durbin some of the frustrations that democrats have had with all the republican opposition that they've confronted in the past. unfair, in their mind. but certainly they're not encountering that so far with this bill. >> and it could wrap up by the end of this week. >> well, that's where you may see some of this break down. because senator reid wants to finish up this bill as quickly as possible, and move on to this litany of other issues that we heard senator durbin discuss. senator mcconnell on the other hand, the republican leader, wants to continue the debate as long as necessary for these, all these amendments to be heard, for everybody to have a chance to speak their peace. so that's usually where things break down in the senate is over time agreements, and little things that don't mean anything to anybody beyond the floor. but those are -- that's where the battle is drawn. >> if i could stay but for a second on the litany of other thing that is democrats would like to do that senator durbin

went through. realistically, because i asked him, you want to do this on jobs, what about immigration, what about climate change. realistically what are you hearing? >> this is probably the last big bill we'll see this year, barring some national crisis of some sort i think we will see just a whole series of smaller initiatives, unemployment extensions, bills to extend these tax credits that are expiring. various smaller provisions that would address like the oil spill and liability issue with that. you know, immigration, climate change, all these big objectives that democrats are still talking about with voters are just absolutely unrealistic at this point. as are any serious efforts to as are any serious efforts to address the deficit and other issues that matter a lot to the moderate voters that folks are

scrambling to win over for november. >> and that brings us to your question about the debt and deficit. what did you hear? >> what i heard about the deficit commission was not to expect very much out of it. he's obviously a very savvy interview and he had sort of to read through the code. but he said after our second meeting, you're beginning to see -- he didn't say it's looking harder but that's what i got out of it. on the broader question of the agenda, we had a disconnect. i asked him about the bush tax cuts, which are about keeping the top rated 35% and capital the top rated 35% and capital gains and other taxes on investments low. and he started talking about the min knew sha involved in this unemployment bill and what we call in washington tax extenders bill which they're having an enormously hard time with, and that is really occupying a great deal of their

time. and relative to a lot of the other things we've been talking about, it's not that big a deal. but you can see how challenging everything is for them in this sort of environment where they're under seige. >> and there's six months to go until the election. so politics, how is it playing into everything that we've heard today? >> i think both parties see this as a jump ball right now. and the shreweder politicians know that you really can't read a mid-term electorate until labor day. so i think what democrats are trying to anticipate is where the economy will be, what -- i asked him about what kind of questions democrats are going questions democrats are going to have to answer for voters. i think that's a really big challenge for democrats right now. are voters going to be interested in job creation, are they going to be more interested in longer term problems like the debt?

is there going to be a new national security problem on the horizon? it's a -- mid-terms tend to reflect the immediate past as much as they are a referendum on the few years of a presidency. so you have all of these forces at play with candidates on the left, challenging moderate democrats. a whole stew of republicans. and many of these races from the tea party candidates all the way to moderate republicans like mark kirk in the illinois race in senator durbin's home state. so it's hard to say what voters want and what democrats are going to need to deliver in order to preserve their majorities in either house. >> andrew are you he said in his list, appropriations in budget are a must do. why is that important? >> well, i don't necessarily

stipulate to the question, because it's beginning to look like they're not going to do the budget, which is sort of the arcane washington ritual which has more to do with senate procedures that actually affecting the budget in most years. he said there's 13 workweeks until the election. well, it's awful hard to see them doing very much on their regular appropriations work, particularly in this atmosphere. they have to do a wartime supplemental bill. they have to do this unemployment extension bill. they have to do lots of other -- they have to do a supreme court nomination, which is going to take two weeks. so i can't really imagine them spending a lot of time hashing through the treasury department budget, whiches is one he oversees. so there's every possibility that we'll get at the end of the year a bill about yea big that nobody's read that

everybody always criticizes but that people always vote for in the end. >> all right. andrew tailor, and sheila, thank you both for being part of "newsmakers." >> thank you. >> in a moment we'll hear president obama speaking in hampton, virginia. giving the graduate address. first, a look at the latest in the british parliamentry election. we're going to take a break from that discussion to check in with tom baldwin on the phone with us from london. and he is here to talk to us about the latest developments in the british election which was held last thursday. good morning. >> hello. >> what is the latest? where do we stand right now? do we have a government? do we have anywhere close to get a government there? >> we still have a government. >> a new government.

i'm sorry. >> constitutionally, gordon brown remains prime minister until he stops being mime minister. when we're going to have a new government. >> yes, sir. >> talks going on as we speak in the cabinet office between the conservative party and the liberal democrats as to whether they can form some sort of deal which would give the conservatives the majority they need in the house of commons to form a stable government. labor already talking about this as condemnation. short for conservatives, short for democrats. so it's going to be messy and tawdry. and you will hear a lot more about this if you're in britain certainly over the next few months. >> there's a subheadline in the story this morning that says 62% want the prime minister out now. >> well, that's a similar

proportion to the people who voted against the labebour party in the general election. we've got a three-party system now. and certainly you'll probably find a large number of people in the labor party want gordon brown out. it is possible for labor to stay in power without gordon brown. it's possible for gordon brown to stay in power in thesure short term to see through legislation on a new voting system. because there's talk about the current system being discredited. we need to have a new system. all kinds of permtations are possible here. >> is there a timeline for getting this coalition together? >> no. but i think there will be a point when people wonder why gordon brown is still waken up on downing street having apparently lost the general election. there's also pressures from the markets who want toohave some form of stability. when the markets start trading

again on monday morning, there's a danger that we will see some of that uncertainty reflected in the finances of the country. >> what is to keep nick clage and david cameron from trying to form their own government and sort of move prime minister brown to the side? >> well, that's what they're trying to do today. they're having talks. the thing that is stop them are the fact that they're not natural bed fellows. the liberal democrats are very pro-european. the conservatives are euro skeptic to the point of being phobic. the liberal democrats have long since made proportion nal representation, a new voting system which they think will be fairer. the holy grail of their politics. the conservatives oppose it. the liberal democrats want to get rid of brittons nuclear deterrent. tried it. the liberal democrats are

naturally a progressive party. and for them to prop up a right-wing party, which they oppose locally on the ground, will be quite a big leap for them. >> you touched briefly on the british markets. and what they're hoping to see. if this new government is not formed, let's say, by the end of the week, is this going to have some sort of long-term negative effect object british market and then by extension other economic markets around the world? >> well, we don't know other countries of course, france, germany, and in fact most european countries have european countries have coalition governments and have a period of trading after elections and the sky doesn't fall down on their heads. we're not used it in brit yin, and perhaps the british market is more important than some of the other european centers.

we'll find out monday morning. >> at any point does the constitution over there allow for the queen to get involved? or is this something that will be dealt with just by the politicians? >> we don't have a written constitution, which is part of the problem. and this thing is governed by conventions. and the queen, she will not want to be dragged into this. she will be advised by senior sil servants. she will be advised by ministers. and she will be hoping very much that they will be able to come to different political party leaders will be able to come to an agreement without her being dragged into an unseemly mess. because the one thing she has achieved over the last 60 odd years that she has been on the thrown is she has stayed above politics. >> tom baldwin, chief reporter with the times of london, thanks for checking in with us and helping us to explain to our viewers and listeners

what's happening over there in london. >> it's my pleasure. >> this morning, president obama is in hampton, virginia. he speaks to graduateses about the importance of education and being good citizen. it's his first speech as president at an historically black college. >> thank you class of 2010. please, everybody, please have a seat. i love you back. that's why i'm here. good morning, everybody. to all the mothers in the house, as somebody who is

surrounded by women in the white house, grew up surrounded by women, let me take a moment just to say thank you. for all that you put up with each and every day. we are so grateful to you and it is fitting to have such a beautiful day when we celebrate all our mothers. thank you to hampton for allowing me to share this special occasion. to all the dignitaries who are here the trustees, the alumni, parents, grand parnts, aunts, uncles, cousins, that's a cousin over there. now, before we get started, i just want to say i'm excited.

the battle of the real hu won't be taking place in washington this year. you know i am not going to pick sides. but my understanding is it's been 13 years since the pirates lost. [cheers and applause] as one hamtm alum on my staff put it, the last time howard pete hampton the fujis were still together. let me also say a word about president harvey, the man who bleeds hampton blue. in a single generation, hampton has transformed from a small black college into a

world-class research institution. [applause] and that transformation has come through the efforts of many people but it has come through president harvey's efforts in particular, and i want to commend him for his outstanding leadership as well as his friendship to me. [applause] most of all, i want to congratulate all of you, the class of 2010. i gather that none of you walked across ogden circle. you did. ok. you know, we meet here today as graduating classes have met for generations. not far from where it all began. near that old oak tree.

