grateful. thank you. >> thank you senator whitehouse. we will go to around two after i finished my first round -- to round two after i finished my first round. mr. attorney general, there will be another opportunity to test the constitutionality of the warrantless and wiretaps through the appellate process and hopefully to the supreme court of the united states from the decision made by chief judge walker recently and the san francisco case, holding that the warrantless wiretaps were unconstitutional, saying that the requirements of the foreign intelligence surveillance act precluded the warrantless wiretaps. there had to be probable cause on a warrant. .

. the united states and the case arising out of detroit were declared the warrant was lawyer talks on constitutional the sixth circuit side or there was no standing [inaudible] views as a way of avoiding the citing of questions and the supreme court questions and the supreme court in the united states did not at this point after a lot of your speculation and a lot of discussion, we do not know whether the president's power in commander of chief under article article 2 justifies warrantless wiretapping or the provisions of foreign intelligence

surveillance acts. what you press to have the case coming out of the san francisco federal court go to the green deacons pinker fer decisions? >> we have not decided what we are going to do at this point with the decision that was made by the judge the focus there had been not necessarily as much on the legality of the tfp as protection of sources and methods and a determination as to what we are going to do to the adverse ruling we got from the chief judge has not been made. we are considering our options. >> what do you think? >> i think i haven't made up my mind yet. we have to see the impact will be. this program i guess ended in 2007, 2006.

mauney view is that to the extent that -- i can't get into too many operational things but the support of congress, the authorization of congress to conduct these kinds of programs is the way in which the knicks ticket of branch should operate. it is when the executive branch is at its strongest when we have the foundation is when we work with members of congress to set up these kind of programs and especially when one looks at as you've pointed out, you know, the requirements under fisa so i think we will have to consider what our options are and try to understand what the ramifications are in the judge's ruling in the case >> i would urge you to make up your mind to get a decision. i filed a bill to compel the supreme court warrantless

wiretaps congress obviously can't tell the supreme court how to decide a case that we can deal with the jurisdictional issue and as we look to the next round of nominations i think one of the big areas of failing by the court is in this refusal to take up cases and make decisions. they do not serve in the case involving the questions or immunity where the victims of survivors of victims of 9/11 were suing with strong evidence going very high up into the government of saudi arabia and the congressional determination will immunity would not apply in that kind of a situation and the court by deciding not to decide is a very differential which the

executive power. i think that when we are looking for new nominees went to the court we are looking to the chief justicew))xk roughly the citizens case involving corporations that have political campaigns is illustrative of. i want to pick up one of the questions which senator whitehouse and i asked about the miranda warning some. the impact of not getting the miranda warning as is widely misunderstood. if there and the warnings are not given all that it means is that the statements made by the

subject of interrogation can't be admitted into evidence against him in an article 3 court. but when you dealt with somebody like the christmas day donner you didn't really need admissions or confession the evidence was overwhelming and when we talk about the subtleties of interrogations i find it hard to accept that the assistance of establishing reports bond by the interrogator with the subject would be sufficiently enhanced to pour into giving the mayor mandel warnings as a disc richard for making statements that by the time you get through singing you have the right to remain silent anything you say -- there are

five of them and you get this waivers. but that is a big discouraging factor. so it would be my hope that the warnings would not be given. the most important thing in dealing with a terrorist is to get information to prevent future not contacting the individual. if you had to make, in my view, if you have to make a truce between convicting and getting information which might preclude his subsequent terrorist attack with all of the information. but is what you're saying to the policy of the department to make a judgment on the specific case as to whether to give more in the warnings or not that you leave it up to the interrogator and his judgment is that this report will be established but to not to determine all cases

are miranda mornings? .. and they don't know exactly what is going on at that point but even so, they did not give miranda warnings and that initial interaction with them.

so i am looking for flexibility but with the thought that, when it comes to terrorism the gathering of intelligence is of critical importance. >> i am glad to hear that, that you are not doing it automatically and the gathering of intelligence is the more important factor. >> thank you mr. chairman. it is good to see you in that chair, even though from a different side of the aisle then i am familiar with. it is in the middle, isn't it? i think your comments about miranda are right, except i would have to little cautionary comments. one is, senator graham asked you what was going to happen if somebody arrested bin laden, would they give miranda rights he did not give a clear answer

but that person is not likely to be able to check with you at that moment. we need a policy, number one. number 2, according to the miranda rule, as soon as a person is taken into custody, they are supposed to be advised of their rights before questions are asked. via ei the i policy is in the manual and that is what they mir specter has suggested that when you tell an individual their right to have a lawyer, they have a right to remain silent and you will bring them one but you are going to get less actionable intelligence than if you didn't do so. in fact, the first thing a good lawyer is going to say is don't talk. you may have to make a plea bargain later and other things may happen in the fact that some

people do cooperate ultimately does not affect the rules, the basic fact. realistically you are going to get less information from that procedure, and that is why that is a big part of the reason that many of these cases need to be handled through military commissions and military custody. i will let you respond to that. >> senator, maybe i was not clear. with regard to bin laden there would be no need to give bin laden a rather warnings and if i was not clear there, i meant to be. if he were captured i cannot foresee any reason. >> mr. holder, your presumption is and you are on report that they would be tried in civilian court, and why wouldn't you give miranda warnings? >> unless you are going to try

him in military commission? >> the concern with miranda warnings is whether or not the information might be excluded. we have sufficient statements from bin laden so there is no reason to mirandized; you can still bring his case -- not. >> i acknowledge that that is possible but for abdulmutallab on christmas day, like you said one of the agents know about the strength of the case and there is a doctrine that says if the improperly obtained information as a result of not getting miranda warnings can poison the entire prosecution and raise questions and create many defenses that would not otherwise exist. so i think in the rule, to me simply would be that you expect these terrorist individuals to be tried and taken into military custody and is in the true and isn't it appropriate that after

they have been taken into military custody, if you chose to try them in civilian court, you could still do so? >> i suppose that is true but i think there is. >> we have another member-- number of times, have we not? being we have done it a couple of times. >> what about collegiate ahamed? you declared him ready to go to trial and court. that is a fact. military custody and then you can try them at your auction in civilian court. >> what i've been trying to say is that. >> why wouldn't that be the right way to start the case and have a policy for every fbi, every police officer in every tsa airport official to again, to not give miranda warnings and not provide free attorneys to people who are attacking the united states of america? >> lets look at what happened with regard to the detroit

bomber, abdulmutallab. the fbi agents who have a polity that when people are taken into custody give miranda warnings. they had the presence of mind given their experience and given the concern they have been given the knowledge of the law to understand in that initial interaction they did not have to give him his miranda warnings in the information they got from him can be used in the a trial against him under >> well, i don't know if the public said the exception goes to 50 minutes -- have you ever had a case go that long? have you ask somebody if they have a gun, or i have a bomb, but after a while that exception ends. >> given the experience and that set of facts, i think that the federal government has acted

appropriately here. the statement from the mint would be admissible. >> well i'm saying that a defense lawyer would make that point. >> well, i'm sure, but there would lose it in my court. >> this is really significant. let me say about how we got to this point. my friend senator dick durbin, a democrat, is so eloquent, but president bush -- the first case that came up was padea. that was before military commissions had been established. he established military commissions and the supreme court found them lacking, and the defense department stopped and had to rewrite rules. during that period of time through 2006 the congress passed legislation to effectuate the military commissions. in late 2006, that was. then it took time for the rules

to be written and to move for it. -- to move forward. antánamo that were going to be tried. all of them didn't have to be tried. but they would be tried by a military commission and khalid shake ahamed's case was already proceeding as a military commission, was it not, tell president obama his first act was to stop that. >> the case had been proceeding in a military commission and a halting fashion and the decision the obama administration made was to put a hault to those things so that the commission procedures could be amended and congress passed those in 2009. >> you had a to a commission and you cochaired the commission to decide what to do when you concluded that even though they had already been arrested and already detained at guantánamo, there would be a presumption that they would be tried in civilian court and not by military commission. has that been change? >> no, that has not been change.

the presumption we used, that i use along with secretary of defense and all the people who work with us, the protocol we were given did have a presumption in it. >> i would just say it is not exactly a clean slate and you decide each case based on the facts of that case, you have got a presumption in favor of civilian trials. speak it is a rebuttable presumption and there are a variety of other factors we take into account is not the least of which is at the end of the day, in which form can reap the most effective and i think the test is what we have done which is to say with regard to a think it is five or six cases that the military commissions are the best places for them to be tried. >> we have a letter that came in on march 16, a few weeks ago, from the department of defense, the deputy director that there were no military commissions in

2009. pursuant to an air-- order, a change in policy by president obama as soon as he took office and prosecutors then sought continuances in each case that were already referred to a military commission. and the convening authority seeks referring to charges to military commissions. to my knowledge that has not been changed, has its? >> know i believe but i believe we are going to be making the determination as to where the case up to go. it is our intention to use military commissions as well as article iii courts again with the whole notion of being flexible, pragmatic and aggressive. >> i think that is fair to say you have made some individual determinations on cases and some of these are record cases, financing of terrorism and supported terrorism and pieces that could be easily handled in

these boards but it is clear to me made a firm decision to go the other way to civilian court or virtually all of these cases and it is an error. i hope that you will review that and i hope the new york case will be the beginning of a reevaluation of that policy. >> i actually think in terms of the decisions that are made back in october, november, then in terms of the number of individual cases opposed to the number of defendants that we actually sent more cases to the military commission then i did to the article iii courts. >> thank you senator sessions. senator graham. >> thank you mr. chairman and i think exchange between the two senators has been a pretty good fleshing out of the complexities of the situation we find ourselves in. but i want to try, if i can, to use some scenarios here to reassure people that the system needs to be improved but not

completely by any means broken. if a military member stumbles on osama bin laden or some high target in afghanistan, pakistan or you just named the location, no one is arguing at that moment in time that they are going to read him his rights. what they would do as i understand it is if they would capture him pursuant to military operations which is not require mirandizing the enemy prisoner. obviously turn them over to intelligence organizations. that would be the case right? >> we have the high-value interrogation group designed especially for high-value. >> this goes to senator sessions.. i think he is right on point here. i want to compliment you. i think it is a great organization to have. as i understand it is a collaborative group of people who will be the primary interrogation team on a high-value target is captured within the united states or outside the united states. >> that is correct.

's been their primary purpose is intelligence gathering? and they will be able to assess what the individual knows about any operation? then they will decide if and when to mirandized, which is absolutely fine with me. >> part of the process. >> his lungs was there with the idea that the initial purpose is to gather intelligence and i think that is your college he with the hague that they will assist the detainee in terms of what they know about the war. is that correct? >> the high-value detainees are people who we think their primary value to us is to learn about targeting structure, a whole variety of them is. >> under the love for it is lawful to interrogate somebody. we are obviously not torturing people but we have the authority to do that. i think that is quite frankly-- i don't want to micromanage congress to tell an age and what to do and when to do it, as long as we are reviewing the suspects

not as a normal criminal threat that a part of a military threat trying to find out what they know. what additional rights would a detainee have if any, if they were transferred from guantánamo bay cuba to say illinois? with the transfer of a location create more rights for the detainee than if they were left at guantánamo bay? >> that is a question that i think is has not really been answered yet. it is one we are not sure about. i think certainly as an advocate i would argue that there are not other rights that would necessarily ascertain but it is not clear how the courts are going to rule. >> i think that is a very good point in this is a situation where congress could help give the courts clarity. is that correct? >> i think that is correct. >> as a matter fact judge lambert at hogan has been in

their habeas corpus and in that asking for congressional help and even reading those opinions. i have never seen a judge so open about congress because of if they detainee has ordered release by the judge tejeda be as petition is granted, what happens next? do we have to release the united states if we can't find a third country, what do we do with them? >> there is no requirement they be released into the united states invents those instances where we have decided not to appeal in that release has occurred they have typically been taken to a third country. >> what if you can't find a third country that will take one of these people? what do we do? >> they do not have to be released and they would remain in custody while efforts to try to find the location. >> let's play this out. habeas corpus and is meaningless if they cannot eventually result in release. is that true? >> i would not say that.

it gives the possibility to a detainee, a possibility he can be relocated and that would not [inaudible] >> you would hope that you would be able to come up with. >> would you agree it would be helpful if congress spoke about a case like this to give some guidance to the judge's? >> i think it could be helpful although i think i have, on a cautionary note, congress can provide guidance except in those areas where a judge to make the determination that what the judge is doing is unconstitutional. >> i totally agree and we are in a dilemma as a nation here and i do worry about the international community. i wanted to be more open to the idea of what we were doing to make sense but great richness change their criminal laws to allow people to be held for up to a year without trial. is that correct? >> i think the courts of kind of

pushed back a little bit. >> i totally agree and i think we have the right theory here that if you are an enemy combatant in the wild boar ticks over because there is no provision interest-- domestic criminal law to hold anybody without trial? >> held incommunicado, even-- the courts have not really--. >> if you are going to be charged with a crime i think you need to have have your day in court but if you join the enemy force, i am willing to give you your day in court and you should not have joined al qaeda. as i understand that every member of al qaeda that you hold as an enemy combatant will appear before a federal judge in the habeas corpus eating's. >> if they see kb's review. >> it is up to them but if they want their day in court the judge has to agree with the government that the evidence is compelling, reliable and legally obtained to hold them as an enemy combatant.

both of us are trying to work with a system that has an ongoing review because the enemy combatant determination could he a de facto life sentence. >> well,. >> at the judge rules for the government, we believe that he should have an ongoing review process, an annual review process and i want to complement the administration. i think what you all are doing their make sense of there is an annual review of this person status because the enemy combatant determination could be a de facto life sentence because this war is not going going to end anytime soon. there will never be a formal surrender so it it is an accommodation we are trying to make in sort of a hybrid system. what i would like to do is try to get this committee to work with you to deal with what happens when a habeas corpus and is granted, institutionalized an ongoing review process so we can look at anybody in the world in

in the eye and say no one in american military prison and has held arbitrarily. they have independent judicial review and if every military commissions verdict is appealable to be system. is that correct under the military laws we have? >> i believe that is correct. >> it is so there is article iii review of our military commissions. there is article iii review of our enemy combatant determinations and obviously if you go into an article precourt you have article iii ownership there so what i'm trying to establish with your help is that there will be an independent check and balance throughout every lane no matter what lane you used. but when it comes to closing guantánamo bay, 50 pine% of the mecca people object to it. there has been a 20.shifted i know i'm over my time but this is important. why do you think that is up and? >> i think there has been a lot

of misinformation out there and without casting aspersions on anybody in this room i think there has been been unnecessary politicalization in with regard to. >> can i give you an alternative theory? there is probably some truth to that than i am not saying you are all wrong. i think there a lot of people in this country worried about we don't have a coherent policy in this i have tried to discuss with you, this is hard. the christmas day bomber highlighted the people was a bit unnerving because they saw this guy is a common criminal and miranda warnings. we all watch tv is associated with dragnet in all this other stuff so i think the helpful not only to focus on our allies but also the american people and assure them that as we go forward in this war on terror that we are going to live within our value system that we are going to have a legal system that will protect you and your

family against people who are committed to our destruction. it will not include torture. it will be transparent. it will be open but it will be based on the principle as senator specter said. this is not a normal criminal operation. i think if we could do that as their attorney general not only would you serve the moment well here in america, you would serve the future well and i look forward to helping make that happen. we have got to assure the american people, not just our allies, that we have a good system that will protect us against what i think is an enduring threat. we will be fighting this war long after you and i have left the political arena. i wish it were not so but i believe it to be so so let's part some of the rhetoric and see what we >> i think the point you last made is a very good one. it is incumbent on people like myself to be more forthcoming,

clear with the american people about what our intentions are, and to explain to them in a way that perhaps we have not, and i have not done, effectively to date. so that there is a degree of assurance they have. you're probably right -- in addition to what i have mentioned, that is prole a factor in why the approval notion about closing guantanamo has dropped. >> the congress would be a good partner for you. if congress and the american executive branch were working together i think that would help the public to be assured. >> thank you. before yielding to senator grassley for his second run, i intend to turn over the gavel to the senator in just a few moments. we will have just a couple of

comments on the pending nomination to the supreme court. i might be consulted on the subject. i'm sure that you will be. .ust a word or two i believe the president ought to be concerned about a filibuster but ought to face squarely the fact that the supreme court is an ideological battleground and the lines are drawn. chief justice roberts have defied extensively in his confirmation hearings that he was going to try to draw consensus and narrow the issues. well, that certainly has not happened. chief justice roberts was very forceful in saying that he would not jolts the system. well, the citizens united is one

hell of a jolt. hard to figure a jolt harder than that one on 100 years of precedent and a theory which has been at danced about finding a judge who will be a consensus judge to be the fifth vote and not the fourth boat and some specific comments about bringing justice kennedy over into the fifth vote with the new appointee plus three others from the court. i think it is highly unlikely that president which is decided on the rasul case where justice stevens wrote an opinion identifying habeas corpus as a constitutional right going back to carter and then and explicitly eliminate the court of appeals said it was decided

on statutory grounds or statutory habeas corpus. constitutional habeas corpus and that is as far-fetched as interpretation gambia. when the petition for cert was filed, kirby was surprised justice stevens invoked-- but as was speculated and apparently with real foundation, justice stevens didn't want for justices to grant cert but waited until there were disclosures about major failings in the commissions for reconsideration that takes five justices, not for and then there were five and justice kennedy wrote the opinion. but i think it is fanciful thinking, looking for that kind of collegiality so i would hope that the ideological battleground would be

recognized, and president obama is about halfway through his second year he may have the opportunity for other supreme court picks which would line up with breyer and ginsburg and sotomayor so if you have an opportunity-- [inaudible] >> i am sure mr. chairman you are going to have that opportunity you are so but i will pass along what you said. >> well, that concludes the hearing. thank you very much. let me join senator graham for

doing a very good job. >> thank you sir. [inaudible conversations] [inaudible conversations] >> today, house majority leader hoyer prospects of the democratic party maintaining

their majority through the 2010 election. he also talks about the possibility of the senate passing of financial regulation spilled. it will be at 10:00 p.m. eastern. >> the russian president visited washington to attend the nuclear weapons summit, and spoke at the brookings institute about the economy and foreign relations. this is one hour, 15 minutes. >> good afternoon, everybody. it is my great personal honor on behalf of all the brookings institution, the host for this extraordinary event, medvedev,

the president of the russian federation. as all of you know, it is here in washington -- he is here to participate in a summit that is intended to promote nuclear safety. that is because that he and president obama advanced just last week when they signed the new treaty in prague. these two leaders have also in their personal interaction over the past year given a new start to the u.s./russian relations. before turning the program over to him, i would be remiss if i did not convey on behalf of all of us our deepest condolences to president medvedev and his fellow citizens on the tragedy that they suffered as a result of the terrorist outrage two weeks ago on march 29.

