>> today, retiring supreme court justice john paul stevens on the justice's life and legacy.%+ "america and the courts, today, at 7:00 p.m. eastern on c-span. . .

we are now on our third session of the day. it is the regulation of investment banks by the securities and exchange commission. thank you very much for being here today, gentlemen. as we do with all witnesses, we are going to swear you in.

arlen like to ask all of you to stand up and raise your right hand. -- i would like to ask all of you to stand. do you solemnly swear or affirm under the penalty of perjury the testimony you are about to provide will be the truth, the whole truth, and nothing but the truth to the best of your knowledge? thank you. gentlemen, thank you for being here. we appreciate you having submitted written testimony to us. we would also now like to give you the opportunity to provide verbal testimony of no more than five minutes. we're going to start with you. we will go from my left to my right. if you would please be in. thank you. >> thank you for the opportunity to testify today. this is the subject of the sec 's programs and the adequacies of the oversight of bear stearns

and other programs. i appreciate the interest of the office of the inspector general. i represent -- the accused are those of my office and not the views of the commissioner. the office of inspector general is to promote efficiency and effectiveness of the critical programs of the sec. this mission has become increasingly important in light of the economic crisis. our audit unit has issued numerous reports. one of the most significant reports we have repaired -- prepare the september 2008 analyzing the commission's oversight of the sec programs. we should this audit based on a congressional request based on april 2nd, 2008, from the ranking member of the senate committee on finance. he wanted a review of the market oversight of the first five of

firms with a special emphasis on bear stearns. they asked me analyze how the program was run and the adequacy of our monitoring of bear stearns. the audit was not intended to be a complete assessment of the multitude of events that led to its collapse. it did not purport to demonstrate any direct connection between the failure of the programs and bear stearns collapse. given the complexity of the subject matter, we retained an expert to provide assistance. professor kyle, a faculty from the university of maryland, is an expert on capital markets and has conducted plenty of research. the program's mission was to allow the commission to monitor for and act quickly in response to financial operational week is in a holding company for its unregulated affiliates that might place entities or the

broader financial system at risk. our audit found the program failed to carry out its mission in its oversight of bear stearns. bear stearns suffered significant financial weaknesses and the federal reserve bank of new york needed to intervene to prevent significant harm to the broader financial system. overall, we found there were significant questions about the adequacy of opera requirements given that bear stearns was compliant with several of the work requirements and still collapsed. prior to their collapse, the sec became aware of potential red flags about high leverage, risk- management, mortgage-backed securities, and the lack of compliance with international standards. we did not take actions to limit the standards. the audit found that certain procedures and processes were not always followed. the commission issued an order.

they authorized the internal audit staff to perform critical audit work including risk- management services. our audit found the division of corporation finance did not reduced their latest filings in a timely manner in identify 26 recommendations in tending to improve oversight. -- intending to improve oversight. rules on their and capital and liquidity rules, having external auditors look at their risk management control system, an automated process to track materials to ensure they are adequate result, improving collaboration -- collaboration efforts, and the office of a risk assessment.

the creation of a task force led by the office of risk assessment, a division of management to perform analysis of large firms. one day after we issued our report on the sec oversight of bear stearns, they announced the sec would and these programs. notwithstanding the closure of the program, the sec has made efforts to implement and improve operations accordingly. as of march 31st, to thousand two, we have completed 23 of the 26 in the audit report. we appreciate the commission. we believe your investigation will help the accountability of the sec.

>> turn your microphone on, please. there should be a button. one thing i should add for the witnesses, the light will go to yellow when there is one minute remaining. it will be read in your time is up. -- it will been red when your time is up. >> i appreciate the opportunity to offer my nephews and concerns on the shadow banking system given my long standing interest of our financial markets including, during my tenure as chairman of the sec from february 2003 until june 2005. yes me to discuss the origins and structure of the sec consolidated supervised entity program and the impact of that program on participants. you ask the separatist region, on several other issues including my understanding of

the term shadow banking, the ability of federal regulators to oversee the system, the sec's ability to oversee systemic risk, and the roll over the counter derivatives played. in my remarks today, i will briefly summarize my views on these topics the full discussion of which is included in my written testimony. i would remind the views i expressed are my own and not years of the sec, current or for a -- current or former commissioners. first, i would like to discuss the cse program. they thought this was the regulatory in nature. deprogram extended -- the program extended oversight in new areas mainly the activities of holding companies and other affiliates of broker-dealers. the sec does not have the legal authority to impose mandatory capital requirements on holding

companies or large security firms. before 2004, the sec had required regulatory capital requirements for broker-dealers subsidiaries and such a holding companies. this program established for the first time in sec history a framework for consolidated oversight of the capital, liquidity, and risk factors. the activities carried out through their non-sec affiliate's were a concern. in 2004, during my tenure as chairman of the sec, we adopted the cse program. under the program, the holding company was required to compute on a monthly basis risk and capital. the olding company was required to provide the sec with information concerning activities and risk exposures on a consolidated basis and submit

for examination. the program relied on the agency's existing authority over broker-dealer affiliate's as a basis to impose examination and regulatory requirements on a parent holding company. they adapted the standard for capital reporting. this was generated through the collaborative efforts of bank regulators from the most advanced financial markets and serves as the standard for internationally active financial institutions. the sec amend the net capital rules for the broker-dealer affiliate's of these holding companies would use their internal mathematical models to calculate the net capital requirements. this would help commercial banks -- banks computing since 1997. we recognize that viewing these models my results in lower capital requirements than otherwise would be required

under the net capital rule. accordingly, the commission decided that cse and dissidents provide early warning if their net capital fell below $5 billion. the modified the rules to a more liquid assets than otherwise required. the rules did not, contrary to the suggestion of some published reports, a limit -- eliminate leverage requirements under the capital standards that had been in place since 1970. the net capital rule never constrained leverage in a broker dealer holding company. the many risky activities such as otc derivatives were usually conducted outside of the sec registered broker-dealer. even at the holding company level, a comparison of the

leverage ratio is misleading. the product mix varies greatly. securities -- holdings have a+ more limited exposure to off balance sheet entities. the program represented a significant forward-looking effort to improve oversight to the unregulated affiliates of broker-dealers. >> are you done? >> i am going to stop right now. >> sorryy >> i was going to go on to talk about shadow banking, but i would be glad to do that at the end of the session. thank you. >> think you, mr. donaldson. we have your written testimony. >> thank you, chairman and

members of the commission to allow me to offer my views. you have asked me to address shadow banking in the role it played in the financial crisis as well as the sec proxy experience to regulate one portion of that system. -- the sec's experience. this refers to borrowing and lending outside the traditional banking system. and includes money-market mutual funds, insurance companies, securitization vehicles, hedge funds, and most significantly the fannie mae and freddie mac with roughly $6 trillion in market are the largest elements of the shadow banking system. these are for off balance sheet entities and investment-banking subsidiaries. in the run-up to the financial crisis, the devaluation of these instruments led to many parts of the shadow banking system

including investment takes. that sudden devaluation of mortgage-backed securities was the result of an asset bubble in the housing market inflated with high-risk mortgage products such as the notorious liar loans and no money down financing. it is abundantly clear as has been testified that if on this lending practices had been followed that much of this crisis would not have occurred. most of this to place within the traditional banking system. the shadow banking system spread the contagion to every sector. the failure and the bailouts of these commercial banks as well as investment banks and non- banks highlighted the inadequacy of the capital and liquidity sectors. one might expect to see these in the unregulated part of the system, but what about the failures throughout the system? to answer this question, a good

starting point is the standard for commercial banks which did not provide inadequate early warning system. these standards, which are still in place, the sec -- a sign a risk weight. even without the benefit of hindsight, commercial bank regulators had recognized the problems with these standards. they encourage people to put risk off of the balance sheets. that led to the second set of standards which they inc. in its voluntary program in 2004. -- which today incorporated in it's voluntary program. the cse program was built on the jurisdiction over the regulated broker-dealer company. bear stearns showed that the reliance on the internationally

accepted standards was a fundamental flaw. the rules required an early warning. notice that the firms were even coming close to the 10% needed to recognize they well- capitalized bank. bear stearns had a standard cushion well above that line. in march 2008, formally requested the committee to address the inadequacy of the standards in light of these experiences. all the regulators rely on these standards. this remains a matter of the utmost urgency. while the sec, the fed, and the treasury were surprised by the speed of this, the decision that week than bare steel bridge bear stearns was too big to fail was surprising. -- the decision that bear stearns was too big to fail was surprising.

e.f. hutton, solomon brothers, and more. while the voluntary program, meant to give early warning, it was not capable of preventing them because a new government regulation could do that. mr. chairman, an important lesson from this is that the concept of too big to fail must be eliminated. along with the regulatory uncertainties that follow from it. the freedom to fail, which is a cornerstone of risk taking in a well functioning market, has to be restored. i would add to this that transparency is a powerful antidote for much that happened in the financial crisis. that is no more jurors than in the over-the-counter derivatives market. -- that is no more true than in the over-the-counter derivatives market. >> thank you for the invitation to testify about the sec proxy regulation of investment banks

in the shadow banking system. -- about the sec's regulation. from september to a dozen sex until april to thousand nine, i was a director [inaudible] we aim to ensure that in the event of a firm's failure, they retain their cash and securities held at the firm. some broker-dealers are subsidiaries of holding companies. these are complex firms with even hundreds or thousands of subsidiaries. the vast majority of the subsidiaries black a statutory regulator under the regulatory regime laid out in the 1999 gramm pledged the act. -- financial act. the u.s. regulatory system currently contains no statutory provision providing for

regulation of investment bank holding companies including the setting of capital requirements and a holding company. where does is provide a regulator the authority to impose the quality standards or other requirements intended to help the operational condition of the holding company. finally, the law does not provide for a consolidated supervisor that is knowledgeable in the court security business of these firms that has the authority to impose requirements that would be recognized for this purpose by international regulators. following the demise of a company in 1990, the sec realize the failure of a holding company or a subsidiary could cause problems for the regulated broker-dealer. one of the measures taken by the sec to address this gap with the consolidated supervised into these programs in march 2004. the program constructed an alternate -- an alternative net capital regime for the subsidiary which carried the

affiliated holding company to group rights supervision by the commission. this was a significant regulatory extrapolation that the commission believed was necessary to fill a significant regulatory gap. for the five firms they oversaw, not only the u.s. registered broker-dealer but also the holding companies and affiliates on a consolidated basis. it failed to reflect two fundamental differences between investment banks and commercial bank holding companies. first, the regime reflected the resilience of these firms of the daily market to market accounting as a critical risk and government control. second, the design of the regime reflected the critical importance of maintaining adequate liquidity for holding companies that did not have access to an external liquidity provider. it is important to note that this program is that the only oversight regime applicable to these firms. the broker-dealers within the

holding company's regulated and supervised by additional sec personal and by finra. they had extensive enforcement staff for and broker-dealers, insurance companies, and derivatives. the sec required the companies to maintain net capital ratios of not less than 10% consistent with the the standard. there has been much confusion around the net capital rules including the mistaken belief that the rule allowed investment bank holding companies to increase their leverage this is not the case. since prior to the regime, there was absolutely no regulation by the statute or rule, over bank capital or leverage. in addition to capital adequacy, they required each company to have a funding procedures designed to ensure they had sufficient stand-alone

liquidity, financial resources to meet its expected cash outflow in distressed requirement. access to unsecured funding was not available. the sec viewed applying such a liquidity standard alongside a capital standards to be critical to the supervision of these companies and was noted earlier was a critical distinction between these two. the program adopted by the commission was supposed to fill a serious regulatory gap. a remaining imperative is the need to address explicitly how and by how large financial firms with a primary securities business should be regulated and supervised in the case of financial distress. thank you for this opportunity to testify. i would be pleased to answer any questions. >> we will now go to questions. i want to start with you.

i'm going to focus my questions on sec specific supervision of bear stearns. i know other members will have comments or questions generally about the cse program. my understanding is that bear stearns entered the program in november 2005. prior to completion of the entrance exam that was required, in 2006 there is no on-site exams because there was a reorganization of staff at the sec. because the firm collapses in march 2008, there is no exam for 2007. this means that bear stearns is part of a regulatory program in which there is no on-site exams for the full length of time they are in the program. i do understand there are monthly monitoring reports where the sec would talk to people at all five investment banks.

after the hedge funds blew up, there were weekly or daily liquidity reports. if all told, as i look at this, and i want to clarify i am talking about on-site exams for holding companies, it does not seem to be a regulatory program as we would normally conceive them. certainly not a regulatory program i can add to the other supervisory programs. i look at this, to some extent, it looks like a placcbo. in what respect do you think it was a credible regulatory program for holding companies? >> chairman, as mr. donaldson explained, this was additional regulation of layered on top of what already existed for the regulated broker-dealers of each

of the cse firms of which bear stearns was one. for the first time, as a result of the rules that the commission adopted in 2004, one year and half before i became chairman, the sec was getting a look att all of the information at a consolidated level about risk management, mack trucks, and so on that from this standpoint might affect the broker-dealer and also the environment by which these firms and of these subsidiaries were operating. as you know, because we were looking at the whole picture, what was going on inside the sec's line of sight was on the part of the whole picture. the bank holding companies, supervised by the federal reserve and other regulators as well as state regulators and

other federal regulators, each of them had their own visions. there is a question of systemic regulation that is very much on everyone's's mind these days. prior to the crisis, it was closer to the blind anman and te elephant. once the sec started seeing this information and had to be more closely coordinated. it was even before bear stearns that i began talking about this with the federal reserve in just the same way we had been including these with foreign regulators. i did over one dozen of those while i was chairman. putting this together, both domestically and internationally, was vitally important. more than anything else, it was

a question about being able to see beyond the narrow stovepipe that the statutes had set up. >> that is my point. you were that consolidated supervisor overseeing them. not just be one person touching this, on reflection did you apply the regulatory regime to the program that was warranted? >> -- >> as i understand this, from the very onset, some other people might want to talk about program design, but from the very onset the idea was that you had them on sight a couple weeks out of the year but not of the nature of a normal regulatory program that is going on the books and records of the holding company. >> it was never the vision of the program, built into the architecture, that it would move in and actually we do or double

check all of the work, but rather this was a program that was meant to review the information that was provided to the sec and then commence a dialogue about the reason ability of, for example, the metrics being used at each of the firms. although i was not there in 2004, i have had the opportunity to listen to the of the commission meetings at which this rule was adopted. i have had the opportunity to read what was issued by the commission and the rules that were sent out. there are two ways to look at this. i will read -- i will describe them. the first is to look at this through the lens of the commission in 2004. this commission believed it was taking a very bold step forward to additional areas of regulation that were not open to the statute that would give it a

broader positioo. in carved out of agency resources the people to do that. to put this in perspective, the entire division of market regulation, later renamed the division of trading and markets, it was less than 200 people. they are responsible for overseeing 5000 broker-dealers. inside this box you are going to build a new function which is the cse program which comes out of existing resources. it was budgeted for and it grew. it more than doubled during my chairmanship. the architecture of the program made it clear that it had to be relying on information provided by the firm. it was very different, as you pointed out and go other kinds of bank examiner programs claught -- examine programs.