emancipation drive. i know my university 101. [cheers and applause] beneath its branches about 20 students gathered in 1861, taught by a free citizen in defiance of virginia law. the students were ascaped slaves from near by plantations who had fled to the fort seeking asylum. after the war's end, a retired union general sought to enshrine that legacy of learning with a collection from church groups. civil war veterans, a choir that toured europe.

hampton normal and agricultural institute was founded here by the chesapeake, a home by the sea. that story is no doubt familiar to many of you. but it's worth reflecting on why it happened, why so many people went to such trouble to found hampton and all our historically black colleges and universities. the founders of these institutions knew, of course, that inequality would persist long into the future. they were not naive. they recognized that barriers in our laws and in our hearts wouldn't vanish overnight. but they also recognized the larger truth. a distinctly american truth. they recognized class of 2010 that the, with the right education, might allow those

barriers to be overcome. might allow our god-given potential to be fulfilled. they recognized as frederick douglas once put it, that education means emancipation. they recognized that education is how america and its people might fulfill our promise. that recognition, that truth, that an edcan -- education can meet above any test is reflected again and again throughout our history. in the mess of civil war we set aside land grants for schools like hampton to teach farmers and factory workers the skills of an industrializing nation. at the close of woold war ii we made it possible for returning gis to attend college, building and broadening our great middle class.

at the cold war's dawn we set up area study centers to prepare graduates understand and address the global threats of our nuclear age. so education is what has always allowed us to meet the challenges of the changing world. and hampton, that has never been more true than it is today. this class is graduating at a time of great difficulty for america and for the world. you are entering a job market in an era of heightened international competition with an economy that is still rebounding from the worst crisis since the great depression. you are accepting your degrees as america still wages two wars. wars that many in your generation have been fighting. meanwhile, you're coming of age in a 24/7 media environment

that bomb bards us with all kinds of contents and exposes us to all kinds of argument, some of which don't always rank that high on the truth meter. with i pods and i pads and x boxes and play stations, none of which i know how to work, information becomes a distraction, a diversion, a form of entertainment rather than a tool of empowerment, rather than the means of emancipation. so all of this is not only putting pressure on you, it's putting new pressure on our country and on our democracy. the class of 2010, this is a period of breath-taking change like few others in our history. we can't stop these changes. but we can channel them. we can shape them.

we can adapt to them. and education is what is going to allow us to do so. it can fortify you. as it did earlier generations. to meet the tests of your own time. and first, and foremost, your education can fortify you against the uncertainties of a 21st century economy. in the 19th century, folks could get by with a few basic skills, whether they learned them in a school like hampton or picked them up along the way. as long as you were willing to work for much of the 20th century, a high school diploma was a ticked into a solid middle-class life. that is no longer the case. jobs today often require at least a bachelor's degree. that degree is even more important in tough times like these. in fact, the unemployment rate for folks who have never gone to college is over twice as

high as for folks with a college degree or more. now, the good news is you're already ahead of the curve. all those checks you or your parents wrote to hampton will pay off. you're in a strong position to outcompete workers around the world. but i don't have to tell you that too many folks back home aren't as well prepared. too many young people just like you are not as well prepared by any number of different yard sticks. african americans are being outperformed by their white class mates are as hispanic americans. students in well-off areas are outperforming students in poor rureral or urban communities no matter what skin color. globally, it's not even close. in eightth grade science and

math, american students are ranked about tenth overall compared to top-performing countries. but african americans are ranked behind more than 20 nations, lower than nearly every other developed country. so all of us have a responsibility as americans to change this. to offer every single child in this country an education that will make them competitive in our knowledge economy. that is our obligation as a nation. but i have to say, class of 2010, all of you have a separate responsibility. to be roll models for your brothers and sisters. to be mentors in your communities. and when the time comes, to pass that sense of an education value down to your children. a sense of personal

responsibility. and selffrespect. to pass down a work ethic and an intrinsic sense of excellence. that made it possible for you to be here today. so allowing you to compete in the global economy is the first way your education can prepare you. but it can also prepare you as citizens. with so many voices clamoring for attention on blogs and on cable and on talk radio, it can be difficult at times so sift through it all, to know what to believe, to figure out who is telling the truth and who is not. let's face it, even some of the craziest claims can quickly gain traction. i've had some experiences in that regard. fortunately, you will be well positioned to navigate this terrain. your education has honed your researchabilities, sharpnd your

anlitcal powers, given you a context for understanding the world. those skills will come in handy. but the goal was always to teach you something more over the past four years you've argued both sides of a debate. you've read novels and history that take different cuts at life. you've discovered -- a little amen there. you've discovered interests you didn't know you had. you made friends who didn't grow up the same way you did. you've tried things you've never done before. including some things we won't talk about. in front of your parents. all of this i hope has had the effect of opening your minds, of helping you understand what it's like to walk in somebody else's shoes. but now that your minds have been opened, it's up for you to keep them that way. it will be up to you to open

minds that remain closed that you meet along the way. that, after all, is the elemental test of any democracy, whether people with differing points of view can learn and work with each other and find a way forward with each other. i would add one further observation. just as your education can fortify you, it can also fortify our nation as a whole. more and more, america's economic preemnens, our ability to outcompete other countries will be shaped not just in our bord rooms, not just in our factory floors, but in our classrooms and schools, at universities like hampton. it will be determined by how well all of us, and especially our parents, educate our sons and daughters. what is at stake is more than our ability to outcompete other nations. it's our ability to make democracy work in our own nation. years after he left office,

decades after he pened the declaration of independence, thomas jefferson sat down a few hours drive from here in monticello and wrote a letter to a long-time legislature urging him to do more on education. and jefferson gave one principled reason. the one perhaps he found most compelling. if a nation expects to be ignorant and free, he wrote, it expects what never was and never will be. what jefferson recognized like the rest of that gifted founding generation was that, in the long run, their improbable experiment called america wouldn't work if its citizens were uninformed, if its citizens were apathetic, if its citizens checked out and left democracy to those who

didn't have the i want rests of all the people at heart. it could only work if each of us stayed informed and engaged. if we held our government accountable, if we fulfilled the obligations of citizenship. the success of their experiment, they understood, depended on the participation of their people. the participation of americans like all of you. participation of all those who have ever sought to perfect our union. i had a great honor of delivering a tribute to one of those americans last week, a an american named dorothy height. and as you probably know, dr. height passed away the other week at the age of 98. one of the speakers at this memorial was her nephew, who

was 88. and i said, that's a sign of a full life when your nephew is 88. dr. height had been on the firing line for every fight, from lynching to desegregation, to the battle for health care reform, she was with eleanor roosevelt and she was with michelle obama. she lived a singular life. one of the giants upon whose shoulders i stand. but she started out just like you. understanding that, to make something of herself, she needed a college degree. so she applied to bar nard

college, and she got in. except when she showed up, they discovered she wasn't white. as they had believed. and they had already given their two slots for african americans to other individuals. those slots, two, had already been filled. but dr. height was not discrveraged. she was not deterred. she stood up and she marched down to new york university and said let me in. and she was admitted right away. i want all of you to think about this class 2010 because you have gone some hardships, undoubtedly, in arriving where you are today. there have been some hard days

and hard exams, and you've felt put upon. and undoubtedly you will face other challenges in the future. but i want you to think about ms. dorothy height, a black woman in 1929, refusing to be denied her dream of a college education. . . >> that alternately is the

secret, not only of african- american survival and success, but the secret of america's survival and success. yes, education is the test of our economy, citizenship, times. what ultimately makes us american, a quintessentially american, is something that cannot be taught. the stubborn insistence on pursuing their dreams. the same insistence that led a band of petrie's to overthrown empire, that fire the passions of union troops, that freed slaves and union veterans to found schools, that led foot soldiers the same ages you to have fire hoses and billy clubs on streets and bridges. that lead generation after

generation to toil away quietly through parents, grandparents, great-grandparents without complaint, for the hopes of a better life for their children and grandchildren. that is what makes us who we are. a dream a brighter days ahead. a faith in things not seen. i believe that here in this country we are the authors of our own destiny. that is what hampton colleges all about. it now falls to you, the class of 2010, to write the next great chapter in america is stored, to me detest of your own time, to take up the ongoing work of fulfilling our founding promise. i am looking forward to watching. thank you, god bless you, and may god bless the united states of america.

