without -- almost without resoce. atlantic city, new jersey, prominent place, we drop terminated 59 cops, 59 cops out of the police force. a huge number, and some part of that can be redeemed by the cops progm that we have here, have seen here today. mr. holder, the suspe was around five months recently pakistan, came back and talked about bombmaking training in waziristan. would doj and fbi, were they looking at this fellow at all times prior to the attempted bombing? >> well, we're in the process -- this is an ongoing investigation and we're in the process of looking at indices and files to

see exactly what we knewbout this gentlem and when we knew it. i'm a little at a disadvantage because this is an ongoing investigation and there are leads that we are still pursuing from getting into too much detail about what we know at this point because some of that serves as the basis for thin that are in the process that are ongoing. but we are -- in answer to your question, we are in thprocess of trying to determine exactly what we knew about him and when. >> well, i want to get to a key issue as far as my agenda is concerned. and i ask this, it was reported that the times square bomber left a loaded handgun in his car at jfk as he tried to make his escape. the ste of georgia, state legislature recently passed a bill that that would allow peop carry a loaded gun into an

airport. do you support allowing people to carry loaded guns into an american airport? this one happened to be the largest in the world. >> i mean, we certainly have the supreme court's decision in heller that says the second amendment is an individual right. we have to respect the supreme cours decision in that regard. that doesn't mean, however, that that right is one that is absolute and we have to balance that individual right against our collective security, and there has to be a way in which if there is a tension, we try to resolve that tension. the notion that people could bring guns to airports, especially given the al qaeda focus on the use of airplanes as terrorist tools, is one that to me is very worrysome. i would hope that we would try toeep weapons, guns, away from the very instruments that al qaeda and other organizations

successfully used on september the 11th and have continued to try to use in the present and i suspect in the future as well. >> mr. holder, last month john biddell wounded two pentagon police officers before he was shot and killed. at least one of the handguns was linked to a private gun show sale. i brought the legislation to the senate when vice president gore was in that position and he broke a tie, 51-50, for us to close the gun show loophole, to close these -- shut down these dealers that don't have to ask your name, who you are, where you are, anything. would you recommend congress acting to close the gun show loophole once and for all? >> well, we are committed to keepingu out of the hands of people who should not have them. we know that people who have

access to these guns have committed any manner of crimes. we have certainly seen a disproportionate number of gun crimes in our inner cities and in other places, the incident that you described bein among them. we want to make sure that we take vantage of the tools that we have and that we enforce these mechanisms, enforce these tools, and make sure that as i said, we're keeping guns out of the hands of people who should not have them. >> thank you for that yes answer. i authored the juvele mentorg program, created one-on-one mentoring for a modest cost for at-risk youth during a brief hiatus i had, it was authorized. i plan to reintroducthis legislation for reauthorization in the coming weeks. do you see any value to that

program, to this mentoring, i don't know how familiar you are with the results that we had, in terms of crime prevention and giving our youth an alternative to gangs? >> that's exactly the approach that we have to take. we have to understand that crime fighting happens not only by police officers and by prosecutors. crime fighting happens in schools, it happens in mentoring, through mentoring. there's a direct correlation between schools that work, between mentoring efforts, between high levels of employment, all those things counter, counter crime, are good crime-fighting measures. we have to get beyon the notion that crime fighting only happens through people in uniform or from people who are lawyers, who act as prosecutors. we have to look at the social conditions that tend to breed crime and if we want to keep the

crime rate down, we have to deal with those underlying social conditions and mentoring, mentoring is one of the key ways in which you do that. there are too many young people, especially young men, and i saw this when i was a judge here in the d.c. superior court, who came before me who had no man in their life. women did a great job in trying to raise these young guys but i think that mentoring, especially of young men, is a critica thing in our successful crime fighting efforts. >> thank you, senator. senator murkowski? >> thank you. welcome, attorney general holder. >> morning. >> good morning to you. question for you about a vacancy that we are looking at in the ninth circuit. andrew kleinfeld, who has been alaska's sole judge on the ninth circuit, has notified e president he will be retiring

from active service in mid-june, june 12th. by my reading, that will place the ninth circuit out of compliance with the u.s. code 28 usc 44c which requires there shall be one circuit judge in regular active service appointed from the residents of each state in a circuit. so myuestion to you is whether or not you understand as i do that this requirement under 28 usc, that judge kleinfeld's seat must, in fact, be fill by another resident of the state of alaska and if you agree with that, can you tell me how the process to fill that vacancy is moving ahead? >> sure. we are trying to fill vacancies that exist in all of the circuit courts as well as the district courts as quickly as we can, working with elected officials in all of those states, including reaching across the

aisle to our republican colleagues to get names of qualified people. this president i think is committed to appointing and putting on the bench qualified people who are not ideological in their views. one of the things i will certainly look at, this having been brought to my attention, is to assure that with regard to that vacancy, we will interact with you if there are suggestions that you have. the white house counsel is chiefly responsible for the organization of our effort, the justice department works with the ite house counsel's office vetting candidates and identifying possible candidates and we will do that as quickly as wcan to ensure that that seat is filled as quickly as we can. >> well, we appciate e expediency, but again, i will remind you that that is the only seat that is occupied by an alaskan and as i read the u.s. code, it does require that there be an appointment from the resident of each stateso we

would like to work with you on that, not only ensuring that it's filled quickly but in consultation with members of the alaska delegatio we appreciate that. we also have a u.s. district judge who has announced that he's going to be taking senior status next year and i will assume but i guess i should ask it by way of a question that the administration's plan to consult with the alaska delegation will be very similar to what we're talking about with the ninth circuit vacancy? >> yes. that is the way in which we have operated. we have talked to i think the senators in the states where those vacancies have occurred. as i said, we have rched across the aisle. we are always open to suggestions that senators have, be they republican or democratic, and we try to get the best people that we can for these vacancies. i'm troubled that in at least some of our district courts and

some of our circuit courts, the number of vacancies is getting i think alarmingly high and we need to move as quickly as we can both in nominating people and getting them confirmed. in the senate, there are a number of judges i think who have kind of linged in the senate, either in the judiciary committee or on the floor. i think mainly on the floor. awaiting votes. i would hope any spirited bipartisanship we can get those people votes and get them on the bench so they can serve the american people. >> we appreciate that. want to talk just a little bit more about the ninth circuit. i have long been of the opinion that the ninth circuit covers far too muchterritory, its caseload is too heavy, it's understaffed, the judges of the ninth circuit are being asked to spend a t of time away from their families to hear cases in faflung states that make up the circuit and i have long supported a split of the ninth circuit into two circuits. the question to you this morning

is wheer or not you see any justification in maintaining the ninth circuit in its present form and what is the administration's view on the legislation to split the ninth circuit? senator enson has had legislation introduced this year, we worked with him in the past. if you could just address the workload and the situation as to how the ninth circuit could best and most efficiently operate? >> the ninth circuit i think does present unique problems, both in its geographic size and with regard to the workload that it has. i think we want to look at that, look at those two issues, and make a determination about whether there is the need for some reconstruction, some reconfiguring. this is something that i have not really focused on in the recent past but i know i have certainly read articles about that, had conversations about at possibility. we'll certainly want to work

with congress in looking at the workload, the geographic dispersion of the ninth circuit in making the appropriate determination. >> appreciate that. thank yo madam chair. >> senator feinstein is also the chair of the intelligence committee, and also is an outspoken person on the funding for the detainee trust fund that is often skimpy and spartan. you know where wesk local jurisdictions to hold the prisoners that are federal and then don't pay the bill. so i hope you ask some of those questions. >> well, thank you very much, madam chairman, i appreciateit. i want to ask a question in my capacity of chairman of the nate caucus on international narcotics control, and we've been spending some time looking at both afghanistan and mexico

and the cartels and you could say that there is eruption in mexico and the cartels and you can say that there is major eruption in afghanistan with the taliban increasingly taking over drug lab activities, transportation of narcotics and in effect, transforming themselves into a narco cartel which i happen to believe will be the result. we have found that as much as $169 million comes from a single roin trafficker in a ten-month period in afghanistan. at present, the dea, which has units to address this type of narco terrorism, does not have the manpower to standp and devote full-time operations in afghanistan. i think they have been very effective. i've talked with former agents, mr. braun, others, about operations in southern afghanistan, and believe that