i happen to be -- i happened to be writing as a passenger a few weeks ago. it was a powerful and moving experience. a reminder of the courage and fortitude of the great people. i might add that you observed from a distance with admiration and with compassion another recent event in moscow. while russians were still grieving for their own compatriots, president medvedev led a throng of muscovites in laying flowers at the gates of the polish embassy in moscow this weekend. the russian people are fortunate to have in our guest of honor today, a leader working so hard to modernize their economy, and also working with mr. obama to build for all of us a safer

world. mr. president, the podium is yours. [applause] [applause] >> ladies and gentlemen, first of all, i would like to say a few words. first of all, i would like to thank you for the invitation to speak in this leading research center of the united states of america. another displace as the fame of [unintelligible] now it is high time that i quote rick perkins who once said the activity of the institution he had established is based on the

believe that there is a necessity to precise and impartial identification, and presenting ideas without any ideology. from the first days of their work, your analysts' advocated precisely this principle. this principle helped to find solutions for most difficult problems of the global politics and internal politics as well. today the world is going through a time of profound transformation and faces serious challenges in its search for new models of development. this phrase can be used for any time of the development of humankind, but for us it is very important that there is concordance of interests and interdependence of our purchase. the world will be harmonious only when the parts which make

its up do not collide, but will interact. and created the basis for development of democracy, human rights, and market economy. make up the basis of not only national development, but also some common set of international values. values. values. the dialogue between russia and the dialogue between the u.s. and russia mixup in and bottom part of this. i'm happy that our cooperation is beginning to yield concrete results. i am glad that over the last year we managed to change the atmosphere of the russian-american relationships. that doesn't mean that our relations have become cloudless and everything is perfect, but the environment has been

changed. and there are direct results. and i must say that i am glad that i'm part of that. this meeting is taking place right after the washington summit on the nuclear security. it has been a complete success. i don't remember such clear summits when all the participants would be unanimous in their assessments over the situation. this is not economy, global crisis discussion. this is the topic crucial for every state and it's a real threat, a real challenge for all of us. last week, i would like to say once again, president obama and me signed a new treaty on reduction and limitation of strategic offensive arms. and we made real progress.

whatever the analysts say about this treaty, they keep saying that the balance is changing and it can be advantageous for some of us, but nevertheless, this is a real success. russia and america have not an easy history in relationship. sometimes we run into problems. sometimes we suffocated each other and embraced at other times. there was an abyss dividing us. but we should not try to find differences. we should build long-term relationship for the future based upon democracy, values and economic freedom and common goals to counter global threats.

true, we have very different history. and people see things -- sometimes they see things in different ways. the u.s. has been developing market economy for two centuries already, while our country, in the 20th century have gone through a sequence of economic and political experiments. so as i strongly believe, russia needs several decades of gradually building up efficient political and economical system. this is the only way [unintelligible] to make this happen, there is no need to teach other how to live well. we should communicate on a regular basis, in an honest

manner, being absolutely frank. the problems -- the problems of our country are well known to us, corruption, and healthy lifestyle, technological lack of development -- but we have begun to change our system 20 years ago. this system of like to highlight -- the system does have its own traditions. it has the trace of the old-time traditions that have become habits. sometimes they are an obstacle, but to a certain extent they provide protection to society. they prevented from falling apart. we know how to deal with these problems using the experience of friends. we have to build partnership on the whole range of matters.

inyou're ready to provide assistance to the u.s. if needed, and sometimes it is to resolve some problem. declaring the principles of democracy is not what is needed. a lot of countries do that. and not even changing laws, although improvement to legislation is a necessary thing. this is not enough. what is important is that we exercise the principles of democracy. practice is the criteria of choice and political practice or legal practice indicates all the best and the worst parts in the system. this is real important. and that's when we will fight corruption. then we will discharge people who are unqualified for their service and what is important today is receiving feedback from

the citizens. and i think that this should be done by every official, every statesman whatever level they have. they should use technology. i try to do this. and i believe others should do that as well. today, we have lot of opportunities to do that. and sometimes i think that very often states people have become slaves to their aides. so materials make the files and present them to read. and sometimes they decide what can be shown to the leader and what cannot be shown. because they want to prevent their country and their work in

a positive light. but the time has changed. whatever i read or president obama reads, we always have the possibility to go online and see what is happening in reality. this doesn't mean that internet is the final source of truth, but this is an alternative source of information. we don't need our aides that much today. we can immerse ourselves into information. this is a very important advance that we don't sometimes realize to the full extent. we will cooperate with the united states on the most important issues like countering trim, transboard crime, pier asy. we regulate regional conflicts. we are trying to counter the climate change effects. and we pay special attention to

the international relationships regulation like the united nations. this is a good platform. it is universal and we work in the framework of g-8 and g-20 and we are going to continue this work and we are going to overcome the effects of global economic crisis as well, because we do not know what is the outlook. but there are various scenarios and soon we will be meeting each other in the form of g-8 and in the form of g-20. we are dealing with regional security issues and i would like to draw everyone's attention to the initiatives, which we came up with which is the european

security treaty and this is an important thing. it is not aimed against any organization. this was not the reason behind it. this is not a trick made by russians against nato or o.s.c. we are trying to add better tool to the security system. another issue on which we work quite extensively and we discussed it, maybe you will have some questions on that, the iranian nuclear issue. now a lot is being said about the need to impose sanctions on iran and the reasons for those sanctions are totally clear. iran still hasn't responded to the compromised suggestions. we are discussing these suggestions on sanctions with our colleagues in the six-party talks. last time we discussed this with president obama in prague when

we saw each other to sign the new start treaty. it doesn't mean that sanctions are just a good and healthy thing and they don't always bring about the necessary results and certainly they should not punish the people. they should only prevent the spread of nuclear weapons. in that case, they can be efficient. we are assisting afghanistan in their transition towards a stable and sustainable developing state. we are trying to assist them in assuring a peaceful life. we work together in the political area trying to ensure a political settlement. we are enforcing the local authorities assisting the police. we are working together on transit issues. i believe that all these is eventually contributing to a common result. so far, little is being done to

stop the drug trafficking original naturing from afghanistan. maybe because america is less affected by these problems and russia and europe are suffering more. this is the drugs that go to our countries. and we should achieve a greater progress on that. we have similar approaches on the meast settlement. we need to create necessary conditions to -- for the creation of an independent palestinian state. so far, we are facing a lot of difficulties. until then, we cannot expect a durable and sustainable peace in the middle east. so far, the united states is taking vigorous efforts to recover the constructive process , including through proximity talks. we totally support this idea and this year, i have met with almost all of the middle east leaders. i supported indirect faux.

we hosted the meeting in moscow and i hope eventually it will lead to direct negotiations. any stop in the development always brings about lagging behind. that is why our country started modernizing its economy and started the technological innovation introduction. so far, frankly, speaking, we haven't done that much. and frankly speaking, here, we would like to count on the partnership with leading economies throughout the world, including the u.s. economy and i was very happy with our discussion with president obama when we started discussing our agenda, not with the middle east and not with iran and not with the problem with start treaty, but we started our discussion with cooperation between our two countries and i believe that the truth be told, it is the area that most failed in our

relationship. now we have recovered a dynamic development in these area. we have established a constructive relationship in a personal level between the presidents, but there are no economic result. so i would like to reiterate that it would be a very useful thing, though business is business and it is governed by its own rules and cannot impose things on it, but we could create conditions conducive to its development. i have quoted a saying by the founder of this institution, mr. brookings, and it would be wrong should i not quote about the incumbent u.s. president when he was addressing a meeting in russia. he said that america needs a powerful peaceful and prosperous russia. those are good words. but russia, in turn, also needs

a responsible peaceful, recognized and din milk-developing america, america that enjoys the respect of the entire international community that develops partnership with other countries on an equal footing and that develops its position towards the development of a new system of international relations. that would be a great thing to achieve. at this point, i would like to finish my remarks. and now we can start the more interesting part of this meeting in the question and answer session. if you don't mind, i will stay here to take your questions. >> thank you so much. we will in a few minutes open the conversation to include our friends here in the audience. but perhaps i could get the conversation going a little bit

between the two of us by asking you to follow up a bit on two issues, and they both boil down to one question, which is what next? what next for the negotiations between russian federation and the united states on nuclear and other arms now that you have the new start treaty done, awaiting ratification, of course, on both sides? and what next by way of follow up on what you have described as a very successful nuclear safety summit here in washington? [russian translator] >> frankly speaking, i really hope that more work will be done, more work will follow. speaking about the outcomes of the summit, i hope we will not just go home feeling happy. as for the start treaty, i would

like to see one legal effect after that, the ratification of the treaty and if it does take place, it means that president obama and i did not work in vain. and should there be no ratification, it will mean we have gone back to some soviet times when these treaties were not ratified. but on the other hand, it would be very important in my mind that our relationship should not be reduced to nuclear cooperation or choose the limitation of strategic arms, although it is something that people expect of us. and in this regard, we have assumed a great responsibility towards the international community. i would like us to have a much broader cooperation on all the other areas. as to the future of the treaty and our further steps, i would like us to undertake all the

necessary procedures provided for in the treaty. i would like the treaty to be transparent. i would like it to be acceptable to both societies in russia and the united states. i hope it will not cause any tensions. and i hope it will help us to build on our future cooperation, though, frankly speaking, besides strategic arms, there are other arms that are quite dangerous as well that also require an agreement between us, that require a discussion between us, because there are conventional forces that can cause a traumatic damage. and on such systems, we haven't yet coordinated our position as to what to do next. there are issues on which we should formulate a common position, like nuclear terrorism, like nonproliferation, like control

overstates that are threshold countries and that are trying to use all the ways to sneak into the nuclear club. this is our joint responsibility and i would like us to work on that together. >> thank you very much. i suspect maybe some of our colleagues will want to return to these issues, but if i could ask you one question about ask you one question about russia and the global economy, what you see as the prospects for russia being part of the world trade organization -- what do you see? >> being honest, i think that we should have, be in the wto, we should have been in it a long time ago, because we have been on the threshold the longer than any other country -- been as big as china, and being honest -- it

is a little sun is a highly, and has become a carrot in front of us -- they keep telling us to behave well, and we will accept you to the wto. but this is not correct, because if we assess the organization, everyone will benefit, not only russia. it is a very important part of the international economy, whatever people say. we have a lot of things to offer. talking about my personal position, we would like to be in the wto and we should make the procedure not humiliating for us. i will be frank. i know that obama will not be offended. he said that russia should

enjoying the wto fast. we begin the process in 2006 when our relationship was just evolving. . . we count very much on a favorable position of the new administration to force the joining of russia to the w.t.o. this does not run counter to our commitments like our customs union with belarussia. all the processes can be harmonized and benefit from it. >> i'm going to invite the audience to put some questions top president medvedev. and i would ask you to be sure that they are questions and that you identify yourself when you stand up to ask. we have microphones around the room.

i'll start with ambassador rick burke. >> i listened to the answer you gave about what's next and you outlined a number of areas that the united states and the russian federation could work on , european security, conventional forces, proliferation. does that suggest -- does your answer suggest that a new round of further reductions in nuclear forces is not a russian priority, a new round of priority, a new round of negotiations following the start treaty and hopefully its ratification is not a russian priority or would you support a followup negotiation to achieve deeper cuts?

[russian translator] >> i would like to say that this is an important priority for russia as well as for the united states. ratification is a process that should be addressed by all of us together by each country and we have agreed with mr. obama that ratification will be simultaneous. not to make everyone -- not to put anyone in an awkward situation talking about further reduction of strategic potential. this is our aim in general. there is no doubt about this. and today at the summit, i said that the idea of global zero to date is not an illusion, but we should be honest with each other talking about responsibility about the situation on the planet. this is not only russia and

america's responsibility, though we have biggest part of armaments. if people will arrive at global zero, that should be a collective effort and i will not point the finger at anyone. but we have partners who are less willing to cut their potentials than russia or america. and we have to convince them to go that way. but talking about the further process talks, we are ready for that and we are going to engage in this. this is natural. but today, we have made a threshold since feeling for the next 10 years and this is enough now. and if there is a need, then we will discuss the new levels. but these 10 years will be peaceful for us as long as we

sign this treaty and if the thing -- the preamble, it says about the length between the treaty and strategic arms issue. we have been discussing it for long and we have created this formula that the partners acknowledge this link and also we have worked out a principle or a statement that the treaty will be in effect as long as the development of a.b.m. or other arms development will not contradict the principles of this treaty. and this is a sensitive moment, as president obama, i'm optimistic about this and we hope we will not stop the treaty or withdraw from it.

having some problems about a.b.m. or other issues. but everything depends on us and other politicians who will treat this issue later on. >> you have your delegation and perhaps he could coordinate with his america counterpart, senator kerry, on the two ratification processes. [russian translator] >> would you like to make a question? now you have this opportunity. >> would you -- you have been invited by your president to -- [russian translator] >> thank you. mr. president, next week we will be discussing with the senate this simultaneous issue and the

thing that is being asked by all counterparts, when will the russian president submit this document to the russian parallelment? when will the american president do it? the first week of may? then we will do the same thing right then. we can do that as a package deal, like two packages. in the morning, i make a call to mr. obama and ask him, are you doing it. and i do the same thing. i sign the package right there. >> perhaps you could give him some advice on how to synchronize our own legislative branch. >> we have a problem. it's called the united states senate. but if i could -- >> congressman delahunt.

>> congratulations on signing the treaty and many of us hope that the senate proceed to ratification. i do have a question and you referenced the economic relationship between the united states and russia. and recently, we had a visit from the state duma delegation. and that issue did arise. and we all agree that the level of commerce between the united states and russia is unacceptable. it is abysmally low. we have ideas on the house side as to how we would like the russians to make some adjustments. but if you had a wish list of what you would like to see coming sfr the administration -- from the administration and

congress in terms of initiatives economically, what would they be? [russian translator] >> well, the question is how many wishes can be fulfilled? for example, there are wishes that are never to come true. that we aren't even mentioning anymore, because they are impossible ones. they are wishes impossible toll fulfill, such as the withdrawal of the amendment. it is such a complicated thing that even in terms of this audience, i'm not speaking about it. well, seriously speaking, we need to review our current economic relationship. before the crisis, our bilateral trade was around $25 billion, 30

billion. that isn't that much taken the size of the american and russian economy. frankly speaking, the volume of trade between russia and the e.u. is $250 billion. the trade between the russian federation and peoples republic of china is smaller now, but still, it is 2 1/2 times bigger than that of the united states. but it is not only about the volume of trade, but about the investment as well. as far as the investment is concerned, the situation is not that good, but at least it's a parity situation. we often use this word. the volume of the u.s. investment in the russian economy is around $7 billion. this is nothing. it's a zero. the volume of the russians' investments in the u.s. economy is $6 billion.

this is a little bigger than with other countries. but after all, it's not that much. anyways, the volume of the dutch investment in the u.s. economy is $150 billion. this is the difference in the balances. it doesn't mean that we will be able to bridge this gap very soon, but anyway, mutual investments bring countries much closer together and they fulfill development. most importantly, there should be understanding between investors and the state should see these investments positively as well. it is about creating favorable regimes for such investments and internal -- about a favorable treatment to such foreign investment. in our country, the development climate is not the best possible and we should do everything to

make it more attractive. it doesn't mean that things are so perfect in the united states, but there are things we need to do in order to improve the climate and its elements, including some economic regimes that could be used, including the situation with the legal system. we can improve the functioning of our courts. we could combat corruption. those are the barriers to trade and investment, and not only from the united states. we see these problems. and most importantly, our partners should see their own problems as well, including those problems that impede russian investments or the implementation of joint projects in third countries. >> i want to ask if it's true what i call the retirement of jackson-vanik is an impossible wish? >> i do not believe it is

impossible and i think there is sentiment in congress today to address the issue. you are probably unaware, but there has been the formation in the house of a russian caucus and it's an issue that is being discussed and discussed seriously. >> toby? >> there was a great outpouring in the united states of unity after the terrible terrorist acts and this is due to the contacts that has been made between the americans and russians in the past 20 years. in your first comments about this attack, you said that russia had to deal with terrorism very harshly, but also respect human rights and the rule of law. but we have heard about the first and very little about the latter. and there was a tightening up in

the political system. you have talked for many months about the reform of the security structures and the judicial system and maybe it's even more necessary now. my question is, how do you convince society and other people in your government that part of the fight against terrorism is respect for human rights and for all of russian citizens? and how do you hope to avoid the overreactions that have taken place in other societies after terrorist acts? [russian translator] >> you have touched upon a hard issue. it is not always that society requires that human rights be respected in the wake of a terrorist attack. society requires that criminals

be punished, and in the most serious way, especially for terrorists. and only secondary voices speak to the human rights. this is something typical, not only for russia. this is not only a trait of a civil society in russia. this happens in all the countries. in the wake of terrorist attacks, they demand retaliation. we understand that including the case of such attacks a full- fledged investigation should take place. and it should involve all the parties concerned that are in charge of such issues in the country. the final ruling in such cases should be made by the court, but there is a gap between public sentiment and the position of law enforcement and the judicial system. this is an actual problem that

we cannot turn a blind eye on besides, it is necessary to establish a climate of understanding, not only inside our society that also an understanding between the russian and american societies, between the russian political establishment and the u.s. political establishment. shment. i'm referring to the following. we need to use the same scale to each other after the perptration of the latest savage terrorist attacks on the russian metro. the reaction of the entire world was son -- consolidated and correct. nevertheless, in some cases, we still see old stereotypes are used that are insulting to russia, including these cases are seen in the united states. i reviewed the press after the attacks and terrorists were

still called rebels. we cannot accept that. it is unacceptable to us. i believe it is insult the memory of those who died in the subway station. this is a small detail that is quite indicative on such issues. we should be much closer together. we should hear each other better and then we will be more successful in overcoming the consequences of such terrorist attacks, speaking about the great solid dart of the russian people towards the u.s. people in 2001. this was quite high and we should learn to use the same scale while evaluating each other's situations. and we should be show it to each other in many events, even such tragic ones as the death of

