the opposite side. i wonder if i could ask you in my last few seconds to reflect upon this question and maybe you could respond in writing if you come up with any thoughts from your longtime experience on the street as to how this might work. this is an element, i think, that many people are looking for a solution to that could improve diligence and the quality of the paper sold which could avoid the problem going forward in the future. .

>> i also am admitted not an attorney. but in trying to understand, both in terms of the banking system and in the point about the subprime mortgages, i think most people would understand interconnectedness. you have a five men climbing a mountain. there are all roped together. one falls, he takes the other four with him. for me, the terms being used are a little more difficult to

parse. when you use the coli example, my argument is, coming from my background, that if you told me that spinach had the coli -- ecoli, you would go ahead and eat lettuce. you would not have to worry about that having a bit, because it's in the the spinach. when it comes to mortgage values -- when it comes to mortgage packages, did everybody have them, and when they lost value, that brought everybody down? >> let me try to explain it in simple terms. anybody who has read the tax code knows that this can be complex.

what had happened was, there are these very complicated securities that were hard to understand. people bought them. they knew there were problems in subprime. once the problems occurred, then anything that even looked like security position in the the mortgage area -- like securitization in the mortgage area caused people to pull back. if there was a big concern about the that somewhere and mcdonald's reduced the price of their hamburgers, people would still not buy it if they were scared. >> what about the people who said they were not big in subprime?

>> investors became concerned, even if there was a very low likelihood. what happened was, when one asset class becomes a liquid, no one can selig -- no one can sell it, then people turn to another asset class. they turn to the mortgages that are salable, and pretty soon those become illiquid because everybody is trying to sell them. >> so it is contagion? >> you try to sell something that is illiquid out of fear that it cannot be sold, then it securities become correlated. >> and bear stearns said they

could not deal with this. >> i would simply say that counterparties in the repo market lost confidence in bear stearns, and they were unable to borrow against certain securities. >> notwithstanding [unintelligible] >> this was a loss of confidence. others were experiencing similar problems, but not nearly to the same extent. this was focused on bear stearns. >> so it was to agree. >> let me also say to you, lending practices were very sloppy, and borrowing practices. it is one thing if i want to rico at treasury. if i am a repo -- if i want to repo the treasury.

there was an assumption that you could keep borrowing at full value on these securities when they were dropping in value. >> my colleague is and in mid economists. i will have to ask him if sloppy is the right term. >> what i would like to ask you to do is focus on three specific firm failures. i have four. we were just talking about why those firms failed. instead, i would like to ask you about some areas you feared might happen if they were not bailed out or rescued. please talk about their stearns, fannie and freddie, and aig. as i understand it, the

scenarios that might have happened if these firms had failed word somewhat different. in particular, counterparties. if there is the slowest to deer and the lion has it, that next year -- that next deer might be in trouble as well. could you compare and contrast. >> i have to be very careful here in terms of what i know today versus what i knew then. with bear stearns, what i knew then, i knew enough to know that andsystem was very fragile al, that there were so many unknowns

in terms of the counterparties that this was a very dangerous risk to take and imprudent risk to take to have them go down. what i know today is that what was waiting for us in terms of fannie and freddie, which i did not know then, and how much more severe the overall situation was. but there is no doubt that there was the kind of firm that i believe could have gone down in a more normal way in a more normal market. what i saw beneath the surface throughout the institutions in europe and the u.s. cause me concern. you mentioned fannie and freddie. that is just a different order

of magnitude. like i said, that was just sort of an unimaginable risk to me. then they did not have the ability to pay back their securities, i mean there were three trillion dollars held in the u.s., a three trillion held outside the u.s. that would have been a big disruption there. no one in the world would have had any confidence in our ability to deal with this. >> let me interrupt you. you're describing two different things. with their -- with a bear the concern was that the same problem that affected their stearns might affect another firm. with fannie and freddie, you're

saying that there were actual firms that held their doubt -- held their debt on their balance sheets, and that if they collapsed -- >> it is more than that. something of this magnitude, chartered by the united states of america, a housing bubble, that we were not going to stand behind that, why would any institution be safe? and then, when you talk about lehman -- 9 >> actually, it was about aig. >> aig is an order of magnitude bigger than a lehman brothers or bear stearns.

it was the one that we knew the least about, because there was no one regulating it that had a clear line of sight. we knew the least about it. we knew that it was huge in terms of the size and the interconnectedness, and the credit defaults swaps of all the counterparties. it is a real example of the danger of rating. they were given a aaa rating and liquidity. many people got into that market because they were a aaa. if they entered into contracts where they had to post collateral if there was a downgrade, without making sure they had the liquidity to deal with the downgrade.

then of course, they touched so many individuals because they guaranteed to their contracts and other retirement plans for teachers and care workers and others, you have millions of americans there, you get the insurance. it again, was, it's likely men squared -- it's like lehman brothers squared or whatever. >> is today, consistently from the bears stearns executives, we heard non-specific hypotheses that there was someone who was strategically inciting the panic, that there were actors out there who were actively trying to bring their down to make money. we hear this crop up a lot, but

we never hear anyone actually name names and say, here is who i think was behaving strategically. i am not going to ask you to name names, but do you think there were participants out there who were trying to bring them there or any other reading -- bring down their stearns or any other institution -- bear stearns or any other institution? >> i do. i think that where there is smoke there is fire. it was about a loss of confidence. i believe that short selling was essential. i do not use the word "collusive," because that has a legal connotation, but when you see serial attacks, not just an industry overall, but serial

attacks, and you used the trade to short the stock and bet on the credit defaults what to widen, and it looks like a wolf pack trying to pull down a week , i am not saying there is behavior that was illegal. i am sure that if the sec found anything, they would have acted, or they will act. but i do think that, like so many things, we have rules that were there to serve us well in normal times, but when we had extraordinary times like this, we needed to take extraordinary actions. i still think those that are thinking about circuit breakers or ways of addressing short

selling during times of crisis are important things to do, and i do think -- it sure looked to me like some kind of coordinated action. >> thank you. >> thank you for spending so much time to talk to us about these important issues. i would like to talk to you about a fundamental assumption that people seem to have. i would like to challenge it and get your response. people often say that financial innovation is a great thing. it is important and necessary, answers and important purses -- important purpose. when i think of innovation, i think of research and technology. when you look at financial innovation over the last decade, all of these things seem to have led to a common lack of

understanding about the instruments themselves, but on the selling side and the buying side -- both on the selling side and the buying side. they do not seem to protect people against natural business exposures. they do not seem to help the economy to evolve. they seem to enrich all of the intermediaries throughout this process and to create a lot of unpredictability and a lot of volatility, which leads to where we are today. i guess with that, do you really believe that financial innovation beyond a certain point is a positive thing? >> no, i do not. but here is the problem. and we really get to the problem we were talking about earlier is, how do you deal with this? there is no doubt in my mind

that a lot of innovation is not dead -- is not good. as long as we have efficient market away from the banks, i think the concept of one.itization is a goo but we have had an excessive innovation and complexity. particularly, i think excessive complexity is a problem. with new tech products, you are bound to have mistakes the more complex something is. and the kind of complexity we have with these financial products is a real problem. again, the only way i can think to practically deal with that, that i think is very difficult

to write a rule to say you can do this but you can do that. i think regulators should be pushing toward standardization, and i think the right way to do it is with capital charges, big capital charges. we have to keep fighting towards transparency, disclosure, and penalize complexity with capital charges. >> i would like to follow up on the issue of transparency, in particular looking at the conversation we were just having indirectly about hedge funds and their behavior is within the market. one of the salient moments for bear stearns was when their hedge fund operations and declared that they were insolvent.

when you think of the activity of hedge funds surrounding the crisis, there was a fair degree of lack of transparency in that regard. do you think these are entities that should be included in what you just described, that adequately disclose not only the positions but the players within the market? >> it is very interesting, because we focused on hedge funds early on. we focused on and the relationships between the prime brokers and the big banks, and major that the regulated institutions have plenty of capital and plenty of margin. as it turns out, this is not where the problem occurred. i think that work was good because we didn't have a problem, but the problem was right under our nose in regulating entities. we were not focused on the

citizen conduit. we were focused on the hedge funds. having said that, i recommended in the blueprint we put out that hedge funds were big and complex enough to be systemically importance -- to beat systemically important enough to be charted and have that regulation. i am all for that. i do think that is important. >> thank you. one final question. one of the things that is striking to me and talking to everyone we have talked too far is that there really has not been anyone yet who has admitted that they made mistakes in this whole thing, or would do something differently. i know that you said that everybody makes mistakes. i am wondering if you'd like to tell us what mistakes you might have made. >> i have made a good number of mistakes, because the -- and i

think my mistakes were primarily communication mistakes. start with the t.a.r.p.. we sent a three page outline to congress. we should have had a press conference. we should have said, this is not take it or leave it. this is not complete. this is a starting point for negotiation. i was never able to explain to the american people in a way which they understood why these rescues were for them and for their benefit not for wall street. i was never able to make that connection, and the rescue today remains very unpopular. i think that the things that are generally pointed out as mistakes that we made are in most cases situations like

lehman brothers where we did not have the authorities. again, looking at it from 100,000 ft., i think the major decisions that we made working with imperfect tools and authorities or the right ones. i look back on those and i think they were the right ones. but along the way, there were plenty of mistakes made by everyone, and i sure wish i had communicated better a lot of the time. >> when you look around at the other people who were involved in this, could you give me maybe just the top two or three mistakes that you saw that maybe would have made a difference in this? >> i cannot speak about bill liquidity enough. is -- about bill liquidity --

illiquidity enough. when you find a bank taking a prime brokerage account and making those securities, and using them to finance itself overnight, but then making a 30 day or a 60 day loan to the prime broker, you cannot finance yourself overnight use still have a 30 day loan to them, i wonder how people do those things. i think liquidity and understanding liquidity, and then other than that, i really believe -- we can talk about all the mistakes the bankers made, all the mistakes the ratings agencies made, but i think this

committee, if you do not get to the root causes of these, will be sitting down with another committee in a number of years and it will be worse. we may have corrected some of the outer mistakes, but we will still have at the root cause. we need to restructure, scale back the strength of fannie and freddie at a minimum, do some things with our tax policy, do some things to encourage savings in the united states and to discourage over borrowing. again, that would be mine -- that would be my recommendation. >> just one technical matter. i'm sorry. two minutes. >> i decided to follow up quickly on the issues of common

shot and liquidity. it seems to me that because of the big losses on subprime loans, the mortgage-backed securities market came to a halt in 2007. you cannot buy or sell mortgage- backed securities. this meant that financial institutions could not sell a substantial portion of their assets, and it became, largely, illiquid. then they had to write down their assets because of the rules of accounting at the time. so institutions looked unstable or insolvent. they were certainly illiquid. the regulators simply could not cope with that. this was the disappearance of a major asset class. it just was no longer there. there was no market for it.

i would like to have your reaction to that as a person who was familiar with the situation. >> there is no doubt there were real liquidity problems that made it hard to value assets. i note your view on marked to market accounting. i know that there are a lot of people who blame mark to market accounting, their value accounting. i am one of them. i think the problems would have been worse without them. i think if more financial institutions used mark to market accounting, the problems would not have built up to the level they were. i do not know how you run an institution without having to market these assets and put a real value on them continually

-- without having to mark these assets and put the real value on them continually. during the crisis, people wanted to stop marketing assets and hope that the problem went away entirely. that would have been a real problem. i understand your view, and i have spent a lot of time talking about this with thoughtful people. there is no doubt that during the crisis mark to market accounting accentuated some of the issues. >> i should not have mention mark to market accounting. i want to clarify that i was talking about the lack of liquidity that came from the fact that people could not value their assets anymore. >> absolutely. >> there was no market for their assets. >> there was not a market, or at least a market they wanted to accept. >> thank you. i didn't want to dig down into the weeds on two failures and get your opinion on what happened.

one is, the repo market still pretty dramatically, and we have talked about that spirit but also, -- we have talked about that. but also, banks new j.p. morgan, knew their collateral, and were unable to have transactions take place. one of the things that went on in the past was that investment banks could go to commercial banks, and that mechanism was available to ameliorate difficulties. what went wrong in this crisis that that was not available? >> in any crisis that is severe enough, an institution will do what it takes to preserve itself and not overexpose themselves to credit risks.

i think that tim geitner, who you will be talking to later, and probably tell you a lot more than i can about the try party repo markets -- being tri-party rebel market. you have to stick -- the tri- party repo market. during the crisis, they were the ones who had all the rest. that was an uncomfortable spot for them to be in. it was uncomfortable for institutions on the other side to be so dependent upon what went on in those institutions. i cannot comment on it except by simply saying that it is very difficult at a time when

everyone is worried about markets to ask institutions to extend a lot of credit when their confidence has disappeared. >> i began by questioning you about some documents provided to us by goldman sachs regarding cdo's. there is a page compiled by our own staff from other government documents. if you could bear with me. when paul revere some of the lantern and jumped on his horse -- i referred earlier to the dilemma you might have faced.

is my question. why is it that in 2007, no one from the public financial sector jumped on their horses like paul revere and warned about the crisis? >> i think a lot of people sought excesses' -- saw excesses, but we have had the nine markets for a long time. why is it that in almost any bubble, it becomes obvious after the fact? they all have certain things in common when you look at them. they use the nine markets -- benign market.

there is almost always excessive risk-taking, too much debt and not enough transparency. but here, i think many people , and iere were excesses think there were few of us who sups reject -- who saw something of the magnitude of what we experienced. >> were you worried about shaking the market? >> in late 2007, we knew the markets were fragile. i think that i -- and i have said this a number of times before, i think i was as

concerned as anyone around me, and i underestimated, in late 2007 and in early 2008, i underestimated, i knew there was a problem, i underestimated the magnitude and the scale of what we're dealing with. almost every step of the way. now i look back and i say, if i was omniscient, i am not sure what i would have done differently. as i think back on it today, it is even hard to imagine. i do not like to think about it. >> i know the vice chair would like to make a comment. i am going to let him close. i want to thank you for coming today. we could probably ask you many more hours of questions, but we are going to take 15 minutes for lunch after the vice chair makes disclosing remarks appeared >>

-- closing remarks. >> edwards air force base was in my district. when pilots got up to a certain height, they got astronauts wings. i think if you have astronauts wings, you could have had a better picture of what was going on. thank you for coming. we really appreciate it the ability to cross section with one person in trying to get a better understanding of what happened. >> thank you. >> our coverage of the financial crisis inquiry commission continues with treasury secretary timothy geitner. this is two hours and 15 minutes. >> the meeting of the financial crisis team commission will come back to order. welcome, mr. secretary. thank you for joining today. we appreciate you joining us

midway into days of hearing about the shettle banking system. but joseph starts as we do with all witnesses. i'm going to ask if he would stand to be sworn for the oath. if you please stand and raise your right hand. do you solemnly swear or affirm under penay of perjury the testimony you're about to provide the commission will be the truth, the whole truth and nothing but the truth to the best of your knowledge? [inaudible] >> good. fetis oror've been to the hill a at one minute the yellow light will go on and at the time up, the red light we would like to ask you to give the presentation of up to ten minutes and then we will move to the commissioner questions. thank you. >> thank you mr. chairman,

mr. vice chairman and members of the commission. thanks for me to be a good chance of having to do. during the job of sifting through the wreckage of the crisis so that we can better understand the cause and how to present a recurrence and i recognize the chance to be part of that effort. the senate took an important step yesterday passing with overwhelming bipartisan support reform to prevent future financial bailout. this is a necessary but not sufficient steps to me the financial system more stable. as the debate now shifts the design of thconsumer protection oversight of the derivatives markets and oth issues, the votes ahead are very important. and within the context of this hearing i want to emphasize a central tragic lesson of the crisis. we cannot create a more stable financial system by carving out certain types of financial institutionsr activities from these reforms. if we do we will only make the system less stable. if we do, we will only allow once again burns in the business

of providing credit to ease keep the necessary protection that we need for consumers and businesses against predation abuse and excessive risk. we have to create a strong set of rules that no institution can he state. in the aftermath of the great persian the united states put in place broad protections over the financial systems that laid the foundation for a more stable banking industry for several decades. but over time this financial system and outgrew those protections. over time the constraints imposed by banking regulations encouraged actity to move away from the banking sector in search of weak regulation and the promise of the returns. and over time a large parallel banking system took root out side of the regulatory banks. in the parallel system a diverse group of financial institutis were allowed to engage and the business of banking providing financial services to

individuals and companies without being regulated as banks. at the peak this financial system financed about $8 trillion in assets, becoming almost as large as the traditional banking system. and much of the system used the substantial leverage with relatively thin cushions against the possibility of loss. the parallel financial system operating with much real protections proved exceptionally vulnerable to the loss of confidence as the crisis intensified investors began to pull back and demand more collatal in the system to sell assets to meet the demand for cash pushing the price of assets down leading to a vicious cycle ofanic. that brought was a classic run on the financial system brought us to the brink of collapse and the economy faced a credible risk of injuring a second great depression. now, many people call the parallel system in shadow banking system but it wasn't

hidden away. it operated in broad daylight financed by institutional investors with the history, system with no history or reasonable expectations of governor support in a crisis. instead in many ways the system of secure failure of market discipline. so why did protection put in place following the great russian protect us against the growth of risk in theystem? first i what is it possible is we entered a long period by relative economic financial stability during which the investors to on more and more risk. trillions of dollars of the financial decisions were made in the u.s. and around theorld all the expectations that house prices would never fall. the rescissions would be short and shallow and systemic financial crises in the developed markets were a thing of the past and the world economy would continue to grow. those judgments proved

tragically optimistic and ultimately the protections put in place about the traditional banking system didn't provide sufficient sho absorbers to have a deep recession and a substantial fall in the real-estate values. but part of the cause lies in the bullpen last fragmented regulatory system design in different era that lags far behind cnges in the financial markets. the government's system of the financl oversight was simply not designed to constrain the risk-taking in this parallel financial system. credential regulationsere lited to the banks. the federal reserve had no legal authority to set and enforce capital requirements on a major institutions to operate essentially banking businesses outside of the bank holding companies. the fed also had no legal authority over the investment bank's diversified institutions like the aig for hundreds of small and big financial finance companies. yet as you know no legal authority to set and forced

capital requirements on a consolidated basis across the full range of activities across investment banks. more broadly this is more critical no regulator or supervisor of the core system taking action to prevent the diversion of activity away from the protections regulations designed to provide. the result was a system of the applied a safety and soundness regulation only to the banks was unable to protect the safety and the civili of the broad financial system. addressing these failures is the essentials part of the comprehensive reform now being considered by congress. these reforms would require enforcement of tough constraints on leverage and risk-taking across the major institutions that played a critical part in causing the crisis. financial instutions will no longer be able to ease keep these limits. large and complex global financial institutions will be forced to operate with higher

capital and more stable funding reflecting the greater risk they pose to the economy as a whole. these reforms will bring derivative markets out of the dark and provide transparency and disclosure and comprehensive oversight over all derivatives markets and all participants in those markets. and we will bring standardized data to disk into the central clearing houses and stock trading facilits reducing the risk that the derivative market could again threaten the system. these reforms will prove more stability and funding markets to reform the funds to make them less vulnerable to run and take the repo markets more resilient. the reforms will help improve the disclosure and accounting requirements reducing opportunities for each asian and giving investors better tools for the rest. they will address the rating agencies and reducible our ability of the systems to the future mistakes in the credit ratings and they will provide a carefully designed type of bankruptcy process for large financial institutions so that

