize that the chinooks were also adapted so that they too could be in afghanistan. he should recognize that we have other helicopters in afghanistan that are working, and we are part of an international operation in afghanistan where we shared equipment with our coalition partners. and i have to say to him, the

amount of money spent in afghanistan now is 5 billion pounds a year. that is 1000 extra vehicles, that is twice the number of flying time hours per our helicopters. and i think he should accept that our troops, for the operations th%@@@@@@@ @ @ @ s%@r decision for which this prime minister all to be accountable. in the last 13 years, he has robbed pension funds of 100 billion pounds. his own welfare minister said this, when labour came to office

we had one of the strongest pension provisions in your. and now to prevent some of the week is. presumably he was deceived as well. were the prime minister finally admit that robbing the pension funds was the wrong decision for britain? [shouting] >> when he said there was no answer to the last question, it is him that is never given an answer on any single policy. mr. speaker, mr. speaker, as far as -- as far as pension funds are concerned we debated in this house two years ago and the shadow chancellor put up the case that the dividend tax credit had, i showed at that time that during the period before the stock market crashed what had ask a happen with the resources of the pension funds had doubled. he lost his case when he put it to the house of commons. there is no use trying to put it again. what we have done -- [shouting] >> what we have done over the last 12 years, the pensioners

winter allows opposed by the conservative party. what we are saying we will do is link pensions to earnings, taken away i a conservative government. what we have done is taken 2 million pensioners with a pension tax credit and giving them dignity in retirement, again a post by the conservative government. and what we now have is a nationally concessionary fare scheme which gives pensioners a chance to travel the country at risk under a conservative government. >> david cameron. >> that, mr. speaker, is the sort of reception we're going to rebut in this election campaign. [shouting] >> and he must be, he must be the only person in britain who thinks robbing pension funds was a good idea. this is what his own adviser who sat in number 10 downing street said, this prime minister will go down in history as the one who destroyed our pension system. he just ignores what he doesn't want to hear, and he tried to

cover up the consequences. people are finally starting to rumble gordon brown, and it serves them right. [shouting] >> presumably she was deceived as well. let's take another decision which the prime minister needs to be held accountable. [shouting] >> order. honorable and right honorable members are shouted themselves hoarse before we even got to the castings. >> they were shutting out about national insurance contributions and this is a question about national insurance contributions. the prime minister has made the decision to introduce a jobs tax which will kill the recovery. this morning on gmtv he said that business leaders who opposed this decision have been easy. is the prime minister really telling us that he knows more about job creation that business leaders who employs almost one many people in this country? >> mr. speaker, once again i have to tell him about what

happened during this recession. and what we have to do to take this country out of recession. we had to nationalize northern iraq and they opposed. we had to restructure the banks. business support us but they opposed. we had to take action to secure help for the unemployed. businesses support the future jobs fund. they opposed it. we had to take action to help homeowners. business supported it. they opposed it. and we had to take action to help small businesses. and they opposed the funds that were necessary. as far as national insurance is concerned there is a choice. there is a clear choice. we can put the national insurance up, and therefore protect our schools, our hospitals and our -- or we can do with the conservatives traditionally do, and that's put our hospitals, police and our health service at risk. [shouting] >> the choice, the choice is to go on wasting money and put up tax on every job in the country. [shouting] >> this is what they said.

cutting government waste won't endanger the recovery, but putting up national insurance will. let me ask him again, does he believe that these business leaders including members of his own advisory council, does he believe they were deseeded? >> mr. speaker, we cannot cut our way to recovery and that's why to withdraw 6 billion pounds from economy now is the wrong thing to do. let us be clear the conservative policies would put jobs at risk in neatly, with put businesses at risk immediately and would put growth at risk immediately. as far as 2011 is concerned, we've got to make a decision. do we want to maintain the improvement in our policing, our public services, our health service guarantees, and maintain investment in the schools? we say that will cost that xmi our national interest. they say no. public must make up to my. to the want the public services to be maintained or do they want