president kaczynski and a great part of the polish political elite. >> thank you, director of norn policy at brookings. -- foreign policy at brookings. and thank you for your wise and constructive leadership of russia. my question is about iran. i wonder if you could describe for us how you view russia's nuclear program. is it a threat to russian national security interests? are you concerned it triggering a nuclear arms race in the middle east and now that you and president obama are on the same page when it comes to sanctions, are you on the same page with him when he says that force should be an option that's kept

on the table? [russian translator for president medvedev] >> the talks about iran with mr. obama and my other colleagues are a part of our agenda. we do that regularly and on a full basis. this means that iran is a problem. and what is important that we find evidence of what their nuclear program is, as any society. they do have the right to develop the civilian nuclear program. but the problem is how they convince us of the community that it is and lately we did not

bring any improvement to the situation. it has aggravated. and iran ignores the questions addressed to it. they keep saying small phrases and make small suggestions. so we deal this together, talking about the future. i would not favor sanctions because sanctions is impeasing of some actions. but if nothing happens, we will have to deal with sanctions. the question is what kind of sanction are these. many times i have answered this question, what kind of sanctions we need. i do not favor penalizing crippling sanctions. make people suffer in a humanitarian sense. this is immoral and it creates

negative results, negative feedback and i have grounds to believe that some people need right this. they are waiting for a real clash of positions. but sanctions must be intelligent. and the question is how we understand this word, what is acceptable and what is unacceptable. sanctions must be universal. they must be discussed with the main participants of the international process on this question. and the sanctions must be aimed at one result. that's why the position upon the sanction depends not only on the united states, europe, russia, but also on china, latin america. in this case only, these decisions, if it is needed are

able to get results. and talking about middle east and what can happen over there if the nuclear program is implemented. and a nuclear conflict arises. well, that would be a gigantic catastrophe. we all can't imagine what could happen in the middle east if just one terrorist act happens there or nuclear arms is used. middle east is called middle east because it is so small it is enough for bombings to happen in one place, for it to start spreading all over the world. and that would trigger a humanitarian catastrophe and exodus of people from different countries. and the most bad thing is it will trigger the nuclear arms

race. many colleagues from iran will -- arabic world that if iran gets nuclear arms, they will have no scrupeles without having it as well. and this will enlarge the nuclear club and then no summit will help if all of those countries have nuclear arms. that will open a new page in the history of humankind, which will be very sad. and i hope we will be able to agree and will manage to solve this issue by political -- >> mr. president, i really want to thank you for being here. i come from that generation of american people that were

involved in the second world war and we certainly had great pride when we went into great britain and france. but i don't think we really thanked the russians enough for the fact being on the east coast and having 25 divisions and i think it made a lot of difference. what i want to do is thank you and the russian people for that. the question i'm going to ask you is the same question i wanted to ask general petraeus today when he spoke at lunch time. and that was asked, the military decided that we had to go into afghanistan. what would have happened if we, the military, had said to the russians, will you join us, because after all, you had a big battle there and you still have problems there. [russian translator for president medvedev]

>> if i understood you rightly, you are talking about military presence of russia in such operations, do i get you right? >> joining the united states in military and its allies in the military operations in afghanistan. [russian translator for president medvedev] >> every country has their own history and times it is very sad. our country has a history of work in afghanistan back in soviet times and that was a very hard page of our history. and i'm not sure that our society is ready to once again open the page. but that doesn't mean that we would like to stay on the side lines and agree upon all

questions of cooperation in afghanistan, starting with military, transit, military, social and economic projects, restoring of its economy. we should cooperate in this realm, but what is more today is given an opportunity to the afghanistan political system develop because we understand that america cannot be there all the time. it cannot be lasting forever. it's a very hard burden. but if america leaves afghanistan and the alliance leaves, then how will the political system live in afghanistan? . .

this is the thing the soviet union failed to do. but our country tried to create a political system. we failed to do that. and afghanistan rejected this political system and this political experiment. today's a is that the modern political system of afghanistan -- today's aim is that the modern political system of afghanistan would be instituted. an effective government would appear there, and then we may say that our aim has been done. >> i might insert a question about krygystan, which has

appurtenance to the effectiveness of allied and coalition -- has all pertinent to the effectiveness of allied and coalition efforts. what is your assessment of that current situation? current situation? >> the situation in kyrgyzstan is difficult, once again. it's living through a stage of a legitimate development and unfortunately, i believe that responsibility for that is borne by the authorities in kyrgyzstan themselves who

hadn't taken effort earlier to consolidate the civil society to agree with the opposition to settle the numerous conflicts under way and to organize normal economic development once the former president was outcast by the opposition and he was forced to leave the country and one of the reproaches he received was economic crimes, corruption, a couple of years later we see the same thing slow -- the same slogans and same people there only they switched places. which is quite sad because kyrgyzstan is a close neighbor of ours and least of all we would like to see kyrgyzstan turning into a failed state. the risk of kyrgyzstan falling

into two parts, the northern and the southern part, is still there and it is important to prevent bloodshed. around 100 people have been killed already and now the question is not about who started the whole thing, though certainly an investigation should be held to see who triggered all those problems. the most important thing is to prevent a civil war now and i believe kyrgyzstan is on the verge of a civil war now and all the forces in kyrgyzstan should realize their responsibility toward the responsibility toward the naog@@@@@ @ @ @ @ @ @ @ @ @ @ @ -- we understand what a civil war means today if, god forbid, it is started. it would immediately attract terrorists and extremists,

because in the course of such conflicts, the best possible conditions are created for a radical movement. in this case, instead of krygysztan, and afghanistan of some years ago can emerge a different afghanistan and before the military operations there. so our task is to help our krygysztan partners to find the calmest possible way to overcome the situation. how can we do that? we need to suit the people. we should form a government that would be viable -- and sooth the people. , and some political leaders will need to assume important decisions as to their future. a decision that should be

motivated by the interest of the people of kyrgyzstan, not by their personal political ambitions. >> mr. president, i'm darrell west, vice president of government study here's at brookings. i was interested in your talk in the section about technology and how that broadens your source of information and i'm just curious how technology has changed our leadership style, and when you go online, what are you looking for and also do you and president obama ever email one another? >> we don't email each other with president obama, but it is a good idea. indeed that would be the fastest possible way to talk to each other because until we coordinate our communications with our assistants, then we get communications in writing, it takes a lot of time. in this case, we could just

have a couple of iphones and just exchange text messages or emails. i am quite familiar with that as well as president obama, as far as i understand. but speaking about the changes that occurred in my life through this new information environment, i should say that a lot of things have changed. it's not a figure of speech. this is about our habits and habits are the things we're made of. if some time ago i started my morning with reading a newspaper or a digest or just watching the tv, i don't do that anymore. i go online and i find all the things there, newspapers, tv channels, russian media, foreign media. media that are favorable to the russian president, media that hate the russian president and they certainly speak whatever

they think, which is very important because i don't have a perfect picture of what is going on. the picture that many predecessors of mine and in other countries used to have. this gives an opposite effect. very often, i review some requests or comments of desperate people who write about corruption, law violations, about other problems. i certainly cannot answer all those comments, but the most outstanding things, due to internet, can trigger support from people and then a whole open letters written by many people at the same time and this is certainly a reason for

a feedback from me and then i instruct my agencies and ministries and the government to attend to that. originally it caused some kind of surprise but now people are used to that, moreover, i have started a blog that is run at my presidential website. now governors have started doing this as well. for somebody is a totally formal thing. others, really communicate with people and if earlier officials were threatened by some addresses to their bosses, to the kremlin, now they are threatened by such comments that people can write on the president's website, this is becoming a part of our life. it cannot help us in all the thing in all the problems, but it is certainly helpful and in our society in russia, it is probably even more important than anywhere else.

in our society, this bureaucratic traditions have ages-long history and always authorities have been too far from the people and probably it originated some political traditions as well and this type of communications helps us redress this kind of bad traditions. and i like this. >> i don't know if it's going to be possible to have simultaneous ratification of the new star treaty in our senate and your parliament, but i'm sure your opening proposal about how you and president obama are going to communicate is going to cause a simultaneous nervous breakdown in the white house and the kremlin. but i'm sure you're up to handling that. >> no problem. >> antoine fanachwal, i would

like to switch to the economy. two questions, looking back and looking forward. looking back, after the global crisis, russia was hit by a -- quite a steep and fast economic recession. did that surprise you? also, how fast russia bounced out of it. second question, russia is well known to be -- to have the largest reserves of gas in the world. is that changing now that so much gas, i mean, huge quantities of gas are being found in the united states, hungary, all over the world, how will that change relations with europe and even china? >> speaking about the global recession, if i was surprised,

i will be frank. well, i was surprised. every one of us have their own stereotypes, their own understanding of what are the weak places of economy and what are not. so the thing that happened after the crisis, the beginning of the crisis in our country, was a surprise because the extent to which it fell was more than i could have expected. i'm not talking about other economies. i talked to my european counterparts and american counterparts. all of them were surprise. but that was outrageous -- were surprised. but that was outrageous for me. how our economy depends on raw materials. i never understood that we are so much dependent on raw

materials and this made me talk about the modernization, about technology. but for the crisis, probably we would live by our eninertia and living with the high prices on oil and gas. i'm happy that this crisis happened. the economy has fallen down, but it is bad that this crisis made people suffer, many people lost their jobs, it hit people very hard. but this crisis should change our mindset, our economic approach and thus far it hasn't changed much. many businesspeople and

ordinary people are waiting for high oil prices, it's $85 a barrel now. it's ok now. maybe it will be $140 someday, then we can rest easy doing nothing, but the problem is that this is top-down development and one day, the price will fall and the prices will harr monoize somehow and being -- arm onize somehow and bling -- harm onize somehow. -- harmonize somehow. the major challenge is how fast we can do that, we would like to do it as fast as possible, but this is difficult. we have outlined five priorities of economic reforms not because they are universal

but because they are important and if we are successful in these ones, like space, atomic energy, pharmaceutical drugs, energy efficiency, new technologies in energy, we will have some advancement in these realms, then it will be very good. though high prices for energy carriers is good, why not go and lower them. it gives us some advantage. the main thing is not to rely on gas and oil only. and the fact that they have found new gas opportunities, this is not bad. that will help us be more attentive toward our possibilities. our opportunities. and whatever we say, once 50

years and energy revolution happens, first coal, then oil, then gas, then nuclear power and i believe that in 30 to 50 years from now the situation in both our countries will be different. i don't know if we'll use hydrogenic power, but being complacent with gas and oil is not good today. >> i want to tie this question onto that one. you mentioned the brick countries in your opening remarks and you meet from time to time and are going to be meeting shortly with your fellow leaders in that grouping. when you get together with them cork you talk about these issues and compare perspectives and plans? and what do you see as the future of that grouping?

>> i not only speak to them, after this meeting, i'm going to latin america where the brick summit will be held in brazil and this group, this community of countries today, is formed already. this doesn't mean that this is full-fledged organization, but that doesn't mean these are four countries developing at a fast pace and if we are able to find consolidated approaches, we can do that on many questions, not on all of them, but the things we discuss like economy and politics is very important and today, brick has become a factor of economic development. does that mean that this is a community having an eternal

shape and it is rigid? i don't think. so but in order to change it, we have to reach common approach. we have to agree. last year, when we met each other and discussed these issues in russia, with all of the statesmen of brick we discussed national measures and economic development. this is very good for us and the outlook of our society is positive and we're going to develop this structure. >> this will be the last question. >> ambassador, the last question

is yours. >> this is the second question about kyrgyzstan. since the ouster of the president, some analysts have noted how critical russia was of him, and said russia was angry that kyrgyzstan had not tick to the americans out of the base. can you clarify -- had not kick the americans out of the base. can you say russia has no objection to american access to the base in kyrgyzstan to support our operations in afghanistan? >> how can russia even object against sovereign decisions made by other states?

this is their decision. we can like it or not, but it is a decision made by the krygysz leadership. the president was a coherent person. kiefer said he was going to make a decision to eliminate -- he first said he was going to make a decision to eliminate the american base in kyrgyzstan. and then he made it as same decision to maintain the center for transit movement. i believe coherence the and consistency is the best characteristics of a politician. the more coherent a person is, the better his results are. we can see the results of this president now. it does not mean, though, that we in some way are trying to impede that. on the contrary, when i met the

president of kyrgyzstan, i always told them it was necessary to assist our u.s. partners in addressing the task in afghanistan. the other question is how effective this assistance is. therefore, all the possibilities were there. >> mr. president, before i say a few words of thanks to you, i want to ask our friends in the audience to please remain seated after we have concluded the program so that i can escort the president out of the building. to you, sir, i would like to express particular appreciation, not just for the substance of what you have said, which was remarkable in its breadth and depth and in its candor, but also the which you brought to this discussion. you open your remarks, first of

all, by quoting our founder, robert s. perkins. he would be proud to have his name associated with this event today -- robert s. brookings. you also said some kind words about the summit that president obama hosted. i am sure you have had an opportunity to do spread -- express those to him. that meeting is set a high standard, a very unusual standard. you have done the same thing here with this discussion. by consent. i know enough people around the room -- i can sense, i know the people all around the room, to have a degree of confidence that we all are in your debt for spending this much time with us and covering as much ground as you did with us. i ask you all to join me in thanking president medvedev. [applause] >> [speaking russian]

i would like to say a couple of words more. first of all, i would like to thank you for being so patient to listen to my long answers. secondly, two questions about kyrgyzstan were asked today which is quite unusual. on the other hand, i did not hear the questions i always like and appreciate and that i am always asked, like the question about the development of our political system, the development of our media, our relationship with mr. putin. i believe that is a reason for me to come back and discuss our domestic political life as well. [applause] >> i have a very simple proposal, since you have given a

nervous breakdown to your staff. why don't we give them another and have everybody stick around for another hour and discuss all those issues? >> no. [applause] >> thank you. [captioning performed by national captioning institute] onal captioning institute] caller[captions copyright natiol cable satellite corp. 2010] >> up next, a senate subcommittee hearings on the 2008 failure of washington mutual bank. following that, a couple programs on the financial regulations built. also, president obama.

-- the financial regulations bill. >> a senate subcommittee held the first and a series of hearings looking into the 2008 failure of washington mutual bank, the largest bank failure in u.s. history. in this portion, you will hear from the company's former president for home loans as well as the former head of its capital markets division. >> >> first of all, let me extend

our appreciation for both of you being with us today. we look forward to your testimony. as i indicated to the previous panels, all of the witnesses that testified are required to be sworn. i would ask you both to stand and raise your right hand. do you swear the testimony you are about to give is the truth, the whole truth, and nothing but

the truth, so help you god? >> yes. >> thank you. [coughing] [whispering] i'll leave at 1:00, 12:30. we will again use a timing system. one minute before it is time to change, the red light will turn to yellow. the written testimony will be put into the record in its entirety. please keep your testimony to no more than five minutes. mr. schneider, please go first, followed by mr. beck.

>> i served as president of washington mutual's call loan service. in 2006, i was given the additional responsibility for a long beach mortgage company. before i arrived at wamu, its management and board had adopted a lending strategy. that strategy was intended in part to reduce their exposure to market risk, that is is exposure to market -- interest rate changes, and planned to do so by shifting assets is held on its balance sheet away from market risk towards credit risk, by holding more adjustable-rate mortgages. this strategy was a high risk strategy and would have been implemented. alco made decisions on which

loans to hold and sell based on the risk return profile and other relevant issues, including the type into geographic location of the loans wamu had on its books. although they intended to change its business strategy, market conditions caused it to go in another direction. as housing prices peaked, the economy softened, credit markets tightened, wamu adopted conservative credit policies and moved away from loan policies with greater credit risks. the increase documentation requirements, raised minimum fico scores, and curtailed underwriting exceptions. my team enhanced wamu's fraud detection. during my time, we reduced and stopped making off-day loans and option-r loans. option arm loans decreased by

more than a half from 2006 -- 2005 to 2006 and fright -- by another 1/3 from 2006 to 2007. they stopped offering or loans altogether in 2008. -- arm loans altogether in 2008. in 2006, i was asked to address the challenges its business is presented. i change long beach management twice that year. as i became more familiar with long beach mortgage, i concluded the lending parameters should be tightened to. we raised fico scores, establish maximum loan values, increased documentation requirements, improved program detection for fraud, and eliminated standard income lending. as a result, the percentage of approved loans based on full documentation increased every year i oversaw.

-- i oversaw it. more broadly, wamu eliminated many subprime products and stopped subprime loans entirely. their lending declined by 1/3 from 2005 to 2006 and by 80% from 2006 to 2007. when i began my job wide goal was to evaluate and improve our home lending efforts. as the market changes began to change, my team worked very hard to adapt to new conditions and address the challenges we face. during the time i was president of home loans, we acted to reduce the size and associated risk of the whole loans business, specifically we closed its broker and correspondent lending channels. we close long beach mortgage. we eliminated a number of high

risk loan products and tightened credit standards, and enhanced fraud detection and curtailing underwriting. i look forward to your questions. >> mr. back? -- mr. beck? >> members of the subcommittee, from april, 2003, through september, 2008, i worked at washington mutual. in early 2005, i received responsibility for the capital markets organization in the whole loans group. and the second half of 2006, as part of the changes to long beach mortgage, i was given responsibility for their market capital organization. i will use these brief remarks to highlight a few aspects of their capital market organization. wamu capital corp. acted as an underwriter of transactions

involving washington mutual securities corp. and their acceptance corp. one of these two entities would sell loans into as securitization trust in exchange for securities backed by the loans in question. they would then underwrite the securities consistent with industry standards. as an underwriter, wamu sold mortgage-backed securities to a wide variety of investors. the portfolio managers making these decisions typically have long term, hands-on experience creating, selling, or buying mortgage-backed securities. in addition, purchasers had extensive information regarding the loans were sold, including the data on the performance of similar loans and the conditions in the housing market. wamu also bought and sold home loans. we negotiated the terms and help to close the home loan sales undertaken by whatever entity

owned the loans. typically, these were sales of wamu-a originated loans, although we did occasionally sell loans originated by third parties. washington mutual mortgage securities corp. also operated of all clone conduit -- a bulk loan conduit. they would underwrite securitization transactions in the same manner, regardless of whether the loans were rejected by us or third party. -- were originated by us or a third party. because the capital markets organization was engaged in the secondary market -- mortgage market, it was engaged in the products. we helped determine the original prices on which they could offer loans. we added the various costs that we incurred.

your invitation as about the repurchase and recovery team. we demand that the seller agrees -- repurchase alone. -- a loan. the process itself involves a give-and-take between buyer and seller. . .