[applause] >> today and c-span, california's republican primary debate between the former congressman, the assembly member, and the ceo. then on monday, the kentucky republican primary debate between the secretary of state, martin, paul, and a fourth. it is live here on c-span. >> the midterm elections are only six months away and could change the balance of power in washington. watch the candidate debates that

have worried taken place in key races across the country. it is online at the new c-span video library. search it, watch it, clip it all free. it is the latest get from cable to america. >> the financial crisis inquiry commission held the second of two days' of hearings on the so- called shadow making system. secretary paulson cautioned lawmakers against overreaching on financial power. this is two hours. >> mr. secretary, i have a number of questions for you that really focus on the run up to the crisis. as i have said, there has been a lot of the fascination with bailout, how the system was stabilized. for me and i suspect other commissioners, the question is how did we come to the point where the only options were to allow the system to collapse or to commit trillions of taxpayer

dollars? i would like to ask you just a couple questions with respect to your view, your wallet goldman before you became treasury secretary. from 2004 and to 2006 when you were the ceo goldman, they issued about $8.40 billion in subprime cdo's. let me first? q -- what is your sense of any rigid let me first ask you, what is your sense of the value, if any, of the value of synthetic cdos' and the system? do they provide benefits for capital? or, are they really a device for bedding?

>> mr. chairman, a number of times i have said that i believe we had excessive complexity in the financial products. and that, as i think about it, it is very hard to regulate against innovation. one of the things i have recommended for a number of years now is that when we look at some of these complex derivative products, the regulators make sure that we have a real substantial capital charges against these products, now in terms of the deal is your

talking about, i do not remember the particulars. >> the believe they provide real benefit to the financial system and the real economy as a whole? or are they side bets? >> to get at market-making -- there has been a lot of discussion about market-making. one of the things i saw, and i have not been in the business for four years -- but i saw that clients increasingly were asking goldman sachs and other banks to provide capital and help them to manage risk. there are many examples of that.

the business, i think, is a very legitimate, beneficial business. it needs to be done with very high standards, great integrity, and in a way in which you are working for your clients' interests. this morning i was thinking about this hearing, thinking of all the situations where a client, you know, a major sovereign nation, was worried about the prices of oil rising. would come to an investment bank and look for a way to protect themselves. or an airline worried about the prices, the oil prices going up. a sovereign nation would be more concerned about the prices going down. there are many situations where

customers want their investment banks to help them manage risk. i think that is a very legitimate function. >> do you think it is legitimate if there is no underlying interest? you mentioned an airline company with fuel -- other entities that may have a commodity against which they may hedge. >> of all the times when i was in the business, where we employed hedges, i think the best practice in terms of prudent risk management is firm's hedging securities that they have on their balance sheet. i think of the underwritings of securities were investment bankers needed to take a short position which is part of the offering process, to make sure there's a stable market.

and in the housing there is the reason that someone who wants to put an edge in terms of protecting themselves against housing prices going one way or the other should not be able to. to me that is an important function of a market-maker. we want to separate the function and market-making function, which needs to be done with the very highest standards, not only in terms of compliance with laws, but in a way which inspires and keeps client trust, and separate that from, you know, from activity that is not done properly. investment banks can make

mistakes, commit fraud in a whole variety of areas. but let's focus on legitimate role that market-making plays in the carpecapital market. >> i have one quick question to ask since you raised the standards of concert. not so much in your role as a market-maker -- and i will not refer to a specific case lodge by the sec begin as goldman, but do you think it is appropriate when entity is underwriting the security that it would contemporaneously bet against that on issuance? >> i would simply say that any transaction done in the marketplace has got to be done with the highest standards of fair dealing in making appropriate disclosures. in terms -- when you say betting

against or shorting, i can think, when i was in the business and we managed to sell securities in the public market, as part of an underwriting process, the senate could where the underwriter had a short position, ok, is that betting against the security? that is a legitimate function done to make sure there is a stable market. frankly, every one of these market-making transactions, or many of them, the client for customer expects the banker to take the other side of the trade, to help them manage risks and make capital. >> so, complete disclosure is what you think is elemental? >> i said appropriate disclosure. >> ok, let me talk about -- you know that the treasury department is responsible for

"insuring the financial security of the u.s." on the web said. you were head of that for the president. you brought forth the blueprint. what did we know looking for to the risk of future crises we can have organizational structures, but will we be able to pick up on the warning signs? in your book you know that there is the august 17th meeting at camp david that "my number one concern was the likelihood of a financial crisis. i was convinced that we were due for another disruption." sitting in that position, having come from wall street, by the end of 2006 the leverage ratios at bear stearns were at 32-1, and so on with the other firms -- not counting for balance sheet management.

in the spring of 2007 a little later from your date at camp david, the ratio of level 3 assets, the illiquid assets that are hard to price, at bear stearns are 269% of tangible common equity, and so on for the other firms -- the investment banks have been growing like weeds at goldman 26% per year, compounded annual growth rate, morgan stanley about 15%, and as you point out in your testimony there are warning signs that abound. states all over the country trying to fight -- in early 2000 before you become treasury secretary, there were pre-empted by the occ. in 2004 the fbi was about an epidemic of mortgage fraud.

i held this up yesterday. the economist has an article. this was from 2005. the lead of this story steadman says the day of reckoning is close at hand and it will not be pretty. how the curve housing boom and could decide the course of the entire global economy for the next few years. here are more figures. in your testimony the subprime lending has exploded to be 20% of the market. by 2006, mortgage debt between 2000 and 2006 has doubled in this country. we have borrowed more and those six years in mortgage debt than the entire amount of this country's history. there is knowledge of the opaque nature of the country's derivatives. here is my fundamental question. what did you and other policymakers know when you came into office?

what was the missing information that would have allowed both policymakers and corporate leaders to begin to mitigate risk? >> mr. chairman, with all due respect, i began immediately to work to mitigate risk. within the, finds that that role has no authority to regulate risk for markets. i immediately saw huge holes in the regulatory system. i took several actions immediately. to regulate quarterly meetings of the president's working groups so that regulators can immediately begin to share information to fill in gaps. there was work done there right away. i'm looking at the margin requirements. i'm looking at the amount of

credit extended between the regulated entities and hedge funds. secondly, i immediately started working with congress to complete regulatory reform legislation for fannie and freddie, which had been stalled by politics for years. i commenced this regulatory review, and out of the review came the blueprint. it came pressing market participants to strengthen their infrastructure in areas like otc derivatives, and areas like that. ultimately, we came up with a blueprint. we were on it. in terms of the excess is you talked about, they are there. you could not push a button and

have them go away. the bad loans have been made. we had -- >> was the toothpaste out of the to by the time you arrived? -- out of those tube? >> yes, most of it was out of the tube. there really was not the proper regulatory apparatus to deal with. >> but my central question -- i really had two. you addressed the second. by the time you arrive, is the information you need, it is on the table by 2006? we have heard a lot in these hearings, a lot about we are shocked, surprised. but even when a tsunami comes to health warnings ahead of time. >> and me tell you what was not clear to me, and i don't think

it was too many people if anyone i arrived -- that was the skill and degree of the problem. for instance, if you refer to the book, to go further, the president said to me, will cause the crisis? i said i wished i knew. we could see some of the problems in subprime and housing, but no one, at least that i was talking to, predicted this massive decline in housing prices throughout the u.s. when i have asked myself why, i wouldn't people have predicted that, what would it experts have predicted that? i think it was because we were

all looking through the paradigm that we have had in this country since world war ii where residential housing prices have gone up, mortgages were safe investments. the economic models did not project the kind of wholesale decline in housing prices. but it that was the thing people did not predict. having said that, if we had seen it coming, i am not sure we could have done differently. >> even though by the time all the writedowns were happening at places like citigroup and other institutions, prices have only fallen 5%. would this be a fair characterization that people

knew the storm was coming, were concerned that the levies were weak and had not been tested, and that is a crusade was not a plan in place to deal with the crisis that was inevitable? >> there was not a plan in place when i arrived. i think we put a plan into place. the only plan i know how to put into place was to get regulators together with a very, taking a different approach to the president's working group. with regular meetings where we started working immediately on what we thought the issues would be, and how to respond to them. to get working, i believe to this day, that the most effective thing anyone has done either from the time i was there since i have left, to deal with housing has been the actions

taken with fannie and freddie. to stem the decline in home prices. we began working on that right away. >> i will stop right now. when i close up before you leave a have some very specific questions about fannie and freddie. but i want to stop to get to the other commissioners. thank you, mr. secretary. >> thank you. that presented a whole bunch of questions that i had not planned on in terms of that discussion. i do want to start also with you mr. secretary, at goldman, not for any specific recollection of product. one of the things i'm trying to

better understand since i do not have any familiarity with the relationships in these institutions on wall street, if you ask me about congress i could tell you a whole lot about things people do not normally appreciate resulting in decisions. especially small group dynamics. the old business of who gets what, when, and how, on accommodations which are in terms of quid pro quos and other things that there that make the system work. i do not understand a relationship between institutions, especially in the so-called shadow banking area. it is remarkable to me that there existed this healthy and

