>> let me rephrase the question. have you within the last six to nine months havd conversations with people of the treasury about reform the? >> and might have, but they would be at a general, high level, not specific. frankly, along the lines of the same way i'm talking to you. >> that is fair. do you know who you talked to? >> in my role i try to see senior people in the treasury and at the five lwhite house, an the legislature. tried to talk to them about things on their mind, and if they're interested, those on my mind. . .

again, that would limit to this country's exposure to systemic risk,, knowing that as we lesson that risk, we also lessen some

of our capability worldwide, in terms of the financial markets. >> i think for sure, we need the apparatus proposed for systemic risk regulation. i think that is very important. i think possibly the most important thing being discussed is to recognize, despite every good intention, despite trying to see around every corner, you just will miss the stuff. to make sure that the system is better able to absorb the consequences of missing something, to make sure that

institutions like ourselves have appropriate levels of liquidity and capital, which by and large means more of both. you might have us have certain types of contingent securities. there are a number of proposals out to do it. in general, the system would be made safer if financial institutions had more capital. loans will be more expensive. there will be less of credit. but after the last few years, that will possibly be a policy people are interested in making.

we have to make sure that an individual institution that was poorly run or under-capitalized does not bring down the system. no institution should be too big to fail or have to burden the public with the cost of its failure, or being saved. >> which brings to mind, do you think that the fdic presently has a capable staff that would be able to come in and run goldman sachs if you got into trouble? the answer to that is absolutely no. nobody is going to believe they have the capability to do that, but that is what we are setting up in this bill. we will give them a broad power. it will come in. they will pick winners and losers. they will make decisions. we have none of the expertise to do that, but that is what we're going to give them.

>> my experience with the fdic is limited, because we have only been a bank for a short time. i respect them to quite a great degree, but that has been in connection with their existing functions. >> there is no question that they do a good job when they closed on friday and open it up on monday. but they are using experienced people in the banking business to make decisions on that, if not the fdic. there is no one near the capability of goldman to take over goldman and read it. yet that is what we are writing into the bill. do you think that is a wise decision? >> i am not sure what the interaction is pierre >> the

interaction is that we are going to give a federal bureaucracy with no experience the ability to come in and run a company like goldman sachs. they are going to write regulations that they are going to be able to do that if you become too big to fail or if you become a systemic risk to the rest of the financial institutions. do you embrace that? that is totally different than anything we have heard from the goldman sachs and business philosophy here today. >> again, i do not know how that interacts. i do not know the rules. i do not know how that would be applied in the details of the regulations, and the devil is in the details. >> but you rick -- but you embrace reform? >> i said we support the direction of the bill. i think it is very important for goldman sachs and for taxpayers that we take away the notion --

it would be a very big burden on us if people think that we are too big to fail. we do not think we are too big to fail. we do not want to be too big to fail, but a lot of the negativity that is associated with us is because people think we are getting the benefit of being too big to fail. i do not think that is good for the country or for us to be in that place. >> your the beneficiary of taxpayer money goes directly and indirectly. >> yes. >> so somebody thought your too big to fail. >> the answer is yes, at that time. at that time, even a small institution might have been too big to fail, just because of the

fragility. >> that is a legitimate point. >> i -- >> what about the idea of taking the six largest banks and doing things to make them into 60? buying up systemic risk so that we do not have systemic risk. what do not think that would be a good idea, and i am speaking from a position of not really being one of those big banks. in other words, our balance sheet of about $800 billion is about one-third of where the big banks are. even though we are an investment bank, we are not as big as the commercial banks. notwithstanding that we are one of the smaller ones, obviously if someone is going to get to that position, the fact that

they are big makes it worse. the fact the banks are bigger, more diverse, with more activities in the places in the world, probably makes them safer. secondly, when you think about the big financing purposes in the world, and with the u.s. needs to maintain its competitiveness, having a financial institutions too small to conduct financing on a competitive basis like the rest of the world, i think will be a competitive disadvantage to the united states. >> i have one final question. you are the leader of goldman sachs. there is no question about that. i have asked a lot of questions about ethics today. why did goldman sachs decide to release the personal e-mails of

one person and no one else for this be hearing? we had no investigative purpose, we were not exposing that. is that a political ploy or a defense ploy? why would you do that to your own employees? >> i was not close to the decision. can i give you -- but i think -- i was not specific about that, but i think -- we wanted to get -- and i was not thinking about that because we also provided some information from e-mails with respect to the business

that spoke badly of the firm. i did not think we were adding anything -- >> to me, i go back to the original question. the town set by that, if i work for goldman sachs, i would be worried. somebody has made a decision that he is going to be a whipping boy. he made a very distinct discriminatory decision that one of your employees is going to be

made to look bad. we did not release those e- mails. one of the things we wanted to do with respect to some of the issues was to just get it out so that we could deal with it. at this point, as you are aware, the press was just very -- i don't know where they came from, but i don't think we added, to the best of my knowledge, but i don't know, i don't think we added to the state of knowledge about this e-mails with our employee address, and i think needed to address. >> i have gone over my time. i apologize. thank you for your cooperation. >> i want to start by saying that in many ways the focus on

it just york firm is tremendously unfair. the activities that are being talked about, and i am sure that we could compile the same kind of documents, the same kind of e-mails, from all of your competitors on wall street. i mean, the conduct that we are looking at was not exclusive to goldman sachs. i think it is important to a knowledge that on the record. in fairness, there ought to be another four or five cmos sitting up there with you. >> i would welcome the company. >> i am sure you would. i know it seems like we are harping, but it seems that the cultural realities of what you all do is jarring to most americans. this notion of selling a product that you are betting against is hard for people to

understand. there is a basic sense of right and wrong and common sense. we have spent a lot of time going over that today. i want to talk about several details as they relate to that. one is that, it is clear to me that there was an orphan document in edit the documents we got. it was from one woman to another. it was a summary of an analysis of mortgages. with mortgages that you all were going to slice and dice, and do all the traunches. it is a fairly detailed finding. the date on this is march 13th, 2007. that is the date on this document.

this document says the 7% of the mortgages that the goldman employees had, had material misrepresentations in which the borrowers took four to 14 loans at a time and defaulted on all of them. another 20% of the pool had material compliance issues. they were mainly the missing final touches. >> could you give me the number again? >> this is exhibit number 77. >> i apologize. >> she goes on to say that approximately 10% of the pool was flight for a potential unsecured second -- was flagged for a potential unsecured second plane.

another 5% of the pool involved in the theft, a broker misrepresentation or falsification of documentation. there was a headline risk as well. i am not sure if you did issue a bunch of new mortgages at or around that time in a cdo, in one of these instruments. i cannot say that these are the ones that you issue, but what it tells me is that you had internal analysis on these mortgages. >> center, -- senator, i do not know who these people are. just looking at it, it sounds like somebody complaining, and recommending that we not do some

of these things, from what i can see on this page. >> it is plain on its face that this is a goldman sachs employee who has analyzed a group of mortgages that you all were considering packaging up, either for someone to bet on or bet against. >> i do not know who these people are, and i do not know whether any of this was done. are you saying that we did these? >> i do not know whether you did these or not. the point in trying to make is that it shows that their work analyses going on on the mortgages the or part of your instruments, internally. >> we are supposed to analyze and due diligence with respect to any security that is created. >> if that is the case, then when you issued all of the documents that you did -- when

you did all of the long beach mortgages, do you think you did all of the same analysis? >> i do not know specifically about long beach. i know we have, in all of our businesses, due diligence processes that are appropriate for the business. i would say as a matter of process, i would assume appropriate due diligence was done on it based on our standards and our protocol peer >> well in may of 2006, you did mortgages with washington mutual and with long beach. they had to buy back hundreds of mortgages because of problems. one year earlier they had been

shut down because of problems. i guess, i would like to write -- i would like to request on behalf of the committee that we see the analysis. we would like to see what mortgages there were that you analyze where you found fraud, material occupancy misrepresentation, material compliance issues. i think it would be important for us to see those documents on the instruments that you created for folks to take a side on. >> i am not sure whether an instrument was created out of it, but i get the point. >> the point is, it is hard for us to believe that if you all were doing the due diligence and that you stated a couple of times in your testimony -- now we know, that these things work full of this kind of thing problem we know that's.

you have a document from one employee the recommends putting back 26% of the pool if possible. it does not make me comfortable that you all, after doing the due diligence, actually disclosed as much as you should have disclosed about some of the problematic paper that your packaging up for investors. i would like to follow that trail and get the same kind of documents on the instruments that you did put out on the market both in 2006 and 2007. let me ask you this, and by the way, in may of 2006, right about when you did depth -- right about when you did bacthat, thee was an investigation of long

beach that i found all kinds of problems. that was right before you put this out. that is why i question the amount of due diligence you did in telling the buying public what was in it these transactions. in your testimony, it expressed regret the goldman missed the signs in the system. you said no one could predict that the market would crash or how bad it would crash. looking back, do you think you did enough to look at what were in these instruments and how strong they were on their face? do you think you exposed the kind of problems that the vast majority of these loans represented? >> given that things did not work out well, in hindsight, i wish we had done more. i think we'e thought at the tim,

and again, i am not an expert on that area, i believe we were doing appropriate due diligence and appropriate disclosure. things went much further and got much worse than a lot of people realize. i do not know that we would have -- i do not know what due diligence would have picked that up, but i wish we had done more. >> would more disclosure in fact harm your business model? if you truly are just the house, if you truly are just trying to manage transactions on both sides of a proposition? >> i do not think so. >> it is interesting to me that the investment banks that have created all of these exotic

instruments, that there has not been warmore effort to push for more disclosure. it appears that we are dragging along kicking and screaming. is that an unfair characterization? >> i am not sure. i do not know. >> there is no question that at sometime in early 2007, you realized that there was all lot of -- you had a lot of residual positions, equity residual positions on of the cd those -- cdo's, and that you wanted those books clean up as soon as possible. >> i am not sure. i am not sure a good form of view of equity residuals per se. >> in exhibit 130, there is an e-mail from you to a man that

reads as follows, "should we have cleaned up these books before, and are we doing enough right now to sell off cats and dogs in other books in the division?" that was in february of 2007. >> what page? >> that would seem to be indicating that an early 2007, before you all had marketed more of these synthetic cbodo's, that you were saying you should clean up residual positions and push them to traders. >> i do not remember typing this, but i can tell you clearly how i meant those words and what

i mean. i hope i have this right, but when i use the expression "cats and dogs," i mean miscellaneous stuff. this is just my normal grant about aged inventory. this -- my normal rant about aged inventory. when someone tells me they are using money on old stuff, part of the discipline of our business is to manage risk and sell inventory. so here, i am not even thinking about the particular assets that you're talking about. i am saying, should we close of these books? is are basically saying that -- years are basically saying, your head of the division, you are supposed to be managing this

aged inventory. let's not accumulate residual parts of other deals. sometimes you have little pieces left over, but those little pieces may not be big enough to pay attention to. thaw >> i will just tell you, i will not take the time to read through the whole e-mail chain, but it is clear if you read through the whole e-mail chain, it is about risk in the loan trading business. it is clear that what was going on here was that there was a lot of internal noise about the fact that you had the wrong positions, at repositioned in a lot of this stuff as you guys were moving into some major short positions throughout 2007. as the chairman said earlier in earlier questioning of other witnesses, as you all keep talking about your net for 2007, another one has been able

to delineate specifically how much of a long position you are suffering in 2007, is this really old stuff, as opposed to any notion that you guys were actually purchasing -- participating in longer purchases through 2007? >> it would not matter one quit if we had a risk on our books if it was there for a long time or a short time. both risk is a risk. i would ask people to manage their risks downgra. the fellow who wrote to me said that most of the risk was in the residual positions from the deals done over the past few years, and that is what i was responding to. it is not disciplined to hold stuff because it is small for years. it is probably because it was too small to pay attention to, and that is not the way it is supposed to be.

>> i am not sure that when you look at all the documents that the old positions you had would be considered small in a logistical standards. >> i am referring to old risk and residual positions. >> i guess what i am trying to get out, the point we are trying to make, and this is where i think -- this notion that you guys are market-makers. you also were taking, sometimes taking positions outside of your market-making. that is what hard -- that is what is hard for many of us to get our arms around. i have been talking about this today because i think there is a lot about this that relate to gambling on a a sporting event. the synthetic cdo's did not

represent anything but gambling. there were not real mortgages in there. it was just, take a bet, it just like you would on a football game. i understand the some people are trying to create a derivative market now on how movies are going to do. is there anything you would not create a market for it? >> years are not involved in that. i am is sure there is -- i am not involved in that. i am assured there is. if somebody would be able to do their business better if they were able to hedge or eliminate a financial risk, and they came to us and asked us to eliminate that risk and it was legitimate, honest, proper, and understood, they would come to us and asked to do it. >> thoug do you thdo you think n

wanted to make money because he thought the market was going to tank? he was making a bet. >> he was a speculator. there are people who speculate in corn and other commodities that allow the potential users of those markets to complete their hedges. that is a socially acceptable -- >> mr. blankfein, there is a big difference between a commodity hedging for farmers or an airline company that needs to figure out what it chet is going to cost, and two sides of the deal that are just betting. there is nothing in the essential -- there is nothing essential in a synthetic cdo. it is just people who want to take one side of the deal and people who want to take the other side of the deal.

that is what a synthetic cdo is. >> some of these things do not settle in physical form, but they provide the liquidity and the opportunity for people who want to hedge themselves to have the opportunity -- >> and we cannot take this too far? you do not think that there is a point where we make up stuff to bet on and you guys are securitized in it and traunching it, and especially on dethis, yu put people in the room on one side, and you put them in the room with people who are going to pick the other side of the deal.

that seems weird. it reminds me of this notion -- i think most americans think it would be really wrong for a football player to be into the room with a bookie betting on how the line will go and then go around and play in at the same game they have bet on. it feels like you are betting on the same game you are playing in. >> i know there is an inherent distaste for the short side of things as opposed to the long side of things, but for every transaction, there is a buyer and seller, and there is nothing immoral -- and by the way, some of the people taking the short positions may just be restructuring their portfolios as well. >> by understand that -- i

understand that. but you understand -- 9 >> i do. >> it feels like that you guys were pushing the product you were betting against. at the same time you're letting people who wanted to one side of the deal in the room with the product, not the people who wanted the other side of the deal. it feels like you were a bookie trying to manage risk on both sides. >> in that kind of deal, the biggest buyer, the biggest long been the whole transaction aca itself. it took over $900 million of the transaction itself. the biggest buyer of that transaction was very well represented.

it was the selection agent itself. >> that also seems weird. it seems like, to me, that if you, and it is hard for me to believe that that selection agent was excited about that deal if they really knew that the person helping them make that deal wanted to bet against it. >> the selection agent engaged in a lot of these portfolios, was one of the biggest portfolio managers in that asset class. when we talk about investment deals, it sounds like this is a broad distribution. there were only three professional investors engaged in the whole transaction. in effect, there was no transaction. this was not a transaction that had to be done. this was a transaction that only work if the long and the short agreed on what the portfolio was. i realize that that is not intuitive, but those professional investors wanted those exposures. >> i am not sure that, frankly,

that it is a thing of value that most americans would be comfortable that we would be backing up taxpayer bailouts to companies who were engaging in that. especially if you're not really dealing with the commodity or dealing with the product, that you're making up securitization is for people to take positions on only for that reason. it seems like hamsters in a cage trying to get compensation as opposed to assigning values that i think investment banks in this country have represented for many many years. i thank you for being here today. we have a conflict of interest issues. we have disclosure issues, and we have transparency issues, and we need to get all of those fixed to make sure that we do not have a repeat of this

debacle. thank you. >> i would like to start, if i can, with the topic of asking you about credit rating agencies. in retrospect, how accurate or the credit rating agencies in reading the various traunches and cd thoo's? >> in retrospect, there are inaccurate. >> what you think they missed is so badly? >> i think they never anticipated that the market could fall as much as the market fell. again, this is not anything in it that i know about. i read articles too.

it just seems that they never contemplated -- it never worked into their models of the kind of rules that occurred and the markets -- in and the market. i think that is why they did not work. >> from your standpoint, what ability, if any, to credit rating agencies have to influence the ratings? can you shop around to try to find a better rating? >> the first panel that you had today included people who execute deals and obtain ratings. in my entire career, i never dealt directly with the rating agency, other than with the rating of goldman sachs. >> ok. >> and i am not sure that i have

been able to influence them. >> there enough -- fair enough. let me ask a question i am not sure if anyone has touched on, and that is the use of off- balance sheet ltd., a special investment partnerships -- off balance sheet, limited, and special investment partnerships. why would your company ever want to use an off-balance sheet investment vehicle? why would you ever do that? what is the motivation to move it off the balance sheet? >> i am not sure. i am not sure that we do. >> but goldman it does that, right? >> i am not sure. i think some deal trusts maybe -- i am not sure.

i can tell you, as a matter of our policy, marked to market all of the risks of our firm, whether they are on the balance sheet or not. >> said they were disclosed? >> i do not know. >> we may follow up in another context on that. i would like to ask you about the securities and exchange commission. if your lawyer says you're not comfortable answering these questions, that is okay. i can understand why you would not be. there is a press release that the sec sent out on april 16th. if you will answer, i would like to get a feel for, you know, what you think really happened. i guess i would like to give you

a chance to explain some of this. goldman sacks failed to appear -- fail to disclose to investors the role that a major hedge fund played in the portfolio selection process, and the fact that the hedge fund had taken a short position against the cdo. is it true that you failed to disclose that? >> again, i was not there, but i think our person maintained that he believed that they did know. look, for some of these things, you have to give me license in the sense that i was not there. i think there were a lot of

elements of the transaction and reputations and things that suggest that they should know, and must have known. there are also a lot of opinions floating out in which some people say they did know. that is not a question of not wanting to tell you. i know one of the contested facts in the case is whether this election agent knew or did not know. >> let me ask a follow-up question about your standard of behavior. should that ever nation have been disclosed to investors -- should that information have been disclosed to investors? >> i do not -- i am not sure. the complaint is whether the, at

least part of the complaint, is whether the influence of that person had an undue effect. i am not sure that there is any duty on us to disclose the existence of that short position. this was synthetic, so there had to be a short position. if it was not them, it would be us. everybody in the transaction knew that to the extent that there was a long, there had to be a short perio. the question was, did that short have undue influence in the selection agent. then you get to the situation where our person says the new --

says they knew. then the issue is, how could you not know? obviously, it is a legal case, so there are people on one side, and people on the other, and i do not want to diminish that. but that is the factual issue over which in the case is drawn. >> goldman wrongly influenced the client on which securities to include in a portfolio while telling other investors which securities were encouraged by an independent third-party client. are those allegations troop? >> i will do the best i can -- >> are those allegations true?

