growing like a weed so it is a weed. there are questions about what staff had to do to increase revenues so much. pn became 52% of your revenue. the mess was huge. 90% downgrade. even the dumbest thing in the class gets 10% on their exam. it seems the resources were not apply to understanding these products. . . >> it does not seem to me that you built in the capacity to structure your products well. and this is a huge new industry that brought in revenue, but

does not seem to be from a management perspective. and we spent countless hours trying to understand the modeling. if you look at the modeling, data was put in that was incomplete and inadequate. there were a lot of human judgments. is that not a significant management failure to not have built innthe capacity? might you have missed this last had you been on top of this? >> i think that we certainly believe that we were on top of this. we believe the information made available was adequate. there were other parties in the marketplace that have other roles and responsibilities in respect to evaluation of properties and review of mortgage applications.

we are analyst. we can send that information. we believe our role is to look at the information and the data and process that as part of our analytical process, not to replicate or duplicate roles that others in the market -- >> which they did not do. >> it would appear that they did not. >> they did not. mr. buffett, any observations on whether this was a pure modeling mistake or if it was a lack of diligence, you are a big advocate to due diligence. you have an entity that is a do diligence provider in a sense. you can ask a third party, but if you're going to outsource diligence you would be doing due

diligence. should the rating agencies have done due diligence rather than just looking at the revenues? >> looking back, they should have recognized it. like i said, i did not recognize it. as i understand it, they had something in the model that they would not be a correlation to of the country of the same experience. it is true in the past -- this was a nation-wide bubble. the diversification among states did not make that much difference. it happened every place. >> 91-93 we had a decline in drops. there is the big -- old-line that one bad apple can spoil the bunch. half of the apples may have been

rotten. all right, i have asked you 24 right now. let's move on to the vice chairman. thank you very much. >> thank you mr. chairman. mr. buffett, not withstanding the subpoena, i want to thank you for coming. >> i want to thank you for the subpoena. [laughter] >> i wanted you to have a framed copy for your wall. i think it was good cover because you can tell others that you do not want to go to that you have the power to use it. i do not have anything for you to sign. when i was younger, he went monday night football began, don meredith and howard cosell where the team. don meredith he would launch in but a game game"if it's an

it's where candy and nuts, we would all have a merry christmas." i am not interested in going after the epps and buts. -- ifs and buts. i am a very strong supporter and have tried to maintain the argument that behavior has consequences. you can't do it when your ability to track down someone's with something as an incentive or as a negative can influence that behavior. i am very concerned about the amounts of money that were generated in a structure that provided the short-term opportunities and no long-term downside and, apparently, no thanks to avert having done it. there is to a degree an argument

that this is basically somebody 's idea of unfettered capitalism to a very great extent. you have made comments in that regard. how concerned are you that we are able to get this genie back in the bottle to the point that if behavior has consequences that -- i do not see anybody able to put that structure back+ in place. how do you feel? >> it requires a whole new level of thinking. i think you are absolutely right. when you run a huge financial institution whose stability or instability can affect the entire society, i think there should be a tremendous downside. i think that if someone's personal equation for a financial institution that they run the place that they walk

away with $100 million instead of $500 million, and that is a crazy structure. i think boris of directors should not sign on for such a structure. i think the boards themselves should bear a heavy penalty if the institution has to go to the federal government. it would not be as draconian as with the ceo, but i would focus the attention that the mistakes could cause big problems to society. >> thank you. >> i thought i got out of the business. i did not think i was going to be back on this side of the desk asking questions of witnesses again. i said yes to this because of the way this commission has been structured. it is basically my belief that it is pure public service. i thought it was wise of the

congress to structure us, not to look for answers to this ifs and in terms of looking for to what we should do, but our job is to explain the financial crisis can do it as accurately as we are able with the resources that we have. one of the reasons i was pleased to have you in process of us -- i would hope the answers you would give me to your questions is not the ones that virtually everyone else has given because it does not unlike the behavior and the consequences. the answer is somebody else. given your reputation --

cretaceous are only as good as or baldacci -- -- the reputations are only as good as your balance sheet -- you have a good reputation. in your estimation, i do not want to drag us to this business if -- this business of ifs and buts, you are not going to be able to solve the fundamental problems as we examine them with a single bill that has gone through two committees that have the same jurisdiction. you are just not going to hit it. what i would like you to do, and i would like both of you to answer questions in writing because we do not have the end

of time. would you be willing to do that? >> i had a very good session with your staff. i think they did a good job of asking good questions and good follow-up questions. i would hope some of the material would be and that record. >> we are reviewing it to make sure it is. what do you think the house and the senate has gotten mostly right in the legislation that is moving through congress? where are their obvious mrs.? i do not think we need to deal with subtleties now. it may be in the follow-up written questions. >> i have not read the 1500 page bill. >> no one has. that is a denial that is ok. >> i have two thoughts. one is the question of incentives. i think it is very important.

i think no one has any business running a financial institution for the ship. if they are not able to accept that option, i think someone else should. there should be a huge downside for the c e zero and a significant downside for the board. the second thing is excessive leverage. it is very hard to define leverage because some institutions will stand for wine and their assets are all treasury bills. it is not easy to define, but the size of the pop of the bubble was accentuated because of the leverage that exist in the system. those would be two points that i would try to address intelligently. >> thank you.