>> in this way, wamu took action to prevent [unintelligible] obligations. i hope this brief introduction is helpful to the subcommittee and i happy to answer any questions you may have. >> thank you. we will have rounds of 10 minutes this time. we will have more than one round.

mr. schneider, the gain on sales numbers for the various kinds of loans based on your own data, if you look at exit 3, april 18th, 2006 presentation, that you put together for the wamu board of directors with the high-risk lending strategy. on page 5 is a chart entitled shift to higher-margin. on the left is the information of the gain on sale produced by higher-risk loans. you have enlarged that part of the chart so you can see a better and shows wamu earned about 15 basis points for a traditional loan while option of arms are into 109 and home equity loans for and to 113 and subprime loans are 150, about

eight times more. is it fair to say the gain on sales for the subprime loans was much higher than loans because the bank was able to charge higher fees? is that basically the case? >> if you look at the gain on sale, a number of factors would have driven what would have been the game on sales. fixed tended to have a well gain on sales because of generally went to fannie mae or freddie mac. subprime tended to have a larger gain on sale because of the additional credit risk that investors would demand from the product and it was probably less competitive. >> that would be a higher interest rate? >> yes. >> option arms? >> option arms would have a higher gain on sales primarily

because relative to fix, at last competition. it also had most of the interest-rate risk remain to the bar were four banks -- remain to the bar were. >> that was a higher interest rate as well? >> no. >> after it was recast to the higher interest rate? >> it would depend on the interest rate. >> -- depend on the appetite. >> [unintelligible] until december of 2007 was work >> are on the summer of 2007. >> until then, there was a huge appetite for residential mortgages on wall street? >> i would say the appetite was fairly significant. we started to see diminishing appetite in late 2006 and the

middle of 2007. >> what are daily rate sheets? >> that would be what we post each day for the price of the mortgages were offering on that particular day. >> so they're basically put together by capital markets group -- or they with new york or seattle quest work >> they were distributed from seattle. the information that have come from both new york and seattle. >> wolves will street lane the basic role in setting prices for nonconforming roles across the country? >> for non-agency mortgages, the rate sheet relied of the

execution from wall street. >> as opposed to? >> as opposed to say, fanny or freddie. >> you describe long beach as having challenges you were asked to address. what were they? >> when i first got to long beach, i saw that otter report -- that audit report, and we took over the next several months, we implemented a number of steps to improve the way originations were operated, be put into place, advanced from tools, i changed management twice and over the course by a limited number of exceptions, and eliminated some of the high risk products, and ultimately

decided at the end, long beach was -- at long beach should be shut down. >> de 2006 audit was the reason you are asked to take responsibility for long beach, correct? >> i took responsibility for long beach at the beginning of 2006. one of the primary drivers was the increase in repurchased demands long beach had experienced. that was the first area we looked at. >> then use of the audit? >> correct. >> that you ordered a crackdown on defaults? >> correct. >> and they surged again later. you wrote a december 2006 -- short story is this is not good. we have a large potential risk

from what appears to be recent increase in repurchase requests. we are rapidly losing credibility as a management team. does that sound familiar? >> yes, it does. >> eight months later, august 20th, 2007, the audit report, exhibit 19 -- repeat issue, underwriting guidelines established to mitigate the risk of unsound underwriting decisions are not always followed. accurate reporting and tracking -- tracking is the policy and it does not exist. do you see that? >> what page are you on? >> repeat issue, page --

page 3. repeat issue. at the top, high risk. underwriting guidelines established to mitigate the risk of unsound underwriting decisions are not always followed. number two, higher risks, tracking of policy does not exist. do you see that? >> i do. long beach -- >> long beach continue to issue poor quality loans? >> i think it is fair to say the underwriting group and the audit group as well as myself or less than satisfied with progress we made, which is the reason we decided to shut down the operation. >> when did you finally shut it down and transfer it to wamu?

>> when long beach was shut down, we stop originating subprime mortgages, which was the third quarter of 2007. >> the vast majority of long beach mortgages, your data shows about 95% were sold or securitized. exhibits 1c, based on wamu data, the annual securitization increase more than tenfold from 2.5 billion in 2000 to more than 29 billion in 2006. from 2000 until 2007, long beach and wamu secured of -- securitized $77 billion in subprime mortgage-backed securities. those are the securitization numbers. these are wamu's owned summary as of june 08.

so the securitization doubled from 2005 until 2006, going from 14 of the $29 billion -- 29 billion. that means they were purchasing subprime with other lenders and mortgage brokers through its conduct and other channels. is that correct? are you with me? >> yes. if you look at the chart that shows securitization hold one sales than in 2005. i'm not sure of the exact numbers. >> these were based on your numbers. you have any problems in terms of securitization? >> i do not. >> him why were so many long beach mortgages defaulted? why were they consistently among the worst performing in the marketplace? >> i do not have that market

data in front of me. >> they were consistently among the worst performing securities in the marketplace. >> if you look at the performance of long beach, i don't think any of us were happy. >> why is it true that there were among the worst performers? >> because long beach tended to originate higher credit risk assets than other subprime originators. >> it stopped issuing a securitization in 2003 while it worked on correcting the problems, correct? >> i did not hear the question. >> when wamu discovered they were issuing policies that

violated its own policies, they gave them a chance to correct the problems, correct question request that is my understanding. >> why were securitization is not halted in 2005 or 2006 or 2007 when similar underwriting problems were uncovered. that is the question. >> i'm not -- i wasn't there. >> why was it not stopped in 2005 or 2007? >> as the lead to the origination and overall quality coming out, we were given the right disclosures and if loans proved to be fraudulent, we would buy them back out. >> process. would you that the percentage chart of project originations and purchases by percentage? in fairness to your testimony in terms of the decline in nature,

this type charred wreck baez's the percentages of the originations of wamu as a percentage. based on your testimony is what we see actually happened as opposed to what he said. you can see that each year, fixed mortgages go down and non- conforming loans are still increasing. your testimony said that was not the case. when you came on board, things started to change. did things change because you made an active process to change for was the market soaring so much that you could not market those loans? >> if you look at charts, those are percentage terms. the aggregate volumes went down significantly. some of the items i focused on

were subprime. i took over subprime in 2006. it was 16% of the volume of that time. at 2007, it was 5%. option arms declined during the time i was there and by the time to get to 2008, auction arms were zero. the other armed product would be more conventional hybrid arms. those would be sold to fannie mae and freddie mac. >> would you put up loan types from to 03-2 07. not only were percentages the climbing but the absolute dollars were declining. why is that? >> we address the home loan issues from 2005 until 2008. there was a general consensus that the size of the mortgage business was too large relative to the size of the bank. we wanted to help bring the size of the aggregate business down.

we closed a number of sites and reduced employment levels of home loans by probably 50% at that time. >> i would like to add to washington mutual that is part of our fannie mae and freddie mac proposal. i'm sorry you did not have this in front of you, but it says the key to the freddie proposal is it provides significant liquidity for our option arms originations. with more advantageous credit and for access to the balance sheet with our current agreement to fannie mae. between 2000 and 2008, washington mutual sold more than $500 billion in loans to fannie mae and freddie mac. how did that affect the bottom line?

>> i can only speak to the time i was there. >> how important'm was the decision to option arms? would you have been auctioning arms if freddie mac had not been there? >> washington mutual had originated option arms for years. i think it provided another source of liquidity for the company to sell its option arms by having freddie mac buy them. >> so they were sold for years to freddie mac? had they not been there, when there have been a market in the last two years before you allowed this to help -- before you want this down outside of freddie mac? would it have been as advantageous as the relationship with freddie mac? >> i'm not sure. [unintelligible]

>> can you look at exhibit number 4 -- the way to go, be bold. are you familiar with this power point presentation? >> i am. >> where and when did you give this presentation? >> i do not know the specifics. in preparing, if i recall correctly, this presentation was given a number of times. i would have given it to folks at staff functions, i would have given it to sales and operating functions as well. >> anybody above you that you would have given it to? >> i may have. >> what did you intend by people? -- intended by be bold? >> this was in 2007. we've gone through difficult time and i was trying to improve

the morale of the business. i need every was feeling badly about what is happening. >> on the second page of the presentation, this is light of the organizational chart that has "we are all in sales." were you ever concerned about heavy emphasis on sales with no oversight risk management was problematic? >> this was meant to be taken as a holistic view. what i meant by we are all in sales is we all have to serve the customer and help the customer achieve their needs and help them in whatever way we can. that means we all have a part in helping the customer. >> in your testimony, he made a point of saying making long beach a subsidiary of wamu was before you got there. t think it was a mistake? >> i do not know the specifics of why the decision was made. >> i did not ask the specifics,

i asked if he thought it was a mistake. >> i would say no because it was all part of the holding company. we had all the obligations anyway. >> were you made aware that the loans underlying wamu's securities were having problems? >> i knew we had underwriting problems, yes. >> who were the most common customers for the mortgage- backed securities? >> hedge funds, pension funds, insurance companies, corporations. >> do you believe your customers have a full sense of what they're buying when it purchased the securities? >> i do. >> you think you were aware of the risks? >> i do. >> if you had to redo a thing, how would you do it differently?

>> i would securitized mortgages with more full documentation. it was an important aspect to the performance of the loans. >> were you aware of the significant problems and a credit risk side of the business in terms of the door seeing in terms of loan originations? >> i was not with respect to the audit reports referred to in the first testimony. >> did it surprise you? >> -- >> that up to 82% were unqualified and undocumented loans? >> those are high numbers, but as i look at the document, i did see it was taken from an adverse sample from the loan origination center.

so those loans had been identified as risky and worry their first payment or early payment default. of those, i would expect there would be a high percentage of problems. >> he said long beach paper was the worst performing paper in 2006. how were you made aware of these problems? >> with me have a moment to get to that. -- let me have a moment to get to that. >> this is the e-mail i wrote from an investor conference. the long beach relative performance was discussed

repeatedly with investors at the conference and i would have been made aware of the relative performance talking to people in the market. >> did you continue selling similar paper even after making the comment? >> yes. >> did you alter your securitization practice based on that knowledge? >> i cannot recall that we did. >> i asked the other panel and they said they should know about prior problems. i also asked if they were owners and there was the sec requirements which requires notification of any debt -- any material adverse factors.

were you aware of the nature and depth of the problems with the significant number of loans that were originated that either did not qualify, had false documentation, or had no documentation? >> i was not aware of the specific documents you referenced earlier. >> so you were seeing the end results of what came through and your packaging and selling it. after you received the information that the performance was poor, did you inquire to say why is our paper perform more poorly than others? >> yes. we did a couple of things. in the course of securitization, before the loans are pooled, there are post-closing reviews, many of which you have seen done by origination and their intent is to identify and remove loans from the pool that would come to

me and my team that have underwriting defects. after we received the sale of loans, and underwriting due diligence process is undertaken where statistically significant samples are taken, both at first as well as random, to identify any further underwriting defects. when we come to the process of securitization, the loans are performing and current. loans with underwriting defects should have been removed. as you know, some loans with fraud and underwriting defects to slip through. it happens. it is not a good thing for us. we have an operational and reputation problem and the big financial problem as we have talked about in terms of repurchase reliability.

each transaction does have a warrant. the investors can ask us to repurchase loans. >> so your ability to sell into the future is dependent of the quality of the product you are selling today? >> yes. i yield back. >> what is the stated income alone? >> the bar were does not document their in club -- the borrower does not documentary and come on the application. >> that seems unusual, doesn't it? >> stated in come loans were developed for customers that did not get a w2 and were generally self-employed. >> why did it go beyond that? it clearly went beyond that. >> yes, it did.

i think what happened in the industry is, if you look at the performance of mortgage loans, what was the dominant driver for performance was the ficus score. -- lee ficos score. it was not aimed bacterial driver of performance as we got into -- it was not a prime driver for performance and we started to require additional documentation once begun to 2006. >> can you think of some moral she didn't go without disclosing your income? where he -- or people would just take your word. it seems a foreign concept to me that she could go to anyone and borrow money and they ask of the documentary and come and that they would just tell you and

we're off to the races. >> no. >> what size is stated in some loans were used for wamu? >> i do not recall any specific limit. >> so any mortgages sold could have been stated income? >> yes. >> as it was resold, did it closed without [unintelligible] >> a documentation type is disclosed. >> so if i picked up a prospectus and went through the whole thing on the mortgage- backed securities, it would say these loans are based on state income? >> that would be in the perspective supplement. it is important to recognize that is not the limit of the information an investor or are or what have. they had access to the loan tape, which would have access to the loan. that rating agency feedback and

they knew the historical performance of the shelf we have been selling. they had a significant amount of information be on the prospectus. >> do you have reason to believe specific borrowers were lying about their income on these products? >> as we look at performance of loans and saw early payment defaults, we did see instances where they were lying about their income. >> did everyone in the management of wamu know that? >> i cannot speak for everybody. >> were the top management aware of the fact that some top state income was not accurate? >> i would presume so. >> at what point did you get worried about this? it just seems so difficult to understand -- i have a hard time

dealing with the concept but as things go on and these things are growing and more indications you're getting that stated intent is not working, is there any concern expressed by top management about this? >> we were all very concerned about it. we tightened credit standards in our subprime space significantly when we started to see the challenges. we tightened credit standards in our prime space and all lending types throughout 2007, as we experienced challenges with the performance. >> did you have any reason to believe the internal controls were enough to deter fraud in these? >> over the course of the two and a half years i was there, i think we made improvements. i do not think we were ever fully satisfied that all of the improvements were in place and we continued to work on that.

>> mr. back, did you perform -- mr. back, did you inform investors you were concerned about internal fraud? >> we informed investors of the risk characteristics of the loan. as i said in my previous testimony, we have internal processes in place to remove loans that had identified fraud wnóbefore we sold them. some fraudulent loans to slip through, some loans with underwriting defects, and the investor had the opportunity to put those loans back to west. >> mr. schneider, you said you decided to stop stated in come loans? >> correct. >> when did you do that? >> late 2006 or early 2007. >> why did you do that? >> we were not satisfied with the performance. >> city just eliminated all of them?

you did not just eliminate some of them? you just said from now on, wamu will not accept the stated income loans? >> yes. >> what percentage of that time of those stated come loans were not accurate? >> i am not sure. >> but it had to be a preponderance to totally eliminate them as opposed to just saying -- it was just 10% would not eliminate all of them. you would try to put in tighter internal controls to identified as 10%. i would presume it would have to be a big number to just say we're not going to do it anymore. >> our expectations around delinquency where most single numbers -- if they did get to a number on a product, it probably was too high even at that level. >> you say that you closed long beach? >> yes. >> why did you do that?

>> as we get into 2007, three important things happened. the subprime market was increasingly challenged. home prices, we started to see signs that there were delays -- they were deteriorating. long beach, i showed you the numbers earlier, a percentage of the business was very small as a percentage of our business and it simply was not worth the management and attention required at that point. >> but you were getting reports and i know you just came in 2005, but you were getting terrible reports about things going on in long beach. iit was such a small portion of the business, i just wonder why you waited until 2007 to close it down. >> my initial charge was to go in and see if i could fix it.

we tried as hard as we could. >> how would you characterize wamu relation with its regulators, ots specifically. >> we had a cordial relations and i met with them probably monthly. >> while the line at regulators were diligent, leadership did not report their conclusions. is that something you've founder just did not deal with question are >> that is not something that would be involved with. >> how did wamu use ficos scores? >> it would be one attribute of the loan decision. so we would have the criteria as well as other documentation. >> are they a good indicator of credit worthiness? >> yes. >> they are an accurate

indicator you think? >> i think it is the best measurement available that gives investors an opportunity to understand what loan as opposed to the other. >> is that your opinion also? >> my opinion is it is one of many risks that are evaluated. we have talked about owner- occupied, non-owner occupied, geography, so there are a variety of risks important in evaluating these losses on a loan. >> we talked of a lot about the book "the big short per " he said there were far worse with scores in the 550 range.

>> we may have had scores under 600. under 600 would be low. >> would you agree that those loans are certain to default? >> i would agree that they have much higher expected credit losses than a borrower with a 750 score. >> in order for 550 to survive, he would have to have hands-on management day today. did that go on to your knowledge? >> yes. for our subprime servicing, we put them in a high risk servicing protocol, which meant we called them earlier and more often and work more closely with them. >> what is the concept of a

skinny file? >> i am not familiar with that. >> that is the policy that says a skinny file is a good file. one article says a skinny file is a good file, but you had no indication of that. you have no knowledge of that? did you feel any pressure from wall street in terms of generating more mortgage-backed securities, in addition to the back was profitable, did you get a sense that this was competitive than something you should be in too? >> that was not a driver of activities. if you look at the results of the mortgage business, we did nothing but lower volume and systematically shut down

business. >> it sounds to me like we have heard a bunch of horror stories this morning. a lot of them happened before you came. when you showed up and took a look at what was going on, you were assigned to look at long beach and all that, what went through your mind? was it that it was a challenge or were you thinking? how difficult or unusual did you find the situation? it sounds unusual to me. >> it was a very big challenge. i spent a lot of time trying to make long beach as successful as possible. i tried management changes. we changed products. >> thank you very much. >> first, on the numbers of originations, you testified that the option arm lending

decreased by more than 50% from 2005 until 2006. when you leave out is your option arm lending in 2006 was significantly higher than it was in 2003. you also do not mention the major reduction you will see in origination occurred on your fixed, traditional loans and that caused a significant drop. from that point on, there was a slightly different story with the for mortgages, but the major drop which he you and others refer to came in the fixed 30- year loans. that drop took place when you decided to engage in a high-risk strategy. you have less of origination and purchases of your traditional loans and low-risk loans and starting in 2004, leaving gauge and a high-risk strategy and we saw what the outcome was.

according to sec filings, option arms were $30.1 billion in 2003 and went up to $67 billion in 2004. went up to 63 billion and was still above the 2003 level in 2006. fixed loans went from $263 billion in 2003, dramatically down in 2004 to $77,000,000,000.690466601 and then the real explanation for this shift that you make reference to has to do with the dropping of the fixed loans secured as asians and originations. the increase in the option arms -- securitization and originations. the increase in the option arms increased, but it was still above the 2003 level. i want to talk about exit 50 --

i want to talk about a memo made in reference to the long beach paper being among the worst performing paper in the market. this was in november of 2006. the comptroller of the currency did an analysis on the highest rates of foreclosure in 2008. this is exhibit 58 and it shows long beach being in the top 10 in nine out of 10 metro areas. were you aware of these findings? u,ñ>> i was not. >> should you have been made aware of them?