>> i will do the best i can, not having any direct knowledge. the portfolio that was proposed in which the hedge fund participated, and may be proposed all of the names, more than half those securities were thrown out by this election agent. -- the selection agent. they were obviously making a judgment about all of them. they turned back more than half. then, i guess others were proposed. some or accepted. some were turned back. and then a third agent also proposed some. there was a healthy back and forth over how things looked. every decision that was made --

you know, there is no deal unless the long and the short agree to it. there is no doubt that there were conversations between them. whether this election agent had the responsibility and duty to pick the -- the selection agent had the responsibility and duty to pick that portfolio, and they did. that is my best understanding that i have. >> this says that the marketing materials for the cdo all represented that the portfolio underlying the cdo was selected by aca management. the sec alleges that undisclosed

marketing materials left goldman sachs poised to benefit and they played a significant role in deciding what should and a -- what should make up the portfolio. is it true that all of the materials represented -- that the elements of the portfolio were selected by aca management? >> that is consistent with what i just said. we have an independent auditor. that does not mean that we do not interact with them. it does not mean that we do not give them our views. at the end of the day, the independent audit to make the judgment -- makes a bad

judgment. >> do you have documentation there at your company about what was disclosed and when? >> i do not know. i assume there are. there are disclosure materials. >> for these types of transactions there are documented disclosure materials that pass among all of the parties? >> there are disclosure materials, yes. >> in the past 25 years, america has seen an increasing number and severity of financial crises, and ron, the tech bubble -- enron, the tech bubble, the housing bubble. what steps can wall street take to make sure that there is not another crisis? >> i think the financial reform is a good step that we are working on now.

there will be gives and takes in it, and i am not sure where it will come out. there is a need for reform, a need for higher capital standards, systemic risk regulation. that is general, and obviously, every firm needs to manage its risks very well and better than they have been doing in most cases. in our case in particular, we also have to look through every aspect of our business practices to make sure to not be defensive, but to learn from prior situations, including the one we are in now, and to be sure we do a better job. >> that is one of the questions i was going to follow up with. what are the lessons learned

from this most recent financial crisis? what is goldman doing differently internally now that you have had to go through the bailout and all of the other strains and difficulties that we have all gone through in the last year and a half. >> even as i am explaining what we did and why it was adequate there is not a thing that will arise here or elsewhere that will not be the subject of some soul-searching and some tightening up of standards. we have a high-level committee in our firm going over every business practice, committee, the senior most people in the firm, and it is not in reference

to whether we can win or lose a lawsuit. it is about standards, and we are going over everything. it's like painting a bridge. you get to the end and you have to go back to the beginning. we have to, everybody has to, tighten up and ratchet their standards up and learn from these elements. we were just talking about the standards in that particular transaction that is the subject of the lawsuit. we have the position that we do, and we believe everything is adequate, but given the criticism going under it, and given the position that the sec has taken with regard to our duty, guess what? we would tighten that up now, of course. everything that has been the

subject of criticism will be tightened up. >> there is a company based in little rock named stevens inc.. i do not know if you know them. >> i have heard of them. >> one of the founding brothers of that company always said that he has the philosophy of, we want to be in business tomorrow. what he meant by that, and the way it still operates, is that they want to service their customers, do an excellent job there, and also they want to be prudent and jealously guard the trust of their investors. he has never gotten into any of these 20-1, 30-1, 40-1 leveraged

type deals. they do not do that. i do not think they have made as much money as others in the business, but they have remained very sound throughout this process. my question is, is goldman sachs and or the industry changing those really high leverage ratios and going back to something that i think is more appropriate. you may say more conservative, but it is based more in reality rather than how much money you can make how fast. >> yes. i think the industry is substantially less leveraged. we thought we were not leveraged going into the crisis, and we were not as much as other investment banks like ourselves. with the benefit of hindsight,

we were too leveraged. even though we were thinking we were fine at the time, we are now half as leveraged as we were then. the affects of this crisis will reverberate with me for the rest of my career and the rest of my life. i will remember the anxiety that we all had. i think that all firms will be run much more conservatively, i hope for a long time. i also hope that society will not rely on the goodwill of financial firms. i hope congress and regulators will impose higher capital requirements and liquidity requirements. i think that is appropriate. as we also data during the crisis, we all have interrelated obligations to each

other, and it would not suit me to have goldman sachs the conservative if everyone else is going to take too much risk and put the system at risk. that is why making the world safer and ending too big to fail is something that is of substantial interest to society at large, and also in the interest of goldman sachs. >> and thank you. thank you for your diligence on this matter. like i said, this did not start with you two years ago it did two weeks ago -- two weeks ago, it started a year and a half. >> i appreciate you being here. is the goldman too big to fail? >> i do not believe so. >> so, if goldman went down, the

financial markets would not go into a tailspin from which they could not recover quickly. >> if we went into a tailspin in a normal world, one in which everybody else was not doing the same thing, which is another issue, and by the way, when you cannot rely on -- one that you cannot rely on. many institutions would not have been too big to fail if you were afraid that one spark would take down the whole forest. firms start to shrink when they get into trouble, but i do think that legislation with regard to too big to fail is warranted.

>> i want to follow up with some questions after the first panel and drill down some specifics. i think we have pretty much established the goldman sachs and paulson both played a role in selecting the assets in the attic is a deal -- ind the abacus deal. we also know that some of the e- mails included in these exhibits, the goldman was eager to complete the deal. mr. blankfein, we know you wanted to get the deal done. goldman wanted to get the deal done. we know that, at least in the previous deals, of which there were about 50 in total, you did not use an independent portfolio management agent. i guess the question i have is, why did you ultimately decide to

use an independent portfolio management agent in the abacus 2001 deal, and why would you use a manager if the assets had already been selected? >> the assets were not selected. they were being proposed, and more than half of them or rejected by the agent. i do not know the circumstances under which you choose an agent and which you don't. >> i understand. it is a big company. aca was not the first choice of the portfolio management agent. in fact, described the arrangement as highly unusual. what i wonder is it the selection of a portfolio management agent was due to the fact that the only investment

that could be found was one who indicated that they were only interested in the cdo if you used an independent portfolio management agent? >> i know that the independent made the biggest purchase of the portfolio pippe. as for abacus and how it was structured, i do not know anything more than what i learned from the questions you asked earlier. but i guess i need to know the role, because they were hung out for a lot of dough. you said that aca was an 80% bair.

-- buyer. were you saying that ikb only had 10% of it? what are you saying here? >> we can provide the exact numbers, but to the best of my recollection, ikb had a total position of something like 150. i think these numbers are in the complaint. i think the aca had a total position that was multiples of that, at something around $900 million. ikb i think had won 50, and aca had 910 plus 42.

>> and these folks were on the long side of things well paulson was on the short side? >> correct. >> was ikb told that paulson was part of the process in selecting the securities? >> all i have is the testimony, at the information we have from the streets. i do not have independent knowledge of it. -- from these briefs. i do not have independent knowledge of it. >> i listed about four or five different arrangement that

goldman had. as we move forward and to try to dig down on this, i have been sitting here trying to really figure out a good analogy of how this happened. i get the impression from the fellows that were a year earlier today that it kind of works this way all the time. folks can pick securities that may fail because they are going to sell them short and then try to market them to someone else because they are going to be successful. . . >> i am so sorry. there were not meant to fail.

people wanted to have that risk. in the market, that is not a failure. >> i feel like we're speaking different languages. it seems to me more than just a little bit odd that paulson picked these because they were going to go down. he sold them short so they would happen. somebody else that may be did not have the information -- here is where the disclosure and transparency comes in. they figured they were going to be ok, so they bought the long side. that may be oversimplifying. it is not like selling a and unsound horse. it is not like selling the corn that has been through a cow.

>> in these transactions, sometimes the buyer comes to you and reverse inquires and once somebody else to offer the other side. most of these transactions are initiated by one side or the other. in the absence of two sides, we usually provide the side. >> what i have read here is that this independent-portfolio selection agency on an abacus was selected -- it was selected because there was an outfit by the name of ikb that wanted to buy it. the only way they would buy it is if you have this independent-portfolio selection agency. are you saying that is incorrect? >> that is not what i am saying. i cannot go through the ins and outs of it, because i do not know more than what i have heard. >> ok.

i can tell you here, right wrong or indifferent, it really sounds like -- right, wrong, or indifferent, it really sounds like there was a failure to disclose information to the parties relevant to the transaction. the synthetic financial vehicles -- and i know you said everybody has the right to hedged their risk -- hedge their risk -- these go beyond that. it is more like a scam. i heard you talk about your clients being critically important. i think anybody would think that or know that. that is probably the most important thing. the previous people up here today said they really would not say whether they worked for the clients or for the company.

they said there were market -- they were market makers. the fact is, it was ironic to me they would not say they worked for the clients. that speaks volumes coming in and of itself -- , in an of itself -- that speaks volumes, in and of itself. >> there are parts of our business that our fiduciary -- there is a market. when you are a principle, i can understand your confusion in understanding the question. i'm trying to explain it. i wish i were better to explain it. there are parts of the business

where you are a money manager, where you owe a duty to the cl ient. there are parts of the business where you are a principle, giving the client what they want, and it is understood that you have to know that the product you do delivers what they expect. but the markets could not work if you had to make sure it was good for them. >> in one case, you are working for the client. in the other case, you're setting the market. >> in the business world, if we are not the biggest, most important market-maker, we are right up there. we do well at this. our clients value us for this. what i am describing to you -- >> and one does not bleed into the other?

or vice versa? >> the market understands, when these people are by being -- >> so what are your responsibilities when you create a product? do you have any? >> they are huge. fairness. that it be effective. bamut is exposure part of it when you create a product -- >> is exposure part of it when you create a product? >> yes. disclosure is the disclosure of the risks associated with that, not related to whether you are long or short also, or where housing is going. does the product deliver what the client seeks? >> but disclosure -- >> >> disclosure --

>> if disclosure is not given to both sides, equally, who is responsible for that? whose responsibility is it? it is not you? or is it you? >> the disclosure requirements and the underwriting are very, very well evolve. -- well- evolved. >> so, it is it you? -- so, is it you? you think ikb knew paulson was part of selecting those securities? >> the question is whether we satisfy the requirement. that is a legal question. >> you know the requirements. do you, on behalf of goldman,

accept any part of responsibility for the collapse of 2008? >> yes. >> are you anyway embarrassed that the taxpayer had to bail out goldman? but it is an embarrassing situation to get funds from the government -- >> it is an embarrassing situation to get funds from the government. >> were those funds critically important for you to stay in business? >> i think they were important. i cannot say what would have happened otherwise. they were critically important. >> do you feel you owe anything to the taxpayer because of that bailout? >> yes. we live -- and for many other reasons. i would like to say, senator, and i am answering the without qualification on all of those points -- answering you without

qualification on all of those points. we were not waiting for a government bailout. this is quite famous and observed. weeks before that, we did a transaction with warren buffett, where we gave him equity warrants on a substantial portion of goldman sachs, and -- in exchange for his investment in goldman sachs. he would not do that in a million years if he thought we were going to fail. he makes money, he does not give it away, even if he likes us. days after that transaction, we did an equity deal where we raise another -- raised another $5.75 billion. those deals closed a few weeks before the s.t.a.r.t. -- t.a.r.p.

you use the word critical. it was critical for the overall environments. it would have affected everybody, including us, if the markets had seized up. we're grateful for it. we express that gratitude. we could get financing in the world. we got it. frankly, when we took the $5.75 , we could have gotten even more. i do not know if the system would have gone completely off kilter if it had not been done. it was too much of a risk. we were beneficiaries of what happens. >> i appreciate it. i can tell you -- we were beneficiaries of what happened. >> i appreciate it. i can tell you, there are some things that do not make sense. one of them that does not make

sense is, why did these synthetic instruments come about when there is nothing in them? it is like betting on a sports event or whether it will rain. it does not make any sense. it is not about hedging. this is just playing around, from my perspective. part of this playing around is why taxpayers had to bail out wall street. i have some issues with that. i, like other committee members, think you are a smart guy. i would like to work with you. i think this country is in dire need of wall street reform. i think you could add something to the equation, as long as we can get to the facts. transparency is critically important in making sure that consumers are protected. i cannot tell you how many stories i have heard of people

who lost their retirement, the college tuition, all sorts of bad things, while other folks got billed out and are making -- got bailed out and are making millions of dollars. >> senator, i agree. i would like to be helpful. i could not tell you what the hedging purpose was of having people be able to take long- short positions synthetically in order to shake their portfolios. that is not the end of the inquiry. -- shape their portfolios. that is not the end of the inquiry. if they are too complicated and too risky, and generate the kind of risk that these deid, then it is not the end. notwithstanding that, they may

be something that should not be permitted. therefore, i am not making a spirited defense. clearly, the world needs more regulation. >> as i look at this as a regular person, you have a guy picking this out to have a role in it. -- this out who had a role in it. i firmly believe he picked them so they would fail, so he could sell them short. i think somebody else was not told the story that he knew that on one side of the equation. that is where the problem is. thank you very much. i appreciated, mr. chairman. thank you for being here. >> let me pick up where he left off. these credit default swaps that you engaged in, these synthetics, in my judgment, they

do not serve a social purpose. you may be able to try to find one. there is no social purpose. it is a bet. it is a bet, not on whether or not your house will go up or down in value, but a bet on something that you have no interest income or there is no collateral is involved. no risk is being taken by collateral. people are betting whether or not some even will occur. what happened here is that you won that bet with aig. >> we lost money in that aca deal. >> i am not talking about that deal. the only reason you lost money there is because you ended up with a piece of the long.

you did not intend to have that. we heard that earlier today. >> with due respect, that mrs. the point -- that misses the point. >> you intended to sell that piece of the long and could not do it. you never intended to invest in that deal. >> we intend to sell everything we have for a profit. but you don't intend to sell your short positions all the time -- >> you do not intend to sell your short positions all of the time, do you? we give one example of that. you put your own interests ahead your client, when the client wanted a short position in one of these. you were doing that for your own proprietary interest. you were keeping the short position. you wanted to go short. in this one, you did not want to

go short. you were paid a whole bunch of money by the federal government. aig owed you that money, did you not? >> i'm sorry? >> did aig owe you money? it was paid to them through t.a.r.p., then filtered through. >> they owed us margin, most of which we had collected. >> the t.a.r.p. funds ended up paying that debt? >> i am not sure. >i don't know. >> how many billions of dollars of government money flowed through to you from aig?

