if to make it right, we have had three dni's and three dcia'.s s. we have had a dni for about 62 months. during that period, the period of time in which a sitting dcia has been nominated by a sitting dni is seven months. that relationship has to be built in the closest and most personal exchange of loyal to is that one can imagine. it is not impossible when one or the other personalities delivered by the system but it is a lot easier when the dni gets to shape that choice. . .

>> my sense was that one of the implied purposes of the law was to make sure that the national identities and their role in fulfilling these national functions were protected, and so they did not become all consumed by the d.o.d. half of their personality. that is unavoidable. we are a nation at war, and

perhaps not everyone in the nation is not at war, but the dod is. it is unavoidable. the the personality of those key agencies becomes gradually more dominant. that is not a bad things. that is a good thing. you would want it that way when you get our sons and daughters in harm's way. it is not perfectly consistent with the act that was designed to set in motion. we need to be aware of that and give a grade with regard how well we're doing. [applause] >> thank you, walter. i am going to make a couple of comments.

i by and large had the privilege of working a and think that they have pretty well framed with our discussion that it will come up twice now. i agree that it is an unqualified success. we need to be careful about how much we attribute that to intelligence reports. it was stood up immediately in the aftermath of 9/11 that is not to take away credit to intelligence reform. walter's article the doubling of the budget in the intelligence community, let's not underestimate the impact in terms of strengthening our human intelligence capability, but intelligence reform is really important we have had many

conversations about the importance of information sharing. i have said before, and i will say it again, the nation understood that there was an intelligence failure in 9/11. we did not share the information that we had. the nation chose to forgive its government for that failure, but it had a right to expect not to make the same mistake. it is part of what we have seen in terms of the frustration in the aftermath of the christmas day attempt. that is the important part of the mission, tending the knitting it of insuring that it is 16 separate agencies, the procedures and the process emplace that allowed them to leverage what is a tremendous capability to the nation in terms of keeping it safe.

intelligence reform is part of that. it is one of those works in progress. those of us in the national securities agencies think that is a business that it will be a constant work in motion to adapt a threat we have not even considered. but the things that struck me when a high-level commission -- with the line/11 recommendations, subsequently, i remembered the aftermath of katrina. he asked me what my responsibility was.

these great phrases, when you have a court later, they start out to make a force because they lack authority to end up -- and there is something to that, by the way. i actually think that is some of people's frustration with the and i -- the dni. i am happy if people are interested to have the conversation here. one of the great debates we had with -- it was budget authority was not hiring and firing. but whether or not the dni had budget authority was a tremendous internal battle inside the executive branch and congress. it mattered because the budget authority with relationship to the president, the proximity of the relationship with the president and other cabinet members really became a far greater -- he did not have the

actual authority to impose it. we have got to be clear and honest about whether or not we are frustrated over how the intelligence has afforded -- has unfolded. i tend to agree that just because there may be a gap or lack of direct authority, the first answer ought to be a legislative fix. how much can you? i think we can do more. i do think that we need to understand what the role is, and what that power will yield. david talked about many of the really important functions for which the former president

freeing up the cia director's time and not losing the enterprise management community which, in a post 9/11 world, they got less attention in a direct -- that said, if the dni of the majority of his time as the inner prize manager -- the enterprise manager, you probably would not be able to name him, and you probably wouldn't care. what you hear about, the struggle that you read about is the struggle over what is their

role? we had 74 new -- i hope they will see it is incredibly -- if the role is going to be the enterprise manager, does he need to travel overseas, does he need to interact with foreign intelligence service heads, and doesn't create an inherent confusion among our allies? as we see debates unfold publicly, this is where congressman harman said it is 50 percent lot and 50% leadership. he has to be clear on what he wants him to do and what role he wants him to fulfil.

the director of the cia will define the roles themselves. i guess that leaves things for walter to write about. with that, i will stop. [applause] >> there is always something to write about. let me ask a question because we talk abstractly, and i get complaints all over that i hang on the little facts. it is a question i wanted to pose to the panel. the secretary of defense is really the a hundred pound gorilla in intelligence. that is just a fact. how successful with the dni program be if robert gates or

not the secretary of defense? >> since walter looked at me, i will try that and to be corrected by my friends. i and cap and bob gates is a wonderful thing. because he was the tci -- dci in another life, it is a very helpful thing. the essential compromise and a lot is that we exempted technical intelligence from the coverage. we took out intelligence for the war fighter, that was something that was an imperative. we never got his approval, but to get him to stand back a bit, i am quite sure he -- that was

the compromise we made. looking back on it, we agree with it. there is a different set of needs for the tactical war fighter for -- it then there is for strategic intelligence. having bought gates in that role means there is more running room to get the constant right. i see improvement over the years and how it works. there will be inevitable conflict between the dni and the cia director. we are improving the definition of of roles. we had a few dustups to get there, but boys will be boys. and now we are doing better. my answer to you, walter, is

that the country should be grateful that we have bob gates in that role. because he sees himself as a bridge to making the function work better, is helping us fill out what is an incomplete picture. >> that is all true. secretary of gates is still the secretary of defense. [unintelligible] i will give you an example. its success story for the intelligence community. it is directly transferrable, and seems to work the same way. except we're not in one cabinet department. who gets to be the waiver authority for the joint the requirement?

the secretary of defense. who gets to be the waiver authority for the central intelligence agency? the dni. that is a disequilibrium in creating a community. i agree that it is as good as it is going to get, but there are on our global equities -- unarguable equities. to put this in its starkest form, when we did executive order 12333, he is not out here fighting this war, on page 2, there is a sentence referring to the subplot.

that is the point. the original draft of that was in carrying out his responsibilities. it did not pose -- [unintelligible] everyone else at that table was a cabinet official. that language came in carrying out his responsibilities under the executive order, that the dni will not, rather than the presumed not to. it is not quite the stark language, but until we sidle

ourselves, more in that direction, it will be more than a couple brick shy of a load for him to be able to do what we expect him to do. >> not to embarrass mike mcconnell, but as important as secretary gates' experience to the intelligence reform effort, so too, who is the dni? it requires somebody who knows that a bill that relationship of trust. to be feared as secretary rums felt, he was responsible for fighting a war in two theaters, and rightly was a voracious bureaucratic fighter for our sons and daughters as you would want and expect him to be.

it have to be careful about where he sits and where he stands. and the capability of the particular dna -- dni. >> one of the purposes of creating the dni, and nobody has mentioned the fbi. they have spent i don't even know the number of millions of dollars. they indeed have an e-mail system at 9/11.