>> mr. chairman, i am not familiar with this document. >> should you have been aware of the occ findings is my question, given your position? >> i was not aware of this report. >> i am not talking about the report. i'm asking if you should have been aware of their findings. >> i cannot say. >> take a look at exhibits 22a. this is a november 2005 internal memo called " the southern california emerging-market, targeted loan review results." it describes the year-long internal investigation into suspected loans originated from her to processing centers. we heard in the prior panel said it laid out an extensive level

of loan fraud. 42% of the loans are reviewed contained suspect activity or fraud and virtually all that can be attributed to some sort of employee malfeasance. exhibit 22b and 23b show the percentage of loans containing fraudulent information at montebello office at 83% and at the downey offense, 50 -- 53%. were you aware of those findings? >> i was not. i was not copied on this. >> should you have been? >> i was aware there was fraud, as i said earlier. i was aware that certain loans had underwriting defects. as part of the post-closing review that origination was conducting, i understood loans

that in the fight fraud would have been removed from the pooled loans i would be securitized in. >> you thought there were going to be removed? >> that is what i believed. what did you check to see if that was true? >> what we did subsequent to that was due a due diligence review separate and distinct separate and distinct from the underwriter. >> did you check to see that they were removed before you put those securities on the market? >> i did not. >> purchasers of these securities are relying on you as an underwriter to provide truthful information. you had evidence of fraud yet he did not check to see whether or not the fraud-tainted securities or mortgages were removed from the security. was that not your job?

>> i understood there was fraud and -- >> you didn't check to make sure the fraudulent, tainted mortgages were not part of the securities before you peddled them? is that not part of your job? >> is not. -- it is not. the important aspect of this, and i take your point, it's important to not sell loans that are defective. however, the post closing review is conducted by the origination channel, conducted by credit. >> who is that specifically? >> the post-closing review would be conducted by the operations department with in the origination channel. >> give me the names of the people in charge. >> i would plead to the prior panel, alternately.

>> so it -- i would point you to the prior panel, ultimately. >> so it was their job to make sure they were not part of securities? >> yes. the process in place was removing loans that were defective. >> and it was their job, the previous panels job? >> i have a separate responsibility to conduct underwriters due diligence, which we did. >> you never asked to see if they were removed? >> i did not.

>> take a look at exit 24, if you would. fraud problems resurfacing, early 2008. this is an april 4th memo.

this is from the wamu corporate fraud investigation section. it says one of the mortgage insurers refuse to ensure any more loans issued by the mortgage officer from the montebello loan office. this the same officer investigated in 2005 and describes virtually no actions were taken in response. it says another review of loans in 2007 in the montebello office, this was reported in april 2008, found 62% obtain fraudulent information. were you aware of this audit? >> yes. >> what did you do? >> this audit was conducted by the legal and hr group. i was aware but they were conducting it. whenever i found out about cases of fraud i asked that an

investigation happen. we had no interest in a fraud -- >> yet it continue to have been year after year after year. and you are selling these securities that those fraudulent mortgages are included lee. -- included in. you are out there selling these securities. >> in the cases where we found frauds, we would buy those loans back. >> when you found your people complained about a? when you saw that the audit in april, you saw the continuation of fraud year after year and said a 2005 fraud continued and in 2007, it continued. you are out there selling securities. do you not have a responsibility to make sure, take steps to make sure that fraud and so that you're not just looking back after someone finds out after the security is sold that you take actions to prevent those

securities from being sold. isn't that your responsibility? >> it is my responsibility. >> what actions did you take when this came to your attention? >> we terminated the people who admitted to committing fraud. >> did you offer them jobs? >> i did not. >> did the company offer them jobs? >> they did not. >> did you go after the securities that included the fraudulent mortgages to notify people there were fraud in the securities? did you take the initiative? >> that initiative was taken by the legal department. >> do you know they took the initiative? or do you say it would have been taken by them? >> it was my understanding they would look at it to make the determination. >> as to whether -- >> what ever determination was appropriate. >> did you find out what they did? >> i did not. >> you are out there selling the

securities and you know the risk brought in some of the securities and you say it's your job to make sure it does not happen. you say the legal department was presumably going to take action and you never follow up to ask the legal department whether they took action? i don't get it. >> i expected they would do -- >> but you did not ask to see? >> you did not -- i did not.

>> take a look at page 7 of this, exhibit 24. >> it says there that's wamu has

no record of action taken with certain loan officers. if i could find out exactly -- page 7. i will get back to that. right in the middle. they have no action of -- no records taken -- no records of action taken of the two officers named there. what that is referring to is -- it's summarize on the previous page the prior referrals to the corporate fraud investigations office led to eight separate investigations from 2004 until 2007, two cases each year, with the loan officers at the montebello offices as personnel of the cases. you can see the term prior

referrals on the fourth paragraph. it led to eight separate investigations in three or four years, two cases each year with those people. none of them interviewed the people involved until january 2008. then it says -- on page 7, wamu had no record of issues taken with those loan officers. i don't know how of bank impossibly operate with credibility with this kind of fraud in its midst, but instead of getting disciplined or fired for fraudulent loans coming out of the offices, those top loan officers from montebello and downey, during the same time they were being investigated in 2004 and 2007 were rewarded each

year with a invitation to the president's club, the highest honor at wamu, including all expenses paid trips to places like hawaii and the bahamas. you are very much involved in the president's club to make sure those all expense trips were paid. how does that happen? kiev officers under investigation year after year and instead of being disciplined or fired, they are given rewarding trips to hawaii and the bahamas. how does that happen? >> in cases of fraud where there is an investigation, i ask the hr and the legal group to do the investigations. if they came back with a recommendation to terminate or punish the employee, i would have taken that recommendation. >> were you aware that there were investigations going on every one of those years question >> i was not. >> should you have been?

>> it depended on how big people thought it was. >> was there not a recommendation in 2005 to take action against those officers? >> that 2005 report was something i was just familiar with. i do not know what the specific recommendations were. that was right at the time i joined the company. >> in 2005, this is what was recommended -- this memorandum outlines -- this is exhibit 22a. this memorandum outlines a few of the most egregious activities identified based on targeted reviews on specific areas of

failures to follow policy, based on the persistent, pervasive activity among these employees, we recommend firm action be taken to address these particularly willful behaviours on the part of the employee's name. firm action was paid trip to the hawaii -- paid trips ought -- paid trips to hawaii and the boss? are you troubled by that? -- why and the bahamas. should the bank be troubled? should your investors were stockholders or anybody be troubled by that except us? >> anytime there is fraud, we took it very seriously. >> if it was from, you reward the folks being investigated with trips. that is the action, year after year, the president's club that you say, exit 62, -- exhibit 62,

you hope to find the employees of top sales people at wamu, that you hope to see them all in hawaii. david schneider. take a look at exhibit 30. it is an internal document called "significant incident notification" dated april 1st, 2008. this is westlake village, near los angeles. these are loans issued in 2007 but the report is dated april 1st, 2008. the first bullet point -- many of the loans had several fraud findings, like fabricated asset statements, altered statements, income and misrepresentation, and one altered state of believed to have been used in two separate loans. the third ball point -- one sales associate admitted during the crunch time some of the

associates, we're talking about westlake village -- some of the associates would manufacture asset statements from previous loan documents and submit them to the office. this is as it said the pressure was tremendous and we get them the documents since the loan had already been funded and pressure from the loan consultants to get loans funded. take a look at exhibit 31, a memo summarizing the same april 2008 investigations. page two, exit 31 -- sales associates would take asset statements from other files and cut and paste the current our worst name and address. .

>> my question is, what did you do at the time? did you get back in those securities and make sure that the people who bought them were notified? >> i don't know specifically what was done, mr. chairman. >> did you find out at the time?

did you ask? >> i don't recall asking. >> take a look at exhibit 28. these are minutes dated december 12th, 2006, from the market race to the market risk committee of wamu. page 4. near the bottom. the delinquency behavior was flagged in october of '06 to further review and analysis when recent characterization deals appeared to have more severe delinquency behavior than experienced in past deals.

the primary factors appeared to be cause by process issues, including sale and securityization of delinquent loans, sale and securityization of delinquent loans, loans not underwritten to standards, lower credit quality loans and seller services reporting false delinquent payment status. what did you do about it? >> mr. chairman, i was not a member of the market risk committee, so i had not seen this document before. >> these were secure -- you never saw the document at that time? does it trouble you now? is this the first time you have seen this document. >> i think i saw it yesterday in preparation. >> yesterday you saw it for the first time? >> yes, sir. >> what was your reaction? >> it should not happen.

>> should not happen. these are securities that happened on your watch. mr. beck, they were on your watch, too. you were you aware of these documents? >> i am. >> were you then? >> i was aware of this at the time, i do recall this, and we bought the securities -- we bought the loans back. >> that were brought to your attention? >> this -- >> you went out and looked for them? >> yes, we did. >> you did what? >> we bought the loans back. >> did you go out and look for them after you found them? when you read these documents that fraudulent mortgages had been secure tiesed -- >> this document saysed that we sold loans that were delinquent.

and that's never right. that's never what we represent. >> what did you do at the time you saw this, right? you saw this at the time. >> right. we bought the loans back. >> i know. did you go out and look for them ? did you initiate the recovery -- >> yes, tom lehman worked for me. yes. >> pardon? >> tom lehman worked for me. >> and you told him to go out and found all of these documents regarding these loans? >> i'm talking about the specific question. >> how about the previous documents, when we -- when we identified -- >> when you saw these documents, we talked about three, four documents here. when you talked about these documents, you're saying in every case you told your people go and find every security that incorporated these fraudulent loans, we're going to buy them back back? >> that's not what i said.

i said i remember and recall this specific event because we did go out, because we securitized loan that's were delinquent, when we represent we won't do and that we shouldn't do and these were loans purchased from third parties and the loan servicing tape we got from them was incorrect, strong. when we found that out, we went and purchased these loans back. >> you noifered everybody? >> i believe we did. i believe we made a filing on this particular area. >> what about the earlier ones where the fraud was identified in those offices? did you go back and identify what securities incorporated those mortgages that were fraudulent from those offices? >> i'm not certain dr. coat, mr. chairman, that the loans from that analysis ever got into a securityization in the first place. >> did you check out when you saw the add its? >> i never saw the audits. >> you never saw the two audits

we've talked about here today? >> nope. >> should you have seen them? >> i don't know. >> you mean -- >> i don't know the answer to that. i didn't see the audit. what i relied on was that original nations post closing review would remove defective loans before they were put in the warehouse to sell. >> did you ever check that out to see if it was done? >> no, i did. >> senator kauffman? >> i don't know that those loans were sold. >> did you check? >> i did not. i wasn't copied on the report.

>> now, in general mr. beck, were you arrived of the 2005 and 2008 investigations we have been discussing, is your answer no, you were not aware of them at the time? >> i was not. >> did you supervise the program that was set up to investigate any complaint about your securities and your loans? is there a seven-step program

that long beach had set up? do you remember that? >> i do. >> and that was to affirmatively investigate a complaint about the loans, is that correct? >> yes. service was set up at the end of 2006. >> you supervised that program, right? >> yes. >> did you set up a similar program for wamu's loan? >> that program was designed for -- for long beach. >> my question is, did you set up a similar program for wamu's loans? >> the purchase and recovery team also looked at requests for purchase for wamu loans but the seven-step process you're referring to was used with long beach. the best i can recall. >> why was it not set up for wamu's loans? you had all of this evidence there was fraud in various offices of wamu, why was that not set up for wamu's loans? >> we had a significantly higher

level of repurchase requests from long beach. >> take a look if you would to exhibit 34. now, exhibit 34 is a report from wamu's corporate credit review group. and it is found that wamu's loans marked as containing fraudlent information was nonetheless sold to investors.

on page 3, if you take a look at page 3 in the first bullet point, it says the control to prevent the sale of loans that have been confirmed by misrepresentation that contain misrepresentations are fraud are not currently effective. so the controls are not effective. there's not a systematic process to prevent a loan in the risk mitigation inventory or confirm to contain suspicious activity from being sold to an investor. the coating of the user defined risk mitigation field and fidelity does not directly

affect the saleability of the loans. a review is completed of a sample of the 25 loans -- this is a sample of 25 loans closed in '08 with the appropriate coating in the risk mitigation field. of the 25 loans tested, 11 reflected a sale date after the completion of the investigation which confirmed fraud. there is evidence this control weakness has existed for some time. do you recall this report and that finding, mr. beck? >> i do not. >> should you have seen this report? >> yes. >> were you aware that for some time wamu had been selling loans to investors even had the loans had been marked as containing fraudulent information? >> no.

>> well, now you were head of the capital markets group, right, at that time? >> that's correct. >> is there any way that you should not have been informed about this? >> i would expect i would be informed of this, yes. >> i mean, this is damning stuff. you're working for a bank that a 25-loan test has almost half reflecting a sale after an investigation is confirmed fraud. and this review says that, that failure has existed for some time, that control weakness has

existed for some time. now take a look at exhibit 40-b if you would. senator kauffman, any time you want to jump in here, please do. exhibit 40-b. now, this one is going to take some difficult following because it's an e-mail, so we have to start at the first e-mail, which is on page 4 at the end and work back up to the page 1. take a look on page 4. you will see there on february 14, 2007, michael lieu writes to mr. nelson the subject -- now,

mr. nelson's the senior haven't for portfolio management, and here's the subject. option a.r.m., m.t.a., which is the monthly treasury average, option arm, m.t.a. and option arm m.t.a. delinquency. notice that. delinquency. so now we've got an option a.r.m., m.t.a. which is an option arm with an interest rate adjusting to the monthly average, is that right? >> that's right. >> and the e-mail points out some information -- fieckio scores, loan-to-value ratios about the delinquent, nonforming option a.r.m.s. see where it says that?

it says information about fico scores. >> yes, i do. >> a few minutes later, still on february 14th, working our selves now to page 3, you will see that elsen forwards this e-mail to somebody whose name i believe is yuy chen. do you know who that person is? >> i do. >> is it a man or woman? >> it's a man. >> so mr. chen is being sent this e-mail subject, omings a.r.m. delinquency. it said he attached the description of the option a.r.m. that was delinquent in the 2006 fourth quarter. you can see that it is very much a function of fico's and low document loans. we're in the process of updating

the matrix. your comments are appreciated. so now off that page and you will see shortly thereafter, a couple hours thereafter, there's an e-mail from mr. chen, did you say that was correct? did you say it was a male or female? >> a male. >> mr. chen to you, february 14th. subject, option a.r.m. delinquency. this answer is partially mr. schneider's questions. apparently mr. schneider asked some questions on the breakdown of the option a.r.m. delinquencies. the deshow low fico, low document and newer vintages are where most of the delinquencies come from and not a surprise. not a surprise. now the next e-mail if you keep

going up is from you, the same day you're forwarding that e-mail on option a.r.m. delinquens to mr. schneider and mr. feldman, and here's what you write -- what you write at the top of the page, please review the performance of newly minted option a.r.m. loans is causing us problems. cheryl can validate but my views are at a high margin, option arpgses is not performing well. we should address selling first quarter. that's '07. that's the quarter you're in, as soon as we can before we lose the opportunity.

so in response to your option a.r.m.'s you want to sell the newly minted option a.r.m., quote, newly minted. are you with me so? -- so far? >> yes, i am. >> so that's what you want to do. later that day, still working up this chain of e-mails, later that day, same subject, option a.r.m. delinquencies. this is to you from david schneider. it's now sunday, february 18th, 2007. still -- i'm sorry, this is from schneider. i made a mistake. this is from david schneider.

to you and it says, share all your thoughts. copy goes to you and to cheryl felker. but now mr. schneider is saying, share all of your thoughts. do you remember this, mr. beck? >> yes, i do recall that. >> schneider, do you remember this? >> i do. >> ok. now, later that day, we're still on exhibit 40-b, ms. felkin replies, subject still option a.r.m. delinquency, the results described below, and i'm reading for her e-mail, are similar to what my team has been observing. california option arms, large loan size, 1 to 2.5 million v. been the fastest increasing

delinquency rates in the family single residence portfolio. there is a meltdown in the subprime market, which is creating a flight to quality. i was talking trobt williams after his return from the asia trip where he and alan magelby talked to investing potentials for upcoming covered a.r.m. deals backed by our mortgages. there is still a strong interest around the world in u.s. residential mortgages. gain on sale mortgages or option a.r.m.'sar attractive. this seems to me to be a great time to sell as many option a.r.m.'s as we possibly can. karen killinger was certainly encouraging us to think serious about it at the m.b.r., monthly business review last week. what can i do to help? david, would your team like any help on determining the impact of selling certain groupings, certain groupings of option a.r.m.s. on overall delinquencies. that's refreshing, somebody who's making clear what's really

going on. describes the quote meltdown in the subprime market, flight to quality. who's going to buy option a.r.m.s., who are going to be delinquent? she talked to wamu executives who had just been to asia, talked to investors, backed by -- who's interested in bonds backed by wamu mortgages and she's right, there is a strong interest around the world in u.s.a. residential mortgages. nerds, in other words, we can sell our option arms. so she writes, this seems to be a great time to sell as many option arpgs that we possibly can. mr. beck, you said pretty much the same thing. so the option arms, quote, as soon as we can will we lose the opportunity. the idea is to sell as many of these delinquency-prone loans as possible to investors before their performance get worse and wamu gets stuck with them. that's -- the only way that could happen is because you guys at wamu knew something that potential investers didn't. and that's that these loans were

likely do-to-go delinquent. here's whammed. mr. schneider you reply late that sunday evening, the subject again, option a.r.m. declining quensies. here's what you suggest, d.b., mr. beck, and ms. felkin, ask mr. beck to select the sample portfolios and coordinate with finance on buy/sell analysis and then you ask ms. felkin to run credit scenarios. now we're going to the first page of this exhibit 40-b. now it's tuesday, february 20th. everything's in motion. mr. beck, you send an e-mail early in the morning, 7 kwlon 17 a.m. subject -- re option arm

delinquency to ms. fell kin and mr. schneider making a plan to supply loan level detail and coordinate finances. the final e-mail, which is at the top of page one there, the subject line now reads, "urgent need to get some work done in the next couple of days." that's added above option a.r.m. delinquency. ms. felkin directs her staff to start actualizing the option a.r.m. in the portfolio. she wrote, we are contemplating selling a larger portion of our option arms than we have in the recent past. and this could be a way to address california concentration , rising delinquencies, falling house prices in california with a favorable arbitrage given that the market seems not to be yet discounting a lot for these factors. and she asks for input on portions, her words, on option a.r.m. portfolio that we should

be considering selling. now, when you turn to exhibit 41 if you would. and so far both of you remember everything i have read, do you? >> i do. >> yes. >> now you turn to exhibit 41. this is another e-mail chain the same day. february 20th, mr. hsai sends to ms. felkin an analysis of the key characteristics of loans in the wamu portfolio that it contributed to rising delinquency rates. shaw to felkin and a few others. subject, urgeant need to get some work done the next couple of days on option delinquency. cheryl, i reviewed the h.f.i., the -- hole for investment prime

loan characteristics. that contributed to the rising 60-plus delinquency rates between between january '06 and january '07. the result of this analysis show that's seven combined factors containing $8.3 billion for investment option a.r.m. balances which experienced above-average increases in the 60-plus delinquency rate during the last 12 months. this is 821% increase or ten times faster than the average increase of 79%. i recommend that we select lonings with some or all of these characteristics to develop a hold for sale pull shift, in other words, from holding on to them to selling them and then he lists the factors. that went into this change, and

he lists the eight specific factors. one being an option a.r.m. loan. two, recent vintages 2004 through 2007. three, in california, four, new york, new jersey, connecticut. jumbo loans and specific fico scores. then he wrote, i recommend we select loans with some or all of these characteristics to develop a hold for sale pool. so he presented a recipe for selecting option a.r.m. loans. those most likely to go delinquent so they could be put up for sale before they actually went delinquent. got stuck on wamu's books or discounted. is that right? is that a fair reading of that, mr. beck? >> mr. shaw is laying out the risks as he sees them in the pool and the risk factors are going to contribute to delinquencies. >> ok.