>> the cash flow has been reported at $12.9 billion. they gave us stuff, we gave them stuff. >> what was it that flowed to you net, of those funds, through aig? >> net of what we gave back? >> a dollar figure. >> the only thing that flowed through to us was an additional $2.50 billion, against which we had an insurance contract in case they did not pay us. >> the government did not owe you $2.5 billion. but you ended up with that money from the taxpayers. >> that we would have gotten from the insurance company, had we not. >> but you got it from the

taxpayers. >> we were not looking to get it from the taxpayer. >> but you did. >> in lieu of what should have come from the insurance company. >> the private parties owe you money. -- owed you money. why do you end up with $2.5 billion of taxpayer money in your pocket, when we do not tell you the money. -- both you the money? -- owe you the money? >> because the u.s. government decided not to allow aig to default. if not, they would have been in default and we would have gotten paid by the insurance company. >> why do you end up with $2.5 billion of the government money? >> because the government did not let aig default. >> you could have gotten that from a private insurance

company. you now have money from that taxpayer in your pocket. >> that is from aig. >> that is taxpayer money. but aig got money from -- >> ag got money from the taxpayer and then they paid it over to us -- aig got money from the taxpayer and then they paid it over to us. >> you got $2.5 billion of taxpayer money on a private deal. does that bother you? why do you not go after that other insurance company, instead of taking taxpayer money? why is that not unjust enrichment? >> it was insurance against the default of aig. because the u.s. government intervened, aig did not default, so they did not tell us the insurance -- owe us the

insurance. one way or the other, we would get the $2.5 billion. >> but you would not have gotten it from the taxpayer. did you have any conversations with anybody in the treasury department about that? about whether or not thaig would get money and then pay it to you? >> no. at the time and the announcement, -- of the announcement, i was asked by my regulators, are you ok? do you have exposure? i said, no, we don't. by the way, $2.50 billion would not have caused us that much -- that is not necessarily an

unmanageable number. but if it does not unmanageable for you, it is -- >> it is not unmanageable for you, it is disgraceful from the taxpayer' s -- taxpayer's point of view. >> without that, we would have gotten our insurance. >> you would have gotten it from a private source. you said that a number of times. there was a senator from the 1930's, investigating the great depression. did you hear my opening statement this morning? >> yes, i did. >> they said investors must believe that their investment banker would not offer them bonds unless the bank believed them to be safe. while the banker may make mistakes, he must never make the mistake of authoring investments

to his clients, which he does not believe in. you turned that idea, which is a pretty fundamental idea -- offering the clients investments that the banker does not believe in. you should not have to make -- to be sure that an investment is good for a client. i agree with that. that is not the issue. you cannot guarantee an investment is going to be good. the question is if you believed that it is a bad investment for that client, because you are going short against it at the same time you sell it, that is wahhat these senators said in the 1930's was one of the

causes of the great depression. that is what happened here, too. you were selling things that you did not believe in. what was the sure test of that? you were betting against them at the same time you were selling them. you were taking and intending to keep these short positions. that is a very different thing from what you said about 20 minutes ago. you should not have to make sure that an investment is good for the client. no one is saying that. of course you cannot. you can make sure that someone you sell an investment to knows that you believe it is a bad investment, and that you, at the same time, are betting against that same investment. i will leave it at that. you obviously do not see that. that troubles me that you do not

see that complication. it troubles me that you do not see that you are -- your client is yourself. that is what this has turned into too often. goldman sachs has turned into its own client, taking advantage of a relationship by doing what you did in so many of these cases. that is another thing you did. you took stuff from your own inventory, in massive amounts, which you did not believe in, sold it. and then you did more than that. you bet against your own sale. that happened in at least two of these cases. that is troubling to me. there is a broader issue.

you made a major decision to bet against the housing market. we can spend a lot more time on that. we put up a couple of charts here. put up the chart about a long sales -- about the long sales. waht n -- what number is that? 163. take a look at exhibit 50 -- i'll get to 163 in a minute. this is what you sent to the securities and exchange commission inovember 7, 2007. look at page 5. you said your long-0cash, subprime -- long-cash, subprime

exposure totaled $462 million and seven. dollars billion, respectively -- and $7.8 billion, respectively. >> i am just cautioning that i have not seen this before. >> it is a letter goldman sachs sent to the s.e.c. november 7. you said what your investments were in november, 2006, and what your positions were on alongside -- the long side of august, 2007. that is what happened to your investments.

that is what you did on the long side -- what you were selling long. you also went short. big time. after deducting your long position, you said that your short position was "small." >> the one immutable fact -- >> let's take a look at how small they were -- your net shorts. we put up another chart which is based on your numbers. i will give you those in a minute. this chart shows how net short you were. that is taking everything into consideration. what is the chart number that we can use here? 162. let me have the whole thing.

ok, i got it here. 162, look at this chart. this chart, the same as the one up there, was taken from information from your mortgage department's top sheets supplied by you from february to december of 2007, listing your short positions several times per month. we gave you one example. >> where? >> look at 162. see that? >> not yet. doing the best i can. >> let me have the top sheets.

>> just that graph. >> here, i got it. this is based on your top sheets. this is what you call "small net shorts." every single day, you're net short. it is not something which is sporadic, until december when you cashed in on your net shorts. until december 20, you had a net short as high as $13 billion. here is the backup sheet that is attached. is that what you would call and "small net short"? >> you cannot go by the gross amount. the way you can tell whether you are short and long, the best way -- if you were short --

>> i am just asking you. you said these were "small." the answer is yes, if you think that is small, the answer is yes. >> this did not act like a $12 billion position. our entire spectrum for the whole year of 2007 was under $500 million. you can have a gross headline numbers. -- you can have gross headline numbers. if you are long the slightly better credit and short as like the worst credit -- short the slightly worse credit, those could reverse at different times. in those complicated portfolios,

you could have gross numbers that are long and short, but they may not react that way. success of people who testified here, including our risk managers, said that you really have to look at how they behaved. the best evidence is what was being pnl, did it make or lose money? look at pnl. >> are you familiar with 55b? tremendous profits -- extraordinary profits.

>> 55b? >> 55b. >> i see tab 55, then it goes to 56. >> there is a b. >> i go from 55 to 56. >> we will get you that. >> it's inside 55. >> is there a tab. >> it's just inside. >> ok, sorry. >> talked about extraordinary profits, tremendous profits, $3 billion -- >> where am i looking? >> there is a different page. >> there is. ask him what page? -- vera it is. -- there it is.

ask him what page. >> i see it now. what page? >> page number 2, you see that? >> i am on page 2. >> you see where it says " tremendous profits" in the second paragraph? $3 billion of tremendous profit. >> i do see it.

>> do you consider that a tremendous profit? >> for that trading desk and a guy who was writing this -- he is bragging about his local business. >> i thought that was a big part of your business. >> it was adjacent to other business. i would never even see this. >> i am showing it to you right now. i am just asking you if you think that is a big profit. >> that is a big number, just like the loss in his adjacent business is a big loss. >> that was the profit they made on short sales, taking short positions, making huge profits. you want to deduct the long positions you have in your inventory from that. the question is, did you bet,

big-time, in 2-007 against a housing market? -- against the housing market? >> no, we did not. >> let's look at what you told the board. >> sure. >> look at exhibit 18. this is from sparks. this is just the synthetics. >> i am sorry, senator. >> everything is local. i am telling you what happened in this shift. that is what you told your board -- that there was a major shift. we will get to that in just a minute. let's talk about what made up that major shift. >> ok.

i'm looking at -- >> you see the bottom dot on exhibit 18. the dust started the quarter along with $6 billion and -- the desk started the quarter along with $6 billion and shifted by increasing the long and shifting the short. they shifted. you told the s.e.c., in exhibit 154, this -- ithis is dated september 20. you are looking at exhibit 154. >> yes, sir. >> got it?

>> yes, i do. thank you. >> page 3, the second paragraph, the second line. "net revenues in mortgages were also significantly higher, despite the deterioration of the environment, significant losses on non-prime loans and securities or more than offset by gains -- were more than offset by gains on short mortgage positions." your significant losses on the non-prime loans and securities were more than offset by the gains on short mortgage positions. take a look at exhibit 46.

page 3. the bottom paragraph. it is important to note, however, that we are active traders of mortgage securities and loans, and any of the financial instruments we trade, we may choose, at any point in time, to take a directional view of the market. you deny that. we will express that view using mortgage securities, loans come in derivatives. therefore, although we did not have -- balance sheet exposure to subprime securities over the past three years, are not risk position -- our net risk position was a long or short, depending on our changing view of the markets. this is your own filing, by the way. for example, during most of 2007, we maintained a net short subprime position and maintained

a benefit from declining prices -- from the declining prices in the mortgage market. now look at your tax presentation, exhibit 48. that is to the tax department presentation from october, 2007, as exhibit 48. -- that is from the tax department presentation from october, 2007, exhibit 48. it is page two, right in the middle. a quick word on our own market and credit risk performance in this regard. in the market risk, you saw in our second and third quarter results, that we made money. despite are inherently long cash positions. "inherently long." but inherent, not inherited -- >> inherent, not inherited.

>> i will keep reading. starting early in 2007, our mortgage trading desks started putting on big short positions. those are not my words. those are goldman sachs' words. mostly using azx. we did so in enough quantity that we were net short and made substantial money in the third quarter, as the subprime market weakened. that remains our position today. that is your tax department presentation. i am sorry -- that was the chief risk officer who said this in an internal presentation to goldman's tax department, to be perfectly accurate.

we of already read about the other filing or you talked about -- we have already read about the other filing where you talk about doing very well because you had the big short. and then -- exhibit 45. that is the conference call that you held for the third quarter of 2007. our risk bias from that market was to be short. that net short position was profitable. no hedge there. "profitable because of our short position." here is that conference call. let me continue. what had happened is that you had a meeting with your board of directors. i assume you would have been

there. it was march, 2007. exhibit 22. you had made the decision. there were big problems. we have heard all day long about the subprime sector and mortgages. that is shown on page 8. exhibit 22. if we are together. the first-quarter long position grows with each quarter of market activity -- this is back in 2006. on page 8. do you see the big zero in the middle? -- the big arrow in the middle? when you get to the third and fourth quarter of 2006, you start scaling back purchasing of riskier loans. you reduced your cdo activity.

you marked them down to reflect market deterioration. "goldman sachs reverses -- market position through purchases of single -- reverses long market position for purchases of single positions." you are reversing your positions. you do not like to use the word direction in your public statements. that is what happened. you told the board that he reversed -- that you reversed. when you have the next board meeting in september, you tell the board -- this is exhibit 41, page 4.

got it? >> i do. >> ok. here is what you told your board in september. that you were going back -- you will see the first quarter. you shut down all presidents -- residents. you shut down all of your cdo warehouses. youtube significant mark to market losses. you reduced -- you took significant mark to market losses. you reduced your position. you positioned the business tactically. the business has taken proactive steps to position the business strategically for the ensuing

credit liquidity crisis. what you did was perfectly proper. that is not the issue. you sure did synthetics. you sure did cdo's and rmbs's. you were short, short, short. short like crazy. it is clear from all of these documents. mr. blankfein, you can say publicly that there was no direction here, but your documents say otherwise. you use the direction -- use the words in your discussion with the board, telling them what your doing in regard to your position. there it was clearly a directional change. it was so sharp -- you may have been the only bank that made money when the housing bubble burst. maybe you do not think it is a

lot of money. maybe it is not the amount of money that you can usually make in a month or a year. according to your own records, it was $1 billion, net, after all of your long losses. you say it is half a billion. ok. your records show it is $1 billion. we will not quibble over half a billion. you cannot ahead in 2007, in a market which -- you came out ahead in 2007, in a market which crashed. that is what your own documents show. i am not sure why it is you are saying these things, publicly, like there was no directional change and that you were not "big net short" in 2007. these are big net short

positions. you just looked at the short side, they would be huge. you want to look at the net short. you were $13 billion net short. there was not one day that year, until the end of december, when you actually had anything other than a positive net short position. you want folks to trust you. here is the way i see it. we have been through this business of selling securities to people. in that same deal, you did not tell them you were betting against those securities. >> may i interrupt for one second? >> wait until i'm done. i want to give you my view of this. you want to be trusted. i am glad you want to be trusted. i think you can understand why there are a lot of folks who have some real doubts when you

do not acknowledge the big short. you try to hedge that, 10th that down -- tamp that down. you also, over and over again in these documents, you were selling securities to your clients, at the same time that you were betting against those same securities. you can argue that people know that. what i am saying to you is that people expect -- like those 1930's senators said -- bankers should be selling things that they would expect, hope, or believe would be ok, not that they are betting against them. that is what we have shown. you are in a fairly unique position, by the way, not just because of your size, but because of the big short.

it put your bank in a position where you were one of the river banks -- rare banks that actually came out ok in 2007. the others who did not engage in a big short like you did lost big-time. some of them went under. it is not the fact that you made a profit. it is not the fact that you went short. you have a right to do that. it is the conflict that is so troubling to me. the conflict between going in that direction, clearly changing direction -- nothing could be clearer from these documents. you told the board you were changing direction. the documents show you were changing direction. but then, in that process, over and over again, the securities that were selling to customers, you bet against those

securities simultaneously with the sale. that is what i think is -- that is the part that troubles me the most. there are a lot of things that trouble me here, including the language -- not just the language, but the belief that your own salespeople had that they were selling junk or crap. when you say that nothing you heard today troubled you -- that is what you answered it to one of my colleagues. nothing that you heard it trouble you. one of my colleagues pressed you on that. if that did not concern you that the people who are selling securities under your name believe that they are selling crap or junk -- words even saltier than those -- if that

does not concern you, that concerns me. it concerns a lot of people in this country. you should not be selling junk or crap. you should not be betting against your own customer at the same time you sell to them. all of that coming together is creating the necessity that we take some regulatory steps in the conflict of interest area. amendments have been introduced to strengthen the bill in that regard -- in the conflict of interest area. it exists not only there -- i think you and other goldman representatives today it knowledge that in the area of credit rating, there is the appearance -- today acknowledge that in the area of credit rating, there is the appearance of conflict of interest. you pay those to be rated and it

is clearly in your interest that those be rated triple a. do remember the deposition you had with my staff -- do you remember the deposition you had with my staff? do you remember being asked the question -- >> have we moved past? >> comment on what i just said. then we will go back to the credit rating agencies. >> people are using language -- "big change," "what they think," -- the one immutable fact here that is ascertainable and audited is the net of all these positions in the market yield of less than $500 million worth of revenue in the residential space, and lost $1.7

billion in 2008. >> we are looking at the causes for the bubble bursting in 2007. >> all of those big positions -- all of the market-making we were doing in that time, with all that was going on, getting within five and a million-dollar of flat -- within $500 million of flat, i think it reflects a desire and an accomplishment to get closer to home. anyway, i just wanted to respond. >> you may not think half a billion dollars is a lot, but the fact that you were able to get through 2007 when that bubble burst, was because you went with the big short. >> that is less than 1% of our revenue for that year. >> but it was more than 50% of

your risk value. you put a huge amount of volume at risk to go short in that market. >> the market forced the value of risk higher because of the volatility. >> let's talk about the credit rating agencies. we talked about this during your deposition. we ask you whether or not -- asked you whether or not -- i am sorry. i do not know if we have that. i do not know if we have an exhibit for this. you were there. these were your words. you will probably remember them anyway. ok. we're going to get you a copy. >> thank you. >> look at page 46, if you

would. >> 46. >> got it? near the bottom. now, at the bottom, line 25. either based on your knowledge, how critical it did goldman believe that the ratings given by the cra's were to the successful marketing and selling of rmbs's and cdo's. your answer was, i do not know what drove the business. i do not know how important they were to the business or investors.

you do not know. we do. next question, did you understand that there were certain classes of investors that could invest in certain- rated products. your answer was, i never thought of its. -- of it. that is strange credulity. you never thought there were types of investors that could only invest in triple a products. did you really never think about that or know that? >> i never thought of it. >> you never thought about the importance of that rating, the fact that there were people who could only invest in the triple a. you're not aware that your own firm argues for large triple a's? you're not aware that large triple b's turned into a

triple a's? -- into triple a's? you're not aware of any of that? >> senator, i never marketed that. you ask me whether i would think that it would be more desirable to have a triple a, i would say, for sure. if you're asking me whether i knew that some categories absolutely barred from it unless it had a triple a, it just was not within my scope to know that. >> either based on your own knowledge -- this is the bottom of 46 -- or the opinions of your senior executives that they may have expressed to you, how critical did goldman believe that the ratings given by cra's were for the successful marketing and selling of rmbs's and cdo's? how important is it?

your answer, "i do not know the standards. i do not know what drove the business. i do not know how important they were in the business to investors." you are telling us that you do not know that triple a ratings are important to investors? that is what you say in your deposition. >> you are using different language -- >> i am reading it exactly. >> i do not know the standards. i do not know what drove the business. >> you do not know how important the rating is -- >> senator, i am being asked a question in a deposition about a line of business that i was never personally in. i never did this in my firm. i am being asked -- there are so many people who could answer this question with precision. i am not one of them.

