christopher dodd increases oversight of a big banks. this is about 50 minutes. >> good afternoon, everyone. if i could have your attention. it is my pleasure to welcome all of you do it this 408th meeting of the economic club of new york in our 103rd year. the economic club of new york is the nation's leading non- partisan forum for remarks about business and the economy. more than 1000 guest speakers have appeared before the club over the past century, and have established a strong tradition of excellence which we will continue this afternoon. before we begin, i want to thank

the members of the club's centennial societe. . .

>> prior to joining the bank in 2007, he was a partner at goldman sachs and was the world's first chief u.s. economist. i joined a chorus of people who is pleased to praise his intellect and his market knowledge. after his remarks, we will have to club members ask questions. -- two club members ask questions. bill, the floor is yours. [applause] >> thank you, glenn, for that fine introduction. today i want to tackle the difficult subject -- how should central bankers deal with potential as the bubbles? as always, my remarks do not reflect the views of the federal open market committee or the federal reserve system.

as i see it, we need to reexamine how central banks should respond to potential as the bubbles. after all, recent experience underscored the fact that poorly regulated financial systems are prone to such baubles. -- bubbles. today, i will try to define some of the important characteristics of asset price bubble. s. bubbles typically occur after innovation has created uncertainty about fundamental valuations. this has two important implications. first, a bubble is difficult to discern. second, each bubble has unique characteristics. this implies that all rules based approach is likely to be ineffective and that -- >> and baubles to diminish their potential -- tackling bubbles

will require judgment. despite the fact it is hard to discern of bubbles in their early stages, i conclude that uncertainty is not grounds for inaction. instead, the decision whether to act depends on whether or proper tools can be deployed to limit the size of a bubble and whether the benefits are likely to exceed the costs. this depends crucially on the tools we can deploy to limit the growth of bubbles and the consequences when they burst. i will argue that in most cases, use of the bully pulpit and macro tools, such as rules limiting loan to value ratios, are likely to prove superior to monetary policy. turning to the first issue of whether there are as the bubbles, i will be a heretic and argue there is little doubt that

as the bubbles exist and that they occur frequently. by an asset bubble i mean price increases or declines. i want to be clear that i am distinguishing this from price movement that are tied to changes in fundamentals. in this contest, it would argue that if a bubble were obvious, people would take the other side and a bubble would not occur in the first place. there are several reasons this argument does not hold in practice. first, it is not always easy to take the other side. there are many constraints on the ability to short the asset in question. such limits on the ability to shorts sell can all rise for several reasons. it might simply not be possible because the markets are not sufficiently developed. even if there were instruments that could be used to go short,

it may not be an easy trade to undertake. for example, that a bubble builds up over many years and market participants compensation is based on your to your performance, there may be disincentives to take the short side. compensation schemes and other practices that skew incentives may create a bias to trade with the market. bubbles may emerge from the way that markets dispense process information and trade. experimental work done by a behavioral economists shows that people trade in wayes that generate price bobbles. the intrinsic value of the assets could be determined with certainty, participants a bid up prices far above fundamental valuations, with bubbles being followed by sharp declines in prices. let me give you an example.

all investors start with an identical asset that pays the same dividend generated from a known probability distribution at the end of each trading period. what this means is all participants know the expected values of the dividend stream with certainty. the bridges of bids are allowed to buy and sell these assets from one another -- that participants are allowed to buy and sell these assets for one another. trading should occur only entrance it values based upon the dividend stream. this is not what happens in practice. in 14 of 22 runs undertaking, prices rose a significantly above fundamental valuations, and these price bubbles were followed by crashes. when traders in these experimental runs were experienced, meaning they participated in the experiment before, the probability of a

bubble was not reduced -- was reduced but not eliminated. what we learned from this particular experiment is that a common dividend and common knowledge there of is insufficient to induce an initial common expectation. a lack of comment initial expectation it leads to a willingness to trade. relaxing the conditions in these types of studies to admit more uncertainty about fundamental evaluations enhances and the propensity for bubbles by increasing the degree of divergence in the disciplines expectations initially. -- in participants' expectations initially. there have been too many were as the bubbles have overshot on the upside and a bottle corrected. the behavioral studies -- and then the bubble corrected.

this includes the run up in the value of the dollar in the mid- 1980s, the stock market rise in crash in 1987, the compression of spent do it -- spreads due to convergence trade in 1998, the technology stock market boom in the late 1990's, and the housing price bubble of recent years. all of these episodes were marked by spectacular price booms followed by subsequent collapses. examination of some of these recent bubbles suggest that while as the bubbles are idiosyncratic in terms of their causes, institutional features, duration and severity, they often it share several features. these shared features are important in assessing how policy might be used to temper bubbles in future. as the bubbles come about

through a particular sequence of events. -- asset bubbles, through a particular sequence of events. first, there is a change and innovation. asset valuations associated with innovation changes, and there is uncertainty about how valuable the innovation will turn out to be. this leads to a divergence in expectations concerning how much the fair value of the assets should increase. i believe this uncertainty about what constitutes fair value is important in fueling the bubble. for example, the technology stock market boom in the late 1990's coincided with the development of the internet with foster the reorganization of many business processes and generate a significant productivity improvements. at the time, it was unclear how soon to begin the innovation would be or how successful the companies would be that saw to take advantage of it.

there were companies such as cisco, which sold the routers, and were very successful, then there were companies that saw to use the technology to revolutionize the delivery of grocery supplies and services that failed miserably. the recent housing boom has been driven by two innovations. one, in housing finance were subprime lending made mortgage credit available to households that were of low income and less creditworthy. two, structured finance instruments such as collateralized debt obligations. the first innovation and broadened the mortgage credit to households. the second innovation reduced the cost of this credit. cash flows were apportioned among the senior and junior tranches, and they were then

distributed to a wide range of investors. the structured finance innovation was supported by innovations in the shadow banking system. security lenders, structured investment vehicles and conduits, bought these highly rated tranches of finance of products and financed these assets in the wholesale short- term markets. the second is a surge in economic activity in a particular sector associated with the innovation. in the case of the technology stock market boom, there was a surge in business investment and technology goods and services. in some private -- subprime, there was a surge in demand for housing. this surge is important because it reinforces the notion that innovation is a significant and that this time is different. third, there is often a positive

feedback mechanism that tends to reinforce the belief system that underpins the extreme valuations associated with the boom. without this feedback mechanism, the boom is not likely to persist for a long or push valuations far above what is justified by fundamentals. without the feedback loop, the asset prices are unlikely to be big or broad enough to threaten macro extent -- and macroeconomic stability. during the stock -- a step -- technology stock market boom, there were a number of reinforcing mechanisms. one was the strong notion that goes to it -- those who got to the market with innovation would achieve large advantages. this perception was due to the fact that successful internet based models could expect to achieve a strong network effects which create cinema and barriers to entry -- create significant

barriers to entry. amazon is a good example of a successful company. many firms, well established and start-ups, invested in new technology. the sharp rise in investment in technology and software lead to rapid earnings growth, which helped overtime, to sustain stratospheric at -- valuations. the sharp rise in stock prices led to a reassessment of the appropriate risk premium. the higher the stock price rose, the more people thought equities had little risk. everyone could become a millionaire with little risk or effort. in the subprime structure finance group, there were several positive feedback mechanisms. in particular, the surge in credit availability drove up the demand for housing and push up housing prices.

this caused the default experience associated with such lending to be low. and this reinforces the notion that subprime lending was not risky. it also reinforced the demand for complex cdo's. structure finance models appeared to be sound because losses on the underlying subprime mortgage loans were alone in a correlation rates in performance across different assets were low, just as the model predicted. fourth, the proportion of market participants who believe that particular episode of asset price increases are justified by the innovation tends to rise as the boom persists. those that had doubts about the importance of the innovation or the persistence of the gain in asset prices lose confidence in their opinions as they underperform and lose business and market share. those who believe that the large gains and asset prices were

justified by innovation and benefited become more dominant. casual investors see the rise in prices in the jump in. the shift is important because in markets, prices are driven by the marginal investor. is less well-informed investors plunged into participate in the boom, they can overwhelm the smart money that gets frustrated after having lost repeatedly trying to take the other side. in this respect, a bias toward optimism may also play an important role. studies have found that most people believe they are above average in their action and, be it as investors, car drivers, or other activities. this overconfidence may cause people to keep investing in an acid even when they are skeptical about valuation -- keep investing in an asset even when they are skeptical about valuation. fifth, asset bubbles occur more

easily when it is difficult to short passes. when technology stocks associated with ipos were difficult to short because the available supply was small. a high proportion of the shares in companies were held by the original venture capital investors and subject to lockup periods -- before the short sellers were sold. housing is a difficult to short. the option of selling one's home in order to rent is expensive, both in terms of time and effort, but also in terms of transaction costs. shorting complex structured finance product was difficult because there were no standardized instruments. securities rarely traded and were difficult to value. it was not until the development of the abx index would allow people to buy and sell credit defaults swaps that investors

had a vehicle to that allowed them to short subprime mortgage- backed securities more easily. asset bubbles often come to end when a basic belief system is contradicted by events. this could happen naturally, because economic fundamentals deteriorate or because there is a change in rules and regulations that disrupts the balance between supply and demand. in the technology boom, this might occur because each company cannot get to the market first. even if there is a first move advantage, not everyone will be able to take advantage of it. over time, the failure to achieve first mover status becomes evidence and valuations adjust. lockup provisions on internet stocks and bought -- expire, leading to a sharp increase in supply. this leads to a large fall in prices. in the housing boom, the end came about for several reasons.

one limiting factor was the rise in home prices for the boom to persist -- for the boom to persist, a new cohort needed to qualify for big enough mortgages to be able to afford to buy their homes. the difficulty in replenishing the pool of new buyers limited how fast demand could rise. the limit in rise of home prices led to an explosion of supply, especially in areas like arizona, florida, nevada, and california. as a supply caught up to demand, this led to a downturn in prices. once this occurred, the poor underwriting standards associated with subprime mortgage lending became apparent. borrowers could no longer easily refinanced the house or sell at a higher price. as warren buffett once said, only when the tide goes out, do

you discover who has been swimming naked. so, what does this analysis apply for central banks that might want to limit the development of such baubles? the first conclusion is essentially whether there is a bubble or not into the sides -- and where the size will be challenging with innovation -- with innovation, prices should rise. consider the questions that might have risen relative to the technology bubble. what is innovation mean for technology investment? how many new business start-ups will survive? is amazon rare? how fast will internet traffic growth and for how long? similar questions rose on with respect to the housing bubble. how will this increase in demand translate into prices?

what will the default rate be on subprime mortgages once the demand growth slows? what is the proper correlation rate in terms of loss experience between different subprime and all day mortgage pools that should be used in assessing values of collateralized debt obligations? and how are such collateral as agents like the two differ in a boom rather than a bust? -- collateralizations differ in a boom versus a bust? what should a policymaker do? the first up is for the policymaker to work hard to investigate what is generating a sharp rise in prices for the asset in question. sustained price increases are a symptom of increase in demand and supply. the policymaker need to develop perspective about whether these changes are realistically

sustainable to the extent implied by market prices. in particular, carefully analyzing the assumptions that underpinned the sustained increases in asset prices which might be symptoms of a bubble, and considering the risk that these assumptions might be wrong is important. also, looking carefully at the dynamics of the system on which beliefs are based may be useful. the dynamic of the system reenforcing or dampening. the dynamics are reinforcing -- if the dynamics are reinforcing, there is a greater likelihood of an asset bubble. what tools might be available to curb the imbalances that have been identified? the idiosyncratic nature of innovations and believe systems associated with particular bobbles implies the tools used to reply to respond will have to be different and tailored to the features of that particular bubble.

the policymaker needs to conduct a careful cost-benefit analysis, weighing how successful a policy might be and restrain the rise in asset prices obverses how costly it would be to remain passive. many factors will affect the outcome of this analysis, including a magnitude of the potential asset bubble and whether it is occurring in the equity or debt markets. in this analysis, policymakers are likely to find that credit market bubbles are more prone to generate higher costs when they burst. the benefits of providing credit baubles from performing in collapsing are likely to be higher. credit bubbles affect the finances to much more directly than equity bobbles. much of the debt is held by banks and securities dealers that are highly leveraged. it can take the financial system

with it. in contrast, because most equities are held, such as pensions and mutual funds, by individual investors, it would not threaten the entire financial system. comparing the consequences of the technology stock market crash versus the mortgage debt market crash supports this thesis. the wealth loss was comparable, but the bursting of the housing bubblehead in much greater effect on the macro economy. -- housing bubble had a much greater effect on the macro economy. it may fail to temper bubbles that may be disruptive when they collapse duri. the costs of these types of errors must be weighed against potential benefits of tempering an asset bubble and limiting the damage from its subsequent collapse. so, what are the tools with

which the policymaker should respond? there are three broad sets of tools. the bully pulpit, macro financial -- provincial tools and monetary policy. the first to available is to lean against the wind of conventional wisdom by speaking out against the dangers associated -- associated with a bubble. the policymaker might be ridiculed by a true believer about lack of understanding about the important nature of the innovation, but i suspect over time, a central bank that laid out risk clearly would gradually gain credibility with market participants. use of the bully pulpit would allow the central bank to signal its concerns. this might be useful in shifting the risk-reward tradeoff by

raising the risk that the talks might foreshadow more forceful action. that by itself could temper behavior. announcements of facts can be powerful, especially when they are followed by changes -- announcements' effects can be powerful. the second include macro- provincial. i define that as regulatory and supervisory actions that are not applied on the firm's specific basis. these include tools designed to temper demand or increase the supply in the assets subject to the bubble or increase the ability of skeptics to take the other side of the market in which the bubble may be occurring to counteract a housing bauble, tools available might be limiting debt service to income ratios or increasing the taxes on housing transactions. several asian and european countries have used these tools

to limit speculative real-estate activity, with some success, although, the counterfactual cannot be known by definition. to limit a subprime lending boom, authorities might wish to enforce strict underwriting practices, including verifying in comes and enforcing rigorous appraisal valuations. increasing the ability of investors to short assets in question might be helpful. in arms of macro -- in terms of macro-prudential, tools might include supervisory measure that said capital requirements for financial institutions. they might also include tools that limit the overall buildup of leverage in the financial system. for the equity market, tools like included margin rules for cash, options, futures and equity over the counter to measu derivatives.

it might include raising here cuts, charged to dealers on rep financing -- on repo financing as part of their prime brokerage businesses or raising an initial margin requirements to otc derivative transactions. macro-prudential tools are difficult in practice. it is difficult to judge their impact. if single-family mortgages are at lower by five percentage points, how big an impact will that have? there are also risk that the rules and regulations will be circumvented. investors might move to the instruments or two offshore regimes with less expensive margins. it is important the authorities have the ability to apply these tools broadly throughout the financial sector. none of this will be easy. a lot more work will be required

to develop a portfolio of tools that could be used that would be effective and that would not be subject to significant deviations or unintended consequences. -- said to begin eve asians or unintended consequences. let me take note -- significant evasions or unintended consequences. who controls these tools and decide when it will be deployed? having a sufficient tool kit seems like a good idea, but lodging this authority within a single entity or institution might not be practical or desirable. the final tool available to the central bank in its monetary policy -- is monetary policy. this tool is not likely to work as well because it is too broad. monetary policy will not address specifically the sources of the changes in supply and demand driving the bubble. monetary policy will have be

consequences elsewhere. some argue that monetary policy should lean against incipient asset bubbles. by pursuing a slightly tighter monetary policy, the central bank would take out insurance against the risk that the rise in asset prices is a bubble and its bursting would be disruptive. although this sounds attractive in principle, it depends on how expensive the insurance is relative to the losses the insurance protect against. it is not clear to me that a modest tightening in monetary policy beyond that needed to achieve full employment and price stability would represent a favorable cost-benefit trade off. the cost of the deviation from the monitor policy in terms of loss in output and employment might be high relative to the benefits of a somewhat smaller bubble. this seems likely to be the case in most instances.

historical experience does not suggest that bubbles are sensitive to levels of short- term interest rates. there is some evidence that a tighter policy will reduce desired leverage in the financial system by flattening the yield curve and reducing the profitability of maturity transformation activities. to the extent this is true, this may apply, -- a more favorable trade off in leaning against a bubble. more research is needed. monetary policy appears to be -- [unintelligible] in conclusion, let me underscore the challenge that central bankers face in combating acid balls. doing so effectively requires -- iface in combating asset

bubbles. this is not easy because as the bubbles are hard to recognize in real time in each is different. -- asset bubbles are hard to recognize in real time and each is different. we strongly suggest that they exist and their collapse can be damaging to the financial system and to the macro economy. in my view, the correct approach is a proper and when three conditions are satisfied. first, circumstances should suggest that there is a meaningful risk of future asset price crash that could threaten financial stability. second, we have identified tools that might have a reasonable chance of success in averting such an outcome. and third, we are confident that the costs of using the tools are likely to be outweighed by the benefits.

when these three conditions are satisfied, we should be willing to act. thank you for your kind attention. [applause] >> thank you very much for those remarks. r two questioners today are the chairman of evercorp, and the ceo of the investment bank of credit suisse. roger, please begin. >> first of all, thank you for that speech. i think it is an important advance in thinking about policy responses to bubbles. all this in this room would commend you. having said that, none of my questions will address what you just said. [laughter] >> i did not expect you to.