now that day ms. felkin e-mails the recipe on to you, mr. beck. this is the top of page 41. the subject is thoughts on targeted population for potential option a.r.m. loan sales. she writes it might be helpful insight to see the components of the portfolio in the largest contributor to delinquency in recent times. whole focus here is delinquency, delinquency. now look at 42-b. this chain of e-mails starts five days later on february 25th, 2007. first e-mail is from you, mr. beck, to yourself and to mr.

schneider, mr. rotella. and here's what you wrote, "david and i spoke today. he's instructed me to take actions to sell all marketable option a.r.m.'s that we intend to transfer the portfolio in the first quarter of 007. that amounts to roughly $3 billion of option a.r.m.'s available for sale. would i like to get these a.r.m.'s into hold for sale immediately so i can sell as many as possible in the first quarter. sounds urgent." is that mr. beck the david you're referring to there, mr. schneider? >> yes. >> mr. schneider, do you recall giving that instruction to mr. beck? >> chairman i recall a decision being made in ail coalco to sell more options arms and provide

more liquidity and capital. >> do you remember giving that direction? >> yes, i do. >> now, about two weeks after this e-mail, the market risk committee gives approval to move up to $3 billion in option arms out of the invest. portfolio and into the sale portfolio, is that correct? >> that's correct. >> and exhibit 43 is the march 9, 2000 minutes of the market risk committee reflecting the unanimous approve afflet transfer. now, how many of the $3 billion in option arms that were for sale were in fact sold? >> don't know, mr. chairman. >> do you know, mr. beck? >> i don't recall precisely. >> how about approximately? of about a billion and a half. >> half. >> so we will say about a billion and a half of the 3 billion. do you know which were sold and which weren't? >> no. >> ok. now, the reason that option arm

loans were selected is because they most likely would go delinquent. the market was not yet aware of it. did you notify investers when you securitized option a.r.m. loans into the rmbs' that the delinquency rates for several wamu securities were expected to go up? did you notify the investors? >> mr. chairman, the market was keenly aware -- >> do you know whether investors were notified? >> investors were notified of the risk characteristics of the loan. >> were they notified there was a billion nar dollars in loans that were selected because they were option a.r.m.s. and it was your expectation that option a.r.m.s. were going to go delinquent in greater numbers? were they notified specifically of your findings? >> no. >> now, those option a.r.m.s.,

least the ones that are called wamlt 2007-083, that's chart 51 if you will take a look at it, they show that delinquency rates for a number of wamu securities. and that a.r.m., which is where you put these delinquency-prone option a.r.m.s. -- by the way, option a.r.m.s. are supposed to be prime. supposed to be prime. but these delinquency prone option a.r.m.s., now you won't be able to see that. you will have to look in your book. that's 1-g. they now have a delinquency rate of more than 50%. which means more than half. underlying loans are now delinquent. more than a quarter of the underlying mortgages are in forle.

mr. beck, they were relying on you as an underwriting to give complete and true information >> yes >> complete and truth investigation. did the investors know everything that you knew about the high characterizations? >> the -- >> i'm asking you a specific question. had you an expectation option a.r.m.s. in your inventory would have a high delinquency rate. you based that on an assessment you made. you did a study. my question is, were the investors notify thad wamu did its own analysis to identify option a.r.m.s. that had a pennsylvaniaty to go delinquent. were they notified? >> mr. chairman, i'm not even sure that the loans that mr. shaw identified got into the sale transaction. >> do you know whether they did or didn't? >> i do not.

>> should you? >> i'm not sure whether the loans that mr. shaw identified -- >> should you have known? hey, look, you're being told that your option a.r.m.s. have a real high propensity for delinquency. you write e-mails back and forth. high delinquency, fear of delinquency. you identify those option a.r.m.s. first you identify the risks, ok. $3 billion is authorized. a billion and a half of option a.r.m.s., that inventory are sold. you've done a study. you know the propensity. you have an obligation to tell your purchasers as an underwriter complete and truthful information. my question, did your investors know of your high delinquency expectation? do you know? >> mr. chairman, it's important

when i answer this question to understand that as you pointed out, this is the beginning of 2007. the subprime market is pretty much shut down and delinquencies are rising very fast and that's based and in the prime space. as mr. catguard pointed out in the earlier testimony, because we can't sell loans, they're coming back onto the balance sheet and using up capital, and delinquencies are rising. so our loan officers were going up. so one alternative to help raise capital would be to sell loans from our option a.r.m. portfolio. >> mr. beck, those e-mails talked about delinquencies, delinquencies. you identified the delinquencies as coming from your option. >> yes. >> my question is a very specific question. you knew all of this. they were identified and my question is, did you notify people that were buying your securities that you had done a study of delinquencies in your

option a.r.m.s.? that's my question. do you know? >> we did not -- they don't have these e-mails. what they have is a prospectus supplement that as all of the relevant risk, including what mr. shaw would have put in there, the ficos, the geographies, the ltd's, all of that information would have been in the prospectus. >> you're saying that the prospectus notified your investors that you had done a study of high -- >> no, mr. chairman, i'm not. i'm not saying -- i'm not saying that. >> and that you had determined that, that first quarter's option a.r.m.s. had a high risk of delinquency? you're telling us you didn't notify the idge vesters of that study. you're telling us that you don't even know whether or not those option a.r.m.s. ended up in the securities, whether that $3 billion includes those and that was your responsibility to make sure that the securities which went out to the investors were

following notice to the investors of everything that they needed to know in order that the information be complete and truthful. that's what your testimony is under oath. >> it's a very real possibility that the loans that went out were better quality than mr. shaw laid out. very real possibility. >> and there's a very good possibility that they were exactly the quality that he laid out, right? >> that's right >> and you don't know and apparently you don't care. the trouble is, you should have cared because there's an obligation to make sure that your investors know, what they didn't know that you knew, critical information that you knew. that's the problem. senator kauffman, do you want to -- >> yes. i just want to see if i got this straight. on this list it shows some of the high fico loans are the wunches with the highest delinquency rates, is that right, from the memo from robert shaw on february 20th, exhibit

41. it's telling him there was a high fico really would be deceptive when you knew those were the units having the high delinquency rate, correct? >> senator, can you repeat the question? >> if you look at exhibit 41, when shaw lists options. he lists a bunch he says that fico increase in delinquency among ficos of 700 to 739 was 1,1099% increase. fico 780-plus 1484 increase, fico 620, 1689, 20% increase. for some looking at the portfolio, the high ficos were the ones having an incredible delin quinnsy, is that fair? >> senator, they had a high increase in actual rates but the actual rate was. 4%, which is 4 out of 1,000. >> but it was -- why is the for

the 7.2, 4.2 billion. >> that's the aggregate size of that pool. that's not the amount that was delinquent. >> what percentage of that would be delinquent. ? >>. 4% of that amount. >> let me ask you one other question while we're on that, on the earlier memo it said there were fico rates from 510 to 540. >> what document are you on, senator? >> i'm sorry, february 14th, 2007. maybe i have this wrong. from michael lieu to richard ellison. he lists the attached spread sheet with a total option a.r.m.s., it says $105 million between nonaccrual between fico 501 to 540. >> senator, which document? >> it's on 40 and page theands 135. 40-b.

>> for, once a loan goes nonaccrual, nondelinquent, its credit gets impacted fairly significantly so that wouldn't be a surprise score nor would it be indicative of what the loan was originated at. >> in other words, after it goes delinquent the fico for the person who borrows it drop and this shows their fico score after the delinquency, not at the time they applied for the loan? >> that's correct. >> thank you. >> i just have one additional question. when you said investors were told with the characteristics of loans, they were told of all of the characteristics of loans. did they know, were they informed that loans with those or some of those characteristics had a greater propensity towards delinquency in wamu's analysis, were they told that?

>> they were not told of the wamu analysis. >> so they may have been given a long list of characteristics of loans but they were not informed that loans with those or some of those characteristics, according to a wamu analysis, had a greater propensity towards delinquency, sha correct? >> yes. >> ok. do you have anything else? >> mr. beck, you said that at this point most people knew that the subprime mortgage market was in pretty bad shape. what was the psychology of people buying mortgage-backed securities at that point? >> if they knew that this was a pretty bad situation, which i think by then, they did. >> they did but they didn't know how bad it was ultimately going to get. and so at that point in time they were demanding wider margins for the securities that they bought but hadn't stopped buying them yet. >> ok. thank you. >> you made reference to the subprime market going down. option a.r.m.s. are prime.

>> yes. >> they are not subprime, right? they're supposed to be prime mortgages, is that correct? >> yep. >> thank you both. you're excused. we appreciate your being here. we'll go to our third panel. >> our coverage of the senate subcommittee hearing continues with its second in a series of hearings looking at the 2008 failure of washington mutual bank. in this 35-minute portion, senators question the former head of the office of thrift supervision, which was responsible for regulating the bank and the federal didn't insurance corporation chair sheila bair. c c cccccccccccccccccccccccccgcccccc

>> our final panel this afternoon, sheila bair, chairman of the federal didn't insurance corporation, john bowman, acting director of the office of thrift supervision. we're grateful not just for your being with us today but for your voluntary or involuntary patience. i think you both know what our rules are so under rule 6, our witnesses, all of them, are sworn in. so we would ask you to please stand and raise your right hand. do you solemnly swear that the testimony you're about to give to this subcommittee will be the truth, the whole truth and nothing but the truth, so help you god? ms. bair, why don't we ask you to go first. >> chairman levin, i appreciate the opportunity to testify regarding the role of regulators

in the supervision of washington mew chull bank or wamu. the fdic shares the subcommittee's concerns about issues responsibilitied with the primary regulation of large and complex insured didn'try institutions that posed significant risk to the didn't insurance fund and fdic's role as backup supervisor. to assist the fdic in carrying out its didn't insurance possibilities, congress has given the fdic backup authority to examine sured banking organizations like wamu that have a different agency as their primary federal regulator. we have often used this authority in a collaborative process to convince the primary regulator to collect primary measures. however, when this fails our ability toinedly access information is governed by a 2002 inner agency agreement in which the fdic agreed to conduct a special examination only when an institution, quote, represents a heightened risk, end quote, to the dpt didn't

insurance fund. as we learned in the case of wamu, this is a case of self-requirement, as we must steb that the requisite trigger conditions exist. for example, in 2005, wamu management made the decision to change its business strategy from conventional single family loans to nontraditional and subprime loan products. o.t.s. management determined that fdic should not actively participate in o.t.s. examinations at wamu, citing the 2002 inner agency agreement. in subsequent years, the fdic faced repeated resistance to its effort to fully participate in examinations of wamu, even at late as 2008, as problems that wamu were becoming more parent, o.t.s. management sought to limit the number of fdic examiners involved in the examinations and did not permit the fdic to review loan files. in the spring 2008, wamu raised additional capital but the amount raised approved to be insufficient. virtually all other high of risk

mortgage lenderses had closed, gone bankrupt or chosen to be acquired by other institutions. wamu's board rejected an acquisition offer from a large commercial bank in favor of a capital infusion that allowed wamu to retain its independence and management to stay in place but limited future options for raising capital. in both july and september 2008 warks mew suffered substantial didn't dpt deposit funds. by 2002, cash declined to a dangerously low amount for a institution that had seen average daily withdrawals exceeding $2 billion. the next day the o.t.s. closed wamu. it has been an extraordinary challenging time for the nation's banking industry and we have all learned lessons at many levels. i am very proud at the fdic's role as an advocate for banning against practices and fighting against large bank capital reductions and most importantly

for maintaining confidence in the nation's banking system by resolving failed institutions in an orderly and insuring depositters have seamless access to their money. however, we, too too, are learning important lessons from the crisis and sane tral one is we need to be more proactive in using our backup authority, particularly with our inspectiontution where's our exposure is the greatest. we welcomed the findings and recommendations from the fdic and treasury from their wamu review and have already begun a number of their suggested initiatives. in addition, the fdic strongly supports pending legislative reform methods to address the large number of financial organizations. the ability to resolve these institutions in the same way that smaller banks are treated as we did with wamu is essential toneding the too big to fail doctrine. the fdic also strongly supports the need for an independent consumer financial protection regulator. products and practices that swip personal wealth, undermine the foundation of the economy.

finally, we support legislation to require issuers of mort securitizations retain some skin in the game to provide added discipline for underwriting quality. in fact, the fdic board will consider in may a proposal to require insured banks to retain a portion of the risk of any securitied agencies they sponsor. the fdic would always like to see troubled institutions return to health and safe and sound practices. however, as in the case of wamu, when an institution is no longer viable, closing resolution represents the best course. further delay by the government would have significantly raised the cost to the fdic and impose losses on uninsured depositters and expose creditors to even greater losses. the resolution went smoothly. the fdic was able to preserve all of wamu's deposits, both insured and uninsured. the resolution brarges left home and allowed for a seamless transition for wamu's customers the day after the bank was closed. in other words, most of wamu was saved.

as with all fdic resolutionses, the institution was not bail out but rather competitively bid to the private secretary ert. we were able to sell it as fewer costs to the deposit fund. had the fdic been forced liquidate wamu, the fdic estimated it would have suffered nearly $41 million in losses. thank you very much for the opportunity to testify and i'm pleased to answer your questions. >> great. thank you very much, ms. bair. mr. bowman. >> good evening. my name is john bowman. i became acting director of the thrift supervision a little over one year ago during the height of the financial crisis after about five years as the agency's chief council. is not a role that i thought but i am honored to serve. my quinn testimony summarizes o.t.s.'s supervision of washington mutual or wamu and the reasons why wamu failed. it is important to know that this failure came at no cost to the deposit insurance fund and no cost to the american taxpayer. unlike recent failures of other

financial institutions and near collapse of some of the nation's largest banks, which were domed too big to fail and therefore provided government assistance. the demise of wamu came early in the procession of more than 200 banks and thrift that's have closed during this crisis. lifelines such as the treasury's taurp program and the fdic's increase in department insurance coverage, came too late for wamu. during the real estate boom before the crisis, wamu and other financial firms made a critical error by widely underwriting home mortgages based more on the value of the collateral represented by the homes than on the borrow's documented ability to repay. as home prices continued to rise, these practices supported a widely praised initiative to increase home ownership in america. yet as we now know, home ownership reached unsustainable levels and became too much of a good thing. like all the players in the home mortgage market, bank managers

at wamu and elsewhere mistakenly believed they were effectively averting risks by moving loans off their books and securitizing them. similarly, homeowners perceived little risk in their adjustable rate mortgages because they thought they could sell their homes at a profit before rate recesses kicked in. investors believed mortgage-backed securities carried little risk because credit agency, credit rating agencies rated them highly. those beliefs proved misplaced when the real estate market collapsed, the secondary market froze and the risks turned out to be all too real. the fallout hit financial institutions large and small with state and federal charters overseen by every banking industry regulator. since wamu's failure, the o.t.s. has taken lessons to heart from our own internal review of failed thrifts and from the treasury inspector general's material loss reviews and we have made strides to address the resulting recommendations.

we have instituted controls to better track problems identified in our examination reports and to take timely, effective action when necessary. we have established a large bank unit to keep close watch over the largest regulated institutions, strengthened oversight of our o.t.s. regions and enhanced supervisory consistency among regents, tightened scurlt of problem banks and set deadlines for taking enforcement actions after safety and soundness downgrades. in short, we have made meaningful changes. although some thrifts hope to overinflate the housing bubble, traditional thifts whose managers stuck to their conservative business practices of lending to people they knew and to keeping loans on their books, whether -- weathered this economic storm and continued to provide badly needed cred knit their industry. because consumer lending remains important for american families, i continue to believe in the

thrift charter and the need for thrifts to have a separate regulator. with the changes we have instituted, i believe we have made the o.t.s. significantly stronger for the future. thank you again, mr. chairman. i'm happy to answer your questions. >> thank you very much, mr. bowman. throughout the last few years of wamu's operation, the fdic is the backup regulator made to repeated requests to participate in ots exams and was continually rebuffed. we heard in the second panel how the fdic sought to participate in o.t.s. exams of washington mutual, was limited in terps of staff, forbidden to do file review. for periods of time, o.t.s. blocked fdic access to examine material. mr. bowman, are you familiar with that? was that the right course of action? >> i can't say i'm familiar with it, mr. chairman. given my responsibilities prior toing abouting the acting director but i have read enough

about it and i have been watching these proceedings to have a sense of what's alleged to have gone on. >> what's your reaction? >> my action is two-fold actually. one is the two people who were probably the two most senior people within our organization were both prior employees of the fdic, john rich, who spoke earlier was the vice chairman of the fdic for five years. scott pollicof, who was the senior deputy director, had served with the fdic probably in excess of 25 years, including that as a regional director out in chicago. my sense was they knew what the issues were, their perspective, i assume, would be as closes to fdic as anyone's in o.t.s. so i followed their lead. >> why should it take the fdic four months to get a desk or access to the examiner's library with wamu documents? does that make any sense to you? >> that's sort of a specific allegation, sir, that i really don't have any response to.