>> if you do not know they are important to sales? >> i said i did not know how important they were to investors. >> do you know that are important? >> yes, i know that they all are important and they would be preferred at the same price, by the way. i do not know the extent to which those investors for a lower rating, but a higher yield, are capable of biting -- buying. i just do not know. .

>> i did not say we, as i said i. let me just close with a very brief statement. we have a debate going on here at this moment about how congress should respond to the abuses that we have look at in four hearings now. those abuses include a conveyor belt of toxic mortgages that got into the financial system, huge demand for them that came from a whole lot of places. we focused on case histories, and they were very logical.

billions of dollars of toxic mortgages were dumped into the system. goldman and other banks like them provided members with more money to issue bad loans. there is evidence kind of -- there is evidence, by the way, that goldman was a very much aware that they were buying loans from companies that were selling bad loans. then the financial engineering comes along that turned those high risk mortgages into allegedly unsafe investments, making tripled these -- making bbb's and other things that are not good buys safe investment through the magic of the cd thoso's. so now the poison spreads

further. then we have the synthetic securities that magnified all of that. the mortgage system begins to buckle under the weight of the loans and this and seven synthetic stuff of flooding the system. pgoldman profits from the collapse. i know it was only half a billion dollars. it is amazing enough that it was a profit at all. despite all the losses that you took in your inventory, you are none the less able to make a profit because of your huge investment on the short side. i happen to be it one to believe and the free market. but if it is going to be truly free, it cannot be designed for just a few people to reap enormous benefits while passing the risks on to the rest of us. it must be free of deception, conflicts of interest, etc..

this bill is an important beginning, and we hoped to strengthen it. we want firms to put clients' interests ahead of their self interest. we want to eliminate synthetic instruments that magnifies risk , and these reckless lending practices, lier of loans -- liar loans, and give regulators stronger tools to protect consumers. that is what we have to do to protect main street from the excesses of wall street.

i hope these hearings provide added strength to the reform effort. many of us will be working on legislation to stop the abuses that were exposed during these four hearings. we thank our staff for working very hard and very long. they have spent untold hours digging through these documents. i love the way some of your folks tell the press that they were cherry pick. that book in front of you is a hole in bowl of cherries. these are not cherry pit. these documents reflect a history of what happened. from millions of documents you obviously have to select some that you think represent reality, and we did that. it is a reality that has some unseemly aspects to it in terms of your conduct.

we are just hoping that whether or not we can get the support of wall street reforms, and you indicated some support of reform today, whether or not we get a strong reform bill, we have to have the willpower and the backbone to do just that. mr. blankfein, we thank you. it has been a long day. in particular, we thank our staff. we stand adjourned. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] [inaudible]

>> let him pass through the door please. clear the door. let's make a whole please. [inaudible] >> later today we will show the debate from the pennsylvania democratic senate primary between senator arlen specter and rep joe sestack.

it is the only televised debate in that great. tonight, another debate from the british parliamentary election. it is the third and final debate among the leaders of the three largest political parties, gordon brown, it david cameron, and nick clegg. that is at 9:00 p.m. eastern here on c-span. >> the peterson foundation hosted a forum on the federal budget deficit and national debt. speakers included former president clinton, former treasury secretary bob rubin, and former federal reserve chairman paul volcker, and alan greenspan. this is one hour and five minutes.

>> i would like to introduce somebody who does not need an introduction, and therefore i will not give him one. bob rubin. i hope you are here bah. -- heare bob. [applause] >> thank you for the gracious introduction. >> we had lunch yesterday and he refused to pick up the check. >> we allocated bid by net worth. >> the democrats keep believing there is a free lunch. [laughter] bah, you spent a lot of time in financial markets, trading and so forth. there is a lot of discussion here about whether the outlook is sustainable or not sustainable or what. where do you come out on that,

talking about the longer-term? >> as you know, the congressional budget office, when they reach estimated the budget -- re-estimated the budget were predicting a debt to gdp ratio of about 90% by 2020. there is no analyst that i know who believes that the numbers like that are unsustainable. given our savings rate, the context for our financial situation is very unstable due to the risks. we have large annual maturities, debt maturities that have to be funded. we have heavily overweighted dollar positions in the foreign portfolios.

there is no mainstream analyst that i know of the things that this situation is untenable. i think there are only two choices. one, we act productively -- we act preventative lely, and if we don't, this will be a problem for all americans. it will undermine jobs and incomes. it will be very difficult to do. i am more worried about this than anything else in my adult lifetime, in terms of the economic future of the country. >> what do think the risks are if we do not take significant actions. >> i think that the fiscal situation that we face present multiple risks of a varying degrees of severity. the conventional economist view it would be that the risks, the deficit, will crowd out capital.

there was a comment made to president clinton in 1993 that deficit will throw off a recovery if it starts. the higher rate of private investment can get choked off. there is currently an adversity to hiring and investment. there are more serious risks about concerns about supply and demand and capital. higher interest rates would deter investment. the most severe risk is what you described a moment ago, which is severe disruptions in our capital markets, and the enormous impact that that could have on jobs, and incomes, and

really on the economic world of all americans. i think, unfortunately, there is no ready escape from this. i have not seen anybody put forth a way to muddle through this. we need to face it, which is going to take very difficult measures. we cannot act now because of the very high rate of unemployment. but rather, we need to commit in some realistic and credible way now to take actions when the recovery can sustain the effect of those actions. if we do not do that, then i think the probability is overwhelmingly high that at some point we will reach a fiscally driven crisis that will be severe, and we will have to dig very difficult measures to come back from that. >> as you know, our foreign borrowing has increased dramatically.

the peterson institute for international economics has done some forecast that are enough to keep you awake at night as far as where the foreign debt levels have reached. given that we have become extremely dependent on foreign lenders, what do you think the odds are that they lose confidence somehow in the united states, and what would the affects of that be? what might cause them to lose confidence, and what would be affects the -- what would the effects be? >> as you know, the market is unpredictable, but the one thing you can say with some confidence is that psychology can change quickly and dramatically. i think, to go back to a comment

i made a moment ago, i do not know anyone involved in this process that does not think that at some point, as the markets look at this enormous imbalance between supply and demand for capital that is created by our fiscal deficit and our very low savings rate, and also the possibility of inflation, although that actually seems to me like a lesser risk, it is unavoidable that the psychology will change. that could be very rapid and very harmful. when that will be, i think is unpredictable. it is easy to say that this is a long-term problem that we do not have to deal with now. i think that is a dangerous point of view. we cannot act now, at least i do not believe. we cannot act because of 10% unemployment and 10% under- employment. we should not take actions that have an effect right now, but i think what is imperative for us

to do is to find the political will to take action now, to put in place measures now that will take effect when the recovery starts. >> to work out a plan, in effect. >> i think we need to put in place measures that are both real and credible to the market that will take effect when our system can afford to absorb the effect on fiscal things. we have to grow quickly enough to put these in place before these fiscal risk begin to have too great an adverse impact on us. can i just add one thing? i heard a speaker on the prior panel say that we have to provide economic security for americans. but you have to have a healthy economy. you cannot have the capacity to deal with that unless we have a

sound fiscal regime. >> i am word about your income, frankly. -- worried about your income, frankly. i did not want to discuss it. >> i am worried about how to get your documents. but i did not want to get into that either. >> believe me, i would be a very illegitimate child if i give you those. [laughter] social security is a big part of the problem. some people say is 10% of the gap. is it only a small part of the problem? there are people that are saying that the social security trust fund has $2.5 trillion in assets and that the system is solvent for the next 30 years or so.

to put it differently, in terms of the fiscal ability of the united states to meet its obligations, what do these bonds of that are in the trust fund provide in terms of additional fiscal capacity for the federal government? what are they worth? what are they for? what do they do? because if the american people do not think that there is a problem for 30 or 40 years, you can rest assured that they will not be inclined to do much about it. >> sadly, i think the risks of that are posed by our fiscal position are going to affect us massively before 30 or 40 years. i just hope and pray that your efforts and the efforts of others bring a level of understanding to the american people to the point where they hold their elected officials responsible for taking very difficult measures. the social security question is a very complicated question.

we actually dealt with what these bonds maine in 1995 when we had a deficit problem. -- what these bonds mean in 1995 when we had a deficit problem. they do not provide any independent resources to the government. we have a creditor, which is the social security trust fund. we have a better, which is the goodwill of the united states. -- a debtor, which is the goodwill of the united states. that is a critical point. in terms of social security itself, it gets quite complicated. they are full faith and credit bonds. as long as the federal government has resources sufficient to meet its obligations, then these bonds

can be redeemed, and they have people faith in credit right to be paid -- and the full faith in the credit right to be paid. the problem we discovered in 1995 is that if the federal government cannot borrow, cannot access the markets, then you could have a situation where the government does not have adequate resources to meet all of its obligations. i can tell you because i know this to be the case, there is no clarity as to who has priority under that situation. you have this awful faith in net credit bond, but on the other hand, all obligations of the federal government are deemed to be full faith in credit bonds.

there is no knowledge of how the credit we have will be allocated. can i make one other point that struck me this morning? >> i think it would take an elephant gun to stop you, so go ahead. [laughter] >> we are not remotely like the situations in greece, portugal and other countries in europe. but we should take a look at what is going on there. there is a fiscal crisis of the kind that nobody thought could happen. we should try to learn from that how important it is that we never faced anything remotely like what they are facing right now. >> i have been waiting for 30

years that i have known you for you to make a specific headline or projection. i consider you an expert in constructive ambiguity in. i want to be sure that i understand what you have said. you expect an economic crisis to hit before 30 or 40 years from now. is that right? it is such a bold statement. [laughter] >> let me put it differently. by the year 2013 the congressional budget office is estimating that our debt to gdp ratio will be 130%. i do not know of anybody who thinks that we will get that far, or even remotely that are in time without having a very serious adjustment in our

capital markets which will have enormous affects in respect to jobs and income for all americans. >> it seems ideal for me to introduce the president clinton. who better than you to do it. you worked very closely together and with the congress to bring about a time of enormous sustained growth, fiscal irresponsibility and the jobs. but before you do that, i would like to commend the president on behalf of his remarkable philanthropic work. mr. president, if you are here, you obviously deserves enormous credit for your record on fiscal responsibility iand strong economic job growth. ba is -- bob is certainly

qualified to discuss that with you. however, i doubt that you have received enough credit for your work with the clinton foundation. i have been privileged to attend the last two meetings. the foundation, for those who do not know, excludes an extraordinary array of philanthropic projects, including hiv/aids, childhood obesity, assistance for small business owners, and helping african farmers increased their yields. at this foundation's annual meetings, president clinton attend every meeting, and i was fortunate enough to sit near him at the last meeting. it was simply remarkable. after each project's description and project report, the president for a few minutes would add a few very interesting new pieces of information on every one of these projects. then, at the end, some important

insight about where to take it from there. mr. president, it seems to me that what you get a lot of credit for what you have done in the way of fiscal responsibility and growth, you do not get credit enough for earmark a block -- for your remarkable contributions as a post- president to society. as much as any president i have ever known, your post-presidency is a remarkable spiri. [applause] >> thank you. before introducing the president, let me introduce bob schieffer, who as you know, has

been the moderator of "face the nation" since 1991, and is a chief washington correspondent. he will conduct the discussion with president clinton. into a's world -- into a's world -- in today's world, he is an increasingly rare commodity. he is a tough but a decent, and committed to giving you the time and opportunity to explain what you are trying to say. is no surprise that after such a remarkable career in journalism, having covered all of the major national washington assignment, the white house, the united states congress, the department

of state, and the department offense -- years are not sure why treasury would not be among them. [laughter] he is the winner of many awards. as i said a moment ago, he will be introducing -- he will be interviewing president clinton, whom i now have the pleasure of introducing. during the six and a half years that i served in his administration, i had the privilege of meeting with him many times. every time i had that opportunity, it felt very special, and it still does. i will not recite from his resume, as you all know it very well. instead i will observe, if i may, that having worked for him for six and a half years, it is that my view goes to the heart of why he was such a great leader of our country.

first, he was an outstanding decisionmaker. he energetically sought to understand all aspects of what ever it was that was in front of him, and actually insisted on hearing from those who had a different view than he did. then, after thoughtfully weighing and balancing all of the considerations, and understanding that all issues are about probabilities and not certainties', he decided. he acted. he proved that thought thomas and decisiveness can be brought together in one great leader. -- that thoughtfulness and decisiveness can be brought together in one great leader. he worked for eight years to restore and maintain a sound fiscal regime. believed that was important in itself, and was also critical to provide the fiscal and

political capacity to provide the public investment the was so necessary for our future. fundamentally, his view was that sound fiscal positions and the public investment that they allow government to do it were absolutely essential if we were going to achieve his objective of competitiveness, growth, robust job creation, and increased income at all levels. embracing those objectives, his policies contributed to the longest economic expansion in our nation's history, with massive job creation, increased incomes at all levels once the recovery took hold, and a transformation of our fiscal condition from the large deficit he inherited, large deficits i might add, that work expected to increase at a very rapid level,

to a substantial surplus but he turned over to his successor. that was truly a remarkable achievement. it is my pleasure to introduce the 43rd president of the united states, a thoughtful and courageous and champion of economic challenges, william jefferson clinton. [applause] ♪ >> thank you. >> well, thank you. i have not gotten a standing ovation like that for a long time. [laughter] mr. president, we have heard a lot of things this morning. why don't you just kind of start

off by setting the stage for us. where do you think we are right now, where do think this is going, and how serious is it? >> per se, i think it is a really serious problem. i think everybody here -- the problem with all of these meetings is that we tend to be preaching to the saved. i noticed the other day that on one of the liberal blogs, mr. peterson and i -- and by the way, i think the work you have done is remarkable, and i am grateful -- but on one of the liberal blogs there was a question of how we can be spending like crazy during a recession. it reminded me that people do not know all of the facts.