we can break them up with no risk of loss to the tax payer and less risk to the economy as a whole. i know when people look back at the crisis and a look at the excess of risks we are taking by large institutions, there is a natural inclination to want to move the risky activities elsewhere. to create stability, some argue, we should simply separate banks from preott. but important ways dreading risk-taking into areas with less regulation that is exactly what caed this crisis. the fundament lesson of the parallel financial system is that we cannot make the economy safe by taking functions the central to the business of banking. functions necessary to hp create capital for businesses and help businesses hedge risks and move them outside of the bank's outside of the strong regulations. mr. chairman of the close by thanking the commission for your work in drawing public attention tone of what i ink was the key factors this crisis and

one of the most important objectives of financial reform. thank you. >> thank you, secretary geithner tebeau we wilthe questioning. what we start with to stick to questions and as i said to former secretary paulson today at least in my instance while there has been a lot of fascination generally with the bailout and how the financial system was stabilized i think the questions i want to focus on today is how do we come to the point where it seems l the only two options were either to allow the collapse of the financial system or to commit substantial trillions of dollars ofaxpayers' money to save it and i do want to talk to you in your was the president of the federal reserve board of new york recognizing you had direct supervising responsibilities of th holding companies but beyond that in many respects to the eyes and ears of the federal reserve on wall street. you were in constant contact with primary dealers who had a board that did have linkages, to the financial community and that

you would play a special role in the monitoring system crist infected had undertaken efforts of respect to cleaning up the backlog and trade confirmations in the otc derivatives market. one of the things i noted in preparing the last month for our look at the shadow bank system and that in the period of 2004, 2005, 2006 you actually made a number of speeches about risks that were expanded under the sand contagions, shadow banking. i will notice you made to different speeches on the same day. may 19th must have been a busy day talking about risk. about concentration risk posed by the cbo's and creditor of this and leverage in the system. and it seems to me that you were in a place where you had extraordinary aess to information not just market data that primary dealers are telling you information on the repo mark so this is a pretty fundamental question i have partic as we look forward

trying to assess the impact what didn't you know. and this doesn't need to just be at home and in but what did you and other key policymakers know and have before you to understand the magnitude of what might hit us? microphonen. spec what we start by saying i have spent my previous 15 years in public service dealing with a series of incredibly damaging emerging-market financial crises and financial crisis in japan. when i went to the new york fed, i've been blessed or arred by the experience of wating the country's manament mismanaged the development of risk and systs and how to clean up and contain the damage in the aftermath and when i went to the new york fed, early in the process beginning in 2004, we began a series of three important initiatives to try to

contain donald back reduced we saw growing in the system and reduce the odds that if the conditions change with a shock recession the the system was going to be stronger and the position withstand the shock. let me mention the three most important things we did in that context. the first was to bring a serious experts in market and risk management led by debate could together to a comprehensive examination of the state of risk management practice managing the things that have been the subject of this crisis. risk in derivatives, exposure to hedge funds, complex financial products, help liquidity is manage and stress testing is conducted and using a model of a process pretty much like you are doing which is a sort of post mortem process after the failure of long-term capal management. we brought the group together at my initiative and asked them to do a comprehensive evaluation and provide recommendations to get it and we took the recommendations and we asked the major firms in the world to

undertake this assessment of how they were doing against those recommendations. second, very important thing we did is to bring financial supervisors of all of the major defeat to major global firms. the ftc, the british fsa, their counterparts together to conduct a series what we call horizontal review to try to assess limitations and risk-management and try to encourage people to fix the problems of risk-management early and those targeted very much like what i began with risks and derivatives in the lending to hedge funds and managemt of liquidity conducting stress testing. and those efforts were designed to assess what was the practice where there were gaps and try to bring all of them to get around the world to encourage beginning at that point and 05, 06, 07 to

try to get firms that buy all that the reason they were taking and to mention the one thing you mentioned we need and a similar effort to start to clean up the derivatives markets and standardization of a automation pave the way to achieving these reforms to bring this out of the dark on to the clearinghouses so we can manage the risk better. now, as you know, those efforts were in the end fundamentally inadequate. they did not do enough enough and they didn't come upith enough contraction. there isomplicated reasons i would be happy to discuss in part because we were operating within a set of existing capital requirements. this didn't adequately captured the risk the system had through the possibility of a deep recession. so i think the simplest way to answer the question about what doe not know -- what we did not know was the degree to which the system was reliant on ratings, ratings the did not

capture with the falling house prices would do across the system. we did not know the extent to which the parallel financial system had built up leverage and exsure to liquidity risks that level then when it came crashing down would threaten the stability of the rest of the system. we did not know how vulnerable the money markets were to run and how unstable the basic funding structure was and i can go on. ..

yohad this enormous growth and leverage, and liquidity risk in a large power for financial system. thos those were related experience wd happen when you had a run on that system. so the oversight system when they talked about-- as i said in my remarks, did not establish a set of classic restraints on leverage on what came to be a large part of the american financial system. and people tried with duct tape and string, like the ftc did in their regime, to take the

authority to make the best of it and tried to get to a point where they were trying to put in place better constraints but that effort came too late and it was too weak and it was not grounded in law and it was fundamentally inadequate. >> so let me ask this, and that is, given you had spoken on this and you have actually identified what you sober levels of risk in some might say levels of the responsibility, you saw those two trains of sk in your responsibility going towards you, towards collision. do you believe that you are others in leadership sounded the alarm early enough and loud enough? >> mr. chairman chairman i said this always. absolutely we couldave done more. absolutely. and people ask, it is inevable, were brief fundamentally powerless as a country to prevent this from building up? i do not believe we were powerless. i think it is unfair to say it is the benefit of hindsight, but i would say if the government of

the united states had moved more quickly to put in place better designed risk-taking that captured where there was risk in the system, thens would have been less severe that the government had moved more quickly to contain the damage i think the crisis would have been less severe as well. >> let me talk about that in the last two days i cited a number of market warnings that i won't repeat today from the dramatic expansion of mortgage in this country to the explosion of sub-prime lending, the efforts of states that were printed b the occ to fight fair deceptive lending, and just look him and i was a person in real estate investment on the ground, 50% annual increases in home prices so a l of warning signs out there. clearly, one of t things you have identified is the lack of a structural barrel bureau plea to move on these problems but i want to assess and i really thought about it as we have gone through a set of hearings. do you also think that the system doesn't have enough iconoclast synod, that the

decision-making process is unduly controlled but by people who were of the financial system and close to it and am able to step away from it in the way you need for true risk assessment? and of course i think there are variations of this all the way from people may be on wall otreet whondha le aryn' tme

put in place measures that might mitigate those risks. our system was fundamentally flawed and organized. you had people calling over the system with nobody responsible, and nobody in charge.

that was a tragic failure for the country as a whole. it was an avoidable fair, i believe. it is easy to say in hindsight. it is true that at the time, anybody operating in the world could see classic signs of an asset credit bubble that could prove kravis got -- could prove catastrophic. we had a huge capacity to understand others risk. this was essential to what happened. if we were to face a major financial crisis, it could be much more damaging and much harder to manage because it was likely to take place and start, as it did, in this parallel system where there was much more leverage and liquidity risks, and you did not have in place

tools to try to contain the damage earlier. that is really the story of the crisis. >> many of the signals i was talking about or not just market data. we're talking about leverage and liquidities in those firms. i have two very specific questions, because we want to move on to talking about point in time. one of the things we're trying to do is measure what people saw at what time. on march 16th, there was some engagement, as you know, between the secretary and fannie and freddie. they used portfolio capps to keep them in the marketplace. the only reason i mention it is that there is a reference -- i do not expect you to know this e-mail, but i am looking for the bigger figure -- bigger picture here.

the renegotiations to keep freddy and fannie into the game. this person says he was leaned on very heavily to guarantee -- to substantiate the guarantee. in march, the bear stearns weekend, were you worried about something of the maggot to deptford -- of the magnitude ultimately happens in september happening in march. >> at that time, as bear stearns fell off the cliff, we were deeply worried about what that would do to the broader stability of the financial system, and we knew what the point that fannie and freddie, like many others, faced very substantial losses on their mortgage portfolio. their relevant autrity to encourage those firms to go out and raise a lot ofhe system, ane

straightforward sensible thing. and, that was important because, as we saw fundamentally, short capital going to a storm like this was catastrophic andhey were short capital. the problem with these crises is people tend to weight. if they wait too long it looks weak. the pricing is expensive. they don't want to dilute their shareholders so they keep the bass sick pay down-- basic pattern that fannie and freddie had then we worked very hard to try to encourage people, to encourage them to raise capital. >> were you for hardening the guarantee at that point? >> i often use the argument that you need to make it more credible to the world. they are going to have the financial resources to meet thr commitment. you can do that lots of differenways than one is by making sure they raise more capital and the other is to strength in what was an implicit

commitment at that point for the government to stand behind them, and ultimately of course that was-- both were necessary and i was fully supportive of the judgment of the need to do that. >> the final question for you. later in the day we willave a panel of g. m. pimco recipients. it appears from documents that we have, that ge was able to keep its, going with this sichuan subs commercial paper throughout this crisis even though of course the general spread over libor increase for all participants, but at some level, a disruption in the credit capacity of ge speaks volumes about the death of what we are seeing, so on september 29 and 30th, you had six telephone conversations. just to put that in context, you probably didn't get any sleep these days but the 27th and 20th was the day that goldman

and morgan stanley became bank holding companies, that we can. on monday the 29th, that is the day the dow dropped 770-point. after the house voted down the financial bailout bill. was mr. al mao speaking to you about concerns about disruption in their ability to issue paper? >> at that point,fter that famous mutual fund money market fund broke the buck in the wake of lehman's failure had abroad base run on money market funds and you had a broad base run on commercial paper markets, so you take the prospect of some of the largest companies in the world, in the united states, losing the capacity to fund those commercial paper markets. so we were involved at that time in designing what ultimately became the commercial paper which was the bkstop for the commercial paper market to complement the temporary guarantee for money market

funds, so i was involved in a whole range of efforts to help decide that facility. and i was exposed to and had conversations with people across the financial market who depended on commercial paper markets, who were trying to make sure we were aware of what was happening and how perilous it was. you didn't need a phonecall to tell you that. all you needed to do was look at what was happening and it was developing it and self evident to all of us at the time. >> with the concerns specifically about that and talk to you about that? >> i can go back and try to refresh my memory but what i'm su they were about and making sure we were aware of how perilous they thought even a company that strong, how perilous those markets were at that time but as i sd, that was self-evident. it was obvious conspicuous and you could see it in just looking at your screen. >> i don't expect you to carry

your daily planner with you t if you would check on that because we are trying to get a measure of the intensity and direct concerns by different market persists as months. if you would check the 29th and the 30th. that is all of my questions at that point mr. vice chaman. >> thank you mr. chairman. mr. secretary, i do really appreciate your willingness to come before us, but the manner in which you have done so. i am very sensitive to structure and protol, having been around a long time but our ability to talk to secretary paulson and the value of his having been on wall street in the private sector, and then becoming secrary of the treasury, followed by your presence, which had you at the federal reserve just prior to coming to the secretary of the treasury, i noted also both of you went to dartmouth. i don't know what that means

with all these harvard guys around, but i appreciate that. it gives us an opportunity to ask questions, which bridge that 2000-- 2000 to 22,003 to 2009 window in a way i don't think we have ever been able to do that. so, when i ask you this question, especially specially based upon your comments about what you did at the new york fed and bringing together experts for for thetate of risk management and then running a global confab with the subject matter. most people can't see this, and it is the only thing i have available right now but basically it is the access of selected finanal sectors, and it shows the blue obviously are the deposits of the bank, and this is the shadow banking above it. and it is a federal reserve board of funds flow release, so

it was around and people were aware of that. wh you run the numbers, and this is all 2008, you have this, the commercial banks a about 7.3 trillion, the so-called shadow bank similar between 7.1 and 7.3. so i mean a 50/50 split right there. when you look at the residential mortgage-backed securities and 2008, about 6.7 trillion, then you have got over-the-counter derivatives in the same timeframe of about 2008, gross market value, 20 trillion nominally, 684 trillion. and we all knew about the runs on a bank in the 30 and the located the problem. didn't anybody talk about the top-heavy aspect that somehow

what works to keep conventional banks, and because of those restraints that they developed other approaches, but clearly, it was the same thing almost all over again except much more difficult to perceive because of the muddinessheatings and the rest, thaneve came up as the subject matter either with the experts at around and talked about, we are kind of concerned about the weight shifts into an area that could have liquidity problems, that could be subjected to a run like we had in the 30s, and the global folks didn't talk about it either. i just don't get it, and they need to understand. now what we have heard from a lot of players in the market was that nobody had a model that, it in the pejorative sense, people said they never thought housing prices were going to go down. i think the correct answer is no one thought they were going to go down that far.

and even given that, you have areas in the government that talk about disasters that no one likes to think about, because somebody has got to think about disasters that no one thinks about. i would think that the new york fed might he involved in that. looking at those markets, itay not have a direct power position, but you are the best person in my opinion to ask in that 03208 period. what happened? >> i will begin by saying financial crises are caused by unwillingness of people to think the unthinble and thateems unlikely so we are not going to worry about that. that is the fundamental mistake that underpins most financial crises in our system was-- that mistake was pervasive across the system. complete, whichever phrase you want to use.

>> even the watchers watching-- apparently thought the same thing. >> know no i wouldn't say that. the initiative that i descre, that we were engaged in, we didn't call it, we didn't really talk it back in 04 and 05 about the shadow banking system, but we were deeply focused on exactly this risk. when i say, when i first came into that job, i said let's look at the system today. it is true we ve these major banks, but what about the invement banks? who is watching them? what about aig? what about the gse's? what about the hundreds of finance companies that else up not as banks that's doing banking. so that basic concerned about the vulnerability of the financial system to systemic risk in those institutions was central to the efforts that i described that we initiated.

now you are right to say that those were outside of our-- outside of our formal legal authority and outside of our mandate in some sense but we knew the horror of the system we were responsible was made more risky and we knew we were in the classic position where in effect, we were the only station in town you could turn to when things fell apart for liquidity but we had no capacity to constrain risk outside of that regulated core. but when none of us anticipated i think was, and i certainly did not understand fully was what produced that finance and how vulnerable it was to run, how you could have had a system where these people again they were operating in public markets issuing public debt under the disclosures of the laws of the united states united states funded by institutional investors. market discipline and all the checks and balances we rely on in that area would have proved

so inadequate to contain leverage earlier. fannie and freddie you can understand because it was essentially a moral hazard. i guess i would say, that set of concerns was central to the efforts we began, but fundamentally what we learned when we discovered and this is an important lesson for us that underpins our reform efforts is that you can't run a stable system wh one part under-- and one part without andy's constraints on leverage, capital requirements were not conservative enough. where they exist in and they were not designed in a way given the accounting disclosures that allow them to fully capture the risks in an extreme event. partly because of their reliance on ratings, partly because of a long history before the stability so it wasn't in the memory, andhat left the whole system more vulnerable.

>> given those areas that you did have responsibility over, the old-fashioned commercial banks, bank of america, morgan chase and citibank, the one thing that strikes most people when they talk about it is that they are really really upset about what happened in the residential mortgage area because it affects them directly. what scares them more was the fact that there were no firewalls anywhere and that what started as an area that you could say wasn't regulated by the definition of shadow banking and the rest of it, but it also affected the structure that was designed after the initial failure not to fail again. >> exactly. >> okay, so i got a right but how come we didn't get it right? >> again, another tragic failure of the crisis was that we designed a system with deposit

insurance around banks, basic prections designed to prevent a fire caused by the failure of a single bank to inspect and jeopardize the stability of banks. system long texted overtime comes with moral hazard risks. not perfect. the s&l crisis being at a good example but the other systems had none of those protections, no fire breaks and no firewalls. the executive branch of the united states, the large financial system in the planet came io the crisis with the president having on the emergey authoty limited to the a of closing financial markets are declaring a bank holiday. actions in a crisis which are largely panic increasing, not panic containing. so you are exactly right, we didn't have the tools to prevent the fire from breaking in the system and these reform

proposals, congress was debating on the subject of the hearing are designed to provide ectly those tools. to make sure that large complexes like aig manage itself so that you cou put them out of their misery safely in prevent the fire from breaking apart, fm jumping the firebreak. >> one last question, which again amazes me in terms of how many people have used it as an answer in terms of the assets that they held in the potential liquidity especially in the shadow banking area. they were aaa rated. at one point, when you look at the kind of residential mortge products that was bungled, everybody knew-- people that you never thought could get into a house that got into a house but something had happened to deal 20% down and all the other arguments that gave you se comfort. whone think a package of the 08 staff would have the

same aaa rating as the package of the 2000 or 1990 ratings? was it because they wanted to believe it did? i mean how could anybody think that an especially this group of experts and others? >> when things are going well and people are making money, they tend to think they are smart and not lucky and they think it validates wisdom. >> mr. secretary i just have to tell you that when things are goin well and people are making money, no one thinks about making the amount of money that was being made. that is not money. >> i completely agree and to reinforce, given this basic collective sentiment that we had somehow produced a perfectly stable system and into shock, things couldn't go bad and y are right in many ways, what happened to compensation and a whole range of incentive structuresed the evolution. >> thank you or go somewhere i remember reading sething about

pride going before-- thank you very much mr. secretary. >> ms. born. born. >> thank you very much, and thank you mr. secretary for being willing to join us and help us in our investigation. your testimony i think demonstrates how there were regulatory weaknesses, regulatory gaps that tied the hands of the regulators and financial supervisors during the crisis, and i take it that you feel that lack of regulatory powers in some areas was an important aspect of the problem. >> absolutely. as i they said my wrten testimony it is quite literally an example of authority that was not used ear enough and forcefully enough, but in the subject of your hearing and this is true for shadow banking,

power banking derivative markets generally, i would say the oversight failure was a, was a gap, a gulf and accountability and legal authority that prevented people come, even people who had perfect foresight from acting preemptively to continue those risks. >> let m just ask you briefly first about the over-the-counter derivatives market, and enormous and unregulated market as of the time of the crisis, where there were tens of thousands of contracts out there, creating counterparty credit risk and virtually no transparency. you said in your testimony, these markets have proved to be a measure of force of uncertainty and risk during periods of financial disruption. do you feel that they lack of

regulation, thlack of transparency, the enormous size of the market played a role in exacerbating the fancial crisis? >> i do. i would emphasize two things though. the first is that, and this is anything fundamental. you had very large institutions writing hundreds and hundreds of billions of dollars worth of commitment and derivatives without capital to back them up. this is obviously true for aig but it was true for a whole industry of insurance companies and of course it was true for many other financial institutions. and the mentally what happened was when they had to meet those commitments they didn't have enough resources to do it and of course that brought them to the edge of collapse. but i think the other problem was in this world of billions of bilateral contracts, it was like spaghetti, putting spaghetti together and when the crisis hit and you had to untangle those and try to figure outhat was my exposure to default risk