-- they didn't even have an e- mail system at 9/11. he goes back and runs the fbi, and nobody talks about it. there have been major changes in the fbi internally as there were major changes in the cia and the justice department after 9/11. how much authority and how much interest does the authority pay to the fbi, the one agency that has standing in the congress in the country at large that can't be touched. >> i didn't mention the fbi today, but it is certainly an agency along with, and security that think about on a regular basis.

there is information sharing domestically, making sure that the law-enforcement community has the know-how of what to do. i knew you would agree with this, more people are at riskier from a terror attack that are at risk in our war theaters abroad. it is critical that this concept affect our communities, not just washington and new york. the fbi does play a critical role. i can't the fbi has ramped up its act considerably since 9/11. the biggest meltdown in terms of unraveling the plot is within

the fbi. there was this big issue that was a fiction, but nonetheless, there was no more lock. that was the second wall that came down. in terms of the intelligence collection, the joint task forces are helping these so- called fusion centers connect the dots before bad stuff happens. the perfect example would be in my home town about the police department, a wonderful community. they noticed there was a string of gas station robberies that must've been intended to find something new.

they got a search warrant and discovered weapons caches and plans to attack military recruiting centers, synagogues, and lax. they were indicted on terrorist related charges, and convicted. the tercel was discovered that was connected and took the ball across the finish line. the fbi is better, i think there is still an issue whether we need a domestic -- i believe my answer is still no, whether we needed domestic intelligence agency modeled after the british agency, but i think the fbi paired with the nctc, paired

with local fusion centers is doing the job better. and i'm finished -- and unfinished civil liberties board, which i know many of us think is essential. the bush administration nominated folks to the positions, and i think it began act -- those positions are unfilled in the obama administration. there has yet been no response. it is important, especially as we ramp up collection activities which we must do, we have a terrible problem. as we wrap them up, we have an

independent watchdog that makes certain we are making sure it is not a zero sum game. that is something walter pointed out today. with those gaps, the fbi is growing into a bigger and more programs role. >> you could make the argument that the most major muscle movement wasn't sharing legislation, and that we need to do better. it was the linkage that was a cultural for americans. they said it could never be done by a dci, in his role of running a four intelligence agency --

this is the really big one and said the legislation. i would also make the case that it requires sustained energy in order to make it work because it is historical and eight cultural for us. i refer you to the guidelines that were issued a very late, the cia intelligence or the spaces between cases, it was allowing investigations and the gathering of intelligence without a criminal predicate. left on its own without energy from the top, here it is from the top of the justice department. without sustained energy, it is so inconsistent with past practices that that will not get

detraction. -- get the attraction. it will have to see whether or not they focus on its. >> i was at the justice department during the clinton administration which is now an assistant attorney general. that is really where this rubber meets this road in terms of what is the appropriate fbi role in the member of the intelligence community. they have their own history, very much a part of this pike church hearings, many of you are familiar with this. in the role of the fbi in terms of the gathering of domestic intelligence looms large in their thinking. they want to the attorney- general guidelines, and we have to remember the fbi is a

different member of the intelligence community because of the law enforcement role. the fbi agents will remind you and the director will remind you that they take the oath to support and defend the constitution, not a particular policy or administration. it is important to say the intelligence community has an important role as a tool for each administration's foreign- policy. the fbi is very conscious not to get pulled to that side of that scale, because that is not the appropriate role. it has been a growth over time, i am glad the mentioned the board because i believe it

contains an important function. i have no doubt that it will be the same intention in the current administration, but is important that it gets up and running. and we push very hard. the need that kind of guidance from the bipartisan support. >> the director of national intelligence is the president's chief adviser on intelligence. is he or she the chief spokesman for the intelligence community? i remember when the bill was being discussed up on the hill, one of the issues was that congress was looking for somebody to blame when there is something going wrong, they wanted one person to blame. if you all remember, it was john

brennan who stood up and was the person to take the blame. who is a spokesman for the intelligence community? >> i think it should be itdni. he is the one with the view over all the parts of the community. on the human basis, the rest of the community can't be looking at places that it always ask them for something. is the place where things happen and that help the rest of the community. there were a couple of times that mike mcconnell went out there and easily said to let me

handle it, and we were very grateful for that. on the immediate case the raise, several people have already commented on that it is very important to bust up the shortfalls. the fact that director blair was not as visible as john was in the aftermath is something that the intelligence community i am sure took note of. that was not a good thing. it needs to be seen as the primary legitimate spokesman of what goes well and what goes ill. >> i agree with director hate to. i've always used to joke that if

there had been an attack, i would be the quickest person to fire and hold accountable while you describe of who else was going to be held accountable. in terms of the intelligence community, i think that the dni, and there is a whole host -- if you learn anything from what we know now about the december 25 attempted attack, there isn't a single point of failure. when there is a failure, there are multiple points of failure. who was in the best position to assess that? that is the dni. i don't think he wants somebody at the white house to play that role, and i think the appropriate role there because of his access to the information is necessary to make

a judgment. >> i am glad i am last. i don't think we thought about who was the spokesperson. we thought about who was accountable. there were accountable and commendable for the successes in for the failures. there are tens of thousands of folks, i thought that was a classified number. but what do i know? but that person needs to be a cheerleader for the exceptional women and men that will work for them. but they are out there in harm's way right now, and their families don't know what it is that they do in the days and nights that they are out there. when some of them, sadly, are

killed, it will be an amazing start on that wall. they might be in other roles. i see that they are the person that we intend to be accountable. in terms of a spokesperson, i am not refer -- i am not sure who that should be. i see that role as being played by hall led the department secretary. -- the homelands department secretary. that she should convert herself into the everett coop. he knew he knew more about cigarettes than anybody else. -- you knew that he knew more about cigarettes than anyone

else. the accountability is different for each spokesperson. >> questions from the floor. yes? >> i like the clarification from mr. townshend -- from this towns and -- mis. -- ms. town shend. i would like to get that clarification. i point goes to the politicization of intelligence. he made the point that the intelligence community is getting thrown into the politics or policies of the administration.

that is something that happens of the foreign intelligence side, not on the domestic side. who and what swears allegiance to the constitution? >> i am happy to do that, because a greater misunderstanding you could hardly have had. there is no question that both foreign intelligence officers and fbi agents uphold and defend -- and for a whole host of legal and policy reasons. there have been great concerns by privacy and civil liberties advocates about the roles of the fbi can and should play. there are more than a hundred lawyers in the justice department that devote -- to

make sure that they use their abilities appropriately. my comments were about the politicization. there's nobody i have worked with that would advocate or count the politicization of intelligence. that is a corruption of the intelligence capability which is inappropriate. what i was referencing was there is no question that the president can and does, republican or democrat, the intelligence community to support their foreign policy objective. that is not politicization, that is the stated use of the president's authority. that a line that can't and muscle to be blurred. there has been much talk in a much debate about it.