the traditional tory policy of putting our public services at risk? >> this morning the prime minister said these business leaders have been the seat. since then another 30 business leaders have come again and -- [shouting] >> let me just read the prime minister, paul walsh on the prime minister's business council, not a tory, one of his advisers. [shouting] >> yes, yes. he's probably a tory now. so is half the country. [shouting] >> let's hear what he had to say. and if it is not to decline businesses have been the seat, national insurance is a tax on jobs. let's hear from john egan, former head, how can there be a deception? national insurance is a tax on jobs, pure and simple. isn't the truth is, this prime

minister would wreck the recovery by putting a tax on every job on everyone earning over 20,000, a tax on aspiration, a tax in every business on the country? this government would wreck the recovery. [shouting] >> mr. speaker, mr. speaker, it's the same old conservative party. >> order, order. order, order. order. members must calm themselves. there are several weeks to go. the leader of the opposition was heard in the prime minister will now be heard. prime minister? >> once again he said nothing about the future. it's the same old tory. mr. speaker, to think he was the future wants. [laughter] >> mr. speaker, mr. speaker, the shortest ever -- mr. speaker, 2.5 million more jobs and striking 97, a sure start in

every community in our country come more people staying on a school at ever, more students going on to university, more pensioners out of poverty. more dignity and security in retirement, and we are the government that has plan for the future. they have nothing to offer, on a labor government. [shouting] >> mr. speaker, is my right honorable friend oh where that on the weekends the bbc has claimed it as the hungriest place on earth. given my right honorable friend's outstanding record on international development, will he use his influence with the international community to ensure that the helpless people of that region are recognized for the suffering that they now

endure? >> mr. speaker, as long as there are children suffering and as long as there are mothers die in childbirth, and as long as there are people who are young people not getting education in schools, we have a duty as the country to act. i think my right honorable friend has done a great you to push this forward them that we as the government have doubled expenditure in real terms for overseas aid from the -- to 9.5 to today, and that is a doubling of our investment in overseas aid that is unparalleled in the last 20 years in any country. and i have to say, i would hope there would be all party consensus that spending on overseas aid can continue. >> mr. nick clegg. [shouting] >> i would like to add my own expressions of sympathy and condolence to the family and friends of rifleman mark turner and third battalion the rifles, and guardsman michael sweeney, first battalion guards.

having served so selflessly and bravely in afghanistan, have lost their lives there this week. we owe them and everyone who has been killed and energy in afghanistan into a huge debt of gratitude. i would also like to join in paying tribute to the bravery and sacrifice of the two firefighters who lost their lives in southampton last night. mr. speaker, today he and he are trying to fool people -- [shouting] >> by trying to fool people with her theory about political reform. last week, yet last week we had yet more troops, this is not true, the minute -- here in black and the labour party protecting their trade union paymasters them the conservatives protecting their paymaster. [shouting] >> who do they think they're getting? after sabotaging this deal, after sabotaging this deal, why

should anyone trust a single word they have to say on police or reform? [shouting] >> mr. speaker, there is one person that prevent the liberal and labor proposal getting a great by the conservative party. they withdrew from the talks. the reason is one name, lord ashcroft. that was the reason. [shouting] >> order, order. the house must calm down. member -- order. members should say their voices for the conversation they will need to have with their constituents in the coming weeks. mr. nick clegg. order. mr. nick clegg must be heard. mr. nick clegg. >> mr. speaker, their answer was ridiculous that the two parties are colluding together to block reform. just last night they colluded to block the most minimal reform our electoral system. just by the way they came together to block our proposal to give people the right. they came together to block our

proposal to clean up lobbying. mr. speaker, we all remember back in 1997, the house of this new government, look at them now. look at them now. you fail. is over. it's time to go. [shouting] >> mr. speaker, it seems like a speech instead of a question. mr. speaker, he cannot deny the fact that when we discussed a lack world funding and political reform the labour party and the liberal party of greed on the means to reform the political funding system. there was an agreement between our two parties. the conservative party got out of the agreement and they pulled out of the recommendation of one person, the person who finds the conservative party, the person who has given 109 pounds to the conservative party, the person who has been offshore for many years, and that is lord ashcroft. [shouting] >> linda gilroy.