across the system, it was very hard for people to know and they reacted as people do in facing fierce. they decided, i'm going to withdraw and pull back the risk wherever i can. that in a crisis tends to-- like margin spirals and that tends to emphasize the crisis of the inability thathose tens of thousands of millions of contracts provided for people to assess quickly what my exposure was to the risk of default by a major institution was a substantial factor exacerbating the panic and made the crisis harder to manage and of course the paradox is that those were markets designed to people-- help people hedge risks and that gave people the capacity to hedge risk but it also gave the much more risk of exposure to panics when things fell apart. >> so, i believe they are very useful instruments, and essential to managing risk, but at they also magnify risk

greatly in this disruption. >> i agree with that or go. >> is this why the administration is proposing regulatory oversight over the market? >> absolutely and again, these markets grew up, grew dramatically in the decades. you of course know this very well. the risks were apparent to many earlier but they grew dramatically over that period of time and it it was fundamentally, people were doing this thing by spreadsheet in fact. people did not have electrically sensible records of what their exposure was. there were huge backlogs of transactions not captured, so when i came to the new york fed and we started the effort to clean that up and produce it, it put us in the position where we couldn't could and finally propose reforms that would bring the standardized part of the market onto clearinghouses and make sure that clear stuff would

be traded on trading platforms and the reforms also ofourse as i said give people the authority to make sure that major institutions writing these commitments, that margins are conservativeouth and the ftc and cftc have the tools they need to better police fraud and manipulation to deter fraud and manipulation earlier. those are the reforms working their way through the congress and they are a very strong package of reforms. >> you essentially indicated that the lack of regulation or the lower level of regulation and shadow banking made the shadow banking sector more vulnerable to the financial problems that we experienced in 2007 in 2008. and, i wanted to ask aboutind

of the flip side of the, which is whether the growth and competition of the shadow banking system impacted subtly or at all on banking regulation, because this was a less regulated system. i think the nks did suffer competitively with various aspects of the shadow banking system. they lost deposits to the money market funds. they lost potential commercial loans to commercial paper and repo, and i can imagine tt commercial banks having felt

this competitive pressure would have wanted to be able to engage in broader activities and with less constraints from banking regulars. we have been told during our investigation that by the time glass-steagall was altered by gramm-leach-bliley, there was not a great deal of separation in fact between the activities commercial banks could engage in and investment banks. so, i wanted to ask you whether, as a banking rulator ysaf pressures to soften constrained on the commercial banking your because of the growth of shaw banking? >> i did not feel those constrais but when he

described what was happening and you gave all the right examples, but let it may provide a few more. we created a system that allowed institutions to an effect choose their regulator. the best examples of that were banks that chose to become thrifts. countrywide seems the best example. a lot of people thought regulatory competition was a virtue and would produce bter regulation, but if you allow people to move risks to where they are the weakest and they operate with leverage and risk to the system, tt is just a catastrophic choice. besought definitely across banking regulators andn fact you know countrywide is an example where countrywide was able to evade the touer restrictions of the fed regime and choose a softer regime which is an ots regime, that is a good example. overwhelmingly you saw people

pressured, pressured to follow the market down. what happened in mortgage underwriting is ather great example. i think he was true in the early part of the decade, probably up until 2004 most of the mortgage and were still underwritten by banks and by thrifts over time of course most of the mortgages migrated to other parts of the system outside the banking, promotes the banking system for the same basic reason so again, a mistake is to permit that and what these reforms did was recognize the basic principle that if you are doing banking, we regulate u.s. banks so we can better protect the system. doesn't mean everybody has to be exactly the same in their financial structure but the leverage requirements they operate with, the requirements on funding should be economically similar that we produce a level of stability that is more tolerable to the country. >> when you are were athe federal reserve bank of new york

, you and your staff had the role of overseein some of the biggest bank holding companies in the world. and those were also institutions that suffered adversely during the financial crisis that we have experience. i wonder if you would comment on the abily of the supervisors to effectively oversee institutions that are that large, and that complex, and whether you felt that you and your sff braley had the capability to do the kind of jobs you would have wanted to do. >> i believe we did, and i think that we have examples that work

quite well at examples where was just fundamentally inadequate. it was absolutely made difficult by the fact we were operating in a system where the checks and balances that we all rely on, whh are internal controls, good out of control in firms, risk managent that look across the entire entity in capture those risks and bring them together so we can look at them, those things were fundamentally weak and it inadequate. we were vulnerable to the fact that under gramm-leach-bliley, we a, we rely on functions of supervisors to supervise for safety at the underlying banks or in the case of the ftc in this case, the broker-dealer and each firm operates across the world and were able to push risk into other jurisdictions to make it harder to captured and we were vulnerable to those as a whole. and of course as we have

learned, the capital requirements and the accounting requirements in the exposure requirements did not do a good enough job of giving us a good picture of what capital really was retive to risk. that is why the big lesson i take from this, among the many lessons are to make sure that we forced the system to run with more conservative requirement some leverage because i do not believe you can design a system that depends on a community of regulators always been wise and ugh and smart and have the foresight imperfect foresight to preemptively, preempt pockets of risk and bubbles of leverage. we will do our be and people will do their best but they will be imperfect and in the best sense that potential problem is, it forces the system to run with the stronger shock absorbers to

observe losses across the system and begin that is the lesson we are trying to bring about with these forms so it is not just the institutions that the markets like repo or secured funding markets, security funding markets etc., derivatives markets coming together also run with much more conservative cushions against the uncertain come against the possibility that the next shot could be beyond our imagination and could be very damaging. that is e central light lesson we try to take. >> what about the need for systemic view, which is very hard for any of our existing regulators to have, because of their silo jurisdictions. >> i think that is very important. there are two ways to do it. one is to take all the regulatory responsibilities relevant to systemic risk, put them in one place like maybe the

british did in some ways, and have a single point of accountability for measuring and managing all those basic risks. i don't think that system works. i don't think it is feasible. we are proposing a different model which is to create a council which brings those firms, those entities together with their functional specialization for market integrity, for resolution for safety and soundness, for the payment system e. and put them into a place where they have to sit around the table with the secretary of the treasury, too, because we are the custodians of the taxpayers money and fundamentally responsible for the financial security of the country have to be in a position to be accountable to the congress for making sure that complement of regulators is running the system sufficiently and conservatively. there or not against. it is not lagging behind the growth of these markets. that is not going to force-- but

i think it offers better chance of someone being accountable and making sure we don't re-create again huge gaps, opportunities for arbitrage where theules leg with a heightened risk in the they did. >> let me ask you one last thing there became prevalent a view among economists, a view among some regulators during the last 10 or 20 years, that financial markets were essentially self-regulatory, and government supervision, government regulation of markets was either unnecessary or actually counterproductive. do you think that played a role in the regulatory weaknesses and the regulatory gaps that you

have described in your testimony? >> it is hard to know. i find it hard to imagine that anybody who lives in the financial system believes fundamentally they are self-regulating just because the history of financial systems is a history of recurrent crises, some devastating like this one, and some more mild, bu all consequential. and we learned those lessons painfully of course, but i think the lesson of the behavior and experience in history is that if you allow institutions to take deposits that can be withdrawn on demanand make loans, they can be called on demand, then you create a risk of runs and that is consequential to the economy as a whole so we built up a set of protections not jt to counteract the moral hazards caused by the perception that these firmare important and

consequential but to make sure that you protect the economy from thing is getting out of whack. our system, like any country, among its strengths, and has a lot of people with diverse pepectives making decisio in the congress and the regulatory community. i think the real problem was that that long period of stability allowed all views to prevail. some people could say that proves that all these innovations reduce risk. that they prove that the markets are working well. that capital requirements are strong. and that long period where risk seems permanently reduced allow people to not confront i think what worked fundamental vulnerabilities. that is the way ild try to answer that question. >> thank you. >> thank you mr. chairman and thank you as her secretary for coming today. one of the things that is to

live full about your testimony is you actually are clear about what you think and don't think of what went on and that is not in the typical performance by someone at the table so thank you. let me ask you a few questions about that. one thing you said is that a root cause of the crisis is uneven regulation or absence of regulation. yesterday we were-- learned that under the csa program the sec felt that all of the five major investment banks have adequate capital. they met the standards. bid 10% capital the fed would have required. they had morehan adequate liquidity because they had gone above the standard set of bank holdingompanies. what difference would having it eat a legal requirement make it even if they were in compliance with the standards? >> i want to answer that question carefully because as you know i was not the supervisor andave no underlying knowledge of their financial quest-- condition. >> since they were in compliance

with the regulation what this making it legal to? >> i think would actually be very hard to justify a judgment that those firms were operatg with a level of leverage and they sufficiently conservative funding structure that made them equivalent, certainly three of them, equivalent in terms of stility to those firms that were operating under the constraints of the leverage ratio and the broader banks advisory regime. i would not agree with that judgment and of course i'm limited by the fact that i'm even know what happened after, after the storm engulfed many of them and had no direct knowledge before that. but i think it's fair to say, looked but dead in the appropriate way, economically they were allowed to run with more leverage, much more exposure to run the risk that was true for a classic bank subject to a leverage ratio and the other requirements that came. >> i guess that was my second question which was the assertion that this s a fundamentally more fragile structure.

in the aermath, it appears that regulated banks, commercial banks and the shadow, whatever you want to call them, failed in a comparable way. >> wing of the banking systems are fundamentally fragile. most financial crises are classic failures of traditional banking. banks lending too much for too long without risk etc. so you are exactly right in this crisis shows you both examples. but, it begins and was much more severe in my view and thi parallel banking system, and i think the crisis uld have been much easier to mane if it was simply eight classic yanking crisis, which are slor moving by design because liquidity risk is more contained, but i think you are right to say traditional banking and in parts of the shadow you call -- maxell people

making too much risk and against the possibility, the remote possibility they thought of a deep recession. i think you are right and is a set of my remarks i absolutely believe that the leverage constraints, the capital requirements that were put in place in the traditional banking system were not conservative enough and i think they were not conservative enough in two respects. one is it didn't give enough weight to the possibility we have a huge shock like this and they also didn't capture the exposure banks had to the pressures that would come when that parallel banking system did not collapse that parts of its collapse under enormous stress, so those were a failure and design of capital requirements to traditional banks as will. >> just a point of clarification, you don't want to college shadow or traditional banking of institutions but there was a set of activities locad in traditional banking and seen by the regulators that were the activities that were the same as in the shadow ban.

>> i think that is fair to say, and if youant to try to say what is the one cause that was common to everything. >> a i would love to hear that because i disagree with the cause is so far. which causes are the most important? >> i was going to say, i think if you look at a single factor that underpins the risk management failures, there is the ratings failure etc. was the failure to anticate the possibility of how prices would fall as much as they did, and what effects that would have on the ability. that failure is the same failure that caused millions of families to borrow more than the value of their home and was likely to be orphan as well as more prudent. that would be one-- what was not a cae of the crisis? which things people have put forward you think ought to be

crossed off our list? >> why don't you give me her candidates and i will respond. global capital flows. i believe along period of very low at just rates around the world absolutely contributed to the crisis. i think that created an enormous force of money looking for a return. i would say it was a factor. i mean, this is a deeper conversation of course but there are people who believe that at the root of everything was again a fine moral hazard risk which is a set is more compliced than that. i don't belie the existence of the fire station caused a financial crisis so iould not put that high on the list. but you should probably test me on the others. >> we will come back to this. i don't want to lose all my time but another thinyou said in your diagnosis of the problem was the absence of a system regulator, and i was instantly

going to point out the fsa in that england had a financial crisis and you have dismissed them as a preferred model but to what extent did we not already have it president financial market to have the capacity to do exaly what you are suggesting, sit down a look at risk and we got a financial crisis crisis anyway? >> excellent question and i agree and i think that body did not provide its important function, and you are also right to say that it is eablishing an instead see that it is now over the full mandate won't necessarily make sure people use that with that effect but i think it is important difference in the sense of the way the reforms are designed now, there really is an explicit mandate with the ability to in effect, deter weakening of let's say prudential requirements and to recommend they be higher and the existi much more informal structure thats the

president's working group does not come with that responsibility so i think that would help again as you know i think from what i said, i i don't think committees prevent financial crises and i don't think committees all financial crises, but on the other hand, you do need to invest people with a direct response but you want people to wake up everyday with a a sense of obligation not just to look across a system where risks are but given some authority to act in that case and we did not establish an executive brch of the united states, that set of obligations are quite that the capacity for leverage. >> i want to go backow to your time as residents of the new york fed, and during that period, the board of governors came to the conclusion that the risks andub-prime housing could be contained and he made a statement. did you agree with that? >> i never made that statement. i was not part of making it.

>> did you agree wit that? >> i would not have said it that way. i believe i try to say this, that i think we face growing risk across this financial system of exposure to a very dramatic crisis, and part of it of course what was happening in real estate markets. it was not principally because of what was happening and sub-prime. it was a much harder wider phenomenon that produce this mix of leverage across a system. when i talked about it, i try to cast it as facing signicant risk that risk from a much broader and i think more dangerous constellation of forces than simply what was happing with sub-pri. >> what would, beyond that list and that constellation. >> you had people taking huge leveraged bets on the possibility, on a world which is -- falling sharply or growth falling ofthe cliff or go. bad was the unifying mistake

that so many people in a fore management investors, borrowers made. >> were you surprised by the concentration of mortgage exposures on the balance sheet sheets of for example the regulated tanks, city matt? >> no. i think that banks lend money. banks always hold exposure to real estate risks as you have seen across the country. the story of community bank failures across the country is concentrated to the commercial real estate relative to capital. capital. what was surprising was that a huge part of that risk was held in these financing vehicles that came with very high ratings. the instructions came with very high ratings and as they said the capital requirements were that they were not-- they were designed in a way that made them much more while mobile to those

failures and did not protect against those failures people everywhere took false comfort from the fact that exposures to real estate risks were in securities that were rated aaa. >> were you surprised by the large amounts of hedging that was done through aig and other monoline insurers, the cd's? >> of course i was u to my eyeballs in the growth in the tbs market and what that meant for the system, but we had no window and no capacity to said set you would-- who had written huge commitments relative to capital because as you know, the things we could see were only in those institutions we cou regulate and as i said, even those metrics we use were flawed. but we were not able to see where you have those huge pockets of risk and institutions outside the banking system that wrote those huge commitments and

derivatives. >> when he attacked mr. corrigan to assess risk management d develop-- best practices, how did they do? you never said. >> the institutions did not do wellut the recommendations i think if you look back in retrospect have them were quite good. as iaid, the lesson i take from this is that we did not have sufficient traction to use those recommendations to induce enough changes in behaviors earlier largely because we were still operating within the existing capital requirements, and i think the only way ian think of preventing that from happening in the future agains to make this simple capital requirements in a leverage ratio and the other one, conservative enough so you can rely on them,

not rely on all of these other things you try to do. remember all of these firms when you look at their stated ratios, they gave you some convert that they held a fair amount of capital against their risk. that was false comfort. a simple lesson i think is just to say you have got to run the system with more conservative shock absorbers. speak and you need more capital. i don't want to look like i was contesting that. i was just trying to get a sense for even what the perceived best practice might be, what your assessnt of their actual practice was and whether they improved it in response to this. >> i think some did improve. you look at the corrigan report, and you compare it against this thing we organize called the senior supervisors group, a

report on actual practices across those firms that i think was published in the fall of zero wait? 07? i am not sure. and you could see and they are a pretty historic criticism of what was the state of actual practice and i think we have significant effect in changing prtice, but obviously not enough. the numbers were inadequate. >> before i run out of time, two more questions. number one, you said in your statement that among the things that cause the crisis was the government not moving quickly enough. when should it have moved in what should it have done and what did you mean by that? >> again, i am a king things more simple en they obviously could be, but to say historically, i would say we did not move early enough to contain the emerginrisk aoss the system. >> preemptively.

>> preptively and when things started to fall apart, and i think this is true for governments around the world, did not move quickly enough and forcefully enough to try to contain the damage. i think the federal reserve was exceptionally aggressive, took a huge amount of criticism and did things we hadn't contemplated ever before with the authority congress gave us but in the end he canceled his financial crises with tools that are about liquidity. they require ultimately as we saw, the full financial force of the government in terms of fiscal policies to support demand and ultimately capital in the system and broad-based guarantees to contain panics, and they believed that have been deployed more quickly and many of us of coue were strong advocates of early action, i think this would have been a less damaging crisis. >> i yield the judgment to additional minutes. >> in particular-- indeed many of these banks.

a question that immediately comes up then is should the fed has moved more quickly to provide discount window access to people outside a bank holding companies and as you know, there is lots of interesting decision-making that went into that and i would love to hear your views. >> we were extraordinarily reluctant, i think appropriately reluctant to take that exceptional step. it had not been taken since the great depression ben, to provide traditional lending against collateral to institutions we were not supervising and regulating because we knew in doing that, you would be creating enormous moral hazard risk for the future and i think we were appropriately reluctant until we believed and we came to believe of course that that fateful week in march, that the system was at the edge of collapse. now thoseacilities of course are not designed to protect individual failures. they are designed to protect the system from oad-based runs and

prevent solvent institutions from becoming illiquid and they can only achieve so much, as you kept seeing. we were very reluctant until we were at the point where we thought there was a substantial possibility of systemic collapse and at that point it was absolutely necessary in my judgment essential we do i and i fundamentally believe we do did that at the right time. >> thank you. thank you mr. chairman. >> the former chairman of bear stearns yesterday said you did it 45 minutes too late. if you could do would an hour earlier, do you think the end result would have been siifictly differe, different or ultimately no different? ..

>> they allow us to mitigate the severity of the liquidity run crisis. the cannot prevent -- protect affirm that cannot convince its investors that they have enough money to capitalize their risks. >> unless your pockets are deep enough. >> and we were not prepared to lend into a run on institution that had lost the capacity to convince people that it was viable. that would have been irresponsible. >> thank you. senator? >> thank you. i would like to put our crisis

into a broader perspective. i have seen some foreign ministers of finance and others who have been at least supplely critical -- steadily critical that we may be moving too rapidly and not properly integrating our reforms with what will happen on a broader, multinational basis. could you comment as to how do -- is this crisis, if you would result in as in i similar determination of a position to lead to similar prescriptions being written for a variety of countries? >> let me just say two things in response.

we made the argument that we should wait until this crisis was definitively over. we could undertake a much longer recovery -- a reflection of how to fix it before we began the process of a broader reform. we made a different choice. we did this with countries around the world. we decided we were better able to get consensus quickly on a stronger set of reforms if we acted when people were deeply aware of the crisis and their memory had not faded. i think we know what we need to know about the court choices in recalled -- involved in reforming the system about the core -- i think we know what we need to know about the core choices involved in reforming the system. there are reforms we hope will be enacted globally. there are central elements of our reforms that, to be

effected, have to be done multilaterally. the best example of that is capital requirements. we're in the process of negotiating an international accord to limit risk-taking. some things have to be done differently. our responsibility is to ensure we're fixing those things, too. the world, i believe, generally, would very much like to see the united states fix the things are wrong in our country. there depending on us to do it. i have never heard them suggest that we should slow the pace of reform. they want to make sure we're doing this in ways that will be not too punitive on them, globally. there is concern that some of the proposals we have been promoting on capitol are going to be a big burden for other countries. that is a concern. it is a sign of help -- health

that we're being ambitious in what we're trying to achieve. >> i would like to pick up on the issue of capital. i was surprised to learn that the value of securitized mortgages is higher for purposes of capital than the underlying mortgages themselves. is that a correct statement? >> i do not know whether that is correct. i would say it this way -- one thing is important. it was not in effect for u.s. banks and still is not. it was essentially irrelevant to the cause of the crisis. all u.s. firms were operating under the first regulations designed in 1990. that set of risk weights did not do a good job of capturing the

important process. you're trying to change those to make them better reflect the risk. >> you have anticipated my question as to -- if the statement that i made -- maybe i had the wrong one -- is correct, and my colleague thinks that it is correct, does this indicate that the international, financial community was falling victim to the same mistakes that we made, which was to put unwarranted value behind a certain set of instruments, largely because they had a high credit rating, without any requirement that there be some greater to diligence as to what -- greater due diligence as to what was the comment -- what was the structure?