adding to the general can also speak to this. there is a legitimate use in our intelligence capability to understand the intentions of the enemies in the intentions of other states. all of that is perfectly appropriate to support the foreign policy objective. >> let me just add this challenge, being true to the facts and preserving your autonomy while at the same time, being relevant and listening to policy-makers that is the existential challenge for everybody. >> i think it is an important question. when bob gates left, he gave an impassioned speech to the work force in the cafeteria at langley and quoted these words, and the truth shall set you

free. the role of our intelligence agencies is to speak truth to power. intelligence is not policy, it is a set of predictions, and it is not science either. based on the other information about human behavior, if it is corrupted, slanted to be what one thinks the policy maker wants to hear, distorted, or cherry pick, it will inevitably lead to bad policy. good intelligence doesn't guarantee good policy, but bad intelligence tend to put us on a slope towards bad policy. i am with the families of september 11. my question is about oversight

from congress, and i will assume that no one is going to say that we shouldn't have congressional oversight reform, so how are we going to have congressional oversight reform. >> mike is ducking and is now under the table. does everyone know what of the most outspoken members of the 9/11 families? i call her the wind beneath our wings as we tried to intelligence reform. it is a huge credit to you they never quit. -- that you never quit. it was up there in terms of the big project to accomplish. oversight. millen has missed it. congressional oversight, in my view, is still challenging, but

i think it has improved since we have passed the legislation, and i think there is cooperation, big time cooperation between intelligence community leaders and the members of the house and senate intelligence committees. i no longer serve army intelligence committee, but i think the effort is under way to do better oversight. the other thing i would like to say is that we don't get as high and large with respect to all lan security oversight. -- homeland security oversight. one thing is that we consolidate and reorganize the way congress functions. congress still has eight committees and subcommittees that oversight over alliance security. that is an embarrassment.

we're not doing much to change the situation, and it makes it extremely hard not just for the whole land secretary, but it makes it very hard for us to do effective oversight, so keep that in mind. if we get it right is because you and the families keep reminding us. >> we are secret espionage services inside of an open society. every day, we're demanding more transparency and more accountability from every aspect of that society. we can't reach 300 million countrymen. we have to do it as a vehicle of congress. it does have the work. we're almost as desperate as the people in the article one branch to try to make it work. there a lot of arm -- and there

are a lot of relations. this is truly a labor of love. we have not had the intelligence authorization bill for five years. in the intelligence reform aspect of the 9/11 commission report is the only element of the report that remains active. >> let's go over there. >> where the difficulties in understanding how well they're doing -- he mentioned if you take one model, you get what result, it with another, you get a different objective. you mentioned the legislative intent and as your where, it

separates the joint staff out from the service staff. in general, you mentioned -- with anybody care to take that step forward and say is that model one for them to emulate in some respects? if so, what authority should they seek and what steps should they take to make it more real? >> there are difficulties transferring it to the communities. this is missed by a lot, but it is really important. the department of defense is divided between combat command, and military compartments.

the intelligence community is not organized in that way. the nsa and cia will trade and operate their own forces. as i suggested earlier, the personnel model transfers nicely. the rest of it doesn't. we can to throw it over here and expect it to work. it is not quite enter your question, but it is related. i have fought a lot about the relationship between the dni and the dci. that is the pass/fail relationship for the entire community. there are six big collection agencies. one of them as the cia, and i am looking for a model in american

history. it might relate to the dni/dcia relationahip -- relationship. i like mullen has some -- mike mullen has some inherent authority because it is -- because he is the joint chiefs of staff. . -- >> one thing we did not want to do was rebuilt the department of all land security. -- the department of homeland security. the new form has proved to cause a number of digestion problems, not just there, but certainly in

congress. those of us considering what to do wanted something much simpler. we used models that had been suggested by the joint commission, the 9/11 commissioned, and others. it seemed to me to be sort of, kind of right. he has a certain advantage that i don't have. i continue to believe that the joint command idea, the orchestra conductor idea was a simpler way to leverage agencies. it is not just the cia/dni relationship. while there is amazing technology that we use. the one-off's we are able to

produce will hopefully never be able to be produced anywhere else on the planet. leveraging the assets so that everybody wins, not just an agency has ownership over them was a big piece of what we had in mind. i think our concept is fine, and i would hope going forward that a piece of what we had in mind would be implemented by the dni and future dni's. that is to not build a big bureaucracy that competes with the -- with the responsibility of the dni, but to have something new lead and nimble.

-- lean and nible. not to build -- lean and nimble. not to build a big new buildings, but not waving a baton across, using the same spore and making real music. >> i was reminded about your question and the discussion about the model and the chairman. and second, a the policy -- a policy debate that came up. we were talking about in the structure having the cia, and who had its own operational authority reporting to individual and the dni did not have operational -- indi the dni

did not have operational authority. this was going to be a challenge. part of what you're hearing in the discussion of your question is, we continue to grapple with that because it is the only direct report, and the cia does not have a parallel line to someone who has operational authority like everybody else does. i think that has caused some of the friction. >> chairman, you said earlier to the member of congress that they are under informed and the role of the intelligence agencies to speak truth to power. i remember speaker policy saying that congress -- the cia misled congress. in your opinion, is that true?

is it still ongoing in your experience? and what can be done to remedy that? >> i think the briefings to congress are improving. i made that point. one of the huge fights i had when i was a member of the gang of eight was to get more people briefed on the intelligence committee. michael remember a saturday afternoon phone call from me to him when he was shopping in a mall. and i right? >> so far, so good. >> that was the day that the president had declassified portions of the terrorist surveillance program. that was the day that most of us that had been briefed could call others to understand some things that we had not understood.

i did not understand that that program did not strictly follow -- we can have another conversation about that, but i did not understand that. i called mike that he -- to urge that he come over immediately. i thought it would be very helpful. that did not happen that day even though he was willing to do it. he was enroute and then called back. it eventually did happen. the briefings of more people, the better. i think he would still say it if he were here, those of us on the intelligence committee play 20 questions. if you don't ask precisely the right question, you don't get the information. i'm just speaking for myself.

the intelligence committees should be given full information where an independent branch of government. we should keep something classified classified. certain secrets, certainly should not be in our newspapers, walter. or even revealed the congress without -- outside of a strictly classified environment. i think we are doing better and i think it is crucial that that relationship work better. in the end, what are we trying to achieve? we are trying to get to an environment where we know the intentions of our enemies. we put the best people in the best structures in the best technologies against the hardest targets. those targets are evolving.

unless we're able to do that or we have been recently in terms of screening passengers trying to enter this country, what of these days, the bad guys are going to score again. -- one of these days, the bad guys are going to score again. >> put that caveat aside. the overwhelming instinct to brief the hill, brief them deeply. to use it emmens metaphor, you have to put them on the manifest -- an airman's metaphor, put them on the manifest. there are no upsides to trying to hide the ball. that said, i was president obama's dcia for 3 weeks. i have the same kind of

conversation with his predecessor about a sensitive matter and whether not i should brief it to the hill. i was pushing one way, and his staff was pushing the other. and i will add that president obama has threatened to veto the current authorization bill if it contains language that takes out of his control who on the hill is briefed. it is really about article was an article to -- one and article two. they're operating on the outer limits of executive prerogatives. linda's want jimmy madison. -- blame this one on jimmy madison. >> we will leave open some more questions to the next panel which can take the ones we have left open. thank you very much.