>> the first new medical hospital for 25 years. what plans does the prime minister have to protect the progress that has been made the way in which waiting list have plummeted? >> mr. speaker, we have given every patient a guarantee that they will receive treatment within 18 weeks of seeing the doctor. that is a guarantee that we give personally to every patient, and in the next parliament they can enforce it and go private or go to another health authority if it is not meant. the opposition party which used to back that guarantee. we have given a guarantee to cancer patients they will see a specialist within two weeks. and in the next apartment they will be able to other diagnostic test within one week. that is a guarantee we have given. the opposite party will not support that guarantee, even to cancer patients. we have given a guarantee to general practitioners that they must be people in the weekends or in the evenings as well as

during ordinary working hours. as a guarantee that we're giving, but the opposite party refuses to support a. people will make up their minds in whose hands is the health service save. it's in the labour party's hands. >> the prime minister opened his election campaign yesterday by promising to campaign amongst real people. but he spent the whole day visiting the homes of staunch labour supporters. [laughter] >> does he intend to spend the whole campaign visiting and moving from state house two state house. [laughter] >> by the time i met them all, they were all staunch labour supporters. as a result of the message we put him. i had to say yesterday, yesterday i visited a number of places and i asked, and i asked people, i asked people what the major issue affecting them is. and they said they wanted to secure the recovery. and i have to tell people that the conservative party taking 6 billion out of the economy would put the recovery at risk.

the issue is very clear. jobs with labor, unemployment under the conservatives. >> mr. speaker, will my right honorable friend heed the warning of the former bank of england member, that if you follow the advise of the right honorable members lord whitney and patent and took persistent action to cut the deficit, it was late out onto unemployment unemployment but the rising poverty, social disorder? >> mr. speaker, this is the central issue of this you. will be secure the recovery? the conservative party says take 6 billion out of the economy and it doesn't matter. in fact, take six-point out of the economy now and there is more on deployment, more businesses go under and there is less growth. i believe when you look at what people are saying in an doing in every other country, they are saying we got to secure the recovery before we take any further action. only the conservative party is

think a money out of the economy now. they have made a historic mistake. >> will the prime minister confirm the whole truth about helicopters? as confirmed by parliamentary officers from the ministry of defense. that he has already cut helicopter numbers from 522 to below 500 over the last 18 months. and under his plans, by 2020 there will be only 303 helicopters, a cut of 42%? >> mr. speaker, i'm sorry that he takes this to because we have ordered -- [shouting] >> it does we have ordered more helicopters for the future. we have reconditioned to be in afghanistan. we have repaired the chinooks in such a way they cannot be used in afghanistan. and we have increased the number of helicopter hours that are being flown by our troops. now that is the answer to those

who say that not enough is being done. more helicopters, more helicopter hours in afghanistan, in afghanistan now. >> has my right honorable friend had a chance to read in yesterday's financial times most of which speaking for the change of government britain will find itself dangerously isolated in europe? [laughter] >> does he agree, does you further agree that we must work with chancellor and other leaders and not get into bed and breakfast with extremist politicians, the holocaust, that are not acceptable in our democracy? >> mr. speaker, if the conservative party had really changed the would've changed its position on euro. but it's the same old conservative party moving further and further to the extreme of europe. can't form an alliance with chancellor merkel or with president sarkozy or with the right democrat parties in your.