>> absolutely. the system was riddled with that basic and vulnerability. it was too vulnerable to mistakes. they held less capital than they should have. >> do you believe that the international, financial community is moving to correct those errors? >> absolutely. we do not turn this over to the international community to solve this for us. we figure out what makes sense for the united states and we try to build consensus, internationally, to pull other firms to that level. we preserve the authority here to differ if we need to. you pointed out one example of a set of basic vulnerabilities in the system. we were fortunate, in many ways, because we did have a leverage ratio in place and many countries did not. vulnerable to crisis than for other countries and as many people of pointed

out, our banks although they look large because they are a large country were much smaller as a share of the economy than was true for the major countries to reduce our banks work at the peak even with investment banks now called banks are about one time gdp comparable numbers in switzerland and the peak were almost eight times gdp and the u.k. almost five times gdp and europe, almost two times gdp so our banksere less leveraged than the whole system as a whole was much schaller dee dee to smaller as a share of our economy and hard to imagine because our crisis was severe but we were in a better position to withstand the shock that was true for other countries. >> spread the leverage ratios the you just cited are so extremas that indicate a higher proportion of the financial business in a place like switzerland is run through tradional banks as opposed to what we are studying on the

shadow system? >> you are right. the shuttle's systems are would recall universal banking models and they combine one entity, legal entity the span of the financial activities their capital security markets are less important source of credit and our country. our country is still half of e credit comes through what we call banks and roughly half of credit comes through the security markets both simple bond markets as well as asset backed securities markets. >> i am almost out of time. >> a couple of minutes? >> a couple of additional minutes to ask a different question and that is you talk a lot about your efforts in new york and now here to look over the horizon and try to have a better idea of what is coming at us. do you -- what degree will the reform that you are advocating increase our capability to be mo anticipatory there for

proactive rather than just reactive? >> i think it will help. course what you want is aally system that is able to move more preemptivelyhat is more agile that cantay close to the frontier of innovation and we hope to produce that there is no guarantee we can and that is what fundamentally i keep coming back saying you need to do your best and design a system that creates the possility that compare for the possibility it won't be perfect and therefore u want the system to have better cushion against the inevitable uncertainty we all live with because we want to know with confidence where the xt shocks are going to come from. we just make sure it will be less damaging when it happens. >> thank you. >> thank you. mr. wilson. >> thank you, mr. chairman. and thank you, mr. secretary to spend some time with us today. it's been very informative i

would like to follow-up on what my colleague, douglas, was talking about before because i think these are very important questions, and particularly the question of whether you and what you are proposing fr and reform is to solve the root problem because i think you would agree that we don't want to solve the wrong problem and one of the things we are in is figung out what the problem really was. now in the hearings we told so far it seems very clear it did not really matter whether you were a regulated bank or less regulated investment bank in terms of what happened to that institution in the financial crisis. would you agree with that? >> i wouldn't agree with that. i would say that in the -- let's think of it this way. you have a world where you have

tonstitutions. classic banks that take deposits and make loans and u.s. banks that we call them banks for the minute but they are funded a very short, no deposit insurance. money can leave in an instant and they are able to take on more leverage than banks. >> the assets are different than banks. in the bank assets team to be causing to be long-term and investment banks tend to have very short term assets easily sold. >> a little less short and many people thought. a very substantial portion of their asset were quite illiquid in the crisis and they could not sell them actually that quickly which was a fundamental difference and so the level -- i'm not an economist of the level of transformation that risks run in many of those institutions was vy, very large. i think in many ways as large as banks but the difference is that when the liquidity dries up in the parallel system, the assets

were not liquid enough in the panic to be able to sell them and meet the demand for the margin it's a bird or for the margin of withdraw so that stuff came crashing down and the enormous pressure -- it was only -- we did only what mistakes banks made over centuries. it would have been a slow moving crisis because liquidity would have been more stable because most of it was deposit funded and it would have been an easy courses to manage. it would have been a serious recession still, an easier crisis to manage so i think it was a different consequence. >> okay. now waiting to raised exactly the point i was trying toet to. thank you very much. and the point was in 2007 as you recall, the mortgage-backed securities market simply came to a halt, completely unprecedented and that meant that these investment banks that you are talking about here turn out to

have an affect long-term assets when they were intended to be short-term assets so the question really is is the right question the investment banks or is it what caused the short-term assets of a thought they had to become the long-term as e t like gulated commercial banks? so i am going to pause it to you the possibility that because of this crash in the mortgage-backed securities market that short-term assets were turned into long-term assets, noegulatory system could have survived this. because we took about $2 trillion in assets that was on the banks of financial institutions on the balance sheetsf financial institutions all over the world also particularly in the united states but all over the world

and we made them illiquid. they couldn't be sold. isn't that a major effect that no regulatory system could have anticipated and shouldn't we be thinking about what caused that to happen rather than imposing more regulation. islamic i'm not quite sure where you are going with that but that is an interesting question. i guess i would try to look at it this week. if you are going to take on a lot of risk but it looks short term or long term with everything that the assets, but you know that there is risk in those assets and you are going to fund them with money that can leave and a heart beat and you don't hold much capital against the risk of losses then you will have a problem. and that, i believe, is a problem that is mitigated if you get capital regulation right over institutions that are in the business of making the

markets where companies barrault. but i completely agree there are other things that happened in our financial markets that made us more vulnerable to the abrupt loss of confidence onybody holding securities backed by real estate in the united states. >> all i am saying is simply this, and we had an abrupt, and shot to the entire system coming from the fact that a very large number and size of assets simply disappeared as salable assets on the balance sheet to banks and investment banks and that changed the condition of those institutions very materially from a capital and liquidity

standpoint. i would like your reaction to that. >> that is what happens in any crisis. the positions are tested. one is the proposition that you are funded stae in a lot of people made a lot of judgment on the expectation that would be seamless permanent uninterrupted never dappeared it would be they're cheap and available. that assumption is of a crisis and a mother is you hold a bunch of assets and think you know what you might lose in those assets t sell them or hold them over time and it takes both of those mistakes to cause a crisis and we had both at the same time and they were related. people ran because they solve all. they couldn't tell what it was. >> this wasn't any crisis. this was larr than anything we've experienced bore and i think the reason is we are talking about an asset size larger than anything we've ever experienced before. about $2 trillion in mortgage-backe securities and

related securities scattered throughouthe financial world and have a suddenly becoming not worthless but very difficult to sell except the most distressful circumstances. this isn't a problem rather than have sufficient regulation. >> no, i don't think so because again like almost every financial crisis it has real estate at the scene of the crime. it doesn't really matter how fancy the products are or what you call them, cbo's or asset backed securities, they have real estate central to the crime, and nothing unique in that and again what we do is we protect ourselves from that risk byaking sure the institutions that are necessary to make the markets function to make economies work and enough capital to cover the losses and are not liable to run and again, i don't think that the regulation can solve all

problems. it can solve lots of damage and has done poorly it's damaging. regulation creates incentives for asian, but capital leverage with a test to be at the center of any diagnosis and the problem and the reforms. >> i have a little bit of additional time, so i will go on. spinet three minutes. >> here's the issue. you suggest that capital regulation would be a solution to this problem but if we are talking about a 70 year study that is we haven't had anything like this for instead -- since the depression to talk about imposing so much in capital requirements and fine arts, banking system on investment banking systems they will no longer be able to offer a reasonably priced credit to those who needed? >> no but you are asking the right question i believe.

when i first came to the new york f and was understanding the system in which banks were operating i asked my colleague how do we know what is enough capital? how do we choose what is the net and my colleagues this an example which is to say we think it is enough to cover a 30 year flood but not 100 year flood. government's gauge place about what level of insurance you force to run against what probably of the flood and i agree we cannot and should not try to design the system that makes filling your impossible to recover because that would impose excessive cts on businesses and would not be efficient for the country as a whole but i can say with a lot of confidee that our requirements were too thin and too modest and would be better for the credit generally, better for the economy and allocation of capital cost chaim if those

requirements more conservative but i agree you can't design the mendicant try to to protect against all sorts of shocks and we have to have a system that allows for failure. you don't want to fill the air asamaging as it was in this crisis. >> o last question then. >> you see in your prepared testimony that the financial system i think i'm quoting here out grew the protections created in the depression. now, wouldn't it be fair to say that the system group outside the banking system not to avoid regulation so to speak but because banks were in effect unable to participate in the securities market which was a very efficient market for financing business and financing consumers. this is the securitizati market. banks were effectively prevented from participating in that because of class people and not advocating them certainly but

isn't that why we developed this shadow banking system if we want to cl without? >> the capitol requirements of the paradoxical feature there was strong enough to encourage a lot of the funding to shift outside for with a there was no capital regulation but they were not strong enough to protect the system when that system came crashing down so i don't think they were right in the sense that the banks were allowed to help companies raised debt and equity and they were about to participate actively in these other secured funding markets for credit card receivables for automobile receivables on just real-estate asset backed so they were able to participate in a lot of them did of course in ways that left them in the panicky referred to so i don't

quite agree with that part of your question. >> that is all the time i have. thank you. >> mr. giorgio. >> thank you. mr. secretary, you said something to the effect that all this stuff started to crash down and crashed on quickly. i guess i would like to explore whether the stuff deserved to crash down and was created in such a way that anybody other than right in the center of it and not looking at it ought to have known it had the strong possibility of crashing down. yesterday we had testimony from former sec chairman cox who said of the practices had been followed the crisis simply would not have occurred. the nearly complete collapse of lending standards by banks and other mortgage originators to the creation of worthless or near worthless mortgage perez of

september 2008 banks reportedly for one half trillion dollars of losses on u.s. subprime mortgages and related exposure, and the creation of those mortgages plus exacerbated by then turning to those in in in in in a end toesidential mortgage-backed securities and into collateralized debt obligations in the process that the last hearing by likened to something like alchemy where you're took the trouble be rated trauner gist of the residential mortgage backed securities 90% of the charges for high earmarks and this was the bottom of 5% of the 7%. there was 2% of equity below and then you took that staunch low-rated from a whole bunch of mortgage-backed securities and created something called the collateralized debt obligation. somehow slicing and dicing ending up with a security that

had it was super senior tonsures ostensibly but of course we now know that all that was essentially fictitious and that when he lost a very modest amount when these mortgages begin not to perform in some modest amount three, 5% you impact all of that to launch and then he essentially rendered the cd a worthless and it was exacerbated i think it's important to note it was exacerbad by the shadow banking system in a couple of ways. we had another $120 billion of those who were essentily in short by aig by selling credits default insurance against which they were not capitalized for and they were essentially spreading their aaa ratings like holy water over the cdo is that did deserved to be great in that

way and another 60 million sold to the paper, wood, so you took these fundamentally forecasrs securitized products and concentrated risk eckert wes taxpayers have to bail out, city dee dee to a citibank which took $25 biion liquidity put on the cdos off of their balance sheet which was essentially one-third of the capitol which nobody seems to have noticed anything about and i guess all of this goes to sit at -- say that it seems to me we need to have people prepare to recognize the emperor had no cloes their need to be people who saw the possibility of this collaps of these securities was much higher than anybody gave them credit

for and i wonder if youan speak to that. >> i agree with much of what you said and i think you are right that modest losses would been deeply into those kysa torch ron gist you describe to -- you have to emphasize it wasn't just in those complex structures -- lacrosse the system and

countrywide wa an example would and banks across the country that did suggest current real-estate as a whole when and i don't know that in this much l be with remedial, how much remedial measures will be in it

you like to say these reforms will solve all the problems but then we won't know for sure which ones they are doing an adequate job but they do some verymportant things. they do get fundamentally add some of the complex ancies. they will force the risks exposed theyill force firms that write these commitments to hold more capital against the commitments. some limited intellect -- one these things are i think you can say they are necessary quote hot of course of the time people will find a way around them and

have another period you create great incentives for people who take great risk they will do it again. our b is to make sure those mistakes when they happen or not as damaging to the system. >> and i guess the other things that we looked at the last hearing i would like your comment is this capital arbitrage where institutions ha like citibank were putting things off balance sheet or into different elements putting them into the trading but donato avoided people recognizing different regulatory entities recognizing recognizing there's ultimately address in this particular instance of liquidity of $25 billion almost one-third of their capital. if one set of ceo's sale. >> again the system who did not capture the economic exposure many firms had to the funding vehicles. the crisis began in july of 2007

when a french bank that of a money-market fund closed the gates of the withdrawal because the fund had funded a bunch of risk in a structured investment vehicles, these off balance sheets of german banks that had brought a huge amount of mortgage risks so the bank it happens across the system and the accounting ratio the disclosure regime, the ratings regime, the cattle rations and did an adequate job of capturing the exposure and that is a fixable problem and it will be fixed perfectly and you want to make sure that is overtime better and i think that is a problem we can do a much better job of presenting in the future by again making sure that accounting conventions capture the exposure to the exposure is

better. ratings less vulnerable to the conflict, capital provides a bigger cushion against uncertain of loss. it won't solve all problems but it is a good place to start. >> very good. thank you. >> mr. secretary i want to make an observation picking up early on mr. wallison and mr. george yo and one of the things that struck me when i heard the discussion is the people who've come before us have talked about how nothing could have been done to avert the crisis but at least is clear to me as i read more and hear more there ia lot that should never have been done at the outset and you were talking about in this discussion what kind of regulation on securitized products are on capitol is it fair to say some for it to look at the point of origin and other words there was a situation here i am not saying it was the whole of the problem but the fact was poisonous

subprimal loans were permitted to enter the system in the first place and an exotic financial instruments were treated that heed carry the poison throughout the system. .. >> i would just emphasize that if you look at prime mortgage loans, they are very high too, well outside the expectations of most people. unemployment rose so much more and house prices fell so much further than people expected. it was pervasive. i do not believe you can prevent of financial crises. i don't believe that you can try to run a system that tries to

prevent failures. but the job of government is to make those failures less damaging. they do not cause so much collateral damage to the innocent. they do not have such severe consequences on the economy. i believe we can provide a very good framework for fixing and not just the direct cause of this crisis, but for making us less vulnerable in at the future. crises will happen. what policies should do is make them more manageable. >> would you agree that the problems and a prime mortgages may have been exacerbated by the availability of a whole slew of loan products by -- to a whole slew of consumers who otherwise would not have been able to enter that market? >> i do. >> earlier, we ask you about some conversations. i want to expand on that for a minute. we talked about the c p f f.

i know that on october 7th, 2008, you announced the commercial paper program. then you began buying commercial paper. i believe originally there was some talk about that being only asset backed and not unsecured. i do not know if that shifted. >> we started a facility called the -- it had some acronym. it was about asset-backed commercial paper. then we put in place a broader commercial-backed paper program. >> was their concern about being able to issue commercial paper? did conversations occur about being able to enter those programs because of the necessity of those programs to support their issuance or the market as a whole? . chairman, those conversation that i had with a variety of people in the market, money investors and

people relying on cp markets, they were about making sure we understand how broad the problems wer people had lots of ideas about how we should solve them. >> we were going to check. i don't expect you to -- like i said carry your daily plans. >> like the asset-backed questions -- >> the a-issue in the time b and b-their participation in the programs. okay? >> i'll be happy to go back and chec my recollection is almost certainly they were about making sure we understood how bad the potential financing stress was. and like we heard from across the system, acrosshe economy, encouragement for us to do something about it. >> all right. double check. we can swing back. mr. hennessey. and thank you for coming togeer.

i am a little concerned about one the biggest challenges that we have here. two the biggest challenges. they are the advantage of hindsight and theangerous of selection bias. we know now what happened when policymakers and supervisor its did not know what was going to happen. you can find someone predicting any outcomes. we've had people points to the a in the past and say why weren't those paid attention to. with respect to senator graham, i can tell you with certainty that devastating hurricanes will hit florida. but that is different than suggesting that i should know when a specific hurricane is going to hit miami, and even if i know that houses are being built that are too big on the shoring of florida that's different than saying i should have known about this hurricane or some have been suggesting that i knew that a particular

situation was going to occur and that someone did nothing about it. since you were running the new york fed, that argument would apply to you. i don't buy the argument. but i want to ask you about it. with respect to housing and how the housing problems translated into theinancial sector. i think it was generally known for years if not decades that u.s. policy subsidizes housing. i know a lot of my economist friends would say oversubsidizes. i know that i did not know until the fall of 2007 that there were specific severe problems in an element of the housing finance market. can you comment on the argument that policymakers should have seen well before the summer or fall of 2007 those housing problems? do you believe that's a valid

argument? >> i -- basically agree with where you begin. i say most -- i usually say exactly the same thing to you. which is be weary of the benefits of hindsight. and be skeptical of the capacity of the foresight. i completely agree with that. i can told tell you what i thought at theime. which is that i was veryorried about the possibility that this whole set of forces you saw in the long period arising house prices, huge increase in leverage, growth in these risky funding structures. i was very worried those risk would be substantial for the system. and that did not know what the possibility was of a big shock. where it would come from. where it would happen. how damaging it would be.

i thought there was a risk it would be quite damaging and harder to manage for the reasons that i said before. but i would not claim, and having said that, that i thought at the time where i spent time. i spent a lot of time with people in the markets, of course. i did not find people at the time who were particularly compelling about exactly putting these things together and seeing w exactly whas happening in no doc loanses, ninja loans, et cetera, it was actually producing huge exposures that looked triple a or supernior. be wary of the benefits of hindsight. and -- but i think on these bac, the reason i think it's important to come back to the simple risk in leverage is that leverage is hard to capture. you could observe at that time,

there was leverage in the system that made us vulnerable to a shock when it was going to happen. nobody had the capacity to predict the timing nature, magnitudef that shock. the lesson that i would take is design system that recognized. don't deny a system that trying to depend on people that sits in the job. we're gog to hope those people in washington step in with perfect wisdom in the future and deprive people of boring too much. i think that would not be a good way to run a system. run a system that has more skepticism about the capacity of individuals to act preemptively. i think that's the forms try to do. >> thank you. second part of that, same sort of question. i could characterize it as were you generally surprised by the bayer and subsequent events.