[applause] >> we will have a very brief break to have enough time to put the new panel up. stay tuned for just a minute. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> president obama will be in prague tomorrow morning to meet with russian president medvedev to reduce russian route -- and

nuclear stockpiles by 20%. and later, the anti-nuclear weapons group holds a discussion about the historic agreement. live coverage begins at 10:00 a.m. eastern. >> c-span. our public affairs content is available on television, radio, on line, and you can connect with us on twitter, facebook, and youtube. if you can sign up for e-mail's act c-span.org. >> in now, and the former national intelligence director mike mccall and others from the bush administration. this is one hour. >> thanks everybod -- thanks, everybody.

thank you very much to our first panel. we will begin the second panel. it is my pleasure to introduce john ganen. >> it is my pleasure to introduce john from bia systems. he has a long history in the intelligence community, including serving in the senior most positions at the cia, chairman of the national intelligence council, an assistant director for central intelligence for analysis and production. john also served a stint on the hill for the select committee on health and security -- homeland security. please join me in welcoming john

gannon. [applause] >> we have steve cambone, the first usdi, and john mclaughlin, the acting cdi -- dci. all of the tournament were very active in leadership, and in the reform efforts prior to 911 -- at 9/11. they were imperative in improving our intelligence capabilities and were very much engaged in discussions with the congress and the population in general about intelligence reform after 9/11.

this is a panel that is not about all the problems we have talked about, but we have solutions. we're going to look at the future, and you're going to go with your wrist. i would like to leave as much time, so leave your questions -- your comments to about five minutes. let me turn to like mcconnell. >> nothing is too hard as long as you don't have to do the work. what we can pontificate based on prior experience. i have been a professional at the analytical level, and i have served in a variety of capacities. i am probably the biggest cheerleader for the united states intelligence community. it is a wonderful organization, and i can tell you from first to

experience as a member and as a leader, is the best in the history of the world. that said, we can always be better. let me give you a promise on why it can always be better. as i mentioned a couple of times this morning, the department of defense was created after world war ii, as amended. we debated and thought about it for years. i was a product of that environment. if i had taken a tour outside the navy, i would be fatal select -- fail select. i was there for the debate over goldwater/nichols. every test defect -- every secretary testified under oath that if you pass this bill, it would ruin this department. it was passed by ronald reagan.

every service chief and every service secretary said that it was the best thing that has ever happened to the united states military. it was a radical transformation. here is my premise. the bureaucracy, once established, and the bureaucracy that you pick -- any bureaucracy that you pick will fight to maintain itself to the point every defining reality -- of redefining reality. intrusive oversight or forces beyond the control of the bureaucracy, the bureaucracy will refuse to change. that is my premise. some might agree, others might take issue. that is an older gentleman observing the issue for a long time. . .

>> is your job in defense of the constitution to let the facts speak for themselves, not to twist the facts to fit some policy objective, but let the facts speak for themselves. the closest analogy we have is the director for the fbi and the chairman of the federal reserve. they are selected. they have a tenure. their responsibility when they are speaking to the executive

branch or the congress or whatever, they must beat the facts as they know them. this town reacts to four things. only four things that i could figure, but the four on my list, crisis -- if we have a crisis, we are going to have some action. we will act at crisis. the second is balance. we did not control crisis very well, we certainly will not control balance. the third is money. it does not always get the exact change we need, but when there is money generated, it gets a lot of attention. the fourth thing is the law. that is the thing that we control. i believe we need to update irtpa to get it right. today, the law leaves us in a position where it is entirely personality dependent. my good friend mike spoke earlier.

mike is a true intelligence professional from the early days in the air force as i was an intelligence professional from the early days in the navy. we understood this community. what does it take to be successful? we had a deal. he said the best thing about your job is it lets me do my job. i said i understand that, and the best thing about my job is i can try to make the community better. he said i will work with you on that, and we worked at it really hard. there were some things we could not agree to because of the seats were occupying. there was some credit to things that were achieved. revision of the executive order 12333. it took a full year with the full support of the secretary of the defense and the president, and it was a battle on every paragraph. the law does not spell out the

authorities. so my view is, we need to revisit that law, we need to establish it on the principles, and there are three important words in the english language that matter in a bureaucratic context. those three words are authority, direction, and control. if the dni is given authority, direction, and control, this community will sort itself out and off into good things. [inaudible] the final thing i would say, and this was mentioned earlier on the panel. we are a community conducting espionage against foreign interests. we cannot play out our activities in the public. we are compelled to protect

sources and methods. if we do not protect sources and methods, we will have lives lost, and we will lose the capabilities of very sensitive and expensive systems that we used to collect information. we also cannot allow our output in speaking truth to power to be the political fodder for the policy debate. so getting this right is important for the country. the big question is, am i prepared as a professional looking at this for 40 years to make the point that we need 18 years dni and we needed department of intelligence. a tenured dni and the department of intelligence. if we do not do it that way, we will continue to argue about these issues, and it will be

personality dependent. i had keith alexander as a director of nsa and so on. we were able to work it out, because we all wanted to work it out, but it leaves it to the personality of those players, and it come b.g.e. it can become very dysfunctional if those personalities do not mesh. >> i was remiss in not noting the arrival of our current dni dennis blair. we look forward to your comments. >> i am reminded that when we were all debating this in 2004 in the situation room in congress, i, along with many other people, argued that this person, if the president was going to create a dni, needed to

be very substantially empowered. i think we lost that argument, for reasons that may be understandable. i do recall that in the middle of the debate, the very senior center called it from the cloakroom and said john, i am still searching for the answer to a question as we debate this that you raised during testimony. my question was a simple one. who will really be in charge, and who will you hold responsible when something goes wrong? it seemed to be a very vital question, having been held responsible a number of times for things that went wrong. so i think today as we try and talk about the future and try and make recommendations year, we keep finding ourselves wrenched back to the past for all of those reasons. so as i think about the challenges, the point of our panel here, the challenge for

the d and ni going forward. the first challenge seem simple. the first challenge seem simple. that isno carrierringconnect 120 when you circulate among the agencies, and they do it indirectly by that classic bureaucratic technique that we call a slow rolling. that is exactly what my, was talking about here when he said it took a year to get what amounted to an important but essentially modest revision of 12333, the bible of the intelligence community.