growing structure based on very short-term financing overnight, a number of institutions doing that. so you were sharing the grazing in the pasture. yet as has been indicated in terms of goldman with the current ceo and others, that he would take opposite sides in terms of market-making, that was within the institution. in trying to understand a relationship between institutions, not so much inside an institution. clearly if you are the largest you can be on both sides simply various roles. but if you are smaller, you may have to be more dependent on others. it is this business of to what extent was there a symbiotic

relationship with other firms? or was it pretty much predatory? and that is one of the reasons the smaller ones when first? going back to the congressional example, i think they would be fundamentally opposed to someone one day on an issue. that issue is dispensed with. the next day we end up on the same side. you tell folks when they first come, you can be opposed to somebody, but if you're locked in a position to that individual, you'll miss a lot of opportunities to actually advance some of the things you are interested in. from your perspective, what was the culture? predominately? it had to be at least symbiotic, did not? >> mr. vice chairman, where you're getting at in terms of infrastructure and secured vending, i think you're getting

at the repo market. let me talk a little about that. it might help. for many financial institutions, not just the traditional investment banks, had to rely on wholesale funding for a big part of their funding. it was not all deposits. so, you have this secured lending or repo market that grows up which is a very healthy thing. you would not want everyone having to rely only on the banks for wholesale funding. repo is secure the name. the lender is at least partly protected during bankruptcy because their collateral is protected. there is a market where two parties could do with each other. there are many sophisticated institutions. some more so, some less so, that

wanted to invest money. some are pension funds, money market funds, governments. they want to invest money. a safer way to do it would be to enter a secured lending arrangement with a wall street firm. they can do that directly, or you have a custodian administer it and did you get a tri-party repo. what happened was this group very quickly, with no single regularity -- regulator better having a per view, no one could get information on the whole thing. it grew fast in the systems did not keep up with it, nor did it infrastructure. the participants got sloppy in their credit decisions.

it is one thing if i am a money- market fund and lending to a bank, and taking treasuries as collateral. if i'm taking mortgage securities and asking for no margin or hair cut, it is a sloppy kind of provision. so now, what happens this this has gone up and there are excesses. i would say to the chairman, this was something i was not aware of, the extent of the issue. i had seen it through one little lens of goldman sachs. this big market growth and a regulator looked at it. now when the crisis comes and investors are afraid, there were a number -- they are concerned about bear stearns. they lose confidence. then when you say it is a predatory, these people, if someone is afraid, and afraid about their own institution

surviving, then they pull money out. or they do not roll over their secured lending. why? there are certain cash investors who do not know what to do with collateral if they got it. they're only looking at the underlying credit. so, this was a shadow market that was a very viable market, continues to be valuable, and just plain needs to be fixed. there were mistakes made by regulators, the system, sloppy practices by practitioners, and then the biggest sloppy practice of all were the banks and investment banks if they did not maintain liquidity cushions. everybody talks about capital, but to me the biggest lesson i learned out of all the crisis

was the lack of focus by so many market participants and by regulators on the importance of liquidity. you cannot place huge reliance on any short-term, overnight market. if you do not ask yourself what you do if the market does not function as normal, how much caution do i have? >> would all those institutions were about themselves and others? >> they did not worry until they did. it is hard to explain this. >> i do not think it is all the hard if you use other examples. all the others felt there were liquid until they tried to put up the assets. people felt comfortable with treasuries. but the idea that an economic

model in terms of mortgages -- did anyone not look at what the mortgage was changed between the different decades and until now? that there was significant erosion in any comfort level on how long a mortgage could last given the rules. a quick example -- i represented a big area, a lot of desert, and when there was enough grass in the spring -- to get it cheap. we saw fairly high loss of desert tortoises. so, the blm wanted to run an experiment and put styrofoam tortoises out in the desert when the sheep or running on the grass to see what kind of an so, i told them that my sheepmen would be ready to put their styrofoam sheep out in the

desert when the blm was ready to put its star from tauruses there. because she did not get a decent understanding or relationship. when you rely -- and i will talk about rating agencies in a minute, when someone gives a triple-8 lead to a package which was fundamentally so much different than the earlier packages, and relied on that triple-a rating, at some time doesn't look at the underlying problems? in the desert, the crows followed and would go up and flip them over in the morning and have a warm meal in the evening. unless you can control the birgit could not solve the problem. everyone argues that we did not have a model that could tell us what was happening. i just do not understand given the level at which people were operating, which brings me to

the question when you became secretary of the treasury, looking at it not from your normal perspective but from the broader scope, were you shocked at the amount of weight placed in the portfolios on these risky mortgage packages? >> i will tell you what surprised me. it is related to your question. as you said, there was the rating, but a number of the firms -- in my testimony and a number of people have talked about it being important that those who underwrite securities nations have scan in the game. behalf ski-- have skin in the g. the big problem was that a

number of institutions had have their bodies in the game because they had huge positions. the positions were overrated. even if they were rated triple8- a, one of the questions which is your point is that it is very hard for experts, and the experts to know anything with certainty. people could have been predicting this, this crisis four years. they could have predicted it, hedged themselves, and lost a lot of money. it is foolhardy to tie up a lot of it any institutions' balance sheet on any particular security, the matter how high the rating, unless it is a u.s. government security.

>> is that what happened? i'm trying to figure out how could the weight of the securities created, supported by the mortgage market, pulled down the commercial paper market, the market and other markets? was it that big? i'm understand -- >> there are several institutions to own too much of that. the point is this, the subprime market by itself was a relatively small, relative to the u.s. economy or capital markets. the problem was much bigger. there were excesses' in housing and across the markets more broadly. you used an analogy of the

desert. there was a lot of dry tinder out there -- that analogy is used a lot. the driest tender was subprime, which is where the fire started. but there were many other excesses'. that is really what happened. there were whole lot of things coming together to create this crisis. host>> in terms of the rating agencies, are you familiar enough from both the house and senate to have any opinion as to its usefulness, or effectiveness? >> in terms of the rating agency piece of this, i agree with one part of the legislation which i think it's controversial to certain people.

no matter how the rating agencies are regulated, and we need more regulation, and more disclosure, and around the rating agencies -- i do not like the fact that we have several breaking agencies that are enshrined in securities laws, regulatory manuals. their ratings are referred to. that is a dangerous crutch. too many investors, too many banks relied overly on a rating. i am all for the rating agencies. i think they should be independent. they should give advice just like equity research houses do. investors should look at those as one tool. but i don't like the fact -- and

i support the legislation that would take reference to credit ratings out of securities laws. >> the senate would greed in office within the sec to the minister the rules and practices for rating agencies. >> i think it probably is a good move. >> the house creates a seven- member board for credit rating agencies? >> i have not really thought about it. >> you could get unanimous. both bills would require a measure of certification that due diligence has been done by someone. but neither one talks about who would pay for it. it will evolve outside of some regulatory structure. >> i will say this. no matter how you regulate this, and it needs more oversight and

regulation. no matter how you regulate them, it will not be flawless. it is hard to believe that anyone in rating agency will always be able to see the issues that others do not. and so, therefore, i want to get to something more basic than that. i do not want the rating agencies to be held up as the font of all truth and have the ratings be part of our securities laws. >> than my only question left, out of curiosity, why didn't you put more emphasis on the rating agencies in your testimony? do you think you give enough weight? >> no, in terms of shadow banking -- >> if you give an overview at the beginning. >> i have written about it quite

a bit in my book. i do think the rating agencies made plenty of mistakes. i think they fell under the same paradigm that so much of the rest of the world did. the use economic models that did not foresee what happened. >> but everybody has used that as an excuse in terms of not knowing the true value of what they held. >> so clearly the rating agencies, and i made a number of strong recommendations, even before bear stearns went down to the president's working group, about the kind of disclosures you need to see from the agencies and processes they need to run. i was just trying to get to something more fundamental. i do not want to see a situation ever again when, where a lot of sophisticated people just turn to say it is not my fault, it

was that of the rating agencies. i want investors and big banks, and regulators to be forced to use rating as one tool, but do some of their own work and some thinking for themselves. >> thank you. would you be willing to respond in writing to any other questions the commission might have? we're learning as we go. >> of course, but i have to understand that now my staff consists of one system. i no longer have -- but i will respond. >> we will try to write questions that can be answered by one the system. tanker. >> thank you. >> thank you, chair angelides, and i want to express my thanks to you mr. secretary, for being

willing to meet with us and help us within our investigation. the first area i want to ask about was over-the-counter derivatives. i fully agree with you bad derivatives are extremely important instruments in managing and hedging risk and play an invaluable role in that respect. nonetheless, the over-the- counter derivatives market had grown to more than $680 trillion by the time of the crisis in the summer 2008. it was virtually exempt from federal regulation and oversight because of a statute passed in 2000, the commodity futures modernization act, which had eliminated