for a fraction of our national investment in that country, a dea unit could, in fact, be dedicated to removing narco terrorists from the battlefield in direct support of the administration's top priority. so i am asking the distinguished chairman to add money either in this bill or to try to put it in a 2010 supplemental to stand up a new terrorism investigations unit at dea special opations division to focus on afghanistan. would you support such an effort? >> yeah. i think the dea has been particularly effective in afghanistan. at the end of fiscal year 2010, we expect to have a permanent staff of about 81 positions, dea positions, in afghanistan. i think that the reality is that given the nature of the problem that i think you accurately

described, additional dea agents, additional prosecutors, additional people from the martial service, could all help both with regard to the fight against the narcotics trade which helps fuel the liban and also help that nation in its efforts to adhere to the rule of law. i think we have to view this comprehensively but i think the point that you make about the need for expanded dea resources in afghanistan is exactly right. >> second questi. yesterday at the request of senator cornyn, i chaired a hearin of the caucus on international narcotics control, particularly on drug violence in mexico and the implications for the united stes, and what appears to me is that kidnappings in the last three years are up substantially. they are in southern california, they are in arizona. stash houses are up and home

invasions are up, and i think that has really fueled the arona law which i think is an unfortunate law, but nonetheless, i understand the fear that people have. the question comes, have you looked at beefing up even more the law enforcement effort in these particular areas and if so, what is justice prepared to do? >> we have deployed justice department resources from the atf, from the dea, from the fbi, along the border. i'm concerned about the level of violence that we've seen increase really pretty dramatically even in the last three to four weeks, and i think that we are going to make sure that we keep a sufficient presence both in mexico and along the border, that we work with our state and local partners in those affected areas along the border to keep the violence level as low as we can.

the efforts that our mexican colleagues have taken, president calderon has taken, those have been heroic efforts. we have to make sure that we are supportive of those efforts. we have to i think as i said, make sure that we maintain and increase our presence within mexico, but also maintain that presen along t border. we have deployed atf agents there on a rotating basis and i think one of the things we're going to have to consider, given the violence level that we see in mexico and i'm concerned about that spilling over, is to make -- perhaps make that presence on a more permanent basis. >> just one of the things that came up yesterday, a captain by the name of martinez, 24 years experience, chula vista police department, they got a grant and what they began to do is really develop intelligence. a lot of these kidnappings related -- in mexico related to somebody in the united states, the person in the united states won't call up and say my

relative has been kidnapped but they will talk about it. they pick up this talk so they're able to go in and make an arrest in concert with mexican police or prevent something from happening, and i think that's a ry good effort. additionally epic, my understanding is that dea has requested funding for an expansion and renovation projt to enlarge the existing epic facility. since 22 of the agencies are planning on adding personnel, is that something that is critical in youview? >> yes. i think it is. the need for -- for us to be successful in this effort, we need to have -- need to gather as much intelligence as we can. we need to be able to process that intelligence. we need to have the enforcement agencies co-located so they can all make use of that intelligence and then

efficiently deploy the resources that they have. the department's request for fiscal year 2011 seeks really significant resources to combat violence along the southwest border and one of the ways in which we can do that think is by supporting epic which i think is a critical part in our efforts. >> would you allow me one more question, madam chairman? >> absolutely. i think this is absolutely critical and was going to be part of my second round. please. >> you're a good sport. i appreciate it. let me ask a couple of miranda questions, because i'm seeing and reading everything -- >> wait a minute. >> -- that's going on. is it true that every american has the right under the fifth amendment to a miranda warning? >> yeah. the supre court in the dickerson case, when chief judge rehnquist was arrived live in a decision, said the miranda warnings were of constitutional

dimension and struck down a federal statute that tried to get around the earlier miranda ruling that was first established by the warren court. the rehnquist court said that the miranda warnings were of constitutional- >> so thisis now well-established that every american under the fifth amendment has this right. >> that is the way in which the supreme court has interpreted -- >> is there any exception? >> yes. there are exceptions to miranda and that is one of the ways in which we conduct our interrogations of terrorism suspects. it's what we did with abdulmutlab. >> could you concentrate on the national security exception? >> yeah. there is what's called a public safety exception. it comes from the quarrels case and allows a police officer and federal agent to question a suspect,otential defendant, a terrorist, for -- in order to protect the public safety, to ask questions such as are you

acting alone, are there other bombs that we need to be worried abt, are there other people flying in who are going to be helping you, ings to ensure the publ safety. we are allowed to ask those questions without giving miranda warnings and with regard to abdulmutallab and also with regard to shahzad, we mde extensive use of the public safety exception befe a decision was made to give them their miranda warnings. >> now, difficult question. according to process and precedent, what is the vicinity of time that that you call the public safety, i call it a tional security exception, can last? >> that's not really been defined by the courts. it is not -- it's not a prolonged period of time but i will say without getting into too much detail, that certainly it has been publicly reported that with regard to abd abdulmutall abdulmutallab, there was a

one-hour interrogation period under the public safety exception and useful, valuable intelligence was gained in that one hour. a lot of people have said you only spoke to him for about an hour, they say 50 minutes. withourecognizing that in that period of time, qualified, experienced fbi agents can elicit really substantial amounts of information and again, without getting into too much detail with regard to shahzad, the questioning under the public safety exception far exceeded the amount of time that we had with mr. abdulmutallab. >> is it fair to say that process and predent take that to around three to six hours? >> i don't think -- the courts have never really said exactly -- >> courts have not said. >> -- how far you can go. >> prior use. >> i think that as long as you are asking questions, appropriate questions, probing about public safety issues, i think the courts are generally going to be supportive and we have asked those questions, i think, appropriately. minding the dictates of the

supreme court in the quarrels case, and as i said, with regard to shahzad, really made use of that exception to elicit a very substantial amount of information from him before the decision was made to give him his miranda warnings. >> could shahzad be declared an enemy combatant and if that were to be the case, could heetain counsel and overturn the decision? >> he could certainly retain counsel in whatever forum he was in to try to challenge the decision that was made to not give him his miranda warnings. one of the things that -- >> what would be the likelihood of his succeeding? >> well, i'm obviously an advocate here but i think on the basis of the way in which the interrogation was done here and the care with which it was done, i don't think he would be ver successful. >> you do not? >> no. >> everything i've seen says he would have a high chance at

being successful beuse he is an american and that seems to me to be a heavier prior rit. >> i'm sorry. i didn't hear the question. no, what i was saying is he would not be successful in -- i was saying he would not be successful in trying to say that the interrogation that was done was done inappropriately. that was what i was saying. he would not be successful. >> in other words, declaring him an enemy combatantould not avoid his basic right? yeah. i think, again, the courts have not totally weighed in on -- in all of these areas, but i think the courts have really kind of indicated that there are certain basic rights that are going to apply no matter what forum you are in. it's a very big misconception that somehow or other people have far greater rights, terrorists have far greater rights in the article three

courts than they would say in the military commissions. under the reformed military commissions act, there are substantial procedural rights that defendants have. it's one of the reasons why this administration feels comfortable in using either military commissions or the article three courts. there is not a distinct advantage that people get, if they are in the article three courts. we have seen that we have successfully prosecuted over 300, close to 400 people who were charged with terrorist offenses in the article three venue. >> thank you. thank you, madam chairman. >> we could pursue this li of questioning but we have another witness and i have one other substantive question, then something related to maryland, then we will go to the inspector general. attorney general, one of the issues that we are deeply involved in, whether it's the judiciary committee, the intel committee or appropriations, is

cybersecurity, and we regard this as one of the greatest threats facing the united states of america, and as we examine it, for example, the task force that i'm on, we're looking at governance, technology development to maintain the cybershield, the development of a work force to be able to be involved in this, and then there is the issue of civil liberties. my question is, this goes to the justice department, in the area of governance and civil liberties, there are new definitions that are going to have to be developed because essentially, the mother ship of most knowledge on protecti lies with the national security agency whose job is to protect dot mil and our military options but there is dot gov, dot com, there is the power grid. has the justice department been tasked by the white hous to look at, i'm not going to go