>> one question on the kind of incentives, upside and downside. you talk about financial institutions. the very structure of credit rating agencies, it does seem in the end that there are lots of upsides and very little downside. i think there is a fine distinction between financial institutions that received federal money and, i might add, credit rating agencies that got us there. wasn't this system is tilted in terms of lots of upside and downside? >> i think most of corporate america is tilted back way. >> i know you are a owner but come on. >> we have seen significant downside. there is no question. the mistakes that were made at moody's and standard and poor's had affected their stocks.

>> i have no right to ask you this, but just as the rating agencies produced what ever a triple a was and then investment banks and others were able to take the leftovers, restructured them, and turn them into more triple a's rated by an agency, you need to speak out more than you have about fundamentals. there are not very many people who can command the respect -- and i know you were busy out there in front of a number of different channels, but you have to do more about this. this may be your real legacy. >> i have spoken out on some things. i do not disagree with you.

perhaps no one spoke out enough in the past year during the bubble. my partner speaks very loudly. i agree with you. >> once congress acts, the ability, as you well know, to act again to move into areas that they were not able to will be virtually impossible. he only tried to clean up the area you knew then to burst. this is not nearly as comprehensiie as it needs to be. it may need to move to torte. i am going to turn my time over to others you may want to quiz you. capitalism has changed in your lifetime. my concern is that it gets better which means responsibility, a moral

obligation -- behavior has consequences. thank you. >> thank you very much, mr. thomas. we will now move to senator graham. >> thank you very much, mr. buffett and mr. mcdaniel said, per your insightful comments. mr. mcdaniel, you said that inc. the research into its rating process. the chart that is about to be -- ced to g >> can we place it where it was before? >> be real time keeps ticking.

>> newborn. >> this chart indicates -- move on. >> this chart indicates securities that were rated by moody's. the blue and the red or the cdo's. the first of the yellow boxes is in october 2006. it was something south of $10 billion issued. when a new peace research service issued a report -- moody's research service issued a report saying that the u.s. housing market downturn is in full swing due to single-family housing production, house

prices are falling at an increesing -- in a increasing number of areas. the word crash is used to describe the situation in areas of the country that represented about half of the outstanding mortgages. how was that information inc. and to the ratings process is of the new peace? >> the analysts and ratings -- moody's. the analyst and a ratings -- it was included in the ratings communications and analysis. they do use multiple sources of information, including

moodyseconomy.com. >> recognizing, the question is al in october 2006, was this incorporated into the ratings process? >> i do not how it -- i do not know how it was used in the rating committees. >> the concern is, immediately after that dire prediction was theed, the c number,eo's -- to $40of ceo's went billion a month in less than 90 days. it does not seem that the announcement of severe problems correlated with the actions that were taken. >> i believe the rating committees would include any information they believed relevant in their deliberations. >> could you, as a follow-up,

give us some more specific information as to what did happen in terms of incorporating this research into the rating process in october of 2006? >> yes. >> can i simplified that? this came from moody's.com. could you do a chronology of what management did specifically? it is pretty dramatic. they used the words that the market and would crash. could you give us a specific time line of to did what went on the top level on down? >> i will do that. i should add that at this time, even with the analysis that moodys.com was producing, their expectations were for more moderate in terms of what was the one to happen in the housing market than what actually

happened. i just want to make sure that there is no misunderstanding of the degree of downturn they were expecting at that time. >> one of my concerns, which is not peculiar to financial industry for rating agencies, but seems to be endemic across our culture, is the avoidance of warning signs until the situation degenerates into a catastrophe, whether it is the failure to see the consequences of new technologies and deep water petroleum extractions, but not changing safety and response capabilities or some of the signs that have led to the financial collapse. the first panel, made up of people who had experience at of why, gave examples

these warning signals were not acted upon. those included the desire to increase market share, the lack of ability to walk away from a deal, the lack of a human- resources to keep pace with the rapid increase in the number of cdo's that were being evaluated, the lack of an attendant research capabilities, the fact that the banks were misleading the agencies and manipulating the process. those were some of the items that were listed. do you concur with that list? are there other items you would add to the list? >> there are some things i would concur with and others i would not. to highlight two i think are important, first of all, we

agree that having a robust, independent research function is important. we've had made changes in both the individuals and independence of the credit policy option over the last three years. >> excuse me, can i ask -- one other issue was the fact that the committees during the ratings seemed to be devoid of people either from the real- estate industry or from the banking industry. therefore, they had little personal capacity to evaluate what was happening in those areas. had you taken some steps to broaden the pool on the rating committees? >> that, again, in the category of lessons learned, greater

cross-disciplinary expertise is important. we have made important strides in accomplishing that. i think we have made very good progress. >> could you give us some animation on that subject -- information on that subject? what was the status of those rating committees during the period of 2005 forward? >> with respect to being able to walk away from the deal, i simply disagree with that. we did not rate hundreds, probably thousands, residential mortgage-backed security charges -- tranches.

they were not such that the issuers and west to have those opinions and we did not rate those. we set out entire market sectors for credit reasons where we had credit concerns. that is because the ratings quality is paramount. we do not always get it right. predicting the future is an uncertain process, but i think that there has been a misunderstanding of our willingness to stay out of markets where our credit opinions or its more conservative or we have credit concerns. >> what about this issue of misleading or manipulative activities by banks? >> certainly, if we are where -- if we are aware of misleading or

manipulative information, we would not pursue within institution that is providing that. >> if the testimony that we have is that the banks would not have disclosed information which was requested and the analyst did not feel that they could push back against the banks to make that eight requirements of their issuing the rating. >> our methodologies are, i believe, clear in terms of the information we need to rrte an estimate. i believe that we pursued that informatton consistent with our methodologies. there may be additional information that may be interesting to review which may or may not have an influence on our thinking on credit, but we certainly would look to have all of the information consistent