>> here is the first one. two weeks ago, the congressional budget office released its latest outlook for the u.s. budget over the next 10 years. while it is very detailed, the most important single number is 9%0%, which is the debt to gdp ratio. my question is -- do you think the united states actually could reach at 90% debt to gdp ratio? would global financial markets except up-- accept that? >> i think you know better than me that we do not like to speculate about the future.

it is clear to me that the fiscal path the u.s. is on today is not sustainable over the long term. now, how far you can go before is unsustainable, i do not know. what that tells me is that just as it is important for the fed to have an exit strategy for monetary policy, we need a viable exit strategy for this period of fiscal policy stimulus we have undertaken. it is not that we have to tighten fiscal policy today. that is probably not appropriate, given how weak the economy is. it suggest it would be helpful to have a credible plan of a future fiscal policy consolidation over the longer term, so that market participants are confident that when the time comes, the government will do what needs to to get the budget on a sustainable path. >> thank you.

maybe i will bring it back to today's topic. the question is -- should it be the fed's role and are they in a position to assess where fair value and where we may have bubbles? and you touched on the effort to control asset bubbles which may inhibit innovation, which has been so important to the growth of the u.s. economy. >> the answer there as we are not trying to target asset prices. there is no desire to decide that asset prices should be of particular value. when innovations occur, asset prices should move. when the as the price movements are are proportioned to the value of the innovation is the issue. to say the federal reserve or other policy makers should not respond when asset price movements or extreme is inappropriate, because as we have gone to this crisis, the

consequences of a bubble bursting can be destabilizing to the financial system and the macro economy. it is a very important to underscore the fact we are not talking about the central bank targeting asset prices. we are talking about the central bank and other policymakers is thinking about what is the consequence when asset prices go up a lot? and when those as the price movements may be umoored -- unmoored from fundamentals? we may decide we are on this -- uncertain about whether it is a bubble or not. we need to be more proactive than we have been in this respect. and we should do the cost- benefit analysis and when that comes down on the favorable side, then we should act. >> roger? bill, the consensus economic forecast -- and i just looked it

up again this morning and i looked at the bloomberg survey -- and this is quite modest growth and high unemployment over the three-year period covered by this forecast. 3% real growth over the period, and unemployment rates are reaching, descending to 8% at the end of 2012. the question is -- do you think it is possible for meaningful inflationary pressures, not a slight uptick, but meaningful inflationary pressures to rise in this country in the face of such a weak growth and employment markets? >> i think the answer is it is possible, because inflation is not a consequence of how much slack there is, but also is a function of expectations. you could be perfectly comfortable in terms that you have plenty of excess slack, but expectations became umoored -- you would happen -- unmoored

, you would still have a problem. we are reassuring people that we have the tools in place to exit smoothly when the time comes. we do have those tools and the ability to pay interest on excess reserves. we have the tools in terms of the ability to drain reserves your research repurchase -- and the reason we are telling people that now is not because the access is -- the exit is near, but because we want to keep inflation expectations anchored. it is a very important we continue to work on that. >> bill, you spoke previously about global harmonization of regulatory reform, and today touched upon the importance of

global coordination in regulatory matters. there are efforts going on it with u.s. policy makers, the g-20. to what extent is it likely the fed follow the deliberations of boswell 3 as they get introduced? >> the fed is supportive of that, because if you do not have harmonization of standards, that will lead to regulatory arbitrage. and that will lead to a race to the bottom. everybody will start to lower their standards because they need to help other institutions that are located in their jurisdiction. i think we are supportive of that. how supportive we are of proposals depends on how those proposals turnout.

there is a lot of involvement of the fed on the financial stability board. i am a member of the steering committee. the vice chairman as a member. we spent a lot of timei in boswell. we are trying to achieve those harmonized standards. >> a question about the banking system. the data shows that total outstanding bank credit, as measured by cni loans, continues to decline. in fact, the total of such loans has declined every month for the past year. my question is -- one, how important is this? second, why is the credit continuing to shrink? third, how can we have a healthy

recovery in the face of a shrinking banking system? and fourth, when my it stabilize or reversed? and i have a follow up. >> i think there is no question that the decline in loans outstanding is a function of the tightening of credit standards we have seen over the last year. it is also a symptom of the fact that small and medium- sized banks are under a lot of stress because they have large commercial real a state exposures. those will take many years to work out. -- they have large commercial real estate exposures. what i expect will happen is that the banking system will gradually healed itself and we will start to see credit availability improved. the survey of senior loan

officers suggest that people are no longer tightening credit conditions. we may be about to see the beginning of listening. large banks are in better shape than they were a year ago. last year, large banks that were subject to the supervisory assessment program were raised almost $200 billion in equity. they are in good shape now. it is the small and medium-sized banks that have to get -- and that will take time. this is one reason why people are seeing moderate growth over the next couple years as opposed to strong growth. the banking system is still not fully back to health. >> bill, he spoke about the importance of regulatory reform. including a wide range of

financial intermediaries. do you believe the current legislation before congress today addresses that, or does something more need to be done? >> we do not know exactly what the legislation is. i think it is premature to decide whether it is broad enough. i take the point of your question. it is important that we do not jack up the requirements a lot on commercial banks and that all other activity flow into the non regulated sectors. it is important that the regulation be applied broadly. people recognize that. it is hard to do it in practice. the fact that congress is talking about systemic risk regulation is helpful in that regard, because that implies you are looking at risk or saw to lay across the financial system, not vertically. -- risk horizontally, not

vertically. that discussion makes me feel comfortably. e. it is important regulation be broad. we do not want to drive activity it from the very tightly regulated sector into the unregulated sector. >> last question. then i have a member question. >> let's move on to some tougher ones. [laughter] bill, everyone knows that one aspect of the price we came through -- the crisis came through is a series of regulatory failures. the federal reserve was not exempt. the fed did regulate bank holding companies and we saw a gigantic losses in government

rescues -- and government rescues. what steps has the fed is taking to -- has the fed taken o make sure the mistake is made will not recur? >> there is no question the federal reserve and a lot of other regulators could have done much better. i stipulate -- as a consequence, we have been doing work to figure out how we can do supervision better. we have done studies at the federal reserve bank of new york, the board of governors was involved in a big effort system wiwide, and i think the changese are putting in place are designed to do a couple of things. it is much more multidisciplinary. not just bank examiners, but market people, researchers, economists to get a sense of the landscape.

one of the problems going into the crisis was everything was looking at -- looked at by an institution by institution bases. you look at an institution, their capitals, and their earnings, and it looked good. you were not capturing all of the linkages across the financial system. the second is horizontal reviews. best practices. who is doing things well? and bringing the people who are not doing well up to snuff. and the other thing i think we are doing is we are trying to develop a more challenging culture about supervision, in terms of thinking about the bank of the business. -- the bank is a business. how does a bank generate revenue? what risk does it take to generate revenue? rather than checking the box is in terms of is a bank and for me

-- and forming to every rule and regulation. if you not get that -- if you do not get that big picture, you will not do a good job of supervision. this is something we are definitely working on. >> one member question before we close. it draws on a recent op ed in "the wall street journal" on the subjects of interest rates. persistently low interest rates discourage savings and are damaging to seniors living on a fixed income. your thoughts? >> i think his observations are correct, that low interest rates are not attractive to savers. there is a consequence of that. at the end of the day, the fed has to set monetary policy for what is best to achieve its twin objective of full employment and price stability. our view right now is that the

federal funds rate needs to be exceptionally low for an extended period to contribute to easier financial conditions to support economic activity. in the current environment, we are not getting the job gains we would like to get. we would like to see employment gains more substantial than what we have gotten. what that tells us is that monetary policy needs to be on an easy setting right now to stimulate the economy, to stimulate employment growth. that has to be our first priority. >> thank you very much. -- that has t6[applause] thank you very much, bill. our affection for you is in estiv-- inestimable. and we have a gift for you that will not violate any regulations, i'm sure.

before we adjourn for the balance of lunch, i will remind you that the next meeting will be on april 22, where we will have the governor of the bank of japan with us. thank you and enjoy your lunch. >> meet another winner in the studentcam documentary competition. we asked students about our greatest strengths or a challenge the country is facing. we are talking with the third prize winner, a seventh grader in georgia. what is human trafficking? >> it is the selling of people or illegal activities on the streets of urban america. >> why did you decide to focus on it for your documentary? >> it is an important question that people need to understand, that it is a big problem in

america. >> let's talk about what you knew before you started the documentary. >> i did not know much about it at all, actually. i knew it was a problem that people do not want to talk about. and that is something that is very prominent in america alone. we need to understand that. we need to see what is going on behind the wall that nobody wants to climb. >> you interviewed angel vicker. what did you learn? >> e open up -- he opened up the points about the world. she told us about how she was able to help a lot of the victims that were going around on the streets, how they rescue them, how they were able to rehabilitate these people. i think that was important. >> what are some problems

associated with trying to stop human trafficking? >> there are many federal places that do not really understand the problem, they do not know what the entire situation is. they need to understand it completely, what they are looking for -- the profile of the people they are trying to get in and prosecute. they need to find what these people are doing. they need to understand that these are shady characters and that they needed to discover exactly who they are that are doing this. it seems they ignore the problem more than they want to learn about it. that is a large problem. if they're not helping, who will? >> how does your knowledge evolved from creating this documentary? >> i did not know a lot about that before i made it.

i knew so much about the world of problems -- the recession and the wars, and that we need to be finding something -- something that we need to discuss and find exactly how these people are working. we need to know these people need help. i knew there were people out there that really did need this. i wanted to make a documentary for them. >> the community is getting ready to target human trafficking. what advice would you give? >> they need to definitely find out who is within this, not the people that are exactly se lling these people, but the exact -- the people they are selling. they need to understand and find these people. they need to help them in any way they can. they need to provide some kind of housing, education.

and then they need to be able to have them open up and tell how they did this, exactly who did this to them, how they were sucked and it. then we need to prosecute the people doing it. >> we thank you for taking the time to talk to us. congratulations on your wind. >> thank you very much. >> here is a portion of his documentary. >> kids were put into trafficking situations inside the united states or overseas. half of them end up in the commercial sex industry. >> of these victims, what is the average age? >> the average age of a child prostitute or child exploitation victim is 14. >> 14? that's the average age of an eighth grader. >> to watch all of the documentary and all of our wedding videos, go to -- our winning videos, go to

studentcam.com. >> tomorrow on "washington journal", josh rogin reduce the nuclear summit. stanton gives an historic view on the issues being discussed at the summit. then a discussion on patient safety. and dennis quaid, actor and patient safety advocate. "washington journal", live on c- span at 7:30 eastern. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] on thursday, chuck prince apologized for the impact of financial crisis on americans. his comments as of 4 -- came as robert roman testified before -- robert rubin testified.

the commission plans to publish a final report by december 15. the hearing is 3 hours. >> the meeting will come to order. we are in the midst of three days of hearings on the issues of subprime lending and securitization and how the subprime origination phenomenon in securitization phenomenon may have impacted our financial and economic crisis with which we are dealing in this country today. yesterday, we heard from alan greenspan from the federal reserve. and we heard from the officials from citigroup.

today, we are hearing again from officials from citigroup, mr. rubin and mr. prince, and later today from the office of the comptroller of the currency. we will continue at our hearings in this same cool, not really air-conditioned room in fannie mae. with that, i would like to begin at our hearing. we have the former chairman and ceo of citigroup. and we have robert lerman, the former secretary treasury of the united states of america -- robert rubin. and we have the chairmen of the executive committee of the board of directors of citigroup. thank you for being with us this morning. what i would like to do as we are doing with all the witnesses who appear before us as we are customarily swearing every witness in. with that, i would like to ask each of you, both of you, to

stand up so i can swear you in front of the commission. thank you. do you solemnly swear or affirm under penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth, and nothing but the truth to the best of your knowledge? thank you very much. gentlemen, you have provided us with a written testimony, which we have. i will ask each of you this morning to provide us with oral testimony, not to exceed 10 minutes. mr. prince, i will ask you to start. please turn on the microphones and pull them as close to you as you can. let's commands. thank you. >> thank you. -- let's commence.

>> let me start by saying i am sorry. i am sorry the financial crisis has had such a devastating impact on our country. i am sorry for the average american to have lost their homes. i am starting we -- i am sorry for our management team could not see the unprecedented market collapse that lay before us. i was the ceo of citigroup from october 2003 until november 4, 2007. i held various positions within its senior management for nearly 30 years. until november 4, 2007, when i resigned, ciit and its predecessors -- -- citi and his predecessors was my professional life. i have given thought to the things that have led to the financial crisis.

i would like to set -- share my views to set the context. the financial crisis resulted from the confluence of several factors. the absence of any of which would likely have caused the crisis to be averted or significantly moderated. first was the unusually long period of low interest rates, stemming from a change in the pattern of global funds outflows following the 1998 emerging markets financial crisis, as well as the stimulus if actions of the federal reserve board following the bursting of the technical bubble and the terrorist attacks of 9/11. as a result, investors in reaching for yield. and many people, from investors and traders to rating agencies to regulators, believed that a new era of generally lower risk

had begun. during this period, securitized products grew dramatically. in an effort to satisfy investor demand for products that have higher yields but were still believed to have a high degree of safety. the growth in securitized products also reflected a growing belief in and reliance on a financial modeling by traders as a basis for risk decisions and a growing reliance on the rating agency determinations by investors. . .

on november 4, to this than seven, -- on november 4, 2007, there was a write-down related to holdings. that same day, i resigned as ceo. after i left, citi incurred even greater losses, which led them to receive over $45 billion in federal t aarp funds. as the commissioners are no doubt already aware -- over $45 billion in federal crp funds -- federal t.a.r.p. funds. as the commissioners are no doubt already aware, it bears emphasis that citi was by no means alone in this view and that everyone, including our risk managers, government regulators, other banks, and cdo structure all believe that these held no risk. it was a perception strongly

reinforced by the above aaa rating bestowed by the ratings agencies. citi's write-downs on the specific securities totaled some $30 billion over of period of six quarters. it is fair to say that this factor alone made a substantial part of the difference between citi's ultimate problems and those of other banks. was not aware of the decisions being made on the trading desk to retain these super seniors, given the perception that these were extremely low risk, it is hard for me to fault of the traders who made the decisions to retain these positions on citi's books. having $40 billion of aaa-plus rated paper on the balance sheet of a two trillion dollar -- $2 trillion company would not raise concern. it is important to appreciate that the cdo business which was a small part of a large and

complex financial institution was being managed. in retrospect, it turned out that that risk assessment, while widely held, was dramatically wrong, given the wholly unanticipated and signet and collapse in residential real- estate lawyers across the board in nearly every committee -- community nationwide and across the world. let me say something about risk. i always believed that the risk function at citi was a critical part of our overall business. after becoming ceo, one of the first things i did was to name a chief risk officer of the company. i change the reporting structure so that the risk when john was then completely independent of the business -- the risk

function was then completely independent of the business. there were not paid on profit or volume or revenue. i believe that was good governance and i believe we are ahead of best practices at that time. he was known as one of the most sophisticated risk managers in the investment-banking community, with a strong, hands- on training background. as serious issues and all the in the late summer and fall of 2007 relating to the subprime market and are later -- and are lower- rated cdo holdings and other businesses such as leveraged- lending, our senior management was fully focused on the unprecedented issues the company faced. we had multiple special board and committee meetings to apprise the board members of the issues as they developed in the real time and to solicit their valuable advice and counsel. regrettably, we were not able to prevent the losses that occurred.