into the policies today, that will be a subject of other hearings and otherforum, but has the justice department been tasked by the white house to begin to look at what are some of the laws pertaining to governance and also, the laws of civil liberties where we have defined fisarules, we have defined firewalls which the military can't -- the role of the private seor seeking help from gernment, do they go to homeland security that doesn't have a lot to offer right this minute, or if they do, but they're getting it really from the dot-mil. could you share with us what you have been tasked to do? >> well, we certainly are tasked with the responsibility of making sure that the internet which is a great tool, is used in appropriate ways. one of the things that we are tasked with is making sure that on the one hand, it is not use

in a criminal way by people who would perpetrate frauds, by terrorists who use it to spread the -- their ideologynd potentially radicalize people and also, they use it in an operational way. we are also tasked with the responsibility of making sure that we do this in such a way that people who are on the internet, who are online, are protected. for fiscal year 2011 -- mr. attorney general, i'm not asking that. i'm asking about the law and the fact that every report that has been issued says the law is now either gray, dated or nonexistent on this. we have mr. schwartz, a very capable professional, the white house czar. we don't know who in the hell's in charge. that's number one. number two, there are these issues where the private sector is really apprehensive about the ongoing attacks on them. google comes to the national security agency.

that's really new ground. so we want to, as we look at this, protect -- we have to have a kind of legal framework also to be able to define what are the parameters, how can various sectors in our government, do we maintain the current structure, do we look at it. ha you been tasked to examine this inna comprehensive way? >> well, we are working with our counterparts in various parts of the executive branch and working with the white house as well to deal with the issues that you have raised. we are concerned about intrusions, we are concerned about privacy, both for corporations as well as individuals, and we also want to make sure that theaws that we have on the bos are up to date to deal with this new reality that we confront. many of these laws that we try to apply in this cyberage are not necessarily consistent with the threats that we face in a variety of contexts, so what we have tried to do is to look at the laws as they exist.

we have people within t justice department, in our criminal division, and in other parts of the department, that are always coming up with suggestions that we take to the white house and then would obviously work with congress -- >> i'll be honest, mr. hder, i'm not looking for suggestions. i'm looking fo a comprehensive effort tasked by the white house to the attorney general's office that says you've got to put a team together and look at this and give the white house a report and give the congress a report to see if we have to move in a direction. has that entity or something similar to it, i don't want to get lost in semantics, or is it kind of we look at one area and we look at it in another, because that's been the problem. >> well, again, i would say that there is -- that comprehensive effort is run through the white house and in conjunction with the other branches of -- >> but you are the president's lawyer. you are america's lawyer. any new legal framework must come from the advice, counsel,

legal memos, et cetera, from the attorney general's office. or am i wrong? >> no. we certainly play a big, substantial role in that, bills that go through, suggestions that are made all have to be vetted in the justice department to make sure they are legal and our office of legal counsel looks at proposed legislation in that regard. >> well, i would like your team to talk more extensively to senator feinstein and i, and about something we might ask of the president and so on, rather than i don't want a line item in an appropriations committee directing it. but there needs to be clarification of governance and there has to be clarification and perhaps new law in this new world that we have to protect the american peoe. you did a great job, when i say you, everyone that got the times square bomber. there could be somebody out there right now that's got their eyes on the grid or any number of other things. we have to have our legal framework. meeting with entrepreneurs,

they're stealing our secrets from the patent office, they're raiding our ideas. the private sector needs all the help that it can get and we have certain constrictions that have served us well in the past, so we want to maintain privacy. we want to maintain civil liberties but we also don't want to be operating in an area where in our desire to protect the people, we have inadvertently made them or our entrepreneurial enterprises vulnerable. why don't we talk more about that, involving the intel and judiciary committee. >> that's fine. >> senator murkowski, i understand you have another question? >> i do, just one question. this follows up on some of the comments that have been made about the times square bomber, the recognition that in conjunction with the federal, state, the local law enforcement individuals onthe scene, it was an effortthat we recognize and

kind of in view of the fact that we've got national police week beginning next week, i think that it is a testament to the work and the coordinated efforts that go on. we appreciate that. but i -- as good as that was, i think there is a lot of concern out there about why the suspect was not apehended until the jet has pulled away from the gate. i come from a state where we all fly and we've got a level of scrutiny at our little airports in some pretty remote and out of the way places where people feel like the level of scrutiny and surveillance is just over the top, and they look then at an individual that has all -- he's triggered all the flags. yove purchased the ticket with cash, you've purchased it just immediately before the flight, international flight, all of the

indicators. one really has to wonder, where was the failing here, what happened with this watch list and senator mikulski has used the terminology the watch list is like nails on a blackboard. i think that gets all of us charged up as we talk about that, but we really do have to nder, why was he not taken into custody at the screening point, at the gate, in the jetway. it makes you wonder whether or t there's a lapse in communication then between the fbi and ntsa or perhaps between the fbi and other law enforcement agencies that are working at the airport. so the question to you this morning whether or not you are satisfied with the way that this take-down went or whether there are ways that we can

improve on this and then secondly, whether the take-down of a fugitive on board an aircraft presented safety risk to the other passengeron the airplane. so if you can just speak to that end of this issue. >> i guess in direct response to your question, i'm never satisfied even with an operation like this one, which i think we all have to understand was successful. the person who was responsible for placing that bomb in times uare was apprehended in a relatively short period of time. now, i don't take too much from that. we were successful here. it does not mean that we don't have to continue to be igilant. there will be other attempts and we will have to make sure that we are up to the task. we were successful here, but am i satisfied, no. we have to always look at our failures, our successes, and figure out ways in which we can in the next occasion, be even

better. here, the tsa has already announced that it is going to make changes with rerd to how often airlines are required to look at changes that are made on the no-fly list. it was 12 hours. they will move it down ttwo hours. so that it is, if that change had been in effect, it's possible that he would have been caught before he got on the plane. with regard to the take-down -- >> can i ask you about that, though, because i have -- you purchase a ticket at the last minute to go home, i purchase it on my credit card, it's not ca, and yet i am subjected even as a united states senator, i'm subjected to the full-on screening because i've purchased a one-way ticket at the last minute. ll me why, given all of the red flags again in this particular instance, why we were

relying only on that watch list, on that no-fly list. was there not sufficient information to cause furth questioning? i think people are really concerned about how he was able to board that aircraft and have that aircraft actually leave the jetw before we were successful in apprehending him, and we're pleased that he was -- he was stopped, but we all have to wonder how did he get on that airplane? >> well, as i said, we have to look at this successful operation and determine how we can do it better the next time. but again, i go back to the fact, the foundation here is that the effort to determine who was responsible for the placement of that bomb and his apprehension, we were successful in doing that in a relatively short period of time. the screening that ges -- that people go through, he was not

while on the plane necessarily a danger. he wt through all of the metal detectors and all of those things. the information that was passed to tsa was done in a way, under a system that is now in the process of being changed. in recognition of the fact that as we look ev preliminarily, as we look back on what happened with regard to him, that we already have noticed there are things that we eed to calibrate in a different way and those changes have already been announced and are being instituted. >> i would like to help the senator from alaska out. we're really grouchy about the watch list and what happened. we were really proud of law enforcement because they knew ere to go, but when you have a bomber that we know is loose in america, we often presume they want to get out of america so there should have been a significant kind of red alert for the methods for leaving the

united states of ameri, particularly when you're in new york. you either go north or you get on an airplane. so the northern border should have gone on red alert. tsa should have gone on red alert. somef these questions, senator, i think were also appropriate fothe secretary of homeland security. that's the tsa part. but the president of the united states was volcanic after the christmas day bomber and ordered significant reforms..o cf1 o once again, the watch list seemed to be dysfunctional. >> well -- >> are you in charge -- who's in charge of the watch -- who's in charge of watching the watch list that they really do watch and who's in charge of the watch list, making sure we use the watch list? >> well, the information that we were concerned about him was shared with many hoursefore i guess he actually got to the airport, but what i would say is