with our met a lot -- methodological approach. >> mr. buffett, this is a broader question, but you have an excellent reputation for being the smasher for your firm. you feel that that is a principal responsibility of the ceo. why do you feel that as a society we have missed so many signals across a range of areas? >> rising prices and a discredited sensitivities and judgments of people that are very smart -- you get in much more trouble with a good premise than a bad premise. when you have a sound premise,

initially that makes a lot of sense. after a while, the rising prices of all internet stocks allow people to make billions of dollars over things that are nonsensical. 66 or 67% of the people will want to be in one. it you believe that house prices are going to go up next year, you will stretch to buy one this year. after a while, rising prices became their own rationale. people thought that by one house was a good idea -- by three houses was a good idea. people who lent money said it does not matter if someone is lying about their income because of the house goes up in price we will get our money back anyway. it affects the reasoning power up and down the line. isaac newton participated in the south sea bubble, got out,

and got claimed. he was regarded as generally been pretty bright. we had farmland in the midwest. it was a worse recession for us that the housing recession. there are going to be more people, the rising prices prevented their own destruction. >> it is a narcotics, but do we not expect that regulators, credit rating agencies not partake of the narcotic? is that not their role? >> it is not easy to avoid. >> you do not was your police trading in crack. -- you do not want your police trading in crack. >> with the power of this podium, we had a great internet boom after that. >> that was the nature of our

question of who was responsible. someone must be. >> i want to ask a different question of mr. mcdaniel. during this period of the last five years, how frequently did representatives of various regulators from financial records -- institution regulators to the sec, visit new to talk about's your methodologies and inform themselves to what you're doing? they are the ones you have imposed regulations requiring the use of your rating services. how close supervision are monitoring of activities did they maintained? >> pursuant to the credit rating

agency reform act of 2006 which became effective in september of 2007, there has been multiple inspections and reviews of our rating processes and practices by the securities and exchange commission. prior to that. , the oversight was less intensive because there was not a regulatory framework. >> prior to that legislation, are you saying that they did not think that they have some responsibility to having mandated are given strong incentives to use the rating agencies products as part of the management of regulated activities that -- activities.

>> i cannot speak for the commission, but i believe the regulatory oversight opportunities were more limited prior to legislation passing, said they were not -- so they were not as extensive in their oversight of moody's are the industry. >> thank you very much, senator graham. >> thank you mr. chairman. thank you both for coming here. let me start with you mr. mcdaniel said. you were here this morning for the earlier panel. >> i heard most of the earlier

panel. not all of it. >> i was wondering if you heard anything about your company that was a surprise to you or that you did not know. >> the issues that were raised by some of the individuals that were more critical of the company i have heard before and, in fact, we have investigated those issues previously, including use of and an external law firm. we found the concerns that were raised to be without merit. >> there was this question i thought enhanced what you referred to when you talked about enhanced analytical integrity. i think you were getting at the point that there were pressures, perhaps, on the talent that you had -- the analytical talent -- to produce ratings. is that what you meant by

enhanced analytical integrity? what did you do to prevent that from happening? >> in the context of my prepared remarks with regard to enhanced analytical integrity, i was referring to some of the actions we have taken since 2007 to separate our credit policy function from the line of business ratings analyst to have more cross disciplinary participation in the process, and to create further separation of any person who is involved in commercial activities for the terms. >> let's talk specifically about this one issue. our analyst now permitted to top two issuers -- talk to issuers? >> yes, analyst do speak to

issuers. >> you're not concerned that there are pressures brought to them by people who are more ambitious and forceful? you do not see that as a problem in? >> i am -- you do not see that as a problem? >> i think it is important and should continue. the analyst may have questions about financial information or management strategies. i do think that those communications for purposes of creating predictive credit ratings or useful. >> is there a manager who oversees the analysts and can be available for discussion of these issues? >> there are managers to oversee our analysts, yes.

they would be available. >> let me ask you want final question. what is your view of what caused the financial crisis? >> in terms of direct causes, certainly the weakening of the housing market, the softening of that market, and importantly, the very rapid tightening of credit for mortgage borrowers who needed to refinance. that greatly exacerbated the issue. the sudden tightening of credit produced the kind of large and rapid problem that we saw. >> it is principally a problem of people not being able to finance -- refinance debt costs

failures? >> that was an important contributor. it acted as a catalyst. >> mr. buffett, we have had housing bubbles before. we have had other kinds of asset mobile's before, most recently an oil price asset bubble. this one was quite special. i want to press you a little bit on this because i would like to get your sense of why this one was special. why did it get so large? why did someone with your astute knowledge about the economy and not see that this was an extraordinarily different bubble from one we have had before? >> i wish i could give you a good answer to that. it was really the granddaddy of all bubbles and it affected in an asset class of 22 treen.

it hit every -- 22 trillion. it hit everybody. the figures show that it happened. when it gathers momentum -- the internet bubble went further than i thought it would. we had the farm bubble in nebraska where things went crazy for a while. when your next-door neighbor is making money and very easy by buying a second house with a very small down payment, after a while it's sort of gets to you and you figure that you should be doing it too. there have been a history of bubbles. i never understood like tulips were worth so much.