but it was not a result of management or board inattention, or a lack of proper reporting of information. the lessons learned from this experience are many. let me address two issues that seem to come up repeatedly when discussing citigroup. is it citi too big to fail? and is it too big to manage? these are separate, but related questions. i personally cannot think it was too big to manage. too big to mbó][i=)ññiñiw72q we made enormous strides during my tenure to improve the way in which citi worked. i think the company was much better for it. in any event, i do not think that the broad, multifaceted, and diversified nature of citi's businesses materially contributed to our losses, or to the financial crisis more generally. indeed, smaller, more narrowly

focused firms vote -severed in similar ways. it is a unique institution. it is the only truly international, u.s.-based bank, a feature that gives it great advantages in many of its businesses around the globe. now, too big to fail is a hard issue appeared my own view is that we're past the days of exclusively small, locally-based banks and institutions. the local institutions have a place in the financial landscape. the financial world we live and is complex, interconnected, and global. i think this demands sophisticated, global, and diversified financial institutions. gap said, i do not believe it is good for the united states to have a financial system where the failure -- or threatens failure -- of key financial institutions would impose the kind of dramatic and near catastrophic damage on the

entire system and the national and world economy that we saw one lehman failed and when numerous other financial institutions, including citi, needed extraordinary government assistance. we must find a solution to this problem, whether the resolution of 40, greater regulation, increased capital requirements, or all of the other creative and innovative measures that your commission has been discussing. thank you for your time. i'm happy to answer your questions. >> thank you, mr. prince. mr. rubin. >> thank you, mr. chairman. i appreciate the opportunity to testify today. the financial crisis has taken a terrible toll on and in some americans, who have lost their homes, their jobs, their savings, and their confidence in the future of our economy.

better understanding the cause of the crisis is essential to protecting our nation's economic future and to be effective financial reform. i hope that my experience at goldman sacks, the national economic council, the treasury department, citigroup, and as the chair of our nation's largest, inner city, development organization, can be helpful to this inquiry. let me may to group relevant observations. first, -- let me make two relevant observations. during my time at treasury we dealt with the mexican financial crisis and later the asian financial crisis. in both cases, our approaches on balance were successful, we still learned an enormous amount from looking back at what happened. secondly, as policy-makers address financial reform, it is important to remember that our

national economic policies have enormous effect on. for example, president clinton undertook deficit reduction and a critical public investments, and those policies, in my view, contributed greatly to the longest economic expansion in american history. simply put, policy matters. with those thoughts in mind, let me turn to the causes of the financial crisis. while i had thought for some time prior to the crisis that markets, including the market for credit, had gone to excess, and that the accesses would at some unpredictable point lead to a cyclical downturn, this is not what happened. instead, we experienced the most severe, financial and economic crisis in the 80 years. in my view, the crisis was not the product of a single cause, but rather the product of an

extraordinary combination of powerful factors operating at the same time and feeding on each other. but meaning just a few of those. market excesses. low-interest rates, most notably due to large capital inflows from abroad, which contributed to the excessive risk-taking by lenders and excessive borrowing by businesses and consumers. a sharp rise in housing prices also contributed to increased consumer leverage. a subsequent press of this drop in housing prices -- the subsequent precipitous drop in housing prices. lacks and too often abusive mortgage lending practices. shortfalls in regulation. high levels of leverage in financial institutions, joined with deteriorating asset quality. there were a few market participants and analysts who

saw the broad picture and the potential for a mega-crisis. a larger number saw one or a fwe of these factors -- a few of these factors appeared almost all of us, including me -- financial firms, regulators from analysts, commentators -- miss the powerful combination of factors that led to this crisis and the serious possibility of a massive crisis. we all bear responsibility for not recognizing this. i deeply regret that. let me now turn to citigroup. my role at citi defined at the outset was to engage with clients across the bank's businesses here and abroad, to meet with foreign, public officials, and to serve as a resource for the bank's senior management with respect to strategic and managerial matters.

having spent my career in positions with significant operational responsibility at treasury and goldman sachs, and no longer wanted such a role my agreement with citi included that -- wanted such a role. my agreement with citi included that i would not manage personnel. i was present when citi's problems occurred. in my view, there were two primary causes. first, citi, like other financial institutions, suffered large losses due to the financial crisis. i am told that citi has analyzed the data made available in connection with the 2009 stress tests and has estimated that the losses in citi's businesses, other than cdo's, were roughly comparable to peer firms. this ever distinctively high --

base suffered -- they suffered distinctively high losses. we met with the most senior management to discuss the considerable turmoil in the fixed-income markets. in a presentation on the fixed- income business, i learned that citi's exposure included $43 billion of super cdo -- super senior cdo's. they were rated aaa-plus and had minimal risk. my view, which i expressed at the time, was that the cdo business was an arbitrage as activity -- and arbitrarized activity. i believed these transactions were not completed until the distribution was fully executed. having said that, it is

important to remember that the view that the securities could be retained was developed a time when aaa securities have always been considered money could. -- considered money-a gogood.

i served on the search committee that led to the selection of the companion. ultimately, citi took $30 billion of losses, a substantial cause but of the bank's financial problems that led to the assistance of the united states government. i believe that the overriding lesson of the financial crisis was that the financial system is subject to far more severe downside risk than almost anyone had foreseen.

i believe that it is imperative that private institutions and the government act. citi, first under chuck prince and then bigger than it implemented major personnel changes, restructured -- a been a big group and it -- citi, first under chuck prince, and then under the group and it -- then under vikram pandit, implemented major personnel changes. derivative regulations, reflecting my strong views from my time at goldman sacks, that derivatives create -- at goldman sachs, -- resolution of 40 to avoid the moral hazard of too big to fail. -- resolution to avoid the moral

hazard of too big to fail. we need to protect american consumers and financial system. with that, i appreciate the opportunity to share my views and would be happy to respond to your questions. thank you. >> thank you, mr. rubin and mr. prince. we appreciate you being here today. pressure willingness to help us in our endeavor. -- we appreciate your willingness to help us in our endeavor. we're going to begin the questioning by commissioners. as chairman, i will start off with some questions for both of you and each of you. so, i want to pick up on your comments about whether or not this institution was too big to manage, too complex to understand, perhaps too big to

regulate. for the benefit of people watching today, it appears as though there were about $51 billion in write-offs related to subprime lending. the institution went from about $670 billion in assets in 1998 to $2.10 trillion on balance sheet and another two trillion dollars off balance sheet by 2007. by 2008, the tangible equity-to- assets ratio is estimated as 61- t o-one -- 61-to-1. i want to ask questions to get to the heart of that organization, particularly a run subprime lending. on november 17, 2007, there was a meeting between executives at citigroup, including yourself. at the red there briefly at the

meeting. -- you were there briefly at the meeting. this is from the supervisors of the federal reserve board, the occ, the fcc, the u.k. fissa. there was an assessment of what he thought had gone wrong. these are notes, not his exact words report communication across businesses, decentralized nature of firm, a senior management business line and risk-management did not fully appreciate the market risk of a leveraged-long pipeline. corporatewide stressed the things an area analysis was insufficient. the firm did not have adequate understanding of its risk- sensitivity factors. the nature and origin in size of the cdo exposure were surprising to many in the senior management. as you look at some of those comments, the do you think those are of fair reflection -- as you

look at some of those comments, do you think those are a fair reflection? >> if you look at citi prior to the crisis erupting, the day that the ceo ran a very effective independent, risk management capability, what he did, as i understand it, and i remember being there for part of the meeting -- what he did, and rightly, it seems to me, is after the crisis emerged, he looked back on what he could learn from the circumstances that existed. i do not remember the specific comments that you just made. i remember there was a conclusion that citi could do a better job of bringing together the risk exposure across various product areas. the successor has focused more

on that. my answer, mr. chairman, is i do not believe that citi is too big to manage, but i do think that every time you go through a crisis -- there were times when we have very difficult developments in trading areas. when that happens, we look back to learn how to do things better. i think that is what david was doing or was reflecting in the comments that you just repeated. >> let me ask you a related question, mr. prince. for the sake of efficiency, i will try to move back and forth between the two " of you. on october 30, mr. bushnell made a presentation to the board -- i will verify that -- the essence of this is that -- she had a timeline of key events in the

subprime market. -- he had a timeline of key events and the subprime market. in 2007, he noted that hsbc had announced a major mortgage delinquencies and losses related to that. on june 12, my birthday, 2007 -- bear stearns asset management announced that their funds were in significant problems. i knew you wanted to know my birthday, mr. vice-chairman. on july 10, s&p and moody's announced significant cdo rating changes in major downgrades. on august 10, bnp paribas froze its funds and countrywide announced significant problems. both you and mr. rubin have said that you became aware in september of problems in the cdo desk.

when all of these things happened, why did not the potential of problems rise to the top in the wake of these major announcement? why did it not bubble up? >> mr. chairman, i think you have to go back to the time in question. so much has happened since then that it is a little hard to put yourself back in the time frame of when this happened. i can only speak for what people must have been thinking, because i obviously did not know about the cdo positions and the time frames that you're talking about. in hindsight, i believe that people believed, and they believed with a level of certainty that is hard to appreciate today, that the super senior truenches would never be touched by these problems. the various rating changes were for the lower-level, not a super senior. sitting here today, that belief

looks unwise. at the time, moody's said that these problems would never reach the super seniors. i think people believed that the structuring process had gotten to a point where that top-level would be immune from the problems that fowere being seen at the lower levels. i am not saying that is right. i think that is what they believed at that time. >> let me pull back a little. the very nature of the cdo's -- they were a collection of the lower trenches of the residential, mortgage-backed securities. i want to attribute this to mr. georgio. there's an element of taking lead and turning it into gold. there were the lower-level which to take and put it at the top

and it is suddenly highly-rated. interestingly enough, by the fourth quarter of 2007, housing prices have only fallen 5%. just for reflection, in 1990 and 1991, housing prices have fallen 3%. that was driven by places like california, florida, and texas. by the fourth quarter, you had written down $18 billion. clearly the super seniors or touched quickly. there were not truly the aaa -- they were elevated in that structure. the related question is, to what extent did you ever do anything at the board level -- you said at 1 point -- at one point, that putting on the aaa-risk paper would not have excited your attention. did either of you gentlemen look of the nature of these instruments and say, i am

troubled about the nature of taking this sub-par stuff and running it at the top? did you ever do the analysis -- the hard analysis of the underlying collateral? mr. rubin? >> mr. chairman, i will reflect back on the days when i ran goldman sachs. when you are running a large or medium-sized organization, you can look to the people you have in place, the aggregations of risk -- which citi has done well -- but there is no way, in an institution with hundreds of thousands of transactions a day and probably something over $1 trillion a day running through it -- i did not know what was in those books when i was running goldman sachs. would not know it on the board of citi. you depend on the people there to bring new problems when they exist. you're talking about a level of granular ity that no board

would ever have. the board has a stronger possibility -- strong responsibility to make sure they have people in the right places. >> you both attended weekly business meetings. >> i know that $40 billion seems like chump change, but it is a fairly significant initiative to have $40 million of exposure. i might add, in the rmbs bring a, you guys were doing about $90 billion worth of this. i am curious about the debt of strategic discussion around the positions in the mortgage-backed securities and the underlying collateral. >> if i may say something? we had strategic discussions about the operations of the business. individual positions only came to that meeting when either independent-chris management or

the people running the businesses felt there were problems -- when either independent-risk management or the people running the businesses but there were problems year if i had to guess, my guess is the people who structured these did up problem analysis and determined that even though the individual securities within them were not of the quality of the totality, that with the structures they had the risk to begin the minister -- the risk became deminimist. they calculated that the risk was one in 10,000. >> that is what they're model showed. i really question the models. if you only have a 5% price drop in the right of $18 billion. >> once developments became adverse, the securities incurred

considerable difficulty. there were real problems. i was talking about how they were seen at the time. >> let me ask you a couple of yes or no questions. mr. prince, you had about $11 billion worth of lines out to subprime originators. yet acknowledge in your interview that you begin where, fairly late in the game, you said you found out at the end of your tenure -- this is about the $11 billion worth of warehouse lines that supported some very aggressive subprime lenders. he said, i did not know it before. being that involved, i was not comfortable with. mr. rubin, did you know that the bank had a very significant $11 billion-extension two very aggressive subprime lenders? >> i do not remember today whether i knew at the time or not. >> ok.

let me ask you, mr. rubin, one more question. i want to go to one final issue before i turn to the other members. yesterday, we have before us a man who was chief risk -- he was in the business of underwriting unit in the risk function. he had tried, unsuccessfully, to get his superiors to move on some concerns the had appeared on november 3, 2007, he sent you an e-mail. he was concerned about the inadequacy of the samba and size for loans that citi was buying and then selling to -- of the sample size for loans that citi was buying and then selling to ban in may and freddie mac.

-- to fannie mae and freddie mac. he also found that the failure rate rose to 80%. that was sent to you, and some other individuals -- did you ever -- it was sent to -- did you ever act on that? >> mr. chairman, i do recollect this. either i or somebody else sent it to the appropriate people. i know that tit was acted on and actions were taken in response to that. >> could you get back to us, you enter the people existing at the company today, back to the commission exactly how citi responded, what it did, when. >> i would be happy to. i know that legal counsel has that information. >> last set of questions before i yield to the other members. i will come back at the end.

i want to ask you about a sequence of events. here they are. both of you have said that you did not become aware of the cdo exposure until september, i believe. as i understand, by looking at documents, by looking at the interviews you did with our staff, you learned in early september, at which point, you started a series of meetings and later nightly calls that became known as the "def-con calls." the first meeting was on september ninth. mr. rubin was in korea, but in touch by email. mr. rubin yo, you joined these extensive calls. you said it was a timber 12th when the cdo -- she said it was september 12th became the focus -- when the cdo's began a bogus

bid you announced your third- quarter earnings come indicating -- when the cdo's became the focus. renowned director-quarter earnings -- you announced your third-quarter earnings. i want to ask you -- you a carrot -- you apparently became aware in mid-september. october 1, you announced that you're announcing your exposure is $13 billion. here is what happens according to the records i have seen. i will certainly give an opportunity for you to review these to make sure we have the chronology right. maybe i should ask a question did it appears that two good things happen. the first is that there is a call with analysts are wary you tell an alliance and the public that citigroup has a $13 billion

subprime exposure appeared on the same day, a presentation is made to the corporate audit and risk management committee and to the board of directors. as part of that, there is a presentation on risk-management. it says, "the total subprime exposure in the market and banking was $13 billion, with an additional $16 billion in direct super senior, and $27 billion in liquidity puts." on the same day the public is told it is $13 billion from the board and audit committee are told it adds up to more than $50 billion. i believe $55 billion is the total mass, roughly. at which point, on november 3, you have an emergency board of directors. on november 4, you announced of $55 billion exposure. mr. prince, that is the day you announced your resignation.

why is there an announcement made to the public that it is $13 billion at the same time that the board and the risk and audit committee are being told that it is substantially more? mr. prince and mr. rubin? >> you asked a very detailed, factual question. i would have to look at those very carefully to answer it in the level of detail with which to have asked it. at that time, the financial people working intensely with the fixed-income people to try to determine exposures in this area. this was an unprecedented time in which markets were crashing and rating agencies were pulling supports out of longstanding structures. i think that their view of what the exposure was the subprime changed during that period of

time, as the events happened. you quoted from a presentation. it sounds to me, just listening to what you read, that the presentation was structured in a way to say that our subprime exposure was x, but do not forget we have these other things. perhaps that reflects their thinking at the time. i would have to look very carefully at the comparisons you are making to be able to answer the question in as detailed a way as you have asked it. >> we will provide this to you. it is on page one. this is called risk management review, update to the corporate audit and risk committee. it says the total subprime exposure in markets and banking was $13 billion. it is in the executive summary and the top, and to the heading subprime. it said the total subprime exposure in the markets and binging was $13 billion, with an additional $16 billion in direct service a year, and $27 billion in.

>> i cannot remember the presentation. i could give you what i suspect was the case, if i may. you can confirm this to yourself. i do not remember the presentation. but it strikes me as understandable in the context of how those positions were then being seen, which is to say that the $13 billion, i would guess was of prime exposure below the aaa super seniors that we now discussed a number of times. that was viewed as a broad exposure -- as subprime exposure. the $43 billion, the super senior number, was not viewed as a broad exposure. it was viewed as the aaa security. now i would note -- >> i would just note -- i wanted to look at the document under subprime. >> it may have been listed under subprime, but since i do not

remember the discussion and i was not part of the formulation of these documents, you can find out exactly what these people were thinking. my guess would be that they were viewed as to two different classes of exposure, one being a subprime exposure and the other being, because of the structuring, aaa super seniors. >> i may have one or to other questions, but i want to stop now and move on to the vice chair. thank you for your answers. mr. tomas. >> thank you for coming. given our charge of trying to understand what happened so that we can convey to the american people what happened is an exceedingly difficult and complex job. we have a short period of time. we obviously no more than we did yesterday. we will know more tomorrow.

these hearings are not designed to be exhaustive. if i ask you -- if we have questions, not only relating to the topics that we have before us, but other concerns based upon your position in experiences, some very in death, others very broad, would you be willing to respond in a timely way to written questions that we might submit to you between now and the end of our statutory journey? is that an appropriate -- >> i am not sure how we could save no. -- could say no. [laughter] >> i do not know how you can explain what you did and how you did it. all you do is say yes. >> the answer, mr. chairman, the answer is yes. we would be delighted to.