and it was a broader field of vision. >> ended up being a review program and not a regulatory program. >> i do not think that it is fair to say that it was notta regulatory program. clearly it was. it had rules which is set for example that you have to maintain a the standards ratio that meets the fed's well capitalized reqqirement. you have to have liquidity. you have to compute your standards ratio monthly even the fed only requires it four times per year. they were enforced. the program relentlessly work against those metrics. one of my points today is that it was the wrong metric. there are two ways to look at this. >> in the interest of time, can you answer that quickly. >> the other is to look at it from the standpoint of now or post-bear stearns in 2008.

the reason i shut down the program was what happened in 2008. knowing what we know now, or even what we knew then, it would manifest that a program that limits itself to this even though this may have been ambitious given the lack of statutory authorization, and was not all that was needed. you need a lot more resources to do this otherwise you could not muscle the banks around you. you could not say if you have to change your business. even though it is your shareholders and you are the ones taking risk, we tell you to do it differently. europe -- you are going to tell goldman sachs, morgan stanley, every one of these firms that you do not understand your own risk models and we understand them better. if you are going to get to that. were you tell people how to run their business -- to get to that point where you tell people how to run their business.

>> did you ever ask for more resources? >> days after bear stearns. >it, the world -- it caught the world by surprise. >> you have -- you said you had comfort about the cushion of these firms. i want to go to the issue of leverage. having reviewed the information about the 2004 decision, i do not find a direct cause between that decision and an increase in leverage of the holding company spinco that we put that issue aside, but let me go right to the facts. if you look at bear stearns, the tangible assets, tangible equity ratio goes from 31% to 38%. at goldman sachs from 26 to 1 to 32 to 1.

at morgan stanley and goes from 29 to 1 to 40 to 1. and lehman brothers, 34 to one to 40 to 1. with respect to your comment about the nature of the assets, if you look at all of these institutions by 2007, their level three assets which are illiquid assets for which there are no discernible markets, it greatly exceeds their liquid. we -- that levin is 243, goldman 200, merrill 216. did you look at that and see -- say, these leverage ratios are crazy. forget the 2004 decision. in the aggregate, you have a 2%

efficient deficit and in values -- you have a 2% deficit in values. is your microphone on, mr. donaldson? >> during my tenure which ended june 2005 we only had two falling in under the program. i go back to what cannot be emphasized enough which was the reason for starting this program in the beginning which was the leverage and the activities that were going on at that time were beyond our purview. as a result of that, we felt we should start the program. we recognize that using the standards that it was going to be a different set of criteria.

it was never leveraged bingo i want to emphasize that. and was never a leverage restriction on these firms. -- there was never a leverage restriction. >> the ability to say you cannot stay in this program with that level of risk, there was that ability. there would have been a consequence for firms. you have the ability to take action in the sense that you did have ample authority and ability to press the firms to reduce leverage. the ultimate sanction would be to say you are out of the program. >> that was not the criteria. the criteria was the net capital. that had to do with your ability to discharge the obligations of the firm. it had nothing to do with leverage. we had that ability and used it.

>> was this a safety and soundness regime? was it safely implemented? >> i cannot comment on what happened after i was there. i believe we effectively implemented the installation of the program, yes. >> let me do this. i know other commissioners have questions. the new reserve the balance of my time at this moment and go to other commissioners. i will circle back. mr. vice chairman? >> thank you. that we try to ask this question in slate -- a slightly different way. because of the bear stearns panel we had just prior to you looking back at what happened to them from their perspective going forward, this is both for mr. donaldson and mr. cox.

we were all aware of the contest that went on as the traditional banking system saw a significant shift from them to the so-called shadow banking because of the ability to create more modern instruments or more creative instruments. it reached a point with the act+ passing in 1999 which changed the traditional structure so that it could blend. these terms may not be technical, but it could blend into the activities of the investment banks. what was the mental set, and i start with the mr. donaldson. it had no legislative structure. frankly, given the mantle said

that led to gramley to bliley -- gramm leech bliley. i guess we're still working on tomorrow after what happened yesterday afternoon to all of us. if you have this attempt to take the sec's given jurisdiction and regulatory power and see what you could do with it to solve or at least address a blank in the regulatory structure because of what happened with the repeal of glass-steagall work because you felt it was necessary to deal with them regardless of what happened in the traditional statutory structure that was no longer there.

am i making sense? was the cse the best thing you could create given what you had created a out of, i .e. the regulatory powers that were there? when speaking for the time i was there? i think we were increasingly concerned. >> is your microphone on? >> yes. we were increasingly concerned with what was going on in the shadowed area. there were new instruments, new activities in these holding companies that we had no access to. we felt we had to do something about that to at least gain access what was going on. in addition to that, it is important to understand that the foreign non-u.s. jurisdictions

were putting pressure on the investment banks in the united states to be overseen at the holding company level. that is an important thing to note. investment banks were to be frozen out of doing business in one of its largest markets, the european union, unless we did something to make it possible for them to operate. >> it was created within an extension of the regulatory power that you already had? >> yes, that is correct. >> you could have used various criteria but you chose particular ones such as basil. let me shift over to mr. cox. where was the pressure coming from?

i will transition over. i felt it was not coming from the industry, or was it? >> have you gone to mr. cox? >> no, i am transitioning. >> idec the pressure was induced. it was put there by, specifically the european union, which said that we would not be able to do business over there on less their regulated under a holding company for men. we will do it for you if you do not do it for yourself. we will not put you into our system unless the sec or someone puts you inside a holding company structure. that was where the real pressure came from. conversely, the pressure came from the industry wanting not to be frozen out of this market.

frankly, i think they wanted to be regulated by us, by an american regulator. >> in has to be a voluntary system because you cannot impose it on them. >> yes. >> and now to your regime. bear stearns is one of the first ones and were the first one? judycse structure? >> there were five total and bear stearns came in -- do you remember the date? >> november 2005. >> at some point, -- >> and their brothers in already. >> you had five banks. you shut this down in 2008. were there any banks left? >> merrill lynch had been, by agreement -- they did not close until after.

>> when i am trying to do is remember and picture the environment at that time. was there any push or pull among the other regulatory inssruments that oversee what used to be the old commercial banking system? was there a poll that the fdic may be could move in that direction? did the sec take it upon themselves to do this or were they encouraged to do so by virtue of the appropriateness of what you could do? >> question's going to the formation of the program i think needed to go to chairman donaldson because i was not there for that part. the program was created before i got there. speaking for myself, it was a freshly minted program when i arrived. it had just been the subject of several years of consideration

by the sec proxy top staff that represented their -- the sec's top staff. it had been developed by rules adopted unanimously by all the commissioners. when i became commissioner, i was in this room for my confirmation hearing sitting next to the director of the division of market regulation, eric's predecessor. she was extending these. we had all these people who offered this. all these people seem to be connected to harvard university. >> wasn't as robust as you wanted it to be or as robust as it could be under your structure? -- was eight as your boss? >> all the people briefing me on this were the architects of the

program. it represented the agency's best of the time. i had no reason out of the box -- >> let me say, mr. cox, i know you outside of that environment. if someone told you that was how the world was coming you would not necessarily accept that. >> i am made of the critical. when i went to the sec, i had a lot to learn all at once. this is one of those things i was briefed about during the transition. chairman donaldson and i spoke about this as well. the view of this program, at least in the agency, was that this was the best thinking of the agency. the standards that it used to work in use by banking regulators around the world. it was patterned on the fed program which is where the 10% well capitalized metric came from. the standards were in use by banking regulators around the world and indeed the united

states was on track to get these in 2009. the program was a very advanced in that sense. days of two was constructed as it was because under the first there were too many incentives to move risks off of the balance sheets. we have heard a lot about those problems, off-balance sheet risks. they're still going to be an issue. it needs to be worked on. taking a snapshot of the program pre-bear stearns, it was thought this program was well constructed and very aggressive of using the sec's rather narrow statutory base. >> you have all five investment banks under the cse. bear stearns fails. is it conceivable that in your

mind looking at the structure and environment at that time that one of the banks could fail and that the other could have remained standing -- and that the other four could have remained standing. i am trying to get to the too big to fail concept. >> that would have been the norm prior to bear stearns. as i mentioned, the sec proxy most recent experience had been [unintelligible] we had set up to be the regulator during the liquidation of the regulated broker-dealer. even in the event of 2008, which was cataclysmic, we saw the protection of rural work. we saw the segregation of assets, customer cash, and securities work.

the sec by statute is supposed to protect the investments and and investors. the sec was fully preferred -- prepared to play that role again. we played a different role in provided emergency regulatory approvals for a weekend transaction involving jpmorgan chase. what i said at the time contemporaneously in testimony before congress about that event is that the way things happen we will now never know. of this commission had the best opportunity to dig into this thus far, but we will never know what would have happened if we had played the game the other way. the social sciences, unlike the physical sciences, want to run the experiment, you cannot go back and recreate this. >> i do not think any of us would want that if we had the

chance. >> it would be difficult to live through twice certainly. >> let me just go back to the 2004 and 2005 time frame. there was considerable concern on our part as to what was going on outside of our jurisdiction. we had the traditional turf battles, if you will, with other regulatory agencies as to whose jurisdiction it was. we were so concerned that we set up an internal risk department for the first time in the sec. the assignment there was to look over the hill and around the corner to see if we could not identify risk. this was the beginning, i think, of the concern for the systemic problems that were out there falling to the cracks. >> it is refreshing to know that in the most recent battle to try and create some structure of regulation that none of the

regulatory agencies are in a contest with each other. the industry desires are not being reflected in any way as they tend to move legissation through the congress. we apparently learned a lot. could i ask all of you to say yes to the offer as we continue to learn more given the resources that you provided to us that we could get to you with a written statements and you could respond to us with written statements? even so far as to what do you think about where we are now and whether we are going in the right direction or not. we are not supposed to talk about where people want to be. it is very hard to figure out where you ought to be if he did not have a full understanding of where you were. right now, we find that a whole lot more difficult than some people would think it would be.

i know you would not from the position you are in, but we need all the help we can get. would you be willing to respond in a written fashion? >> absolutely. yes, of course. yes. >> before i turn to you, one follow-up question to my earlier questions. i think this does to an issue that has been raised as to whether this was ever intended to be a regulatory regime or an accommodation for investment banks who faced a problem with the european union. this is it to you, mr. cox. i have read the work of our staff. i read the inspector general's report. with respect to bear stearns, we have read the monthly monitoring reports which have been entered into the record. there's one thing that strikes me, pulling away from all these details, i do not see -- and i noted earlier there were no on- site exams during the two year timeframe. in simple terms, i did not see

any action taken at any time by the sec to change the business practices at bear stearns, to change their risk profile, or to any way alter the activities that might have given rise to their safety and soundness or the safety and soundness of the system. am i wrong? i do not see anything of significance where a change was made in any practices. >> i would yield to the director on the details. since you are addressing this in a general way, i think the answer is that bear stearns changed rather dramatically in response to the cse program. i can illustrate that. first, the cse program set up a minimum $5 billion liquidity standard. that is something that, by the way, commercial bank holding companies to not have to do that. they do not have to have in the quiddity number at all.

it was an added metric for the cse programs. >> did they not raise that on entrance? >> no, they did then. under supervision they raised their liquidity to 12 million by 2007 -- $12 billion by 2007. in march 2008, it had reached its highest liquidity ever of $21 billion. i think if you consider the testimony you heard earlier, you recognize that it was the change that was made also at the behest of the sec. they forced them to start looking at this on a firm wide basis. there were a lot of things about the way bear stearns was runs that was changed by the program. to take the broader point -- as i say, on the details i would refer to the director. >> i would just point out that the inspector general found that the activities were deficient on lebanon -- on leveraging our

risk and they found there were no changes made by the sec with respect to western's risk management. >> it is difficult to disagree with -- with respect to bear stearns's risk management. >> is a difficult to disagree with this. the failure of the program is manifest in the failure of bear stearns itself. the main purpose of the program was to provide an early warning system and it did not. i fundamentally agree. i would also point out that for the federal reserve, with the regional fed, they have the same things with -- they were being used across the system around the world. with respect to the question of whether this was meant to be an accommodation or a real regulatory program, i can tell you that since i was not there in 2004 but i did listen to the meeting, again the release, i

have every reason to believe that the story is exactly as i have heard from my service at the sec exactly as german donaldson has explained it. the sec was very, very interested in getting more information from name cse program and its vision. >> i will stop and go -- i will stop. >> thank you very much for appearing here today. i'm going to start of, before we get to the consolidated supervised into the program just to ask mr. cox and mr. donaldson about a topic you both addressed in your written testimony and we have not talked about yet this afternoon which is the role of that over the counter derivatives and the lack of transparency and oversight of

them played in the financial crisis. i wondered, mr. cox, if you would, that. -- if you with comment on that. >> on many occasions, i have been finding myself reviewing the debates a very long time ago, it seems now, certainly in another context. when you were at the cftc. when i served as a member of the president's working group, i know how valuable that interchange is. one of the things that i recognize looking through the distance of time and the fog of memory, there were, in addition to regulatory concerns, market concerns, and so on, there seemed to be turf concerns.

it seems that some of the recommendations provided floated flowed -- flowed from the "our team is better" sense. it is the worst count reversed kind of rivalry. you have the sheriff's department and the city police who are both is supposed to be chasing after the culprit. there was a private -- a pride of brand. even though the sec's formal recommendation was that we should not regulate, i got a sense that it was a move as well and that possibly the sec would have had a different view if program ready. i do not know if that is true or not.

i am also -- i am almost inviting a question from you. >> i will not testify here as to what motives were in 1998. >> i think looking forward that we still have this problem. and if we do not have it in the agency's then we have it in the congress. i served 17 years there. in order to solve the problem, you need to get the committees in the house and senate, the financial-services committee, and the banking committee to provide -- to act differently. this does not serve as a criticism, but they need to act differently than they have been able to act over decades. i think that is one of the reasons we find ourselves here. the reason that this market was able to borrow so far out of the regulatory structure when at least transparency would not have been acceptable but hugely beneficial to the market is that congress was incapable of

legislating on the subject. as we have seen when the regulatory system tries to work in the spaces of the loss and the laws are too old, it comes up short like it did here. if we are going to fix this problem, and i do not want to assume the definition is the same for everyone, the problem with cds and other synthetic problems during the financial crisis was largely a function of ignorance. people did not know where the exposures were. .