this. there were, as i indicated to senator murkowski, we learn from the experiences we've had and changes have been -- have already been instituted with regard to the watch list so that if we were faced with a similar situation, i suspect that we would have detected him earlier than we did. but again, as i said, i guess at the press conference, i never was worried about whether or not we were going to apprehend him, ven all that had been done with regard to the surveillance that we had of him, the notice that we gave to the airports in advance to look out for him, and as a result of that notification, of those notifications, he ultimately was apprehended before he left the country. >> madam chair, can just ask -- >> because i do hav to move on. >> i know. this is just very quickly. it's prompted from something that you have said. we have instituted in this country this amber alert when a

chilgoes missing, and there is a network around -- >> right. and it's worked well. >> and it's worked very successfully well. it would seem to me that if we can have a system like that when a child is missing, that when an incident happens in new york, that instantaneously, there is alert that goes out again to all of the exits, whether it is the border exits or the airports, and just seems to me that we can be doing more. i look forward to working with you, attorney general. >> first of all, i want to thank you for the question. second, the president's got to give us a tsa nominee that we can confirm and then we have to stop screwing around with holds i think it would go a long way. tsa needs permanent, vigorous leadership. u're not the head of tsa. but i bet the president's pretty proud of one group of

government, but after the christmas day bomber, he did order significant reforms and the watch list issue and the tsa issue does not seem to have been one of the areas that have quite clicked in. so that's not for today. we're going to excuse you. we have so much to talk about from the third war border on our southwest border to the war that's going on against ou children. we have a terrible situation in maryland with another violent death on a college campus. all these things which we can talk about, but your justice department is working hard to be working with locals on so many fronts. we want to say thank you. i do want to raise an issue specific to baltimore and to maryland. you might recall, mr. attorney general, that a young fire cadet, rachel wilson, died tragically in a training

exercise two and a half years ago. they have filed for the appropriate federal benefit and the public safety officers benefit program. it took a long time to even get a hearing and to get the attorney -- the a.g.'s attention. now there was a hearing on january 20th, there was additional information, it's now been 90 days sincehe hearing. the family's had no contact. they're really frustrated. it's one thing to lose someone you love in a training accident where government failed her then and we cannot let government fail her now. i'm not commenting on the outcome of the decision, but i would like a well-paced decision-making process and contact with the family. could i have your assurances that you will look into that? >> you have my personal assurance that i wl look into that.

the concerns that you have raised are ones that worry me as well. people who p their life on the line in order to protect the rest of us i think are owed a special obligation and the families, the survivors of those people are deserving of i think special attention. i will make sure that i examine where that case is and to the extent that i can speed it along, i will do so, or work with you if there are legislative ways in which this matter might be ultimately resolved. however we can do it. >> i appreciate that. i know you will bring sensitivity and expedition to this. excused. >> thank you. >> we look forward to working with your team. we're now going to call up mr. glenn fine.

as mr. fine comes to the table, we want to note he's the inspector general of the department of justice. he was confirmed in december 15th, the year 2000. he has worked there and been extensive history -- he has worked in the office of inspector general ever since 1995. so we just want to thank him first of all for his service, and as you can see, there was so much we had to go overnd the vote also delayed it, but mr. fine, it is the hope of this committee that we function in a very fiscally prudent way and we look forward to your testimony in terms of what you think are things the committee needs to be aware of in the area of management, that we could encourage management reforms, if

appropriate, and then also where you think we could have better spending. >> thank you chairman mikulski and members of the committee. i appreciate your inviting me to testify about the office of the inspector general's oversight work related to the department of justice. in my testimony today, i will focus on significant challenges facing the department, as you consider its fiscal year 2011 budget request. overall, i believe the department has made progress in addressing many of its top challenges, but improvement is needed in important areas. first, the department has made progress in its highest priority, counter terrorism. but the department continues to face challenges in this area. for example, last year, the oig issued an audit report examining the fbi's practices for making nominations to the consolidated terrorist watch list. a failure to place appropriate individuals on the watch list or a failure to place them on the watch li in a timely manner

increases the riskhese individuals are able to enter or move freely within the united states. our review assessed the accuracy of the watch list and the timeliness of entries made to the watch list. we found that the fbi did not consistently nominate known or suspected terrorists to the consolidated terrorist watch list and did not update or remove watch list records as required by fbi policy. in response to fbi's made progress addressing our recommendations including the development of a training course to ensure all counterterrorism personnel are familiar with the current fbi watch list procedures, improving internal controls to ensure that known or suspected terrorists are nominated to the watch list and also ensuring that watch list records are modified or removed as required. while the department's highest priority is counterterrorism, it must also focus attention on its traditional law enforcement functions, including the investigation and prosecution of financial crimes, cybercrimes and violent crimes.

one critical issue for the department is how to allocate its resources among these competing demands. for example, the oig is regularly revvewed how the fbi allocates and utilizes its personnel resources. we issued last month an audit that determined that in 2009, the fbi had used 26% of its field agents on counterterrorism matters while it used 51% on criminal matters. a review determined that the fbi actually used its field agents in line with the allocations it had made to its highest national priority, including counterterrorism. however, we found that the fbi used fewer field agents than it had allocated to some other national priorities, including gangs and criminal enterprises, white collar crime and violent crime. in order to maximize the effect of its resources and counterterrorism and other areas, it is important the department components coordinate effective wli each other. one of our recent reviews found that jurisdictional disputes occurred between the fbi and atf in explosives investigations and

that both maintain separate and uncoordinated explosives related data besand training programs. in pursuing its counterterrorism and law enforcement missions, the department must also balance its responsibility to protect individual civil rights and civil liberties. this issue was highlighted by several reviews we conducted regarding the fbi's widespread misuse of national security letters. in response to our recommendations, the fbi and the department have taken action t seek to ensure that such misuse does not recur. restoring confidence in the department is also an ongoing challenge. in the past several years, the department of justice has faced significant criticism for alleged misconduct in prosecutions, the dismissal of certain u.s. attorneys and politicization in the hiring of career attorneys. while these issues involve a small number of the many important responsibilities the department handles, they can affect public confidence in the objectivity of the department. the department also faces challenges each year in managing

the award of more than $3 billion in grant funds. this challenge was heightened when the recovery act provided the department an additional $4 billion in grant funding. the department must distribute this large amount of grant funding quickly and effectively monitor the use of these grant funds while continuing to manage its other grant programs. the department also has ongoinn challenges in managing information technology systems and in ensuring that its i.t. planning, development and security measures maximize the effectiveness these expenditures. a major challenge in this area has been the fbi's development of its sentinel case manement project. the oig has issued a series of reports examining the fbi's ongoing development of sentinel. in our latest report, we identified significant concerns about therogress of sentinel. the cost of the project is rising and the completion of sentinel has been delayed. while we beeve that sentinel can succeed, it will take close scrutiny and careful oversight by the fbi to minimize any

further schedule delays and budget increases and to ensure that the final product meets users' needs. my testimony also discusses other challenges for the department, such as safely and economically managing the bureau of prisons' rising federal inmate population. in conclusion, the department has made progress in addressing many of its top management challenges but further improvements are needed in immortant areas. the department must maintain its focus on counterterrorism while effectively pursuing its traditional law enforcement duties, protecting civil rights and civil liberties, restoring public confidence in the department, providing effective oversight of the billions of dollars in grant awards each year, ensuring safe and economic detention facilities and effectively managing information technology and financial management systems. these are difficult tasks which require constant attention and strong leadership by the department. to aid in this effort, the oig will continue to conduct vigorous oversight of department programs and provide

recommendations for improvement. that concludes my prepared statement. i would be pleased to answer any questions. >> well, thank you very much, mr. fine. as i said earlier when we welcomed you to the table, you have been at justice since 1995, am i correct, sir? >> that's correct, yes. >> so we really want to thank you for your service and we would like to thank the entire staff of the inspector general's office for the work that they do. as you can see, i intend to b a watchdog and a reformer in terms of the administration. it's not whether you're for big government or small government. it's are you for smart government. i think we're in alignment here. i'm not going to ask questions about sentinel but i will thank you for bringing that forward as an issue well before this hearing, this chair and staff have been actively involved with both the director of the fbi, the contractor and so on to make

sure that the original purpose, that sentinel does happen and happens thway it's supposed to happen within appropriate budget parameters. we're not going back to the boondoggle we had with the previous attempt. you heard today from the exchange by senato murkowski and even myself with the attorney general, this watch list issues. in your testimony, you say that the fbi needs to do more, you talk about in your audit report that you made 16 recommendations to the fbi and they have improved nine, but we're all deeply troubled by this watch li, and the watch lists don't seem to be working the way they were intended. and you know the story, in this case this man got on this plane when there was active hot pursuit going on.