jurisdiction of the federal agencies over the market. i wanted to ask you whether in your view of this regulatory gap played any role? you said in your testimony that derivative contracts, including an excessively complex financial products exacerbated the problem during the financial crisis. i wondered if you would elaborate on that testimony? >> first of all, i think your point is well taken. the chapter the chairman referred to in my book when we had the first conversation with the president about the potential of the credit crisis -- the topic talked-about then was over-the-counter derivatives. and how quickly this had grown, citing the same numbers that you

did. you just talked about them being outside of the regulatory review. we did not even have at the time the right protocols for how they would function in the crisis. the netting agreement, and the big backlogs of really and booked trades. there was a lot of work being done by the fed -- and backlogs of really unbooked trades. i was very supportive of pushing the industry. first of all, these products did not create a crisis, but exacerbated it. not only in the way which has been written about a lot in terms of the enter connectivity, but -- of the inter- connectivity, but in terms of masking the risks that were so opaque and difficult to understand. i had certain regulators saying the system was not that

leveraged. because they were looking only at the dead as opposed to what was imbedded in those products. those products are hard to understand. that is why i so strongly believe -- standardization is in all of our interests. complexity in general i think is our enemy. it is hard to regulate against complexity and innovation. the way to do this is you press everything standardized on to an exchange, and the over-the- counter you put through a central clearing house, where you have great oversight, and then you have, if it is complex, you put big capital charges. you penalize complexity which will help to move toward greater

standardization. that is really the right way to deal with it. you are right on in terms of seen that as a concern, but those people would say it is a fundamental cause i think are wrong. it is something that needs to be fixed. i am hopeful it looks like -- that legislation is on the way to fix it. >> it with respect to the remaining over-the-counter market, assuming regulations are applied that would standardized contracts onto exchange, would you advocate more transparency for that market? >> yes, yes. that would solve some much. -- so much. regulators, industry participants had no idea. with general motors, everyone knew how many of their bonds rusting, but no one had any

idea how many credit default swap contracts were out there and general motors. >> or who have them, or the exposure. >> absolutely. fortunately, to me this is now understood by just about everyone. >> let me ask you about the political influence and power of the financial services sector, industry leading up to the crisis. there are some reports that indicate the financial sector may have spent as much as $5 billion in lobbying expenses, federal lobbying expenses, and campaign contributions in the decade leading up to the crisis. and that in 2007 there were

almost 3000 registered lobbyists in washington who had been hired by the financial sector. i wonder whether some of the regulatory gaps and weaknesses that we saw may have been in part, at least, attributed to this effort to influence federal policy? >> it is interesting. i cannot comment as to how it impacted congress. i do know that it is very, very difficult to get anything done this fundamentally controversial done in congress without a crisis. but there are many jurisdictional issues. this is complex stuff. what i saw in terms of regulators, i just saw

regulators seriously working to try to gather the information. if the man from mars -- when i arrived, if i had had to explain as to how -- and i see you laughing -- because you know how this was reviewed. and why otf regulated these and occ these, and the regulator had access to all the impression -- i could never have explained it. so, i have no doubt that lobbying has an impact. but there you have to talk to some other members of the panel who were closer to the political process than i am. >> clearly there were regulatory gaps are weaknesses in terms of the oversight of the shadow baking areas -- banking areas,

do you agree? >> yes. and did you think the effort by the sec decreed a consolidated, supervised entity program for the investment bank holding companies was a step in the correct direction the? >> you know, i will tell you at the time when i was on wall street added. i thought that the people we had worked with at the sec were of the highest quality. in government i thought there were just some very strong professionals there and working very hard, and very diligently. so, i look at it from that perspective and simply say, if i get up to 100,000 feet and

looked at it, i just say that we all made mistakes. there were regulatory mistakes over periods of time. clearly, from the bankers and investors and all the different participants -- but i never doubted for a minute and the competence and professionalism of the regulators at the sec who had just a short period of time -- remember, this program had just recently evolved. then we had this and not me. >> the you think going forward it is important to try to eliminate regulatory gaps, like this for the shadow banking system? >> here is what i think going forward. these big, complex financial and

institutions the to have a uniformity of approach in having tough, consistent regulation without some being able to find notes and crannies. then in terms of the shutter banking, there needs to be -- that is a big reason why i recommended the systemic risk regulator. the concept -- someone needs the authority and ability to gather all the information necessary so that you can look at these big, systemic issues. i do think that a systemic risk regulator, if in place, would have had more authority to deal with the over-the-counter derivatives much earlier, or would have had the purview to deal with the repo market. >> or with institutions like a.i.g. which was not really

overseen affectively? >> absolutely, with the holding company -- yes, that was an example of an institution able to arbitrage and build a self on the gaps in the system. >> one of the questions i have and would be interested in your observations on this -- obviously, there were problems in supervision even with bank holding companies in terms of the biggest institutions. today some of those bank holding companies are even bigger than they were in 2008 because of consolidations, because businesses have gone out of business, and for other reasons. are these institutions really capable of effective supervision by government

regulators? in the are they capable of effective internal management? probably your experience at goldman sachs could informed that issue. >> i would say this to you. that i think that the level of concentration where we have 10 big institutions with 60% of the financial assets -- you know, this is a dangerous risk. i believe these institutions are necessary. they perform a valuable role. the way i get your question is this. i say, first of all, i know we can have better regulation. more consistent, a bigger capital requirements, bigger liquidity requirements. but then i come to the conclusion that regulation will

never be perfect. unless you hypothesize that these institutions wanted to blow themselves up, it is hard to believe that regulators will always be able to find the problems they cannot find themselves. so there will be, will continue to be failures. there have been since the beginning of time. institutions have failed. we have had financial crises. that is why i believe in addition to strengthening the regulatory system you need these resolution authorities said that the government has the authority that when a big institution fails to step been outside of the bankruptcy process and wind it down, and wind it down and away in which you're not saving and propping it up in their current form. the expectation has got to be that they are liquidated. i know that is complicated, but you can train regulators to do that. that is why i'm such a big

proponent of this concept. these big institutions work with the regulators to create a road map for the liquidation if they do fail. you'll never get perfect regulation, but i just do not think the american people will ever again want to see the taxpayer come in and save these institutions. so when they fail we need a way to liquidate them, and in a way in which they don't hurt the american people and take down the system. so, you are right. we should strive to make the regulation as effective as we can and give regulators tools they need and information so they will be right more often. but then there will be failures and we need to figure out how to deal with them so it does not hurt everyone else.

>> matt have another two minutes? >> ps. >> i just wanted to follow up with you on a specific example, for example goldman sachs. you are very familiar with what goldman is likew ishat. what running it involved. do you think your experience with ahead of a big institution like goldman sachs -- that is capable of an orderly wind down in case it gets into financial problems? >> yes, i think any institution can be wound down. it is complicated over a period of time. in the middle of a crisis there is no institution that if you

have to liquidate it right away that i think the assets will be worth more than liabilities. my view is that with any institution there has got to be away that if they fail, that you know -- the expectation is they will not be propped up in their current form. that they will be broken up, changed in some way, liquidated. i believe that can be done. >> thank you. >> sir? >> thank you, mr. chairman. i appreciate your testimony. i want to go back to this observation in your book. if there had not been the housing market crisis to trigger it, does it mean something else would have? >> when i said and inevitable --

when i said inevitable, what i said in a book was that our history in this country has been, and certainly in modern times, has been every six, eight, 10 years there has been some crisis. starting with the s and l crisis. i can take you through 1994, 1998. we had russia and asia. so, we have had these. and so, what i saw was excesse'' building in the system. now i could have said the same thing in 2004 or 2005, and i

would have been wrong in terms of the timing. but ultimately you were going to have these. . . yes, i've vented is it inevitable. but we are seeing today -- i think it is inevitable. i think it will not happen right away, but there will be stresses and problems in the capital markets sometime in the

future, probably in our lifetime again. the key thing is how to have as the relatively small, manageable events. they will never bee small. >> the signature of the what we have the report on is the housing market. in your testimony, you said there were several policy decisions that shaped the home mortgage market. >> i think what you would need to look at to look at the weight of the whole series of decisions we made. the various programs for housing, not just fannie and freddie, but the fha, the

various hud programs, state programs, even like the mortgage interest rate reductions. is that fair relative to renters? forgetting about fairness, you have the sum total of things pushing this way up and i would travel around the room in capital markets and other nations would look at us in all that we had home ownership above 60%. -- they would look at us in awe. we got it up to 69%. we need to look at those policies as fundamental root causes of the crisis. >> on that list would be the gse? ? yes. >> in your book, you said you received a briefing about the gse's and that they were a

"disaster waiting to happen." use of the business model was fundamentally flawed. go can you tell us exactly what the flaws were in the business model and why you thought they were a disaster waiting to happen? >> i did not predict this disaster happening this way. that was a phrase i used that turned out to be prophetic. i did not see it quite as clearly as it came about. in terms of the structure, first of all, there were the ambiguities. there was the implicit government support, the congressional charter, and then private capital and profit.