>> this lack of transparency. >> in your view, what did you think we should do going forward? >> i made very specific recommendations when i was chairman. i stand by those recommendations now and i'm happy to see that two years later, even though when i testified about them, i said it was a matter of urgency, i am glad we're doing it now.

movewe're going to do is as much as possible of this market to come up we will have a central clearing house and counterparty and we will have to the extent that these are not standardized contracts, we are going to have transparency because there will be dealer reporting and you'll have a well functioning market. >> mr. donaldson, edie think they played a role over the counter -- plate -- do you think a play role in the crisis? >> absolutely. there was an attitude toward derivatives in the early days, a very positive one of risk dispersion. that was an attitude threats many of our government agencies. derivatives were a positive. as time went on, and derivatives

got more robotic, it became obvious that there was an increasing danger there. we need to trade these days is in a central location as muchhas pecan and wheat -- as much as we can and we need to know what is out there. we need to make sure there is credit. e --t's turn back to d c s the cse program. it was adopted largely because the eu had taken the position? that our investment banks, our largest investment banks, needed to demonstrate that they were receiving

consolidated supervision in a meaningful way, either here at home where they would be subject to regulation in the eu as a condition of their doing business there. i wondered what the motivation of the eu was in taking this position because at that point in the united states, the united states did not have any requirement that investment banks or other financial institutions other than banks and their holding companies had to have consolidated regulation. >> it is hard to get in the head of the eu. >> did they explain it at all? >> i think there was a competitive situation going on where the eu wanted to become

much more of a financial center, if you will, and wanted to outdo the regulatory excellence that was emanating from this country. i think it was a movement on their part to try and bring control so that this new entity was nd chief financial market. >> as i understand it, most of the impetus for this came from the industry itself, who wanted to be able to contiiue their role in the you'd -- nd e. you? did they come to the sec with a proposal? >> i think it was a chicken and egg thing. the eu was saying, you better get yourself regulated and our firm saying, if we have to be regulated, we would rather be regulated by the sec then we would buy a regulator.

>> as i understand the program, it was similar to what the banking regulators do in that it was really designed to be provincial regulate -- prudential would be -- provincial regulation with an eye on the safety and soundness of the institution rather than a traditional role of the sec. that focused on investor protection. is that right? >> i think that is right. >> was this the role that the sec had any experience with before? prudential regulation? >> obviously, the focus of the sec was on investor protection and not provincial regulation. >> this was something new that

the fcc was taking on essentially in terms of -- the fcc was taking on an essentially as an approach to regulation? >> yes, i would say so. even in terms of just strictly investor protection, we needed to know more about what was going on in this market that we had no jurisdiction over which could have investor protection implications. that was much more important than the provincial -- prudential aspect. >> do you agree, mr. cox? >> yes. i think we have agreement even be on this table with the current chairman of the sec. this was an unusual step outside what normally was considered to be its core competency,

certainly on set its tradition. provincial -- prudential is just different. there could be a very broad brush about it. the biggest difference is that in rule base regulation, there is a positive standard and you can look at its and you can conform your conduct to it and if you do not do it, somebody comes in and checked the box and right to opt. on the other hand, if you are being supervised and you have a conversation about it, it might be required to do something a lot more than the rule. you might find the rule does not have any application in your situation. you might have an ongoing dialogue or you've visited regularly. there are other important differences. the main one i can point out is that supervisors tend not to be in force. there is a good reason for that. if you are going to have this dialogue and that of the nature of the supervision, you'll learn

a lot. people open up to you and tell you everything you need to know. if you are going to be an enforcer, people are going to have their lawyers with you when you talk to them. when i negotiated the memorandum of understanding between the sec and the federal reserve, one of the sticking point about sharing information was that if we give it to you, you might give it to enforcement. we said, if we see something that might be violating the law, of course we will. they said, if you do that, people will tell you any first place. both of those are useful commentaries, but they tell you how it is very difficult to spread the circle. this was an interesting experiment for that reason. decideely, you've got to which you are going to be.

i noticed when chairman greenspan testified before this commission, he took special care to point out that the fed does not have an enforcement division. that is not what they do. supervision is very different. if i may parses even more finely, safety and soundness is something that is a term of hours, bank regulators. i do not believe that is in the charter of the sec program. the reason that that matter somewhat is that while it was a rovincial -- prudential supervisory program, unlike the federal reserve, there is some way to rescue them with. >> -- there is no money to rescue them with bread >> you did testified that the purpose of the program is to monitor and to act quickly.

>> i think that is exactly right. i want to distinguish between that and the liquidity backstops that the banking system provides are a big distinction between this program the federal regulatory system. >> three minutes. >> and did you feel -- did you feel that you had the resources, the personnel, the experience and to institute this kind of a new regulatory

program? >> we got new budget and we took our employment from 3000 to close to 4000. all of a sudden, overnight we had not only more bodies, but we had more well-trained bodies. we thought we had adequate resources. >> obviously, in the end, in to douse an aide, all the investment, all be consolidated supervised entities that were in the program either failed or became something other than investment banks.

i think that the program was an utter failure and therefore, you were terminating the project. right? >> i certainly terminated the project. those words to describe theused- program. i do not think that is an accurate assessment. the inspector general put it, the program failed to achieve one of its architectural objectives which at was to serve as an early-warning system. with respect to a staff that worked on this, something has been said about this and other forums. i want to point out that the staff that was there when it chairman donald sinnett was there, that was there when i wa3 the director was in addition to

this team, but the director had been the chief economist at the sec, taught at harvard in terms of understanding mathematical models. he had a ph.d. in astronomy. it must have come in handy in understanding some of the models. bob colby, the deputy, who was there under me, a 30-year veteran of this area of understanding. matt, who was the head of the program, to harvard degrees and in mit ph.d. in economics. he was hired away by the federal reserve in the wake of all this. these are very smart people.

the agency is able to attract the very best people. i think that is something -- what i do think is correct is that the skill sets at the sec overweight lawyers. that will be something that is continuing for the agency to try to diversify. even if it is going to be rule based, it's still be to have a variety of skill sets. >> would like additional time? >> one minute. perhaps this demonstrates as well as anything could how institutions that are too vague and interconnected to fell -- too big and too interconnected to fail, maybe some -- maybe too big to supervise as well.

>> i completely concur. i have not heard it said at all. one of the lessons we have got to infer from all of this is that if the market is going to be moving as fast as it is, people will be developing new products in the future. a systems regulation that tells everybody to slowdown is not going to work. instead, you've got to make sure that the subject of regulation is comprehensible to the regulators. that means, perhaps, rather dramatically changing the scope of what it is that comes at a regulation. >> thank you. >> just for the record, i think you're talking about staffing. just for the record, the staffing level kind of. pre your tenure.

the csc staff, in 2004, had 12- 15 staff dedicated to it. it was a pretty thin slice of folks. .> at the beginning >> thank you, mr. chairman. thank you everyone for joining us today. two things i want to -- four areas that are worth pursuing. one is the structure and conduct of the program. the second would be the experience of bear stearns and other investment banks underneath that program. the third would be how the -- how they looked relative to other regulators. the fourth would be the

traditional role of the sec and investor protection. i wanted to pick up on what you just talked about. the traditional role in investor protection -- one of the striking things to me and all of this is that the u.s. ended up with trillions and trillions of dollars in toxic securities. investors did not appear greatly protected when it all fell apart. i am an economist. recently, that appears to be a good thing. not always. it looks like the bulk of this was issued under these particular regulations, uprule 144-a. i would like to hear the views of view about whether the sec had the power to tighten protection.

>> i think there was a hole in the regulation of derivatives. as a result of the law that was passed which took the authority away it -- >> what about securitized in mortgage assets? things like that? not as derivatives. >> it opened up 88 in the derivatives market to and took authority away from the cftc and the sec. through that hole, the credit default swaps went. nobody had jurisdiction over them. >> mortgage-backed securities? those are not all through that.

are some of them through your particular rules which allow the very sophisticated investors to have products that were not going to beat normal registration process? >> i am talking about derivatives. >> i am not. are there large amounts of securities that turned out to be quite problematic which were never in any way put to the traditional s.e.c. scrutiny? >> instruments or securities? >> securities. was a there -- did the sec have the power to increase its scrutiny of these instruments? >> increase its jurisdiction

over these instruments to talking about? >> i suspect that it did unless we were prohibited by law by having jurisdiction. that is what i was referring to in the derivatives issue. >> did you ever contemplate that? >> not exactly sure what about that did not have -- that we did not have jurisdiction over. >> i think he is talking about a whole series of instruments that grew up in the marketplace, such -- he is talking about this hold generation of products that developed. >> i thought i said that.

>> i think they understand your question and you are asking about private placement as well as public offerings of securities, right? >> absolutely. >> and in the short answer is that these securities were issued both ways. it is not really a characteristic of the security that it operates under -- is a question of the way it is sold. there are some statutory exceptions that would override everything, commercial paper and what have you. it depends on how people were structuring them. the fact that some of these were large private placements is

really a much smaller and incident of ohio that particular transaction was structured. the largest issuer of these kinds of securities was the tse's -- gse's. there was a lot of requirement to come under the disclosure regime, to the extent that securities are sold in public markets. in terms of their own reporting, fannie mae and freddie mac did not volunteer to be covered by the act. i actually asked congress to do that. even now, it has not been done. they did do the 34 act in the fall of 2008. >> in retrospect, on the part of either of view, should the sec have required some examination

of the market innovation? >> certainly, they were all over this in many ways. but during -- we are focused on securitization is and the use of the public markets for the sort of thing. the second thing i would say is that one of the big sources of private placement activity or on registered activity is hedge funds. the sec enacted rules. i supported those rules. i put into effect. -- i put them into effect. we now have to put them into effect by statute. >> the commissioner has talked about the degree to which you have adequate staffing and the

degree to which this really was a safety and soundness regime. i am very much interested in how effective you were able to be an in 2004, when the sec adoptedes. the capital, it did obtain the power -- and to ascertain the risk management rights. >> did we have the sophistication and knowledge -- >> did you have the authority? >> the authority? we did not have the authority -- actor i was there, we did not have the authority. the mortgage pool vehicles, which fell in between the regulatory responsibility.

>> my understanding is that when the brokerage dealers adopted the capital, you have the employees to examine the risk practices and methodologies? what'd you do get comfortable with their practices? >> i think we did have the authority. >> how did you use it? >> i am not sure i understand your question. >> the stress test that investor -- investment banker used, you examined them? he signed off on them? merrill lynch fails and has to -- you're comfortable with their risk-management practices? >> you are talking about the capital structure of the investment firms? >> their risk manageeent broadly defined. the capital they held, the

hedging practices. >> with the eventuality that came down the pipe, we did not realize what effect it would have of a run on the system. a refusal to finance these firms by their traditional suppliers of capital, i think that was the circumstance that was not anticipated. it was a crisis. it was not anticipated. unexpected, and predicted, at least by our agency. -- and predicted -- unpredicted.

>> i think the answer is that the agency did. the way this works inside the agency, of course, is that the commission comprised of five members receive a recommendation at a meeting with his staff presents documentation for the recommendation and makes a recommendation and the votes is whether to accept or reject that recommendation and the means of pushing back on that or understanding it is the dialogue with the staff prior to the meeting and so on. each of the commissioners has councils that help them do this. by the time one comes to a vote on this, those questions have been answered. the source of the information is

the program itself. if they miss something, eric there is a mistake inherent in that system, it probably would not be uncovered in that way. >> the inspector general has supported the that the sec was aware of some deficiencies in the risk-management practices of bear stearns, a do you think that there are things they could have done to prevent the failure? >> i think the distinction to be made here is whether -- is the distinction between understanding concentration and understanding what that means for the rest of the farm. we certainly were aware of concentrations of mortgage securities. bear stearns, the securities firms with and not, -- securities firms with in that comment it was a business

decision by the firm. the thing that we messed it, and that i think most of the industry a mist, is that -- is the question of how volatile or what kind of price or underlying value you could see in those mortgage instruments. we did this -- we did not miss the concentration. given that they were concentrated, we thought they could withstand the kind of shock we might expect for mortgage instruments. it is not sense that we misjudged. >> what we heard from the bear stearns panel this morning was that, we know there was a large decline in housing prices and there was going to be a great risk out there somewhere in mortgage finance, but we could not tell who held that risk.

we'll look around at each other and could not tell you have the risk, so we decided we were all safe. the market looked around and said, none of them are safe. my question for you is, could the sec distinguish among the five entities under the csc the relative exposure and the exposure to the risk of the decline in housing loans, which is at the heart of the 19. >> yes, we could certainly distinguished their relative exposures. that is a judgment we could make. >> one of the seminal moments most people point to in the recovery was the treasury stress test. if you have the capacity to

reveal relative financial help, why was there no information available? >> as i understand those stress tests, they were more rigorous, more substantial than the types of tests that we perform. they were performed to a uniform benchmark across all runs. there were scenarios that selected and they were run across all forms. it was a large undertaking. the types of work we did did not impose a uniform standard. that is something we discussed. the reason was that we certainly could have done that. we elected not to because we wanted to let the firms manage risk the way they thought it was best managed, given their business model. we needed to build comfort with that.