the same time i know in my own state, there is a prominent businessman who travels to the west coast every single week at the same time, getting on the same plane, everybody knows him because of the regularity of his habits, because of his last name, he's on a list and he has to go through it like he just arrived in the country and is paying cash for every single thing in the world. so it's two sides of the coin. do you have any further thoughts on how we could make this more effective or given in light of what has happened over the last couple of days, where some things worked well in a spectacular way and others really raised some flashing yellow lights, like the watch list. >> we have done a series of reviews on the watch list and we have had concerns about it, both -- in both areas that you talk about, making sure that people appropriately are put on the watch list in a timely fashion, in an accurate way, and

also that people who shouldn't be on the watch list are taken off. we found problems with the fbi getting people on quickly and also accurately putting them on. in fact, our review found that 15% of the fbi terrorism investigations we reviewed had failed to nominate terrorism suspects to the consolidated watch list. that's unacceptable because it increases the risk that these people can move about freely. so we think that needs to be done more quickly. we think also the information needs to get to the front line screeners who need it in a quicker fashion, both customs and border patrol people, the individuals at the airport, and one of the things that we looked at a long time ago was the issue of secure flight and who is going to actually be doing this screening, the people on the manifest of the airplanes and now it is with the airlines. my understanding, it's moving towards the tsa who will take over that responsibility and hopefully with that, there will be more expeditious, quicker and effective screening of those passengers before they get on the plane.

>> well, in light of what has happened, i think there's going to be a lot of recommendations and we would welcome your views on that. let' go to the issue of grant disbursement. we want it to be fair, meet criteria and be done in a timely way. we have asked them to do what, i think you said $3 billion? >> $3 billion each year. >> that's like 10% of the government's funding, and i know at another hearing, our colleague senator mccaskill raised issues about how in the previous administration, the grants were handled and so on. i'm not here to finger point. i'm here to pinpoint. are there things that we need to encourage through the appropriation process a way that -- to improve the grant disbursal, the grant management process? >> i think there are some things that the department can do to improve and that this committee

can spur the department to do. i think it's important to get that money out but it has to be used effectively andhere has to be monitoring of where that money goes. so we need to have a fair and open process, there has to be documentation about why we're giving it to one person or the other, not simply discretionary subjective views, and that when it goes out there, there has to be training, how it's to be ed, there also has to ben assessment of whether there's high risk grantees that need extra monitoring and extra training to ensure that that money is used appropriately. ojp, office of justice programs, has an office of audit assessment management. that should be an internal screening mechanism to go out and do monitoring, to make sure the financial reports are in, to make surthat the money is used for its intended purposes and is being eective. i believe ojp has made progress in beefing upthat office but it ought to do more of that. it shouldn't wait for the oig to come in and find problems. it ought to prevent the problems in the first place or find problems on their own, and not wait for an outside entity like

the oig to find problems. so i think that's a critical area. >> could i -- you think it's an issue related to staffing, training or culture? >> i think it's all of the above. all of those. it's not been staffed up adequately, i don't think. i think the culture has been in the past to get that money out quickly, but not to ensure that it's being used appropriately. i thin that's changing with the new head of ojp. but i also think that there needs to be training on that money as well, and not simply expected it will be used appropriately. >> you know what i have found, you heard me raise some of the issues with making sure we have law enforcement, that it's not only putting quote, boots on the ground, we often in congress will provide money for staff, but then not for training or for technology that maximizes the efficacy of what they're doing. would you say that this is an ar we should focus on which is

not only the adequacy of people, but that we really look at training and the -- well, of course, the technology issues in the government are a whole other one, but would you concur with that? >> yes, i think there does need to be adequate training. that's a core function of what these grant-making entities need to do, not simply to g that money out there, but to train people how it's to be used, an how it's to be used effectively. it only takes a small percentage of that $3 billion to be held back for adequate management and oversight to have effective use of it. i think there ought to be a small percentage of th to go for effective management, to go for training, to go for adequate oversight by -- internally by the department justice and also by the office of the inspector general. i think that's an important thing that should be considered in the appropriations and makeup of those grant programs. >> well, thank you. there are other issues that we want to talk about as well with you, particularly in the area of the detention of prisoners.

and you very rightfully brought forward that when weave the responsibility of holding people in incarcerated situation, the issue of violence against prisoners and then concurrently also violence against prison officers, are deeply troubling. we're going to ask my staff to talk with you in more detail about that than today. but you know, i want to ask a queson where it sounds like senator mikulski meets senator coburn. one of the areas where we absolutely agree is where the federal government provides funds, but we end up in conferences where it's 66 bucks per person toprovide bagels and i was at a communitity fair and there was something that someone gave me a little plastic shopping bag with the name of a agency, not a federal agency head, and said here, enjoy it, you paid for it.

well, that's not what i go to my taxpayers to ask them to do. there are a lot of -- and that's where we get a bad rep. that's where quite frankly some of the folks who are cranky with government have every right to be cranky. you know the famous $4 swedish meatball, i think there was some extravagant spending at at conferences and so on. how does the igc getting a grip on that? i do believe in conferenceses. you go to like the gang conference that we have? maryland with the support of the u.s. attorney and all of us at the local level, and they really do share information and further those important relationships that are so critical in law enforcement for rapid response and so on. but, you know, $66 for a bagel

breakfast is a little high. >> you're sligabsolutely right. and we did a review of conference expenditures and those found those ob babuses. you don't need lavish spreads and we were concerned by that. we found $ meatballs, a can of soda would cost $4.50 they'd charge that one can of coke. and as a result of our review, the department has implemented oversight procedures. they made sure that the funding for meals is at a reasonable level. they made sure that there are alternative locations or that it's done in an economic fashion. they look at the per diem cost. so i think ther have been reformed made as a result of the issues that were bruought to th

table. but you're absolutely right, you don't need that kind of funding or that kind of excess to have an effective congress and i think the departmt of justice has a handle on that. we're doing a follow-up review, we're about to initiate one, to see what reforms have been made and do they have a handle on this. >> we estimate that we won't be mashing up our bill, of course, until june waiting for the house. but we'll look forward to your report if it comes again. and that's all part of our smart government initiatives. and, again, i am for conferences, the kinds of meetings that occur. i think that's the only way that you can do training and i think you would concur in your many years at justice where law enforcement, particularly at the state and local vel, can come togeth and form those relationships that work so well. you know, after the terrible

events of 9/11 and our local law enforcement ash tround the belt which meant maryland, virginia, the district, really developed much more close relationships. an along comes something like the terrible sniper case. remember that? you're a local guy. but cause they knew each other, talked with each other, trusted aech other, we didn't have to federalize our response, that the local -- because they had been trained, equipped and trusted, we were able to bring that smniper to justice. so i believe in the training and came madry that comes. so i want to say thank you and we'll have other ongoing conversations with you. and you have to know we really to appreciate the work of the attorney general and if you could convey that to your staff, i in speaking for senator shelby

himself as a watch dog on these issue, we would very much appreciate it. good tha . >> hang you very much. >> before i conclude, i want to resit rate the fact that senator shelby wanted very much to be here's mightave additional questions for you and we invite his staff if there are any other. if there are no further question, the senators may submit additional questions to the subcommittee. we request the department of stice's reonse within 30 days before because of so ma controversial issues in the committee, would he resere rese to hold ongoing hearings. so the committee will stand in recess subject to the call of the chair in cooperation with the ranking member. we're in recess.