40% of our debt is now held by non-american sources. i think this is a national sovereignty issue. it is about control of our economic destiny. i do not want to be in someone else's control, and i do not think america should be. when president bush was in office and they reversed our policies and doubled the debt of the country, there were some economists on the other side that made this superficially rational argument that national deficits and debt did not matter any more because we live in a global financial system and we were doing a favor to foreigners by taking cash of their hands and buying their stuff and giving people tax cuts. i do not agree with that. i do not think we can solve this

problem unless we see it in the proper context. this deficit, this debt problem is the problem of an aging and civilization. if you go back to the dawn of time and you study the oldest civilizations, they all have won a thing in common. once you become successful, you tend to become rigid. if you compare the jobs i have taken on in haiti with where we are in america, the problem in poor countries is that they do not have the systems. no matter how hard they work, there are no predictable consequences to their efforts. you have to build systems in a country. the problem is, once those systems work and make you great, they tend to become more concerned to holding on to the position they have banned further into the purpose for which they were established.

we like to believe that america is forever young, but if you look at the budget, you have to look at all of the delivery system problems. we have a problem in health care. we are spending 17.2% of gdp. switzerland spends 11%. most other people spend around 9%. but we do not get better outcomes. we cannot afford that. we cannot solve the deficit problem unless we deal with the underlying health care costs that affect not only government spending but the private sector as well. germany and netted 300,000 jobs out of their solar subsidies. even taking into account the dragon that the subsidies put into the economy, if you

transfer that to america, it would be at least 1.2 million jobs. it would actually be more, because of our solar capacity. the sun that shines in germany as much as it does in london, but they still decided to make a better future. we have two problems in education. one is k-12 quality. the other is higher education cost. i strongly supported the president's education reform initiative, but i think most of it will be gone in five years. the economic benefits of the gi bill were gone in five or six years. the delivery system is deeply flawed and has to be changed. we have the same problem in finance. all of these derivatives and hedging mechanisms -- they started out with agriculture. every farmer i know always

hedges against always -- always had against dramatic changes in crop prices. there was a great article last week saying that one solution would be to have the same sort of clearing house they have. you never hear people complain about the commodities trading anymore. you have to see the fiscal crisis we had as a part of america's challenge to modernize its delivery systems, to be more concerned about the future again, which means we have to be careful about how we get rid of the deficit. that easiest target is non- discretionary spending, because the future always has a smaller constituency than the present. but we are already terribly down there, and we are going to pay a

much larger price if we do not reverse it. i wanted to be here. i thank bob rubin for his introduction. i think he is the finest treasury secretaries and alexander hamilton, and i still believe that's -- treasury secretary since alexander hamilton, and i still believe that. i supported the president puts a stimulus program. it was difficult for me to say that, because i did not want to increase the deficit, but the economy was contracting at such a rapid rate that i think the deficit would be worse if we did not do something to stabilize it. we would have had many more people unemployed in the government alone if we had not done something about that.

we cannot do something to generate more jobs unless we deal with immigration and these other issues, education, energy, the cost of war, and especially health care. >> do you agree with what president barack obama announced yesterday, that everything has to be on the table, including the recently passed health care reform bill. >> sure. i would think the president would want some sort of a good- faith bipartisan effort. if i were in congress, i would have voted for the bill. you cannot let people cherry pick. last year, when the economy was

down, health insurance profits were up 56%. one of the goldman sachs memos that has not been discussed this week, because it does not reflect poorly on the company i suppose, talked to some investors in health care at the time they thought health reform would not happen. it said they did not care what would happen, they would just keep charging those who could afford it more. keep in mind, older societies are obsessed with security. security for us is national defense, social security, and medicare. believe me, i invested in new weapons systems, new strategies. i support the conflict in afghanistan and what we are trying to do there.

but that does not mean that there should be no review. i think the secretary of defense, who by the way, i think has done a fabulous job, has shown that in his willingness to review some of these weapons systems. i think we have to put everything on the table. >> one congressman on the commission said this morning that there is no way that the new health care reform legislation is not going to be exacerbating this problem. do you agree with that? if this is on the table, what do you do to make sure that does not happen. >> i do not agree with that. for one thing, it makes people in the small businesses and individual markets have some market power with these exchanges. i think if they created a public option to compete with insurance companies it would help. but i do not agree with it. nothing could be worse than what we have.

those people who were in -- those people who were against this or in a packed -- were in fact defending -- their only answer was for us to spend 17% of gdp on health care. more than anyone else in the world. their only answer to spending a trillion dollars more than anybody else spends on health care without better results was to let people buy insurance across state lines -- which i agree with, by the way. and to do malpractice reform. the problem with malpractice reform is that if you look at it, it has modest results. i think you would have more success by having more insurance by large pools of doctors. after the university of texas

went to self-insurance, they embraced the elemental principle that a humongous presented of malpractice is committed by a very small percentage of doctors. they just did not ensure them. the average malpractice premium of four specialists dropped 20% or more. we could do that everywhere. if you did it in washington d.c. you have to say that they could cross street -- cross state lines so that you could include virginia and maryland. i think you ought to let primary health care positions knocked out a significant portion of their medical school debt for every year that they work in an underserved area.

>> you are a pretty good politician. i think there is general consensus on that in this room and across the country. if you're going to run for office right now, and obviously fiscal responsibility was a big part of your administration, how you frame that? how'd you get elected, and how did you stay elected by telling people, we are going to have to do something here. we may have to raise taxes. how do you get yourself elected and stay there in the congress in this current environment? >> well, first of all, i would say, the end result works. look what happened when bill clinton was president, if i were running. [laughter] that is the first thing i would say. the second thing i would say, more seriously, is that america

has got to get back in the future business. we have to be a tomorrow country. we have to create more jobs. we have to revive the economy. we have all of these things we have to do. we cannot do it if we keep mortgaging our future to other people. tell people around america that have our debt is held by other countries and that very soon it will be 75%. do they really want that for their children and grandchildren? then i think i would tell them that i will be careful how i do this. i will do everything i can to minimize the burden to the old, the poor, and but that in order to do that, we have to change the way we do health care, the way we do energy, the way we do education. we have to reverse the age ratio. but we can do it. that may not be popular. >> let's talk about that a little bit, because that is

sorted in the news lately. do you see immigration reform as part of fiscal responsibility? >> i do. i think the bill that senator mccain is supported before and the effort to the president is making now -- look, i do not like that arizona bill, but i understand why it happened. it is horrible what is happening along the border. that indirectly triggered events. we've made efforts before to break all of the colombian cartels. secretary geitner and i went to what once was the most dangerous

city in the world. what happened? we got much better at interfering with airplane and water transport of narcotics into america. they sought an overland route to mexico. that took them to moderate. there are people with their own drug habits. now here we are with all hell breaking loose, and people are scared. people are coming over who are innocent and looking for safe haven, but we are looking at others because we are basically are in the other side. mexican police are dying every day trying to keep drugs from the kids, but the bad guys come over here and buy assault rifles

because we did not reinstitute the ban, and then others are trying to stop the drugs. i understand what happened, but over the long run, the great thing we have in this country, if we have any advantage over china and india in the race to the 21st century, it is that we have somebody from everywhere here. and they can do well. people all the time say, you don't really think you can make anything could happen in haiti do you? i say, look, i am 663. i just had a second heart surgery. do you think i would spend the next five years of my life doing something i think is going to fail? 11% of african-american doctors are haitians.

this country still works for immigrants. the reason there is anti- immigrant sentiment is -- just look at the numbers. male factory workers without a college degree got killed in the last decade. men, in terms of their real weight loss, suffered more than women did. there is still a gap in pay -- their real wage loss, suffered more than women daid. there is still a gap in pay, but white men who have only a high-school degree or some college got hit the hardest by this. i do not think there is any alternative but for us to increase immigration.

we can start in the areas at the top and the bottom, which will not displace the people who are most insecure. i feel very strongly about it. i just do not see any way out of this unless that is part of the strategy. >> since we are talking about what is in the news right now, let me just get york general impression. what did you take away from the hearings yesterday when you had a goldman executive, who basically took the line that, whatever is wrong with the economy, they did not cause it. as i understood, they really feel no responsibility for that. >> well, first of all, i think they are really mad about the sec. i think the timing was a suspect and they do not believe they violated a law. >> do you think there was a connection? >> i am not sure on this

particular sec deal. i have read a lot of material on this. i am not sure that they violated the law by not telling people that john paul's and suggested the security that would be in at the cdo, because of the ability on the other side for people to get information. i think the problem here is that too much of our growth in at the last decade was in finance. ever since we went off the gold standard, which was necessary for economic national purposes, if you look at it, we had a global financial economy before we had a global environmental or labor safeguards. ever since then, economic inequality has increased.

the only time the bottom 20%'s wages increased more than the top 20%'s was during the last four years of my administration because of the contraction in the economy. i think the fundamental problem was articulated by your good friend john bogle -- vogel hays said that finance is gobbling up too many dollars. if you are a farmer in arkansas, you want to hedge against the prospect that you have a bad crop year and you will

you also want to hedge against having a great crop year is that will make the price too low. what economic purpose is served by this? if he loses money, it confirms -- if paulson makes money, as he did, it confirms the belief that the market is going down. on the other hand, if he lost money and the other side made money, what good does that do? it would keep more people pouring money into an unsustainable bubble. for me, that is why i like this

idea of requiring greater reserves and derivatives. i think there ought to be clearing houses as was suggested, because too much of this stuff has no economic purpose no matter who wins or who loses. that is the biggest problem. the goldman guys think they are being targeted and that they did not violate the law. i am not sure they violated the law, but i do believe there was no underlying merit to the transaction. that is what i think it should be looked at. that is why i think we need to structure whatever is done on the regulatory side to increase transparency and reduced leverage. >> be set up a -- you set up a commission on entitlement reform. it was very successful in outlining how serious the problems were, but it did not come up with solutions.

you were not able to get them. what advice would you give it to the men who are starting out on this commission? >> first, let us talk about what happened and what did not. when i took office, medicare was projected to go broke in 1999. we added 25 for 26 years to the medicare trust fund, which was about the average length. social security you wanted to have longer for obvious reasons. we never have had a funded pension system. we added only four or five years to that. the reason we did not get social security reform was because the chairman of the ways and means committee and i had just about reached a deal where we would slow down the cost of living

increases for social security and make them more in line with real cost of living, at least for upper-income people. in return for which, we would make available the opportunity to build a savings account on top of social security. we had worked the numbers out. we thought we could take it out 75 years. as far as i could determine, it was about the only issue that newt gingrich and dick gephardt agreed on. they both told us that neither party wanted to fool with social security before the 2000 elections, and would we please go away. when the leaders of both houses are against it, it is pretty hard to pass something. i do not think there would have been much heat. i think actually, people would have appreciated it. now, if the numbers i see are

anything close to bright, the fix that we had would not be sufficient to take it out to a 75 year life span and to take the burden off the budget. so my advice to them is to tell the truth. people are not stupid. the american people know that the average age of our society is going up. there are lots of people in higher income levels who do not need all of the benefits that they may be entitled to from the government. if you pull most people in the top 2% or 3%, they would give it back to stabilize the country and give their children and grandchildren a better future. there are lots of options here. now, the democrats have never wanted to do that because we were afraid that it would chip away at the universality of the system.

republicans did not want to do that because they did not think it was there. because you pay a percentage of your income. if you are going to keep giving everybody what they are entitled to, you're going to have to raise the cap at some point. one problem, by the way, in making policy for all of this, when think a group has recommended is that we look at all these tax expenditures. the biggest one, by far, is the employer health deduction. one problem we have with all of this is that there are drastic differences in the cost of living from state to state, as

well as the state and local tax burden. for example, if you make 200 and decals and dollars -- if you make $250,000 in little rock, you are doing well. if you make the same amount in new york city, you are doing well, but you are also paying significantly higher taxes. this commission is going to have to look at that too. is there some way to navigate this reform with the understanding that a young person in new york city may look like an inviting target to someone living where the tax burden is low, but after rent

and other expenses, they will not actually have much in their pocket at the end of the year. >> president barack obama said today that he will follow the recommendations of this panel. do you think he will be able to keep that promise? >> in general, i think he can? . first of all, i do not think you could have to do better people cheering this panel. -- have at two better people sharing -- chairing this panel. one is head of the small business administration who brokered the last balanced budget agreement. he had the children's health insurance program which was the biggest increase in health insurance since medicaid.

he ran the effort i did for the un in the tsunami relief and reconstruction. these people are really smart and able. they will know immediately what pressures of the president and both parties in congress will be under. they are free and not to disregard the politics and smart enough to take them into account. they are not likely to put something on to the president's plate that will undermine the foundation of his administration or both parties, if everybody holding hands and jump into the boat together. . .

and that is another thing. people have not felt that yet because interest rates are so low, and the whole world is coming and out of the global recession, but one of the things that no one knows is we were able to have very high group with very low inflation -- very high growth with very low inflation.

but even with open markets and high competition, the size of our debt and the fact that so many others have a debt around the world, i think as soon as this economy picks up, and there is a mad scramble for cash to service debt, i would be very surprised if you do not have a very brisk increase in interest rates, and keep in mind that will play into the president's budget to and the calculations, because they will have to be spending more and more to service the debt -- play into the president's budget and the calculations. i believe that is what our budgets did, 3% for servicing the debt, and that is a massive amount of money in order to take something from the past and put it into the future, and that is another thing that i think will resonate with the american public, because they are all paying high interest now,

everyone. they pay credit-card bills, and they understand that. and that is another argument, i think, that will do well. let me just say, one of the problems we have got in this country that is only related peripherally into this but aggravates the current situation is the fiscal condition of state governments throughout america, and while it is true that 49 states have constitutional privilege -- provisions that prohibit deficit spending, and vermont really does, because they do not have a printing press either, most states do not follow that. what they mean by a balanced budget in that state is the legislature gets to go and pass something that the governor signs, and they agree on what they think the revenue growth will be, if it only turns out to

be 3%, they may get 5%, and they draw it down from the rainy-day funds, and that is ok if you only have one year and if the deficit is not too much -- draw it down from the rainy-day fund. then if you have the kind of year that new york has had or california has had, then you run into a brick wall virginia. in my state in 1948, i can say is that nothing to do with it, nothing. the state had an amendment that requires a balanced budget. the legislature passes all the bills twice, which is great. everybody can pass their pork bill, and everybody is happy as a clam, and then the body of the

senate and the house get together and organize all of the bills that have been passed, and what you spent last year minus what you do not have to spend any more -- anymore, that is a category a. then they do some numbers, and that is category b. and then everything else is in category c. so if you hit a gusher, more power to you, and everything is handled as a legislature says, so here is how it works. if you start off, that when they go home, two months later when the budget year starts, if you're only having two% revenue growth, then the budget is only allowing the governor to do two thirds of category b, and if you let one day more than two

quarters go by, the governor and chief officer have committed a misdemeanor. i once cut spending six times in two years. i had an early retirement program, but we never had a massive layoffs. we never had the kind of things that people are facing now korea we never had a massive layoff -- we never had a massive layoff. we never had the kind of things that people are facing now. what we ought to try is to do whatever we can to get these states on sounder fiscal footing. borrowing from pension funds and doing all of these things, that will have a big indirect ramifications on all of this. -- ramification on all of this. >> one of the things that will get heavy scrutiny by this commission is the value-added

tax. what is your view of the value- added tax? obviously, i think any value- added tax that has any chance of getting through, he would have to exempt groceries, i would think, but what do you think about value-added taxes? >> i think if you did it, you would have to reassess the rest of the tax system to keep the progressive -- keep it progressive. it is on every stage of the production process. the one thing that blue-collar america should like about it is that it is good for exports. if that does not allow quite so much of a subsidy of imports, subsidizing the production of exports, at least they did the value-added tax, -- they get the value-added tax. i think this is a great time for

us to rebuild our manufacturing sector in america. it is the right side of value- added tax to keep the progress of the -- progressivity, it would be the right thing. a lot of things that are good in theory requires so much change that people just cannot make the mental leap, so i am not sure the commission will wind up recommending it. i know them well enough to know that they have to have the theory in their mind about how it could actually pass before they would recommend it. it is a big leap, but if you look at people in europe, it is like any other kind of sales tax. beijing start paying it. and it would be good for exports, which they just start paying it. and it would be good -- they just start paying it. and it would be good for

exports. we get it coming and going because they had it, and we do not. >> we asked people on the we in if they had questions for you. i want to get to just one. this is sheila linebrink for the institute of truth in accounting, and she said, do you think that congress knew -- sheila weinberg for the institute of truth in accounting, do you think that congress would make different decisions? i think they do know. they do not have the political will to change this. >> i think they're generally aware but not specifically aware. the center for american progress, as you know, is a much more progressive group. they put out a really interesting plan about what is going to happen if we do not do something to deal with this

deficit and what we have to be prepared to do, and they said step that you never expect that group to say because they understand what is going to happen to the american economy if we do not do it. i think one problem is the congress is not organized to deal with it. you know, bob rubin said this in passing, but one of the most significant things that we contributed in administration was the establishment of the national economic council along the lines of the national security council with all of the relevant players, including the commerce, -- the commerce department, the agriculture department. we understood that there is amacro -- a macro, and macroeconomic section.

-- a macroeconomic section. this is where the members of the committee defined their success by whether or not they produced progress. they did not adopt every jot and tittle, but if they did something, i think it would make a difference. name any other committee. the armed services committee is not organized to decide what should not be done in defense. people do not say, "put me on the armed services committee so i can close the base in my district." [laughter] i have a higher regard for politicians than most people do. i think they are smarter and are

worth more than they get credit for. i think this is something we all say is a priority, but here we are with no committee in congress organized for this purpose. otherwise, we would all be up there testifying. >> mr. president, this would be our final question. we have been talking about long- term problems, but i want to focus on the short term for you, because you have a big deal coming up here this summer. you are about to marry off your daughter, and i will ask you that. are you save to handle that? >> i do not know. i told her when she was a little girl, it would suit me that she did not move out until she was 25 and did not marry until she was 35, because she is my only child. she does not think i am in any shape to handle it. she said, "the only thing you need to do is to walk me down the aisle, and you need to look

good." and i said, "well, what is your definition?" and she said, "about 15 pounds." so i am about halfway home. i like my future son-in-law, and i and my area. i think he is a good human being, so hillary and i are delighted. thank you. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> ladies and gentlemen, lunch will be served. they're closing down the center to transition for luncheon. we urge you to proceed, and

russians are standing by to guide you, and you will have time for a brief conversation with your colleagues. thank you. >> later today, we will show the debate from the pennsylvania democratic primary between arlen specter and another representative. it is the only scheduled televised debate before the primary election. that is a 7:00 p.m. on eastern -- 7:00 p.m. eastern on c-span. and it is the third and final debate among the leaders of the three largest political parties,

gordon brown, david cameron, and nick clegg. that is tonight at 9:00 p.m. here on c-span. >> the americans agreed to talk. >> in 2000, one man wrote about the taliban, ahmed rashid. now, with the 10th anniversary of his book, that is on "q&a" on c-span. >> now, remarks on the state of financial markets and their role in u.s. and run economies from the citigroup ceo who spoke last wednesday at columbia university as part of their lecture series. we begin with an introduction by the columbia university president. this is one hour 5 minutes. >> and the world leaders forum. my name is david, and i and the executive director.