>> did you follow the e-mail traffic back and forth here? >> no. >> well, the fdic was going to discuss with wamu the recommendation that it was going to make to downgrade its standing. from a two to a three. and o.t.s. got wind of it and said, quote, i cannot -- this is from rich to pollicof, rating disagreement, i cannot believe the continuing audacity of this woman. the audacity being that they were going to sit down and discuss their recommendation to

downgrade wamu. what -- why is that so audacious? >> are you reading from a particular e-mail, sir? >> i am. exhibit 68. >> all right. >> so the question again? i'm sorry. >> what is audacious about the fdic seeking access to a -- not in this case access, sitting down with a bank, which had the kind of problems that that bank had and to tell that bank that

they were going to recommend a downgrading in their rating? why is that so audacious? >> well, i think you have to ask john rich that, sir. >> i did. >> i don't mean to make light of it. i'm not sure exactly what else might have been going on with the director at that time, what his perception was, what his perspective was and why he might have put it into an e-mail like this. >> and in terms of access to files being sitting next to o.t.s. when you do your examination, is there anything particularly problematical about that? >> you know, i don't think so. >> did that happen? >> should that happen? >> that fdic should sit next to an o.t.s. examiner? >> no, that she should be rejected when they try. >> the difficulty i'm having with the characterization of rejected is that i'm looking at the fdicg's report, which was issued as part of this, and that seems to indicate that in fact in the end -- and i'm quoting now from page 45 of the report,

that in the end the information obtained from invoking backup examination authority did not prompt fdic to challenge o.t.s.'s composite rating of wamu until mid-2008. that to me indicates the fdic got its information. >> it took four months. >> maybe not in a timely fashion. >> mr. bowman, it took four months to get a desk. there's a problem. >> a desk? >> yes, a desk in your offices. in fdic offices -- excuse me. >> wamu's office. >> no. at o.t.s.' offices, in wamu's office -- let me get it straight. in wamu's offices where o.t.s. had space, it took four months for the fdic to get a desk. now, there's a problem here. there's a turf war going on here. it's obvious. they couldn't get to the examiner's library that had wamu documents. we had testimony here today. did you hear that testimony? >> i heard some of it, yes, sir. >> should that be the case? should that happen? >> it depends upon the circumstances. >> do you know anything about these circumstances?

>> these particular circumstances? i know there was a dispute going on in terms of how the 2002 agreement should be implemented. yes, sir, i know that. >> do you know that mr. bilco in july of '08 sends a message about the -- you know that memorandum of understanding that was finally issued relative to this bank. first thing he wanted to know, how come that went to the fdic before it came to me, but the answer that he gets back from mr. -- that mr. dellco says to mr. ward is the following, he apologizes, sends the m.o.u. and says, the m.o.u. came up yesterday on a call i had with mr. rich, mr. pallicof. it went to the fdic because i committed to the fdic to consider their comments in an interest to emphasize their letter writing and posturing, fdic's posturing. this is e-mail practice between your people. does it bother you if that's the

case, that there's a feeling that exists here, that there's a feeling of rejection to access to files to doing an examination with the fdic significant next to it, that memorandum of understanding which is shared with the fdic, that the fdic is viewed as being a posturer, and that's why it was sent to try to avoid that posturing? .

>> there has to be a way to work those issues out. >> when they were not given the access to the files, they were not given space, and they were asked for reasons. when i asked what was the reason given, they said we were not given any reasons. then you have an interagency memorandum which has now been entered into. as i understand this, the agencies negotiated this memorandum. there is a standard and therefore fdic access, an f.d.i.c. involvement. is this interagency memorandum

sufficient now, or is it being renegotiated? >> no, it is not sufficient, and it is being renegotiated. >> why is that? >> it is circular in that it retires as to -- requires us to show rest. we really need much broader authority to be able to go in when we fill it is necessary to engage our risk exposure. >> mr. bowman, what is your reaction to that renegotiation? >> i have a couple of all, going back to your earlier question about access to information. my sense is that -- in the document id states categorically that the fdic had sufficient information to arrive at an concur with the rating that the

0 rts had entered into. that is a significant amount of information in terms of who got to sit and which desk or who got to sit in which chair whether they got a desk or not or whether they had to stand in the hall. >> mr. bowman, the question here is access. >> it took them four months to get a desk with your folks. they were denied access for four months at a critical moment of the bank that was in deep, deep trouble. i hope you are not going to justify that. >> i will certainly look into it. i cannot justify because i do not have any knowledge of it other than what is being presented here today. >> i think your folks had knowledge of it long before today and i think he should have looked into it long before today. >> to of those folks no longer work at the agency. >> your legislative foes have access to this material.

>> i also should point out -- your legislative folks have access to this material. >> these are your documents. >> how many different documents were turned over? >> according to my staff, these documents were shown to you in your interview. >> the number was 10. >> how many did we ask your former staff about today, more than 10? >> i do not know. >> let's take a look at something that comes from your documents which i have asked them about. these works exurbs from -- these are excerpts from ots documents.

this is the pattern. underwriting of sfr loans remains unsatisfactory. it has been an ongoing examination issue for several years. one that management has found difficult to address. presidential quality assurance of 2003 originations disclosed critical error rates. sfr loan underwriting has been an area of concern for several exams. securitization is prior to 2003 have horrible performance. year after year after year, these are the findings, and yet no formal action taken by ots against this bank.

again she did not hear me ask questions about it before, but this is not effective regulation. it is feeble regulation, year after year after year. the inspector general's report is highly critical. i don't know if you ever get -- if you have read the report or not. did you? >> i read the purport -- i read the report providing management response. we have already adopted the one recommendation that was made in that report in terms of further changes by the office of -- it had been put in place in october 2007. i have read the report.

>> mr. bowman, are you willing to work with the fdic to, clicker an interagency memorandum which will allow it possible for the fdic to promptly access information about injured in decisions whenever it finds the dnieper intervention? >> up until that were able to find the information, i was prepared to say yes. i should point out that my only hesitation in saying that whenever they would like to get the information is that we do have a statutory structure which is -- which assign certain responsibilities to different agencies. the authority as it relates to the federal reserve. is that above back up regulator. one of the complaints by congress coming out of this crisis is that there was no one to provide or sign

responsibility to. there is no one in charge, to the extent that we mix of who the regulator is, we get ourselves in trouble again with that same kind of charge. if we made a mistake, we should be held accountable for it. we can work with the average -- with the fdic so we do not have a situation like we had as it relates to wamu. >> is there any reason, since they are a back up regulator that has majors in in the game, given the fact that they ensure each of these firms, is there any reason why they cannot -- you cannot work together cooperatively without mixing up your roles in terms of accountability? >> i am also a director on the board of directors at fdic.

there is no reason why we cannot work together. >> is there any reason we cannot assign principal responsibility to you or to any other regulator if you wanted to? without having that crop year from relationship with the fdic? if you could assign responsibility to someone and still have them act in cooperation with somebody else, right? >> absolutely. >> that was repeated in these e- mail's. we have a principal responsibility. we went through these earlier today. we just want to remind the fdic, we are the principal regulator, as though they did not know it. that is what is so troubling here. critical times in terms of this bank and its depositors, its impact on the economy, its investors and so forth. we did not see that. we did not see that -- i can still not understand what the

reluctance was. how do not understand why fdic was apparently rejected when it sought access to materials and access to join examinations. -- to joint examinations.

let me ask both of you about some of the risky practices that we have talked about at these hearings. the state income loans, the- amortizing loan, teaser rates. should these practices be banned either by regulators or by congress? you have talked about one of them, i believe. >> we are opposed on a policy level to stated income. we are opposed to teaser rate underwriting. we think you should document in come. you should document the customer's ability to repay, not just at the introductory rate

but when it resets as well. in 2008 the federal reserve board had one of the things that complicates -- we can only reach -- the majority of this was done by nonbanking institutions that would not be subject to provincial standards are consumer standards of bank regulators. it does have the authority to comply consumer lending standards across the board. in 2008 we filed a strong, and letter urging the fed to ban it stated in come to require underwriting at the indexed rate for all high-risk mortgages, not just the subprime or higher rate mortgages but also interest only loans and any non traditional mortgage product. the fed did finalized rules but that only applied to the high rate loans. they did not apply to the

negative amber tons asian loans. they should consider applying them -- negative amortize asian loans. >> you have the authority as well. >> we have the authority for insured depository. >> you have the authority to ask -- act on all those items you enumerated. >> that is right. >> he made recommendations to your board? >> we have, where we join in the interagency guidance. it did not completely ban as stated in come as our examiners indicated, but it did make clear that we think that should be the exception, not the rule. i would be willing to go further and just eliminate it. if you provide flexibility in

terms of the types of documents and that can be provided, any third party good verification of income can be allowed, but some verification should be made. i do not personally think there is any reason for stated income alone. we would be happy to apply -- you are only getting part of the market if you do not allow products of the nonbanks as well. you do get into a problem with the more standard you put on banks. you have the nonbanks doing looser underwriting and a strong market share from the bank. >> that is the kind of testimony that will be very helpful to us as we proceed with the legislative response. mr. bowman, what would be your answer to my question? >> i would agree with everything she said. the ots does not have separate riding responsibility.

in terms of guidance versus regulation, regulation is the way to go in that regard. the only caution i might have, it has to be applied across the board, both to regulated depository institutions as well as what is referred to as the shadow banking agencies or the shadow banking industry. number two, i think we have to be careful in terms of -- right now we are getting indications there is a credit crunch going on in the country. consumers, small businesses, individuals do not have access to the kinds of credit they believe they need. some of that may be an overreaction to the response to what happened in 2003-2007. the more prescriptive we become in terms of the kind of products made available to consumers, i think he could have an impact

upon availability of credit. >> did you comment on the negative amortizing loans? >> we think there are product that any loan that has adjustable features must be underwritten at the fully indexed rate. the issuer of the loan should determine not just whether the borrower can make the payment at the initial introductory rate, but when it resets. these are terrible products. the vast majority of borrowers continue making minimum payments, building up aegative ever taxation -- amortization.

the loans almost always go back when they hit the reset period. none of them were underwritten at the full indexed rate and should not be allowed. we have encouraged the fed to expand their role -- to expand the rule. >> i agree with that. >> he indicated that you have already sent some public comments on this. we appreciate any further comments on this subject. i think on that positive note, we will end. i do not think also arise along hearing. we had a situation where a bank was riddled with unsafe and unsound lending practices. the regulators saw them, understood them, but did not act

to stop them. that was part of the problem we have had, a big part of it. other parts will be taken up next week when we look at the credit rating agencies, with their failures were, that contributed to this economic disaster. the week after, we will be looking at the investment banks and what their major contribution was to this economic disaster. today's hearing will now be adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> now, debate on the financial regulations bill with senators bob corker and christopher dodd. this is about 35 minutes. >> i thank my colleague from arizona as well. i came to the floor of the united states senate -- i come to the floor yesterday in response to the campaign by those both outside and apparently inside this chamber who are trying to literally kill the wall street reform legislation and to tie that reform to that bill to bailouts. i pointed out in those discussions yesterday that these arguments are straight out of wall street's playbook, written by political is the political strategist. i submitted his political strategy that he offered months

or weeks before even consideration of the bill outlining how to debate -- how to defeat this legislation. mr. luntz had a strategy on thousand to kill it. you have to look at the date of his memo to know what i'm talking about. here we have a strategy basically written by limb to avoid any accountability for the mess that they've made of our economy. if it seems strange to you, mr. president, and others that the minority leader is accusing our bill for being too kind to wall street by reciting talking points written on behalf of wall street, you are a he not alone drve obviously -- you're not alone -- obviously. what seems stranger is the leader's insistence that this legislation is too partisan. perhaps he hasn't spoken to the former chairman of the banking committee, senator shelby, with whom i have spent months working on building consensus, who he himself said months ago that we had achieved a consensus on as much as 70% of the bill that will be presented to this body

in a mott o matter of days. perhaps the minority leader hadn't spoken to any of the republicans on the banking committee, mr. president, who joined with democrats in bipartisan working groups and asked reform months ago, each of which those groups achieved real and meaningful progress that is reflected in the bill that will be on the floor in a matter of days; not just amendments that will be offered, it is in the text of the bills, of those working groups, democrats and republicans on the banking committee. perhaps the republican leader had forgotten that as far back as february 2009 i insisted that meetings with the treasury department, as they were still crafting their plan for reforming wall street, include republican staff, so that republican idea ideas would be e proposal from the very beginning, mr. president. well, this morning mcclatchy newspapers looked into the minority leader's accusations made in this chamber yesterday morning and frankly found them

lacking. please indulge me for a moment, mr. president. i'm reading from this morning's newspaper. let me quote, if i can. "mcconnell accused discoed of drafting bipartisan legislation even though the banking committee chairman has worked roughly half a year with key senate republicans and incorporated many of their ideas into his bill. mcconnell also said the bill contains controversial bank bailouts, but it doesn't." end of quote. and this from today's associated press report, mr. president: "mcconnell on tuesday said his views on the financial regulation package have been most influenced by the comments of community bankers in kentucky, his home state. yet such bankers are represented by the industry groups that most favor setting up an advanced, prefinanced liquidation fund for large institutions, the independent community bankers association, the very community banks that insisted upon the $50 billion, that the banks have to put up if they are real estate

going to be unwinded, rather than taxpayers, the very banks that my friend from kentucky claims are advising him on his views of a different view than he does about the bill that is before us. the newspaper article goes on. it says "mcconnell has also complained that the democratic bill is partisan and the white house intervened to stop democratic-republican negotiations." "senator christopher dodd, the chairman of the bank committee, negotiated for months with leading republicans and found much common ground only to see the vote in his committee unfold along party lines." well there you have it mr. president, in black and white. attacks on the wall street reform bill are false. mr. president, this legislation incorporates republican ideas and democratic ideas and it definitely includes one idea that we all agree on: ending taxpayer bailouts. just ask sheila bair, the

chairperson of the federal deposit insurance corporation, the organization that comes in and puts an end to failing banks. ms. bair is also a republican, former legal advisor to former majority leader bob dole, an appointee of the previous administration, the bush administration. she told -- sheila bair told the "american banker" in an article published this morning, mr. president, "the status quo is bailouts. the status quo is bailouts. that's what we have now," she says. "if you don't do anything," she says, "you're going to keep having bailouts." end of quote. "nothinnothing is what we will e even members deny having this bill come you on the floor of th."it makes bailouts" -- this l that we'll have before this body -- "it makes bailouts

impossible, and it should," she says. "we worked really hard to squeeze bailout language out of this bill. construct is that you can't bail out an individual institution, you just can't do it." end of quote. mrs. boxer: will the senator yield for a question? mr. dodd: i will be happy to yield. mrs. boxer: i want 10 say thank you so much for taking to the floor to explain to the american people the very strange debate we hear coming from the republican leader on this. i was stunned because i had heard that he had met with the wall street people and the banks and then he said over and over again -- the same phrase yesterday, which was repeated endlessly, that the bill that you and the president and the democrats are working on, trying to get bipartisan support for -- for which i commend you -- he said that that bill would mean

one thing and one thing only: taxpayer bailouts. when we all know the entire purpose is to put an end to one dollar of loss of taxpayer bailouts. so i have a question to ask you. isn't it my friend's goal to get into a situation where the banks and the super-big banks, the investment houses bay into a fund themselves with their own money so that if there's any problem and they need to be wound down, it doesn't cost $1 of taxpayer money, that the fund will be paid for by these businesses themselves? am i correct on that? mr. dodd: mr. president, let me thank my dear friend and colleague from california. she says it so much more directly and clearly than my efforts here to explain this. she's just absolutely correct. this is the ira irony of ironie.

the $50 billion provision in this bill was proposed by the republicans. i didn't come up with this idea. this was an idea that was brought up by the community bankers and republicans who said the taxpayer, if there's an unwinding of a failed institution, the american taxpayer shouldn't have to pay a nickel for that. it should be paid for by the institutions that put nem selves in that position. that's what we did. in fact in the other body they have a stronger provision with even more dollars involved in t the irony of ironies, that a republican provision in this bill designed to insulate the american taxpayer from having to pay a nickel to unwind a failed institution, they're knew calling somehow evidence that this is a bailout. the only reason that money can be used is to bail out -- rather, unwind that institution if it gets that that situation. mrs. boxer: and further, if i could say, my understanding is, if an institution gets in trouble, if they're just going to go down. they're just going to go down. they're not going to be revived. and i would say to my friend,

because he's an expert on this -- and years ago i was on the banking committee the, no longer there. i want to make sure i understand if i'm right on this. i think the american people have appreciated the fdic over the years, because the fdic was another way for taxpayers to be kept out of a problem because it's an insurance fund. the banks are taxed, and they put the money into the fund, and if there is in fact a bankruptcy, you're covered, your deposit is covered -- right now i think it is up to $250,000, am i correct? mr. dodd: correct. mrs. boxer: so this whole notion has worked very well. but in closing, because i don't want to interrupt, you know, the speech of my friend, because i think it's important, it seems to me suddenly there's been a huge injection of politics into

a bill that really should have had, as you point out, i say to my friend from connecticut, bipartisan support. if in fact the republicans came up with the idea to have a fee on these institutions to protect the taxpayers, so that we have no bailouts, and now after meeting with the banks it feels like to me -- and these big institutions -- they've turned on their own idea. but they're using the language that is the opposite of what they now want to do because, as i understand it -- tell me if i'm right -- if we keep the status quo and do nothing -- which is again their idea right now -- we're in trouble because we saw what happens when these big institutions get in strubl trouble. main street starts to hurt. lending starts to freeze. and we have seen millions of job losses due to that horrible time we went through. so i want to commend my friend

and just urge him, if he has to come here every day -- and i'll be glad to come over here as well -- to explain to the american people the truth. i'm so tired of politics obscuring the truth. and we need to put an end to it. we're not perfect. the other party is not perfect. no one is perfect. /gwáa;# @ @ @ @ @ x@ @ h thank goodness, those funds are being repaid. the vast majority of those funds are repaid, but we are not going to go through that again. i would never vote, and i say that right here, to bail out these big institutions who were so gambling -- they gambled on the future of america. i will not do it. therefore let's put something in the place where they pay into a

fund so that if there is a problem in the future and they have gone bust, we will wind and down and wind them out on their dollar. i just hope he will keep saying that. i do not mind getting in a debate with the other side. makes our country great because we all appeal to different people in the country. it's good for stability of a nation. but let's not come here with false debate. let's not come here with made-up arguments, because that only hurts the debate. and i just wanted to praise my friend. i wanted to thank you for doing this. mr. dodd: i thank my colleague for doing this. you don't have to have a ph.d. in bank. just ask yourself this question: the idea of requiring these institutions to put up money in advance so that if they fail, they end up paying for the cost of unwinding it. who would object to that? who is objecting to this?