we should not be surprised by this. a little history is in order. this is normal. when the cia was established in 1947, it took a number of years before it had established itself, if you will. it was vigorously opposed by the military, by the fbi, and by the state department, so it was not until the early 1950's that the cia began to take the kind of shake that we came to know during the cold war. so this long struggle to establish the dni is not all that surprising, but i would say that the dni's job is somewhat harder than it was for an earlier director of central intelligence to establish the legitimacy and effectiveness of that office. i say harder because there is, as everyone here has noted, an admirable mcconnell does make

clear, there is this gap between the responsibilities of the office and the authorities of the office. put yourself in the role of the dni. you look at your book every day, your business card, and if it could fit on your business card, it would say that you are the president's principal adviser and the principal adviser to the national security council and the homeland security council on intelligence matters relating to the national security. that is literally what the law says. if that is on your business card, actually it would not fit -- you are going to feel responsible for just about everything that happens in the intelligence world. i don't know how you cannot. so that gap is an important thing for all of us to keep in mind. while the law freed this

individual from the burden of running a large, complex agency for which mike hayden was stable, it also, in doing so, took away one of the sources of the power it that the director of central intelligence had, which was his role of running a large, complex agency. one that was more organically hooked to the rest of the intelligence community than [inaudible] there are some opportunities around today, the christmas bombing attempt, for example, which is an enormous opportunity for akaka dni terms of what needs to be done in its aftermath. i may be wrong, but i think this is the closest call we have had in the homeland since the dni

office was created. and when you think about the complexity of that event and the gift that it is in many respects, by virtue of being a completely formed terrorist operation that did not work, when you think about the complexity of it and the involvement and the way it touched different missions in the intelligence community, only the dni, by law, can take the steps required in its aftermath to tune up the performance of the community. it is important to remember, the cia director cannot do that anymore. you think back. period, after that it -- if you think back to that period, if you watched the crawls at the bottom of the cable news channels, for the first two or three days it was all about how the cia had failed. after 23 days, is starting to see some other initials appear.

people came to realize there was a dni, an nctc. there is an opportunity here for the dni to demonstrate that he is the only person who can tell all of the things involved. you can bring a party into line with responsibility through all the means we have talked about today, personal relationships, more legislative octane, and i frankly would endorse what admiral mcconnell just said on that score. but maybe the most important way to close this gap is through achieving things out of the dni office that no single agency can achieve. what are they? let me just list by very quickly, and then i will wrap up. all star was a very big ideas and then move to some narrow

ones -- i will start with some very big ideas. first, we think our collection paradigm. no one else can do this. we have a collection paradigm that is rooted in the marriage of classic espionage and technology developed in the 1960's, involving basically spy craft imagery, communications intercepts, and some other arcane methods of collecting intelligence. the adversary understands is pretty well. is probably time to ask the paradigm shift question, which is what is it we cannot do today which, if we could do it, would revolutionize our business the way technology get in the 1960's? that cannot be done by any one agency. second, and several panelists have alluded to this too, when the issue came up of who should be the spokesman for the community.

only a dni can shape the environment in which intelligence operates. people talk about intelligence as if it exists in a hermetically sealed box. how often do you hear the phrase "is all about intelligence." it is not all about intelligence. there are a lot of other things that bear on our performance and national security and that bear on the performance of the community itself. there are four major constituencies, the congress, the public, the media, and the customers, and they all have to be in some sort of alignment, or at least in some comprehension, if not agreement, about what this incredibly arcane business is about. if not, something will be dysfunctional. a dni can deal with that. third, resolved the problems that no one else can result. the community does not have an

i.t. architecture that permits intelligence officers to deal with the enormous volume expanding every day of information with anything like the efficiency that you deal with it at home, sitting in front of your computer. it is better, but any dni to take you to that level of performance will revolutionize the business beyond anything that has been done since the committee came into being 63 years ago. no. 4, form teams of people from throughout the community to gang up on the issues today that are all cross discipline, that no one agency can deal with. again, one needs authority. finally, all sorts of issues that need to be solved on behalf of the whole community. one that comes to mind is the difficulty of dealing weith, as

foreign and domestic concerns emerge in the area of terrorism, the whole question of how you deal with u.s. persons data is very complicated, legally, policy was, civil liberties wise. no one agency cannot touch that. someone else has to do it. so those are some of the things that are the future challenges for a dni. that takes us to what i would call the catch-22 question. those things need to be done, but does the dni have the authority to do them with a process that is less than a trip to the dentist? i think not yet. >> thank you, and is a pleasure to be here. it is good to see a lot of old friends that i have not had time

to seek, or rather they have been more busy than the over the last two years. unlike most of the other panelists, i am not a career intelligence officer. i did not grow up in the intelligence environment. i came to its as a user of intelligence, and ultimately as a policymaker who had to rely on the intelligence community and its various agencies and actors for information that was vital to the performance of my task, which over the course of my time at the pentagon, in the various jobs i was then, boiled down to providing to the secretary of defense cabinet officers advice about the execution of his responsibilities and obligations, both as the secretary of defense and as a principal staff assistant to

the president of the united states. i come at this issue somewhat different than the others. that may account for more of the nuance than specifics, because there is little that has been said about some of the additional capability that the dni might easily have in the way of additional capability. i also think is helpful, and i am not sure who made the point about expectations this morning, to come back and said some expectations on just what it is we think this human being in this very complex world ought to be charged with doing, and how we are in fact going to measure his success, because what the policy maker is looking for from the intelligence community is accurate, timely, useful, and often actionable, in the sense of being able to immediately convert knowledge to action,

information. most policymakers did not look for intelligence. they need information. they need to understand what is going on, and they rely of the judgments of the people in the community to provide that information to them. they have a hard job to do, and the most important policy maker, of course, is the president. he has a myriad of obligations. as one sits back and reflects on the range of responsibilities he has, one can begin to appreciate that he would like to have a variety of instruments and tools by which to accomplish that myriad of tasks. by extension, the president flows down his authorities to his cabinet officers, and they executed much of the nation's policy on his behalf. as a group, i will call them the

national security council, for lack of better term. what are they looking for? they are looking for the intelligence community to provide them information that will allow them, and i keep searching for the right phrase, but it is to anticipate discontinuities in practice around the world as they see it today. i do not use the word surprise, because the second half of that is that they would have information to help mitigate the consequences of surprise. merely by definition, you cannot do that. surprise is not subject reduce the price is something you did not anticipate. it is really anticipating those discontinuities that would allow some lead time for that leadership to make some adjustment that one looks for. second, minimizing risk and

maximizing opportunities for success. where are the risks that we face? i will never forget the long conversations we had with george and john and others in the community with respect to operations in afghanistan and subsequently in iraq, and how did those risks it minimized? that was a constant conversation that took place between the intelligence community and its representatives and the policymakers who are wrapped up in decision making. but those two things, anticipating and minimizing and maximizing risk an opportunity. we are also looking for information that will permit the laying down of a foundation for an enduring and stable outcome to whatever set of issues or problems or crises we may face, and that the outcome is favorable to our interests, whatever they may be in the event. we are always looking for that help and that support. there has been a great deal of criticism over the years.