>> is a part of your responsibility to advise senior or for senior management -- >> i was interviewing my view and expressing mr. prince's view. >> could i have your view, mr. prince? >> yes, i would be delighted to do that. >> yesterday, we spent some time with the former risk-management officer, and co-head of debt obligations. we were also with the former chairman and co-chief executive officer of citi markets and banking. i woke up this morning -- my alarm was set at 5:00 a.m. i have my radio on c-span and i woke up to the voice of the commissioner was inquiring

about, as we began our journey yesterday into this garden of good and evil, about synthetic cdo's and what were they. it led into commissioner gi orgios trying to understand how you take them and turn them into triple a and triple a-plus, the super seniors that somehow or never supposed to go bad. then i listened to another excellent questioning of the panel, leading to a better understanding of these products that were created to be sold, which generated millions of dollars. in some years, tens of millions

of dollars. then citi management, but never resulted in the dollar of clawback of the way down. i finally woke up realizing that, if i had a chance to start my life over, i may very well choose a different path. because apparently, you get to the top without ever having experienced any of these things that people underneath you do. you did not have a comprehension. you are not informed, but you get to make all this money on the upside, and there is no downside. you folks have an opportunity to submit written testimony, which you did. i do not believe, correct me -- there is no limit on the pages of written testimony? >> not that i am aware of.

>> there is a limit on the verbal, which again expressed as you see fit. what we have in front of us is your written testimony that started with a blank sheet of paper and that you were willing to inform us more or less. mr. prince, on page two, you say, "the patchwork nature of state regulation in the origination of subprime and all mortgages lead, in hindsight, to the origination of more and poorer quality subprime assets to be secured aitized." was there a requirement that they be securitized? >> i am not sure i understand. >> there was a demand, you say this descendants above this, in dealing with the growth of securitized products.

you obviously want to produce securitized assets that have low risk and high-yield. who would not? you create synthetic products. but it sounds like you are saying the fault was the state regulation of the origination of subprime, because they gave us poor-quality subprime assets to be securitized. you did not have to do that, but you did. please, we heard enough yesterday about you starting a line of argument that others, third parties, b. du assurance -- gave you assurance that they were ok. how do you get to the top if you do not have an experience whatsoever? or your argument is that you do

not pay attention to it? what do you get paid for, if it is not having some intuition, understanding, knowledge, or do you just do what everybody else is doing because everybody else is doing it and if you do not do it, then you will not make money? because i do think it is all about money -- big money -- on the way up. but never at any point is it on the way back down. when we get -- when i get, i will speak for myself, this kind of an argument as to what happened in hindsight, listening to someone blamed the inferior quality leather in shoes, based on the feed some persons applied to cattle that produced the leather.

explain what it was that you did with products. it makes it very, very difficult, notwithstanding a paragraph or to which i believe our sincere, in terms of what happened. but in this entire process, not $1 of clawback. mr. rubin? i have a question. that was a statement. if you want to turn it into a question, you can. >> that is ok. >> you started with a blank sheet of paper as well. i do like a laughter pages where you go into the analysis of some things -- i do like the latter pages as well, where you go into the analysis of some of the things we're talking about. you know as well as i do, when we're talking about financial

services legislation that committee jurisdictions limit what they can look at. it is going to be a long and difficult process. for the first time in these hearings, someone has introduced, of their own volition, in the comments that they offered to the commission, some partisan comments. in the fourth paragraph, you state, "it is important to remember that our national economic policies enormously effect all of us would work force a vote, president under -- president clinton undertook deficit reduction and made it critical investments which led to the longest economic expansion in history. simply put, policy matters." well, so does the truth.

you came in before the clinton administration. he became president with the democratic congress and a democratic majority in the house of representatives. the house of representatives is the branch of the legislature which in article i section 8 has sole responsibility for the generation of revenue legislation. it is the place that controls the nation's purse-strings. just before you were sworn in as secretary of the treasury, january 11, 1995, for your three years of experience as

treasurer, on january 3, i was sworn in for the ninth time into the house of representatives and for the first time in four decades as part of our republican majority in the house of representatives. i guess i am a little personally concerned that, if anybody looks at the election of november, 1994, it was over the tax and spend policies of the democratic administration and maggiore, principally those who control the purse strings in the house. the american voters rejected those policies and voted out the members of the democratic party. if there was deficit reduction as a policy, and critical public investments for 6 of 8 years of that administration's policy-

making -- it was with the republican majority in the house and represented is that controlled the purse strings. i was on the committees that controlled the purse strings. i guess i am a little concerned that the continued representation of what i would call a half-truth does not serve our needs today. i know -- this is a partisan statement, surprisingly. the fact that it became a bipartisan to have to make policy, i believe, worked to the benefit of the american people. there has been great criticism by the current majority, in the administration in the congress, about the unilateral control of

the presidency and congress for of period of time by the republicans. and i am concerned about the current return of structure, of the current non-bipartisan arrangement. just as you were writing their, and characteristically, given a little bit of credit -- just prior to your signing in, you knew you were going to have to work with the house of representatives controlled by another party, which i think ultimately was in the american political division of accommodation and compromise and it moved some policy. the president signed it. he would have had nothing to sign it had not been advanced by a congress with the house of representatives controlling the purse strings, run by a republican majority.

bamut is it possible for me to respond? >> -- >> is it possible for me to respond? >> let me briefly respond to pieces of that. i did not mean to make a partisan comment. i was trying to make a point on public policy. it does not relate to this crisis. in 1993, we did have a powerful that-reduction program. in 1994, the election came out as you said. it was not personally -- i do not think it was about the 1993 decision. it was about a lot of other matters. you're absolutely correct in saying that in 1997, the republicans and democrats were together in a bipartisan fashion for the reasons that you describe to a bribe the balance that budget agreement, which carried forward the work that -- for the reasons that you described to bring forth a

balanced-budget agreement, which carried forward the work that others had done. >> i do not impersonally and i only knew from a comment that obviously got far more coverage than it should have, if in fact he made it. i assume that those things occurred and you made that at some point about the business of, if they are playing the music, you have to dance. no, you do not. now, i understand -- they're probably would of been consequences. maybe somebody would have not continue to make tens of millions. but when you -- i have to commend the audio of the dialogue between the questioning of the commissioners in the answer from those people in

citibank who were in the position to make up all these things and have knowledge about it. i understand your at the top. these were the people who were not. the creations that he made, arguably driven by the desire markets -- and your job is to make markets. your argument is, we did not know. we did not understand. had we known then -- at some point, is it necessary, in your opinion, to create a structure which stops you from doing things? because i do not think anyone wants to create that kind of structure. i believe sunshine is a great isn't that -- is a great disinfectant. you need third parties to understand. should you have to have money,

not withstanding that you are adequately capitalized under some regulations that were created prior to the environment that we were in? looking back, because you have hindsight now, what would you have preferred that was comfortable to allow you to carry on your business, but nevertheless -- i do not believe in simply exposing -- imposing structure for the sake of control. i do not want to kill the go ose that laid mostly golden eggs. your point about international and national -- we cannot go back. i am very concerned that we address problems in the united states and we do not ge a successful negotiated agreement and a nationally, which does not advance our need to control, given the nature of your company in terms of its significant international involvement. what could have been done that

would have made it possible for you to carry out aspects of business that makes sense, but would have limited, controlled, mitigated what you wound up doing? >> there is a lot there. let me respond to the quote that you mentioned. , the alleged " that i read was in the media. -- >> the alleged quote that i read was in the media. >> you were in japan. i would appreciate the courtesy of repeating the entire quote. when liquidity dried up, the financial environment would become very complicated. but that as long as the music was playing, you had to get up and dance. >> i am not surprised that the entire quote was not printed. >> it actually was printed in

many places. if i can finish my answer. i think i have been quoted in secretary paulson's book as asking the regulators to impose limitations on the company so that they would not be engaging in some of these activities. i want to emphasize that this was about leveraged lending and had nothing to do with the mortgage business, the cdo business, and nothing to do with the issues that we have been talking about here. but in terms a of thequote itself -- but in terms of the quote itself, i specifically asked the regulators if it would take action. >> you started off your statement using the term, "he wanted the regulators to impose." you wanted them to stop you from dancing.

can you not set up structures inside? if you limited yourself, others would not? is that the origination of imposed -- impose on everyone, because none of you can regulate ourselves -- yourselves, in terms of creating these super seniors that are never going to go down. >> you must have misunderstood. i said this had nothing to do with the mortgage business. this had to do with the leveraged-lending business. in 2007, banks' lending to private equity firms was a matter of great discussion. at that point in time, because interest rates have been so low for so long, the private-equity firms were driving very hard bargains with the banks. at apple in time, the banks individually had no -- at that point in time, the banks

individually had no credibility to stop lending in this business. it was not credible for one institution to unilaterally back away from this leveraged-lending business. . >> i want to follow on at the threat of that conversation, because you and many of the people who were here to testify yesterday have alluded to the fact that they were not rewarded

for growth. they were not rewarded for revenue growth or earnings growth. that was secondary in the way they were compensated. m i wrong? did i misunderstand that? did you not say earlier that part of the major forces in -- part of the major driving force in compensation was not a revenue it growth? >> i said that the risk function was not compensated based on business volumes. >> and thank you for that clarification. that is logical. the follow-up to that would be, how do you then it tried to factor in at risk into the way that to compensate all of your executives? because what i hear, and a little bit of this notion, is that if people are dancing, you need to dance it too. oftentimes, people are rewarded

by the way they are compared to their industry. then, it is it difficult for any manager to say, no, we do not want to grow in this business. inevitably you will be compared to entities that are growing, perhaps unwisely. i would like you to comment on if there is a way things might have been structured differently so that those decisions would have been easier for people to make. >> that is a very thoughtful question. the compensation structure on wall street is one that many people have criticized over the years. it is for traders, bankers and so forth a compensation model that is based on revenue growth, not even a profit growth. but a number of people over the years, warren buffett among them, have tried to change the compensation model on a warrant -- on wall street.

i spent nearly 30 years with citi and its predecessors. when i was an executive of the company, we were paid a fair amount in stock in the the company. more than half of our pay was in common stock for the company. for a time, we work required to hold 75% of the stock we received. we could not catch it out. in my case, i held 100% of the stock. our rules also provided that you had to hold the stock as long as you are with the company. you could help -- you could sell it when you left. as i sit here today, i hold virtually every share of stock that i held over a nearly 30-

year career. i have watched it go from $60 per share to less than $1 per share. my interests are 100% in stock shareholders. i watched my personal net worth disappear because my company suffered. i cannot speak for others. i cannot speak for whether other people cashed out, but i think the model that requires you to have that kind of alignment with the stock orders is a good one. >> it is in certain respects, but i guess that you would agree that there are certain elements in the that that would also encourage risk-taking. when you look at how wall street expectations play out in regard to equity in particular, they are related directly to revenue and profit growth. by definition, you will want to leverage up.

my point simply is that, risk itself and the assumption of liabilities was not necessarily the norm in how people's compensation was determined. there are people whose cash payout was substantial enough to accommodate any decline in stock price should it occur. it is fair to say that there is a greater emphasis on a growth than is perhaps healthy at the corporate level. would you agree? >> you can not overstate the need for risk assessment in a running your business. but i want to emphasize, if i may, that the ceo positions we are talking about were not put on the books of by the people who were trying to take on more risk.

they thought they were taking on the little or no risk. very clearly, from the commission standpoint, the notion of making sure that risk considerations are embedded in the operation of a business is absolutely a high criteria. i grant you that. but i think it is a more complicated issue in this case, because the folks involved did not think they were reaching a risk standpoint. so at risk parameters were not violated. in hindsight, it has been horrible, and i accept that. but at the time, on a prescriptive basis, going forward, this is something the commission needs to struggle with. the notion of having a stronger risk parameters as such would not by itself and go to the essence of what happened here.

>> the financial services sector is uniquely complex. it has a regulatory structure that is designed to help companies assess risk and manage their own systems. i am interested in your comment that you were in a position to have people surface problems to you as they occurred. but would it not also be true to say that you and the regulators who oversee your business to ensure safety and soundness should have been asking of the right questions? from your perspective, i would be interested in your description of your interactions with the various regulatory agency, and also, to what extent you felt they were asking the right questions at the right time. >> i might have misspoken or had a misunderstanding. i did not say i was in a

particular position to have issues raised. what i said was a that a board does not know what is in the position books of a financial services firm. you are not going to know on a granular level what is happening in a business. you need to put a strong people in the relevant positions, and then you are depending on of those people and a set of checks and balances to surface problems when they exist. that is what i was alluding to. >> in the interest of citigroup, observers would say that was not present. the infrastructure was not there is a is, properly allocated and properly executed for risk management. you have said this was not true. given the outcome, do you think there was a way for you to have

done this better, and do you think the regulators should have noticed this more strongly in what they did. >> i do not think that is right in terms of the processes of not being there. we had a board meeting once a month, and the independent risk- management people reported to the audit committee and to the board both in writing and verbally. we had a very robust processes around reporting risk. in the instance of that we are talking about, these aaa instrument certainly were not reviewed the way they had been in the entire time. >> but we are talking about process. >> you had a very well-regarded system of risk-management. you had about 2500 people

working in this area. they presented to the audit committee and the board at every meeting. >> so, let's talk about the regulators for a second. do you feel they asked the right questions at the right time? were they the kind of things that would support every agency feeding back to the federal reserve about the safety and soundness of your enterprise? >> i was not personally involved in the interactions between the company and the regulators, so i cannot answer that. >> can you, mr. prince? >> i was. i would describe it as follows. the regulators were embedded in the organization. that is to say, they were representatives of the regulators, the various regulators who had offices in our building and worked there on a daily basis. in addition to that, our various staff functions, the risk

functions, the audit functions, the legal functions, would meet with the regulators on a periodic basis. my guess is it was at least monday it -- once a month. i would personally meet with them at least once a quarter, sometimes on a private basis. i think that what happened here was that the regulators also mistook the ultimate safety of the cdo positions. i do not think it was a situation where the regulators were not active. it certainly felt at it from a company's standpoint. i do not think it was a situation where the regulators did not know what was going on. they lived with it is a day by day. the mistake that was made by everyone about the value of these instruments was fundamentally also made by the

regulators. i think that is basically what happened. i do not think it was a failure of a regulatory involvement with the company. >> and thank you. i see my time. >> thank you very much. >> let me start with you, mr. prince. i want to thank you both of you for coming. >> call them like a little closer to you for everyone -- : the mic a little closer to you. >> mr. prince, you talk about the 30% crisis -- a 30% drop in housing prices as an unprecedented event. he referred to it as a black

swan. have you considered why it happened? have you given any thought to that? if you have, could you describe to us what your thinking is? >> i have given that some thought, as you would imagine. i know that for a period of time before the financial crisis, david would say that our stress testing is x or y. we would have to have a decline of x or y. and we have not had that since the great depression. i thought about why, in this time. , we had such a huge decline -- in this time period, we had such

a huge decline. my guess is that during the time in which home prices increased so much and so much expansion of 1ibzlending occurred, that coule seen as a bubble in housing, so that if you were to draw a trend line that would go up at a certain number of degrees, that because of the easy money and other factors, that trend line in housing would have accelerated very quickly. instead of going up at a steady in time, it went up at a rapid incline. . coming back down, on the other side of this, is the 30% of number that we see.

the decline is somewhat a function of the increase. >> we have had bubble's before. this was a very large bubble, but we have had them before. but when they the slated -- when they deflated, the mortgage failures were not substantial. it was certainly not a 30% decline in housing values. were you aware, for example, that in this particular bubble, 27 million mortgages or subprime? they were ready to fail as soon as the bubble and deflated. i asked some of the people at the table yesterday if they were aware of it, and they were not. when alan greenspan testified,

he mentioned that there were 12 million mortgages made by fannie mae and freddie mac that were not reported as subprime, so people were not aware that a very substantial number, almost half of all the bad mortgages in the economy at that time, were made by fannie or freddie and were either guaranteed by them or on the books. has it been made clear to you why this happened, why we had a 30% decline in housing, if you understood and new at the time that so many of the mortgages, more than half in our financial system, were of this quality? >> a commissioner, it is hard to put yourself back mentally in the that time frame after all that has happened. the events of the last couple of years color 1's thinking --

one's thinking. it is hard to think of a subprime loan as not being of bad loans, but i am not sure that was the case at the time. i am not sure that from a policy standpoint, a landing at stand point, subprime loans were equated to bad loans. >> i am really happy you said that, because that is exactly the point. most people were very proud of the fact, especially here in this building, and elsewhere in washington, were very proud of the fact that subprime loans were being made and that the home ownership is a is rate was going up. now, when it turns out that these mortgages failed and caused, i believe, the financial crisis, everyone is running away from them and trying to point fingers at who made these loans. but we have to remember that