>> you have had many years to watch our economy. to economists in general, sharply rising prices are a signal that something is particularly good -- is peculiar in the economy. esol the prices rising, but you did not think -- you salt beef prices are rising, but you did not think it was something that could -- butyou saw the prices rising, but you did not think it was something that could go wrong? >> a significant percentage of the publicly traded homebuilder's let it be known that they would like to sell out to berkshire hathaway. looking back, i should have figured out what i did not figure out. >> were they asking more than once? >> it is interesting, i never

heard from them for many decades and all of a sudden some of them showed up on my doorstep. >> you were once an owner of freddie mac. you are familiar with alfred may -- fannie mae and freddie mac operates. do you see their activities as having any role in the growth of this bubble? >> i think they were doing what they were instructed by congress to do to a great degree. they took on weaker forms of mortgages in greater amount -- amounts. that has been covered in the reports. they also bought the required 20% down payment, but then they would buy mortgage insurance from other entities. i look at the profiles of some of those loans. frequently, a significant percentage of the time, more

than 80 percent of the borrower was going to mortgage payments. that is not sustainable. they were still, in effect, helping people to participate in something that would lead to big trouble. >> what did you sell your freddie mac -- why did you sell your freddie mac stock? >> i sold it for a lot of reasons. at one point, it became apparent that they were getting more and more tranched by trying to report increases every quarter. they became quite interested in having that happen. they also bought some bonds that had nothing to do with housing at all. they were using the government's credit to enlarge the size of this hedge-fund type information

-- portfolio. i figure it d.c. one cockroach, there are probably a lot more in the kitchen. >> if you eat -- did you tolu fannie and freddie enough to find out if they had -- follow danny and freddie enough to find out if they had requirements? >> there were predicated on using the tax credits and bald. of course, they have no income now. thus became very dubious assets. >> were you aware that they were buying the type of mortgages that they were buying? >> they were mandated in many other activities by congress, no question about that. there were also tried to serve on wall street. that issa tough balancing act. >> , do i have that? >> four-o'clock 55.

-- 4 minutes and 55 seconds. >> it has recently come to light that you participated actively in that market. >> i said that derivatives -- i think that used improperly as they are certain to be because of what they provide people who trade in them, i think that they pose system-wide problems. >> what do use them for? >> i use them to make money. if i think they are misprized, i'd buy them. >> -- miss priced, i'd buy them -- mispriced, i buy them.

>> you do not hedge that? >> i do not lay them off. we sell insurance. >> this is much like what aig did. >> i do not think it is much like it. we sell credit insurance. >> i have no further questions. thank you, very much. >> can i bring up one. ? it gets back to another point. it you go back to the late 1920's, we had a bubble in stocks that was caused by extreme margins and people who did not know what they were doing. they had commission hearings after that and they decided that this was a societal problem. congress gave the federal serve the authority to regulate margins. the federal reserve still has

that authority, as i understand it, 70 years later. we put in derivatives and swaps, at that point you can borrow 100 percent. i brought this up a half dozen times. i say, what in the world are we doing when you can get a return swap? it is something that should be addressed. >> maybe i misread this, i thought your problem with some of the legislation that is going through had to do with the bag that you did not want to put up the collateral. >> in terms of contracts that were negotiated several years ago, there was one price for collateralized contracts and another part uncollateralized. thousands of companies

negotiated under that basis. if we are required to substitutt an uncollateralized contract and make it a collateralized contract, before we send that money to wall street, we should get paid for the difference between those two types of contracts. just like changing the price or changing the maturity, there is a significant difference in price. hundreds of end-users would be required to send money to wall street firms, contrary to the contract they originally negotiated and contrary to the differential. >> you do not have an objection to doing it in the future? >> not in the least. i object to selling one type of contract. >> thank you very much for joining us. i would like to start with mr.

buffett largely because my mother is watching and she would be very disappointed if i did not acknowledge your seniority. >> h hi mom. >> you charge enough to cover the rest of your undertaking. >> we only take on risk we can handle ourselves. we only have about 250 contracts are so total. if everything goes wrong, we can easily handle it. that was not the case with aig. >> indeed, it was not. let me address a general question about how we might restructure the incentives in the market system to try and avoid these kind of crisis in the future. he said, mr. buffett, you light moody's because it had a pricing power. you testified a little earlier

today that in many ways the incentives -- incentives for rating agencies have become worse during the credit crisis. the new controls put in place by regulators are too weak to significantly alter this dynamic. then, there is a quote that you also have in your testimony that you gave privately to our team, market systems -- taking a small percentage results in a huge amount of money per capita in terms of the people who are working in at and they are not inclined to get it up. whenever i hear the terms of modernization and animation, i reached for my wallet. it is easily what they mean by revenue producing. we have seen a number of things going on in the marketplace. you have also said that everybody should have a lot to lose in this marketplace.

in and the securitization process, we have learned that everybody involved has nothing to lose. the mortgage brokers to originate the mortgage get paid a percentage of the mortgage they originate without regard to the consequences if it succeeds or fails. the bankers to put the deals together or getting a percentage. the lawyers to write the perspective, the auditors to audit the books, and the credit rating agencies to write the3 cash at the conclusion of the sale of these securities. one thought that some people have suggested is that rather than pay all of these market participants in cash, that you might increase the likelihood of diligence being properly done if you paid them in the securities

themselves. if you are getting 10 basis points of the dollar's, and give the -- you know that you will live with that security for a long time. you can't bonus the people that did the job with the same security. if they succeed, they get 7% interest for 10 years. what do you think about that idea? >> i liked it. or, put it in a deferred account. i think the most can be achieved by getting at the big institutions. i was at solomon almost 20 years ago trying to put in a new compensation system. it can be very difficult. i do not retract any of those