by 2009, everyone knew there were problems in financing. taking that specific failures in specific institutions. some have been suggesting you and others should haveeen that was going to happen or some are even implying that people did see that was going to happen and didn't do something about it. >> as i try to explain, we did a lot of things starting to 2004 which were designed to make the system more resilient. reduce the risk that whatever happened, it would be less damaging. i think the steps had the right objectives. they were very effective in many areas. i think, for example, what happened to the how littlevent hedge fund failures had on the system as a whole. a lot of examples of things that those results that were helpful to the system. but absolutely did not do enough soon enough to make the system strong enough to withstand that.

for us, in my view, this crisis started in the middle of 2007. and as, you know, the fed moved very aggressively doing things we had never done before. no road map ahead of over countries to help to put some foam on the run away and sort of containhe risk that would estimate other institutions. but ultimately, of course, you don't solve the problems by using liquidity. you have to solve them with more force. >> good. i want to praise you for the work you have been doing on dealing with the resolutions issues, having to do with credit derivatives. and i strongly support the arguments that you are making about in effect hardening the system so that even if all of the over sight and all of the supervision failed that was system is more robust to withstand that shock. we heard from bayer, they said, look, we were profitable.

solvent. just in irrational run occurred. after bayer, there was the among ridgety facility of the fed, which as i understand it, as since expired. so let's imagine that another profitable solvent firm faces an irrational run. isn't there the same risk, isn't the system not hard enough in that particular area. >> two additional minutes. >> i wou not characterize what happened on the case on a run on a solvent institution. but if you -- if we don't reform the system, absolutely. we're still living the vulnerability today. without the full set of protectis, preventive a better tool for crises, we've been living with a more vulnerable system. they add to moral hazard.

sit here and do nothing. the system would be more vulnerable and more stable in the past. even solvent firms are vulnerable. you saw a lot of institutions that were strong come under pressure because the world went into panic. again, i think the best defense against that is to make sure that the entire system, firms and these funding markets, derivatives markets, et cetera, are run with thicker cushions against loss. that will make everything less frank jill will somebody makes huge mistakes. but also makes sure when people make mistakes, you can put them out of the misery, because the taxpayer be exposed to loss and you can draw a fire break so the fire doesn't jump to the rest of the system. that's t basic simple theory under the reforms. i think those are achievable reforms. they don't be designed to

prevent fuel from making mistake. p we just want the mistakes to be less damaging. >> so that's the resolution authority. and tn a whole set of requirements to reduce the probability that any one particular fm gets himself in the situation where investors will lose confidence. we saw this with wachovia and wamu, even insured institutions can face runs. even if the pending legislation becomes law, you are still at a greater risk for one the noninsured firmed of the irrational liquidity just because it doesn't exist. you can have an solvent firm saying we are running out of liquid. >> that's right. the question you have to ask is that desirable. willhat produce more

conservative behavior. there's the safety net. it should induce caution. it didn't work hawaii comin into the crisis. so again, i think the lesson we try to take is to say there's a function called banking. which about helping companies raise capital, helping people borrow, you want that to be stable in crises. other economies can't function well. that requires restraints risk taking and better fire fighting capacity. you can't make the system stable if it only exist on fundamenlly half of the system. >> thank you. ms. murren. >> thank you. thank y, mr. secretary, for being here to talk to us about this. i'd like to follow up on a nuts-and-bolts question that came up in the last hearing on citi. we had the opportunity to question former chairman

greenspan. we were able to look at the bank supervisor group in new york. this one is dated may 9 to may 27th of 2005. i'd like to enter that into the record. it is conducted byxaminers from other federal reserve banks. and it is my understanding that each rerve bank is reviewed every four years. and that in this particular report, there was commentary made that related to the citigroup team. that was the team's time and energy is absorbed by hot topic supervisory issue which is compliance, governance, information request, that keeps the team from continuing its supervision objectives. the result is there are insufficient resources in a consistent manner. we recommend that management review the sufficiently of staff across the lcdoortfolio.

there's also another report which is the same year on the same topic which is titled draft close out, which also mentioned not having sufficient staff to sustain continuous supervision which may result in late reaction to address emerging risk areas. i'm curious abo when you look back on this, and recognizing the benefits of hindsight, do you agree with the findings of this report. that there were resources to citigroup and other large complex banking organizations? >> here's how i think about it again and colored a little bit by hindsight. i s very concerned in looking at our mix of responsibles in those bank holding companies. about the burden imposed by a range of what you might call compliance obligations, consumer protection, cra, bank secrecy act. very important policy

instruments, policy requirements that we were charged with enforcing through regulation. and the burden those imposed, relative to the resources that we had to also do what you might call a much more difficult task. also important task of jging whether a firm had a risk management capity to manage the risk, whether the safety and soundness obligations they faced were adequately met. when the liquidity was managed. whether the firm had adequate stress testing what might happen if all of those securities had held and turned to mud. and i felt -- and again this lesson helped shape what we know of financial reform. we did propose to take the fed out of consume protection and have it focus in its supervisory on a narrower range of requirements. i still believe that's right and

appropriate. in part, it helps make sure these people are focused on a more single mission. which is safety and soundness. which has we discovered is so important to the system as a whole. >> i guess the question then would also be have we had an opportunity to be able to address that or have you? if you look also particular operation riew. this one is dated december of '09. there are still references here to the timlyness of the supervisory products being a concern. and that it is in fact a repeat findingsrom the 2005 operations review. and theirurther citations that relate to supervisory ratings not being updated on an ongoing basis to effect to the financial condition to the organization. do you feel like the responsiveness at the supervisors at the federal reserve bank in new york was swift enough to the

circumstances? do you think they should have been more aggressive in the ratings and reportings of the condition of citigroup. >> i believe these are the most capable, most talented, public servants i've ever worked with. but i absolely agree. i've said that many times. i do not think we did enough as the institution with the authority that we had to help contain the risk that ultimately emerged in that institution. and i think a lot about what we could have done differently. maybe part of is it about resources. i think it's more fundamental. i think the system again we were operating with a set of rules that did not compel firms to hold enough capitol against the risk they were takg. they did not capture them. that's why i believe it's so important in the reform process that we rely not so much on the discretion of supervisors to

force more than the framework, try to ge the rules better. and so that firms can live with the set of measurable objective rules. you not forced with the risk that these very capable people because of other preoccupation that are burdens were insufficient leverage and traction. you don't want the system to rely on their ability to force terms in conservative in the rules. i got to make sure the rules adapt and force more themselves. >> do you think there should have been more examination of the off blast sheet of sit tough group, specifically the underlying assets. is that something you think would be beneficial? >> a lot of this has happened. you need to make sure they come on balance were or stay off, you force people in the exposures,

just one note though. one risk themselves did not in the end prove that largen that particular cas but it was a particular across the system. and it made it much harde for people to understand what fundamentally might be the ultimate measure of losses in a lot of institutions that took o much risk for the real estate losses they had. >> thank you. and i think i need to enter these two reports that i sited into the record. do you need information on that? >> i'lnote the 2005 operation report and 2009 operation report; correct? can i quickly though, i want to prez one last point. in the federal reserve banking, we did not citi's off balance

understand, what happened is they have been reportinghe $13 billion subprime exposure. as you know, i'm sure you're quite aware in a matter of weeks leading up to mr. prince's resignation, that was revised upward $55 billion. they took that $25 back on to their balance sheet eve though they weren't legally required. we can at least say it was terrible. the other thing that was pointed out to us, the examiners complained aut the provisions of graham-leach-blileynd kept them blind to some of the asset quality problems. it sounds to me like there was a whole here. the offbalance seat endes, vehicles, and no one is looking at them. so they did pose a risk or at least certainly a potential. >> absolutely. i agree they were material in

the sense. this system, this system of a whole bunch of different regulators looking at pieces of the entity. the fed is supposed to be looking at whole thing. accounting regime. capital that didn't capture the risk. internal checks and balances that failed to transfer. that system did not work. >> by the way, i shoul add the scc toll. they really fell, it seems to us, at least my reading of into a black hole of shorts. >> right. >> or a gray hole. >> many problems with the problem with the hole is it looked like it wasalled aaa or supersenior. and people didn't say how big is a cushion of loss source is underpinning that. that's why all of the sudden stuff that looked like was risk free had a lot of embedde >> they were cdos. with that, i want to thank you

all. thank you about all of the commissions were coming here today for your time and answers to our question, mr. vice chairman. >> ms. -- mr. secretary, we're going to be sending you a list of causes. probably more fundamental than that. as one the arctects of the financial regulatory reform that's currently being examined by congress, would you provide a 30 second or 1inute pep talk to the commission as wee going forward, attempting to find the causes of the financial crisis while you and others have already decided what it was? [laughter] >> and you can take a minute. >> you are doing such a terrific job of exposing the full range of fundamental causes that you are helping the cause of reform. because we can match very closely the causes that you've

exposed with the core of the reforms that the senate is now consering. you are giving great energy and urgency to the task. even if the senate enacting, don't stop your exercise. because that's just the first stage. we are still goingo have to be not deal with the gse and housing finance markets. we're still going to have to process that you are undertaking. it'll be the prosses that was formed and the work you had ahead. not sure you wanted this, mr. thomas. please encourage our leaders in the senate to act on reform. so we can get on. >> i'm trying to explain to them the institution and the fact

that the committees have jurisdictions which don't necessarilyover everything that needs to be done. by the leadership in congress but the fellowship sometimes doesn't get there. >> i'm learning that myself too. but i think we're close now. and i hope they moveuickly. i think there will be an enormous amount of work that we have to shape. and the process of inquiry that you've laiout will be enormously important to the work. >> final work. we have to quit talking about it as hto. it's here still. >> the vulnerability, absolutely. we're living through the system that caused the worst financial crisis since the great depression. and it's worse than that. because we had to do things no one should have to do that create the risk of moral hazard. if we don't act to fixhose problems, we'll be more vulnerable. my compliments to what you are trying to do. keep at it. don't stop because we're going to get the bill done.

>> thank you very much. we got out ofin >> today on c-span, calif.'s

republican primary debate between the three candidates for senator. monday, the kentucky republican primary debate between four candidates. that is live at 8:00 p.m. eastern here on c-span. senate majority whip dick durbin is our guest today on the "newsmakers." he will talk about efforts to pass financial reform legislation and the landscape of the midterm elections. first lady michelle obama talked andt raising her daughter's paid tribute to her mother at the white house this friday. these remarks are about 10

minutes. >> mrs. carter, where are you? [applause] mrs. carter, you have been a wonderful support and a source of knowledge for me during my time here. if you have been so generous. we try to have lunch together whenever you come into the city, and i just have to say that the time we spend together means a great deal. i cannot tell you how much i appreciate your support. as many of you know, mrs. carter is an advocate for mental health worker. she has just written a book, and we are going to be doing more work together on post-traumatic stress disorder and mental health. she has not stopped moving yet. you cannot keep her down. yes? [inaudible] thank you.

mrs. carter is also joined by her granddaughter, sarah, and we thought we were going to have heard great granddaughter, josephine. we are going to have four generations of carter women, but she got a little fussy, and mom was like, you have got to go home. maybe next time. i am also pleased to see that tricia nixon cox is here. president nixon's daughter, please stand. [applause] president eisenhower's granddaughters are here as well. please stand. thank you all for being here. it means so much.

we have -- the girls and i favored picture is your wedding picture that is in the colonnade downstairs. we stand and look at that and think about the wedding. they are not thinking about marriage by the way. [laughter] do not write that on a blog. they just like the picture. and, of course, there is a photo of president eisenhower meeting with the civil rights leaders in 1958 that is in the oval office. there is much history in this room today. i am is so pleased to welcome these generations of women back to the white house. it is an honor to have you all. if you look around the room, that is sort of the theme here today. we have many generations here this afternoon. we have teenagers and retirees. we have family members and friends. we have cabinet secretaries and students and everything else in between.

[feedback] many of you came with a woman who means a great deal to your life. really? [applause] mothers, daughters, granddaughters, mmntors, mentees, sisters, best friends. it is a wonderful combination of women who are important to us. the people here today showcase just how crucial women are in guiding our families, and in our neighborhoods, and in our country as well. they are the shoulder that we lean on as individuals, but collectively, these are the shoulders that form the foundation of our communities. they are our friends, our teachers, our mentors, our bosses. they find time to drive community projects and carpools.

they lead our businesses and our birthday parties. our lives and our communities are blessed by everything big and small that mothers and mother figures give us every single day, and that is really what mother's day is all about, showing our gratitude for all that they do. it is about attempting to give back just some of the love and the care that these women have given us. that is a big ticket to fill on just a single day. when you think about it and try to do the math, do 15 or 20 nights that are sleepless during high school equal a bouquet of floors? maybe some chocolate or a branch? i dunno. [laughter] the mothers with teenagers really laughed at that one. i do not quite know that yet. the answer is, really, there is no way to quantify just how important these mothers, these

women are in our lives. there is no way that i could ever fully measure all that my own mother has done for me. [applause] this woman who tries to take absolutely no credit for who i am for some reason, she is my rock. she has called me up when i have stumbled. she has pulled me back when i have run out of line, talked a little too much. she really does push me to be the best woman i can be, truly, as a professional and as a mother, and as a friend. she has always, always, always been there for me. as our family has grown, she has managed to expand her love for all of us.

raising our girls and the white house with my mom -- i am not going to do this. it's a beautiful experience. the opportunity to have three generations of women living in the white house is beautiful. i am pretty sure the president is happy about it too. [laughter] in this world, there is so much going on. we know that we are blessed, the obama, we are. even though we live in the white house, our day-to-day family interaction is not really different from families living in atlanta or tucson, because everyone is busy. ours is just televise. everyone is doing the best job they can to raise their kids. everyone is looking for support. in his mother's day proclamation president carter wrote,

"the job of nurturing future generations is often both more difficult and more important than ever." that is as true today as it was 31 years ago. really, one person cannot do it alone. for any of us to think we can or should, we should just get over it. we all need support. as a singularly important as my mother has been in my life, there are so many other women who have also played significant roles in my development. the new perspective that i learned from teachers and co- workers has really shocked really -- has really helped to shape me too. we do not need to have a mother or grandmother. we all have those people in our lives to have given us a piece of themselves. that is one of the reasons we

have the white house leadership and mentoring initiative here. even with our busy schedules, and the women who work here are busy, we believe in the importance of giving our young mentes a piece of ourselves pepper -- a piece of ourselves. we have some of our mentes here today. i would like them to stand. [applause] you all look so pretty. they do not usually get this dressed up when they come here. i could barely recognize these girls. you can sit down. these promising young women have been with us for the past few months, and we have had our share of fun with the stuff that we have done. we have gone to events together.

a few of them got to ride in my motorcade with me. kinda cool, isn't it? they come to some of my events. we got to eat dessert from the last state dinner before anybody else. remember that? we have done some community service together. we put together a food packages. i was quite impressed. they are very focused. we met with the supreme court justices. wasn't that amazing? justices ginsburg and sotomayor spent a long time with us and it was pretty powerful. but the this program is not just about doing fun stuff together. is also about ensuring that these women really see their possibilities, right? it is about helping them realize that they can be leaders of tomorrow, and that is what we expect, and showing them that they can create their own opportunities. that is what we talk about, right? we want them to imagine the possibility that they could one day be a cabinet secretary or an

officer in the military who mentors a young girl once a week. we want them to imagine being business leaders who balance their kids and their professional lives. there are so many of these stories right here in this room. they may have different characters and soundtracks, but whether you grew up on bing crosby, aretha franklin, or beyonce, each story here is important. . .

[applause] >> the senate majority whip is our guest on "newsmakers" we look at the political landscape heading into the election. that is today at 6:00 p.m.

eastern. tomorrow night, the kentucky republican primary debate between the secretary of state, rand paul, and john stevenson. that starts at 8:00 p.m. eastern here on c-span. up next, the debate against the three republicans in the californian primary debate. they include the former h-p ceo, carly fiorina. this was hosted by abc television in los angeles. it is just over one hour. >> abc 7 presented the republican candidate debate. >> hello and thank you for joining us. i am with kabc television.

this is the senatorial primary debate featuring the three leading candidates for the republican nomination, tom campbell, chuck devore, and carly fiorina. we are at the museum of tolerance in west los angeles. seating -- seated in the front part members from the women's voters of los angeles. we have drawn a strong as for the order in which the first question will be answered. warren, your question to tom campbell. candidates, you have 60 seconds. >> good evening, candidates. mr. campbell, "conservative" is a buzzword for this election. what are your conservative credentials that separates you

from the other candidates here on the stage tonight? >> may i begin with a word of thanks to the league of women voters come abc, and the museum of tolerance. go i am so pleased to be here. i served in the administration of ronald reagan. i have a ph.d. from the university of chicago and the economics. i served five terms in the house of representatives and in two of those five, the national taxpayers union foundation ranked me the single most fiscally responsible member of the house of representatives. incidentally, i was pretty good in the other three but i could not be number one all the time. there is ron paul in the congress as well. the others, i was number one, she came in 95 out of 100. on fiscal and economic issues, smaller government, individual liberty, there is no stronger candidate who can beat my

record. this is on a fiscal conservative principles that we unite the republican party and when america. >> mr. devore? >> i was glad to hear him talk about fiscally conservative principles. i do not believe there has been a tax increase that he has not supported in recent history. this goes back to not only the last year when he ran for governor and supported the largest tax increase in u.s. history at the state level, but also a 32 cent per gallon gas tax on top of what is already america's highest gas tax. i think that leaves something to be desired when it comes to conservative principles. and so far as both of my opponents, i am the only person who has unequivocally and unambiguously opposed amnesty. i think that says something for conservative principles. i also worked in the reagan administration in the pentagon. i may lieutenant-colonel in the

u.s. army reserves. i have served in the legislature for six years were have developed a perfect conservative record against big government and for lower taxes. >> thank you very much for having us. but this is a wonderful place where we are reminded always a never to forget the horrors of the holocaust. it is a wonderful place that teaches tolerance and the great diversity that we have in this country. unlike my two opponents, i am not a career politician. i have never run for public office before. i believe our founding fathers intended hours to be a citizen government by and for the people. i have received recommendations from sarah palin's and the list goes on. i signed the taxpayer protection pledge the day i announced my candidacy something that mr. campbell refused to do. i think washington, d.c., has a

spending problem. our government is it too big. it is too expensive and too intrusive. >> the oil rig explosion in the gulf of mexico has caused the governor to reduce his position on offshore drilling. that call for an outright ban. has it changed your view? >> it has not changed my thinking at all in the matter. what is very fortunate about governor schwarzenegger's response to public opinion is that by sitting no is what he is consigning california to is more supertankers. if you do not get this off your own shores, you have to take this from asians who hate us and use the money we send them to fund terrorism and are trying to kill us. the objective of facts are supertankers are more dangerous and have more accidents than offshore rigs. secondly, the accident that

happened in the gulf of mexico happened in 5,000 feet of water with a semi-submersible rig. we have shallow waters and the rigs are scaffolding that goes down to the ocean's surface. but it is completely different. they cannot sink at all in california. i am very, very disappointed with the governor. it was my bill last year that the state senate passed that would have opened up the first offshore these in 40 years in california. -- the first offshore lease in 40 years. >> first of all, this is a tragedy what is going on in the gulf. it is a human tragedy. we lost 11 lives. it is an economic and environmental tragedy. we should make sure we understand why this happened and make sure that it never happens again. as it turns out, not apparently did we have a technology problem but we also forcibly had a

regulatory problem. nevertheless, i believe offshore drilling is a necessary and we must take advantage of every source of energy we have in this country. i would just say that 20 years ago we could have chosen to really lean anwar in an environmentally responsible way that is far away from a population. go extreme environmentalists prevented us from doing that. we need a comprehensive energy policy in this country. we need it now. >> when we propose putting new drilling platforms off the coast of california, i am very sorry to see what has happened in the gulf ago -- in the gulf. consistency should matter. i think we can grow from the coast. technology is infinitely more achievable than it was a few years ago. i appreciate the attention my two colleagues have given me. the only better thing would have been less attention.