so they have to go into alliance with the most extreme comments of europe, and alleged thing they did was vote against the transfer of information to do with the problem of tax havens, exactly the sort of policy lord ashcroft would want him to support. >> what did the chancellor mean when he said that the job losses resulting from the national insurance hike would be manageable? how many is manageable? >> i will tell the conservative party about jobs. jobs is helping young people. jobs is helping young people to get into work. and 200,000 jobs created by the future jobs fund now and over the next few months. jobs is also helping young people stay on work with getting working in education. the summer school we are care in teen. and jobs is helping small businesses through this difficult time with the time to become with a reduction of business rates and with the help we're getting them now. take 6 billion out of the

economy now and you put the recovery at risk. take 6 billion out of the economy, and that means that thousands of jobs would then go. >> d. in court a? >> thank you, mr. speaker. the prime minister is aware of the effects of the retrospective introduction of business rates on company operations around the country including my own constituency. five years after th the invitatn evaluation of his agency has many companies. one went out of business after being summoned for a rate increase which was reduced on appeal. with the prime minister me with the chance and the department and get a fair and equitable solution to keep jobs in our port is a? >> i am grateful to him that he has been a persistent advocate of the port and the jobs that are created as a result of that. i have to say to him i'm happy to meet with him to talk about this issue and to talk about

what we have done, which is equal interest repayments in installments paid over an unprecedented eight years. i am happy to talk to him about what more we can do. >> has my right honorable friend authorities said, a member of the prime minister's own management committee, this advisory committee, has said i don't feel -- [shouting] >> it's my firm do that the proposed national insurance increase is a tax on jobs. so why does the prime minister think he's got it wrong. >> mr. speaker, i said the country has to make a choice. the conservative party have made their choice but i say to the country, if we want to maintain and improve our schools, if we want to maintain and improve our policing, record numbers of policing in this country, neighborhood policing, and if we want to ensure they can to

guarantee, a gp guarantee another guarantees of our national health service, and that has to be paid for. i believe the country will make the choice in favor of maintaining and improving our public services. i think once again the conservative party are exposed as the party that opposed public service improvements in our country. >> thank you, mr. speaker. over the years there's been a continual drift away from the imposition of the direct taxes to indirect taxes. as the prime minister knows, these bear most of only on those who can afford least. and i wonder if the prime minister will agree with me, it's becoming time that we went back to the traditional labour party policy on taxation, and that is to redistribute wealth in favor of poor people. and i would like to see in this

general election say that he's going to see that there will be direct taxes imposed on the billionaire rich and we should be paying the real bear of taxation in this country. >> mr. speaker, there is one point on which i would agree with him, and that is the importance of tax credits that have helped -- that have helped lower income and middle income people get out of poverty and secure their livelihood. the conservatives are not interested in tax credits. 6 million families in this country received tax credits. 20 million children and mothers and fathers benefit from tax credit. one of the cuts the conservatives propose for this year is to cut child tax credits for middle income families. now that we do more to push people into lower income groups than anything else. they should change their policy and help middle income families in this country.

>> david green? >> the prime minister promise with his jobs for british workers, can he confirm the latest official figures produced this morning show that the number of u.k. born private sector workers is several hundred thousand lower today than it was in 1997? [shouting] >> mr. speaker, net migration to this country has been falling as a result of actions that we have been taken. and it has fallen in the last three years. and it is falling because there are more people here locally getting the jobs that are available. and i think the conservative party should think twice about the policy on orders on migration because the very businesses they are quoting want to be able to bring people in this country to do the jobs that are necessary. we proposed the australian point of system on migration. their policy of a quarter of immigration without giving a number would do great damage to british business.

>> thank you, mr. speaker. as i know my right honorable friend is aware, the last 10 years have seen an unprecedented increase in support for science and technology in this country. but would he agree with me that now is not the time to cut investment in science research and education? for it is in these areas that we will enter our future economic success and economic growth. >> mr. speaker, record investment in education, record investment in universities, record investment in science in our country, record investment in new innovation in our country, that is the record of our labor government. and i'm proud to tell people that we are the party that supports industry in this country. >> given the allegations surrounding the council and the demand for an inquiry, the inquiry supported by the farmer

there, with the prime minister support such an investigation, or easy afraid there is something to hide? >> mr. speaker, it came down to the apartment and he spent most of his time, most of his time boating with the conservative party. he should go back to scotland. he should go >> coming up next, a discussion about reorganizing the u.s. intelligence agencies. the financial crisis inquiry commission looks into the causes of the 2008 economic collapse. then, british members of parliament make their case for reelection ahead of next month's vote. a panel at the american and averse to the's law school will look at the cumbersome -- at the confirmation process for supreme court nominees.