earlier remarks. i agree with them. >> it was said that it was a great idea, but they are not core to like it. it seems to me -- i want to go back to what happened at moody's to some extent. 100 years ago, john moody started trading railroad bonds, which you know a lot about. they are relatively simple instruments. now they are raiding complex instruments. maybe i should turn to mr. mcdaniel is on this question. some of the -- some of them are skewed in favor of your property rating. in your pricing, i have learned from our investigation, our nds on residential mortgage-backed

securities, you charged basis points on this and that were rated senior and 3.50 basis points for the tranches that were rated subordinated. it seems you should put less in the supported tranches. it is similar to a difficulty that we discovered in the mortgage-brokerage situation where mortgage brokers were sometimes compensated at twice the percentage rate for generating a mortgage that had a higher interest rates payable to the lender than a traditional mortgage which then incentivize them twice as much to direct borrowers into sub-prime mortgages and -- to otherwise

may have qualified for traditional mortgages. mr. mcdaniel, do you think that is a problem? why did you actually structured the fees payable to new peace in that way that gave you more if you rated -- moody's in that way that gave you more if you rated them higher. >> first of all, they were not aware of the severance in pricing in their deliberations or analytical work or rating committee work. secondly, although i have not had a opportunity to do a comprehensive check, i did go back to look at rnbs applications in 2006 and 2007. the basis point fees were identical. >> our people say that the change in 2007 that led to 3.5%. that is a reduction in pricing

power. 3.5 basis points starting in 2007. >> i was able to look at 2006 and it was identical in 2006, as well. i did not have a chance to do a comprehensive check. >> maybe you could do a comprehensive check and report back to us. you have nine basis points for reading a cdo which is twice as much as she got 4 rating and rmbs. it is unclear to me how that could be. does that incentivize you to do mightdo's because you more than $1 million in fees. is it really that much harder to rate a cdo than it is too great and mbs? >> i can only respond in respect

to the overall approach. yet there is an opportunity to charge fees and that the market will bear, i think we would do that. we have fees that range from very, very modest -- particularly in the municipal bond sector -- tuttis that are more substantial for large corporations -- to duties that are more substantial for large corporations -- to fees that are more substantial for large corporations. >> looking back to this chart that commissioner graham brought in front of you, it strikes me that when you look at this in the face of contradictory information, the actual number of deals and rated in both cdo's

and residential mortgage-backed securities goes up dramatically. even after you have had four or five major downgrades, you are still raking a whole bunch of deals that come forward. i will sort of give you a past to some extent on nobody knew that the market would go down as was basically -- i do notody%- remember what your term was, mr. buffett -- everybody was the leading in this mobile. once you get contradictory information, do you not have a obligation to go forward? it seems to me that there are so few transactions in the marketplace, you're trying to get these deals done so you could mop up the last bit of the gravy before they took the plates away. these deals are not out there

anymore. there are not nine basis points cdo'sn cod's anymore -- anymore. do you have a thought on that? >> as long as securities are being offered to the marketplace, i think we have an obligation to shrike to offer our best opinion on the securities -- i think we have an obligation to offer our best opinion on the securities. what is coming to market, i think we should offer an opini on. we obviously want this opinions to be predicted. we want his opinions to incorporate all information that we think is relevant. i think we should offer the opinion. >> they were not any more predictive, were they? in fact, they led to downgrades just significantly as they did prior to that. is that not correct?

>> if yes, mr. angelides. -- yes, mr. angelides. >> there are two greeks on this committee. mr. buffett, do you fault the management of a new lease -- moody's, or at least that? how is it that they went forward and continued to rate the securities, is essentially, no differently than they had been doing in the face of the bubble? >> i want to put this in perspective. offering an opinion is one thing. offering opinion that they are triple a is quite another. >> i think in 2007, $500 billion were rated triple a. about $100 billion plus is when you began to be the downgrade.

maybe they should not be rated investment grade. >> of course, they were subsequently downgraded. mr. buffett? >> i do not know what took place internally, but from listening to this and what i see on the chart, it looks like they tweaked their model. it is sometimes difficult for people to adjust their opinion that much in a short period of time. >> that is right. too many mixed metaphors here. i guess i would like to ask you, i know you testified in your internal testimony that you thought the government made the right decision in backing up these companies and that the

markets needed reassurance -- reassurance at the time. there are many to believe that that demonstrates the breadth and scope of this crisis. we have had some any other crisis. enron was the seventh largest corporation in an america -- in america. none of them are required trillions of dollars of taxpayers' money to bolster the private sector, and yet you still it was necessary at the time. could you elucidate? >> in december 2008, our financial system basically came to a halt. you had 30 million americans with their money in money-market funds comprising three and a half a trillion. in the first three days of that week, 170 billion cleared out. that was all institutional.

individuals had not caught on yet. when 30 million people began to worry about where their money market funds are going to be, when you have paper stopped in terms of issuance, -- we sell a treasury bill for $5,000,090. at that point, your mattress was not even good enough. >> we are not proposing remedies

. .

>> mr. megna daniel, i have a question for you about the events of the crisis. and when you look back at the financial crisis, i wonder if it the legislative requirement -- that if the legislative and format that as investors to invest only in rated securities, it that had not existed, how would your business be different? which to compete on different terms and what you have had to reward people differently?