-- i am the executive director. to project ideas from academia into the business world. we aim to bring economic policy and business leaders to columbia in an effort to help stimulate and interact with our academic community. this year, much of the activities have focused on finance. and i am delighted to finish off the year with today's events. it is hard to think of a field where economics has not has as much of an influence.

it is hard to imagine that until the academic work 40 years ago, and no one on wall street had the ability to properly price stock options and many of the other derivatives that have been at the center of the financial crisis. moreover, as fed and treasury officials intervened in the markets following the crisis, many of the terms of the tarpon were determined by pricing models which are taught in our finance classes. -- many of the terms of tar [ determines. the finance industry accounted for only 2.3% of u.s. gdp. did they come in as more than tripled in size to 7.7%. in 1990, there were 610 hedge funds with $38 billion under management.

while world gdp in 2006 stood at approximately $47 trillion, the capitalization of the world stock markets was 10% larger. it was 10 times larger, so it is therefore not surprising that financial crises that global implications. perhaps what is most surprising is our own surprise of the crisis in 2007. there have been 18 major banking crisis in the developed will alone. that is the developed world. since the end of the second world war, or roughly one every three years, with major crises

hitting countries like spain, norway, finland, japan, etc. our surprise perhaps reflects the parochial nature of americans, who ignored crises in other countries with the sense that we were too smart to let something happen here. understanding what happened and what we can do to prevent further crises is therefore critical in order to maintain stable growth. in this spirit, we have this important lecture as part of the world leaders forum. president bollinger is here as is our distinguished speaker. thank you. >> oh thank you all for joining us this evening. i would like to extend a special thanks to david and his colleagues at is program for economic research.

that is tonight's co-sponsor, as you heard. they played a critical role in bringing this together. they check their perceptions at the gate, and they open their minds to new perspectives, and new people they might never have encountered were considered. it is one of the best and most attractive arguments to coming to the greatest, most global of american cities, graduate school. this provides a venue for almost any topic and a society that has chosen to make free speech and debate a higher value than anyplace else in the world and, perhaps, ever. these forms -- forums , the best

ways. french president nicolas sarkozy, and the highest-ranking military officer, the chairman of the joint chiefs of staff, admiral mike mullen, where tonight, one of the global economy's most important business leaders, the c.e.o. c.e.o. -- the citigroup ceo. this is a topic that is rightly at the top of concern in conversation not only across our own country but across the globe in the wake of the worst financial crisis since the great depression of the 1930's. just two weeks ago on this stage, just ziegler -- joe had a conversation with others, including arthur levitt, and there was the president of the federal reserve bank of new

york, and, of course, there's been many conversations, classes, and seminars over the past year at our law and business schools, schools of journalism, engineering schools, all seeking to understand. what happened to our global financial system, n.y., and what should be done about it? our distinctive role is to bring scholarly perspective to this historical moment. we're obviously not alone in asking these important questions. indeed, since the moment of the meltdown in september 2008, perhaps to the benefit of hindsight, those that are most powerful financial institutions have come under a new wave of much-needed public scrutiny and discussion. as this week's hearings and debate in our nation's capital amply illustrates, we are at a real inflection point in history on financial regulations.

and a new perspective and a change of heart -- it became morally accepted that free markets should be left free to correct themselves and that they would, in fact, do so. there were voices of dissent, to be true -- to be sure. there were regulators and others who debated repealer and the glass-steagall act more than one decade ago. journalists investigating increasing leverage and saw the bubble and predicted its bursting an early morning shift -- early warning shots of enrons and worldcom, and as aesop of the past decade, it was fundamentally a brought failure of knowledge and information. a failure to understand the realities of economic activity at a very basic level, a failure to seek linkages and connections -- and as we saw in

the past decade, it was fundamentally a broad failure of knowledge and information. thank god for colombia. -- columbia. there is the major academic voice of the citigroup ceo, who had the impeccable timing of being named the ceo in 2007, when the troubles in the global financial system may have already become manifest but not to their disastrous existential scope. the challenges he inherited -- >> we are going to leave this program now to go live to louisiana, where president obama is getting a firsthand look at the response to the b.p.-gulf of mexico oil spill.

he met with bobby jindal and some of the first responders, and we expect him to make a statement. we expect him to talk about also, perhaps, the attempted car bomb incident in new york city last night. you're watching live coverage here on c-span. >> all right, good afternoon, everybody. first, let me say a few words about the incident in new york city. i want to commend the work of the nypd, the new york fire

department, and the fbi, which responded swiftly and aggressively to a dangerous situation, and also want to commend the vigilance citizens who noticed the suspicious activity and reported it to the authorities. i just got off the telephone on the way down here with mayor bloomberg to make sure that state and federal officials are courting affectively. since last night, my national security team has been taking every step necessary to ensure that our states and local partners of the full support and cooperation of the federal government. we're going to do what is necessary to protect the american people, to find out who is behind this potentially deadly act, and to see that justice is done, and i am going to continue to monitor the situation closely at home and abroad to safeguard the security of the american people. we just finished meeting with an admiral, our national incident commander for this spill, as

well as coast guard personnel, or leading the response to this crisis, and they gave me an update on our efforts to stop the b.p. oil spill and mitigate the damages. by the way, i just wanted to point out that i was told it was drizzling out here. is this louisiana drizzle right here? they gave me a sense of how this bill is moving. it is now about 9 miles off of the coast of southeastern louisiana, and, by the way, we have the governor of louisiana, bobby jindal, as well as other sort taking part in this meeting, the parish present, because we want to coordinate between local, state, and federal officials throughout this process. i think the american people are now aware, certainly, folks in the gulf being aware, but we're dealing with a massive and potentially unprecedented environmental disaster.

the oil could seriously damage the economy and the environment of our gulf states, and it could extend for a long time. it could jeopardize the livelihoods of thousands of americans who call this place home. and that is why the federal government has launched an coordinated an all-hands-on- deck response to this crisis from day one. after the explosion of this drilling rig, it began with an extensive search-and-rescue mission to rescue people, including three badly injured. and my thoughts and prayers go out to the family of the a 11 workers who have not been found. when the drill units sank on thursday, we immediately and intensely investigated by remotely-operated vehicles the and thousands -- the entire

link. three weeks were identified. the most recent coming just last wednesday evening. the admiral and secretary napolitano have made it clear that we have made preparation from day one to stage equipment for a worst-case scenario. we immediately set up command center operations here in the gulf and coordinated with all state and local governments, and the third breach was discovered on wednesday. we already had by that time in a position more than 70 vessels and hundreds of thousands of feet of equipment, and there was the homeland security, department of the interior, a minister from the epa was here, my assistant for energy and climate-change policy, and the administrator of noaa. so what to emphasize, from day one, we have prepared and plan

for the worst, even as we hoped for the best. while korea prepared and react aggressively, i am not going to rest, and the gentleman and women here are not going to rest or dissatisfied and to the key is stopped at the source, the oil in the gulf is contained and cleaned up, and the people of this region are able to go back to their lives and livelihoods. currently, the most advanced technology is being used to try to stop a leak that is more than 5,000 feet under the surface. because this leak is unique and unprecedented, it could take many days to stop. that is why we are also using every resource available to stop the oil from coming ashore and mitigating the damage it could cause, much of the discussion here at the center focused on if and when we have to deal with

these mitigation efforts. thus far, as you can tell, the weather has not been as cooperative as we would like, but we're going to continue to push forward. i also want to stress the we are working closely with the gulf states and local communities to help every american affected by this crisis. but let me be clear. b.p. is responsible for this leak. bp will be paying the bill. but as president of the united states, good to spare no effort to respond to this crisis for as long as it continues, and we will spare no resources to clean up whenever damages caused. while there will be time to fully investigate what happened on that rig and all responsible parties accountable, our focus now is on a fully coordinated, relentless relief effort to stop war damage to the gulf. i want to thank the thousands of americans to a been working around the clock to stop this crisis, whether it is the brave men and women of the military or the local officials call the

goth home, they are doing everything in their power to mitigate this disaster, prevent damage to our environment, and help our fellow citizens. during this visit, i am hoping to get the opportunity to speak with some of the individuals who are directly affected by this disaster. i have heard already. the people of this region have been through worse disasters than anybody should have to bear, but every american affected by this bill should know this. your government will do whatever it takes for as long as it takes to stop this crisis. this is one of the richest and most people ecosystems on the planet, and for centuries, its residents have enjoyed and made a living off of the fish that swim in these waters and the wildlife that inhabit these shores. this is also the heartbeat of the region's economic life, and we are going to do everything in

our power to protect our national resources, compensate those who have been hard, rebuild what has been damaged, and help this region persevere, like it has done so many times before. that is the koran and i am making for the united states, and i know that everybody who works for the federal government feels the exact same way. thank you very much, everybody. [applause]

>> a live look of president obama on the gulf coast in louisiana today, getting a firsthand look at getting a look at the b.p. oil spill on the gulf coast. he spoke to bobby jindal and others, and also a reference to

the attempted car bomb incident in new york city last night. we are going to return now to a program from columbia university, including the ceo of citigroup, who spoke there as part of their lecture series of the world leaders forum. as a result, at the peak of the housing market, citi like many others was highly exposed to u.s. housing and the u.s. consumer. citi and many other financial institutions took comfort from the fact that many were highly

rated, and they were insured, and in retrospect, we know that this was false comfort, so what did we do at citi to learn and to remember the lessons of the turmoil korea lived through over the last two years? after i became ceo, my management team and i had three priorities, financial strength, cultural change. we moved extremely fast to shore up the strength of city \i, and we succeeded. we raised a lot of capital. we have reduced our assets by over half a trillion dollars. we completed 43 divestitures. annualized costs are down $13 billion, and, unfortunate, we

had to lower our head count by over 100 10,000 people, and last year, we were among the strongest banks in the world by most of the critical measures of capital and liquidity. along the way, we received additional help from u.s. taxpayers in their form of tarp investment in citi. by the end of last year, we'll pay that back with a substantial returns for taxpayers. however, and i have said this again and again, and i will say this publicly and future, we owe a large debt, which we are committed to repaid by remaining an active contributor to the american economy and the communities that we serve. strategic clarity was our second priority. and that is because we were in numerous divorce businesses

around the world, many of them newly acquired. we were not a unified company with a unified culture. consequently, we initiate a process of soul-searching. we examined the global environment, not just immediate problems but also a long-term forces at war, including the rise of emerging-market, and we asked ourselves the most basic questions. first, why do clients always need us? and second, what are we really best as a company? and here is what we decided. first, a return to the basics of banking. citi had tried to be all things to all people. we decided that citi would be a

bank and take deposits and make loans and provide custodial services, facilitate capital flows through trading and underwriting, all with confidence and trust by focusing on banking basics. citi will ultimately be 40% smaller than its peak in 2007. we also resolved to concentrate on why clients need us. our most distinctive competitive advantage is the unique ability of cti to connect the world through an imperiled presence. in addition, we changed our business model from one of capital deployment to client centrism. we about to focus squarely on client interests, and that is, by the way, much more than a platitudes, because banks and other companies, including citi,

often strayed from this. it was often with an emphasis on trading for the banks. a bank serves the interests of its shareholders and employees by concentrating on what is best for its customers and on building relationships with them, and that is a clear lesson of this financial crisis. we also recognize that our only strategy could be as good as our people. this is a people business. we had to make some critical changes in personnel and senior management and in the leadership of our businesses. we have to have a world-class team, sharply focused on the basics of banking. in addition, xciti -- citi made changes to its board of directors. and finally, we resolved never to compromise our financial

strength again. it has to be at the core of our strategy. we made extensive changes and risk-management systems, established twopenny financial disciplines, and returned more assessments of risks. let me talk about a third priority. cultural change. clearly, something that is much more intangible, but, to me, it is absolutely essential. and it is at the center of what i'm going to talk about next. this drives constructive behavior every day. a culture of irresponsibility is a very powerful force beyond rules and regulations to help guard against bad judgments, temptations to push the envelope, and the impulse to act in self interest first. so we at citi are creating a unified culture that is based on

the responsibility of finance. no one, including me, wants to see a repeat of 2008-2009, but here's the problem. in five, 10, 20, or 30 years, people in the midst of a volatile economic bubble are unlikely to see beyond delusions it creates. their memories of what happened in 2008-2009 will be dim, maybe even nonexistent, and they could repeat history. they could succumb to all- familiar pressures that we just saw over the last many years. to them, risks and the market appeared to be coming down, creating pressure to increase leverage and take more risk. shareholders will demand more and more profits as they view mounting returns for other shareholders. clients will say to their financial advisers, "what is wrong with it?" my friends advisor is giving him

30% year, -- "my friend's adviser is giving him 30% the year." you are living in the dark ages. get with it. they will all feel these conflicting pressures, and when they react, they will turn up the heat with the whole system, and that climate, suder experts and even people were generally smart and wise -- pseudo-experts and even people who are generally smaller and allies will be involved. palkot we make sure the lessons that we never learned are imbedded in our collective memory so that we can at least mitigate future crisis? we thought about this a lot and spent a lot of time thinking about this for citi.

how do i korean institution for the future? had we make sure the system internalizes the learning -- how to why create the institution for the future? how do we make sure the system internalizes the learning? -- how do we create the institution for the future? each can create a culture of irresponsibility. but let's be honest. history and show there is not a correlation between the enactment of moral laws and the and a great financial crisis. and it always find their way around a letter of the law. this will be the subsidy or supplement existing frameworks with a goal to stay ahead of crises.

realistically, the goal is not to stop crisis but to mitigate them and have the tools necessary to effectively manage them. , so one of the reasons i am really here tonight is that i am at the right university with the right group of people, the right minds, some the best minds anywhere for directing the question, and the world and the country needs your best thinking on this. how to retrieve a global banking and regulatory structure that constantly enables us to learn and stay ahead of crises? how do we ensure that there is clarity of principles by which to run the system, with continuous additional laws and regulation and other tools to take into account the products, new ways of doing business, and new technologies? can we change in approach to evaluate whether this time is really different, or can even hope? let me go back to citi's

responsibility. i believe the purpose is to ensure that we serve client interests, and we are in force for positive change in the world. i should point out that in my experience, the type of business you are in significantly affects culture. there is truth in the nation, for example, that banking is one kind of culture, and we still has another kind of culture. i think, therefore, that by returning to the basics of banking, we are helping to set the fundamental tone for the culture that we want at citi. i believe the systematic pursuit is ultimately the way to have an institutional memory that deeply unpacks the memory of both

current and future employees in all of our businesses and all levels of our company. it is intended to guide citi's behavior went private economic interests conflict with public interests. and it's precise meaning will in golf randy wolf -- it's precise meeting will evolve. today, we of three core principles. first, the activities must contribute to the economy, and today, citi must contribute. we must support the financing of public projects around the world. for example, since the beginning of the u.s. housing crisis, we have had 900,000 homeowners --

we have helped them. we lend money to businesses of all sides of the special focus on the small and mid-sized companies that have trouble obtaining the financing they need, where leaders financing -- we are one of the biggest sources of financing for schools, hospitals, and other vital infrastructure products. the second principle, that our businesses must be all about our clients. our products and services must promote choice and control over their financial lives. that is why, for instance, we have had some of the policies on fees and overdrafts. we have invested money to provide scholarships for college education as well as counseling and instruction on financial matters for low-income individuals and families, and it

is also the reason why our strategy and business model are designed to use our capital for clients versus proprietary trading. the third principle is that we will be a strong advocate for systemic safety and for foreign- looking global financial reform. that, by the way, starts with making sure our house is in order, all of us, and that we run our businesses prudently. but it goes beyond that, and i a publicly advocated reform that will protect consumer interests and spread confidence. the entire city organization -- the entire citi organization around the world has joined me, and what we advocate to their the principles that are exactly the ones that the president talked about last week, banks

should not speculate with their capital. markets need to be transparent. derivatives should be cleared centrally. we need a strong party to detect interests. we should end once and for all the phenomenon of too big to fail. we shall never a strong systemic regulator. it is essentially, absolutely essential to have a level playing field. and we need a merit-based compensation system driven by long-term performance. we believe these principles of regulatory perform kendry a stronger system and bring wall street and main street closer together. still, the broader challenge is to korean a global banking and regulatory system that constantly learns from experience and stays at a crisis. and let me remind you again that

this is where i hope the world gets help from superb and well trained minds here at this university. obviously thinking long-term now and then, i contemplated what we would look like an five years, 10 years, 35 years from now, and i do not know what the markets are going to look like or who are competitors are going to be or how the economy will fare in 2013 or longer, but i do believe the culture will serve as well. someone said that a corporate culture is nothing more than how we do things around here. and our culture will be shared by response will finance. my responsibility is to build that culture, and that will be my most valuable legacy at the institution. both city and -- citi and

columbia have histories that are intertwined. when the bank lost its charter in 1812, a group of merchants formed the citibank of new york, today citigroup, and took over at the national bank headquarters. columboia and citibank survive the war of 1812, the civil war, the great depression because they were blessed with leaders who acted as stewards of great institutions. during hard times, people who feared bank failures brought

their money to citibank because we were known as prudent bankers. our reputation was quite literally are most valuable asset. so today, whether we teach -- we can repay the debt by enhancing the quality and education of these great institutions and by using their power to make the world a better place, an act ci, that is my purpose. so, mr. president, thank you for inviting me to speak here today. it is a wonderful group, and i think all of you and they're ready to take questions. -- i thank all of you and am ready to take questions. [applause]