on washington journal tomorrow, sewell chan covers the financial condition. an analysis of it new treaty between russia and the u.s. it begins at 7:00 a.m. eastern time on c-span. >> this weekend,npr course bonding on what has happened to the sunnis following the fall of saddam hussein. her book is "filled moats on democracy." a columnist looks at war.

find the entire schedule at bootv.org. >> a discussion on the state of the intelligence committee jane harman frances fragos townsend -- and frances fragos townsend. this is one hour and 50 minutes. >> we will open it up to

questions and answers. walter pincus reports to the "washington post." his articles were among those in the 9/11 package that was awarded the 2002 pulitzer prize for national reporting. among many other honors was an award for exposing the neutron warhead. he has been a consultant for nbc and cbs and won an emmy for writing a television documentary. he has covered intelligence and national security issues for many years. please join me in welcoming walter pincus. [applause] >> thank you. thank you, very much.

it is good to hear that kind of introduction which is short. that is better. it is an interesting subject and we have an illustrious panel to talk about the first part which is are we safer? on my right is congresswoman jane harman who i met 40 years ago. she was a longtime member of the house intelligence committee and is one of the four authors of this legislation. general michael v. hayden is the former cia director but he was here at the beginning as the deputy director of national intelligence. frances fragos townsend was in

the white house when the bill was being considered and when it was passed. as somebody who has spent time at justice and at the white house, she brings another view to this. i think what we will do is have each member of the panel give a five or seven minute overview. i will then ask a couple questions and we will proceed from there with questions from the floor. >> thank you. good morning. the bipartisan policy center is living up to its name. i have greeted about 200 of my nearest and dearest friends and you are definitely bipartisan. i assume that all of you, including all of us, are committed to making intelligence

work better. my answer to the question is yes, we are safer in the last five years and i would say part of the reason is we pour able to do intelligence reform. i would not call it a paradox as it has been called. i would call it a fact because we were able to legislate adequately. let me also salute the bipartisan team in front of me, doug -- governor tim kane. they separately and together embodied what elected officials should be light. there are both former elected officials which shows with there are smarter than i am. they did it voluntarily. they have worked together to bring quality to our policy- making and real focus to the different challenges of the

post-9/11 world. each of them is really a lovely human being. i think we should all salute of their leadership. [applause] >> walter said that i was one of the big four. i do not think i and that big. we are as big as we need to be. one of the big four who helped write in the final version of intelligence reform five years ago and another of the big four is susan collins. the other two are joe lieberman and pete hofstra. i have always said that the two females did 90% of the work. that is why the product is as

good as it is. let me make a few points. early this morning, after i read my newspaper, i to actually read print newspapers and i clipped out walter's article today. i do not know how many do this but i wanted to show solidarity. i was reading about the attacks on our consulate. i e-mailed my friend, our ambassador to pakistan. i said i am glad to hear you are safe. we went on a visit a few months ago and i am pleased that our consul general of is safe. she e-mailed back and said the star performer was the intelligence agency. they're doing a fabulous job in

pakistan. pakistan and yemen are the two most dangerous places on the planet. our intelligence agencies are doing a fabulous job. i was in yemen last week. i finally made it. i talked to our government officials. you all talk about a paradox that probably the person, the terrorist who would pay terrorist number one in terms of threat against us against al- alaqi. he was the imam in san diego when two of the hijackers ended up there. is it not a paradox that this guy who we should have found before the 2001 attacks and up in yemen where he is at large.

he ends up being a person who is now not only an adviser to the fort hood shooter, in the plot to have the nigerian christmas bomber blew up a plane over detroit, but has literally called for attacks against the u.s. of our intelligence women and men, a combination of agencies, are hard on the case. i predict they will be successful. those are just two examples of the events since 2004 that i think are keeping us safer. let me just make a pitch for why i think intelligence reform was necessary and why i think our product was a pretty good

product. we were operating before 9/11 and a -- on a 1945 business model. everybody remembers that the cia was part of the national security act of 1947. it was designed to keep us safe during a bipolar world. it worked pretty well with a few glitches. the wall came down in 1989 and it took us 15 years to upgrade or change it. during those 15 years, even if few years prior to 1989, the world totally changed. i would argue we did not have the tools against that world and the example is our very flawed intelligence leading up to our decision to go into iraq.