>> 2 i do not know exactly how the business if it were different or lesser regulatory uses of the ratings. nonetheless, i am supportive of a reduction of use of ratings and regulations. i think that the use of rating and regulation offers rating agencies of basis for competing other than on the quality of their ratings. they creep on the effect, the certification that they have -- they compete on the effect, the certification that they have. and i think rating agencies should prosper or not based on whether market participants about you the ratings and value the rating opinion and to research the company has. >> 2 with that mind -- with that

in mind, we had some in the panel that suggested they could not determine that there was a connection between their ability to get the ratings right and their actual recognition within the firm. do you think that that is true? >> we tried to reward people in terms of their position in the firm and there consultation based on vague -- there compensation based on the quality of the word. it could take a long time to a evaluate the performance of securities. but their research, their preparedness, the robustness of their reasoning are things that can be judged and we very much try to do that. >> it was not outcome oriented. >> that is able to be measured

at a broad level statistically to a strong outcome. it is more difficult to judge an individual's performance especially in the short run on a limited number of credits. it is easier to measure them at the broad level than the narrow level. >> 90. mr. buffett, with the investing world be in a better place if everyone had to do their own due diligence? >> for some, but there are those that are not equipped. they probably need to rely on some kind of standards to make sure that people don't vote totally hot wild in terms of how they invest in funds which belong to their policyholders.

and then we do not use ratings. what we're really hope for insecurities, that would give us a chance to earn a profit if we disagree on how the agencies raided them. there is one ironic point that i should mention. if there were 10 rating agencies, all would be well regarded, and we could have any one of them, that would compete either on cracks -- price or laxity or both. they would be out there trying to get our business and they might also try by laxity. you could argue that there is one rating agency, and they would not need to compete on either price or a black city. independence and relief come with strength in business. -if you had a situation where there was a lot of competition,

i am not sure that rating agencies would be independent as they are. >> i would hate to differ with you on that. if you look at equity research, there are a number of batik shops specifically known for the quality of their research and they do not a engage in banking activity. they do not have that -- -- as much at stake in the origination process. so i guess my question is, if you change the way that people get paid, do you end up getting different outcomes? that is the nature of where i was headed. i had another question for you, mr. buffett, you've been a largely hands-off investor but i was curious about the due diligence process in your investment in goldman sachs.

if you talk about your conversation with management there? >> 2 that decision was made in september 2008. we were approached by every firm, at least every firm that went under, about putting money in. when goldman sachs was willing to take my on terms i found satisfactory, which had not even been the case the week before, i came to the conclusion that unless the american financial system totally fell apart, that it was going to be a sound investment. i had far more confidence in their risk management that i had with some of the other wall street firms that were coming to me earlier. if the system had fallen apart, at the federal reserve had not acted, in terms of commercial paper and the money market funds and all, everyone would have been toast, i think, basically.

but my basic conclusion was that the american government knew what was necessary to get the engine started again. and that that was the case, goldman sachs was in fine shape. >> but they did change the terms under which they were willing to except your investment as time went on. >> they would not have paid as remotely what they did at april 1 -- i cannot remember the was september 21 or 23rd. at that point, but not only wanted to shore up confidence. and the world was not going to come back and and financially, because i thought the federal government would have to act. it was so what is that they had to. and i thought that our $5

million would not be injured at all and the terms were attractive. i made the decision that that was good use for the money. >> bank. >> mr. holtz-eakin. >> mr. mcdaniel, you're talking about the inherent conflict of providing ratings to the market and running the company for profit. however affected the outcome of your rating process. how do you manage that conflict? what do you put in place to keep that under control? >> from my office, i think it is important to emphasize and reemphasize the fact that we are trying to create long-term show rover value. and i think the way to do that

is to have credit ratings that are of high quality and predictive overtime. that is why it was sought and the mortgage related securities sector, there were so damaging to the firm, and in addition to consequences for the larger economy and to households in america. beyond that, we had structural components of the firm that are designed to insulate and to protect the analytical process from the financial and commercial interests of the company. again, including independent policy function, and we also recently created a separate commercial organization in the firm that is separate and apart from either credit policy for

the rating analysts business. >> those are recent changes? >> the policy function has existed for many years but we have enhanced it into independence. and the commercial group is a more recent introduction. pe also have formally separated the rating agency from our other non-credit rating businesses. those kinds of actions, i think, aren't useful and important, not only for our own process to be able to turn around and demonstrate that they are being handled in the right manner. >> quality ratings ended up being the key. you want to make them as good as possible. >> absolutely.

>> i am interested in the situation that occurred in 2007 were u.s. residential mortgage- backed securities market for downgrade. and you are rating cdos, going ahead and reading them aaa. -- going ahead and breaking them aaa. -- rating them aaa. >> we thought that all the information that we had was relevant to the rating process. but the housing downturn, its magnitude, and how widely it was going to affect home prices nationwide. so as a result, even though we felt we were including relevant

information, and we thought we were using the best information that we had available in the rating process, it proved to be insufficient. >> you could not wait until you found out more from your rmbs side? or was the short-term pressure to great? >> the opinions were available to the team's as they developed. we were trying to incorporate their changing points of view as we were looking at other securities related to the mortgage sector. >> in the benefit of hindsight, there seems to be a rush to get this stuff done. it strikes me as central to your role, and you have a chief risk officer.

and knowing the way in which these ratings were done, waiting get more information -- we heard from a panel earlier today about the capital underlying cdos, but the study was not done, and the pressure from outside the organization to manage the market, all of which was striking testimony to a real effort to moving toward short- term gain at the expense of what turned out to be the reputation and the long run value. >> the housing bubbles and the collateral consequences from the housing problem, if we had thought they were going to be what they in fact turned out to be, we wouldn't have had very different opinions on the securities. with just under estimated and dramatically underestimated the significance of the downturn. >> mr. buffett, you said you

are interested in a long-term value and not short-term profit three were you aware of the problems of the housing-related structure ratings? >> not sufficiently geared to my knowledge, i don't think i ever bought a cdo or residential mortgage-backed security. we bought one recently that we thought was perspective. i spent a lot of time -- more interested in straight equities. >> were you satisfied with their risk measure and do due diligence on all the agencies -- all the products they provided ratings on? >> i know their business model is extraordinary.