and i mentioned earlier it was not my idea. this was an idea brought to me by the republicans. sounds moo me -- sounds to me the people who have to put the money up is objecting to it. these are the large institutions that don't want to be assessed any cost associated with their mismanagement of an operation. and so it's pretty much as plain as the nose on your face. i thank my colleague from california. i'll try to complete these remarks. i know others have other matters that want to be heard. i want to thank sheila bair from the federal deposit insurance corporation. we know her here having worked as legal counsel and being part of the bush administration. when she talks about our bill and says that she did today hear that there's absolutely -- this bill has been written specifically to end any notion of any kind of a bailout by the american taxpayer again -- i'll

quote her again -- "it makes bailouts impossible and it should. we worked really hard to squeeze bailout language out of this bill. the construct is you can't bail out an individual institution. you just can't do it." end of quote. further, mr. president, our bill stops bailouts by imposing -- let me tell you how we do it -- tough new requirements on wall street firms. being too big and too interconnected will cost these firms dearly. and should that not be enough, our legislation, regulators can use the new powers in our legislation to break those firms up before they can take down the economy of our country. it stops bailouts by forcing firms to write their own funeral plans and to pay for their own liquidation in advance so that taxpayers don't have to pay a dime for that. and they shouldn't.

and if that isn't enough, our bill stops bailouts by literally eliminating any possibility for the government of the united states to bail these firms out. you see, these wall street firms, mr. president, believe that no matter how much we hate bailouts, if they're important enough at the end of the day, taxpayers will come riding in on a white horse to save them. that's like they did under the bush administration. this bill kills the white horse. there is no white horse under this bill. and when we pass it -- as i hope we do -- big banks, large institutions, banks will know that if they fail, they fail. their management gets fired under our bill. their assets will be liquidated under our bill. their creditors lose money under our bill. and taxpayers don't pay for any of it under our bill, mr. president. the bill stops bailouts. to insist otherwise indicates that either the minority leader

doesn't know what's in the bill or he chose to distort what's in the bill. and yet, mr. president, i read this morning in the "wall street journal" the republican leadership -- and i quote them -- "struggling to maintain a unified opposition even going so far as to circulate a letter pledging that each republican senator will vote to filibuster this bill and keep it from even being discussed." i hope that's not the case. i can't tell you, mr. president, in my 30 years here what a denial of everything i've stood for and worked on here in countless pieces of legislation for three decades, to have members of this body who have spent hours with me crafting the bailout, including their ideas, to vote against even allowing this bill to be debated. i just know that cannot happen. i just don't want to believe that 41 of my colleagues haoerbgs many of whom -- here,

many of whom have worked with me on this bill, are going to sign on to a commitment that they won't allow this bill even to be debated and discussed unless i agree to their provisions. i've never seen anything like that in my 30 years here. i've worked tirelessly for months to put together a bill that reflects various ideas. i know it doesn't satisfy everyone. i've been criticized by the left and the right on this bill. i understand that. but, mr. president, i tried to put together a bill that reflected what i thought was common sense, sound and good legislation. and i pray that the news i'm hearing about 41 signatures before most of these people have read what's in the bill, have any idea what's in it, are signing on to a political commitment without understanding what's at stake by losing this bill and having the status quo remain, bailouts that are in place, taxpayers are exposed and the 8 million jobs that have been lost in 7 million homes and others that have suffered as a

result of this economic crisis get little or no relief. that's a stunning conclusion, if you will, of the efforts that have gone on. and it isn't about us. it's about the people out there who deserve far better than they're getting. anyway, still even apparent that the republican strategy is to delay and obstruct, even after it's become clear that the minority has very little to offer in this debate except for some false talking points verbatim from the big bank script. the minority leader took the floor again this morning and said -- and i quote -- "the republicans believe the solution is for bipartisan talks to continue." well, mr. president, they will. as frustrated as i am, my door has never been shut. and the door is still open to sit and resolve and work together to get through this bill. but i'm not going to sit around days on end in the rope-a-dope game of never knowing who i'm talking with, whether or not they have any ability to bring

people to the table, just to disagree with my idea and i'm still against the bill. i've got to ask myself why did i go through this process agreeing to much of what they're offering, and there's not a single political vote to show for it, in fact to vote against even debating the bill. why in the world would you go through what i just did to end up at this particular point? apparently someone informed the minority leader, i guess, that those talks have been going on for over a year. so they will continue. then again, he once again made the false statement that the bill would -- and i quote him -- "allow wall street to bail out banks." say it enough, i guess it becomes true in some people's minds. i would say to my friend, the minority leader, if you want to continue this debate, you can start by ceasing the efforts to filibuster this bill even before it gets to the floor, and i would suggest more than two or three people have probably seen

it, have any idea what titles are in it, what we try to achieve under the bill itself. if you want to debate, you have ideas, bring them to the floor. that's what this body exists for. let me also say this: if the debate is going to consist of democrats offering ideas to tackle this very complex -- and it is a complex set of issues -- and critical challenges on behalf of american families and businesses and the pherpbz making -- republicans reading false talking points, then count me out. i'm not going to engage in that kind of debate and that kind of negotiation. i have no interest in that whatsoever. we have a job to do here. if my friends on the other side of the aisle don't feel like doing the work, maybe they should think about the millions of unemployed americans. who didn't go to work this morning because they lost a job in this economy created by the mismanagement, the failure to step up and take steps to correct these problems overt last number of years.

those americans would love nothing more than to put in an honest day's work for a good day's pay, but they can't because the same banks who are sponsoring this parade of bamboozlement on one side of the aisle cost our country jobs, 7 million homes, lost health care and destroyed futures and retirement accounts. that's all gone. what about them in this debate? are their issues, their views, their concerns going to be discussed? just shut it down, don't even debate the issue because you won't agree with my idea. mr. president, that's not what this institution exists for. it's not about the process. it's not about committee assignments. it's not about your idea or mine. it's about people beyond the walls of this chamber who are counting on us to get a job done for them. and our failure to step up and even debate these issues and consider each other's ideas, i think is a tragedy. i know my friends on the other side of the aisle are faced with

a difficult choice between supporting their party leadership and participating in this complicated, difficult debate. and i'm not naive. i know that's a hard place to be. but if we can't act like united states senators for the sake of this issue, for the sake of legislation whose success or failure has such an enormous impact on the very survival of our middle class and our economy as we know it, then why are we even here? why are we even engaged in this if that's what the choice is? it's easy to understand why the big banks don't like this bill. it's far harder for me to understand why any of us would be sympathetic to those arguments. we don't work for the big banks. we work for the american people who sent us here from our respective states. we work for families who paid a steep price for wall street's risky behavior. we work for the american public that lost those jobs, those more than 8 million jobs and still

face near double-digit unemployment. mr. president, we work for an american public that lost nearly 7 million homes to foreclosure, for millions of people who have seen their small businesses fail or their retirement accounts evaporate in a matter of hours. we work for an american public that is sick and tired of feeling like no one is looking out for their interests. and like the political hacks and lobbyists hold all the cards in these debates and discussions. mr. president, the minority seems intent on proving them right. i hope that's wrong, but i'm worried that they may be right. on proving that there's no issue more important than saying no, stopping all discussion, currying favor with special interests and trying to gain petty political advantage. strangling this bill with a filibuster or suffocating it with false claims that stick our nation and its taxpayers with bailouts forever. it will continue this era of greed and recklessness on wall

street. it will leave us vulnerable once again to another economic crisis. mr. president, i've been here a long time. i know this institution is better than that. i know there are friends of mine on the other side who care about this bill, who want to be a part of the the debate, who want to be part of the solution and have ideas to bring to the table and recognize no one group, no one senator are going to write exclusively to this bill. but i can't get there if the attitude is we won't even let you debate it or discuss it. that attitude is not what the american people expect of the members of this body. so on their behalf, mr. president, who desperately need us to act, i hope that we're better than that. in the coming days before this bill reaches the floor, that we can find that common ground. if not, we need to go forward, but we need to have that debate on the floor of the united states vitiate the quorum if there's no problem with that. the presiding officer: without objection, so ordered. mr. corker: i came to the floor because the senator from

connecticut, who is my friend, made numerous comments about the process. i know that he's still here. i would hope that possibly he'd be willing to enter into a colloquy. i notice he's talking to the president right now. i'll wait just a second. i was hoping maybe the gentleman from connecticut might be interested in a two-minute colloquy. maybe five. and i'd like to give a preamble, if i could. you know, there's a lot of rhetoric going on around this financial reform bill. i appreciated so much the chairman of the committee engaging me for 30 days to try to reach a bipartisan agreement. we voted a 1,336 page out of committee in 21 minutes with no amendments. and we did so with the

understanding -- at least it was my understanding, i'd love to have it cleared up right now -- that the best way to reach a bipartisan bill was to vote a bill out@@@@@@@ @ bk then what we would do is try to seek a template for a bipartisan bill before came to the floor. >> certainly that was the intention and hope. there were 401 amendments sought by 2:00 p.m. on friday before they announced the marker for that bill. over the weekend, staff came to work on amendments. i say respectfully that no one from the minorities side came, but over the weekend it was suggested to me by the minority

that they would not offer any amendments. markup. i was prepared to stay there all week. just for purposes of understanding here, that was their decision. hopefully we can get to some agreement further down the road. we agreed to a lot. the bill that was on the table that day for the markup was substantially different than the bill i offered as a discussion draft in november. it reflected a lot of ideas and thoughts that had been incorporated between that date and the actual markup date. mr. corker: and i have repeatedly, publicly thanked the good senator from connecticut for going through that process. and there is no question it is a much better bill. as a matter of fact, i think it is a very amendable bill. here's what i'll say, i think things are being said -- there's no question some of the attacks on the order to liquidation have been over the top. on the other hand, there's no question that treasury and -- and the fdic created some

loopholes. that's what executive branches do, because they want the flexibility to do whatever they'd like to do. i would do the same thing if i were them. but there are some things that need to be tightened up and i think we can do that in five minutes. i really do. i talked to the treasury secretary yesterday. it's obviously more of a committee-committee level deal now. i understand that. i think we can resolve that. i think the thing -- i know there's been discussions about this letter. the fact is i think what we're trying to do is say let's get this template done over the next couple of weeks. let's don't slow it down. i know talked about entering a bill on april 26th. i know there's talks of sliding a week because there are some other cats an dogs need to be -- and dogs that need to be dealt with. but we can do this. if everybody would just calm down and if everybody would quit exaggerating how bad things are,

there's been a lot of cooperation. i just met with the ranking member. i left his office. i think there's a strong, strong, strong desire to reach a bipartisan agreement. and i hope -- i think -- i'm not blaming anybody, but i think the white house is stirring around in this, all kind of forces going on. i think the good senator from connecticut wants a bipartisan bill that will stand the test of time. i know that i want one. i know the ranking member wants one. i think most every republican wants one. and i think if we could quit shooting things over the transim and settle down, i think without slowing the introduction of this bill down, not slowing is it down one day, if we just get serious as adults for the next 10 days or so, a week, i think we could finish. and -- and i really believe that. and i just would ask -- i'd ask all my colleagues, and i ask this respectfully of my

colleague from connecticut, who, you know, look, things didn't get where they needed to be and i understand what happened. but i still relish the fact that we came close and i think we can get back there. i really do. i don't think anybody's trying to su sub trifiewj this. we may have a few folks who don't want this because they don't like laws. i'm making that up slightly over the top myself. but i think most people really want a good bill and i think the chairman -- i think what you did in december demonstrated that you really want a good bipartisan bill. i don't think it's right -- i will get in a little bit here. i don't think trying to call one republican senator to pick him off, two republican senators, to pick them off, i don't think that's a bipartisan bill. let's get back to the table -- mr. dodd: my colleague wanted a

colloquy here. i'm glad to be an audience here. mr. corker: i'm glad to listen. mr. dodd: if i've been -- because i'm responding to the minority leader. the minority leader has come every morning now saying that this bill perpetuates bailouts. i'm not going to allow those being accusations being spread s the country when i've been told this is a partisan bill. i have done what i have done in the 28 months i have been chairman of the committee. i developed a bipartisan solution to bills. it motivated me in everything i've done. to all of sudden out of the blue, knowing all of the efforts that i made, along with others, to try to find that common ground as my colleague from tennessee well knows here, and then to be faced with a minority leader who should know better to come to the floor making these silly accusations, false accusations about a process that has been anything but partisan,

about conclusions in the bill that are anything but accurate when in terms of what's included in the legislation, and i'm willing to listen to ideas and how we can make this tighter, if that's the case, to stop the bailouts that are occuring in the country. all of that. then to have a letter circulated, 41 people, even most of whom have no idea what's in the bill, but take a political position because they're being asked to do so without some appreciation for those of us, including yourself, who have worked so hard on this to produce as good a bill as we can, understanding that there are many ideas that many colleagues want to bring to this debate. and they should have the right to do that. that having a full debate on the floor of the senate -- i fine -- what does that say to future chairs? why would you bother doing what i went through? if in fact at the end of it all, the answer is, i'm sorry. we didn't get our way, so we're going to stop our debate. i find that distressing to me, as a member of this body,

leaving it in a few months, i won't be here for the debates. i have to say to the newer members coming along, be careful. if this is the template on how we operate, then all of the things i tried to do, the hearings, involving everyone, recognizing you didn't solve every issue, you have to request yourself the question, why would you do that if at the end of the process you get a letter to circulate stopping a motion to proceed of this import -- if this had been a purely partisan, you're not allow in the room, keep you outside, we're going to write what we want to write. i would sign the letter if that is the case. this is not the case in my view. i say that respectfully to my colleague. mr. corker: i will respond respectfully, i think the course -- this course of action to get under way is to finish the bipartisan -- let's face it. you and i went a long ways and we stopped on march the 10th it end and i understand that you

were losing democrats on your committee -- mr. dodd: i had gained republicans. mr. corker: you had one and that's all you asked for. i want to reiterate that. i never said i would speak for everybody but myself. and i didn't leave the table. never left the table. so the fact is the bill has taken a partisan bill on march the 10th. there's no denying that. you wouldn't deny that and look at me with a straight face. there are some bipartisan solutions in this bill, and i grant that, and i thank you for those incliewtionz, but there's -- inclusions, but there's still work to be done. and i would say to you what republicans are trying to do is let's finish that work before it gets to the floor. you've said this and i don't think i'm betraying confidences. i would never do that intentionally. this is a complicated piece of legislation and what we need to do is get the template at least bipartisan in the beginning and then you're right. i mean there's issues like the

volecker rule and governance issues that will go back and forth. but let's at least get the main parts of the bill right. not the way that you would want it on your own, not the way that i would want it on my own. that has not happened on a number of the titles in fairness. and i would just urge everyone -- there's been a lot of work done. you've done a tremendous amount of work in this committee. let's finish that work over the next 10 days. let's quit yelling at each other and let's finish the work the american people sent us to do. and i'm not lecturing. i say all of this respectfully. let's just >> president obama said the financial regulations bill making its way through congress would prevent the kind of taxpayer funded bailout that occurred last year. those remarks came just before a meeting with the economic

advisory board at the white house. this is about five minutes. >> thank you all for coming. we have a few topics to discuss today and i am eager to hear from all of you about how the economy looks from your perspective and your forecast for the next month. we are particularly interested in the issue of hiring and how we are putting americans back to work. i will also be focused on hearing from you your recommendations in terms of how we can increase exports in the years to come, because we know that if we are selling products overseas, not as purchasing products and services, that is going to directly benefit the growth of our economy. i do want to say a few words quickly about the issue of wall street reform. i know that some of you have worked in the financial industry or have been leading financial regulators. many have been advocates of

reform for some time an active in this area for more years than they probably care to remember. as i've said before, we need a strong and healthy financial sector to grow jobs in our economy. the devastating recession that we just went through offered a very painful lesson in what happens when we do not have adequate accountability and transparency and consumer protection. we cannot allow history to repeat itself. never again should american taxpayers be forced to step in and pay the price for the irresponsibility of speculators on wall street who made risky bets with the expectation that taxpayers would be there to break their fall. we cannot leave in place at tattered set of rules that will allow the crisis to develop without the tools to deal with it. that is why i expect that we are

going to have a strong reform proposal that demands new accountability from wall street and provides protections for consumers. this is reform that will force banks and financial to pay for bad decisions they make and not have taxpayers pay for those bad decisions. that means no more bailouts. this reform also bring new transparency and accountability to the derivatives market. this is something that paul volcker spoke publicly about just the other week. the derivative markets were a lot of the risky financial bets like reebok companies like aig to place. there are literally trillions of dollars sloshing around this market that basically changes hands under the cover of darkness. when things go wrong, they can bring down the entire economy, and that is what we have to bring more transparency and oversight when it comes to derivatives and bring them into a framework in which everybody knows exactly what is going on, because we cannot afford another aig.

let's be honest. some in the industry are not happy with the prospect of these reforms. we have seen the usual army of lobbyists dispatched a capital hill. they have found some willing allies on the other side of the aisle. congress has been trying to carve out a lot of exceptions for special loopholes so that folks on wall street can continue to make these risky bets without any oversight. i hope we can pass a bipartisan bill. i partisanship cannot mean simply allowing lobbyist driven loopholes to put american taxpayers at risk. that would not be real reform. in the coming weeks, every member congress will have to make a decision. are they going to side with the special interests and the status quo, or are they going to side with the american people? anyone who opposes this reform is going to be leaving taxpayers on the hook if a crisis like the one we have just seen ever happens again. i consider that unacceptable. i hope and belief is that all of

us, democrats and republicans, will be able to find some common ground on this issue. it is too important to become bogged down in the same gridlock and partisan politics we have seen. it is time we demand protections for consumers so we do not find ourselves and the same mess again. with that, we will officially convened the meeting which will be live streamed, so let's clear up the room a little bit. >> senate leaders plan to bring a new financial regulations this week on the senate floor. the house has already passed a similar bill. senate banking chairman christopher dodd is developing a different bill. while negotiations continue on that, the senate will begin the week with the number of president obama's judicial nominations. in the house, members will consider getting the house delegate the same voting rights at