>> which cases were those? >> when bear stearns demand -- bear stearns came into the program before i was there. i came in in dissent -- september of 2006. when bear stearns entered the program, they did not have a list set of procedures or protocol. coming into the sea is the program, there were required to develop those types of quantitative models and to have those meet our -- we have to approve them. because they wanted to come into the program, developed those and got those going. that would be one concrete example. a give you a quantitative type of example.

there are other examples that are important, but have different characters. risk government is very important in these firms, the way that information flows and the way that authority flows within the integrated financial firm is very important to resolve disputes. the internal audit function at bear stearns did their work, but we found the information was not coming up to the audit committee appropriately. the quality of the information and the nature of the process was not good and was not transparent and we expressed that view and we made sure that the quality and nature of the change to -- of its changed. >> thank you. there is a lot of discussion about staffing of this and how

all the different entities were treated, but all of these investment banks are now gone. they failed in one way or another. that is not unique to the crisis. there was a lot of failure. do you feel that it is inappropriate to single out anybody for the failures of the investment bank? >> i think you are right to observe that this was something that affected all the large banks. ultimately, all the large banks increasingly similar as they are, this the same fate or the same bailout.

they'll faired essentially the same way. the reason why so much focus came on the sec in the midst of all this was the sequence. bear stearns, which was the focus of the hearing, happened in march a dozen 8. that put a lot of attention -- march of 2008. at a lot of attention on that space in financial services. as we look back, bear stearns quantitatively was a very modest complement to what required $16 trillion in order to restore confidence in the market. that is, as the federal government committed in various forms. >> thank you. >> i would like to continue the

line of questioning that deng had started -- the data -- doug have started. from the perspective of the investor who is trying to make sense of what the risks are and the options that he or she has to invest in, much of our system is built upon in forming the investor and assuming not able use their good judgment to make decisions that are best for them and best for the system. in our last panel, mr. schwartz, the last ceo of bear stearns made this statement that from the outside, you could not tell the exposure to the housing

mortgage risk with the kind of information that was being made available to the investor community. my questton is, is that disinherits limitation of the accounting -- is that is an inherent limitation of the accounting and literary professions to properly explain to the layperson what it is that is going on or is the structure of how the information that we make available in adequate, but susceptible to being made more informative so that that prudent layperson can make better judgments. >> i think these are complicated instruments. not designed to be understood by people who do not understand mathematical finance. i think there was an over reliance on ratings.

that is one of the great weaknesses out there, the weakness of the rating system. >> do you think that the instruments and the processes are inherently so complex that they are not susceptible to more informative presentation to be prudent layperson who is looking to that information to make judgments? >> i think you can probably be better -- i think he can be better done. -- i think it can be better done. >> let me ask -- answer your questions in two ways. just to make clear, the program was not about disclosure. it was about the risks of the financial control in the program. the question you asked is a very

good question. financial intermediary years -- you do not have to go to an investment bank to get the results. there are loans and then there are loans. when you think about the disclosure, it is not generally sufficient to distinguish on a line by line basis what is going on. that is not a theoretical constructs. that is reflected in the capital market as well. if you look at the yields, the financial will trade at a larger spread, reflecting its opacity.

it is difficult to get sufficiently granular exposure to these firms. general motors made cars. they will make cars from a year from now. financial intermediaries can make that kind of change. happees very quickly. capital markets recognize that and discount their debt because of it. it is very hard to get periodic disclosure to reflect that. >> do you think that maybe the disclosure forms ought to contain something similar to what we require now on a package of cigarettes? that this is dangerous to your help and do not depend on what you are about to read for any salvation? you have any comments about that? >> one thing we did look that in our audits was there was an

issue discussed previously about what was the information for? there were certain situations within the sec were other divisions could have had access to some information from the trading market about what they were finding, what they were burning and through their supervision. that might have been banned use and disclosure process. -- that might have been then it used in the disclosure process. the investors were not able to have that information because of the way the process worked. part of the program was that it was meant to provide information to the folks in trading and markets and not necessarily to be disclosed outside the markets that they would feel comfortable in talking with them.

that would go against the other divisions in the sec. having that information. >> my last question relates to this room in which we are meeting, which is normally the house of the senate banking committee. are the recommendations -- are their recommendations that were made during your leadership to the congress that were not adopted, which would relate to the crisis that we now are discussing. congress should reconsider as it moves forward in its reform efforts?

>> one thatti think congress should move forward on is be regulation of hedge funds. i think these are large pools of art totally unregulated and we need legislation. we tried to regulate them and we did not use through the legal process. that would be number one. >> mr. cox, what would be your priorities with what congress should do in terms of reforming the financial-services system? >> i have a longer list even now, but you ask what i recommended that congress did not adopt. one of the things of the recommended is that we lost this authority in court is what the chairman just described and that was given the sec the opportunity to regulate hedge fund. register their advisers. the second thing is that

recommended the closing of the regulatory gap or credit default swaps specifically in that category of derivatives. i explained the ways in which that should be done. >> i am going to yield two minutes. >> i recommended to the congress repeated the in many ways -- repeatedly in many ways that the sec be given authority to regulate the fiscal authority to the extent that we represent -- two -- regulate corporate entities. this multi trillion dollar market to present all the same risks to investors, two-thirds of whom are individual investors and that market.

as we have seen, the economy has only put the stresses more seriously on finance. california is now in a similar position as greece. this is going to be an enormous issue and disclosure, transparency, is the best antidote. what the markets understand what is going on and let investors protect themselves. i also urge that we have legislation around the infrastructure for credit default swaps, which i think is very important. i think we need to merge the cftc and sec jurisdiction over futures and options. we're the only market on earth that does it this way. the reason we do not do it is that there is a different jurisdiction. we also need to rationalize more broadly the jurisdiction of the

judiciary committee's with the banking committees bbcause now we need to resolve these institutions. i made recommendations and have recommendations, but the bankruptcy system needs to be tailored in order to resolve these financial institutions. i know my two minutes are up. please contact me if you'd like. >> to, mr. chairman. -- thank you mr. chairman. one of the things that is unique about you on this panel is that you have actually been in the investment-banking business. he ran a business in that area and so you have quite a lot of experience in that area.

what you said was a simplistic comparison of ratios to leverage ratios of bank boeing co's is misleading. in market making books and more limited exposure to off-balance seats -- off the balance sheets. invest in banks are different business model entirely from commercial banks. in light of this comment, do you think that there is anything inherently wrong in the investment banking model? can we expect that investment banks will return at one. as fully functioning members of

the financial system? >> the investment banks have started from a base point different than commercial banking system. they're in a lot of different businesses. i do not think there is anything inherently wrong with that model except i think that as things have developed, i think is questionable whether the investment banks can continue to basically trade for their own account, proprietary trading, when they have a backstop of the federal reserve. i question some of the businesses that are in the investment bank mold right now.

top on that list to be proprietary trade. >> assuming they are not bank holding companies or they have not submitted themselves to regulation by the fed as bank holding companies, a stand-alone investment bank is not a business model that we ought to consider unsuitable for our economy? >> no. i do not think it is. i think it is one that has to be regulated both in terms of leverage and liquidity and all the things we have been talking about. i did not in the model itself -- >> i am going to ask your successor about regulation because i am interested in this. i have asked the proceeding groups about the same thing. we have a strong system of regulation for banks.

i have -- we have a much less robust system of regulation for investment banks. you have all made a very strong presentation of that house suitable and how effective investment bank regulation was, although we know that it is not honest robust as the regulation of commercial banks. as you pointed out, both regulated commercial banks and investment banks failed under their respective regulatory at the same time, during or proceeding the financial crisis. are we looking at something that happened in the market during a

financial crisis that no regulatory structure could cope with? or are you saying that there is a way to make regulations so robust that it can withstand the kind of pressures that occurred in the financial crisis? >> let me enter the last part first and work backwards. -- let me answer the first -- the last part first. we can quantify how strong that deal force wind was. we know that it took $16 trillion to restore market confidence. once that approach was decided upon as opposed to letting things fail. as a result, it is easy to see that no amount of liquidity was going to be enough to withstand

a run on the bank because at some point, a cash runs out. these are fractional reserve systems. the commercial banks are very leverage. lovebird -- levered. if people pull out their money, they collapse. once you are on a run on the bank space, where fear is driving people and pulling -- and they're pulling out their money, at capital liquidity can not be enough. is this system that we have got susceptible of some fort up -- some form of regulation that would stand between us and what happened? is this inherently out of control? as long as you are willing to let institutions fail, you really do not have to worry too much about how much is going to

cost the taxpayers. the losses fall on the people who take the rest. the problems that got us to the discussion is that the government decided that these institutions could not fail. that makes it very direct intersection with the system of taxation and representation that goes with it. at the federal government is going to be involved and the taxpayers are going to be involved in paying for these things, it seems to me that you cannot have too big to manage. >> let me stop you. this is the fundamental question and you touched on it. bear stearns had 10% capital.

the officials of bear stearns told us they were expecting to be profitable in the first quarter of the new year. just before they were taken over. yet bear stearns was rescued. it was treated as though it was too big to fail. in the past, in the securities business, and you've mentioned, they all failed, and no particular disaster in the market as a result of all of those failures and people learned lessons from that. bear stearns was the first time that the u.s. government has ever stepped in to rescue a securities firm. in your view, -- the officials of bear stearns said they did not think that bear stearns was too big to fail. do you think that they were too

big to fail? did you participate in a recommendation concerning the disposition that week? i did not want to ask you what your decision was because it is executive privilege. >> i yield the commissioner an additional five minutes. >> thank you. >> i heard the testimony earlier today on that subject i thought it was very illuminating to learn that there was not an expectancy at bear stearns of a government rescue. that contrasts with what we heard from richard testifying recently before the house of representatives. he said he expected a liquidity bridge.

i do think something changed in march. >> that was a moral hazard? >> i think it understates its given the scope of what was going on. moral hazard is sort of a vague thing. this is very specific. beginning in march, everyone came to the view that they would be too big to fail. how could you not be? >> would i am asking is, what is your view about the policy of rescuing bear stearns in light of the moral hazard, as vegas that might be, that it created? his remarks suggest that moral hazard was operating here because he expected that his firm would be protected in some way. probably, they did not take many

of the actions they would otherwise take to protect themselves and many others probably did not take actions with respect to lehman brothers that were necessary. what is your view on the policy of that? was it a good idea to rescue bear stearns or not? >> the way3 question to everybody's satisfaction is to be to rewind the tape and do it the other way. since he cannot do it, there are two explanations for what happened. the world of the lot worse if we had not done anything. these runs on the bank are driven by panic and fear and what the government did make that worse. we have for all this before. i honestly do not know how to sort that out. i was skeptical about all these things.

i was skeptical about the long- term consequences of a bailout. i thought that he the short run a fax were clear enough. the purpose of this was to restore confidence to the system. the presidential effect needed to be a thoroughly considered. i was very satisfied that these questions were thoroughly considered by both tim geithner and henry paulson. after discussing moral hazard problems and talk -- and all the other questions, i remember henry paulson saying he thought he never would see the day were bear stearns would be deemed too big to fail. once the decision was made by the federal reserve about what they needed to do to protect a system for which they are responsible, the sec acquiesced

in the decision and agreed to do everything possible to help facilitate. >> i am running out of time. i understand the ruminations that went through your mind. what i'm askkng you is, >> do you believe that it was a good policy to rescue bear stearns? was there any indication that you had, as chairman of the sec, that the failure of bear stearns would have effected other institutions? >> as chairman, i certainly was constantly in contact. he knows what resources the sec has available. the sec did not, in 2008, have a

body of data on which to draw, to say, "you cannot do that, that is wrong." my role, institutionally, it would have been impossible for me to say the sec has a completely different view. i would have to answer this question more as a 17-year veteran of congress and say what i have voted for it. that is easier. >> would you have voted for it? >> i would not have voted for a policy of bailing out financial the cetaceans outside of the traditional banking system. >> all right. mr. georgiou. >> thank you, mr. chairman, and thank you gentleman for joining us the afternoon -- thank you, a gentleman for joining us this

afternoon. mr. cox, use date "above all the sec is a law enforcement agency ." our role on the commissiin is to determine whether the success or failure of the sec played a role in the financial crisis. as the top cop, you were almost the most important person in the world, responsible for policing the global securities market. as we look back on your tenure, everyone knows of the two large ponzi schemes that were missed, and although these con men caused investors tens of billions of dollars, few would argue that there were causes of the global financial crisis, and neither would i.. on page 3 of your testimony, if i could direct you to it, you

stated that the mbs devaluation was, itself, the results of the bubble, exacerbated by the use of high? -- high-risk mortgage products. it is abundantly clear that " honest -- if honest lending practices have been followed, much of this crisis would not have occurred." the collapse of banks and other mortgage originators led to worthless, or near-worthless mortgage papers. as of september, 2008, banks have reported more than $1.50 trillion in losses. again, we have heard, in other hearings, about an fbi report in 2004 to issuing a warning about the extraordinary amount of fraud in the mortgage origination market.

in light of the fact that these underlying mortgages became part of these mortgage-backed securities, which, as you stated, became worthless, or nearly worthless mortgage paper, and, they, in turn, who were slashed and diced into other securities, what did the sec do to investigate the underwriting of these so-called aaa securities that were created from this worthless or near worthless mortgage paper? >> one of the reasons i pointed this out in my written testimony was to knit together what is a rather long in an era of all the things that went wrong. the failure of underwriting standards is one of them. the sec is not the regulator of mortgage lending, nor been forced which ignore the enforcer of those standards.

it is not the case -- nor the enforcer of those standards. to is certainly much closer the building. -- to the beginning. it is important to keep our eye on that ball. even today, the standards that seem to to be used are very loose. is sec's enforcement role focus in the securities market. there, the sec has been very active. in 2007, we formed a sub crime task force. at the time that i left, we had over 50 active subprimal investigations going. some have resulted in actions the last year. some were announced.

i think it is important that the sec continue in this vein, because, as we all know, market confidence is in some ways very enforcement. furthermore, the sec has over half of its people devoted to law enforcement. >> mr. georgiou, and my time, can i follow up? >> that would be fine. were those enforcement actions -- against whom were those? >> they would not be against lenders for lending, they would be against people for committed securities fraud.