they have the ability to price. >> i want to come back to that. isn't that at odds about being confident with their long term values and not know that they do due diligence? >> along one value was in their position, that arose naturally over a long period of time. i am in no position to judge thousands of ratings. they've got us are not below standard & poor. -- they have got us and not before -- a notch below standards and for. they spend time with me and the key managers, but three hours every year, and any questions they ask me, i give them the answer. i give them my thoughts about the future.

they have been diligent in terms of what i have seen at the berkshire hathaway level. they also have significant pricing level. i think they should be doing at a lower level. but that is another question >> what is the source of the pricing power? >> securities, people expect to have a standard and poor's and moody's rating. it is required. it's like an sec filing. you're not going to come to market without it. if they tripled their fees, i would pay it. there are certain things that are required as far as securities. and in this country, an

important part is to have a standard and poor's and moody's rating attached to them. >> has movies ever lobbied congress to enshrine in statute of offer ratings? >> note, just the opposite. we are repeatedly going back at least 15 years about the risks of including ratings and regulations and offering up support for the support -- the zero -- the elimination of the use of ratings and regulation. >> they are required our regulations. but if they were not, we still would have to have them. they would be different in years from now or 20 years from now.

all that sort of thing, we would not be able to issue a bond without a rating. >> from the long-term value perspective, the internal controls were not of great concern to you. >> i yield the gentleman an additional two minutes. >> i am not in the position to evaluate the internal workings. no, we on a specific -- a significant position in procto and gamble. -- and procter and gamble. i do not know how they make tied. over time, johnson and johnson will do fine. i think generally speaking, i think they will continue to do a

good job. >> i'm going to take a minute to probe this. don't you believe that shareholders have a threshold responsibility for the proper context? and let me add to this -- predict the housing prices. there's now a whole set of information here -- sec reports and testimony of not just to repeople of the culture of moody's that may jeopardize the rating qualities, information that there were in adequate sources, and adequate pay, which may be good for the bottom line revenue that the pay was not sufficient to attract and retain that type of quality people that you have. there is a meeting talking about this that as the markets are talking -- coming apart, a big employers meeting, talking

about getting back on track, and the manager finally stands up and says about it after 30 minutes, one of our attendees from the corporate sector, or you point to talk about how we're going to salvage our reputation? don't you think a shareholder owning 20% others have made threshold responsibility in regard to these types of operations? that is number one. and knowing what you know today, are these matters of great concern to as a shareholder? >> aside from the real estate bubble, i do not have a record where they have been further off in their ratings than i would expect them as normal human beings to be.

>> it talks about threshold issues like adequacy of resources, affecting rating. if we cannot count on our corporate shareholders, who can we count on? >> tape johnson and johnson. there's been a lot of material about a situation. am i an going to investigate that? i think they are going to do a fine job over time. do i think they are region returns are things, if you see a cockroach, if they have a problem at one live, i don't think about that. we have to wonder and 60,000 employees and somebody is going to be doing something wrong. i wish i knew who was. i don't think it is been a systemic failure.

>> have you looked at the sec public reports? >> no, i have not. >> mr. mcdaniel, much can be said about the tone at the top. can you just tell me what outcomes and results you value most from your company? >> similar to our markets and made a few minutes ago, obviously i want to have a very successful business. and i believe the way to have a successful businesses to have high-quality products and services, in this case, ratings and related research. it does nothing for our business to focus on the short run and cut corners. and as i said, that is why it is

so deeply disappointing to of had the experience that we've had in the mortgage related securities areas. >> part the product and service, what one value would you buy a the most part mark >> it relates to the long-term value of the firm. first of all, i think that it is. and we have adjusted our compensation program over time in order to try and high-quality products and service with compensation. our senior management team, the top senior most individuals in

our firm, now have as part of their compensation program three-year performance share plans. and for everyone involved in moody's investment and rating agency, there's a 50% of that plan based on the statistical performance of our rating over that three-year period. this was introduced at the end of last year. >> this is after the crash. >> it is really an experiment. we will have to see how it works. the ability to measure ratings over multi-year period is something that we can do and we think that it is going to provide good alignment for our senior management. >> keeping with the idea of town at the top, in your communications with the rank and file of moody's, it is clear

that quality tromps market share. >> i have to be concerned with all different aspects of managing a successful business. before more junior employees, their compensation, our analysts and support analyst, their compensation is in no way tied to the number of securities they rate or the number of companies that follow. >> for the share that they gain in the market. >> or that they lose in the market. >> so what were the real goals that they had when they were working at moody's? >> i care about market coverage as much as i care about market share, if it is produced on an

unpaid basis. i still want to have market covered. i also appeared the front -- deeply about ratings quality. part of my job is to balance those interests properly and to communicate that balance in interest throughout the firm in a way that individuals understand that the long-term success of this company has to start with product and service quality. we need quality and research quality. >> mr. buffett, much has been said about regulatory or supervisory value throughout this. the sec failed, you named the regulator that was involved, and a number of them. other than over-the-counter derivatives, can you think of a major area of of regulatory oversight that dictates major changes in our system?