64% -- and there was a 64% home ownership rate in 1994, but in 2005, it had gone up to 69%, and everyone was very proud of this. i think we have to look at this as a question of government policy and not as a question of casting blame on the people who happened to be involved at the time. let me go to one other subject. the national community reinvestment coalition says it in their annual report from 2007, that over $four trillion in the community reinvestment act commitments were made by banks in an effort to get approvals from regulators for a in mergers. you were much involved in this

as the general counsel for citi for awhile. your commitment was something like $500 billion. are you familiar with the fact that these commitments were made in connection with applications to the fed board to another regulator for approval? >> well, that is a long time ago, but i would say in a general sense, yes. >> while you're at citi, there were announcements and that these commitments were being met. these loans were being made to provide financing for people to buy homes. were they in fact made? >> i am confident that the commitments the company made in

the community reinvestment act area were filled. i do not know the details. >> you made them, and the announcements were valid. the loans were actually made. i have just one more question for you, and that has to do with the fact that you talked about the downgrade by the rating agencies as being a precipitous and causing tremendous turmoil in the markets. but the downgrade really had one effect, and that is an accounting effect. that is to say, once the downgrade occurred, then it became necessary for financial institutions that held these mortgages to write them down in some way, or take losses on their balance sheets. i would like your views on this whole question of fair value accounting and mark to market accounting, and the way the accounting rules operated to

have an effect on the financial crisis. >> that is a very broad topic, and i am sure we could have hearings in just on a mark to market accounting. >> we will. >> i wish you well in that. [laughter] >> roll call. >> and i hope i am not here for it. my feeling is that the debate on a mark to market accounting is that it is a false debate. it should be a ball mark to market or a note marked to market. -- it should be all mark to market borior no mark to market.

if a pension plan is funded, you can find it for a number of years. there are very few areas where the absolute nature of today's market to a market accounting applies. there are no cases where the mark to market accounting is not associated with the cash flow of these instruments. it is entirely possible that at sometime in the future people will make a lot of money from these instruments, because they will pay out. but again, but picked -- but again, the debate is not about those issues. we either have to have it as a theoretical purity, or we do not. >> almost everyone who has come before our commission has testified that the high level of delinquency on subprime loans led to the bubble bursting and

was one of the primary causes of the financial crisis. the deterioration of these loans caused the cdo prices that you are so well aware of. i was surprised that among the causes you listed of the financial crisis, the delinquency on subprime loans was not among them. why was that? >> well, it was a matter of how much i was going to licit. >> you listed a dozen items. >> what you said was factually correct. what i did was list of factors that led to a deep subprime foreclosure rates rather than list the subprime foreclosure rates themselves. i referred to excess lending by

lenders, regulatory problems, and excesses and abuses in mortgage extensions. it was that combination of factors that contributed greatly to the problems with subprime. i could have added it, "all of that led to the problems with subprime." >> when you were secretary of treasury, do you recall the housing policies of the clinton administration and the effort to increase homeownership by increasing the credit available to moderate and low income borrowers? >> yes, i do. >> and you thought they were in successful at the time? >> i did. >> and you supported them? >> i did. >> as i mentioned before, the homeownership rate in the united states increased substantially. at the time, everyone was very pleased about this.

would you have gone to congress at that point, understanding what you know now, and sent to congress, we have to stop this subprime lending, because sometime in the future, it is going to cause us tremendous problems? would you have gone there as secretary of the treasury and done that? >> and know. -- no, let me give you my view of that. i believe the cra did an important thing in making credit accessible to people who otherwise would not have had it. that experience has given me some sense of this issue. i do not think the problem lies in cra, and i think it is very important to have subprime credit available.

i think it is very clear now that there were substantial excesses and abuses. what i think we need now is to continue with cra. i think it is very important to make credit available in inner cities and corresponding areas, but i do think we need strong consumer protection. then you can get that the excesses and abuses and the problem. >> go ahead. >> i think there are instruments that are susceptible to abuse, and i think regulations should be put in place to stop the abuse. >> i agree with you in the the sense of that cra is not the problem. but fannie mae and freddie mac had on the balance sheet in 2008, have on their balance sheet probably today, about 12 million subprime loans that we did not even understand were on their balance sheet before they

disclosed in 2009. that is one of the reasons we have this problem. did you ever attempt, when you were secretary of the treasury, to rein in the kinds of things that fannie and freddie were doing at that time? >> commissioner, at the time -- let me give you two responses to that if i may. if we had serious consumer protections put in place, ujen the kind of loans you are referring to, if they are the result of the excesses and abuses, will no longer exist. those mortgages on the books of fannie and freddie will be sound loans. >> i yield the commissioner an additional five minutes. >> when i was at treasury, we

had concerns about fenty -- about fannie and freddie. the deputy secretary at the time, larry summers, but quite involved in it that issue. >> what would be your idea of a loan that would enhance the ability of low and middle income people to buy homes, and affordable housing loan as fannie and freddie were required to make it, that would be a sound loan? i mean, if you were going to require organizations, as betty and freddie or required to make certain kinds of loans -- as fannie and freddie were required to make certain kinds of loans, how could you regulated to

ensure that these would be unsound loans instead of the kinds of loans they seem to have made it? >> i am no expert on mortgage extension, but i think what i would do eschar as consumer protection what i would do as far as a consumer protection more generally would be to only extend loans to people who constitute sound borrowers. i think there are probably certain instruments and that i would prohibit. if it were practical, i do think it would be important to have some kind of counseling available to low-income borrowers. too often, people in that position really are not adequately equipped to make the decisions and they need to make.

but that may just not be practical. i would have at suitability requirements. i would bart certain instruments. -- bar certain instruments. >> and the down payments? >> certainly, adequate downpayments. >> might it really correct the record? -- might i really correct the record? republicans gained the majority in the house of representatives in 1944 was a statement made at the beginning of this hearing. what we meant to say was 1994. i want the record to reflect that. >> as they say, imitation is the

sincerest form of flattery. the chairman and the vice-chair have stolen some of my thunder regarding the cbo's, but i still feel compelled to return to that topic briefly. citi wrote off more than 33 billion of the 43 billion that you had on the books. because i think it is emblematic of something that went seriously wrong in our system that everybody believed was impossible -- i mean, yesterday, we had a panel of your underlings, if you will, who were very serious, high ranking people within the bank. they sat here before us. they all made a lot of money. in one instance, almost $100

million in the course of three years before all the troubles hit. notwithstanding that, the risks associated with these cdo's, all of them said this was inconceivable. every other institution who was dealing with them had the same views, so we were hit with the calamity which nobody could have anticipated. it seems to me that -- yesterday i likened it to a medieval alchemy. today, as i study it more, i am beginning to believe that it was hallucinatory. this is something i think really deserves exploration, because if you look at the fundamentals, it defies logic. that is not to say that there were not a lot of people who

believed it. i want to focus your attention on it one more time, if i can. these securitization that occurred resulted -- and this is out of the goldman sachs analysis basically, that 75% of the trenches where aaa,. the bbb traunches at the bottom 7%. it took out all of the bbb trenches -- traunches, sliced and diced them, and got these

collateralized debt obligations. suddenly, you have taken what was at the bottom 7% of the underlying security and made it, more than 90% of it, above a-rated. the fact that nobody questioned this it is highly troubling. at the end of the day, this was the most significant single matter that impacted your books, and it certainly impacted the books of a whole lot of other financial institutions. there is a comment that was given to us by a former senior staff member from the federal reserve who warned us that, "the specific accuracy of complicated financial models should not be trusted.

" presumably, somebody was modeling this, and somebody believed in the modeling that resulted in the these analyses. the credit rating agencies, the regulators to the extent that they evaluated this, but we now know that everybody was horribly wrong to the tune of over a third of your capital. how do we address these kind of dilemma is a is what i guess i >> you have stated it quite well. in hindsight, it is hard to see how these structured product could have been accepted in of the way they were accepted. i think that, going forward, the commission needs to think about

the next issue. in other words, it is very unlikely that structured products are going to be of very big problem for anyone in our lifetimes. those are not likely to be accepted into the same way, then flee. the question really is, how could an industry, how could the control processes for an industry have missed something so universally, and how you protect the next one? i do not know what the answer is to that. i do not know whether the next one will be a sovereign debt or -- i do not know the answer to that. hopefully, part of the commission's effort will be to try to examine why and how people as smart as, with as much experience as a is the people in

these agencies, how all of them could have turned out to have a what was a false belief in these instruments. >> it's a in terms of your comment about being accepted, my assumption is that that was not meant in the context of something being offered and then something being accepted. you wear it surprised that people bought them in terms upon -- you or exit -- you were surprised that people bought them? >> i would respond to that very thoughtful question in the

following way. i have been involved in this for about 40 years. i can remember when the models for it came into prominence -- first came into prominence as a measure of market volatility. the problem with all models, and it is one of the reasons i make the suggestions i do it regarding leveraged, is that there is no better information to feed into them. in this case, the information 20 years of history. this is the great lesson of this

crisis. the downside of the financial markets turned out not to be reflected in the experience of the last 10, 20, or even 40 years, but rather to be far greater than that, and greater than anybody thought. i think the one thing that could have made an enormous difference here is if there had anna and recognition -- if there had been a recognition that the real downside of our system was that stressed conditions were not reflected in the experience of the last decade, but rather were far worse. it seems to me that what we need to do in both the private sector and the public sector is to have changes in reforms that reflect what is now a new understanding of the downside risk of our system. >> let me try to keep the focus on you folks for just a minute.

i am not saying that you needed to be as present as the people who soaves -- as president -- as precient as the people who foresaw this. they analyzed this, and they basically shifted their positions to offload some of their exposure to the mortgage market. of course, people like henry paulson made $15 billion betting against the subprime market. mr. rubin, you have a whole history in at the subprime market, yet careening into 2007,

citi made a slew of a bet that put you into further jeopardy in this regard. you were continuing, essentially, to advance your exposure. let me just point out one other thing. in july of 2007, you started to buy back cdo's to put them back on your balance sheet they had been off your balance sheet. it seems like you might have taken some action to protect the balance sheet of citi. >> there were some hedge fund managers, henry paulson was one,

who really did see the big picture spiri. if you look at the various activities major firms were engaged in, i don't think any of them really saw the potential for the kind of crisis that we had. in terms of the purchase back, i was not aware of this $43 billion exposure until september. that was taking place at the level you would not see if you were just on the board. my understanding is that they were basically frozen. >> but you could not sell them. >> well, they could not sell them. >> should that not have been a

signal to someone that your exposure was dramatically increasing by having to take these back? >> you are correct. they had to buy it back -- they had to buy back those traunches because the market had fundamentally become frozen. >> this was more than a year before lehman brothers failed, nine months before bear stearns. >> it was before we became aware of aaa positions. they still believed, and as i understand it was in good faith, that these wordplay aaa securities -- that these were aaa securities, and that they would begin to function again in

time. >> let me ask you about one other question. i recall that you either had to miss your thanksgiving dinner or get up a from your in thanksgiving dinner in 2007 to apply to abu dhabi to raising $7 billion in capital. would it have been possible for you to have raised more capital for citi event or prior to then that might have avoided the taxpayers having to bail out citi at that time? i recognize that it was an expensive capital. but, could you speak to the capital requirements? yesterday, alan greenspan said that one of the things he would recommend, even though he did not take much responsibility for this, but he did suggest that

going forward there should be a whole lot more capital, and a whole lot more liquidity required but these large financial institutions in order to avoid the risk that the taxpayers will have to bail them out into the future. >> i agree with that position. my recollection is that at that time, shortly after our new ceo -- no, i was chairman and we were looking for a new chairman. we tried to raise -- i think i am right in this -- my recollection is that we tried to raise as much capital as we could. there are others who would remember that better than i. your point is extremely well

taken. from that point forward, we had a highly proactive and focus on raising private capital, and ultimately raised billions, i do not remember the exact amount. >> but of course, at that time it was harder to raise and more expensive to raise. >> i do not think we ever held back from raising capital at that point because of a price, at least not as far as i can recollect. >> mr. prince? >> yes. >> mr. prince, from 2006 to 2007, citi increased its leveraged loan limit. if you were concerned, why did you about the limits to be tripled? >> we were in the business of

lending money to private equity firms and so forth, for them to conduct their activities. it was widely reported in the press and that private equity firms were driving very hard bargains with the banks. my belief then and my belief now is that one firm in this business cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future. running a securities business is a lot like running a baseball team and where none of the players have contracts. people can leave any day and go to another team. if you are not engaged in the business, people leave the institution. it is impossible, in my view, in a leveraged lending business,

for you to say to bankers that you are not going to participate in the business for the next year or so until things become a little more rational. you cannot do that. you cannot do that and expect that you have any people left to conduct business in the future. >> thank you. if i could, just one more minute. there are several issues i would like to ask about picking it is a if you do not get a chance to answer all of them, i would like you to respond in writing. there are many forms of arbitraged engaged in by the printing -- arbitraged engaged in by the principal financial institutions coming before us. there was an attempt to have the least restrictive regulatory

process. you wanted to move things off the balance sheet so that you did not have to hold capital against them. if you hold trading assets, capital requirements are so low on them that you are basically holding 800 to one leverage on them. many people who work for these institutions are able to avoid what seems to me is one of the glaring failures of our system, in that insufficient capital, insufficient money was being put where their mouths were by the institutions. could you speak briefly to that? >> with respect, that question is important enough and detailed enough that i would prefer to respond with a supplemental. >> about would be fine.

>> i would make one general, if i may. i think one of the challenges for those engaged in a financial reform is the very technical nature of the problem. the kind of issues that you have identified do need to be addressed in terms of increasing constraints on leverage. hopefully, that will be part of this process. however you doin it, there will always be people seeking to find a way around it. this will always be a work in process. >> perhaps the total amount of capital required should be the same after securitization as before. you ought not to be able to

transfer assets off balance sheet and end up with a circumstance where you do not have to hold any capital against tahem. 50% of the mortgages that you held were off balance sheet. i know that there are some new balance sheet requirements that have come in as of 2010 that may require you to bring some of them back on, but there is a reason why you had over $1 trillion in assets off balance sheet. someone believed it was in the interest of the organization in some capacity. was it less capital, less ability -- less visibility, who knows? but you are not alone in this regard. it seems like the capital transparency needs to be addressed. >> you have identified a very important problem. on the other hand, that

securitization, it is done on a sound basis, it is central to the function of our economic system. you are right accept that you have to enable institutions to have an effective and securitization is well at the same time eliminating this problem. >> i know i am over my time, but let me say one thing. one idea that has been floated about has been to have you take some risks in connection with these securities. maybe you need to hold them. as alan greenspan said, maybe you need to pull them and be aligned with the investors so that your diligence is appropriately incentivized to be sound. >> just one note for the commission members, according to our staff, this is an estimate, of the $51 billion associated

with subprime failures, $10 billion or in the banks, and some $41 billion were in a non- banking enterprises. >> i was unable to hear the testimony yesterday from the other representatives of citi. to the extent that in a less than perfectly informed, i apologieze. you said that no one could have foreseen this kind of crisis, and that that was a universally held belief. the question is not whether you could have foreseen the whole crisis, but whether you could have foreseen the spark that lit the crisis, which was the poor

assessment of underwriting, the poorest assessment of the risks associated with the mortgages, the poor hedging, etc. it? ? you were familiar with the activities of fannie mae and freddie mac and identified them as a risk. wouldn't there be grounds to be at least a little suspicious at some point? >> i did not say that no one could have foreseen this. i think some people did foresee it. what i said was very few people foresaw the full combination. >> the point is, they did not need to. they just needed to see one piece. >> well, i am not so sure about

that. it seems to me that there was a large combination of forces that came together. it only a few of those had occurred, we would have had a very different experience. you can say, why didn't this or this suggest to you that would have been a problem. i actually did suspect some aspects of this, and talked about it in speeches, but what i did not see, was all of these factors coming together. is that extraordinary combination that led to this crisis. as long as we have had capital markets, we have had crises. you always look back and say it, "these were obvious warning signs."

they are not always obvious at the time. unfortunately, a market-based system, which i believe in strongly, will have periodic and down cycles, hopefully not like what we have just experienced. >> in your testimony you did talk about low rates causing people to borrow short-term and lend longer to get a higher yield curve. did citi create a structure that was too dependent on a steep yield curve to survive the changing rates? >> across the financial world, around the globe there was a so- called carry trade.