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[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> people could have been preventing this crisis for several years. and they have lost a lot of money. and this is just foolhardy, to tie up imbalance sheet, no matter how high that the rating

is unless this is the u.s. government security. >> and they have tied so much into the mortgage market. when i want to know is, what is the weight of the securities -- they take down the options and the securities markets, -- >> i understand this. >> there are institutions that have too much of the paper. the way to think about this, i think this is critical. the subprime market was a relatively small -- was relatively small relative to the u.s. economy the problem was much bigger. this was more broadly across the

markets. we have the analogy of the desert. there is a lot of dried timber out there. subprime was where this started. but there is a lot of other things happening. this is really what happened. a lot of these things were coming together to create this crisis. >> in terms of the ratings agencies, we have legislation in the house and senate. are you familiar enough to have an opinion about whether or not this is useful were directed affectively in dealing with the ratings agencies? >> in terms of the ratings agencies, and that part of this, i agree with one part of the legislation, and i think that this is controversial to sudden -- certain people.

i think that, no matter how these agencies are regulated, we have more -- we need to have more regulation and more disclosure, around the ratings agencies. i do not like the fact that we have several ratings agencies that are enshrined in the securities laws, and -- the ratings are referred to. i think that this is just a dangerous crutch. i think that too many investors, too many banks, they rely overly on the rating. i am for this agency and i think that this should be independent and they will give their advice like the equity research houses, and the investors need

to look at these as one tool. i do not like the fact, and i support the legislation, that would take reference to the credit ratings of these securities. >> there would be an office to administer the crediting rate -- the credit rating agencies rules and practices. >> i think that this is cool enough. >> there is the seven-member advisory board for the credit rating agency. >> i have not really thought about this. >> you could possibly get unanimous. they would require a measure of certification that diligence has been done by somebody. but neither one of them is talking about who was going to pay for this and the structure. this is going to change outside of the regulatory structure. >> well i would say this.

no matter how you regulate this, this needs more regulation -- this is not going to be flawless. this is hard to believe, that anybody, in the ratings agency is going to be able to see the issues that others will not. i want to get to something that is much more basic. i do not want for the ratings agencies to be held up and have these ratings be part of the security. >> my only question that is left, out of curiosity, why was there not more emphasis on the ratings agencies in your testimony? do you think that you gave this the right way to? >> in terms of the shadow banking, -- >> you give the overview at the beginning of your testimony.

>> i wrote about this in my book. i think the ratings agencies have made plenty of mistakes. and i think that this fell into the same place with so much of the rest of the world. the economic models did not understand what happened. >> everyone has been using this as an excuse, not knowing what they were holding. >> clearly, the ratings agencies, i made a number of strong recommendations, before bear stearns went down, about the working group and the kind of disclosure that you need to see from the ratings agencies, and the processes that they will need to run. i was trying to get to an answer that was more fundamental than that. i do not want to see a situation, ever again, where a

lot of sophisticated people are able to say that this was not their fault. i want for the investors and the big banks, the regulators to be forced -- they can use the rating as one tool, but they should do some thinking for themselves. >> may ask you if you will respond in writing to any other questions that the commission may be having as we move forward? >> i hope that you will understand that my staff now consists of one assistant. i will respond. >> we will try to write questions that will be answered by one assistant. thank you. >> thank you. >> thank you very much, and i want to express my thanks to the

secretary for being willing to meet with us, to help us in the investigation. the first thing i want to ask you about is the over-the- counter derivatives. i agree with you that derivatives are extremely important instruments in dealing with risks, and they play a great role in that. but nonetheless, the derivatives market has grown to more than 680 trillion dollars in no small amount by the time of the crisis in december 2008. this was virtually exempt from federal regulations and oversight because of the statute that was passed in 2000, the

commodity futures modernization act, which was eliminating jurisdiction of the federal agencies over the market. and i was wanting to ask you if you reviewed the regulatory gap and of this played a role. and you said that derivative contracts, including the deceptively complex financial products made the problem worse during the financial crisis. i was wondering if you could elaborate on that? >> i think what you have said is well-taken. and the chapter that was referred to, where we had that first conversation with the president about the potential of a credit crisis. when i was talking about is the over-the-counter derivatives.

and we were just talking about this being outside of the regulatory review. and at the time, the right protocols were there to see how they would function in the crisis. there was trade that was not booked, and there was a lot of work that was being done by the fed and i was very supportive in terms of pushing the industry. i think that -- first of all, these products did not create the crisis but they magnified this. and i think not only in the way that has been written about, the injured-connectivity. in terms of masking their risks. they were so complex and difficult to understand.

certain regulators said that the system was not that leverage. and they said that they were only looking at the debt, and not was in those products. that is why i strongly believe that standardizing is in everyone's interest. and the way that you get to simplicity, complexity in general is the enemy. it is very hard to regulate against complexity and innovation. the way to do this is that you take everything that is standard, in the exchange, and then you put this through a central clearing house and then you have great oversight, and if this is complex, you have major capital charges and you help to

move to a greater standard. and i think that this is the right way to deal with this. and i think that you are correct in terms of seeing this as a concern. the people who say that this is the fundamental cause, this is wrong. this is something that will need to be fixed and i believe that there is legislation that is there to fix this. >> with respect to the remaining markets, with the regulation that would put the standardized contracts on to the exchange, do you advocate more transparency for the markets? >> this would solve so much. and it -- as you know, the regulators had no idea. general motors is an example.

everybody knew that the bonds were outstanding, but they did not know how many credit defaults contracts were coming out of general motors. >> or about the exposure. >> to me, i think, fortunately, this is now understood by everybody. >> let me ask you about the political influence and the power of the financial-services sector industry, leading up to the crisis. there is a report that indicates that the financial sector may have spent as much as $5 billion in lobbying expenses, federal lobbying expenses and -- expenses and campaign contributions leading up to the

crisis. and in 2007, there were almost 3000 registered lobbyists, and they were in washington and they had been hired by the financial sector. i wonder if some of the regulatory issues and weaknesses that we saw may have been contributing to this effort to influence federal policy. >> i cannot comment about the impact of congress. but i do know that it is very difficult, to get anything that is fundamental or controversial through congress without a crisis. there are a lot of issues with jurisdiction, and what i saw, in

terms of the regulators, i was just seeing the regulators who were seriously working to gather the information. and if a man from mars -- if i had to explain to somebody from mars about this. you know how this was regulated. and why they're regulated these institutions and why there was not any regulation with access to all the information in the market -- i could never explain this. and so -- i have no doubt that lobbying -- you would have to talk to other members of the panel closer to the political process. >> clearly, there were regulatory weaknesses, in terms of the oversight -- oversight of

the shadow-banking areas. and, did you think that the effort to by the sec, to create a consolidated entity program for the investment bank holding company was a step in the right direction? >> at the time, i did it when i was on wall street and the people that we were working with with the sec were of higher quality. and in government. i think that there are some strong professionals who were working very hard, and very diligently. and i look at it from this perspective.

and i simply say, if i get up to 100,000 feet, we all make mistakes. if you look at the regulatory mistakes, clearly, from the bankers and the investors in the difference participants, i never doubted the confidence and the professionalism, that the regulators at the sec, who had just -- -- they had just recently evolved. and then we have this -- this tsunami. >> do you believe that going forward, we should try to eliminate problems with the regulation? >> this is what i believe, going forward.

i think that these complex financial institutions need to have a uniform approach. they need to have tough, consistent regulation. this is without being able to find nicks and crannies. and in terms of shadow banking, -- a big reason that i recommended this concept was that somebody needs to have the authority, and the ability to gather all of this information that is necessary so that you can look at these big, systemic issues. and i would think that the systemic risk regulator would have more authority to deal with the over-the-counter derivatives. and they would have the authority to deal with this market. >> or with the institutions like aig?

this was not really seen affectively. >> this is like a holding company. this is an institution that was able to build itself up, by playing for the system. >> the questions -- one of the questions that i have is in the observation. obviously, there were problems in supervision, even with the bank holding companies, in terms of the biggest institutions. and today, some of those holding companies are even bigger than they were in 2008. this is because the businesses have gone out of business. and for the other reasons -- are these institutions capable of

effective supervision by government regulators, and are they capable of effective internal management, in your experience at goldman sachs? could disinform this issue? >> i would say, the level of concentration where we have big institutions with 60% of the financial assets. this is dangerous. now these institutions are necessary and they perform a valuable role. so the way to get your question is this. i would say that i know that we can have better regulation. absolutely, and more consistent, better capital requirements, the requirements with liquidity.