>> thank you very much. i would just ask one or two questions, and then we'll open it up for people to go to the microphones. a complicated question to ask at the beginning, i suppose. i'm very struck by the way in which you characterize how the world got to the point that did. and how that world is likely to come again. whatever they thought initially, convinced themselves of things that turned out to be not true, or they felt trapped in a system

where they had to act contrary to what they thought and hoped they could get out early enough, so this is the bubble. this is a mass hysteria. is a psychological problem. -- it is a psychological problem, and to people like me, this is not a new phenomenon. we have a bill of rights because because democracy loses its bearings, people become frightened, rather than a brilliant and korean market bubbles, the create -- they become fearful, and they oppress minorities badly. and there is a way of dealing with that. we put the bill of rights for the constitution.

there is a culture of supporting a constitutional rights and so on. my question to you, if you were in an ideal world, and you like to have a bill of rights, what kind of social structure do we need to help us stop that from happening? the fed is not there. what kind of structure do we need? what the structure is there? >> there are a couple of dip and aspects of bubbles that we need to think about, but there is also an informational counterpart. somewhere along the way, they

did not have the information necessary to absorb what was going on and therefore give the market a chance to succeed, and we found that out here. we knew nothing about the extent of the credit default swap portfolio. that particular market went from a few billion dollars early 2000 to over trillions of dollars in a very short period of time. by the way, lots of issues against transparency. so there are issues about social structure we can talk about, but there is not one fundamental principle but i think it's absolutely critical -- there is one absolutely critical thing, and that is we have to endeavor to always change roles, always changing laws to ensure that we of continuous transparency. now, that is easier said than

done, because there are lots of gas interests by the way, dealers to deal in these markets are the first ones to say, but if there is one principle that we have to abide by, it is give capital markets a chance to work, and they admit a chance unless they have information that they need. -- and they do not have a chance unless they have the information that they need. we do live in a political economy. you know also as a student of history and some of the biggest changes have been around economic disasters, as well. some of the biggest changes in laws or regulations happen when economies turn, so the question of how you institutionalize some

sort of learning, in a bill of rights, etc., to make it happen is incredibly difficult because we live in a global market. each country is going to have its own idea about the kind of economy it wants to run. witness what is going on in europe today. and in that scenario, it is very difficult to come up with something that works. .

>> you are a person who i have always said that really understands the grasp, the essence of what is happening, the forces at work, and is able to think about that will play out or should play our. i was also struck by how you say we need a level playing field in the global economy, and what you just said about the need for coordination across countries. obviously, sovereignty and our notions of sovereignty are a major part of what must give way. it is not possible to build the kind of global economy we are doing with the same degree of

sovereignty that states assume. do you think that is right, and how do you see that unfolding? >> obviously, sovereignty is a political question. it does not matter what i think. it is a matter of what the people in the country think and what they want. that is not going to change. think about sovereignty or rather governments in a very different way. what are we learning? there is a wonderful real-life example we are roaring through in europe, where a group of countries got together and said no individual currency. we have been and of national sovereignty of bring local money, -- have given up national sovereignty of printing local money. certain countries actually have lost control, therefore, of their credit rating. their financing because they cannot print money.

the ultimate governance mechanism in some ways is the bondholders who own sovereign debt, certain european countries, are telling them what they need to do. ironically, yes, there is political sovereignty, but the capital markets tend to take over economic governments very well, and that is the phenomenon we will have to live with. therefore, the need for global coordination, and the need for really thinking about the financial side of the equation for countries around the world is that ultimately the capital markets will speak, and as they speak, they will control your economy and that will control which you need to do. but learning through that and getting there is a difficult process. i must say that, having gone from g-7 to g-20 is absolutely terrific. it may not be complete or

perfect, but it is a very positive step. >> your thought here is that sovereignty is going to give way, but it will not come from a global financial system to respond, it will come from markets demanding that countries behave in certain ways that they may not want to, and they are going to cede some of their sovereignty. >> and the history of that is clear, when you look at some of the countries in latin america or europe. the bondholders are telling countries, here is how you manage your economy. it is about what it is that the capital markets thing because you need it to keep the economy going. >> let me ask one final question. do you enjoy your day? do you really like going to

work, -- let's go to a question. >> i was very gratified to hear your opinions of how banks should be run. at the same time, if you listen to yesterday's hearings in congress, it seems to me that goldman sachs is exactly the opposite view. i wonder if you could explain that, and if you could have some benevolent influence on the thinking of the executives of goldman sachs, which i frankly think are rather criminal. >> you are not going to be surprised if i do not comment on that. what i will say, though, is that we have to go back to their principles that i spoke up. that is the closest thing to a bill of rights that you are

going to get. what it says is transparency matters. disclosure matters, responsibility matters. and by the way, the sec and the regulators are really thinking through the concept of information. when you look at the global financial markets, it is not only about regulating products, regulating structures, regulating institutions. ultimately, you need regulation of information. i hope as we go through this process, we get to the other side, we will get to a better market. >> thank you for coming today. you mentioned a few times that banks should not speculate, and one lesson i learned, there is no difference between speculation and investment. i wonder what is your

definition, and do you consider cdo's as speculation? >> that is a very interesting question. by the way, it is exactly the kind of area that thoughtful academics can really contribute to. there is a difference between speculation and serving clients. if you commit capital to help clients, that is clearly in the context of the business that you are in. that is true if you make a loan, if you provide the liquidity, if they want to sell something. if you commit capital to markets because they are dysfunctional, and you actually have a market making business, that is consistent with the business model that you have. i think what is not consistent with a business model is to have a group of people sitting back somewhere in a room and who are actually not dealing with their plan, but they are using the

companies capital, dealing with everybody else on the street and running portfolios and investment, because they believe that by doing that, you can earn a rate of return. i don't want to get into philosophy, but i looked at and say that that is not the purpose of the bank. there are lots of other institutions. if it has a role, it is a limited role in the context of using your capital. to really understand how markets work, to create strategies and create products for clients. it is the ultimate client oriented role, but that is a very clear distinction in mind. >> i have two questions that relate to financial industry reform. one is internal with regard to

corporate governance. with regard to corporate governance, i wonder if you can comment on what kind of measures of banks can take to resolve the tension between the incentives of risk managers and those of profit makers within the bank itself. the second question is about the proposals, both the house bill and the dodd bill contain proposals for resolution funds that can aid in crisis management. what are your thoughts on those? >> i think compensation is a significant question. again it is not the theory, it is the practice of compensation. the theory is to design a compensation system that avoids moral hazard. we understand that. the last time it worked for certain financial firms like investment banks was when there were private companies. the government's and moral hazard and compensation -- the

intention of for one has to go with this, given that compensation levels can be large, is to see what we can do to mimic the private partnership aspects of compensation. ultimately it comes down to subjective evaluations, and it is exactly the kind of process which we are spending a lot of time on. the regulators are spending a lot of time on it. they are going to look at the structure and say i like it or i do not like it. your capra requirement will go up dramatically because you are a riskier firm. -- akaka requirement will go up. -- your capital requirement will go up. your second question was about the fund. that is probably one of the areas that evokes a lot of different reactions from people in the g-20, and for a variety

of different reasons, because -- there are lots of questions around that, even in academics. how do you define insurance? what are you going to get as a bank in exchange for getting that insurance? it is really complicated to think about that in the right way. therefore, it is one that is going to take the most amount of work. to the extent that we have been through this crisis, to the extent that everybody has learned and memories are fresh, i do not think it is an issue of urgent decisionmaking. it is an important one, but i hope that we will take the time to think through rather than rush to judgment.

>> with regard to the supervisor capital investment program, the $5.50 billion offer to citibank is recovery, do you think bank stress test should be imposed every two years, or just if one of the major players failed, like lehman brothers and in the recent financial crisis? >> let me see if i can answer it all together. one of the good things to come out of this crisis is the need for a systemic regulator. again, you have sovereignty issues, one for every country. let's say aces diming regulator is that can actually gather the information. -- 8 system in regulator that can actually gather the information.

-- systemic regulator. it is the closest thing we can get to an information base for the decision making process. that information is best understood when you run what-if scenarios. that is what stress tests are. >> this was conducted through several government agencies. do you think you need an outside player to look at those scenarios that might not be as comprehensively matched by the bank's internal risk department? >> i think that is a solution, but on the other hand, the

problem was not because the bank numbers were different from some of the other numbers. in some cases they are just wrong. nobody expected housing prices to go down 40%. it is less about that, but i think the process is really important. there is always going to be a scenario you missed. we know that, which is one of the points that make this such a difficult exercise. but what if scenarios are not only about risk. if you have jurisdictional areas, if something goes wrong, it is not clear the same bankruptcy laws apply around the world, and what if scenarios or also, where is the capital track? how or the contracts going to be met? there are a lot of issues surrounding that, but it is the right approach.

>> for the banks like citibank, which was rescued by the government's and which ended up diluting its share so much, what do you think is the best message for companies that have to have their stock diluted so much? what is the best method to fix that are to change that? my second question is, should financial regulation get passed in some form? do you think there'll have to be some real equilibrium? >> i think the financial services industry is one place where there is constant consolidation and fragmentation, constantly. yes, we will reach a new equilibrium, and we need strong potential reform. we need it fast.

>> how do you deal with stock dilution in general? >> it is an economic contactcon. the only way to deal with it is to restore value. you do that by doing the right things. you can do stock splits and there are all kinds of pros and cons for it. the fact that you own two shares instead of one share does not change the value of what you own. there are stock buybacks and other things you can look at, but the phenomenal course of action is to run your business correctly -- fundamental course of action is to run your business correctly. >> we have three people left. we will just take all three questions and then answer them. >> my question was on rating

agencies. what kind of reform would do suggest for the sector being blamed a lot for the financial crisis? >> citigroup was formed by a merger between travelers group and citibank, which at the time was a violation of the glass- steagall act. the thing 3 -- repealed glass- steagall did contribute to the crisis? what ie position on the proposed to him more cash -- student loan reform proposed by president obama? >> rating agencies, well, they got it wrong, too. what they are really good at is in trading companies with assets and liabilities and businesses

and earnings. where they got it wrong was in rating financially engineered products. but they have learned from that. i think you are going to have more robust rating agencies on the other side. let's talk about state loans. we have a very large still own business, and the basic change on student loans is that government guaranteed loans are issued by the government going forward, versus going for companies like ourselves. is one or the other. to me, it is fine. the biggest goal is to make sure we have student loans and that we have students who have the ability to get money. i am happy with that. >> i bet she was asking about

international student loans. is that correct? >> the last one is glass- steagall and regulation. everything that happened would have happened, could have happened even without glass- steagall. that is the irony of this thing. i can understand why people think about it. to me it is less about glass- steagall, but a need for strong regulatory reform. if we do that, i think we get the right place on banks not using capital. having the clarity of what banks are in business for, i think that goes the wrong way. it is more about let's get this kind of reform bill passed. >> you have made major contributions to this institution over a long period of time, and it is just

wonderful to have you here and have the special contribution today. thanks for coming. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> later today we will show the debate from the pennsylvania primary between senator arlen specter and joe sestak. that is at 7:00 p.m. eastern on c-span. and tonight, another debate from the british parliamentary election. it is the third and final debate

among the leaders of the three largest political parties. gordon brown, david cameron, and nick clegg. this week's topic, the economy. that is at 9:00 p.m. eastern here on c-span. >> now a discussion on how the deficit could affect defense spending. this is 36 minutes. host: we're talking about defense spending particularly defense spending in the face of the deficit and ramifications to national security, if that defense spending is cut. our guests are james karafano of the heritage foundation and bernardfenell, with the american security project and a senior fellow there. welcome to the program. tell us about the deficit and from your perspective if the deficit continues, how is it

going to affect national security? guest: certainly the deficit is a real problem, especially next decade. and the interest payment is going to raise and you get a squeeze on social programs and how much are willing to tax. and unfortunately when you look at discretionary spending, defense makes up a decent chunk of that. so it's hard to see how without major changes there is going to be a squeeze on defense budget. host: james, your thoughts. guest: well, he raises a great point. there's a bigger elephant in the room and that is entitlement spending, social security, medicare, and medicaid. if you run that out 30 years, thrtsdz there's nothing left in the budget. all discretionary spending disappears. so there are the twin elephants in the room and i would argue entitlement is the bigger one.

we've got to be responsible. but we've got to get our priorities in order. providing for the defense is a fundamental argument. sometimes it sounds you get the family around the table and say times are tough. and they're like, well, dude, we need our cable subscription. you have to cut the mortgage. i don't see it that way. i see we ought to fund defense first. we have lots of bad things we're doing in our fiscal policy and we should fix them. but cutting defense like not paying your mortgage is just not a smart way to run your federal budget. host: so in order to pay for the guns, james, how much of the butter are you going to have to cut? guest: i think that's a bad argument too. we want economic growth or security? and the answer as americans we want both. and let's be honest, we can do this. over the course of the cold war we spend 8% of the gdp and our economy grew. and when it ended it doubled. so sound fiscal policy allows

you to spend for defense but opens up for economic growth as well. host: burn ard, in order to pay for the guns, how much butter do you cut? guest: i agree with jim on this point. there's not really a trade-off. i think the more interesting issue is do we need to be spending as much as we're spending. defense increased by 250% since the bush administration began. and that only covers part of our defense cost. and the question is, given the threats we face in the world, is it sufficient or too much or too little. i think we have to have a debate on that. but ultimately we can find the money to pay for legitimate security threats. i just will argue at this point we haven't had a process which is disciplined and serious about assessing what threats are and how large a budget we have have to have in response. host: talking about defense

spending, deficit spending and national security ramifications from trying to mix the two. our guests, james of the heritage foundation and bernnard of the american security project. if you want to get involved, give us a call. the numbers are on the bottom of your screen. so, you have a chance to go in and meet with the president tomorrow. what is your plan? what are you going to tell him either needs to be cut or where does the spending need to be cut? guest: i think you have to start with strategy. and here's the challenge. at the end of the cold war we adopted a hedging strategy. we don't know what the world is going to look like, let's cut our budget 30%, but maintain it roughly as it is now. and we've maintain that for 20 years now. when bush came into office he

began a real disciplined process of trying to review and reassess. it was cut short by 9/11. we have had a cold war looking defense budget, smaller than the cold war but sort of allocating the same way. on top of that we're laden with the wars we're fighting now. but there's been no attempt to step back and say, what commitments to say, south korea. should we be spending as much as we're spending on say defense of taiwan given the fact that there's no cold war to justify that. i would argue that once we begin to step back there are cuts we can make, and some would be precisely an issue like taiwan where we spend billions of dollars in terms of bidding capacity to fight this probably unlikely scenario when we probably wouldn't want to fight anyway. and as a result, if you look at that kind of logic, it talks about the carrier size, size of

the navy, some air spear yort assets that you might be able to cut. there's a lot of things that flow out of a discipline strategic review. host: james. guest: i agree it ought to be based on strategy but you need a long-term view. everything you buy in the military is a 25, 30 year investment. i was in the military, they bought me in 1973 and i left 30 years later. so you have to think far term. and what that suggests is you really can't cut this too closely. things don't really radically change from one year to the next. we spend about 1% or 2% over the life of the nation basically from the american revolution up to world war ii, except when we're fighting wars. during world war ii, we spent 45%. after, we spent about 8%. that was the era of the cold war but that was the era when american became a different

country. we became a global power and had global responsibilitieses. so when the cold war ended how much of that had to be there. and take the cold war out of the picture and what's left for requiring for percentage of defense, for defendsing u.s. interests around the world, for defending ourselves from threats around the world. and he is right we never had that big debate. we were about 3% of gdp and going down when 9/11 happens. we go back up to 4% but largely because of paying for the wars. baseline spending is still not much different. and i think about 4% of gdp, we've done the analysis siss from both ends and we come to the same spot. you needs about 4% of gdp day in and day out to kind of pay the mortgage on national security. so i don't really see the cuts that he is talking about because i see those

requirements 10, 20, 30 years down the road across the spectrum of needs. host: our first call from pennsylvania, on our line for independents. caller: good morning. wow, with all due respect there, james, you know, really, the real picture i've seen recent reports is over half is what we really spend on the military. and do we need 700 bases around this world? this is ridiculous. this is empire. and what are we protecting? mainly capitalism. and is that in the best interests of people? we have to ask that to ourselves as a people now. but, i mean, this growing -- what about the kind of injuries we're having now? what about the kind of policies, the -- should we really occupy these nations that have al qaeda? do we go into yemen? do we go into some alia, do we ok -- occupy these nation sns

ok -- occupy these nation sns we need to be like let's be smart about this and let's not be an empire. we will be respected, we will save money, and have all the entitlement money in the world. listen to this tea party movement people. we will have all the money in the world if we change our military policy and we will be safer. all reports are we or a failure. all our efforts so far has increased al qaeda. this is leading to war. we need to change policy and get out of afghanistan. we need to stop these wars of occupation and we need to go after our enemies directly. james. guest: well, it's a great question. it's a point i hear a lot and it's just wrong. america has always had the responsibility, which it says in the constitution, to provide for the common defense. part of providing for the common defense is sometimes leaving your shores and going out defending yourself.