>> you were funding things at very short maturities to make money in long maturities. did that become too much of the business model? >> that is a good question that i do not know. i would say in retrospect that across the entire financial system there was a great deal of this kind of carry trade going on. there was a massive influx of capital from abroad. the bond market yields were lower than they otherwise would have been. as you know, mortgaged yields tend to be a function of the tenure, and that is what my

reference in my statement was too. >> you've said that you cannot overstate the need for risk assessment and running your business. as i understand it, this was essential to your portfolio. on march 29th, 2004, occ concluded an examination of the fixed-income derivatives at citi. that report was transmitted to you six months later. they concluded that certain traunches continued to pose a risk management challenges.

you seemed to place a lot of reliance on the credit rating agencies. how much reliance was placed on the agencies? >> with respect, the positions that are involved were not known to me until september or october of 2007. i do not know the answer to that. david was here yesterday, and i think he would have been the proper one to answer that question. >> i will just add one comment if i may. both of us learned about this in the fall of 2007.

clearly, i remember when i initially heard about it, and i have a reaction which is in my statement, to the effect that if you are engaged in an arbitrage business, then the other side of that transaction is to completely dispose of the risk. . .

i'd think that you need to go back. >> but you were his superiors, were you satisfied with the risk assessment in your organization? >> david was knowledgeable and capable. >> i had great confidence before david -- before this and i have great confidence in him now. >> you felt that the internal processes surfaced appropriately? >> correct. >> in the report that ended

december 31, 2007, traditionally the board was provided limited material in terms of impact on the legal into it -- entity. in light of the assessment by a key regulator, at the bank level and that the parent level, is there a reasonable basis to be -- >> an additional five minutes, prior to the answer. >> the date? >> december 31, 2007. >> i have not seen the company's response. it is worth noting that the regulators, including the fed, were involved with that the

company throughout this entire time. . . \ / \ if the fed thought that it s inadequate, it would have been useful to raise it at another point in time. >> mr. rubin? >> i think that david was extremely qualified for his job and i have no doubt that they acted in good faith and i think they have good processes. i think that after the fact -- let me add one more thing, if i may. i think that in terms of the facts at the time, those decisions were taken rather than

dispose, they sought aaa securities. obviously in retrospect after the enormous development that took place and the tremendous cost that those developments led to, these securities had a very different look. evaluating whether they did what they needed to do, which was bringing issues to the board for evaluation in terms of facts at the time that were not reasonable of the time, my judgment would be that they acted in good faith. >> at the same time, the fed -- this is the report from the senior supervisors meeting from the federal reserve bank, board, office of comptroller, sec, at nsa, and the japanese fsx felt that bad communication

across all lines created silence that senior management did not fully appreciate in terms of the market risk for retaining of senior positions and that balance sheet in richmond for not sufficiently enforced. both the measurement and conveyance of risks, activities appeared to be inadequate in the conveyance. >> the report you just read was dated when? >> november 19, 2007. >> it was referenced earlier, in november 19 meeting where mr. rubin attended part of the meetings where mr. bushnell was. >> thank you. >> the problem with a report

like that, commissioner, is that must be distinguished from an important point. i spent a career evaluating trading operations. the challenge was always to decide whether people had acted reasonably or sensibly. the report that you need to read is not what you just read. you have got to find a report issued before that, before they knew what was happening. >> excuse me? >> continue. our apologies. >> i am worried. >> go ahead. you did nothing wrong. >> one needs to look at reports

that were issued before the crisis developed. if there was a crisis i would assume the regulators would have brought them to the attention of the company. it was difficult, after the fact, to make a judgment it was reasonable. >> a fair point. are you aware of any reports from supervisors prior to the crisis that suggested the same characterization of banks in terms of the internal risk assessment communication risk? if there were such reports, i was not aware of them -- >> if there was such a record, i was not aware of them, and i would assume that there would have been insistence that they be at rest. >> we can assume the existence of the reports and i would ask

additional questions on that front. >> i would like to point out that mr. told deacon -- holtz- eakin did reference previous reports that were very clear. we will direct the commission staff to promote -- provide that information to you. for the record, when i asked a question to the staff on the balance sheet losses there was miscommunication. giving you the right number, the losses in the non-banker very substantial. >> thank you, mr. chair. i would like to sincerely thank

mr. prince and mr. rubin for being willing to appear to for us today to help us with this important inquiry. he said in your book that unregulated of ct derivatives can cause problems. do you believe that they did in fact contribute to the financial crisis? >> at the very least the credit default swaps seem to have played a role, a meaningful role, in the crisis. my reference, by the way, in the book, was directed at derivatives more broadly. >> do you now think that there is a need for any regulation of

the otc derivatives market? >> i think there should be and i thought that there was at goldman sachs. regulation of over-the-counter derivatives and listed derivatives should be enhanced, particularly through and hit -- increase capital margins. >> in your testimony you say that you feel standardized derivatives should be exchange traded and that customized contracts should be cleared, if possible, and if not there should be disclosure of information about them. can you elaborate on the benefits that you think it would provide? >> at the very least if they are standardized, and you are an expert in this field, to the extent that you can standardize

those instruments, not only is there transparency in the markets, but there is also potential for net in organizations that will considerably reduce the risk. over-the-counter derivatives are the more difficult problem but it seems to me -- and i understand that this is technically very difficult, but it seems to me that it is possible to put these over-the- counter derivatives through a clearing system for increased transparency. if that is technically not possible, and i understand that there are technical problems, it seems to me that at the very least there should be some means found for creating transparency so the regulators at the very least know what the exposures are. >> you said in the past -- in

your view was lack of political will related to financial service? >> i do not think that they were able to be overcome. they were insurmountable at that time. when i was at goldman sachs in my last couple of years my senior partner and i develop serious concerns about this. i went to see dick fisher and he agreed. i started an effort to see if we could do something in the breath of the hour later proposals. it quickly became apparent that there was no possibility of moving forward. as you said, the industry had

very strong views on this and it was not something that we could do. >> do you think that the lack of political will may have been affected by a pervasive view that the market was an appropriately self-regulatory and there was no need for regulation? >> mmm, that is a level of sophistication that is an important question, but in the political arena i do not think that was what this was about. more about the interest of those involved and their ability to affect those interests. rather than the much more sophisticated question you are raising. >> you said you would think that at the least credit default swaps played a role in the

financial crisis. looking at the bigger over-the- counter derivatives market, there is a lot of injured activity that is created through the contract. there is also a lack of transparency. i wonder whether or not those problems, plus the lack of effective discovery, played a role in some of the financial panic that struck in 2007 and 2008 wh. >> too big to fail is also like to connected -- too big -- too big to fail is the too connected to fail.

disclosure of information to the regulators, the think that this would address some of that problem? >> in part, but i fell back at goldman sachs, and i still feel this, you need one more piece. substantially increased capital margin requirements for a greater cushion in the event that problems occur. as i said in my book, as long as these are conditions, none of these will be a problem. under stressful conditions you can get these very quickly. >> in that connection there are margin requirements on exchange that can be raised. they probably should be raised.

in the over-the-counter derivatives market, the instruments themselves have lent themselves to high levels of leverage. a number of instruments which have seemingly been designed just to build in a great deal of leverage. currently there are no mechanisms to require margin for collateral on that. is that correct? >> yes. >> do you think -- i am concerned that some of the complex city that entered into the market, some of the highly complex instruments may not be fully understood by the parties.

either by the over-the-counter derivatives dealers themselves, their management and board, or by the entities that are purchasing them. particularly i think about the problems we have heard about in municipalities like jefferson county, alabama. the fleece problems that were evidently somewhat designed to disguise a certain amount of greece and its exposure and the dead. i would like your views on the need for this degree of complexity. i am not sure that regulators have the capability of understanding the instruments. i do know that anyone else does either? >> a very good question.

my recollection is that i discussed this in my book. i think. i think that the complexity is understandable -- i suppose that complexity is never useful, but the other hand is that your point is correct. i think that users of these instruments often do not understand the complexities and risks embedded within. that is exactly why i think that capital margin requirements could be increased. at least you would have greater cushion. i think that if you have greater capital margin requirements, you can focus more on understanding the risk they were taking and it will most likely result in less use of the instrument. >> thank you.

>> mr. thompson? ms. murray? you had a question? >> just a follow up on your comments about your perspective. it will be short. you mentioned capital requirements being important. did citigroup ever create products that were specifically designed to avoid capital requirements bella >> i do not know the answer to that. >> mr. prince? would you create a project for which one of the principal reasons was to avoid capital requirements? >> i think that the answer is no, the product would have to be designed as something that a client would want. you would not create something internally focused. if your question is if the team

would create products and in the course of doing so tried to minimize capital burdens, my guess is that the answer is yes but i do not know for sure. >> the minutes from one of your meetings relating to the creation of new products had annotation regarding this type of structure avoiding capital requirements. >> i have no way of responding without seeing. >> we will provide the document. what is it? >> the minutes of a meeting from 2002. >> teamack, the committee that created new products for your institution. correct? >> yes. >> we will be sure to follow up. >> thank you. >> mr. thompson? mr. wallace.

>> the topics we will -- we are on is a topic that is important to me, financial innovation. mr. rubin. you have had a long career in the private sector and the public sector. the innovation in this industry is something you have seen quite a long time. you understand the role of the attacking the public's interest -- protecting the public's interest. what steps should be taken to make sure that products that have societal a fax like these structured products are well conducted before they get their, like the one we are experiencing. >> an interesting question.

as desirable as it would be to accomplish this, it may not be doable. the problem is -- when problems developed with these kinds of instruments it is because there is a set of circumstances that was not anticipated. all that these institutions do this test instruments as before. looking at 10 years, 20 years, reasonable cases, and risks and losses. if something else happens, something you did not anticipate, it is a very good question. it seems to me that the answer comes back to where we were before. you have got to create a system that can deal with it the unanticipated.

this is why i would increase margin capital requirements. one more thing, if i may. innovation plays an important role in our economy. a constructive role. >> someone argue that financial innovation is nothing more than regulatory arbitrage of one sort or another. do you agree? >> i think that innovation has nothing to do with regulatory arbitrage. i came from a country that have very large exposure to all this. they decided that they wanted some way to pace themselves in future movements. we should have a system that allows us to do that, but i

recognize the systemic risk that enabled us to do that. the commissioner and i were discussing this. >> can the risk-management systems keep up with the rate and pace of innovation? >> that is a very important question. i think of the risk function that we have was extremely robust. david was thought of as the spender on wall street. a couple of thousand people in a risk organization that were independent of the businesses, and the -- able to say no any time that it wanted. these businesses operated under

the constraints of risk limits and so forth. a different question and perhaps the one you are getting at is whether or not the intellectual capacity, smart nature of the people, could keep up with the innovation of traders and so forth. i think that the key there, and something i took seriously as my job, was to make sure that we have the best people involved. when i became ceo my first job was to could david in charge. i took great comfort over the years from the frequent comments from the regulatory authorities commenting on david's strength as an individual and the

strength of the function, notwithstanding the after the fact document growing. i think that that is the best we can do it some level. we have never had a situation where a product off went out the door that had not been looked at by risk. and whether at times they did not do as good a job, human nature being what it is, they said a structure and put people in the structure, which is the best you can do. i think that the regulatory situation should be changed. >> that is where i am going next. >> all of the different regulators and schematics is crazy. i wanted to make sure i

commented on that. >> innovators by their nature are passionate about what they do. my personal opinion is that it is not clear that a risk management function can keep up with increased activity from innovative teams. i think that poses a systemic risk, quite frankly, to the industry. that is my opinion, if i might add. on the regulation from yesterday mr. bush nelson said that he thought that some consolidation of regulatory oversight was warranted because there were too many regulators that they would have to deal with. would you observe differences in

the regulatory scheme in recovery process? the recovery process being the rigor of their own oversight. >> with respect, that question is too broad. i will give you the best answer i can. i think of the regulatory structures in the jurisdictions you're talking about compare with the united states more favorably, in some ways. the regulatory structure here being historically based from the time after the depression i think that a more efficient regulatory structure would lend itself to greater probity for the industry.

the way that these economies acted to the crisis, it is a part of that. also in the u.s. in the u.k. thank you. i yield the rest of my time. >> mr. wallace? mr. george abela that will go allies chair. >> -- go to the vice chair. >> i may have it put -- misunderstood, but i thought that you said you were concerned while you were at goldman sachs over something high in the derivatives market. >> to my knowledge, credit

default swaps did not exist until much later. >> what were you concerned about? >> october 18 so, i thought we should have higher market derivatives for stress conditions so that derivatives can feed back in the cash markets why did you oppose it?

that is the story we have. my views of the ones i sent out a little bit ago. the issues i have been devised upon by treasury, approaches within existing regulatory framework being considered are very uncertain >> wed the

contrary, i was trying to >> we are out of time, can you submit it for the record? flax i will do that. >> i will state it quickly. >> do not answer it now because we do not have the time, but i would like you to respond in writing why it is >> as you

respond to him it -- we do not have to capitalize where the liquidity of foot was in terms of the balance sheet up being appropriately capitalized. thank you. >> mr. thomas? >> thank you.

if you would like to this in writing, they did not have the technical capacity to assess the models until i started out talking about the garden of good and evil and i meant that. unfortunately stress tests may

not be useful. in terms of the models that you look at. i would not be here if the function of this commission was to examine policy offer by the commission one of the reasons i like capital is the use the official in areas and other

facilities -- transparency and present ability for each person.

almost $150 million on the way out. on the way down that same team did not have a nickel. i do not like government telling people what they can think across we sat through a channel

and i want to thank you. citibank did not hold out for a certain extraordinary aspect from your organization. basically we have been given no opportunity sell the pieces were exchanged and change behaviors and we had half to have consequences. making your stock argument, mr. prince, most of you about something other than that as well. to make the argument that

somehow some apology allows for a file maintenance >> valley have read along with many of the commissioners -- file maintenance. >> now that you have run along with many of the commissioners, let me say that if i lived another 100 years by would not for men to achieve what mr. greenspan has achieved.

we have been trying to examine how this substantial far-flung financial empire failed to the point where the united states government had to provide $45 billion in assistance and assets. in one particular area, subprime lending, there was a massive failure. of what i have been struck by in the documentation is i have been struck by frankly how much folks in the organization did not know about what was going on and i am struck by how much the two of you did not know about what was going on in your organization. at the end of the day you were the head guys. you were in the suite of

executive offices. looking at the record they did point out a number of regulations on the table. yesterday mr. bowen sent information about a $50 billion per year business where mortgages were being bought and sold and appeared to be in compliance. we have discussed the fact that subprime originators, u.s. management were not aware of them. cataloging in number of significant issues. even today it is clear from the record, even after hsbc had its problems, these were not the highest level decisions about how to handle subprime. it seems to me that at the end of the day the two of you in

charge of this organization -- i will say that you took responsibility and resigned. i wanted to ask you clearly, you have gone out of your way about how you were not vault in operations. you have a direct duty to the chairman of the executive committee, attending weekly business meetings. your compensation was $1 million in salary for a guaranteed bonus. in your interview you indicated your level of reaction -- interaction was frequent. you would talk multiple times per day, speaking by phone every other day. you were very involved in the

investment-banking business. mr. rubin, i would ask you, do you bear central responsibility for the new york collapse or the u.s. government with citigroup? >> mr. chairman, let me respond by number of parts, if i may. you have pose an important question. no. 1, the executive committee of the board was an administrative body that did not have a decision, they met between board meetings that were very infrequent and were not a substantive part of the institution. they were designed to be convened by the general to give formal approval and substantive parts of the decisionmaking process.

i think that all of us -- i said this in my comments, all of us have failed to see the potential for this serious crisis and the multiple factors at work to bear responsibility. we all bear the regret in that respect. as you correctly say, i was not involved. i was a member of the board. i worked extensively with clients. my interaction on other issues at a strategic and the managerial level, as i said in my statement i think that the aaa securities at the heart of the problem were understandably

viewed by those that conducted the business as being of diminished risk. >> but it went so wrong. even at the end investors were informed of exposure when the risk committee was being told $55 billion on the same day. i do not know that you can have it both ways. you were either asleep at the switch or pulling the lever. i do not know so much that policies are important as much as assessment of responsibility. perhaps instead of asking what you and when, i should be asking what you did not know and why you didn't know it.