and then i come to the conclusion that regulation is never going to be perfect. unless you say that they wanted to blow themselves up, the regulators will always be able to find a problem that they will not be able to find themselves. and there will continue to be failures. there have been, since the beginning of capital markets. institutions have failed. that is why, in addition and -- in addition to strengthening this, we have the resolution authorities so that the government has the authority, that when a big institution fails, to step in and outside of the bankruptcy process, winding this town, in a way in which you are not saving in your proping this up. the expectation has to be that they are liquidated. and you can train the regulators to do this.

and that is why i am big proponent of this concept. these major institutions work with the regulators to create a road map for liquidation if they fail. and this is because -- again, you will never get perfect regulation. but i do not think that the american people -- they do not want to see the taxpayer come in and bail out these institutions. we have to have a way to liquidate these, in no way in which they do not hurt the american people and affect the system. we can never -- regulation -- we should strike -- we should try to be as good as we can and give the regulators the tools that they need, so they will be correct more often. but there will be failures, and we have to know how to deal with

this so this does not hurt anyone else. >> another few minutes. i just wanted to follow up with you, with these specific examples, by goldman sachs. you are very familiar with what goldman sachs is like. and what is involved. do you think from your experience, as the leader of a major institution like goldman sachs, that this is capable of an orderly winding down in case they go into financial problems? >> i think that any institution can be brought down -- and this is complicated -- over time. in the middle of a crisis, there

is no institution, no matter what the capital says, you have to liquidate this right away. and again, my understanding is that with any institution, there has to be a way that, if they fail, the expectation is that they will not be propped up in the current form. they will be changed and liquidated. and i think that this can be done. >> thank you. >> thank you. and thank you for joining us today, mr. chairman. i want to go back to the idea that this was inevitable. if there was no housing crisis,

this would not have happened? >> this history in this country, as it stands, and certainly in modern times, this is every six or two years. there has been some crisis. we could go into the savings and loan crisis, or 1994 and 1998, the long-term capital that we had. this is in russia and asia. and we have these, so -- what i saw was installed in the system. i could have said the same thing

in 2004 or 2005. and it would have been wrong in terms of the time. and what i saw -- and i did not realize how true that this was, the difficulty with the interesting thing is that we will see how these instruments of some of these private pools of capital -- will take us away from the traditional financial institutions and how they will perform under stress. because there has been a lot of change and so, we saw a lot of this perform under stress. i think as surely as we are sitting here today, the next crisis is inevitable. but there will be stress, and problems in the capital markets.

this is some time in the future, in other lifetimes. the important thing is out to have these be relatively small, manageable events. we see these rights in the middle of the markets. these are small, manageable thence to the rest of us. >> the signature of this particular crisis, this is the housing market? and you agree with that? you see that there are very -- there are several policy decisions -- policy decisions affecting the mortgage market. >> i think that you would need to look at this -- you would have to look at this series of decisions that we have made. the different programs with housing.

this is the fha, the state programs, and he just takes something like the mortgage interest rate deduction. a million-dollar mortgage is a deductible. is this fair to the renters, i think that you have the some- total of so many things that were being taken up. i would travel around the world in the capital markets, and other nations were surprised that we had, ownership over 60%. and we were not happy that this was at 69%. you have to look at those policies as fundamental causes of the crisis. >> and he would have fannie mae and freddie mac on that list? you also said that shortly after you became the secretary of the

treasury, there was a briefing and you were told that this was a disaster that was waiting to happen. and he said the business model was fundamentally wrong. can you tell us exactly what these were, and why you think that these were a disaster that was waiting tappan? >> i did not picture this happening the way that it did. this was a phrase that i used -- this was prophetic, but i did not see this as clearly as it came about. in the terms of the structure, first of all, there was the ambiguity. there was the implicit government support and the congressional charter.

the private capital and the private profits. the shareholders and the compensation model. there is a contradiction that is there. and this was a situation where congress was the regulator. they defied the capital. not only the level of the capital, but we count as capital. some things that were defined as capital where not capital. the regulators were set up to be weaker, not to be negative about the people who were holding that job, but they did not have the same position to make judgments on the capital. and then, the office was too big for this. this was just growing, and when you look at all of this, this is hard for people to comprehend

when we throw around these numbers. and then we have 5.4 trillion dollars, you have the securities -- there is just a danger. and when you look at the capital markets, the dangers that they pose are unimaginable. and we can talk about any single institution, but the danger that is posed by the lack of sensibility, with these entities to repay their debt was much greater. and then, the part in the book that you alluded to had to deal with their portfolio. this was a major topic of debate. this was not only making certain of the mortgage pools, they had a way to take the funding and get into these mortgages, to hold them.

and they said that this was necessary for the mission. two-thirds of the earnings were coming from this. and they had a duty to their shareholders. they testified on the hill about meeting the goals with housing. but they had public shareholders, and the duty was to grow their profits. and as i look at that, i did not blame the people running the organization's as much as those who designed this before this went into the side of the mountain. this is a long structure. >> one thing that we heard yesterday was that, during the early part of things, bears stearns was having problems and the agencies and securities were no longer excepted for

collateral. and indeed, if you look back at fannie mae and freddie mac, they were showing clear signs of market distrust. i want you to walk me through the thinking, during this time, when they were actually committed to drop the limits on their portfolio. and they were losing this at a time when the markets -- these were not very safe. >> this is exactly the opposite of what you have said. working with them to get them to raise capital and increase the capital. there was a net increase in capital. they did not meet their commitment.

but to step back -- the specific question that u.s., to get back more broadly, what has happened is this. the credit crisis came in 2000 and seven -- 2007. most of the damage was done by that time. and after this, the mortgage lending was stopping away from fannie mae and freddie mac. there is all kinds of evidence of very responsible people who were borrowing, who wanted to purchase houses and they were having trouble getting mortgage funding. and so, fannie mae and freddie mac are the only game in town. and they were kneading -- i

believe that the problem was already -- this was the banks that loaned the securities and the portfolios, to guarantee things before the house and bubble burst. what we were doing in march of 2008, when we took the action that we took, with bear stearns, we were trying to increase confidence in these organizations and getting them to increase their capital. i was talking to many ceos of institutions, and i had never seen the ceo of a financial institution blisses job by having too much money. you raise money the way that you can raise money. fannie mae looked up to their commitment.

>> they were in the treasury, yesterday. forward, and you know about the financial conditions, you said that fannie mae and freddie mac gave you a weapon that you would never have to use. and shortly thereafter -- >> i never said i would never use this. when i got this authority, i was asking for an unlimited authority. i said this was unspecified. i wanted to have the maximum amount of authority. and then, i said, to the extent , we have the markets that will

reduce the likelihood that we will have to use this. what happened is that fannie mae and freddie mac -- we went to the regulators and did not have the regulatory authority. and it was not until we actually got this -- we got the authority. i was working very hard to get the emergency legislation before congress, to get the legislation from congress and then, the confidence in these entities. and there was certain. -- certainly some kind of risk. once we got this, i was able -- we had morgan stanley, working with the treasury. they were the adviser. and we had the fed, going in to

look at the competition. and it was only then that we were able to get information about the magnitude of the capital problem. and the fact that we have this authority, we could finally address the problem and do something about this. we have the ability to put in the capital. this is the starting area. >> i was also wanted to talk about bear stearns, and this episode itself. i was wanting to get your thoughts about whether they could have been allowed to fail. >> we heard about this yesterday. there was convincing testimony that the purchase of bear stearns said the expectation that other institutions would receive support. and it was very surprising when

this did not happen with lehman brothers. can you tell us about setting the precedent, having seen the intervention of fannie mae and freddie mac. >> commissioner -- we will give him five additional minutes. >> i would like to answer that question. in terms of convincing testimony, you'll never hear convincing testimony from anyone who was close to the market. this is what i would say. we have to look at the timing. bear stearns was rescued in march. and then, we get the emergency legislation on fannie mae and freddie mac in july. i believe that if there stearns had not been rescued and they

had failed, the meltdown that we began to see after lehman brothers would have started months earlier. and we would have really been in this because with -- when we look at this with hindsight, this was before they were stable. can you imagine the problems that we would have had? if they had gone -- there are thousands of parties that would have taken their collateral, and tried to sell the collateral, trading with even bigger losses. there was a huge concern about the investment banking model and this was because of the lack of oversight and access to the discount window. i believe that we would have seen other investment banks going very quickly. and those who make that

argument are missing one fundamental fact. as the chairman has said, the toothpaste is out of the tube. the crisis had been going on for seven months and the system was very fragile. they did not see excessive risk- taking or regulation. there were a lot of loans that were not made. the investors were afraid to purchase student loan securitization with the government behind it. the sovereign wealth fund, they came into morgan stanley and citigroup and they lost a lot of money. this was not like people were saying, they bailed out -- they gave money to bear stearns, and

now we can't let this happen to lehman brothers. the issues that they had were in positions that were already on the balance sheets. you could not be liquidating these positions. they would just have to be taken down with the economy turning down and as the price of houses was falling. and again, i think that you would have had a difficult time finding anyone to buy any institution -- if bear stearns had failed. >> and there is one last question. >> you talk about the investment banking model. the investment banks had voluntarily brought themselves to this capital standard.