[laughter] the people who signed the no new tax pledge, it included george h. w. bush and who then proceeded to say, >> groups, i guess you should not read my lips -- who proceeded to say, " oops." take a look at my record. he will not find that i increased taxes on the american people in the income tax area or any other area for the budget purposes of all the years i was in congress. they can only find three specific -- and i will deal with them the next chance i can. >> the next question for carly fiorina. >> the arizona immigration law has gotten a lot of attention. do you support that law or condemn it? >> the arizona law is also supported, according to the most recent polls, but at least 60% of the american people and a

higher percentage of the people of arizona. i have supported this law. unfortunately, the vilification of the people of arizona is clouding the real issue the issue is that the federal government has failed to do its job. it is their job to secure the border. they have failed to do so. unfortunately, the good people of arizona, who in fear and frustration, are trying to protect their on citizens and have done what they felt was necessary. i believe that instead of calling for comprehensive reform as a barber of boxer and president obama are doing, they should step up and do their jobs. she should step up and ask the administration to do its job. obama, instead of trying to change the subject, should do his job. he's no the legislation to secure the border. >> here's what we should do. the program needs to be made part of the american economy. it is important for california to benefit from a guest workers

who come in here for a season and then must leave. we have multiple pieces. then there is an e-verify program to make sure there is not a fraudulent use of the social security number. we need serious, serious sanctions. if the government had done this, we would not have this problem. do i support arizona? they are within their rights. the state of california should watch and see ago i have been attacked by the that sense i supported arizona's right. i want to make this clear. arizona is acting constitutionally. all this says is when you have reasonable suspicion, asked about the immigration status. >> i support the arizona law. again, to reiterate that i am the only republican appier who

unambiguously opposed amnesty. -- i am the only republican up here who opposes amnesty. ms. fiorina was all over the map with this issue. she was subscribing to racist overtones about controlling our border. the last job i had in the army national guard in california was the deputy in j-1. i helped plan the mission that augmented the national guard down on the border as we were helping the border patrol get control of our borders. we were building a double fence with a road in between. that worked. now what has happened is illegal immigration has crossed to arizona because our border is more secure. the virtual fence is worthless. we must complete a physical barrier on our southern border. >> back to you, mr. armstrong. >> despite significant rain and snowfall this winter and spring,

the state of california still faces a severe water crisis in the central valley where it has crippled farming. there have been other problems there ago what specific actions should congress take to keep the water flowing to the farms and still protect the ecosystem of the delta at? >> there is nothing more important than to get our greatest industry, agriculture, back moving again. in the short term, we need to have a bill that will open up the floodgates once again. that was done for the -- back in the 1970's. it could be done in terms of the delta smelt. we need to build more reservoirs. we need to expand the dam north of the delta. we need to expand the flaps south of the delta. those are the steps to take our 48 year-old water infrastructure

and to the present system. if we do not do that, we will continue to have a sequence of dry years and white years. during the dry years, do not make it worse by having the government sponsored. those of the steps we should take for the long term. senator boxer did not help when senator feinstein tried. >> this is an issue that requires government action. the balance with the endangered species act, we need to have people at least as important as fish and go that is not happening with the endangered species act. when senator offered a one time to a one-year exemption to the endangered species act so we could get the pumps turn back on in the central valley. he was attacked by boxer and senator feinstein. i am proud to accounts that the senator is one of my supporters. i agree with mr. campbell. we need more storage and

conveyance in california. we ought to do this with a bond that has been so larded up in pork that it doubled in cost. ms. fiorina supports that bond. only $5 billion of that bond goes to the problem. it includes money for a golf course in los angeles, a bike trails in tahoe, water taxis in tahoe. and that we opposed this type of irresponsible spending. -- i thought we opposed this type of spending. >> we all felt we needed to run for senator because barbara boxer has failed the state of california. go out that part of our great state is struggling with almost 40% unemployment because barbara boxer does not understand that families are more important than fish. we all want to protect our environment, but common sense says there must be a balance. to turn the water back on in the

delta requires one simple thing. it requires an amendment to as the senate to override the biological assessment that was written by a nameless, faceless bureaucrat. barbara boxer, chairwoman of the public works committee, has refused to go -- vote for that and then. the first thing i will do is to walk into senator feinstein's office is to say, "let us turn the water back on." >> we will not limit our responses to 30 seconds. >> mr. devore, should hedge fund managers continue to be taxed at a lower rate than most of the rest of americans? if so, why? >> i do not believe we should be raising taxes on any activities in america right now. what we have is a problem with too many taxes and not too few. if you look at hedge funds to the degree that we increase

regulations and taxes on hedge funds, all we will do is drive activity offshore to other nations where they get the profit and there will be no regulation whatsoever. i am opposed. >> one of the reasons i think people are tired of career politicians is they never deal with the problem. the problem in front of us is the crisis on wall street. taxing hedge funds would not have prevented the loss street meltdown. -- would not have prevented the wall street meltdown. we have more than 20 agencies supposed to be overseeing a wall street. they fail the. we had fannie and freddie mac which owns 50% of the mortgages that are under u.s. conservatorship being propped up by the taxpayer. yet, an sec official has eight hours a day to watch pornography thanks to the taxpayers of. >> carried interest should not be adjusted. this is the wrong time to be adding to the cost of making an

investment in the united states. in the health-care bill, for example, he suggests that he finances this monstrosity, this complex, a huge addition to government by a tax on those who invest if you make more than $250,000. a tax on interest, dividends, capital gains is the wrong way. >> thank you, candidates. the attacks, immigration, water, energy issues. we will be back with more. ♪ >> welcome back. we continue our debate between the three candidates for the u.s. senate nomination. we will resume our questions. >> back to emigration.

what do you do with the illegal immigrants? do you round them up and send them home? >> e.u. address that question only after you have secured the borderyou. the address that questing after. >> that was a mistake ronald reagan made. it was a mistake john mccain made. it is important and we realize the implications for our state. but only after we have a secure border. as i could respond to my good friend, mr. devore. i have never favored amnesty. when you make the statement you are the only one opposed to amnesty, it is a serious mistake. and takes the opportunity earned by those who obey the law, waste their time, and gives it to someone who broke a law. the first step is to get the border secure. notice how the democrats running the senate, the house, and the presidency say we called the

comprehensive. it is not comprehensive listing of the past with the citizenship. that is a mistake. you will not secure the border, you will have more illegal aliens, you will then have a attractive than by reason of the suggestions in that bill. -- you will then have attracted them out by reason of suggestions. >> it is the federal government's job to create a temporary worker program that works. the government has failed. once again, career politicians like barbara boxer trying to -- are trying to change the subject by saying this is unconstitutional. obama says he needs comprehensive immigration reform. the facts are that we do not need comprehensive reform to do what must be done. the truth is that there are all kinds of people trying to change the subject. if i may, i must respond. chuck devore spends time

mischaracterizing my words. rhetoric is not helping this. when he was quoted this morning as saying "if you see a group of men standing outside the home depot looking for work and they speak spanish they should be asked for their papers." that is not helpful. we have many hard-working american citizens who perhaps speak spanish and are looking for work because we have unemployment in this state about 13%. >> i find it amusing that carly fiorina has now made three references to a career politicians. if you noticed, she did not answer the question posed to her much like a career politician. [laughter] let's be very specific. i do not believe in amnesty. >> neither do i, chuck. as you know. >> perhaps now, both of us are now firmly on record as against amnesty. that is in progress. eyeglass -- i am glad you moved towards my position.

-- anything we do must be fair and follow the rule of law. what we need to do is ensure the people who are already here have an opportunity to go back out of the country come and get a visa to come back in, and they cannot get citizenship until everyone has been waiting patiently and legally overseas has that opportunity to become an american citizen. whatever we do cannot be unfair to the people who have been following the law. >> mr. devore, was this a failure of deregulation policy? if you think it was, do we need tighter regulation? >> it was absolutely not a failure of a regulation or a deregulation. it was due to government's distortion of the marketplace, specifically fannie and freddie, two government sponsored entities given carte launch with taxpayer money -- part blanch --

carte blanche. they have an explicit taxpayer guarantee. it caused innocence in these executive -- exotic derivatives. and eventually caused the crash. the problem with the bailout of wall street is it did not address the fundamental problems that were caused precisely by the government. i know that both of my opponents supported the bailout of wall street. in the case of carly fiorina, what she was chief economic adviser to john mccain, and on the case -- in the case of tom campbell. i was the only one who said i was against the bailout before they happened. >> mr. campbell? >> once again, my good friend has a selective memory. the federal reserve board to the toxic assets off of the bank's balance sheets. it was supposed to be that the treasury would do it with the

supposedly tarp money. instead the federal reserve did. that step was the right step to take. by contrast, the bailout for the tarp money was redirected in a bait and switch to bail out general motors, aig freddie mac and fannie mae. those i strongly oppose. to the question, was it a failure? the failure was when the congress told fannie and freddie, and i remember this statement from barney frank, he said "roll the dice." support the mortgages. that is how we got into trouble. the mortgages that should not have passed the tests were bundled together into a security, sold to the banks, and the rest is a sad history. >> i do not often agree with tom campbell. he agrees with barbara boxer to

often for my taste. that is that chuck devore has a selective memory. of course the wall street crisis was partially a reflection of a failure in regulation. for example, if glass-steagall was put back into place today, something mr. campbell favors, the wall street prices would still have happened. we had more than 20 regulation agencies not doing their job. of course, as i mentioned earlier, fannie and freddie are a huge part of this problem. one of the things that has happened in the dead of night is that the ceiling for conservatorship of fannie and freddie was raised from $400 billion to an unlimited ceiling. right now, the u.s. taxpayer is on the hook. we cannot solve the wall street crisis on this week in sure transparency on wall street, accountability for people who take bets that are too risky. i have called for this publicly for many years for ceo's to take a bailout to resign and attend

the resignation of their entire board. >> let's stay with this financial favorite. how much power or control should the government have over wall street? >> in so far as power control, what we are trying to do is to harness the forces of the free market. government is a port taskmaster of the free market and go -- permits a poor taskmaster. those people with big campaign donations, in the case of carly fiorina, she was talking about how ceo's the bailout money should resign. i guess that would include the people who contributed to your campaign. i never called for their resignation. in any event, what we need to address is the fundamental issue that is less regulation, less red tape, and less taxes that will get this economy moving. government does not have a monopoly on common sense.

government is not going to rescue us from this current malaise. >> the problem, of course, is that wall street, leading up to the crisis, what is not a "pure, free-market." this was influenced by political agendas. fannie and freddie influenced by political agendas from both republicans and democrats. fannie mae and freddie mac were entitled to borrow money at far below the going market rate because they had an implied guarantee from the government. mostar was creating all of these extremely complex financial instruments. government now needs to understand whaa went wrong and fix it. we do not have too few regulating agencies. we had too many. what does barbara boxer and president obama's answer to these agencies who failed in their job?

"never mind these failures. let's create another agency, the consumer federal protection agency, and have the taxpayers find them and magically that will solve the problem." which we should never have repealed glass-steagall. we should never have embraced -- >> we should never have repealed glass-steagall. in 1999, the leadership of my party and the president asked congress to repeal glass- steagall. but that did was allow the banks to get bigger. it allowed investment banks and commercial banks to expand until they became too big to fail. only five republicans voted no. i was one of those five. the mistake is that you allow the federal guarantee to get beyond a very narrow area. the solution is relatively straightforward. where there is a federal deposit insurance as there is on our own personal savings and checking account, there is a role for the federal government to ensure the fdic -- freedom to succeed in

responsibility if you fail. break up these conglomerates is that have become too big to fail. but the federal guarantee to the deposits under the fdic and let the free market decide who the winners and losers are. >> i would like to ask about the environment. in november, californians are going to be asked to vote against the emissions law. do you believe in global warming? >> idec we should have the courage to examine the science behind global warming. even people who are convinced that global warming is a real are also convinced that a single state or a single country acting alone can make a difference. i believe a.b. 32 is disastrous. it is a job killer. why else would we have a

bipartisan support for a proposal that would say it should be suspended until unemployment in california reaches 5%. if that is not an admission that it is a job killer -- the truth is that we must have a comprehensive immigration policy. instead of punishing producers of fuel and consumers of fuel, which is what the cap and trade would do, let us reward and motivate innovation so we can lead into the 21st century. >> mr. campbell? >> the evidence is not as conclusive that the united nations thought it was. the number of flaws in their research is so embarrassing to have announced they will go back. the questions are still the same. is there a change in our environment is due to human behavior which can be ameliorated by any of these proposals? those facts are not yet established. as for a.b. 32, i support we should delay the implementation

until our of unemployment rate is at a reasonable level. the proposal could have another weapon of and commenting it. the california resources board decided not to choose the alternative and instead to enforce a cap and trade. i am unequivocably opposed to cap and trade. it requires a monitor. think about it. in every place in the state that emits carbon dioxide, there must be a monitor to watch and determine if you are producing beyond your limits. the intrusiveness is unparalleled. >> i favor the initiative to suspend a.b. 32. i voted against it on the floor of the assembly. but it is interesting to talk about tom campbell on this issue. he has backed carbon taxes. no higher authority of on carly fiorina, she supported john mccain's cap and trade light on the campaign in 2008.

i am glad we have converts over to the sensible, conservative way of thinking. if california were to implement a.b. 32, it would require a 30% reduction in our greenhouse emissions in 10 years. if we rid of elektra reduction, we would not make it. if we got rid of all privately owned automobiles, we would not make it. the eliminated california off of the face of the earth, you'd make up the difference. we need to solve this problem for innovation and through wealth creation, not through red tape and putting people out of work. >> are we back to mr. campbell not? >> if you cannot keep it straight, we are in trouble. >> i think we jumped. >> miss fiorina, we will go to you. despite the highest foreclosure, unemployment, and poverty rates, many people in the valley

believed their region is being neglected. the majority of the stimulus dollars went to no. and southern california. what can you do to make sure all of california receives proper representation and its fair share of funds? >> a reject the premise of your question. it asserts that the stimulus package has been helpful to california. the reality is that the unemployment rate has climbed since the implementation of whenever federal stimulus dollars have come to california. that is not how we would get this economy back on track. i have lived the american dream. i started out as a receptionist. the people who will get the american dream back on track our small business owners, family businesses, innovators, entrepreneurs. we make it too hard for them to succeed. let us cut the size of government. let us cut taxes. let us cut regulation. let hard-working men and women do what they do best which is to

build the american dream for themselves and their families. the government is not free the american dream, although it can destroy it. -- the government does not create the american dream. make it work. we will continue to have record unemployment in this state. >> again, the government cannot solve this problem. the basis of the question, how can we get more federal dollars, we need less red tape, less government programs, more innovation, more hard work, more individual innovation and responsibility. if you look at the central valley, you see one of the most agriculturally productive places on the planet. busey enormous national -- natural resources. then you see the federal government and state bureaucrats blocking the proper use of these resources. i have sponsored now five bills to lift california's obsolete ban on nuclear power.

fresno once a modern nuclear power plant. we cannot get it to them because the democrats keep blocking it. -- fresno wants a modern nuclear power plant. the government will not bring prosperity by putting our children and grandchildren under a mountain of debt that they cannot possibly pay back. >> when i met with the fresno government association, they brought to my attention something that is shocking. individuals who were worried about water and clean air, transportation, they have to travel to los angeles to meet the director of the regional division of their relevant federal agency. it is remarkable. go as a result, the question was asked to me -- as a result, the question was asked, would you support giving us a chance to have these vital programs right here in the central valley? in eight of the counties, the

have a close to 20% unemployment. when you deal with the burdens of creating opportunity, you should very least -- at the very least offer these people to speak to the representatives in their own county. that is an easy start. the more important immediate start is water. do not forget the clean air and transportation needs as well. they would not be so far behind the rest of the state in the recovery with that. >> a couple of lightning round of questions now. should people on the no-fly watchlist be able to purchase a gun? >> no. [laughter] >> yes, if they have not been convicted of a felony. >> yes. >> oh, my goodness. >> the lightning round has short answers.

go right ahead. -- >> go right ahead. >> if they are on the no-fly list, you can ask until they are off the no-fly list. i cannot believe this. wait until you are off the no- fly list, then exercise your second amendment right. it seems unusual to take that position. >> a bureaucrat or intelligence officer can bridge your rights without a trial. that is interesting. >> i know people who have been on the no-fly list. it has been, unfortunately, we too large. -- way too large. if we permit anyone on that no- fly list to have their second amendment rights taken away from them, that is a problem. use the example of an issue where tom campbell is far too close to barbara boxer for my taste. this is one of them. >> how about miranda rights for those accused of terrorist activity? >> no.

an individual who is an alien combatants ought to be sent to guantanamo bay. they should not begin in reference to people who have important information that can be used. but this is an incredible mistake the obama administration is making. >> are they a citizen or not? if they are, yes. if they are a form combatant and picked up off of the battlefield, i do not expect a private first class to being reading them of their miranda rights. >> the christmassy bomber should not have miranda rights given to him. he is not a citizen. he qualifies as an enemy combat. the "new york times" -- the new york times square bomber is a citizen and it should be read his miranda rights. we should give the government more options to be tried in

military tribunals and sent to guantanamo bay. >> since a jump in on line, i will take 10 seconds to say you get the information from the times square suspect before you give him the miranda rights. if you reverse that, you the opportunity to get valuable information. we have to take a break -- >> we have to take a break. we will be right back. ♪ >> we are back at the museum of tolerance in west los angeles with the three republican candidates vying for the seat currently held by u.s. senator barbara boxer. we continue the debate with our colleague with a question. >> you will have to deal with the issue of afghanistan, the longest where we have been in. there are more than 60,000 troops there now, more on the

way, and more will likely to be called for. would you support increased deployment? do you support the reason why we are supposedly in afghanistan? i believe is mr. campbell. >> i believe -- i support the reason we are there. the judges should be made on the advice of the military professionals, general mcchrystal in particular. the president appears to be following his advice in large part. in addition to our presence in afghanistan, we have the context of pakistan and the areas of the safe harbor offered to terrorists cells in pakistan who are affecting the situation as well. the situation has been brought up about the use drones. the answer is yes by all means. they save american lives. we will come to an understanding with the pakistan government. i have to say that as difficult

as dealing with the afghan station -- afghanistan situation is, it must be brought to the pakistani origin as well. you saw the boat or use of neither. >> when i worked for president reagan as a specialist for foreign affairs, i had the opportunity to go to pakistan. i have seen it with my own eyes. i have visited the refugee camps that existed at the time. i am very concerned about the current policies the president is putting forward. in fact, it springs from the whole false notion that president bush shortchange the afghan war to go into iraw. afghanistan is not iraw. it is bigger, more mountainous, and there are more in xenophobic. it does not have natural resources or an industrial base. its main chief of survival is opium and foreign aid. it will take this 100 years to

try and build a nation in afghanistan. i think what we should do is focus on human intelligence, and rode a tax -- drone attacks, and continue to kill the leadership of those who would seek to harm us. we have to prepare for the next enemy. it is not in afghanistan that the people's republic of china. >> he said he does not support the military's recommendation for afghanistan. i certainly do and think it is vital we are successful in afghanistan. it is vital that we deny terrorists a safe haven. i support the fact that president obama has stepped up in the attacks. i support that he finally took the recommendation of his generals. i am concerned that he established an arbitrary deadline which we are already having difficulty with. i chaired the external advisory board for the cia.