as i say, i did not grow up in the community, but some of the literature one reason is beyond belief at the unmitigated failure, the entire lack of success of the intelligence community, which is, to me, astonishing. having had the privilege of being associated with them for only a brief time, i can assure everyone that most of that purported history is not true. it is studded with success is that unfortunate, are not the community's place to tell, but for those of us to testify to. as i look over a period of time when i was dealing with them, and what i hear from my friends who are still working today, there is no question whatsoever that at the operational level, community is far better than they ever were. that is not surprising. they have had a lot of opportunity to improve their

performance, excel, train, learned, but these guys are good. they have learned to take information and turn it into action in ways that were never anticipated in the past, and will undoubtedly continue to evolves in the future. at the analytic level, creating knowledge out of intelligence, and i want to make that distinction, because what is intelligence but by definition a mix of true facts, misleading facts, false facts, and no facts? and maybe more, if we could think of some more descriptions. from all of that, they are expected to provide to a policy maker information on which that policy maker is expected to make decisions, and on which he realized. by all accounts, despite recent stories to the contrary, it seems to meet that there has been remarkable improvement. that has to be in turn played at the feet of the reform effort in

no small measure. it cannot be otherwise. that success is a consequence in good measure of it. what about the role for the dni going forward? we are given this assignment, so please except in the spirit it was done. being a principal intelligence adviser, what i would argue is that the management responsibilities that have been conferred on the dni are for the purposes of fulfilling that assignment. the management responsibilities, in and of themselves, have little value unless they are designed -- unless that management is done for the purposes of making the dni the

best adviser to the president's, and by extension, to the other members of the nsc, to the congress, and all the other operators out there in the world down to the fbi agents. as was pointed out this morning , and i will remind again that dni was not given operational responsibilities. one can argue whether he should have been given those responsibilities are not -- or not. if he had been, we would now be debating whether the dni th thee dci just made larger and what are the problems. there are other issues that need to be thought about when one thinks about whether or not the dni should have operational responsibilities.

let's pick up the point about the spokesman. mike hayden, the true dilemma for the intelligence officer when faced with a question by the and press it -- by the president of the united states. the president has an agenda. he was elected for that purpose. he is looking for information, as i suggested earlier, that will help him to execute that policy. i cannot imagine a more difficult position to be in than to be asked a question where in the officer has both to balance the interest of the president and what he knows to be or knows not to be the facts of the case. that is very hard. the advantage of having a dni is it does allow for some separation between what the dni can represent to the policy

maker, the president and all of his cabinet officers, as being the judgment of the community the information he can supply. he can be that buffer and make certain there is not any concerns that then seep out about the politicization of intelligence. he is a true buffer against that concern. that is not nothing in the world in which we live. second, i think he has the advantage of being able to work the domestic intelligence agenda up with greater facility than any other intelligence officer or policy maker, for that matter, save for the director of the fbi. again, that is not nothing, and something that is absolutely essential that has not been fully aired. this singular failure on 9/11

was not whether the nsa was part of the dod or an intelligence -- we did not get intelligence fully integrated. it seems to me that is a banal statement tuesday banalthe dni has two responsibilities one is to ensure the president that he has received that which the president thinks he needs and what he wants to have, and those are not the same things. the president may want something, but sometimes he needs something else. so that is the dni's role, to make sure he has both. second, it is to anticipate those future needs. we had a conversation this morning about the mission managers, about where we are going with some of the collection capabilities. the dni has the luxury of

standing back from the day-to- day execution of the community to think about where events are going, what discontinuities might there be? how do we put into that change the kind of changes that will take a generation to work there and didn't read to work their way through? i spent a good deal of time in the pentagon. no one joins the joint chiefs. one joins the army, navy, air force, and the marine corps. the egos that each of those in skills is what each of those men and women brings to their jobs -- the ethos. they are our sailors, airmen, marines, coastguard.

takes a while for that to work its way through. the dni has the opportunity to bring that kind of change over time into place. whether we make an orchestra director or a cabinet secretary, we can debate about which is the proper role and function, but i would leave you with this thought. as the principal intelligence adviser, there are advantages, significant advantages to the dni not having an operational role. second, in choosing what he decides to manage in the most direct way, and again, it is a very large community. it cannot be managed by any number of people you could imagine bringing into the dni staff. is not possible. i was told by one former secretary of defense that at any

given point in time, someone is out there breaking law. you have to figure out how to deal with it. i think in thinking about this going forward, we have to be clear about where we want him to place his time and attention and effort, and what is the benefit that he brings to the president and to the members of the national security council and congress. >> i have a couple of questions and i want to leave some time for questions from the floor. the first question has to do with the us-dni relationship. for those of us in the intelligence community, if you were at cia, the wolf at the door was dod. no matter how powerful a dci

was, you would lose the battle with dod. the fact was that the secretary of defense, while he controlled most of the assets of the intelligence community, did not have five minutes in a week to concentrate on budgetary or other issues with regard to intelligence, so the dci did have considerable authorities. the question is, and i would have to conclude that the very significant success of intelligence -- the incredible collaboration have seen in afghanistan at and iraq has something to do with leadership of those two organizations. any comment about this relationship going forward? the other question is, i would

assert that the intelligence community is of dig to technological surprise today and in the future of more than any other time in its history. this means destructive technologies. the qdr mentions this with concern, that we now have a world where rnd is distributed globally as opposed to when it was controlled within the united states. are we prepared with regard to technological surprise? you may pass on these questions or you may take them on.

>> are we prepared for technological surprise? no, we are not. we have a game plan. is work in progress. we are focused on it, but my view is that unless it is improved in the year i've been gone, we are not there yet. i think the relationship between the community with the creation of us-dni has made it better, but not where it needs to be. secretary cambone commented, what do we want a dni to do? the most expensive, complex organization in the world, which also happens to be the most effective, is called the department of defense. 3 million people moving parts in every part of the world. one person is a responsible for running that process.

what i am an advocate of is of having appropriate statutory authority for the dni that allows problems be resolved, not punted. example, joined duty. everyone has agreed joint duty is wonderful. it took us three years, i worked it for the better part of a year, and when we finally got it, it was a compromise. it does not put the community where we need to be, because there is no in forcing mechanism in the community. that is why i keep coming back to the fact the appropriate role and authority, in a very complex and challenging environment, but without that decision authority, we are just debating our points of view.

i would also extend this to congress. 88 committees and subcommittees overseeing dhs. the appropriation for this community, the major appropriation for the intelligence community is done in the defense appropriations subcommittees. we have not had an authorization bill in five years. my point is getting this recognized for its importance. it truly is important to the safety and security of the nation. putting it on a par with appropriation, oversight, authorization, accountability, i think is what we need to be focused on if we talk about correcting this and making it better for the future. >> i supported the creation of the under secretary of defense for intelligence. i think it makes sense for the

secretary of defense to have a person that he or she can turn to. 80% of the budget is there at this point. provided that the dni is seen as the counterpart essentially of the secretary of defense, that the usdi -- second, on technology, part of what i was saying earlier when i talked about a collection paradigm relates to this. on technology, where living in the midst of the greatest technological revolution in history. therefore, intelligence always has to be ahead technologically of where the rest of the world is. your adversary and always has what is available to you commercially. their callous examples of that over the years. my bottom line here -- there are countless examples of that over the years. having an offense that assures you are dramatically ahead of where everyone else is

technologically. in the end, that is best way to avoid surprise. >> i concur with john on the technological surprise. i thought it was not good idea to have a u.s. gapfor some of tt john touched on, the phone calls from the dni only when it from him to me. the protocol did not have me calling the dni. that was the secretary pose a call. -- that was the secretary's call. the relationship was between the secretary and the dni. i believe what george tenet told us, at in the context of one of the commission's we did, he and i were talking and he said look, the most important relationship in washington is between the