>> let me be blunt, did think they succeeded? >> i think they succeeded. >> to suggest the sec who was effected is frankly, lucas. -- ludicrous. at a certain point, long answers did not suffice for direct and effective action. >> i would not a group -- disagree with your assessment. i simply meant to separate the sec's role, which is to go after securities fraud, and all of the rest of the law enforcement that are responsible for mortgage lending and a force in underwriting standards. >> let me take it back. you also have a law enforcement function. as you said, your responsibility

was to ascertain whether the securities that were created from these flood of mortgage products met the standards of the securities and exchange commission, to the extent that they were floated in the market place. it seems to me, that was a complete failure during those years. the fact that you might have started in 2006 and 2007, by that time, in 2008, everything was over. bear stearns have already collapsed, and lehman brothers was about to go out the door. >> i would disagree rather strongly with that. in real time, as remember, the credit markets froze up. that effected the municipal markets. in the fastest fashion, we also

got the largest settlement by far in the sec's history. the sediments were over $55 billion of money returned to investors in the form of -- in the form of settlements. that is a record for the sec. it was a very significant, real- time action. >> but taking back of those securities -- the taking back of the securities -- i understand that, and that was good. the mortgage themselves, the residential mortgage-backed securities that were created from these loans, which you characterize as becoming worthless, or near worthless, it seems to me that those proliferated during many years without anyone effectively acting against them. i think the private sector people, who originated them, also had responsibility. >> i think we are coming to

agreement. it was not technical -- it was not technically securities fraud. to the extent that these were securitized, the disclosure system did not work. it was not sufficiently transparent. i think the sec rules provided a lot of information. the underlying situation was so complex, that the marketplace was not able to appraise the risk and press it. >> they all appraised it as aaa. basically, they were rated at extraordinarily high levels, and everyone now knows that they did not deserve any where near that perception in the marketplace. we just heard from the people at bear stearns, who learned that when they could not roll over their money, when they could not finance with anything approaching the car that they were holding other books, ultimately, that caused enormous liquidity problems for them,

putting them and others of the business. there was a discussion this morning about their in particular that had to do with naked short-selling. i have to admit that from time to time i actually read "rolling stone turco there was an article about a month ago that -- rolling stone and." there was an article that called into question the trade. somebody bought a put for $1.7 million to put the shares at $25, or they're about. that was a very unusual trade. of course, there was a lot of short selling in the next 10 days, an enormous volume in the marketplace. i would say jimmy cayne, if not mr. schwartz, suspected that there was some potential, nefarious collusion on the part

of people to do a big bear raid, if you will, on bear stearns. we had a discussion of that, and it turns out that you testified regarding that subject. i wondered if you might comment on what the sec did to look into that. so far, it appears that it does not been resolved. >> as i mentioned, we had many investigations, well over 50 of them, but focused on these related areas. one of the areas that was of great significance was market manipulation. when i was chairman, we set the record for the highest number of actions. it was a big area of focus. one action that we brought involves the intentional spreading of false rumors. in the market prices, given the

scale of it, obviously, that is an environment that is ripe for that kind of fraud and manipulation. to intentionally spread a false rumor, that is a climate where it might be believed. investigating as many as humanly possible in real time was a very important focus for the sec. i know that the way those investigations were, ultimately, you have to prove your case in court. it takes awhile to develop the evidence. i cannot tell you what the inventory is, but i would be surprised if there are not ongoing investigations. >> do need more time? >> just a moment or so. >> one minute. >> thank you. >> this was with regard to the particular allegation of naked short-selling at bear and lehman brothers. i do not know if you have any recollection of that. >> i can give you assurance that

it was immediately some upon by the securities and exchange commission, beyond that, it probably would not be appropriate for me to say if i did know. i do not know the answer to where this stands at the moment. >> i think that is fine. i wanted to ask one quick question to mr. cox. one of the things that struck me was that you were pointing out that there was permitted to allow internal auditors to audit their risk management system, rather than external auditors, which struck me was a major deficiency in the process. i wondered if you could collaborate very briefly. >> sure. we found that the procedures of the c s e program require that it be done by internal auditors.

there were some questions about how that work was performed. we recommended that that matter be looked at, and also be insured that if a decision like that was made, to have internal and 7 external auditors, that it, at least be run by the commission. we found that it was prohibited to do it that way. >> that follows on to the fact that the cse permitted the supposedly regulated entities to establish their own parameters for capital and liquidity associate with the risk that they perceived. >> mr. georgiou, let's wrap the separate. -- let's wrap this up. >> ok. >> mr. hennessey. >> thank you. we heard from the bear executives that bear stearns

failed because of an act of god or nature. what brought the firm down was an unsubstantiated run, that was either a panic or other factors. mr. cox, what i thought i heard from new was that part of the reason that bailed -- that there failed was a program was not implemented and that there were problems at bear stearns. my question is not specifically about the program, but was iran on their unsubstantiated? was -- was a run on bear on substantiated? or, whether actual substantive problems that justified some of the people pulling out? do you by the executives'

argument that there was no rational reason for their firm to experience runs? mr. cox, i will start with you. if you can keep your answers brief, i would appreciate it >> we did not look specifically at that issue. we looked at issues that the market could have seen. those would go against the theory that it was run by unsubstantiated runs. >> chairman talks? >> picking up where david is leading off, his report to the agency, which i was very grateful for, and accepted all 26 recommendations from, and put into effect immediately, it was very clear that there was no evidence of any connection

between the significant deficiencies that he founded his examination and the cause of bear stearns'collapse. the question is a live one. just as you put it, whether or not this is some arrests and a manifestation of something, why there? i think there are several reasons. first, it was the smallest of the investment banks. so, if there were going to be a run on one of these firms, it would take place. if the run award went to be occasioned it not only by people withdrawing funds, but also marketplace activity, it would be easiest to accomplish that in the marketplace with the smallest of the firms. i think that is why bear stearns was first. i think everyone understood that

you just go next on the pecking order. even in an efficient market, there was nonetheless, a hornet's nest around one firm at that time. i think people understood by the time it all culminated in september, that all of them, in the end, given the momentum that was building up, would be vulnerable in that same way. >> let me move on to the other topic. the title of this hearing has been about the shadow banking system. there is an application from that that if only there were more sunlight, if only people have more information, and if only there were tougher regulations, none of these problems would have happened. we have heard a lot of specific questions about the cse program and arguments that the program needed to be legislatively strengthened. i happen to believe that there should be leverage requirements.

what i'm having a tough time believing it is signaling of the particular aspects of the program as being primary contributing factors to these failures, given that over two hundred commercial banks also failed. i have no doubt that a stronger program, or it even a more effectively implemented program, could have helped. when i'm trying to figure out is how does the difference between the cse and, for instance, the fdic's greater amount of information and oversight help us to understand that two of the five investment banks failed and 200 smaller banks failed. it is not just why did they sell, and what does that teach us about the cse program, but in

addition, why did wachovia and other banks fail, and is there some kind of underlined common factor? we will start with dr. sarah -- with mr. sirrah mr. sirri. -- mr. sirri. >> it had nothing to do with the cse program, in my view. >> ok. >> i think the observation you make is a good one, which is it is hard to prescribe the causality to the form and implementation of the regulatory oversight. i just make a comment that it is hard to prescribe the problem to

institutional form. he sought investment banks, commercial banks, insurance companies, all sorts of entities failed. it seems what was common in these cases were the instruments. there were tied tightly to mortgages and, in some places, to commercial real estate. that seems to be what was common. in the regulated entities, the commercial banks, and the cse banks, and in a couple of other places, people understood the exposures. what was hard to appreciate was just a fine, reconciling the -- was reconciling what the market was telling you with something that happened that was outside of the can of what people expected. there were a number of things like that that happened.

we spent a lot of time talking about the disappearance of security funding. these were some areas that we did not plan for. had we gone back in time, four years ago, and i said, and directed my staff to run a one- week evaporation scenario, i think that would have been a difficult thing to cost to happen. it did happen, but to go back four years ago and say that we want it risks an area to be that repo disappears in one week, in all honesty, people would have come back and said "what are you talking about? they would not say that today. >> chairman talks? >> i think he could not have a more clear that there was no evidence --

>> i yield the commissioner another three additional minutes. >> there was no evidence that anything because prevent any of these things cause the crisis. as you put it, what is it that all of these things had in common? all of the commercial banks and the investment bank's -- the one thing they all have in common is that they all use the same regulatory standards. the same standards used by bank regulators around the world heavily discount mortgages from a risk standpoint and a deeply discount freddie man -- freddie mac and fannie mae paper. concentration is baked into the standards. those were the standards that the sec decided to put into its

program. it became the backbone of the program. therein lies an explanation of not only what happened to investment banks, but also what happened to all of these commercial banks. >> anything to add? mr. cox? >> there has been a discussion about the collapse. i think we were appropriately judicious in what we said. we did not find a specific connection between the failures of the program and the collapse of bear stearns. i will echo what chairman cox said. in addition to the standards being inappropriate, and not useful, what we found in this case was the lack of exertion, the lack of influence, and the lack of regulatory effect -- it was not aggressive enough

oversight that was conducted here. perhaps, if one were to look at other situations, they might find that that same lack of aggressive oversight could have been a cause of more than just matters involving the csc and the sec. marin -- miss murren? >> thank you. it think the voluntary nature of that program did not allow the sec to pursue things as aggressively as they might have? >> i think that is a big factor. today, we of for a lot about how the programs will -- how the program was subscribed. those are all qualities of a voluntary program. in our report, we did find that there were some instances when

certainly, the sec could have been more aggressive in same, as suggested by the chairman earlier, you are out of the program, or to threaten them. nevertheless, i think the voluntary nature of the program was something in the minds of all of the oversight folks, and that that had a great effect on how the program was a implemented. >> your comments and your written testimony suggest that there might have been some culture of inaction at the sec, and i am not sure what time frame you are looking at when you suggest that. do you think that is still present? david kotz would prescribe -- would discredit different picture. >> we're limiting it to a program. it was considered a voluntary program. i do not think we would have that same view with respect to

other aspects of the sec, nor when he was there, nor now, under chairman mary schapiro. >> could you talk about some technical aspects? are there differences in the disclosure requirements for long positions against short positions, generally speaking, and then, maybe more specifically, mutual funds against hedge funds? if there are differences, do you think a play a role in some of what we have been talking about today with regard to potential manipulation of market activities? >> let me see if i can be helpful. let's start with hedge funds and mutual funds. the regime for reporting mutual funds is very particular, because mutual funds are regulated investment companies. there is a particular regime for disclosure.

you can find out information on every security that they hold, a listing will be provided periodically, that kind of information is provided to you. that is because mutual-fund are -- that is because mitchell funds are an individual product -- and mutual funds and individual product. hedge funds are different. the advisor could be registered. there is no regime for disclosure about those positions. they are not required to periodically report a table. that just does not happen. you also ask about long and short positions. it is a good question that we have been asked a lot, and

something that the commission direct with the disclosure around. it is the pet -- it depends on what insurance you're talking about. i am going to press him that you're asking about equities. the disclosure was about long positions. when it came to short positions, disclosure is something that the commission has dealt with, it is something that the u.k. is dealing with. it is something that i think is still a topic of debate. the last portion of your question, as i understood it, was did the disclosure regime figure importantly into what we saw happen? i think that equity disclosures -- i am going to say, i do not think they were the key issue, that is the disclosure of those

equity positions because what we saw here were issues around fixed income instruments, mortgage instruments, or loans of various types that were not even securities. i do not think they related to those type of disclosure issues. >> effected stop you there, because i want to follow up on that -- there are a number of companies in the number of different energies, and energy consolation comes to mind, there are instances where it appears because of pressure on the equity securities and that it puts companies in a position where they might go south, perhaps not directly because of fundamentals. when you have mitchell funds -- mutual funds are rrquired to disclose, and hedge funds are not required to disclose, and for the more not disclosed short

positions like you what long positions, does it not read it to the desire to have a whisper, cheddar, or manipulation that you might not otherwise have? in other words, why would you not do it? >> it is an issue that we regularly discussed among ourselves. it is something that you have to think about. i think it might be under consideration still. i have been gone up for a bit. >> are the principles not the same? >> many of them are, but there is a slightly different side. when you have mutual fund disclosures, it is for the benefit of the shareholders who own the mutual fund. the disclosure you're talking about is for the company's benefit.