>> the board that i was a part of had a very serious commitment to oversight in to making sure that the institution conducted its business appropriately. but a board cannot know about the institutions within a trade commission. i do not know if it was $1 trillion as a member of the board and in connection with other activities, including our internal auditor, legal counsel, cfo and the rest. you can be sure to have robust

-- robust policies at the board level. as i mentioned earlier, reports to the board at every meeting about the risks and institutions. you are depending upon having the right people in the job and those processes being robust. >> i will make one last comment. you are not a garden variety board member. i think that the most people chairman of the executive committee of board of directors implies leadership. $50 million every year guarantees some implied leadership. i think the leadership and responsibility matters. >> i agree.

the committee was a formal administrative apparatus. in 2007 because of the problems that were developed i felt i should not get a bonus but not because of the reasons you are alluding to. i felt that the money could be better used towards other purposes. i went towards management and suggested i did not get a bonus in 2007. >> you will be the only one in the end to make an assessment. risk always applies -- implies upside and downside. acknowledgement and understanding are important, but it is up to you. >> i completely agree, but it is

important to understand the roles that these institutions play. >> before you leave the point, you did not ask me my opinion but i would like to state, if i may, it is absolutely incorrect that mr. rubin bears any responsibility for what happened at citigroup. >> i appreciate that. >> you are the person that resigned, what happened after you left? who assumes the position of ceo? >> mr. bishop. >> what happened in terms of

that office after that? >> at that point a search was conducted and the bagram handed became ceo. >> so, there was a search. mr. rubin, as chairman of the board, notwithstanding the discounting, it is hard to believe that in this time of stress, based on your background and the role you played in getting out from for thanksgiving dinner, you must of had fairly significant knowledge within the corporation. to back away from any kind of critical decision

hah u.s. said the that is the case. because there is such a structure that is so coordinated, you trust that all of those people beneath you, when we go back, i understand i am getting older. i made a mistake on the date. but we have the record open in terms of rich men questions. you said that you would respond and i wanted to give you a heads up as we finished. our attempt to understand in some depth one corporate model, there will be additional questions trying to understand how with middle management and upper management panels, chairman of the board panels, that we are comfortable with the assurance that you knew what was going on in that everyone denied

responsibility. >> can i make one factual correction? i was not chairman of the board. i only became the chairman of the board after mr. prince stepped down. >> why would they make you chairman if you had no knowledge of the structure of the company in a meaningful way? >> i have lots of understanding of the structure of the company. >> when you look at ceo, you are looking for someone who understands the knowledge and the problems. this is not need to be carried out, but there are problems with your multiple the miles. >> i do not think that they are multiple the miles. this is an explanation of the affirmative role played by the board based on the function and

structure of the institution. i was asked to be chairman after the step of. there was an outstanding selection for the new ceo. >> i guess we are saying that we can talk about board direction and structure function, but what we want in terms of corporate models in those positions, there is a higher confidence from some people than others. at some point you cannot understand an institution by simply following the lines of a structure model or even the dotted lines. what we are trying to say is that it it is hard, based on my personal knowledge of you in the involvement in any institution i am aware of, the ability to call back to restructure its function model that argues about the box

that you were in. i have never seen you except the outlines of the structure of a box. if you wanted to accomplish something that he felt fairly strongly about, it is hard for me to say that we are finished, but i wanted and on a compliment. >> your response is a rather mixed complement. >> i reserve the right to amend. >> i decided that when i left the treasury i would never have an operating role again. which is precisely why we developed it at citigroup. >> the record of today's commission and the discussion is what it is and i would like to thank both of you for taking

your time with us today, answering our questions. we appreciate it very much. we will be adjourned at 12:30 -- we will recommence at 12:30. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> president obama is holding a series of meetings in washington for his nuclear security conference that gets underway tomorrow.

he prepared for his first meeting at blair house and also has meetings scheduled with leaders from kazakhstan, south africa, and nigeria. we will have continuing coverage available on c-span that works and our website, c- span.org. now, u.s. suprem4i court justic, john roberts. he recently offered a historical look at the changes experienced by the high court over the past century and its evolution as an institution.

he takes questions from audience members on topics like traditional independence, the increasing costs of litigation, his relationships with president obama and former president bush, in his role as a consensus builder. he spoke recently in indianapolis. this is about one hour. >> indeed this is a historic night for the law school as we welcome, as you well know, the 17th chief justice of the united states, john g. roberts jr. we will have a door prize for anyone the could name the first 16 without going on the internet. i could not blame half of them earlier today. i do have to say a couple of words. the chief was born in buffalo,

new york. as i mentioned, he grew up as a hoosier in he still has family here in indiana, including his sister, kathy, and their daughter, katie. we're glad that they could join us here this evening. [laughter] [applause] i have to point out that the chiefs' first beagle job was as a summer clerk at ice miller after earning his bachelor's and law degrees. since graduating he has held many important positions, including associate counsel to president ronald reagan and a judge on the court of appeals, for which she was promoted from

his current position. so, before turning it over them , i wanted to thank the chief justice for being so generous with his time today. he even had lunch with the faculty. your generosity with your time has made today very special. we are very excited to have you and i never handed over to you, mr. chief justice. [applause] >> thank you all very much. in is a phrase that you hear all the time here in you may think it is trite, but there is no better way to express genuine feeling. there -- it is a great time to

be back here in indiana. over the past month here it has been a great tradition that has been upheld. you do not have to be big to have a big heart. line #3 of the story that is told with three great basketball coaches. got on a heavenly throne coming forward to give an accounting of his life. having won 10 ncaa championships as a player and a coach and a graduate of ucla. . .

thank you for that generous introduction. i am honored by the presence of the members of the state government, university and law school communities, and all of the other distinguished guests. i am especially honored by professor white, for whom the lecture work is named. -- for whom the lecture is named.

he has been the guiding force in improving the nation's law schools. i am sure the students come here from a wide range of undergraduate experience. i was a history major and found that a basic knowledge of history, including of our legal institutions, is vital to legal education. i would like to draw on both history and firsthand experience by offering a perspective on some of the changes that the supreme court has experienced over the past century. change is, of course, inevitable, even if progress is sometimes a matter of debate. the supreme court is not immune. like other government institutions, the court changes over time, adapting its practices and procedures. the court evolves more slowly than the other branches of government. the court, by design, is the most deliberative, stable, and politically-insulated of the

bridges. court members have life tenure, but they also understand are simply temporary trustees of an enduring institution. they know the court sustained the public's respect with fidelity to fundamental principles. we are circumspect in changing the court's time tested ways except for good reason. the court may move slowly, but it is not static. it has undergone significant transformation. it takes a historic perspective to appreciate the pace and direction of that change. today, i would like to offer one such perspective by comparing the current court to the institution as existed 100 years ago today. first, to put the court in context -- what was happening a century ago? the country had just elected a new president -- william howard taft. 100 years ago this past monday, he began the tradition of

throwing out the first pitch at the start of the baseball season. a new president meant changes. the white house had to install a new bathtub. it was big enough to hold four men. [laughter] one taft, and four other men. meanwhile, teddy roosevelt had left for africa to hunt for big game. it prompted cheers from wall street. the alliance did not prevail and roosevelt sent back -- the lions did not prevail and roosevelt sent back many specimens for display at the natural history museum. the previous year, robert perry became the first person to reach the north pole, the wright brothers were improving their flying machine, and henry ford was building his model t.

people were increasingly migrating from farms to cities. the nation's courts begin a phased disputes involving new commercial activities. -- began to face disputes involving new commercial activities. if he went to the location of the supreme court, you would not find this building. you would find a series of houses that had replaced the civil war era jail. one of those would become the headquarters for the national women's party. the 19th amendment would not be adopted for another decade. the supreme court would later be built where those houses stood in 1910, but it would not be complete for another quarter century in 1935. if you went looking for the supreme court in 1910, you would find it meeting across the street in the capitol building. when the original plans were made for the design of

washington, d.c., in the early 19th century,had been set aside for the supreme court. from 1814 too 1860, the court met in an attractive but small room in the lower floor of the capital. they moved out of the original chamber to a larger and more ornate space. the court sees the opportunity to move upstairs into the old senate chamber pictured there. these new chambers were a vast improvement over the old basement courtroom, which were windowless and quite dark. the new courtroom was larger. it had a high ceiling and natural lighting. it had a separate robing room so the justices were spare the indignity of having to put on their robes when they came to the bench. there was no room for the justices to have separate offices. without office space in the

capital, they work from home and generally came to the capital only on arguments and conference days. looking back even further, the court of 1910 was very different from the court of 1810 when john marshall was the chief justice. in 1810, chief justice marshall presided over a seven-member court. congress extended the court to nine members and then 10 members and then nine members, which is where the numbers stood in 1910. during those years, some of the duties of the justices had also changed. in 1810, justices serve not only on the supreme court, but also on lower federal courts in different regions of the country, a practice known as writing circuit -- riding circuit. congress and that responsibility in 1891, when it created a

system of regional courts of appeals -- congress ended that responsibility in 1891, when it created a system of regional courts of appeals. the attorneys presented cases orally and the arguments could last for days. the small town of washington was so lacking in things to do that the court's oral arguments became a leading social occasion and a source of entertainment. people clamored to see the great advocate, daniel webster. he was known to stop this argument in midstream if he spotted late-arriving ladies in the gallery, and started over from the beginning. we do not allow that to date for any reason. [laughter] -- we do not allow that today for any reason. [laughter] as the century progressed, the greeks became larger -- the briefs became longer.

we allowed 30 minutes per side today. in the first decade of the 21st century, there was also an important innovation in brief- writing. a young lawyer submitted a legal brief that included social science data to support the legal argument. in that case, the data included medical reports and statistical compilations to putting limits on working hours for women. it is quite common for lawyers to submit such briefs today. the focus on relevant, non-legal data and are commonly called brand as briefs -- brandeis brief says. in 1909, the court was led by chief toast this -- she justice melville fuller -- chief justice

melville fuller. he served as chief justice for more than 20 years. even though most people would not recognize his name for his distinctive face, which is an important lesson for a modern chief justice. you might mistake him for his much more famous contemporary, mark twain. [laughter] who were his colleagues on the court? this is a picture of of fuller court in 1909. how many do you recognize? it included edward white, refers and david burke, william day, william moody. these men were very important figures in 1910. for most americans today, even law students and professors, the names to not bring even a faint bell -- do not bring even a

faint bell. most people recognize oliver wendell holmes, who was famous when he joined the court, and remains one of our country's most iconic judges. after graduating from college, at the age of 20, he enlisted in the army to fight for the union in the civil war. he was seriously wounded three times in three separate battles, including a antietanti. he survived law school as well. [laughter] he wrote his classic book "the common law" at the age of 40. he served as a judge on the massachusetts supreme court before taking a seat on the united states supreme court. the other famous justice, less than holmes, was john marshall harlan.

his father was a lawyer, and he named him after chief justice marshall. the father clearly had high expectations for his son. he lived up to his name. he graduated from transylvania university in kentucky. he became a successful lawyer and joined the court as an associate justice and 1877. he did not precisely follow in john marshall's footsteps. where john marshall had been a great unifier, john marshall harlan became known as one of the great dissenters. his most famous for his 1896 dissent in the case of plessy versus ferguson, in which he defended principle of a colorblind constitution. between 1909 and 1910, the court was in the middle of a dramatic change of personnel. chief justice bullard died. three of his colleagues -- chief justice fuller died.

three of his colleagues either retired or died. president taft, who would later become chief justice, had the opportunity to appoint a new justice and four new associate justices in one year. he chose his new chief, edward white, from louisiana, who led served as an associate justice under fuller. -- who had served as an associate justice under fuller. chief justice white was the first associate justice in the history of the court did become chief justice. -- to become chief justice. there have been 3 cents, including my predecessor but william rehnquist -- there have been freed since, including -- there have been three since, including my predecessor william rehnquist.

like many of their predecessors, they are virtually unknown today. my guess is that, not even the law professors will be able to pick out the lesser-known. they would probably recognize the fourth appointee, charles evans hughes. he was governor of new york at the time of his appointment. he had been mentioned as a candidate for the presidency. he joined the court in 1910 as its youngest member, but left the court to run for president. he returned in 1930 to serve as chief justice. one of his colleagues noted that charles evans hughes, "looks like god and sounded like god." i am very happy that the standards have been lowered since then. [laughter] the five justices who joined the court in 1910 change the

appearance of the court to the white court. it may have looked different, but it faced many of the same issues. it was the era of what is known as the lockner area. it had applied a substantive limitations based on the due process clause to economic legislation, over the dissent of both justice holmes and justice harlan. this was the era of insular cases which dealt with the application of the constitution to oversee territories. the ins is occupied the newspaper front pages of the 20th-century -- the in solar -- the insular cases which dealt with the application of the constitution to oversee territories occupied the newspaper front pages of the 20th century. you could examine the day-to-day of the supreme court and find that they were deeply engaged in

the resolution of fact-found commercial disputes. their decisions in that era turned on common-law principles of contract and property law. for a number of reasons -- there were a number or reasons for that. one reason dominates. they had virtually no control over the cases they would hear. throughout the 19th century, the court functioned as what we call a court of error. it had to decide and appeal that was properly filed from a lower court -- it had to decide any appeal that was properly filed from a lower court. let's look at some numbers. in 1860, the court had 310 cases. 1870, 636. 1880, more than 1200 cases. 1890, more than 1800 cases. congress's creation of the regional courts of appeals in

1891 initially decreased the backlog, because the regional court served as the initial court for correcting errors. it did not solve the problem. the numbers again tell the story appeared in 1900, the court had 723 cases on the docket. by 1910, the number had increased to over 1100. the court and 1910 faced a very serious problem. the overall caseload of the federal court continued to grow. the court had decided virtually any appeal properly presented to it, regardless of the importance of the case. the courts and a vast amount of its limited resources deciding very -- the court spent a vast amount of its limited resources deciding cases of little importance wererúú matter only to the client directly involved in the dispute. that situation persisted for another 15 years until 1925. in that year, the new chief

justice and former president william howard taft determined to believe the court of its mandatory jurisdiction. they gained greater control over their docket by requiring the parties seeking court review to file what lawyers call a petition to identify the area for decision and explain why it was important enough to warrant review. the court could then determine through the process what is should review. the court contained significant control over its own pocket. as a result of the leadership of president task -- chief justice taft, the court focuses its resources on a limited number of nationally important issues, a typically issues that have divided the lower courts of appeal. there is one other striking aspect of the court's docket in

1910 that i would like to mention. the law students and law oppressors -- professors would immediately recognize. the supreme court still applied what was known as the swift doctrine, named after their 1842 decision. they ruled that when a federal court exercise diversity jurisdiction, when called upon to decide a case between citizens of different states and there is no controlling state statute, the federal court may decide the case of based on its view of what the law should be. the highly regarded justice story who offered the -- who wrote this what the opinion -- the swift opinion thought this would lead to greater consistency in federal court. it also created two bodies of

common law in each state. the state, law, announced by state courts -- the state common-law announced by state courts and the federal common law. the outcome could vary depending on whether it was brought in a state court or the federal court. clever lawyers would file their case in the court where they thought along favored the outcome they desired. -- they thought the law favor the outcome they desired. one judge pointed out that it directed the supreme court into commercial disputes that should be driven -- governed by state legislatures. the justice who authored the erie decision was the same attorney who had parred the brandeis -- who had authored

the brandeis brief. instead, the courts commercial rocket today -- dockedet focuses on specific areas and only intervenes when there is a conflict in question of febrile law. justice brandeis's decision was subject to criticism. i do not think anyone seriously questions the wisdom of the doctrine today. uniformity has been achieved much more effectively through other means, such as the nationwide adoption of the uniform commercial code. looking back over the past century, it has brought a great deal of change, even for the supreme court. the court no longer occupies the seen it -- occupies the

senate's discarded chambers. it occupies a bill of -- it occupies a beautiful building designed especially for its use. it has streamlined and improve its process for briefing and argument of cases. it now has the power to control its stop it and focus its resources on those cases -- control its docket and paupiettes -- and focus its resources on those cases that have international -- have national importance. none of this happen overnight. there were deliberate steps achieved through a process of consensus over of period of years. it was a steady evolution in response to a demonstrated need and has created a stronger and more effective court. thank you very much for your kind attention. [applause] thank you.

>> we have a few minutes to take questions. i think everybody knows there are certain issues that might come before the court or that are currently before the court that the chief justice cannot comment on. otherwise, he is open to answer anything. i open the floor to anybody who might have a question. >> in what ways would you say that an appreciation of the court's evolution as an institution in its people and its practices and its setting in forms what it does now? in what ways do these alterations propel forward or urge caution in things that are on today's platter, if not the docket?