dci and the secretary of defense. in my view, what has happened is that that relationship has now been adjusted to be the secretary of defense and and dni t, andhe dci very closely related in that relationship. what had been a bipolar relationship is now a triumvirate, if you will, for those matters that are affecting the intelligence community. and they have got to be on the same sheet. is not by accident that you often see the proper and array of personalities there. a president paying attention is going to look to see that he has the right people in those jobs. >> we did not get to the discussion about information sharing, so we may have some questions about that thrown at us. >> my question is related to

counterintelligence. if one looks at what is occurring within the borders of the united states, if you add together the number of personnel, terrorists and their supporters, russia, the people's republic of china, i would say that while we have very good people working in counterintelligence, the policies and a good strategy, we do not have the resources to conduct the kind of counter intelligence that we need to. it's very labor-intensive. i would propose that we see a massive expansion of the number of personnel and done in a way that is coordinated. i don't know if military services my return to playing a role domestically, not in wiretaps or anything that would violate civil liberties, but as they did before in coordination with the fbi, expanded double

agent operations, or surly physical surveillance and things like that that could complement what the fbi is doing. >> not enough resources, i agree. i do not think it is necessarily simply a assault with people problem. there are lots of things we could do in how we administer the process. something that was mentioned earlier, addressed the clearance process. the clearance process was trying to make a go faster, not waste all the time. also embedded in that was a better way to administer the process from the ability for constant life cycle monitoring. it does not mean you monitor it all the time, but you could. it acts as a deterrent. those who are on the inside after clearance are in for life,

and they can start it. that is what is happening the past with spies and so on. i do not know if it is quite as dramatic as the way you frame it, but it is certainly something that needs attention. >> i would like to pose an issue of future challenge, and that is cyberspace. admiral mcconnell has been outspoken about that recently, some of the challenges, but a lot of people may not know that admiral mcconnell, when he was dni, was a catalyst for the effort that led to the comprehensive dick --, relenza national cyber security initiative. a tribute to his leadership there, but going forward, how should we think about cyberspace in the context t thehe dni? >> recently there was an article talking about an episode that showed that tension between

operations and intelligence collection, one that apparently, according to the article, left either side very happy. how should cyberspace be managed within the context thethe dni? -- within the context of the dni? >> it is with that knowledge that i intended to make the argument in the previous administration and current administration. there are things happening that are of strategic significance. we have all benefited from the status of increased productivity around the world. has introduced an unprecedented level of risk, when you imagine

-- i would just use banking as an example. we do not have a gold standard. you take all the printed bills and all the coinage, you we get maybe by% of our wealth, so where is it, and how is it accounted for? my worry is not so much nation states who are stealing its permission for advantage. my worry is an extremist group whose intent is to destroy or to downgrade or corrupt. so if an extremist group with low-level investment attacked us in that way, it could have large-scale consequences. the dni's role is to keep it plain english, be willing to make -- take a position on it. the mitigation of the issues often are embedded in the intelligence community. the national security agency is

the only authorized force in the nation whose mission is codebreaking. what we have finally come to realize over time is codebreaking is often the enablers for attack, which is what everyone wants to talk about, but it is also the enable for defense. i fink the dni in the committee has an important role in making this translatable to how would you defend the department of defense? how would you defend dot-com? how would you do that using a community that has the capability to make the unclassified and useful at the speed of the internet. is a big challenge. my view is the dni is going to be involved in this activity quite some time before we get a level of mitigation that we find acceptable.

>> it is probably the most complex problem we have. it involves exploitation, attack, and defense. those functions are all spread around in the u.s. government. probably someone that senior level can only get their arms around this. our vision is clouded because we have yet to have a demonstration on a major scale of what it can do. we have had the equivalent in the cyberworld of the embassy on the uss cole in 2000. it was not until 9/11 that we really got our act together, broadly speaking. we have not had that on the cyber yet. it may come, and when it comes, we had better be ready. we had better not be scrambling.

>> a question for the panel. one of the analogies we used in coming up with the idea of the dni was the hope that in the intelligence community, we would create an equivalent to what in the military is the shared professional bond between particular officers. from a civilian point of view, you become a military officer. there is a professional bond there that is very significant. there really was not in the intelligence community. to what degree now do you think the work force, that 100,000 people, would sell identify, regardless of what agency they are from, as intelligence officers. are we at the level we should be, and where do we think we are going in the future with that type of cultural, share, self identification?

>> first of, no one knows. that is the answer. my instinct is, just circulating around and talking to people, most people identify themselves as intelligence officers. the question is beyond that and goes to education. there are a number of very fine schools in the intelligence business, but generally speaking, the idea of continuous education is not as embedded or routine as it is in the military. i think that is part of firming up everyone's identification in a profession with standards, ethics, that are common across the profession. >> having grown up in the navy, i have three enemies, russians, the army, and the air force. [laughter] in about that order. it was not until i was part of a joint activity and joint force

that you really start to have a bond as a professional military officer. in my hierarchy, is citizens first. even today, as much as we have a joint task force, people still will identify with their parent organization, which is not a bad thing. they also identify with the united states of america at and doing the right thing in bringing together of the full capability of all forces to accomplish whatever the mission is. i think we are better, but the intelligence community has not yet achieved what the department of defense has a cheap. it is mostly the isolation of our communities. we do not live in the other person's spaces and have that constant communication and dialogue. >> i want to thank all of you for your participation. [applause]

suggs thank you very much. there is up light snack outside. we will get swiftly to the dni's speech here in the next few minutes. thanks very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> coming up on c-span, the financial crisis inquiry commission looks into the causes of the 2008 economic collapse. then, british members of parliament make their case for re-election ahead of next month's vote, during "prime minister's questions." i look at the confirmation process for supreme court nominees.

>> on tomorrow's "washington journal," a new york times reporter has been covering the financial crisis inquiry commission, looking into the 2008 economic crisis. the author of a history of nuclear weapons analyzes the reasons are trading between the u.s. and russia. juan williams discusses his recent column about the tea party movement. "washington journal" begins at 7:00 a.m. eastern time on c- span. >> all this month, see the winners of c-span's student video documentary competition. students from 45 states submitted videos on one of the country's biggest strengths or challenges the country is facing. wash the top winning videos

every morning just before "washington journal," adden." >> congress created this panel to investigate and report on the causes of the 2008 financial collapse. today they heard from former citigroup officials about their past lending practices. this is 2.5 hours. ä;l >> we will swear un.