if they are a hedge fund, holding long or short constellation of energy, the concern of was constellation energy. >> consolation energy was one example. if i wish to invest in a stock, i could very easily go and look up when the ownership structure to see the company that i am keeping. i think that to the extent that part of the job and the mission of the sec is to create a fair environment that people are able to assess the investments they are going to make, knowing who has a short position would be very important in the same manner that knowing who has a long position would be. >> i think it is a good point, but the only additional point i would make is that the short positions are not held long- term. they might be very long -- might be very short term. if your point is there might be

a well-known investor, that might be relative information as an investor, and you might like to know that. >> as a follow-up, to the specific example, -- >> the more time? >> maybe a minute. thank you. as it relates to bear, have you been able to bring that into previous discussions?3 i caught a sense of it. if you want to explain, i'm happy to answer. >> their project hate was a there was -- their particular take was that there was market manipulation. >> i would answer this way. over the time that we're talking about, a number of senior

executives felt there was manipulation often through a short-selling. they would say that the short sellers have gang up. as running a division, my response was to get us some specificity, yes and name, a trade, something i can turn over to enforcement. i've had countless conversations, and that was the information that i relayed. i will tell you, not one single time did anything come back to me with enough specificity that i could pass it onto a college. >> that is helpful. thank you. ms. born. you have a follow-up question. >> i wanted to ask a lot a slightly different topic. during the decade leading up to the financial crisis in 2008, securities firms broadly

decline, spent $1.1 billion in federal lobbying expenses and campaign contributions, according to data for the senator of responsive politics. the financial sector as a whole reportedly spent more than $5 billion for lobbying and campaign contributions during the same time. i wanted to ask mr. david kotz, and mr. donaldson, whether you were -- mr. cox, and mr. donaldson, whether you were aware of these efforts to exert political pressure in washington, and whether the financial-services industry was actively lobbying congress concerning the regulatory powers of the sec. mr. donaldson? >> well, certainly, one is aware of lobbying going on.

the question is, did it affect the operations of the sec? did it affect the decisions that for made? did it effect any of the things it we were supposed to be doing in terms of protecting investors? now. >> that the law was applicable to you, whether any changes to the log? >> a perfect example, i guess, would be the lobbying on the hedge funds. there was a massive lobbying effort going on. it basically did not have any effect on the decision of the commission to vote to regulate hedge funds. that was thrown out in a court decision. as far as influencing anybody within the commission, or on th3 was any influence coming from

that. >> there were no legislative changes resulting from industry lobbying that you were aware of? >> in terms of the functioning in said the sec? >> or your powers, or your jurisdiction. >> not that i was aware of. >> mr. cox, i have a unique perspective of being able to see this from three vantage points. my assessment, first, is that there as an enormous amount of lobbying, and because this is all about money, even more so. secondly, the lobbying, almost always, takes the form of stopping things from happening when it comes to the sec, rather than try to reverse engineered the whole system -- engineer the

whole system. when i got to be the chairman of the sec, and i was in a position to make legislation, and there was an immediate push back a lot of it was from the industry that likes things the way it is. i have mentioned that the municipal market is a multi- trillion dollar market. they like things the way they are now, and they do not want to have prospectuses and disclosed to retail investors the same things they would find if they're buying up regular bond. they will try to stop it. >> thank you. >> douglas holtz-eakin. >> i want to thank everyone on the panel for up to this piece together this long narrative. one of the things that stands out about today, again the bear

panel basically said, as we look from the investment bank world, in particular, and wall street, in general, we all looked the same. you could not tell where the risks were. when bear stearns goes down for unfounded rumors, they all go down. you said you could clearly identify the risk, with those exposed to the -- to commercial and simmons, were the ones that failed. that would suggest that markets were disciplined in bear stearns in particular when things are starting to happen. there's one more piece of interference that came up this morning, and i want to get your reaction, mr. sirri, and mr. costs as well -- mr. cox as well. mr. sirri suggested that there was commercial banks' borrowing from the discount when the and

then handing the funds over. this was a traditional role. he suggested the fed tried to engineer this in the midst of the crisis, and i wondered whether you thought that was an expectation, where whether there was indeed an effort of that type? >> to take your second question first, i have no knowledge the there was such an effort in place. i cannot comment on that. to the first part of your question, i think there have been times where commercial banks were used as conduits to address certain parts of the financial system that had gotten in trouble. dan the stock market of 19 -- the stock market crash of 1987, that was a mechanism used. >> in your oversight, was there an expectation that this would be a part of managing risk? >> absolutely not. the mechanism you mentioned,

which i acknowledge is a mechanism, i never once had discussion with my staff as being a part of a liquidity risks and area. >> mr. thomas. >> won quick wrapup question to bring us back home. picking up on something mr. hennessey said, i think we will need to consider the relative performance of different kinds of institutions, engage in either similar or divers practices. at the end of the day, the cse program, and an objective basis, failed. huntingtown want to ask a specific question. -- i think i want to ask a specific question. it goes to the nature of what it was constructed to be. when the program was adopted in the open session, mr. donaldson,

you said, if anything goes wrong is going to be a big mess. the then director of trading and markets assured the commission we have broad discretion. i guess, this probably for you, mr. sirri, as head of the department, i've had an opportunity to review the monthly monitoring reports, which i believe one to you, correct? idc, that in the fight a number of risk areas that are occurring at a dump -- obviously, they identified a number of risk areas that are occurring. should there have been certain activities of bear stearns that you should have constrained? >> i will directly answer your question. one thing that i want to make sure that has come out, that has not come out, is you asked why

the program was there. an important part of the program was the regulated entity, the broker-dealer. what happened was the regulated entity was down, but capital was downstream to the holding company. when they got in trouble, they took on the broker-dealer. the point, there, is that given that we are charged with watching the broker-dealer, comprehensive and permission was not enough. you're not want to do it that way. we need other information. >> looking at the holding company, where their activities that should have been constrained? >> to have done that -- let's take the concentration of mortgages. it seemed to be a key issue. i think what you are asking me is should we have looked at that mortgage concentration and said

it is too much, and you, bear stearns, need to ratchet that back? if you ask the question in 2007, or maybe a little earlier, at that point, it is probably too late. the markets have started to seize up by then. when you start to see the problem, slightly after the fall of the bear stearns hedge funds, it is probably too late to shed those positions holley, without taking a hit. but suppose we move back in time to 2005, or 2006 -- were ever a time frame, was there a time where you should of pushed the identified problems? >> the october 2005 for report

highlighted concentrations. to do this, you would have to have a view that was contrary to the view of the entire market. that is, a small group of smart folks who do diligent work, you would have to take a position that was contrary to the firm, the street, the market. we did not have that level of confidence that we were right. if we did have the level of confidence, but we knew the mortgage market was going to go down, we would have taken that position. we would have run it up the flagpole within the building. as a staff, who identified the concentration, who saw what happened, we did not sit there and say that these markets were going to head down, it is a bubble, therefore we should do something. we did not believe that was the case. >> this raises a very significant -- exit, the corollary to that, then i will go to the vice-chair -- it

raises a significant issue, which is, what we heard is that this is what everyone believed. of course, it is not really what everyone believes, because there are many voices of they're saying that there was a bubble under way. it does seem to me that the people in at this system itself, they did not have critical eye is. that is either at the investment banks or the regulatory agencies. there were not that many outside, critical voices saying "hey, wait a minute." all the people of knowledge were very insular. there were part of the system where they shared value an affirmation and it turned out to be limited. >> at that moment, as at any moment, there are people on both sides. there are people that had the view that we're in a bubble.

at the same time, you had people who said this is still a strong market, signs were good, and you should invest in concentrate on mortgages. the market brings those people together at a particular price. why take away from it, is that when you are a regular -- a regulator, it is very hard to second-guess the market. he is a tough judgment to make. if you design a regulatory system that hinges critically upon that, upon the regulator second-guessing market prices, that is very tough. >> i was the suggestion that, as much as tolerating the level of risk. i agree. i am in real estate. it is hard to call the top and bottom. i'm generally not good at that. having said that, you can decide to put parameters around certain activities. mr. thomas. >> have we not just come full

circle? there is a brown bag on the table, is it worth something, and how much is it worth? >> i love when people said it predicted something, and say they got it right. what about 870 two times the predicted it, and did not get it right. at some point, it is the collective wisdom, but how can you have wisdom about what is in a brown bag, when you can not looking a brown bag to make the decision? you have to have a structure and exchange, so that you have some concept. at least other people can look in the brown bag and come to a conclusion. i would like to get it out of the brown bag and on the table, so that people can make those assumptions. to say that there are some people who said that it was coined to be bad, that is not going to line up enough people that said it is going to be good. how can you expect a refereed?

i think it was a lot of people who thought they were smarter than they were, dealing with products that they had no idea what they were, created by folks who did not fully understand what they were doing, except that this was something very useful for their purposes, and, there was another agency pushing this to make sure that everyone is able to possess something, which was a mortgage, regardless of how much they made and what condition they lived. we're beginning again at the circle. >> if it does make one comment -- if i could just make one comment. >> it seems to me that what you're saying is correct, and one solution that you have, which has been tossed around, is an independent systemic risk oversight, someone who was not in the channel of looking at

things from the point of view of their agency, or the normal way of looking at it. some of has the right to go anywhere and can put two and two together. why you need someone above the fray? why not get it out of the free -- out of the brown bag? if you cannot look at it, to me, it is the failure of transparency, and the ability to communicate in a market that prices it based on what other people think it is worth. that has been my biggest problem. how could they figure out what they had, if they did not know what it was? >> thank you, very much. i think also commissioners? >> thank you very much for your time. thank you, commissioners for a very hard daywork. louis peck at mike huckabee and tamara with former secretary hank -- we will be back tomorrow

morning at 9:00 a.m. with former secretary hank paulson, and turn secretary timothy geithner. -- and turn secretary timothy geithner. -- and current secretary timothy geithner. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute]

>>, and today, a retiring supreme court justice john paul stevens and elana kagan. america and the courts, today, 7:00 p.m. eastern. >> saturday night and c-span, remarks by utah republican senator robert bennett that his party pulled the nomination convention. he is addressing the 3500 delegates saturday, at the salt lake palace convention center in salt lake city.

>> this weekend, an entrepreneur ted leonis. sunday night on "c-span's q &a ." >> janet napolitano visited tennessee today. she spoke about the severe flooding. this last about 10 minutes. >> i want to welcome you all. during this last week, as we have been dealing with the impact of this flood, we have had a wonderful response from the federal government. fema has been here since their rain started falling on saturday. they have been very helpful. the offices of the senators and congressmen have been in

contact. through this process, i have had a chance to speak with the janet napolitano here. she is the very helpful. she wanted to see things firsthand. we have been traveling around this morning. i think in the most of the people standing up here. we are certainly available to answer questions. right now, i would like to turn this over to secretary janet napolitano, to give you a briefing on what she has seen, and answer any questions you might have appeared -- might have. >> thank you, governor. this has been a quite -- as the governor said, this has been a large disaster. it was important to see with my own eyes with the impact was, and see what the recovery efforts are, to make sure that the administration is doing everything it can. when i say the administration, that is a little formal.

that we are doing everything we can to link up with the impressive efforts under way already in tennessee, be it the volunteer effort, that you see here, and the efforts of the mayor, the governor, and your federal representatives, led been very active here. i think the people of tennessee can be assured that everyone is focused on this and paying attention, and now, we have to work our way through this. we have the same administrator here. is it does seem not administrator here. he has been here three of the last five days. he has done all over the state, and reported back to me what he has been seeing. even as we have been traveling around today, speaking with the aboutnor and the mayor other things that need to be done to set up information centers, to really begin

thinking through the recovery efforts that will need to be made in terms of housing, small business -- you name it. this is a big flood. it effected a lot of areas across tennessee. some parts are dry and open for business. people should know that. other parts, they are pointing it out -- term help. in that regard, -- long-term help. in that regard, as of 7:00 a.m. my time, in washington, d.c., there were 16,000 people in tennessee who had already registered for assistance with cmo. but megan never again. -- let me give you that number again. there were already 16,000

people registered. more than 760 inspections have been completed. we know what the damage number is. more than $4.1 million has already been approved for assistance to individuals. that is not the same as public assistance. the president has already signed every disaster declaration that has been submitted. we turned those around very quickly for tennessee, so those resources could be immediately available. people watching this may want to know what they need to do to register for assistance. this is the key, top step. we cannot help f we do not know who you are and where you are. it is 1800621fema or, go to

www.fema.gov. or, you canm go to m.fema.gov. i have this high-tech card that we wrote that as the numbers on it. i will hold it up here. take a picture of it. put it on your screen. that is the first step. then, of course, the volunteer enters have all this information and more as we begin the process of helping people with their housing needs and assistance needs is recovering from this flooding. let me stop and see what questions there might be. yes, ma'am.

>> are you confident that there will be enough assistance [inaudible] >> your question goes to one of the more difficult issues. we will be able to provide assistance, but only up to a certain level in terms of cash. we'll be working with people right noo on where they need to live. for example, a lot of people went to live with relatives, or they are staying in a motel. we can help with that, as soon as we know who they are. . .

the secretary of housing and urban development is going to be here. they will be coming in and looking at what needs to be done, not just as far as cost.

>> [inaudible] >> we are working with the tennessee emergency management authority. they are helping to guide us in terms of fema to make sure that every county that needs it is getting help, is getting inspected. the administrator of fema was telling me that if you go down the street and someone says, " that is fine," that is not good enough for us. we want to go to every area and make sure we have eyes on the target. i think fema will be here six months from now. in terms of assisting with recovery efforts. but at some point in time, this will not be primarily fema, but it will be these other efforts

that i described with housing and business development and the like. >> [inaudible] >> nussle going to have the fema administrator talk about that -- i am going to have the fema administrator talk about that directly. >> part of this is also small business administration. one of the things that is very helpful, a lot of people that have a payroll tax losses this year, is that the irs will come in and adjust your current tax payments. you may be eligible for a return based on your losses in this calendar year.