the shareholders, the compensation models, that there was just a contradiction there. secondly, this was a situation where congress presumed to be the regulator. they defined capital. the legislatively defined this. not only the level of capital but what could count as capital. something's i considered intangibles were defined as capital. and was set up to be weak. not saying anything negatively about people who held that job, but they were not given the authorities that a normal regulator is given to make judgments about capital. the elephant had gotten too big for the tents. it just grew and grew and grew. when you look at all of the -- it is just hard for people to throw around these numbers to even comprehend. you have the $5.40 trillion when

you look at the that the issue. -- at the debt they issued. the danger they posed was unimaginable. we talked with the failure of any one institution, but the danger posed by lack of competence and the ability of these entities to repay their debt was much greater than that. these were big. the part in the book you are alluding to really had to do with their portfolios. this was a big topic of debate. it would not only ensure these goals but they would take their funding and buy into these mortgages and hold them. they said that this was necessary for their mission to

support their market. the people explained it to me that two-thirds of their earnings were coming from that. their boards had a fiduciary duty to the shareholders. they could talk about the public mission and could testify on the hill about meeting their housing goals, but the head public shareholders and that is where their duty was -- to grow their profit. as i look at that, i never so much blamed the people who ran the organizations as those who designed the plan we asked them to fly before they flew into the side of the mountain -- who designed the plane we asked them to fly. it was the rock structure. >> one of the things we heard yesterday was that during the early part of march as at bear stearns came under duress, agency securities were no longer accepted as collateral in the overnight repo market.

if you look back at spreads during that time, there are spiking up and showing signs of market this trust. i want you to walk me through the thinking then during that time where fannie and freddie were permitted to drop the limits on their portfolios and lose the capital surcharge at a time when the market is saying even with the capital surcharge and limits they are not safe. >> it is exactly the opposite of what you said. i had my staff work with them to get them to raise capital, to increase their capital. as a result of what we did, fannie went out and raised $7 billion in capital. there was an increase in capital. freddie committed to raise capital but they did not meet their commitment. to step back, to the broader

question, what had happened was this. they had -- the credit crisis came in mid 2007. most of the damage had been done at that point. after that time, mortgage lending virtually ground to a stop away from fannie and freddie. there is all kinds of evidence of it really very -- up really very responsible borrowers who wanted to buy homes and had the economic wherewithal. they were having trouble getting mortgage funding. now fannie and freddie are essentially the only game in town. they needed -- i believe the

problem was already baked. they owned the securities in their portfolios and had guaranteed what they guarantee before the house. bubble had bu -- before the housing hubble had burst. what we were doing in march 2008, at the time when we took the action we coke -- took with bear stearns, we were trying to increase confidence in these organizations and get them to increase capital. i was pressing many institutions to raise capital. i was talking to many ceo's of the institutions say. i have never seen a ceo loses his job by having too much capital. raise capital when you can. fannie raised and live up to the commitment but freddie did not.

>> if you run the clock forward knowing what you know about their financial condition, i believe you said something about fannie and freddie on reform legislation that they give you a bazooka you would never have to use. shortly thereafter, you used it. >> i never said never, okay? what i said was when i got this authority i said -- i was asking for an unlimited authority. it sounded bad politically to sit on limited so i said "unspecified." i wanted a maximum amount of authority. i said to the extent -- more authority we have the more confidence the markets will have that and that will reduce the likelihood we will have to use it.

with fannie and freddie, we were not the regulator and did not have authority to go in and look. it was not until we actually got in, ok, and got the authority. i was working very hard to get the emergency legislation from congress. confidence went in these entities. it was an unimaginable risk. we went and got this emergency authority. once we got fat, -- once we got that, we had morgan stanley working with the treasury as our adviser. we had the occ. we had the fed working with fha

to go in and that these entities. it was only then we were able to get our arms around the scope and magnitude of the capital problem. the fact that we had these authorities for the first time we could address the problem. we could do something about it. we have the authority to put in capital and put them in a conservatorship. that is the story there. >> i do not have much time, but i wanted to talk about the bear stearns episode. i went into -- i wanted to get your views on whether they could have been allowed to fail. >> with your bare could what? >> fail. -- whether bear could what? >> we heard convincing testimony that they set the expectation that other institutions would get help. when lehman brothers did not get help, it was a shock and surprise. if you could give us your views

particularly about setting the precedent having seen the intervention with fannie and freddie and how he thought about doing that with bear stearns. >> i give the commissioner 5 additional minutes. >> ok. i would like to answer that question. in terms of convincing testimony, you will never hear a convincing testimony from anyone who was close to the markets. >> we give you time to answer. go. >> here is what i say. there was rescued -- bear was rescued in march. we get the emergency legislation on fannie and freddie in july. we put them in conservatorship in september. i believe that if there stearns had not been rescued -- if bear

stearns had not been rescued, the meltdown we begin to see after lehman brothers had gone would have started months earlier and we really would have been in the soup because, now that i look at this with hindsight before fannie and freddie were stabilized. can you is that -- can you imagine the mess we would have had that if bear stearns and its thousands of counterparties would have grabbed their collateral, try to start to sell that, drive down prices, create even bigger losses? there was a huge fear about the investment banking model at that time. i think you would have seen other investment banks to go very quickly. those that make that argument are missing, to me, one

fundamental fact. as the chairman said, using the expression, the toothpaste out of the two. the crisis had been going on for seven months. the system was very, very fragile. you did not see excessive risk taking. you did not see speculation. there were a lot of a prudent loans that were not being laid -- made. investors were afraid to buy student loan securitization is when the government was behind it. sovran will funds and other foreign buyers who had come in to morgan stanley, citigroup, merrill lynch had all lost a lot of money. people were scared. it is not like they said, "gee, they bailed out bear stearns and now we can go and let lehman

brothers." if the losses lehman brothers and others had were in positions that were already on their balance sheets. they were illiquid positions that had to be marked down as the economy turned down. this happened as home prices dropped. again, i think you would have had a hard time finding any buyer for any institution if the government -- if bear stearns had failed. >> one last question. you talk about the investment bank model being in trouble. we heard yesterday from the sec that investment banks have voluntarily put themselves to a capital and liquidity requirements.

by the standards of regulation, they were fine. my question specifically is is there a real difference in the performance of commercial versus other entities? >> i might have a little bit of a bias, but i will tell you analytically that people looking of the leverage ratios, if you had adjusted for accounting differences -- the have the discipline of marking the to market -- they were at least as well capitalized as the commercial banks. i believe that the issues that i think this was a confidence issue -- i think this was a confidence issue.

i think there were a couple investment banks in bear stearns and lehman brothers that had big exposure to the housing market. bear in the particular probably was not as diversified. i think it comes down to the quiddity management and liquidity cushions. -- comes down to liquidity management and liquidity cushions. i saw it across the board with banks and investment banks and g. my comments of nafta to the relative strength or weakness by got to a concern about the lack of confidence. when the market -- mike, it's got to the relative strength or weakness. >> i am going to take a couple minutes of my time. at our last hearing when we had

fannie mae in front of us, the vice chairman and might describe a time line in which we have no verified. i'd like to enter it into the record as well as underlying documents. but against what is happening in that late february, early march timeframe which culminates about the bear stearns weekend. let me see if i can describe this very quickly. there are concerns about the meltdown of the private side of the mortgage market. you had expressed some big concerns about fannie. a review also said, both publicly and in an interview with our staff, that fannie and freddie were the only game in town. it looks like what is happening here is that the portfolio caps are going to be lifted which happens in february so they can keep lending and now into a market is big headlines. the deal that i think you and your team are trying to broker, i do not know if that is an

accurate characterization, and loud -- it allows them to continue to lend, a charge reduced by 10% on the promise to raise more capital. is that a fair assessment? >> i would say this -- they made a commitment to raise more capital. fannie raised $7 billion. >> and freddie did not. >> freddie did not live up to the commitment. there was more net capital raised. there was the deal in which the regulator and the gse's working with my staff were lifting the capital surcharge to raise capital. it was -- and i just cannot say it strongly enough, this was to raise capital. the only other thing i will say

about lending into headwinds, it is just the opposite. what you will find is that the markets have declined dramatically in housing prices. there were continuing to decline. everyone was aware of the issue. the losses they had did not stem from -- i think he will find, they did not stem from going ahead and doing a risky things. yet it had to do with what was going on in the housing market. go and had to do with -- it had to do with what was going on with the loans they guaranteed before that and put on their balance sheets. >> i think we're are going to have to look at this. it is clear there are the concerns.