i think that the reform, which was modeled after goldwater- nichols, we wanted to set up a command structure across 16 agencies was to -- was designed well. the original bill was introduced by democrats on the house intelligence committee. i was then the ranking member. it had to change in order to get through congress. it was based on recommendations of the joint commission on intelligence which was a bipartisan and bicameral effort met urgent effort -- bicameral effort. it was also based on recommendations from the 9/11 commission which came after us. the joint command structure was supposed to be a flexible and nimble and -- coordinator across these agencies. coordinator is not a strong enough word.

orchestra conductor is closer to what we intended. we had to make compromises to make the bill go through. you remember the opposition donald rumsfeld. the chairman of the house armed services committee, as well. we had to make compromises in order to get the bill through. in spite of that, we were courageous as struck the final compromise. we have had three dni's since then. i would say we still have a work in progress. it is 50% block and to% leadership. -- 50% law and 50% leadership.

after the failed christmas attempt, we understand that the best fix we could have is sustained leadership at the top. i am not accusing anybody here of a failure of leadership. i am saying that sustained leadership at the top is what is going to make an excellent work force which i and some of you have this did around the world. we now have the ability to leverage the strengths of 16 agencies and our intelligence products are much better. i am very excited to read the iran nie when it comes out. i think we have the ability to leverage our strengths and we are now capable, a great example is the revised screening procedures that the department

of homeland security came up with the last week that our intelligence based rather than name based. we are now capable of taking a look at things based on the information we get from the tip of the spear which is intelligence. let me close with wishing everybody in this endeavor well and saying to everybody in this audience that your leadership has helped us get to this point. our country is safer. we have had a lot of success stories recently and i think our future will depend on and not letting down that focus. thank you. [applause] >> thank you. just a couple of quick comments on the title of the panel. are we safer? yes, we are. the dni share some of the credit

for making us sick. i would argue that the national counter-terrorism center is almost unparalleled success story. a few other things were mentioned like intimate -- like information sharing. these are happening below the surface of the water. mission managers, kinds of substantive process changes whose outcomes uc only after thyears have been put into motin by the creation of the dni. i have an additional one. by have a particular view on that because of the jobs i have held. i do not think it was a direct product of the legislation. it clearly was a byproduct and that was this, the creation of the dni freed up the director of the intelligence agency to

spend every waking moment running cia. my first encounter with the director during the transition, i had a 3 by 5 card that was half full of points to make as he was coming here for his confirmation process. the first thing i said was i did not know if you realize this you will be america's commander and the global war on terrorism. i cannot imagine doing that job and selling that function if i had to do what he had to do every morning. i had a four hour jump on the director in terms of turning to my task at hand because they fni existed. i suspect it will remain. i would travel to stations

around the world after i became director and this was still when the whole question of the dni was a jump ball. my wife and i would have town meetings with our stations overseas. we would do broadcasting of things we thought they should know. we took questions and terribly. within the first three questions, what about this dni thing? the answer and would give is the one i just give you. that really batters. i would also suggest that this is hard and both david and the congress woman commented on personalities smattering. if something needs to be improved, did not effectively djump to the legislative

fix. this could depend upon personalities. and if you tip that premise about let me suggest some things we could do better. the dni had a really tough job. senior intelligence adviser to the president and the smooth functioning of a very large intelligence community. he really depends on his deputy. i do not need to be self reverential. if you look at the history of the dni, the position of the principal assistant has been vacant almost as long as it has been filled. that is not trivial. that is a big deal. a second item that has to do with personalities, legislation says that the dni will nominate to the director of the cia. that is the most important relationship in the intelligence committee. if you get that right, other gs