i know our military men and women, they all are absolutely committed to being successful in afghanistan because they know how an important is to deny terrorists a safe haven. i believe we now must do what is necessary to succeed there. i believe that means we must follow the recommendations of a very, very fine leaders like general petraeus and general mcchrystal. >> do you feel the requiring americans to have health insurance is unconstitutional? >> i believe it is beyond the commerce power of the united states federal government. the difference is very important. an individual shall not be forced under the federal government's authority to carry an insurance policy if the individual does not have all the elements the federal government wants.

they are subject to a fine. if they have more elements then the government wants and that they must pay an excise tax of 40% of the additional value. that is an intrusion on individual liberty, the judgment that an individual or a couple might want to make about the policy will mean for them. what can the government do and what can the state government to do is clearly delineated in our constitution. the state or the repository of all rights are now specifically given to the government. is in the tens of government -- the 10th amendment. i would vote against bills because they expanded the role of the federal government. for this people who say, "how can you saw this otherwise"? we could and should have taken care of those with pre-existing conditions and those too poor to afford their own insurance. >> the short answer to your question is yes.

for that reason, i sign a pledge to repeal obamacare four months ago. to go back to a previous question, i think it is very important what is going on in afghanistan. they do not present an existential threat to the united states. they do not have an industrial base. they do not have armies. they are terrorists. because of the fact that afghanistan has no means of national support for a large army, where is the end game? do you propose we stay in afghanistan until they form a modern democracy? for heaven's sake, their constitution was drafted by the french as a part of the nato mission. i am an intelligence officer. i am in lieutenant-colonel. i have studied this issue. we need to kill our enemies. we do not need to build a modern

nation state where one cannot exist. >> there are some many problems with this health care bill that we must repeal it. let's start with the fact that it does not solve any of the problems that it would solve. i battled breast cancer last year. that is why my hair looks strange. i lost it all during chemotherapy. it made me an involuntary expert on the health-care system. the truth is that this bill increases the cost of care, the cost of health insurance. it has increased our federal debt by $500 billion probably. president obama just established a "deficit reduction commission." i think it is code for increasing taxes. he did say, "let's put everything on the table." let's put repeal of the health care on the table if you are serious about reducing the deficit. [applause]

>> many historians consider the killing of 1.5 million armenians as the first genocide of the 20th century. what are your thoughts or position on the pending house resolution declaring that genocide? >> i support the resolution. i support a companion resolution on the floor of the assembly in california. in fact, it was the first genocide of the last century. perhaps not, adolf hitler referred to it and asked, "who remembers the armenians"? we have not had an accounting with the turkish government on this issue. that is one thing that leaves open this chapter of history. it is time we have an accounting. if they say they are not the direct descendant of the ottoman

empire, why do same knowledge the objective facts -- why did they not acknowledge the objective facts and move on? >> of course it was genocide. it is a tragedy that we are tied up in political lives in washington, d.c., instead of able to speak the truth. i think it is yet another reason why people lose faith in their government. of course it was genocide. here we are in the museum of tolerance, a wonderful place that calls on as it to never forget those who were lost in the genocide whether it is the holocaust or whether it was happened with the armenian people. i must say, and this may be the only time that i say this, but i agree 100% with what mr. devore just said. [laughter] >> mr. campbell? >> in this museum, there is a

representation of the armenian genocide. that is because it did occur. you must speak truth or you run the risk that it will occur again. there was an armenian genocide. their remembrance might help prevent a recurrence. sadly, there are other genocides. world war ii and also in rwanda. there are memories of those in this museum, too. bemis continue to face the reality that there are evil people and that america is a good nation. we should never apologize for taking the step that we, as a good nation, stand up, call out evil. i was a so disappointed when president bill clinton refused to use the word "genocide" because if we used the word we

would have to do something about it. >> we will go to some 32nd answers and now. >> he will keep us in order, right? >> we will try. -- we are going to go to 30 second answeres now. >> secretary gates does not necessarily think that the policy is working. what do you see now. how far do we need to go if sanctions and policy are not working? >> of course what we are doing is not working. it is obvious. what we are doing is not working. yesterday or the day before, we retreated to our secretary of state revealing how many nuclear warheads we had in order to demonstrate some sincerity about nuclear nonproliferation. meanwhile, iran says they will go ahead. he is intent on building nuclear

weapons. we should, and i have called on barbara boxer to do so, the senate and house should reconcile the two bills and send them to the president immediately so he can enact sanctions on refining petroleum so we can begin to cut off access to the financial resources of the iranian revolutionary guard. we must be prepared to do what is necessary to prevent them from getting a nuclear weapon. >> in september 2007, israel bombed syria's nuclear sites. in 1981, israel bombed iraq's nuclear capability. we must send the message now that israel in its own existential defense uses military force to destroy the nuclear capabilities of iran. we will stand with israel. sadly, obama send exactly the opposite message. he is saying that we will give sanctions one more try.

no sanctions will ever turn iran back from their plan. he is a man that hath declared israel has no right to exist and that the holocaust never happened. >> first law, a nuclear-armed iran is not just israel problem. it is the world's problem. when i worked at the pentagon, i did a classified war game that led to operation praying mantis which was the largest naval exercise which destroyed the iranian navy. i know about wielding a big stick. sanctions do not often work because business leaders, like carly fiorina when she headed hewlett-packard, used in offshore into the cold [inaudible] that is why we have to use force. it is why we need to use covert means to encourage the people of a run -- iran to drop off their

leaders. >> we are close to running out of time. we have time for closing remarks from each candidate. please try to adhere to the 32nd time frame. -- the 30 second timeframe. >> i am grateful for the opportunity and i ask for your support to be the next senator from california. one issue that compels us is the 12.6% of california's that are out of work. the interest rates will rise, inflation will happen. people in washington continue to run the printing presses. replace senator barbara boxer, one of the biggest spenders that congress has ever seen. they raided her the single most fiscally responsible -- irresponsible member of congress. >> we are spending beyond our means to sustain ourselves.

all americans want is that we live within our means. we want to follow the constitution. unfortunately, we have not been getting that barbara boxer in 28 years on capitol hill. this is the year that we can in her reign. this is the year that we can send someone to washington, d.c., to represent our state that understands that the federal government exists to secure our in a legal rights, not try to protect us from our own stupidity -- secure as from -- secure our inalienable rights. >> i have lived the american dream. i have travelled all up and down this state and met people who, like me, have had enough. we have had enough with out of control government spending, taxing, and out of control government regulating. we need to take our government back, make them listen, and make it work.

we can do that by marching in with our votes and reducing and defeating barbara boxer in november. there is one candidate on this stage who can defeat barbara boxer in november. i ask for your support. let us march with our vote, take our government back, make them listen. make it worked. >> we thank you, candidates. we are out of time. [applause] we would like to think the league oo women voters. these be sure to vote on june 8th. thank you. ♪ >> tomorrow night, the kentucky republican primary debate between the kentucky secretary

of state, rand paul, and others. that begins at 8:00 p.m. eastern here on c-span. senate majority whip dick durbin is our guest on "newsmakers." we talk about the political landscape heading into the midterm elections. that is today at 6:00 p.m. eastern. >> tonight, the entrepreneur ted leonsis on his book, "the business of happiness." we talk about what it means to own a professional sports team. that is tonight. >> the president got on the phone and said to me, "judge, i've been like i would like to announce you as my selection to be the next this is the justice of the united states supreme court."

i said to him, "-- caught my breath and started to cry. i said, "thank you, mr. president." "the supreme court" has into this with all of the judges, active and retired. it is available now in hardcover and also as an e-book. >> a look now at developments in the british general election. host: things. we will take a break from the discussion to check with tom baldwin, on the phone from london, the chief reporter at "the *." he will talk to us about the latest developments in the british eleion held last thursday. good morning. guest: hello. caller: that is the latt, are we closer to getting a

government there in london? guest: yes, it is the same as before the election. by the constitution, gordon brown remains prime minister until he stops being so. we will have a new government next year. the talks are going on as we speak. it is between the conservative party and the liberal democrats about where they can form some sort of deal which would give the conservatives the majority that they needin the house of commons to form a stable government. they are already talking about this as forming a condemnation -- con for conservati, dem for democrats and so on. it will be tawdry and you'll hear more about it if you are in britain over the next few months. host: there's a headline in the

paper which says a 62% one th prime minister of now? guest: yes, there are certain annumber -- we have a three-pary system now. there are many in a certain party who want gordon brown out. this possible for labor to remain in power without gooden brown, and for gordon brown to stay in power to see through legislation on the new voting system. there was talk about the current system been so discredited. there are all kinds of permutations possible here. host: is there a time line to give the coalition together? guest: no, but i think that there will be a point when people wonder why jordan brown is still looking up there after having lost the general election. there are also pressures from the markets who will want some

former stability. when the markets stop trading on monday mor-- when the market stt trading on monday morning there is a possible reflection of the uncertainty in the country. host: what is the play between cameron and clay from trying to start their own government in moving brown aside? guest: that is what they're doing today. what stops them as they are not natural bedfellows. thliberal democrats are pro- european. the conservative party's are skeptics to the point of being public. -- been phobic. the conservatives oppose forming a new government.

it goes on and on. the liberal democrats are naturally progressive. for them to prop up our right wing party which they oppose locally on theround would be big league for them. host: you touched briefly on the british markets and what they're hong to see. if this new government is not formed by the end of the week, is this going to have some sort of long-term negative effect on the british market, and then by extension other economic markets around the world? guest: well, we do no know, france, germany and most european countries have european countries have coalition governments. this guy does not fall for the we're not used to wait in britain and the may be more sensitive to it here. perhaps th british market is more important than that of some her countries as london

is a financial center. ho our final question for you, tom. at any point does the constitution in brita allow for the queen to be involved? or will this be dealt with only by the politicians? guest: we do not have a written constitution which is part of the problem. this is governed by conventions. the queen, she will not want to be dragged into this. she will be advised by a senior civil servant, be advised by ministers. she will be hopinvery much that they will come, the different political leaders of the parties will come to an agreement without her being dragged into the unseemly matter. the one thing she has achieved over the last 60 years on the turn i

>> the outcome of thursday's british election is still unclear. the conservatives won the most seats in parliament, but not a majority, and they are negotiating with the liberal democrats on a power-sharing agreement. labor leader gordon brown remains prime minister while negotiations are underway. an update courtesy of sky news which aired on british television earlier today. this is just under an hour. >> is a coalition actively under consideration? >> we are trying to do a deal with the conservatives because they came out first, not with the majority, but first in the election. we always said that if there was a party with a mandate, we talk

to them first, and we are going into that seriously. you write reported there has been a process meeting. -- rightly reported there has been a process meeting. a fair tax syslf:is investment n a green, sustainable future, investment in schools, and a new political system. >> that would mean a review of the voting system rather than necessarily a commitment to change it, is that right? >> i cannot imagine that a review would be enough. we have been there before. the conservatives came into power promising a referendum. there was no referendum. we are clear that the parliament next u.s. has failed because there were safe seats that led to the corruption and expenses scandals. we need a fair vote. >> labour are offering iraq --

referendum again. would that be enough? >> some say there would need to be a referendum. if there is to be a deal, an arrangement, a coalition, for the conservative party, they will have to move from the position they have been in. they have not removed more than marginally, they have not committed themselves to any substantial view on their fair votes agenda. they have not agreed to make the house of lords of electorate. the have not made clearhb that people like ward ashcroft should not be in politics that they have not paid their taxes. -- lord ashcroft. there is a willingness to talk about it. is on the agenda. the talks will see whether there is a willingness on the part of the tory party to move out of a position they have had for 65 years where you can run this country on and the minority of

support. rç as the junior partner, obviously you have to concede some of your manifesto as well. >> of course, you cannot expect to get everything. this extended tuitions are the economy, which has to come first. it is also important to note that now there is the first opportunity in our fiscal lifetimes for constitutional and political electoral reform. in opinion polls in the last few days, they think now that has to be delivered. >> you think it is possible that get pretty david cairns team could move? as i hope it is possible. -- david cameron's team could move? >> i hope it is possible. they have been superficially accommodating. the test is now coming. they did not get a majority. >> on the question of the economy, i am a little bit

confused what you are looking for. on the one hand, you were saying we have to face up to this, we have to be tougher. on the other hand, you were in not supporting the conservative plans for cuts now in order to defer the national insurance. >> we believe that there are certain shifts in spending in that should happen this year so that things are not important, we take away, and we put money into, for example, an emergency jobs program, to get housing back into use, which puts people back to work and so on. we are than clear that there are significant cuts, savings that will have to happen across britain. a political consensus on how to do that. 2ñhence the proposal involving l the major parties and the bank l of england. we believe that if we are going to carry the country with us and have a fair#n outcome, it has to be done in a considered and

consensual way, not by one party having all the power. >> you have been an mp for 27 years. did you come into politics to go into a coalition with the conservatives? >> i came into politics to make decisions, to be in government, and to influence and obtain our agenda. as we have done at local governments level and in scotland and wales, we are working with the outcome -- there is no guarantee these talks will succeed. we are trying to make them succeed, but we do not have to get it tied up by tomorrow. we have heard that the tory party now realizes they ought to talk to their mp's, too. as we can. we are hopeful that there can be an outcome, but if not, other

outcomes have to be explored. >> what you are talking about is something that would be measured in years. >> there is one thing that would lockean with any party, and that is a fixed term parliament agreement. you allow this parliament -- if he and his colleagues to live with that, it means stability. what we cannot have is everybody thinking derangement will last for six months, when the economy, -- thinking the arrangement will last for six months when the economy and the world markets need to have stability. >> we cannot start by thinking this iscvbwñ a short-term fix. the public has decided, they have given no party the right to form a government on their own. we are working with what the public have told us they want. it is a distorted system.

it seems to me we have to have a stable and fixed term arrangement, but at the outcome, we cannot have another election subject to the public's will come were you have a distorted outcome because the voting system is so corrupt and unfair. >> there are those who say the liberal democrats are between a rock and hard place. effectively, you prop up the conservatives and voters might get angry with you. he did not seize this opportunity to take decisions exercise power, then they get annoyed with you. >> good option is delivering what we believe in, reducing the gap between the rich and poor, redistricting well, having their taxes, and political reform. if we get those, then we stand proud. what happened in scotland and wales, remember well. we did coalition arrangements with other parties, but we achieved a lot of our agenda. the result was, we have been

rewarded by a greater growth. holding our ground and gaining seats, not losing seats. we can win more support by making sure we stand firm on our principles. >> do you really think is credible, given the public mood, the fact that labour lost seatt, is there really [unintelligible] >> the figures are different. conservative plus liberal democrat making it a majority, labor plus liberal democrat do not make a majority. there will have to be other people involved. it is possible, and there is some common ground, but we are not there yet. there are separate matters for the labor party as to whether that is led by gordon brown are someone else. the public have told us that that is what they want, because the tory party came first.

we are working with what the public asked us to do. if we can deliver, we will, but it is not the only show in town. there could be an alternative arrangement. let's see how today and tomorrow go. if we can agree, we will, if we cannot, we will move on. >> the labor mp broke ranks yesterday, becoming the first member of the new parliamentary party to call on gordon brown to quit, following their election defeat. he claimed that the prime minister was losing party boats and standing in the way of a coalition deal with the liberal democrats. he joins me now. thank you for being with us. was it your call really a bit unnecessary? gordon brown looks like a caretaker and a dead man walking. >> the electorates have their say, and the key theme in the election was a key theme from labour voters.

they do not want gordon brown to be prime minister, and i heard that time and time again. large numbers of labour voters say we are happy to vote for you as our mp, but we do not want gordon brown as our prime minister. for whatever reason, the electorates' made that judgment. it is not tenable for gordon brown to run any kind of coalition or administration. it would be suicidal for the labor party to have an election this october or november with gordon brown still as leader. by our september conference, we need a new leader leading the labor party, not gordon brown. >> what you are really saying is that you would like the leadership contest to start now, efore this contest to start now, whole question of who is going to be in government is resolved. >> it is not tenable for nick clegg to be seen to be propping

up gordon brown. that is not going to happen. in the real world, nick clegg would be crucified if you propped up gordon brown, and gordon brown and popularity was a key factor in this election. that is the reality. therefore, gordon brown needs to be making plans to step down as the labor leader, and when a new government is formed, it should éiq be formed by gordon brown. gordon down should -- gordon brown should then be stepping down as prime minister. the labour(é? party needs to be electing a new party leader. >> would not take weeks at the very least to get a new leader in place? that is just what the country does not need at the moment. they are trying to get a government sorted out as soon as possible. whoever emerges would not be in a position to do a deal with nick clegg right now anyway

because they would not have the authority of being a proper party leader. >> we are not always short term in our thinking. the media wants instant decisions. this is about the future of the country. it is about stability in government and dealing with the economic crisis. and i think the general public and the electorate is rejecting labour's approach on the economy and what alistair darling has successfully done with the economy. what i have is the unpopularity of gordon brown being the prime minister, not least from vast numbers of labour voters who voted for me. what needs toçzfn happen is a cr understanding that gordon brown will be stepping down as labour leader and that we have a new leader before the conference. there is no need to rush into it in the next few days. a7ccthere is a long, democratic process. there are many people who could be the nextalabour leader.

we need a new leader in place by the conference. what we cannot afford is any idea that a gordon brown administration, a minority administration -- they would not last five minutes in parliament. it would be bad for the country and disastrous for the labour party. >> did you have any preference as to the new labor leader should be? rex the voters have no preference at all. they know all the potential runners. there are quite a number of peace so -- of people who would be suitable. i can think of four or five people who have a very good claim to be the labour leader can give is a far better position to win the next election, be it this autumn or be it in two years or four years or five years' time, whenever it is. the one thing that is certain is that it would be disastrous for

the labor party to have any notion that gordon brown could be leading us into another election. it could be one as we had in 1970 for this autumn. gordon brown is not the person to lead labour into that election. we therefore need a change before then, and the timescale has to be a new leader who gets elected and is there after a party conference in september. >> it looks a bit sunnier where you are than i am. coming up, a labour-tory coalition. we will be looking at this morning's newspapers. >> let's take a look at the front pages of the sunday newspapers.