the founding fathers knew this. we create add fleet and sent it to the mediterranean and kept it there for almost half a century to combat pirates because it was in america's interest. those bases are there for one reason, which is to defend our interests. and when we walk away from our global responsibility, and the best example is afghanistan. we walked away in the 1990s and what happened? we got attacked. and you have to go forth and defend ourselves. and al qaeda is a good example. al qaeda is not stronger. al qaeda has been the injured. as a matter of fact, burnard, we're going to do a joint event on this tomorrow. there have been 30 attempted terrorist attacks on the united states, we argue the number is 31, 32, have been foiled in large part because we were stopping them. and that's just part of what you have to do. america has always done that. host: quickly. guest: we don't have to have

quite a large footprint. that's the argument. we have to make a clear assessment of what the threats really are. and i think there are places where you could say a smaller footprint abroad, lesser finger prints on the foreign policy lives of other people would be better. guest: it's a footprint you need for your national interests. absolutely. host: back to the lines. ohio, go ahead. caller: yeah. what i would like to say is we're so concerned about these entitlements and how these entitlements have to be cut and republicans just hate entitlements. and what's the definition? is it an entitlement for bp to contact the american military when it's oil wells are leaking? is it bp's policy to take american's children to war so they can get their contract? i'm wondering what a real entitlement is.

host: bernyard, american security project. guest: i raise it for an important issue. how do we define our national interests? and when you begin to think about what in fact we are defending abroad, in some cases it isn't so what the american public thinks is worthwhile. considering how much money we have to maintain, we have to spend to maintain the capacity to defend access to persian gulf oil. most doesn't come to us anyway. most is on behalf of our allies. but it's a major capacity to keep a fleet in the persian gulf or around the persian gulf, paying for stability in countries throughout the middle east. these are very high costs. and i think we need to have some debate about are we willing to pay these kinds of costs for oil. we are. and i'm not sure that we shouldn't be. in fact, if you say shouldn't we be spending money to say protecting oil? that's the life blood of our economy, as a result it's probably a good idea to spend significantly. but it's once of the things we

ignore. there's an interest there. and then it gets beyond the debate. on the other hand, we talk about things of health care, we're putting dollars. we have to figure out how to make health care revenue neutral. no one says how do we make additional spending on defense or meeting new threats revenue neutral and they should all be put in the same kind of box. they're all interests to be paid for and discussing the costs and benefits is part of what politics ought to be about. host: next up, connecticut, john on our line for caller: i have a friend for my paysen mr. karafano. they never seem to mention welfare, which is the biggest waste and fraud in our country. if we didn't have so much fraud in that, maybe we would have money in our military. and with the military, i think we could probably pull back some of our bases from europe which is pretty safe now, and maybe place them on our borders

where we are being invaded and overrun. that's our our attention should be in the military. and we would have more money to spend on military if we didn't have all these wastes programs like welfare. we're always attacking social security where people tend to pay money into. and it's not entitle quamt when the government takes money from your pay check and force us to contribute. but i wish you would mention welfare as an entitlement. guest: this is a great point not just for italian americans but for all americans. which is to put defense spending in perspective. and i think this is the most important issue. people talk about defense spending as if this is the main driver of what we're doing with our tax dollars and it's simply not. 40 years ago, defense spending was 50%. today it's less than a fifth. today, it's programs like medicare, medicaid, and social security. but if you add in like means

tested welfare and education, those are bigger than defense. the financial bailout package, you add all those things together. so defense, even though it's the single largest item in discretionary budget. and for folks who don't understand that. that's the part where you don't have -- the government doesn't have an obligation, you have to budget for that. but it's a very small thing that's not driving the train. kind of look at defense spending the reason why we have a deficit, the reason why taxes are going up. that's not it. defense spending is there for one reason, to protect us. host: next call from arizona. greg. caller: good morning. how are you gentlemen doing this morning? my question is how do you justify the fact that we're in afghanistan and iraq, and we have triple canopy in the same people as blackwater, all these private contractors defending

supposedly defending our -- let me ask those guys right there. when they walk outside from the studio today, do they feel threatened and if they don't do they feel that they're not being threatened because of the money that we're -- being spent on private contractors and our military? do they feel our world is safer because of that? do they honestly feel we should be where we're at doing what we're doing with our military killing people and continuing this nonsense? guest: well, there's a lot of issues there. do i feel safer when i walk out the door because we have our military protecting us? absolutely. i'm skeptical about the mission in afghanistan. i think on the whole we're not going to get much out of that mission in the long run. as a result the investment is probably not going to pay for itself. but on the whole i think we do have an effective national security apparatus.

and even though it isn't as big a budget item as other things including social security, medicare and medicaid, it's a lot of money. and we tend to lose that in washington. we get used to throwing around billions of dollars here, you add those up and it's real money after a while. and here, if you could cut a billion out of defense budget, brick it down to what it was in the year 2000 i think you would have significant savings. it would be over $2 trillion in a decade. but that's not the issue in that sense. the bigger issue is that we need to figure out what do we really need to spend? let me talk about the issue of contractors for just a second. the real problem with contractors, and part of the issue is we're trying to do some interventions on the cheap. we have an unsustainable defense policy where we're trying to do too much with too little. the issues isn't to spend more. i think the issue is maybe we should try to cut back on our

missions, have more limited modest kinds of goals in terms of our national security policy abroad and then we could fund it properly with lower risk, less reliance on contractors and probably a better chance of success across the board. host: next up, new york, new york, john on our line for republicans. i'm sorry, for democrats. go ahead. caller: thank you for c-span. al qaeda in my opinion was nothing more than a rag tag group of bed oins that we overreacted to after 9/11. i'm sure you can pick apart my words in one or both of your guests, -- one will bick apart those words. but president bush overreacted and brought us into the wars. we need to be out of south korea, germany, two rich countries that can pay for their own defense. and to really come up with solutions for problems poignantly, i don't hear the many -- your guests are not

poignantly coming up with problems. you know, you can decriminalize drugs. not that i'm in such total favor of drugs as a way to fight the war on drugs. and as a way to fight the war on illegal immigration, if you make it impossible for there to be insurance coverage for workers compensation and for businesses, and for business liability insurance that excludes coverage for illegals, then the employers would be forced to only hire legal workers. thank you for c-span. host: james. he talked about how much money was spent versus what is spent in over other countries. and according to a chart we have gotten from global issues.org, the united states in 2008 paid for 41% of the world's military. the next five countries, china,

france, the uk and russia, don't even come close to half of that. are we spending too much of the -- more than what we need to be spending as u.s.? guest: that's a great question. and i would lo to have these debates. i would love to debate what are we doing with regards to other people. this is a terrific issue. is that the right metric, what other people doing. we have the world's largest economy. we have 300 million people. we've got one of the largest countries in the world that's interconnected with every country in the world. so do you really want to compare our defense requirements, our national security requirements with some of these other countries? i'm not sure that makes a lot of sense. people go, well, it's like if you had, i don't know what kind of car, so you've got a pinto and bernard's got a mazz rati. wulled it -- would it be reasonable that bernard should

pay the same for insurance as you do? you pay what's appropriate to defend what you have at risk. we're a huge country. we've got a lot of things to take care of to protect. our investments should be appropriate to that. that's all. . .

so we ended up a 40% cut, much of which was implemented -- the defense budget dropped pretty significantly. the issue of bush in iraq and afghanistan was not that he did not have enough forces available that he chose not to send sufficient forces. it is not that we did not have meant to send their. now we have 100,000 men in afghanistan, but when we were trying to close off the escape of bin laden, we eventually relied upon local groups, and it

allowed them to escape. there are logistical problems of how to get the man into the country, but that issue with bush was a deliberate choice to have a light footprint. the issue was a deliberate choice. why? maybe it was easier to sell to the american public, or was it because there were over- confident in the ability of the forces? there was much debate. it was not the issue that the force was not capable. it was large and capable. it was a matter of how to use the force. that is where bush and rumsfeld have come in for legitimate criticism. host: texas. caller: i'm in the district of ron paul.

he says we're spending all this money on wars going broke and these are not for america, but for israel. host: we will leave it there. guest: it raises a great point --defense is not what is draining the federal economy, at less than one-fifth of the economy. the argument that somehow defenses bankrupt in america is simply not true. host: james, the heritage foundation, a defense expert. he is also director of the center for foreign and policy studies. bernard is a senior fellow at the american security project, and was previously professor of military strategy at the u.s. national war college. he has held positions at both

georgetown university as well. the line for democrats, from missouri. caller: i have a brief comment about domestic spending. then i will ask a question about defense. the tea partiers are always talking about entitlements, but should be in favor of means testing all of social security and medicare. on defense i cannot see us keeping troops overseas like we do. they are everywhere, japan, germany, and all kinds of places. we should bring those tow. then again, we do need defense spending -- of the question -- are we still in the star wars thing? we have no defense against an accidental launching of russian

missiles. will we be spending money on defensive star wars? guest: we have a significant program and it has been surprisingly successful. many were skeptical. but in fact, we were able over time to hit missiles launched. our capabilities especially of the theater level against ballistic missiles are significant. even on the national level there are progressing. there is no real challenge there. there is broad consensus on the capacity to shoot down accidental launches against the u.s. the bigger question is how much you want to extend that to allies, but interceptors in europe, and what are the consequences? but we're making progress in defending the homeland from the

ballistic missile attacks. host: next, okla. -- i'm sorry, oregon. caller: yes, i'm calling -- i love my phone on recall and the boys pushed in 002 for the democrats' one. this is the second time i was told was on a republican line and i got cut off. host: ok. [laughter] while we wait for more calls to come in, how much, james, is congress going to be taxed? maybe that's not the right word, but how much responsibility is it for the congress to try not only to figure out a way to pay

the defense, the top opprobriums, and to get the point across to the american public that the defense spending is a smaller part of the budget? guest: now is the right time to look at that great question. congress those two things yearly. a budget for the defense department. that is called an appropriations bill. then another bill called the of the rescission bill which is basically guidelines to the defense a permit -- called teh appropriations bill. this is a month all americans ought to focus on these issues,

and we're calling it protect america month. we have that information on a on our website. this is a good month to talk about these issues. take them seriously. let your congressional members know. the congress needs to know citizens are informed, have an opinion. both bernard and i prefer if people got educated and informed, and then let their leaders in washington know what they think about that. host: jennie, sugarland, texas. caller: i'm also a democrat and have also called on -0002. today she hung up on me and i told her the website says -0002.

i wish you would have the numbers on the screen for the entire program. they were not on there before. in john dean's book from 2004, he said the bush administration had a plan to get the country in such a financial condition that there would have to get rid of social security and medicare. but it would not happen when george bush was president, but after he left. as far as the iraq war, dearlove in the british record and a book by suskinid says that dick cheney without a doubt that there were no weapons of mass direction. yet look at all the money in halliburton who got rich. what have they done to the country? they gave part of their offices over to the uae they will have to pay money on taxes for many

we're gettingiving to the war. guest: the lobbyist decisions are very complicated. the notion that big to any new there were no wmd's in iraq is principal. it did he exercise due diligence? probably not. but look, that happens all the time. i do not see the evidence of conspiracy. i would not want to argue that conservatives have a conspiracy about how to use defense money to bankrupt the country. the tax cuts are another issue. host: we want to let viewers and listeners know we changed the order of the phones every month to, mix things to make sure people are honest calling. to make sure you cannot program the number into the speed dubbing of this being the beginning of the month, the

numbers have changed. sorry for the confusion. tampa, fla. caller: good morning. what kind of studies are you doing in terms of troop quality? i have spent time in active navy and navy reserve. it seems like we spend more time try to get people on and off the fat boys list. any studies or analysis on troops to be out there? guest: we have looked a lot at manpower costs. it raises a good issue. the manpower costs of the largest portion of defense spending, and fastest rising portion of its --within the defense to permit we have a mini storm that mirrors the larger budget. the health care, retirement, benefits cost a lot more.

we do all we can to take care of the troops. i was in the army for 25 years. these people really are selfless service. but the problem is -- when you squished down on the defense budget, you are not going to take that part out. what falls out? buy new equipment, making sure troops are adequately trained, have ammunition. you have to get the issue right. the manpower costs will continue to grow. if you're budgets are flatter smaller, they will eat the whole budget. we just cannot afford to sit back, and back osay -- ok. the lives of men and women are on the line. when people went to korea there were wearing sneakers without

boots. we need to make sure they have with the need. they are looking after national security. we have to blame ourselves for 9/11 and part harbor and for other areas at the end of the day. people fought they could take on america. part of having a strong defense is to let people know we're not, an not, but also when people take us on to make sure we look after our interests. host: in equipping the military in particular, is it necessary for them to have the f-35 fighter jet, or could some of the budget because there? guest: you are asking an old army guy for should have more planes. the answer is yes. many people ask when was the last time someone shot down an american plane, or an american got killed by an enemy

fighter? the answer is a long time. air superiority is going into an area you were fighting. other guys cannot fly to challenge you. the f-22 is a big part of that, so is the f-35. caller: mr. carafano, we may be a large super power and have it 50 times bigger of the economy, but are we that much bigger than the next biggest economy? what ever happened to the idea of zero-based budgeting? that would certainly clean out a helluva mess. guest: the issue is not how big our economy is and can we afford -- we certainly can afford our

current budget, and could spend more -- but should we? our current investment -- is inappropriate? there more sailors than there are diplomats in the entire foreign service. there more musicians in the u.s. military ban foreign service diplomat. is that an appropriate balance? i think we need to step back and recovery. we need a sufficiently large military to perform, but need to examine alternatives. are >> tomorrow, on "washington journal," republican bill richardson.

former world bank president paul wolfowitz talks about the impact the downgrading of greece will have on the world. rusty barber on the latest developments in iraq. "washington journal," live at 7:00 a.m. on c-span. >> what i think is vital now is the americans agreed to talk to the palestine leadership. >> in 2000, he wrote about the taliban and the rise of osama bin laden. now, with the 10th anniversary edition of his book, he looks at what is next on "q&a", tonight on c-span. >> newspaper -- newsmakers is pleased to welcome mark warner. senator, thank you for being with us. let me introduce our to reporters.

next to me, damian paleta of "the wall street journal." >> this is a very large bill, as you all know, with a lot of elements to it and a lot of complex language we have heard over the past week. for the everyday american, who wonders how it matters to them and if it protect them, i think there are three or four overriding goals that both parties have. we want to make sure that we never get to where the american public was forced to bail out large financial institutions the way we had to in the fall of 2008. we did not have any kind of early warning system to prevent institutions from getting too big to fail. we put a series of what i call speedboats