this was required for the commercial banks in these companies. and by the standards of regulation. my question is, is there a difference in the performance of commercial against the other entities? >> i will tell you this right now. analytically, people throw on the leverage ratios. and if you have adjusted for accounting differences, setting the discipline of the market securities, i think that they were at least as well- capitalized as the commercial banks. and i believe that the issues -- this was an issue with confidence, and i think that

this started with a couple of the investment bank's in bear stearns and lehman brothers, and they had major exposure to the housing market. and bear stearns was not as diversified. and i believe that this comes down to liquidity management and liquidity questions. i saw the same lack of liquidity management, and i saw this across the board, with the banks and the investment banks. my comment did not get to the relative strength or the relative weakness. there was the concern and a lack of confidence. and when the market loses confidence in the entity in the middle of the crisis, it is hard for them to continue to exist. >> i will talk about something

that he mentioned. when we had fannie mae and freddie mac in front of us, we described the town law -- the time line that we have verified, to get into what is happening in that late february, early march timeframe. and this culminates around that weekend. let me see if i can describe this very quickly. there are concerns about the meltdown of the private side of the mortgage market. we had the big concerns about fannie mae and freddie mac, and you have said, publicly, that fannie mae and freddie mac or the game in town. but it looks like what happened here is that the portfolio -- fannie mae and freddie mac will keep lending into the market with a large risk. the deal that you are trying to

broker, i do not know if this is the accurate representation, involves landing in, having their capital surcharge reduced, instantly reducing their capital by 10% on the promise to raise more capital. >> and i would say this. i would say that they made a commitment to raise capital, aunt fanny mae raised -- >> did not live up to the commitment. there was more capital that was raised, and there was the deal in which the regulators were working with my staff -- this was lifting the capital surcharge to raise capital, and i just cannot say this strong with of.

this was to raise the capital. i object to the idea of landing in the head winds. i believe that what you will find is that the market's -- the markets have declined, dramatically, with housing prices than they were continuing to decline. everyone was aware of these issues. the losses that they had did not stem from this. they did not stem from going ahead and doing risky things, this had to do with what was happening in the housing market. and what had happened in all the loans that they guaranteed before that. >> we are going to have to look at this. it is clear that there are deep

concerns about an e-mail -- in which he will ride, they need to eliminate the negative rhetoric, and the regulators are not happy about this. they said, it is important to make this guarantee. this was well above the pay credit to double the size of the u.s. debt. a couple of days before the transaction, he says, this is perverse. we will work on the credit risks, the mortgage credit risk leverage, without new capital. this is my question. i am trying to see how you saw

those markets. there was a rescue involved with their stearns. at this time, you are striking a deal that will allow them to stay in the market. and you have major concerns about solvency. we are now in the business of a bailout. you think that things will get better. >> neither one. the bailout did not start in march. i cannot say this more clearly. this was about raising capital. the lawyer said that we had to wait till the second-quarter numbers.

we had gone and gotten the emergency legislation. this was solely about raising capital. what we were dealing with, we were dealing with a situation where the markets were on edge. they were the only game in town. this was not unique to them. we were pressing the financial institutions to raise capital. this was unimaginable. i had no idea that we were going to need to go to congress to get these authorities. and i had no idea that we could have gotten these authorities. remember, fannie mae and freddie mac were a political football. i have seen the reform affected four years, that we were working to try to get the authority that

we needed. and i had no idea that we were going to need to get these authorities, and the real experts would get their arms around the problem. and then we would get the tools that we needed to address this problem. working with what we had, without being the regulator -- we were asking them to raise capital. i think that this is the right thing. this was a sign of confidence, when they raise the capital. >> i think, given your single staff member, i want to follow up on this. they are also trying to understand the markets, the dichotomy that you face. and i will move on to the other members. this is between trying to stabilize the markets, against

trying to acknowledge, publicly, the state in which that you are in. >> i simply say this. what you need to recognize, and i will answer this in writing. treasury is not the regulator. we did not have the people or the authority, we did not have the capacity to really get in there. and so, what we were doing was telling them to raise capital. and it was only when the markets lost confidence in these authorities. we have the tools to get in there. and get our arms around the problem. >> thank you very much.

i would like to ask three questions relating to the lessons that were learned, because you say that this was not going to be the final financial crisis of this country. one of these relates to the continuation of bear stearns, and this is, when you face the issue of lehman brothers. you were, in addition to dealing with lehman brothers, you established a principle, and this was that bear stearns was not a precedent for all of the future circumstances, and that you were not going to rally the federal government to the salvation of reinstitution. what were the factors that cause you to make the case-by-case decision that they were not worthy of the federally-assisted

transaction? >> thank you for asking this question. you have written a book and answered this hundreds of times, and people -- we have had bernanke and tim geithner say the same thing. people still question us about this. the fact of the matter is that bear stearns faced liquidity in the capital problem. and we were very fortunate to have someone come in to solve the capital problem, to be able to guarantee the books that were being traded there during the dependency. and what we learned there, is that the government limited the authorities.

nobody had the authority to guarantee the liabilities of the investment bank. we did not have the resolution authorities. i spoke about the need for this. lehman brothers came along. and we were not able to get any bank to play the same role that j.p. morgan paid on bleaching played on bear stearns. we tried very hard to do this. and frankly, we were powerless. we were prepared for the bankruptcy. this is not what we did, intentionally. we just had the regulatory system.

>> the second area is the conditionality, of the funds to the financial institutions. this is for the other bailout practices. this is part of the perceptions of the united states, where there were few requirements, like the royal bank of scotland. we have limits on the dividends, so why is this not the same conditions for the u.s. buildup institutions? -- bailed-out institutions? >> we do not want the same kind of thing in the united kingdom.

we diagnose the problem of being a major capital shortfall in the banking sector. we have designed a program attracted to the healthy banks, and we want to come in, to participate. and this is preferred, so we will be like at nationalization, designed so that the government will get their money back. and then, this was the entire purpose of the program. interestingly enough, i was wondering if we would get a few thousand banks to participate. but right after the announcement, critics began to

say that you have to force them to go -- to start lending. you have to control compensation. understandably, many of the banks said that they were not certain that they were in favor of the deal. there were a number of banks that went back, and we had 700 that did not take the money. this prevented the tellabs and the government is going to get back the money, but i think if this was not stigmatized by the people who wanted to put different controls on this, there would be a few thousand banks which would have money for a few thousand years -- but the next few years to get the economy going again. they said the program did not work because there was not enough landing and people were stigmatizing best.

we were dealing with healthy banks, that would voluntarily come in so we are not trying to nationalize the banks like the british government. and we were tired of dealing with them when they failed. >> there was the perception in the public that one justification was to stimulate the economy by making credit available. and there was disappointment when there were perceptions that this was not happening. >> this was the entire reasoning and i did not say this. the reason for deciding this program was that so many of the banks would take this and went to capitol and they would be lending. this was the purpose. but as soon as we announced this, before the first banks cut

the capital, people were wondering why they were not lending. and now, if you are a bank you want to have this deal. and how his big brother going to make you --