"the sunday times report" stet david cameron could make a better offer to the liberal democrats. "the sunday telegraph" says david cameron could reject the three party leaders areá12÷ picd at a ceremony yesterday that was seen live on sky news. gordon brown exploded with rage on the phone after nick clegg suggested he had no right to cling to power. "the observer" got hold of what it claims to be a secret letter. independent" says ace of david cameron and nick clegg will meet again today. "sunday express" says david

cameron says his party is close to a power-sharing agreement with the liberal democrats. joining me or to safely reelected mp's. welcome to your%,cç biryou both. >> i saidcímk the one certaints that gordon brown would lose his majority endured either be a hung parliament or a conservative majority. that was spun by the monday papers of me being complacent about a victory against labor. i think the election results speak for themselves. >> is roughly what you expected? >> it was always going to be enormously difficult for the

tories to get an absolute majority. >> he predicted a hung parliament on that same show. >> i did. but what people did not bargain for was that some tory voters came out because they were frightened of this alleged liberal democrat surge. >> there was an interview with boris johnson. the point i would like to emphasize again and again is that we always said it was a mountain climber. z:we made the point that if we were going to get a majority, we would have to break a lot of records. my take is that we won the gold medal in the election, but we did not win the world record. >> it did not take david karen

long. -- david cameron long. >> the point i want to make is that i think david cameron and the conservatives did brilliantly well in this election. they rescind -- they achieved a record number of seats. it cannot fill the labour party did well in the election. >> "the sunday times" is saying to the voters tell brown to quit. are you joining john mann in calling gordon brown to quit? >> constitutionally, he is doing the right thing. the conservative party is the

largest party with the most seats to try and brokerage deal. if that fails, then obviously we would have to try and put something together. the only people that won't barn rat to quit now, is because if he quits now -- the only people that want gordon brown to quit now. >> we apparently have got some words from gordon brown this morning. >> will you resigned, mr. prime minister? >> i am going to church. >> there is much talk about the fact that you should. >> not much from corn browning said that he is going to church. there is an interesting question about the timing, particularly if there is the possibility of talks with the liberal democrats. >> i think it would be wrong to

try and lever him out now and parachute someone else then. the public would not understand having a prime minister who was not on the cards. he is the leader and will stay the leader until and if he fails to come up with a coalition that can take power. >> why did the tories a-listers failed to score? these are the glamorous people, and a couple of black candidates as well that were posed. why did they failed to score? >> i think this is what you will see in elections going forward, that individual candidates will do better than the national trend. i am surprised that sean daly

lost. i know that labor ran a whole series of scare stories directed a council house tenants about what the local council might do. >> in london, the labor vote dug-in. [unintelligible] we got very good results. >> it has to be said that calling your constituency dinosaurs is probably not the best way to find a seat. >> i thought joann was an excellent candidate. i certainly do not have dinosaurs. i have wonderful conservative activists. >> a secret memo threatens the

liberal democrats and conservative coalition. >> it is a civil service memo drafted on the basis that william hague was going todiw;k through the door. it says it is secret, but it is a government paper. it sets out what we have always said in public, which is that we seek engagement, not confrontation with europe. we have commitments on criminal- justice, social employment committee that we would like to take back to brussels. it is spun by "the observer." i love the way they always spend the stories. -- spin these stories. >> elections have consequences. the conservatives are the largest party, the largest number of mp's. one has to assume that he and

clegg and make it work. >> she is talking about your party. who is going to be the next leaguer -- leader in the conservative party? >> i think the picture will be gordon brown. [laughter] >> tv's thrilling election right, after all the ratings, the polls have shifted. >> they said it had an effect in . i thought it was wrong to have that kind of instant poll created. i thought it was a phantom liberal democrat surge. >> people really were in the used. they did enjoy -- people really were enthused. they did enjoy the debate.

>> this is sunday live. on our website you can keep up with all the latest. coming up, another perspective on the coalition government. >> we have the former conservative cabinet minister. this is modern, progressive politics. for once, you must be feeling a little sorry that you are out of

politics. sex no, i am not, actually. >> no, i am not, actually. i think what david karen is trying to do, and nick clegg as well, is to be in line with public opinion or head of public opinion. during the last disasters parliament, there is a feeling that something new has to emerge. this is an ambitious project the two men are embarked on, the possibility of a coalition government. since the negotiations began on friday, the will -- have been saying this is impossible to do. has been going on for long enough now that a little bit of hope is beginning to spring from. i very much hope it can be brought to a coalition. >> do you believe that the idea of coalition government will be good for britain? >> absolutely, in the present circumstances. during the election, the parties did not talk about the depth of

the problem, but the depth is terrible. greec&îát was literally on fire, and the contagion is spreading across europe. it may be that unless we take action very soon, we like other countries will simply have to take dictation from investors as to what our policies will be. the tax rises will have to have will be handed down to us. if we can get a coalition government that can show strength, then we have the opportunity to write our own cuts and are on tax rises. that is what it amounts to. >> you could get a coalition government that really does the right thing for the country and makes itself so unpopular that labor will return to power in the next election for the next generation. >> that leads to a cynical view of politics in which no one ever does the right thing.

david cameron probably sees margaret thatcher as his model in this respect. she did have to do very unpopular things, and she was very unpopular. however, the conservatives were in office for 18 years. there was a sense that the time had come to have firm leadership and to get on with the problems. >> obviously they are professional politicians. is there a good option here for the liberal democrats? >> i think there is. particularly because they did not do so well in the general election. they have been hanging around for 30 or 40 years hoping that a general election would coincide with one of their surges. they had a surge in this general election, and unfortunately, it did not work. the have the opportunity of entering into this government with the number of positions and

a big influence on policy. i think you have to say that if the liberal democrats did not take the opportunity to be in government, what would be their future? what's more than anybody else, they need but others to'p'& comd cooperate. it is enticing that they would have positions in the cabinet. i am happy to run through the categories. i think most of the issues that have been discussed as difficulties can be resolved. >> let's take the view that basically liberal democrats should insist on pr. do you really see that as a sticking point? >> i see it as an obstacle, but i think us see the way around it. it is for the conservatives to offer up a committee to consider the options. that would have to be accompanied by an assurance that the process would come to a

conclusion, and then be put to referendum. the referendum is by no means a foregone conclusion. given what i know of david cameron, i don't think he wants to be seen as the person who turns his face against the updating of the electoral system. we have just been through an election in which many members of the public have seen the ugliness of that system in $u$an ever before. >> he is the leader of the conservative party. can he sell all this progress to his own party? >> the tories are very serious about political power. if this is pulled off, not only did the tories go into positions of power, they have every prospect of being there for for five years. they also have the prospect of

being reelected. that is a very powerful weapon to use against the critics. there will be critics. the conservative party is an organization that is difficult to manage. but delivering power settles a lot of the arguments. >> this is sunday like. coming up, more discussion. >>9u+ deal or no deal? it is the top of t$b/- $(lc@&c+ there are quite a few conspiracy theories circulating about this result. also we have a times columnist and the sun's political editor jer. >> it is funny said deal or no

deal. it takes him back to a quiz show called "take your pick." in the first round, the contest and had to answer the question without saying yes or no. that is where nick clegg is at the moment. the new and open the box and either take the money. your ad ventures, you open the box. if you are not adventures, you just took the money. which other option he takes, he will be under severe criticism. if he wants the fastest route toward the electoral reform he wants, in that case the coalition with labor make sense. that is also the one he could get the most blame for if it goes wrong. it's very difficult, but if he does not do anything, then he will get the blame for the fact that there will not be a government. or there any wonderful options for nick clegg? no, it's either take the money

or open the box. on one side, i think that by historical standards, 36% of 306 seats should be sufficient. on the other hand, we are in a new situation at the moment. if the other parties can come out a majority, there is something to be said for that. i am teetering on the edge, like nick clegg may be, on these decisions. this may be a situation he will never get to again. he might be best going for a labor reform agreement. gordon brown would not be leader of the labor party, it will be someone else. >> i agree with david that nick toh position. toh who would want to be nick clegg this morning?

it is a lose-lose situation. i think david cameron's and is stronger than most people give it credit for. he can go it alone. it will be difficult. >> what happens, just assume they do manage a coalition government led by david cameron. does the newspaper have to start thinking about being nice to the liberal democrats as well? >> we put on the front page that they are leading the polls. we are in a different game now since the election race. that has been and gone.

everyone really we have to get tu/gñon with this now. britain has voted. the people out there want to see some business being done. d.dqdavid çcameron is in exactle right place, saying we have to work together. >> the talk about stability, this would be a stable government for four years with a clear overall majority if it is formed. or they just saying that to suit their purposes? >> when you talk about david cameron being in a strong position, it is because he might be able to lead a minority administration and then going to an early election. in so far as anyone might be speaking about that stability, it would more likely be the tories than anybody else. on the other hand, the country does want to hear this kind of notion.

the vote this like government and one strong government simultaneously, which is where we are at the moment. there is a very strong pressure brought for people to do the next f. >> we are in an era of new politics. perhaps nick clegg and david cameron are leading public opinion, as some people like politicians to do. >> both of them woke up on friday morning saying this is over, we need to make a deal. selling that deal to their parties is the greatest possible issue that either will have. that is what the liberal democrats exist to try to correct. >> did they really? that is a sort of extreme, abolitionist argument --

evolutionist argument. >> if you are a liberal democrat, you want to change the electoral system, said advocated. -- so you advocate it. you are right about the speed with which the situation has changed our attitude to what would normally happen in this situation. the way we think about politics has altered. it becomes possible to imagine a coalition of parties beyond a conservative. a week ago, i would never have comprehended it. it would have been impossible. now you begin to realize it is not like that anymore. it is about commanding a majority in the house of commons. t from the other direction. what is the best outcome for the labour party in all this?

the liberal democrats, a big electoral reform deal. all the progressive people in now realized that electoral reform is not just inevitable but is one of the ways of reconnecting politics. the political parties haveqç"hr members now. this is a long-term development that has happened in most of the democratic companies. pi-xemkm>> i think that is thet outcome for the labour party, to struggle along now with the coalition. go to the polls in a year with the new leader and come back into power. next on our website, you can get all the latest whispers from westminster. coming up, welcome to westminster. i will be meeting some of the new members of parliament.

he wanted a hung parliament, and now he has got it. liberal democrat and conservative negotiators are meeting for talks at the cabinet office. for negotiators8xu"r the tories arrived just before 8:00 a.m.. for the liberal democrats, there is a four-man team. what is the latest? >> they have been meeting for half an hour. they are locked in a room with civil servants facilitating. previous discussions have been described as constructive. it feels they are groping their way towards a deal, but clearly there will be sticking points. the liberal democrats -- a big

sticking point on election reform. it's very difficult for david cameron to deliver. the liberal democrats had nothing to say -- william hague stop on the steps and made this statement. >> we are entering the detail of these negotiations now. we are conscious of the need to provide the country with a new, stable, a legitimate government as soon as possible. the meetings we had were both very constructive and positive and very respectful of each other's positions and the nature of those meetings. we are going into these negotiations very much in that spirit today. >> you heard william hague there use the words constructive and positive. we have been hearing similar language from nick clegg this morning.

some say that compromise is the watchword and that the conservatives need to compromise a bit more. >> they will have to move from the position they have been in. there are various things would have not really moved more than marginally. they have not committed themselves to any substantial view on the ferryboats agenda. they have not agreed to make the house of lords elected. >> gordon brown is back home today in scotland. he chose to attend church this morning. >> will you resign? >> the morning. i am going to church. >> will you resign? there is much talk about the fact that you should. >> james matthews they are catching up with the prime minister, but no news on his intentions. we do understand that mr. brown will be returning to london

later on today. meanwhile, here already,yp david cameron also attended church with his wife samantha firmly at his side. mr. kaelin has said today is a family day, though no doubt -- mr. cameron has said today is a family day, though no doubt he's being kept up-to-date with negotiations. 1974 was when britain last had a hung parliament. joining me now from his home in wiltshire, lord owen. congratulations, you did not stand as a candidate, yet you gotd-j+ what you were campaigng for at the polls. >> i would now like to see an outcome which has the natural interest as its prime objective. frankly, i think that would best be served by a coalition.

i know there are difficulties, but let'sz0mgx hope that what cs out is what is good for the country, which would be a four years, stable, representative government. if these two parties can put their act together, they would speak for 59% of the country. that would make it much easier for the country to live with the hard decisions that are going to have to be taken by any new government. >> your view is that the alternative, if you like, of a progressive coalition, the sort of think alex simon has been talking about, does not offer that kind of stability. éíñ>> i think the numbers do nt add up. ;l/ñ think the moment has gone, anyhow. if there was a moment when it might have been rescued, it would have been if gordon brown had indicated that he himself would not have led such a coalition if it had been developed when he came and spoke

outside number 10 downing street on friday. i think it would be against the trend. the trend is no winners, but the conservatives have come through very much stronger than any of the other parties. the other parties have lost. labour has lost a large number of seats. even liberal democrats are not in a strong opposition as i had thought and hoped it would be. it seems to me also, nick clegg 's position, if he would speak to whichever party had the strongest mandate, has effectively meant that he has been given the people's mandate to talk to conservatives. i think he should use that mandate. he was wise in retrospect not to make that a preferred choice, but to leave it to the country to determine who had the strongest man day. >> how much of a sticking point do you think the liberal democrats should make this issue of electoral reform in these negotiations? clearly, they are the minority

partner in any negotiation. should therefore be the make or break? >> i think there is a way through this. both the liberals and conservatives want to cut the number of members of parliament. the conservatives won 60 reductions and the liberal democrats are talking about 130. that opens the way to boundary commissions, which will take about two years report. if they want to come up with a more proportional results in those constituencies, then you have a very different situation. gñ/9we would end this dominancf the house of commons, of people who have safe seats. nearly 300 people go into an election without any fear of the result. they know they are going to be elected. if the seeds were made more proportionate, the old system was the country seats were tory, the city seats were labor.

if you change the boundaries to make it more proportional, that would be the first decision. two years to a coalition, if you decided to go for the next two years, the newman have a referendum on a proportional system with the conservatives arguing to stay with a fixed course. boundary commissions making it more proportional, they could also grew constituencies if that was the proportional system the liberal democrats chose, and people make the choice before you have an election in four years' time at the end of a fixed term, a coalition government. >> we just saw images of lord ashdown going to visit nick

clegg. you have written in the past about the psychological pressure on leaders at the very top. just from your observations, and you are a doctor by training, how does the psychological mood of the three men strike you? >> i think they are in good shape. i was very surprised by the frankness with which david cameron made his speech on friday afternoon. i thought it matched the mood. as far as nick clegg is concerned, he has not had a victory, so he was a bit down on friday. pennyq[6! ashdown has mentoredk clegg. they are very good friends. their relationship is very important. i would expect him to be the

voice of realism. he has changed a great deal. he used to be against nuclear weapons. he did a very good job as the commissioner in bosnia. he understands compromise. he has been negotiating with the muslims and serbs. that is very good training for him. i was pleased when i saw paddy n and nick clegg together. i think that will help nick clegg. >> what would be revised to gordon brown? he is obviously in a very sticky situation. >> i think it will be resolved fairly soon. i think the message will go through the civil servants who are at the talks that david cameron can command a majority in parliament. fjcthen the natural thing woule for gordon brown to go and resign and the queen asked david cameron to become prime minister. and frankly, the sooner that happens, the more stability in

financial markets, the better the outcome. the actual detailed negotiations can carry on until the queen's speech. that will be fleshing out a program and we will hear more of the details, but the fundamental principle, the best thing i heard yesterday was that david cameron and nick clegg spent 17 minutes together without anyone else in the room, one on one. they have to build trust between them. if they can establish that, then you can have a fixed term, a coalition government representing the views of 59% of the electorate. that is a big prize, going into what is going to be a very rough year years. the initial two years will be unpopular. the decisions they have to take will be tough. i would admire nick clegg if he takes on part of that responsibility, and i would admired david cameron for being generous enough and ready to compromise to make it possible. >> thank you very much indeed.

let's get the latest pictures now of nick clegg this morning. all the leaders are out and about, although actually is their negotiating teams who are doing the hard work at the cabinet office. outside nick clegg's home is simon newton. >> nick clegg let the couple of hours ago with his wife and children, going off possibly to church or to visit some friends. in the last half-hour or so, nick clegg has returned on his own, dressed in his civilian sunday dress rather than a suit and tie, ready to go back inside his house to conclude the business of the day. a short time ago, paddy ashdown arrived with a briefcase. he did not have anything to say to us. he is now inside nick clegg's house, obviously talking over the business of the day, the big

decisions they have to make. >> new political times indeed. let us not forget, a new parliament and an unprecedented number of new faces. joining me now or three of the new members. ayswe have the new tory mp and face as he was in parliament from 1997 to 2005. he lost his seat back to the tories, and this year he has triumphed again in nottingham east. charlie and duncan, are you on for a coalition? as we have rarely spoken. the way i see it, we did not get elected to watch. we got elected to serve our constituencies and help take relations forward. i hope we can do that positively. >> you have been on the

doorsteps saying nasty things about your opponent. does it come as a shocker that he may actually be working together? >> we have to do the right thing for the nation. >> people want to see a stable government emerge. they have given us this balanced parliament. there is responsibility on all the members of parliament to find a way to go forward and provide a stable government to the country. >> you are always a progressive, a supporter of tony blair and gordon brown. in that sense, obviously you would like labour to be in power. wouldn't like to see this coalition working? >> looking at the arithmetic, it does not look like the liberals will be the scaffolding propping up the new administration. i suspect they might be aghast tsy the foreign policy approach

of whatever administration comes out. i think there is a little bit of time to play out yet. >> are you attracted by this idea of making an appeal to the liberal democrats to go in with alex simon and the others to have a progressive coalition for its immediate electoral reform? >> it would have to be just -- more than just labour and the liberal democrats. i think gordon brown is probably doing the right thing, just letting nick clegg and david cameron see what they can do. if that works, we will take it from there. clearly, if gordon is in a position to do the right thing by the country, he will. >> your coming into a very different house of commons in terms of the expenses reforms, no more owning second homes, all of that. are you worried whether you will be able to afford it? >> i think it is an interesting time that awaits.

the important thing is that we have reform. we can rebuild trust in our public life. that is essential for the new government. >> that is one of the things you had going for you. >> there is a big move across the country for change. people did not want to see labour reelected. they have produced an inconclusive result. it is down to the conservative party to make over reform, as >> there will have to be more discipline on the liberal democrat side. >> i am looking forward to working with my colleagues and the liberal democrats here. we are friends and colleagues. i am not expecting to stop falling out front and center.

>> having had little taste of what politics was like many years ago, and people may think labor government in the past -- have not seen anything yet. if we end up with a coalition with ekui& mp constantly in the building, every vote on a knife edge of the time -- adjusted not think the glue will be very strong but in what) hñ we thougt was progressive liberal democrats. nextktt yes or no, is the deal going to happen? >> i think it probably will. 1b$ñ>> on our website, keep up h all the political gossip. coming up, the good, the bad, and the funny. favorite moments from this year's election. year's election.