subprime loans were originated and packaged for sale >> to use only swear that the testimony you are about to provide will be the truth, the whole truth, and nothing but the truth come to the best of your knowledge? thank you very much. this panel is about subprime origination and securitization, and we are going to ask each of the panels, you have submitted to us your written testimony, and we are going to ask each panelist to provide a five minute opening statement. please do not repeat your written testimony and please do keep this to 5 minutes. there will be a light that comes on in front of you that at one minute will indicate one minute to go, and then read when the

five menaces there. with that, we are going to start with mr. bender and then go left to right, or right to left, depending on where you are sitting. 1c >> is that ok? >> yes. >> i am a 15-year veteran of the mortgage banking industry. i am the author of confessions of a subprime lender, and i

currently published several housing, finance, and real estate related periodicals. arguably, securitization could be the single greatest innovation that has ever come into the world of mortgage lending. the entire process from origination to servicing state within the same in -- institutions. banks are motivated to manage risk and to treat borrowers fairly. in addition to creating a renewable source of capital, mortgage securitization also fragmented industry, so instead of one institution that functioned in the true cradle to grave capacity, the functionality became diversified. this fragmentation gave each player a claim to plausible deniability. any concern about the of of -- the laws of the were the concerns of the lender. they merely deliver the final products investors wanted to

buy. the wall street firms at the securities and the investors who -- while the entire food chain contributed to the problems, fragmentation allowed each player to point an accusatory finger it someone else, effectively promoting what we now know as the year originate to distribute bottled landing. with historically low interest rates, loan originators entered the business by drugs. by some estimates, the number of new loan originators working for mortgage brokers increased by 100,000 between the years of 2001 and 2006. during the early years of subprime lending, very few states actually had licensing requirements, which meant that the barriers to entry were minimal. censing 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

this time, the news of the property was being praised for 10% more than the comparable sale six months earlier. it was the subprime industry's willingness to accept overvalued appraisals that significantly contributed to the right of property values throughout the country. to complicate matters, the mortgage industry series a gradualist shift between what was and was not an acceptable form of risk. credit scores reliability was predicated on holding other factors constant. it included a boris rental history and cash reserves. the industry's inability to apply logic and underwriting alone file would serve as its undoing. no other example is more prevalent in illustrating this point than identifying how a borrower's history was verified. verification of rental history, management country to simply

allow for private verification when a note from a barrault's mother became an acceptable form of rental history, there should be no surprise that loans defaulted at an alarming rate. . . >> 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 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 global market group. securitization and underwriting mortgage back securities within citi investment bank. commission asked me to address the securitization activities of my group including our business model and our due diligence activities with emphasis on securitization of subprime and alt-a residential mortgages. i have done so in greater lent in written statement for the record. let address a few key points for you now. first while mortgage trading and securitization activities were part of intermediation business. we purchased mortgage loans from originators and sold the securities to sophisticated institutional investors. our objectively in purchasing mortgages, securitize them and distribute resulting mortgage bonds to meet demand from fixed income investors. secondly, citi's rmbs business was smaller than

the rmbs business at many other wall street firms. publicly available tables show we ranked 7th in underwriting mortgage-backed securities in 2004, 10th in 2000 five. 11th in 2006. and 10th in 2007. significant reason for this, was that unlike many other firms, in the period leading up to the market dislocation in 2007, we did not operate what is known as mortgage conduit which is entity used to apply our mortgages on ongoing basis to established relationships with originators. in addition, citi's investment bank did not have a direct relationship with affiliated mortgage originator from which we had the ability to directly resource mortgages for our securitizations. this meant that instead of originating and servicing mortgages in-house the securitization business, as many of our peers did, we exclusively purchased loans from 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. secondly, with respect to pools of loans that we were purchasing, we would perform a due diligence review, focused on insuring that 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@@nkj2rrr him by detective, i mean the mortgages were not on your ready to seize on -- citi guidelines.

the repurchased million -- many billions of dollars of these defective mortgages. this represented a large risk of loss to the shareholders of citi. i attempted to get management to address this critical risky issue. i issued warnings in june 2006. these warnings were in the form of e-mail, weekly reports, committee presentations, and discussions. 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're being told by someone that we're selling them and this is and that -- this is an acceptable form or risk where as it may not have been so before. >> i apologize, but i want to and nail down the points as we go forward. there was an acceptable level of risk because you are running out of the other mortgages that were more familiar to you of better quality? or could you still do those but not at the volume you could do these? >> no, i referred to it by

looking at whether it was city financial or any other group. the loan must now meet this criteria. it was not a case of whether i had more or less of those available to me. the decision making capabilities for their. >> the target had changed. >> by october 2005, a couple of things have occurred. we had our record upturn in the terms of volume, the loans that had been closed. and number two, we got into a situation where we were looking from our risk perspective and analyzing the volume of loans that we did, we had record level of stated income loans, which was very difficult than when we started. -- very different than when we started. 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 appraiser and the real estate agent in terms of buying and selling homes or flipping them as it is termed? >> it was one of the greatest problems we had what i talk about this in some great depth in the book there is an issue in the relationship between the appraiser and the agent. what we are really talking about is the fact that the appraisal is direct hit from the broker in this particular case, not the real estate agent and one of the things i concluded in my belief is, let me finish this, the broker did not need to apply the direct pressure to an appraiser. the way the industry worked with simple. you placed an order in front of the appraiser and he said i 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 it kept layering the rest, and it was not the wall street investors who are purchasing these taking losses. they were passing them along, down five or six levels, and that is where the money was coming from. i think that people ultimately investing in these need to be aware of what the risks are. there are too many levels that it went through. >> the follow up on that topic, risk in the equity of risk, if you could talk a little bit first about within your unit, what contribution or what importance did risk have in the way you ran your business?

>> risk meaning the department risk for just the valuation risk? >> 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 through-- i ultimately, they met at the chief risk officer at the citigroup level. i was in a completely different part of the organization. >> so the concerns might not have been shared within your two divisions than, if there were

any concerns about the quality of the underlying assets? >> i do not know. >> i don't know if if there where risk intersected between the two business is. >> thank you. thank you. >> thank you ms. murren. mr. wallace in. >> thanks mr. chairman. i have a lot of questions for all of you, and i would like you to be as concise as you can be. i will try to make these questions that don't require a lot of expansion. but we start with you mr. bitner and then i will try to go along the line. what you describe 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 is selling and not you personally. did you ever come across predatory lending? >> i would say, yes 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 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@ goá@@@@@ @ @ @ @ @ @ @ @ >> i'm talking about the affordability and that prices got so high that people could no longer qualify for a 30-year loan, and they wanted interest- only loans. >> yes, exactly, that was the advent of the interest-only, and it just kept expanding the limits. we also started to 40-year loans yes, we kind of a, dated and the snowball started going down the hill and it got bigger and bigger. >> most of which you are describing in your testimony is

something close to misleading investors or possibly the buyers of these loans or the institutions buying the loans. did you encounter any predatory lending? 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 higher delinquency rate. >> that was the first time in 2007 when that seemed to be occurring? >> this was as of 2007 what it looked at all of the loans that were underwritten from 2006 to 2007. that was solely on the prime side. >> thank you, thank you. that is interesting. mr. chairman i only have one more question and that is, your memo to robert rubin. >> let me yield. >> i just need them in a. >> i will give you to. >> thanks. your memo to robert 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 >> >> 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 w >> and did you charge a different trophied going up the chain from your company to whoever it is you are selling to -- dq charted the fair rental fee for having originated alone that charged interest college a marked >> i'm not sure what you mean by that. >> you bought the loan, you sold the loan. did you get andd