there is an e-mail on march 16th that says "a la carte needs to eliminate the negative iraqiya -- negative rhetoric." he says he was a lean don to harden the guarantee. >> i do not like that and it has not been part of my conversation with anyone else. this is wave above my pay grade ." a day or two before he objects by saying, "this strikes me as perverse and it seems perverse that a regulator would agree to increase a very high mortgage risk -- market credit risk leverage without any new capital." i understand part of this was to raise new capital. here is my question. you have deep doubts. i am trying to get a sense of how you saw the markets in march. bear had just been "acquired."

at this point, in a sense you are striking a deal that allows them to stay in the market. do you have deep concerns about solvency. is there a view that we are now in a business of bailouts. does the bailout start in march or do you think they will write themselves? >> neither one. tim believe that they would write themselves and the bailout did not start in march. i cannot say this clearly or more definitively. this was about getting them to raise capital. that is what this was about. guess what? it did. fannie raised $7 million in capital. freddie committed to raise capital and then later their lawyers said, "well we need to wait until the second quarter numbers are out." by the time those were out, we had gone and again in the

emergency legislation. this was solely about raising capital. what we were dealing with was a situation where the markets were on edge. they were the only game in town. i was pressing -- this was not unique to them. we were pressing them to raise capital. this was an unimaginable risk. i had no idea that we would need to go to congress and get these authorities. i had no idea we had -- we could have gotten those authorities. remember, i had seen congress. fannie and freddie were a political football. reforms have been stymied for years. we were working to try to get the authorities we needed. i have no idea that we were

going to have to need to get the authorities come and get the authorities begot which led us get in with the experts to get their arms around the problem, then get the rules -- tools we needed to address the problem. working with the limited tools we had without being the regulator for fannie or freddie, we pressed them to raise capital. i think it was the right thing to do. i think it was a sign of confidence when they announced it. >> given your one staff person, i would like to follow up on the bigger objective here which is also trying to understand as markets are wobbling this dichotomy i think you faced. i will move on to other members but i will state this, the dichotomy between trying to stabilize the markets verses' acknowledging publicly the state

in which they are in -- a versus the state in which they are in. >> let me say this. when you need to recognize, and i will answer this in writing, the treasury is not the regulator. we did not have the authority, the people, the capacity to really get in there. okay? >we were pressing them to raise capital. it was only when the capital -- the market's lost confidence that we got the authorities and the tools to get in there and get our arms around the problem >> thank you. senator? >> thank you, mr. chairman and mr. secretary. i would like to ask three questions that relate to the lessons learned.

as you say, this will not be the final financial crisis that this country will have the. one of those relates to a continuation of the bear stearns story. when you face the issue of lehman brothers, you were, in addition to dealing with the lehman brothers, you were establishing a principle which was that bear stearns was not a precedent for all future similar circumstances. you were not going to rally the federal government to the salvation of every institution. what were the factors that caused you to make the case by case decision that lehman brothers was not worthy of a federal assisted transition? >> thank you for asking that

question because despite the fact i have written a book and answered this hundreds of times, people still tend to, despite the fact we have had ben bernanke and tim geithner seeing the same things, people still question was on this a lot. it is hard to understand. the fact is that bear stearns faced a liquidity and capital per -- problem. we were very fortunate to have a buyer in jpmorgan to come in and solve the capital problem and be able to guarantee bear's trading books and their shareholder vote. we learned how limited our authorities were with the government. no one had the authority to guarantee investment banks'

liability or to put in capital.+ we did not have a resolution authority. after that, and made a number of speeches where i talked about the need for this -- i made a number of speeches where i talked about the need for this. lehman brothers came along. we were unfortunately unable to get any bank to play the role with lehman brothers that jpmorgan played with bear stearns. we tried very hard to do that. we were left, frankly, powerless. we prepared for the, you know, for the bankruptcy. this was not something we did intentionally. we just had a flawed regulatory system.

>> the second area is conditionality of the funds to constitutions through tarp or other bailout practices. in contrast to what seems to be the perception of the u.s. where there were relatively few requirements, in the united kingdom, the royal bank of scotland was required to expel -- except conditions to what limitations would be. why were there not similar conditions attached to the bailout of u.s. financial institutions? >> this is a totally different program. we did not want to deal with institutions as they've serially failed as they did in the united kingdom.

we deadness of the problem of being an big a capital shortfall in the banking sector. go we designed a program that would be attractive to healthy banks so that they would want to come in and voluntarily participate. we put in preferred which was to be like a nationalization. go we designed it so government would get the money back so it was senior to the common. that was the whole purpose of the program. interestingly enough, i was hopeful when we announce it that we would get a couple thousand banks to participate, 20043000, -- 2000 or 3000, but white after we announced it we had critics saying the had two forced to land.

they did not say what the government would do, but we had to control their compensation understandably. understandably, a number of banks said, "i am not sure i like this deal." we had a number of banks applied for tarp and then pulled back. we only had 700. it was a big success because it prevented the collapse. government will get the money back with profit. if it had not been stigmatized by all of those wanting to cut various controls on at that we would've had 2000 or 3000 banks that would have had the money for five years which would have done more than any stimulus program to get the economy going again. there are those who say the program did not work because there was not enough lending, will those people stigmatized it. we were trying to deal with

healthy banks and make it voluntarily -- make them voluntarily come in so we were not nationalizing banks that the british government had done. we were tired of dealing with them serially when they failed. >> there was a public opinion that a justification was to stimulate the economy by making credit available. >> yes. >> there was disappointment when there were perceptions that that was not happening. >> you are absolutely right. that was our whole reason, and i did not make this point and they should, that was the whole reason for deciding the program was so many banks would take it, have the capital, and it would lead to lending. that was the whole purpose and go -- that was the all-purpose. as soon as we announced it, the first banks to cut the capital, they were saying, make them

land. why are they not lending more"? if you are a they, you really want this deal. how will big brother help you step in and how to make these lending decisions? i think what happened was some banks were reticent to take the capital. i think it did help with lending, but it could have a much more effective. >> you are saying that banks and did not want to take the capital which would have put them in a position to be more effective to contributing to the economy because they felt they would be under extra pressure to do that very thing. >> that is right. a number of banks did so we have almost 700 banks take it. even those banks rushed to pay it back, ok? it was because the extent to which the worst stigmatized.

-- the extent to which they were stigmatized. you have this paradox. people wanted them to lend more by clamoring for them to have strings attached. i was never quite sure how many -- how much people wanted them to land. in the middle of the crisis, in the excess? how much lending -- why was the right level and how with the government determined that? clearly this was about lending and getting the bank's capital they needed so that they could. >> could i have two minutes? the third question relates to a topic to have eluded -- had diluted to which is the role of congress. you said congress had barriers such as its tendency to wait until the crisis had occurred

before acting and in some of the problem dealing with this. from your experience with trying to influence congress and be more proactive and comprehensive in your response, do you have any recommendations of what the executive branch could do to facilitate congress of being more effective or what congress ought to do within its own domain to enhance its contribution? >> my own experience with congress was very positive because twice i needed to go to congress with extraordinary requests and twice they reacted before disaster struck. democrats and republicans -- i do not have any.

i, like a lot less people, i do not like partisanship. -- i, like a lot of people, i do not like partisanship. i saw people on both sides of the aisle coming together. in terms of how to solve the issue, you can get some experts appear that are more equipped than i am to deal with that question. >> thank you, mr. chairman. >> mr. walson? >> i would like to follow on some of the questions that lie colleague mr. -- i would like to follow on some of the questions that my colleague, mr. holtz- eakin, asked. i think there is a substantial argument that give rise to moral hazard that made the lehman brothers collapse much more significant than it otherwise

would have been if it would have occurred at all. i want to point out, for example, that once there stearns was rescued, it certainly encouraged lehman brothers to keep its price somewhat higher than it might otherwise have been in dealing with potential acquirers. go on the other side, lehman brothers had a reasonable expectation that it might also be rescued. the chairman of lehman brothers indicated that in some of his testimony given to congress in the past. in addition, creditors of lehman such as the reserve fund that caused so much difficulty, it would have rid themselves of the commercial paper they were holding that would immediately have lost value if lehman brothers had actually been allowed to fail. when lehman brothers did fail they were stuck with this commercial paper. as you remember, that particular

money-market fund, reserve fund, actually broke the buck. there was a run on money-market funds. the consequences of rescuing lehman brothers in terms of its moral hazard were quite significant. i would like, if i can, just to follow up your reasoning a little bit more carefully. if i may just make another couple of points. yesterday we heard from officers and former officers of bear stearns and from german talks of the sec. -- chairman cox of the sec. i was surprised to learn that bear stearns was silence -- and solvent at the time it was rescued. and had not become insolvent according to chairman cox and the former officers of the company.