>> could you talk about what the president has said [inaudible] >> the president has spoken with the governor personally about this. he is briefed on a regular basis about the situation in tennessee. a senior adviser to him has met with him every day during this flood. he knows the extent of this and the breadth and depth of this. one of the reasons i am here is because at homeland security, we

are kind of the first on the scene at the cabinet level, making sure that we have eyes on the ground. i will be following up shortly with a number of other members of the cabinet. these visits are designed to sit down and go through, all right, what do we need to do, what do we need to coordinate and collaborate on as we removed -- as we move from response to recovery. i have to say that the response in tennessee -- i have been to a lot of disasters. the people of tennessee should be very proud of the response and the overwhelming assistance already going on in neighborhoods and counties across the state. obviously, there is very good leadership and very effective teamwork being exercised. these things were already under

way before the floods hit. you cannot respond unless you are ready, right? tennessee had already invested in that, had good plans and trained people in place. those people are working, as you see, all over the state. we are very impressed with that, but we are now at some point going to move from a response to long-term recovery. that is why the whole federal family that was just described needs to be set up and why we need to start resetting people's minds. we are going to dig out of this, but we have to build our homes and our communities back to where they were before the flood. thank you all.

>> today, retiring supreme court justice john paul stevens and the u.s. solicitor general and the justices life and legacy. for the solicitor general has been interviewed as a potential replacement for justice stevens. "america and the courts" today, at 7:00 p.m. eastern on c-span. >> saturday night, but remarks by a utah senator at his party's nomination convention. seven other candidates are vying for his seat. we will have his remarks tonight at 8:00 p.m. on c-span. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> senator dick durbin is the guest sunday at 10:00 a.m. on

"newsmakers." >> now, a senate hearing with new york city mayor michael blumberg. the terrorist watch list and gun purchasing is the main topic. this is one hour and 20 minutes. >> i just want to assure you that the last person to appear this late at a hearing because she was held up in traffic was secretary napolitano. so there is good precedent here.

we thank all of the witnesses for being here today, and of course i want to begin by extending, i am on behalf i am sure of all the members of our committee, and the entire american family, our special thanks to mayor bloomberg and commissioner kelly, and all who work with you in the the new york city government and lived in that city for your grace and your pressure which remains still about the best definition i know of courage, and for the brilliant law enforcement investigation work that you and your colleagues in federal, state and local law-enforcement communities did to bring faisal shahzad to justice, just 53 hours after his attempted terrorist attack on times square. this hearing on what congress

and the federal government can do to keep firearms out of bed hands of terrorists was scheduled long ago -- out of of the hands of terrorists was scheduled long ago, but its urgency has certainly been made clear by the events of the past four days. in fact, the growing understanding of the dimensions of the plot to attack times square certainly should remind us of a reality that i fear we sometimes forget, which is that global islamist extremism, terrorist, have declared war on america, and they are attacking our homeland with increasing frequency. in fact, they have attempted to carry out more than a dozen attacks on america in just the last year.

most of them have been stopped before any damage could be done, again, by extraordinary law enforcement work. but four of the attempted attacks broke through our home land defenses, including the failed attempts on christmas day over detroit, and last saturday night in new york city. here is the fact that i hope we will focus our concern and attention on, and will hopefully motivate our action this morning. the only two attacks on america since 911 that have been carried out successfully -- the only two attacks on america since 9/11 that have been carried out successfully and taken lives were carried out with firearms. the most lethal was last year when an army doctor opened fire with a semiautomatic weapon at the processing center of fort hood texas, killing 13

americans and wounding 30 others. fort hood was the deadliest terrorist attack in america since 9/11. it was the deadliest domestic terrorist attack against american troops in the history of our country. it was carried out by one man with two guns, a pistol and a smith and wesson revolvers. in june of last year, an american shot and killed a u.s. army recruiter and seriously wounded another at a naval recruiting station in little rock ark., simply because they

were wearing the uniform of the u.s. military. he did so with a semi-automatic rifle. in other recent cases, homegrown terrorist cells have stockpiled firearms while plotting attacks specifically against the personnel at fort dix in new jersey, and that the marine base in quantico, virginia. thankfully, again, a great law enforcement works stopped both of those plots, but had those attacks succeeded, and many other americans would surely have lost their lives, as 160 people did in the attacks on mumbai, india, and the events of 2008, which were also carried out largely with firearms. so, the threat we need to discuss an attempt to prevent is real. terrorist with guns and semi- automatic weapons can inflict heavy casualties in seconds. while it is true that homegrown terrorists, which we are seeing increasingly in this country, are generally, but not always

less sophisticated than those trained overseas but al-qaeda and other terrorist training groups, the truth is that they may also be harder to detect and stop, particularly if they are operating essentially on their own. the easy availability of lethal weapons ensures that these homegrown terrorists can legally obtain sufficient firepower to cause terrible damage. as you know and will make clear this morning, we are simply not doing all we can to prevent terrorists from buying guns. the stark fact is that the united states department of justice has no authority to block the sale of a firearms to suspected terrorists, even when the department knows they are about to purchase guns. this, unfortunately, is not a

rare occurrence. the number of times suspected terrorists have been allowed, with the government's knowledge, to buy guns in recent years is stunning and infuriating. this morning the government accountability office will testify that in the last six years, terrorist suspects, people on a watch list, have tried to buy guns more than 1200 times, and in 95% of those cases, they did buy guns. the rest of the time they were stopped because they were on some other list, because they had a criminal record of some kind. i think most americans understand, once they hear these facts will certainly agree, that this has to change. what we can do is block

terrorists from obtaining guns without compromising constitutional second amendment rights. in fact, a recent survey showed that over 80% of nra members believed that suspected terrorists should not be allowed to buy guns. in 2007, the bush administration proposed legislation to give the attorney general the discretion to prevent the sale of firearms to watchless terrorist. it was not enacted. a senator and congressman have previously introduced legislation to do exactly that. it is, in my opinion, a straightforward, bipartisan bill supported by mayors and others all over the country, particularly in cities that are prime targets of terrorism,

including the large and diverse coalition of mayors and that michael bloomberg leads. in my opinion, at this bill should be enacted as quickly as possible to close this dangerous loophole before another suspected terrorist is able to buy firearms legally and use them to kill americans. senator collins. >> thank you, mr. chairman. our nation remains a target for terrorists, whether sent from overseas or radicalized within the united states, terrorists continue to target innocent men, women and children. their callous disregard for life was on full display in new york city this past saturday. had it not been for an alert street vendor and the courageous action of the new york city police department, many lives would have been lost

and many people would have been injured. i applaud the quick and effective investigative work by federal, state and local quick identification and a rest of the suspect, who allegedly placed the car bomb in the midst of times square. this attempted attack reminds us once again that terrorists are unrelenting in their desire to kill americans. we cannot let down our guard, and we must continue to meet this ongoing threat with strength and resilience. from fort hood to the skies over detroit, and now to times square, our nation must come to grips with the terrorist threat, particularly the threat of homegrown terrorism. an alert citizenry is one of

the bbst defenses against terrorist attacks. signs in the new york city subway system read, "if you see something, say something." those of us who work on capitol hill have been asked to pay close attention, to help be the eyes and ears with our local law enforcement. and, as we saw in times square, and alert citizen can be our best line of defense against terrorist attacks. senator lieberman and i have introduced bipartisan legislation that would encourage individuals to report suspicious activity to the appropriate officials. the legislation is straightforward. it would protect individuals from lawsuits when they, in good faith, report suspicious

behavior that may indicate terrorist activity. our colleague has introduced the bill on the house side. given the recent events in new york city, and i encourage the senate judiciary committee to pass this important bill. during the past eight years, significant resources have been devoted to the prevention of the terrorist attack using a biological, chemical, or nuclear weapon. but as recent attacks have shown, the improvised explosive device, or ied, remains of the weapon of choice for most terrorists. indeed, in 2009 alone, there were more than 3700 terrorist incident involving an ied world wide. the materials used to construct

them are ubiquitous, gas cans and propane tanks available at any home improvement store allegedly formed the core of the times square bomb. when terrorists can form items that can be found in an average family's garage into a weapon of death and destruction, it underscores the need for intelligence collection to identify threats, as well as the need for vigilance by state and local authorities, business owners, and all citizens to learn the warning signed to distinguish legitimate activity from the precursors to a terrorist act. of course, terrorist can also choose to use firearms, and that is the issue that brings us here today. for many americans, including many families in maine, the right to own guns is part of their heritage and way of life. this right is protected by the

secood amendment. this committee and this congress faces a difficult issue today. how do we protect the constitutional right of americans to bear arms while preventing terrorist from using guns to carry out their murderous plans? let me note that this dilemma does not arise when we apply it the terrorist watch list to the purchase of the explosives. one of the more important accomplishments since september 11th, 2001, has been the creation of a consolidated terrorist watch list based on information from all parts of the intelligence community and the fbi. our watchlist system, properly implemented, can be an effective mechanism for

preventing individuals with a suspected terrorist ties from boarding aircraft. it also allows law enforcement and border officials to more effectively screened potential terrorists, and it allows the state department to revoke visas of foreign individuals with terrorist ties who are attempting to travel to the united states. but the fact remains that the evidence used to compile the watchlist is often fragmentary, and can be of varying degrees of credibility. as our late colleague, ted kennedy, discovered when his name was included on the watch list, the watch list can be inaccurate. it is not, in other words, the equivalent of a criminal history report, and indeed, the latest department of justice inspector general's report concluded that approximately 35%

of those sampled from the list were left on the list based on outdated information or material and related to terrorism. incidents of mistaken application of the terrorist watch list are very unfortunate, but those errors usually result only in the restriction of a privilege, such as the right to board a plane or travel to the u.s. from overseas. the expansion of the watch list system to potentially deprive law-abiding americans of a constitutional right is wholly different and raises many critical questions. so, as we consider what at first blush seems to be an obvious step that we should take, we must carefully consider these questions.

are there appropriate protections included within the watch listing process to justify the potential denial of a constitutional right? if not, what procedural protections should be afforded those two are erroneously denied the ability to purchase a firearm? what guidelines are needed to constrain the attorney general's discretion to prevent law abiding americans from purchasing a firearm? let me emphasize that none of us once that terrorist to be able to purchase the gun. but neither should we want to infringe upon a constitutional right of law-abiding americans. thank you, mr. chairman. >> thank you, senator collins. we will begin by it describing the legislation, and then we

will hear responses. senator lautenberg, you have been a real leader on this. the bill you have introduced, i want to say for the record, has been referred to the committee of a legislative jurisdiction, the judiciary committee. we are holding this hearing today in the dispatch of our responsibility, generally, for homeland security, to inquire as to the impact passage of your legislation could have on our homeland security. thank you for being here. we welcome your testimony. >> members of the committee, i want to offer my welcome to mayor bloomberg and to commissioner kelly. each of them has enormous responsibility which they have conducted very well. one cannot help but note, as has been done by senator collins as well as yourself, the incredibly brilliant police work

that went on to get this guy before he was able to leave the country. it was fantastic. so, mr. chairman, i want to thank you for holding this critical hearing, and i thank my fellow witnesses for joining us today. i thank representative peter legislation in the house.- this past saturday we were reminded yet again that terrorists are attempting to kill americans on american soil. this story is now old, but shocking enough to further review. it is so hard to believe that and suv packed with explosives and a timing device was discovered in times square, one of the most visited places in america. the terrorist behind this plot plaaned to murder as many

americans as possible. we are fortunate that this makeshift car bomb did not explode this time, but as officials claim they will do everything they can to stop a future terror attack, a loophole in our guns and explosive laws gives the terrorist the upper hand. halfthis terrorist loophole allows suspected terrorists to purchase military grade explosives and firearms legally in our country. mindful of what senator collins said, we do not want to rob people of a constitutional right. i kind of do not like saying this, but i am going to. to err on at the side of protection is sometimes a chance we have to take. it can be challenged in our

court system without problem. as gao will testify, just last year a person on the terrorist watch list was cleared to buy explosives by the atf. how can it be? to put it simply, right now the federal government cannot block the sale of explosives and firearms simply because they are on the terrorist watch list. it sounds pretty frightening to me. it defies common sense, but it is the law of the land. in fact, some of the very same explosive agents that are used to make roadside bombs in a rock and afghanistan are available for sale legally to known and suspected terrorists here in our country. we know that terrorists do not only use explosives, but firearms are also a weapon of choice. in fact, the u.s. citizen who was arrested at jfk airport in connection with the times square car bomb had a loaded gun in the car as he drove to the airport. if you look at mumbai and other recent terrorist attacks, we see that assault weapons and smaller explosives are being

used more and more times. the fact is that they are able to contact these horrible weapons into smaller packages. that is why we need to change the law. convicted felons, domestic abusers and mentally ill are forbidden from buying firearms, but nothing in our laws keeps fanatics on the terrorist watch list from purchasing guns and explosives. it is hard to believe, but unfortunately, it is true. now, this terror gap is in our laws. is not just some theoretical concept. not only can documented terrorists by firearms legally in our country, they do. i have requested reports from the gao about the number of times the terror gap has been exploited. here is what we learned today. from 2004 to february of this year, terrorists tried to buy guns and explosives 1228 times. 91% of those cases, they were

given an ok to buy them. so roughly 10% of these people were not able to buy guns. america is affectively hanging out a welcome sign for terrorists to arm themselves. i have introduced legislation in the senate to close that gap. rep king has offered a nearly identical proposal and the house. our legislation, a very simple, would give the united states attorney general the power to review and deny guns and explosives to suspected terrorists. it does not sound like it is an impediment to living in this country. this common-sense legislation is not anti-gun. it is anti-terrorist.

in fact, the gun owner who objects to the attorney general's finding has the power, under my legislation, to challenge the ruling. that is why support for the legislation is widespread. the bush administration, which fiercely defended gun rights, asked congress to pass my legislation. attorney general eric holder has indicated his support for our legislation. the chairman of the 9/11 commission has urged congress to close this dangerous loophole, and police chiefs across the country have endorsed our legislation. now, the gun lobby tries to argue that gun owners will be affected. not true. a recent poll showed that 82% of nra members want congress to close this gap. everyone talks about making our country safer from terrorism. this is our chance to actually do it.