>> some of the things are quite mundane. it may not seem important, but it matters greatly were the court sets. you have seen the beautiful building. -- but it matters greatly where of the court sets -- where the court sits. architecture is substantive. it took chief justice taft to know that. the history of the evolution is also very important. you studied the justices on the court and you see what makes chief justice john marshall a great justice and how he approached the issue of judicial review. you look to his immediate successor. they both had the same issue in front of them. in marshall's case, what do i do with respect to the question of what role the supreme court

will occupy? he established the court's role and went on to be the defining a combination -- the definer of the nation. his successor had a similar issue. the nation was hurtling towards civil war. he said he would use the supreme court to solve the problem. he issued the dread scott decision -- the dred scott decision that accelerated progress toward the civil war. you have to understand that when you take on, as a court, important policy questions, you have to ask yourself if it is something for the court or the other branches to decide. you have to decide if you're going to end up like john marshall or his successor. the history of who the people are poses the nature of the decisions we have to make.

>> right there. >> you mentioned the fidelity of the high court. what would you say to the average citizen about the current state or current well- being of judicial independence? >> it is something that is very important, that we deal with on an absolute day-to-day basis, maintaining the court's independence from the other branches. just to get back to the architecture, it is important in little ways. i do not know if you have seen the new visitors' center in washington. there is a new entry way to the capital. it is a lavish and lovely thing. when it was being built, they said was -- i was not there yet -- my predecessor -- it would be very easy for us to build a passageway under first-rate into the supreme court. -- under first street into the

supreme court. my predecessor declined. we did not want people to think we are together. we're not just different offices of the same hall. we are separate. little symbolism in things like that. you go to congress did you then walked across the street to visit are much more modest center -- you go to congress. you then walked across the street to visit us at are much more modest center. we ever responsibility to make sure the other branches maintain the limits that are on them under the constitution. it is significant. you look at our history. again, it is not -- it has not always been the case that presidents have welcomed that sort of independence. jefferson is biased john marshall, -- jefferson despised john marshall, who was

his second cousin. everybody remember president jackson's, directed at john marshall. he issued his decision, now let's see him enforce that. that was about the trail of tears were the indians were expelled and marshall said they could not be. -- where the indians were expelled and marshall said they could not be. some of the court had southern sympathies. he was constantly getting in lincoln's way in prosecuting the war appeared lincoln was quite prepared to do something about it if it ever came to a head. -- in prosecuting the war. lincoln was quite prepared to do something about it if it ever came to a head. it is the court's actions throughout that period that demonstrated to the public that

it was doing its level best to try to enter the competition -- to interpret the constitution that put the cork in a position where generally people accept the notion that it should -- that put the court in a position where to generally -- where generally people accept the notion that it should be listened to. the supreme court has issued a decision. i am not going to follow it -- that does not happen. when you look at the history, you realize the obligation that is upon you. roosevelt had enormous popularity. legislative majorities that have never been repeated since. the nine old men are blocking the legislation the country wants to pull it out of the great depression '30s that, this is what you're going to do. the great depression. he said, this is what we're

going to do. we're going to abolish the court. the public rallied around the court. that would have been inconceivable before in a similar situation. we appreciate very much that we owe the acceptance of the public to what we say to the work of all of our predecessors over 200 years. >> thank you for being here. >> sure. >> do you think that society popularizes current justices as celebrities more so than in the history of the court? if so, does that concern you? >> no, they popularized people like judge judy as celebrities. [laughter] if you look at the public opinion polls, most people think she is on the supreme court.

i do not think we are seen as celebrities. some people who takes a desert -- who takes the evidence that's -- justice o'connor as the first woman on the court -- some people take significant steps, like justice o'connor as the first woman on the court. for some reason, on our court, justice souter and justice breyer are always confused for each other. they tell a story where someone stops justice souter in the parking lot and says, oh, justice breyer, it is nice to see you. what is the best thing about being on the supreme court? justice souter says, i would say it is the privilege to work with justice souter. [laughter] i do not think -- and we should

not be celebrities. it is one reason we were black robes. we're supposed to be anonymous. that is why justice, the statue, has a blindfold. you're not supposed to think the way we decide cases depends on our individual personalities. in the best of all possible worlds, it would not. and we all try to work to that end. >> professor? >> thank you. [inaudible] you have spoken repeatedly about your role as a consensus- builder. today, i think the public conception is that the court is quite divided. having had several years on the supreme court, i am wondering what you think about your

achievements as a consensus- builder. what grade would you give yourself in this academic setting? but it is nice to be able to grade yourself. -- >> it is nice to be able to grade yourself. one of my colleagues said good luck with that. in some years it has worked out better than in others. in my first year, there was a significant increase in the number of unanimous opinions. on the court, anything 7-2 or above counts as unanimous. [laughter] the next year it was a failure. the year after that it went up again and was successful. it is not like being in congress, where you have to go people who disagree and can compromise halfway. if the case is whether something violates the fourth amendment and one person thinks it does and and other things it does not, you cannot agree on

halfway -- and another person thinks it does not, you cannot agree on halfway. we have achieved much more unanimity in certain areas. more of our decisions are unanimous than anything else. it is an objective were working toward. we do it for a number of -- we do it a number of ways. we talk about the case is more than we did in the past. we tried to find an arab ground a decision on which people might be able to agree -- and narrow ground of decision on which people might be able to agree. the good thing about the job is you hope you do not have to give yourself a grade until the end of the semester. i hope the end of the semester is a long way off. somebody once told me they did a study of more than 100 law review articles criticizing my

analogies. they have not done a study on how many supported it. [laughter] in an academic community, it is likely to draw more criticism than it does from the people -- from intelligent observers on the street. nobody likes to be told that the area they are studying is simpler than it looks. of course there are hard cases for a justice. there are hard calls for an umpire. i hope most people would agree that is the person that you want more than any other. you do not want the judge participating in the game. you do not want them in a position where they will be hitting or pitching. if the analogy is not the umpire, what is it on the baseball team? it is not always the case. people have different strike zones and all of that. i still think it is the best

analogy and certainly the role that i strive for. i do not get up there and say i want to win the game. that is what roger taney did. you try to recognize it is your job to be much more neutral. is it easy to sort of pick apart the analogy? sure. is it still the most apt? i have not found a better one. >> if you decide to change it -- [inaudible] what do you think has changed in the american attitude -- has it become a more litigious society? what is the change from your perspective? >> it is easy to think that is the case. you can go back before the time

of the founding and read writings about how litigious american society was. every dispute ended up in court. the problem is not so much that it is a litigious society, it is that the judicial structures are becoming more and more ill- suited to resolving it. i see that in the federal judiciary. if you have a significant dispute, the federal courts are often ineffective in resolving its. -- in resolvin git. the worst -- in resolvin git. -- in resolving it. the worst thing you could be is the winning party -- the worst thing you could be in a lawsuit is the losing party. the second worst thing you could be is the winning party.

it ihas quadrupled with electronic discoveries. it may be perfectly relevant to get every e-mail your opponent sent on a particular issue. but that costs millions of dollars to pull that together. you review them to see if anything privileged was done. people did not go because of cost. it is used as leverage in the commercial dealings. those are commercial dealings. he would never want anybody with a normal kind of -- you wouwould never want anybody with a normal kind a personal dispute to go to the supreme court. there are a number of initiatives going on to try to streamline the process in deal with some of the abuses, and make it more feasible for people to go to court. those have to be pursued

seriously. it is not just that it is alleges is -- it is not just that it is a litigious society. the court is becoming more ineffective in solving certain disputes. >> mr. chief justice, what is the relevance of law review today in your work in particular and how does that compare to when you were in law school? >> they do not read any more what i do. [laughter] more seriously, i find that there is a growing disconnect between what is happening in the academy and in the real world. that is not necessarily a bad thing. i was talking with the faculty at lunch. they may not -- and it may be a good thing that they do not view their function as doing things

that are helpful to judges or litigators -- they may be dealing with legal issues that are more abstract. i gave an example earlier. people in the advanced mathematics field are not necessarily good at arithmetic. they do not want to do arithmetic. they want to do something else. in terms of law review commentary, i seldom site at -- cite it and do not find it terribly useful because people are using other things that are more academic. it means they are not particularly helpful. yes. >> how are you? good to see you. we are old friends. so i assume this is going to be a friendly question. [laughter]

>> it is a marshmallow for you. it seems to me that the language of the court has gotten more strident in the last 40 years. if you have experienced it, do you think it hurts the court? >> i think it has gotten more strident. the adverbs and adjectives have gotten a little bit more pointed. i do not think it reflects any greater degree of this agreement. you can go back and look at some of the great dissents a prior ages. there are pretty sharp, too. it does not reflect any great personal division on the court. it is a very, very congenial court -- collegial court, with many important relationships. we do the same things. there actually are not many jobs when people do the same thing.

faculty and law school -- they're teaching and doing different research. we review the same cases, go to the same arguments, sit in the same conferences. it causes you to develop a very close bonds. we are also the only people we can talk to about a lot of things. so we do. and we enjoy that. we are also held together by a more significant bond, such as going through a capital case were you appreciate so much is at stake -- where you appreciate that so much is at stake. we feel strongly about the important issues with which we deal. when people disagree, we want to make sure people understand what we think is wrong with the other side. every now and then, we look at drafts of an opinion that one of us will go to the other and say, do you really need to be

that strong? could you think of another adjective to describe why our friend is so misguided? [laughter] and they do. they do. yes. [inaudible] >> hello, judge. >> thank you, too, for coming. this is a really friendly question, because sometimes you grade my papers. [laughter] knowing that you have a desire, from what you have told us, of staying connected to the real world, we on the trial court think it is a good idea when appellate judges come down to handle a matter in the trial court. it keeps their skills up, keep them fresh, and lets them see how it plays out in the real-

world, since you eventually review it at a different level. here is my friend the question. if i called you up and said, while you are in indiana, i will make available to you my entire pocket, -- docket, and you pick any case you would like to handle as a federal district court judge, what kansas do you think he would want and why -- what case do you think you would want and why? >> first of all, do be clear, i would not do it in a million years. [laughter] my case and -- my predecessor spent time as a trial lawyer. he missed it when he came on the supreme court. he took up and offer similar to yours. he sat as a trial judge in the eastern district of virginia.

it was a title vii employment discrimination case. he handled the trial, reached a decision, and it was promptly reversed by the fourth circuit. [laughter] the thing that infuriated him is that they did it -- they did not even have the guts to put their name on it. [laughter] lack of experience as a trial court -- by lack experience as a trial lawyer. 0-- i lack experience as a trial lawyer. sonia sotomayor has experienced. -- sonia sotomayor has experience. i would not do a criminal case. i read the transcripts of what you have to do in sentencing. i am not sure -- i know i would not like doing it, particularly with mandatory sentences where

you do not have any -- i think that must be gut-wrenching work. i would like you pick a civil case, but it is not going to happen. [laughter] way in the back, yes. >> on a lighter note, what was your relationship with president bush, professionally and personally, and how did that dynamic change with the current president, based on whether the ideology -- based on the ideology or whether he is not your appointing president? >> it makes no difference to your appointing president is, other than you think that he has good judgment. [laughter] it goes back to the question of judicial independence. there are various functions were you find yourself seated next to the president by order a protocol -- where you find

yourself seated next to the president by order of protocol. i cannot talk to them about much. we talk about other things. president bush used to own a baseball team. we would talk about sports. president obama has young children as i do. we talk about kids. i respect the obligations and responsibilities they have. they do the same. it is interesting. once you move and take the judicial oath, you do not have any feeling of loyalty toward your appointing president. you immediately realize that you are in office for life and they are gone. president bush is obviously out of office. think about just this stevens -- think about justice stevens who is going to close at his 34 years on the court soon. president gerald ford appointed him.

it is not as if he looks at the case and says, what would president ford do? nobody could imagine. that is the way it works. it is -- my relationships with the two presidents who have been in office since i have been here have been friendly. again, we represent different branches of government and i have to maintain that significant separation. we have time for a couple more. yes? > justice o'connor and justie souter have taken it upon themselves in their retirement to better educate the public on a fair, impartial, independent judiciary. is there anything the court itself can do to improve that

education process for the general public? >> first of all, it is a very valuable service they are both doing. i suppose what ever you do, you think people do not know about its -- i suppose whatever you do, you think people do not know enough about it. we do a lot. we have a lot of groups into the court through various connections to come and learn -- third and fourth graders. we try to teach them about the court. i went to my son's career day. i thought it was a pretty good show. i came in my robe. we had a case about whether you should have a pizza or cheeseburgers for lunch. [laughter] i gave out little babble pencils

with erasers -- gavel pencils with erasers. i thought it went great. all the talk was about another kid's father was a nasa engineer. the kids need to know more about the courts and what they do. [laughter] we have a new website for the more technologically sophisticated people where you can read the cases and briefs to see what we're up to. justice o'connor's program is also online. a wide range of ages can understand more about what the court does. justice souter's approach is also geared at a much lower level -- high school. >> [inaudible]

this past year, a lot of us in this room have gone around and talked about the importance of abraham lincoln as an attorney. we always bring up the fact that he considered himself a hoosier and that was an important part of his threraits. can you talk about what that might mean to you in your current position? but it is interesting. i do think people bring a different -- and that it is interesting -- >> it is interesting. i do think people bring a different perspective to their job based on their upbringing. my wife is in new york. new yorkers have a different

view than someone in the south or the west. i am very proud of being midwestern. i have always felt a special affinity to justice stevens who comes from chicago as well. you can describe it any number of ways. i have always thought that people from the midwest had a certain openness to them. they do not come to other people with particular, you know, concern or hostility. there are very open to others. i do not mean to disparate people from other parts of the country. they have a certain unifying approach. my wife's experience is different. you're in an irish neighborhood in the bronx, and you tend, not in a discriminatory way -- she tells a story where she asked

your roommate, what are you? it took a long time for her friend to realize what she was asking. are you german, irish, what are you? we do not think of that in the midwest because there is a much greater mixture of things. you mentioned lincoln. we just finished the anniversary of his birth. he argued one case in the supreme court. we have this hand written notes from that argument that i was able to hold in my hand while the nervous curator looked on. [laughter] you notice his remarkable penmanship. it for frontier lawyer, you had to have that. you're writing the contract or deed or will. people had to be able to read it. it looked exactly like what all law students here would prepare -- i know that first-year students would prepare. it looks like that. the cases are written out and

they have descriptions. there are lists of facts. it is interesting. he lost in a sharply divided decision. it was written by roger taney -- talk about foreshadowing of all that went after. you're right about his indiana roots. just like in washington at the time, that is where the entertainment was. he developed his enduring law of all along. -- of the law. one more question. >> or not. >> there we go. >> we often see that the office changes the person and that people do not take on their role in the ways you might predict. there are prominent examples of

justices. are there things that you approached in ways that you would not have predicted once you assumed the responsibilities? did it change the way you thought about the cases? >> i hope this does not sound flippant, but the answer is really no. being a judge -- the justice on the supreme court, you are dealing with the same materials that you dealt with as a judge in the court of appeals and when i was a lawyer. is is is a sign -- it is the same process of analysis. you look at the founding documents. as a lawyer, you try to figure out and put them together to help your case. as a judge, you try to put them together in a way that is faithful to the law. the sole practitioner in the smallest town who is trying to work out a property dispute approaches that is the same way we do.

we are all bound by the rules of law and the obligation to put aside -- you learn to put aside your personal use early on as a lawyer. people often ask, how can you do that? how can you separate your personal views? it is actually pretty easy. that is what lawyers do. when a defendant comes in, you did not say, i do not like the fact that you were involved in this crime. you put that aside and you represent him according to the law. it is the same as a judge. the office changes, but the person is certainly -- that the office tinges the person is certainly true, but it is not terribly -- that the office changes the person is certainly true, but it is not terribly different from anything else. i thank you for all your kind attention into the school for

being so welcoming. there are wonderful students here. the faculty is very intelligent and thoughtful and probing. everyone has been so nice and made me feel very welcome back home. thank you very much. [applause] >> thank you. >> thank you. thank you. thank you. thank you. thank you very much. thank you. thank you. [applause] >> this has been a very special day for us here at all law school. the chief and i were commiserating a while ago about how similar are jobs are. we both have to manage a group of independent-minded folks. he only has eight of them and i have 45.

otherwise, it is very similar. it has been a wonderful day and we appreciate it. we always like to get our speaker a gift. we wondered what would be more appropriate and a book on the 92 beautiful county courthouses that we have here in indiana. >> wonderful. thank you very much. that is very nice. thank you. [applause] >> and we are adjourned. please join us in the atrium for a reception. we will take a few pictures. thank you for coming. host[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> c-span -- our public affairs content is available on television, radio, and online. you can also connect with us on twitter, facebook, and youtube. signup for our schedule alert e- mails