the first question i would like to ask you is whether you were aware that bear stearns was, in fact, a solvent company? i understand there was a liquidity problem, but you -- but were you aware when you got them to be dealing that you were dealing with a solvent company? >> i think that is a ridiculous statement. we were told on thursday night that bear stearns was going to file for record 85 out -- friday morning if we did not act. how does a solvent with -- so the company filed for bankruptcy? when financial institutions die, they die quickly. but it is a liquidity crisis. the market loses confidence. when they die, i do not care what someone has on their books, okay?

assets are not worth more. make no mistake about this may go we were told that the jig was up. at the time, we almost found out whether your hypothesis was right or not. if jpmorgan had not emerged, there was nothing to be done. that was your first question. >> i would say that companies can file for bankruptcy even when they are solvent. one of the definitions of bankruptcy is you cannot pay your obligations as they come due. >> this is a financial institution. >> yes, but let's not get into that. . i just want to be sure that we're talking about the possibility of that we could rescue firms that are coming in

fact, and solvent. -- insolvent. the officers of bear stearns we talked to and chairman cox, though not speaking as chairman of the sec, they both said they did not think that bear stearns was it too big to fail. if it failed, they do not believe in what had caused the kind of disruption that we normally consider necessary to rescue an institution that is it too big to fail. why did you feel that bear stearns was too big to fail? >> first of all, i did not take moral hazard lightly. if bear stearns, if this had happened at a time -- this occurred at a time when the credit crisis had been underway for several months. the system was very fragile.

secondly, we did not have the tools and, as i said, to wind them down outside of the bankruptcy process. what i saw in the marketplace was a market gripped with fear and that bear was not a cause but they were a symptom of the fear and panic in the market. there was a broader problem of illiquidity. i believe that is bear stearns had failed that there were all sorts of counterparties which would have grabbed their collateral, sold it, led to bigger losses, and to bigger write downs. for instance, your comment about

the reserve fund holdings lehman paper -- yes, don right. if there had gone down the reserve fund would not have held lehman brothers paper nor had any other fund. it just would have it triggered this quickly. lehman brothers would have gone almost immediately is a bear stearns had gone. the process would have started earlier. >> if that was true, how could you not have rescued a lehman brothers under those circumstances? would you are saying is that you implied you were going to rescue everyone else for the same reason -- fear in the marketplace. >> we looked at every one of these, but we tried hard to come up with a solution for lehman brothers, very hard. again, if there had been a buyer for lehman brothers like there

was for bear stearns, we would have done the same thing. >> let me turn the questioning to one other point, if i can ask a question on a different subject. you said the subprime mortgages are relatively small part of the problem although they were a triggering element, i think, in your view. are you aware that there are views that the number of subprime and alt-a mortgages is much larger than the 20% you cited? as much as 50% of all mortgages by 2008 were subprime or a alt- a and thus weren't ready to fail -- were ready to fail when the bubble began to fail?

>> i yield an additional three minutes. >> if you had known that at the time, with your view of what was likely to happen or the -- it would your view of what was likely to happen with subprime mortgages be different? >> first of all, i do not know that. i think the big question, where you and i agree, is that housing policy and housing was a big issue here. as i look at the problem, there are excesses' to rob the market but it was housing policy and mortgages were generally. i am not as focused on subprime which was obviously the most egregious. i have no doubt that people use this mad cow disease example.

that came from the treasury and i used it in the book. i do think it is a good example. there was so much uncertainty about that that it infected the other in circuit -- an insecuritizations. i am not sure if that would have made a big difference. >> let me tell you why i think it is significant. we have had questions here, yesterday and we might have some for the ones today, that both regulated banks, which are heavily regulated, and investment banks failed in roughly the same circumstances. there were runs in effect on both. confidence was lost in both. the question really is is that there were circumstances which were so severe coming out of

some event which seems unprecedented in the last 70 years, was not a significant fact that there was no way that our regulatory system could have prevented, or did present, the loss of, not only among investment banks, but also among regulated real banks? >> i take your point. the fact is that this event -- it is hard, i think, to go back in history and find any event that was more extraordinary in terms of the extent of the

crisis, the magnitude of some of the things that were witnessed here. i think your thesis has a lot of truth to it in terms of housing. >> thank you. >> thank you, mr. chairman, and thank you, mr. paulson. i want to turn to a portion of your testimony with which i agree. i would like to highlight this if i could. on page four on securitization, you say, "because securitization separated mortgage originated and underwriters from holding the rest of the loans they originate, it enabled subprime lenders to stop focusing on the creditworthiness of the loans they made and instead focus solely on their ability to sell them upstream to underwriters. underwriters relaxed underwriting criteria relying on

their ability to sell these into a booming market." you go on to say that "reforms are unquestionably a required." they should be required to retain some portion of what they sell requiring underwriters to keep some "skin in the game" which would align their incentives to hold the bulk of the risk. you go on to say "these changes will provide them with powerful incentives to focus on credit worthiness and lead to more responsible lending practices." yesterday we heard from chairman cox. he said words to the effect of a "if honest lending practices which have been followed, much of this crisis would not have occurred." the nearly complete collapse of lending standards and other mortgage originated led to so much worthless or near worthless mortgage paper that as of september 2008, banks have

reported over $500 billion in losses on mortgages and related exposures. $500 billion. that was an extraordinary amount of money in light of the capitalization that a lot of institutions that had to write down this paper. yesterday when the last two ceo's testified, i asked them what they thought of the idea of requiring investment bankers to hold some of their fees in the securities they create whether that might enhance the diligence and align the interests of investors more closely with those of the underwriters. of course, they both said that sounded like a great idea. they said they would not like it. that was in reference to

investment bankers. i want to hearken back to your successor at goldman who i asked a similar question to back in our first hearing in january. he said, "we could take the securities but then what we would do would be to had to them" and not effectively have the exposure to it. i said the whole idea would be for you to be long on this said that in your underwriting obligations when you are representing to invest -- investors that you would be side-by-side with them in the long haul. this leads me to a question which i really think there's more on your experience at goldman sachs and on the street generally than at the treasury. how could such a notion be implemented in light of the different responsibilities that investment banks have in at least three of their roles.

one is as an underwriter in which they undertake to have a fiduciary duty to investors and represent that a security that they are selling is not -- that it will perform as represented. two as a market maker which is essentially what mr. blankfein was suggesting that people ask for positions and they offer their clients the opportunity to invest long, short, or hedge their positions. third of as proprietary investors for their own account. the reason i say this is because i like your thoughts in this regard. if people were required to hold the securities, how would you enforce them holding on to them and staying long on them to not hedge? is that realistic in light of the differential obligations of these investment banks? >> that is a very good question.

a lot of people have recommended what i have recommended. the recommendation is short on policy -- long on policy and short on how you implement it. i will tell you i think it is difficult to implement for reasons you suggested. i think your question has got the note of the way you need to think about this. i think the market making function is not really what we're talking about here. if a bank is in a marketplace and has a claim that wants to sell or once a bank that can make can help manage risk, that is one situation. it is really as an underwriter. i do not know that i even have a

problem, and i probably need to think about this more, but even as an underwriter putting a hedge on this, if it is constructed properly you could have a hedge against, for instance, the mortgage market overall. this particular security, you want it to perform better, right? >> correct. >> because you have done such due diligence. i think the only caveat i would say is you want some skin in the game. you do not want to have it too much. those firms that got into the most trouble were those that kept an extraordinary amount of paper they had underwritten which was what rated aaa and were holding on their balance sheets than the almost failed because of.

>> that is what john mack said. i asked him whether they could eat their own cooking. he said they choked on their own cooking. he gets stuck with the securities on their book but that was not his intention. his intention was to originate and distribute them. he was not able to sell them all. >> that institution and two others it choked on their own cooking. what we are talking about here is not about is a different from a prudent risk management. i never went to ask financial institutions to do things that will not involve a prudent risk management. there has to be a way that, as you underwrite, there is some piece of what you have underwritten that you continue to have to live with and own. >> live with even as the

security is intended to produce. even the bonuses to were paid to people who did the deal and were responsible for the diligence ought to be paid in part of the securities they created. one of the slots is that many people have suggested that underwriters were paid exclusively in cash. the credit rating agencies were paid in cash. mortgage brokers were paid in cash when the issue was sold. they did not retain any risk for the failure of that to perform as projected. that was a problem. i -- could i have a few minutes more. -- could i have a few minutes for? >> absolutely. >> compensation just in general is a problem.

hang them in cash makes the problem much greater. -- paying them in cash. formulating compensation is a problem. paying cash is another problem. again, i strongly believe that, when looking at compensation, it is very important to align interest and for there to be a long tail on the compensation. as you say, those that underwrite the securities, however it is done, an important part of the compensation should be how well they do their job. that has to be the quality of their job and not just the short-term profit. >> i think it also has the beneficial impact of aligning their interest with the investors to purchase it and avoiding untoward