thank you again for holding this hearing. >> thank you very much, senator. congressman king, ranking member of homeland security on the house side, welcome. you're a stalwart fighter for the security of the american people. we welcome your testimony now. >> thank you for the opportunity to be here today. i want to thank you publicly and tell you what a privilege it has been to work with you on homeland security in a bipartisan manner. i also want to commend senator lautenberg for his legislation. i want to offer a special tribute to mayor bloomberg and commissioner kelly, whose actions over the last 72 hours showed 100% police professionalism and was a testament to the work done day in and day out by the nypd.

the city has spent hundreds of millions of dollars to protect itself, and again, the whole world and the whole country observed the leadership of commissioner kelly and mayor bloomberg. i would ask that my testimony be inserted into the record. >> without objection. >> to me, this is an issue of common sense. as you stated, we are at war with islamic terrorism. it is an enemy coming to us from overseas, and more recently and more frequently, right here at home. one of the reasons for that is that our policy overseas has been effective under both administrations in stopping terrorist from coming into the country. that has been a success. al-qaeda though, is always adapting. what they are now doing is attempting to find americans who are legally in the country.

they recruit americans who are under the radar screen. they do not have known ties to al-qaeda. it is hard for us to follow them. we have to expect more attacks from those already within the country. the plus side is that those who have not had a sophisticated training overseas are more likely to depend on whatever weapons they can get a hold of. when we see that terrorists can have access to guns, to explosives, i would ask -- all of us were here on september 11th. we remember the next day saying, what could we have done to prevent this? how could we have stopped this attack from happening? i would just say, if we find out that islamic terrorism, such as we saw on saturday night, or others to have terrorist connections, have gone out and bought weapons and carry out a

massacre, whether it is in chicago or new york or new jersey or anywhere, we would ask, how did we allow this to happen? then we would have to explain to the american people, even though we knew this person was a terrorist, even though we knew they were tied to al-qaeda which has declared war against us, even though we knew that we were facing a threat here at home, we still allow the person who is on a terrorist list to buy a weapon and go out and slaughter people. just think what the american people would think of us. if you think there is a lack of faith in government today, can you imagine if we allow that to happen? we would have blood on our hands. we would be responsible for the deaths of all of those people. that is why this legislation is just common sense. senator collins mentioned that there is a possible violation of constitutional rights. i agree with that completely. in the legislation i have, we provide legal ramifications. people are notified if there on

the terrorist watchlist. they can go to court. senator lautenberg has more extensive protections. his legislation was drawn up after the gao report. i would certainly be willing to adapt my legislation to correspond entirely to senator lautenberg's. nobody wants to wrongly be on the terrorist list, but look at what we are facing. we are facing the possible slaughter of american citizens, the possible murder of american citizens by al-qaeda supporters, by islamic militants, by islamic terrorists. to me, there is no debate year. so long as there are sufficient protections in here, and the protections are here, to me if you balanced things on the side of protecting the american people. we saw that guns or bought for the potential attacks on fort dix. we saw the attack carried out at fort hood. these were domestic terrorists. they were people who -- and they did not even have a terrorist record.

just think how much worse it would be if we allowed someone with a terrorist record to buy those weapons. 91% of those who applied for weapons and were on at the terrorist watch list were able to purchase them. it strikes me as outrageous. this should not be partisan in any way. president bush was certainly as pro-gun as any administration. they strongly supported this legislation, as has the obama administration. bipartisan legislation such as this which is targeted and is dealing with a real and present danger -- this is not a tom clancy novel or someone speculating. how many more attacks to we have to have before the american people and the house and senate realized that this is real, it is amongst us, and we

have to do what we can to protect the american people? thank you for holding this hearing. i look forward to working in a bipartisan way and make whatever adjustments we have to make to ensure that this legislation is entirely compatible. this is not a work of art. i have no private authorship. a pledge to take it any way we can so long as the bottom line is that the american people are protected from terrorists with guns. that is where i am coming from. it is common sense. it is the only logical step we can take, especially after seeing what happened on saturday night. thank you for allowing me to testify. as we say in the house, i yield back the balance of my time. >> i accept it. mayor bloomberg, and thank you for being here.

this was scheduled a long time ago, and i appreciate that notwithstanding the events of the last couple of days you have taken the time to be here. it is clear that the american people have lost confidence in some ways in so much of their government. i think you set a standard of leadership and confidence in making government work. i thank you for that, as well as everything else we have thank you for this morning. >> thank you very much. i can say some nice things about you too, senator lieberman, senator collins. thank you for having us today. it is a great opportunity for us to tell the homeland security committee what is going on in our city and why we need some help from washington. as frank and you said today, the government accountability office has recently released

data showing that terrorists on the watch list have been able to purchase weapons from licensed dealers well over 1000 times. that is a serious and dangerous breach of national security, and it really raises a very basic question. when gun dealers run background checks, which they have to, by law, sen to the fbi, should not fbi agents have the authority to block these sales to those on the terrorist watch list and deemed too dangerous to fly? i believe they should, and so do 500 mayors who are part of a bipartisan coalition of mayors against illegal guns. right now, the fact is they do not. as senator lautenberg and congressman king have just said, it is time to close this terror gap in our law. at a time when the threat of terrorism is still very real, as we in new york city know all too well, i think it is imperative that congress close this terror gap in our gun laws and close it quickly.

the car bomb the nypd found in times square on saturday night was not the only attempted terrorist attack on our city since 9/11, far from it. sadly, we do not think it will be the last. since 1990, there were more than 20 terrorist plots of attacks against our city. that is why it is so critical for congress to fully fund homeland security programs like the "securing the city's" initiative. they should take other steps to help us fight terrorists and to make it even harder for them to attack us. in the last year alone, the nypd, working closely with federal authorities, prevented two major attacks on our city. the first was last may when terrorist purchased guns and explosives as part of an attempted attack on a jewish3 the second was in september when the city and federal authorities broke up a plot to designate -- to detonate explosives in the new york city subway system.

of course planned attacks have not been limited to new york. as everyone sadly knows, in 2007, men were arrested for plotting to attack fort dix in new jersey with an arsenal of high-powered firearms. last june, in little rock, ark., a man opened fire at a military recruiting station. at the time of the shooting, the fbi was already investigating this man after his arrest in yemen with a fake somali passport. he was charged with murder and 16 counts of terrorist acts. on november 5th, 2009, 43 people were shot at fort hood, 13 killed. we know the terrorist was able to buy a handgun despite being under investigation by the fbi for his links to terrorism. after the fort hood shooting, i wrote an op-ed with the chair of the 9/11 commission urging congress to close to the terror gap.

our message was that we cannot wait for another four hood to happen before we take action. as pete said, the bush administration first proposed closing the gap in 2007, but because nothing has happened, people who may want to do our country harm have no trouble buying guns and explosives, as the gao report clearly shows. it is important to note that the legislation before you today would give fbi agents the ability to make exceptions when they determined that blocking a sale might tipoff a subject who is under investigation. the bill also allows those denied arms to appeal their status to the justice department in court. attorney general eric colder supported closing the terror gap in testimony before the senate judiciary committee last year. so do the vast majority of americans. and, senator lieberman, as you pointed out, a poll found that

82% of nra members support closing the terrorist gap. of course, it is true that even if the terrorist gap and our background check system were to be fixed, terrorists and other dangerous people would still be able to go to gun shows to buy arms without any checks at all. we are urging congress to close the gun show loophole. we have found that 82% of an area members are also in favor of closing the gun show loophole that enables the terrorist gap. under commissioner kelly's leadership, the nypd has developed one of the world's most advanced counterterrorism programs. thousands of our best police officers work on counter- terrorism and intelligent every day. a key element of any smart counterterrorism strategy is to make it harder for terrorist to

strike. that is why airport passengers walk through metal detectors. that is why our police randomly checked bags into the subway. that is why they patrol sensitive locations. and that is why it is just common sense to give the fbi the authority to keep terrorist suspects from buying guns and explosives. let me close by is saying something about the second amendment. it was not written to empower people who want to terrorize a free state. it was written so that people could defend the security of a free state. today, our free state is being tested by terrorists. i urge you to take the common- seese steps in this plot to strengthen law enforcement, including closing the terror gap to protect the american people from more attacks. thank you very much. >> thank you very much, mayor

blumberg. commissioner kelly, thank you for being here. when i talk to law enforcement people around the country, they all feel that the standard of law enforcement is set by the nypd, and if anything, your leadership has set that standard even higher. turn the microphone around if you would. >> senator collins, senator lieberman, thank you for the opportunity to be here. terrorists are determined to attack us by any means. saturday's attempted car bombing is just the latest example. since 2001, new york city has been the subject of 11 attempted plots that we know of. it highlights one of the myriad ways terrorists might try to

attack new york, a homemade bomb, by releasing cyanide into the subways, buy enriched cables. the police department is trained to react to every type of threat, especially those involving guns or explosives. that is why it is urgent that we close the terror gap in our nation's law. the year to do so places this country at even greater risk. last year, and testified before this committee about the nypd's response to the attacks on mumbai in india. as you may recall, that attack was carried out by small teams of operatives using ak-47 rifles. as part of our comprehensive response to what happened in mumbai, we held technical

drills with operators from our special operations division based on that scenario. we trained additional officers in the use of heavy weapons so that they will be able to supplement the work of our emergency service officers in a crisis. we also created a tactical reserve force. we have taken these and other measures because we believe an attack involving active shooters is always a possibility. we are also guarding against terrorism in the form of homemade bombs, like those found in that car, or in backpacks, or in a suicide mission like the one planned last september in the new york subway system.

our subject -- our subway program, designed after the london bombings, is designed to ppevent the ease in which terrorists can harm our system. the police department needed to build intelligent collection and analysis and infrastructure capabilities to defend new york city from another terrorist attack. we restructured our intelligence commission. we recruited the best that the federal government had to offer. we created a new civilian intelligence program to support our field commanders with timely information and analysis. we tapped the incredible logistic diversity of the

police department. we signed native speakers of arabic languages. we patrol sent to the plan marks and locations -- sensitive landmarks and locations. we work in cooperation with the fbi and the department of homeland security. all of that effort would benefit from this bill which would exclude anyone from the terrorist watch list from being able to purchase a gun or explosives. from the standpoint of the nypd, at this complement's the anti- gun strategies we already have in place. new york city has proven a leader in it, betting gun violence -- in combating gun

violence. we have been able to drop conventional crime by 40% since 2002. we are by no means declaring we know there are still far too many guns available for criminals. the same is true for international terrorist organizations, which in all likelihood are plotting their next attack as we speak. this legislation would go a long way in stopping them from exploiting this loophole and succeeding in their mission. for that reason, i hope that congress will pass this legislation without delay. >> thank you. we will do a seven minute round of questioning. the fact that you are here so soon after the events of the last four days gives us an opportunity, before we get to

the terror gaps, to just ask you if you have any immediate lessons learned. in other words, from the last four days. from my perspective, looking at it, all lot of what we hoped would happen in a post-terrorist attempt situation in terms of cooperation between state and local government happened. you were there. you're on the ground. give us your reactions. have you come away with any lessons learned? >> i came away pleased in the sense that the public saw something and did something, as senator collins pointed out. we tell the public to turn security over to the professionals. be the eyes and ears, but they are the ones with roots on the

ground to defend us. all of the training that mr. kelly and the nypd and our office of emergency management do together and with federal agencies and state agencies showed itself instantly. a police officer was called over. he was amounted, on a horse. he saw that there was something wrong right away. they immediately started pulling people back. they called in the fire department. we saw a group of people working together. thank god it was not worse than it was. had the explosive gone off, it is fair to say that the professionals called in and did what they had to do to protect us. that should give us comfort for the future, but as commissioner kelly will tell you, we are the target, we are going to be the target again, and the next

attack will be different. we do not know what it is, but we will keep training for any eventuality. >> mr. chairman, it is clearly a team effort. the joint task force in new york city is the largest in the country. we will work together on this case as we have on many others. the relationship is strong and certainly a very productive one as this investigation showed. i think it also illustrated the benefits of technology. we were able to cull information from databases that were very helpful. the key finding in this case was the hidden vehicle identification number. that helped us find the owner.

through using federal databases we were able to link to people who led us to the suspect in that short order. that is why it took less than 53 hours as far as the arrest process is concerned. >> i could not agree more. i was pleased to understand the -- to understand that some of the databases within the department of homeland security were very helpful. you were able to bring that information to bear very quickly in the case. i was thinking about the two street vendors. .

i am getting to an age where i remember things young people do not remember. i remember a case where many people watched a woman being attacked and no one reported it. this was vastly different. two people saw something suspicious and went to the police, which prevented something worse from happening. i give you credit for the campaign that you conducted to alert citizens to their role. we are an open country. an enemy care is not about their own lives or the lives of innocent american civilians. we simply cannot stop every attempt, no matter how hard we try. that is where citizenry becomes 300 million plus more preventers, security providers.

thank you for that. commissioner, let me ask you about this proposal. the brady gun law now says that if you apply for a federally licensed gun sellers a gun, your name is automatically run through a less. -- a list. sometimes there is a wait time of three days, during which a law enforcement is informed. oddly, right now if justice is informed that your name is on a terrorist watch list, they cannot stop you from buying the gun. it is obvious that you want to keep a gun out of a suspected terrorist's hands. talk a little bit about what the

purchase of a gun may say about the moment in a wood-be terrorist's activities. in other words, might it suggests that that person is about to go operational? >> certainly, that is a possibility. we are still gathering information about faisal shahzad's purchase of a gun. we know that he purchased the weapon in march in connecticut. we know that he had with him in the car that gun when he drove to jfk airport on sunday night. it appears from some of his other activities that marches when he decided to -- march is when he decided to put this plan in motion. he came back from pakistan