>> i would say that going beyond the derivatives, addressing the problems of disguised leverage, and winding leverage, which is really tough, doing it with ratios is not the answer. not the sole answer. leverage is what gets people into trouble. we were in berkshire that way. when people stretch and that it rewards for it, they are inclined to stretch more. you had an earlier panel about the objective of return on equity, well, of course it does different things. the easiest way to jack up an equity is leverage. addressing it wisely is better.

but i think that is the most important thing in the regulatory world. >> are you surprised that post- enron we could have off-balance sheet financing that would of been perhaps at the core of this collapse? >> i don't know that it is necessarily at the core but i was certainly prop -- certainly surprised which is just another way to jack up leverage, i was surprised. there certainly were no flashing signs that they had a bunch of leverage off balance sheets. i think there are coined to be fighting the human tendency to borrow more money than you should.

it is just such as human tendency that you need something to counterbalance that. >> thank you very much. >> before we go to miss born, and we've made available to us the evaluation of your cdo? do you to an annual evaluation >> i provide one to the board that they discuss among themselves. >> can we get access to that? >> certainly. >> 2 and reviewing systemic bait grounds that might have been done, have you done comprehensive reviews in the wake of all of this? >> will down on number of reviews. if there is anything that we have not provided, we will

instruct our people to do so. >> and the company did a review of the retaliation allegations. can that be made available to us? >> i am not sure. i am not sure that there's a report on that. >> i think that there is. could you please check it out? >> i will check it out. >> all like to place on the record the fact that the commission examined the assertion that was made which would lead to be accurate that there were various rates charged for different charges t --ran --

for different tranches. >> i did not have time for comprehensive check of that. >> and neither did we but we're going to get to the bottom of it. >> make you both very much for appearing before. mr. buffett, i'm going to take advantage of your being here by asking you about your derivatives and your views of them. as mr. wallison has said, your 2002 berkshire hathaway shareholders letter referred to derivatives, and this is what i think about all as "financial weapons of mass destruction carrying dangers that are potentially lethal." you also presently said that

they are "time bob'mbs." more recently in your 2008 shareholder letter you said that bear stearns collapse demonstrated that time bob of counterparty risk he met earlier described. and i would ask bettis two shareholder letters be placed in the record. >> they will be. >> i'll like for you to describe your view of the role that derivatives have played in the current financial crisis. >> the leverage in the system, the huge dependency on counterparties and one of the beauties of the stock exchange is that you now have a three day clearing system because people

realize that if you have a contract and six months later it saddles, but face to happen. the kuwait stock exchange data and trouble because they had delayed arrangement. some have unbelievably long settlement period. i could of hired the 50's smart as ph stays out of the mit to prepare some type of report that would tell me the risk i was very and i what am not gotten any answer. it was impossible to fit your mind around that. i had ninth counterparties and i could not print out the names of some of them. there is such integrity of our balance sheet, and it was dependent on all these people behaving, strong ought to almost 100 years. i could not design a system that

would enable me to know what the hell was going on. if that was my problem, 23,000 of them, i had passed away -- i heard about vastly greater numbers at bear stearns and women. i don't think it is a good day for the system, particularly if there are not a lot, society gets disrupted and a major way. >> following up on that notion, i think you stated in 2008 that the federal reserve rescue of bear stearns because the counterparty risk posed by its enormous position in derivatives would have created "a financial chain of unpredictable magnitude." is that correct? >> that is correct. in layman, we saw an example of that. i am not saying -- but when

lehman failed, and instant -- an institution with all those deals, at the end, the debt of $140 billion is selling for $30 billion in the market, so $110 billion that should not disappear overnight. >> and with respect to the other large derivatives dealers, aig and the large investment banks and bank holding companies that needed park money, -- tarp money, you think that played a role as well? >> 2 i don't think aig's should help them in the first place. i think there was $300 billion

of derivatives designed for something called regulatory our version large -- regulatory arbitrage, which was a way of transferring over. you get enough of that sort of thing going on in the financial system, you have a problem. >> despite the problems that you and the other people at berkshire hathaway experienced, what is your view of the ability of these enormous derivative dealers to successfully manage their companies and light of their enormous positions? for example, they hold millions of contracts. at year-end 2009, once said that j.p. morgan's position was $78.6

trillion in notional amount. can such an enormous complex parts of your business be successfully managed by human beings? >> i think they are dangerous and i could not manage it. it is hard for me to imagine a system or regulatory system that can supervise something like that. one of the ironies is that there were only four big auditing firms in the united states. i will guarantee you a few things -- two big firms audited by the same auditor, you will find different prices. it is mind-boggling. we lost $400 million in a very benign period with no pressure

iran. maybe that is why lehman brothers also much money. >> 2 you also pointed out that in your most recent shareholder letter, the 20081 that i am referring to, and bought the 20091, that it is almost impossible for an investor looking at the financial statement of these big derivatives dealers to really know what their financial situation is. >> and if you had 1000 pages of disclosure, it would be impossible. i try to tell the shareholders basically the positions are. i think i can do that. there are only a couple of classes of them and i can describe them. anybody that knows accounting and understand what i'm talking about. but i do not know how to

describe 1 million derivative contracts. >> you are a very sophisticated and fester, and i assume in going into derivatives contracts, you carefully examined what the and that it risks are, but the leverage is. i am concerned that so many municipalities and other large institutional investors that may not have your sophistication have gone into these contracts. i am concerned that the embedded risks and the leverage are not fully understood. >> i am sure you're right, like jefferson county and alabama. i go back -- imagine bamboozling the ceo of bmg.

i don't even know why those contras are out there. i think made time, the people buying them do not know what they're doing. >> there's been enormous growth in this market. the bank for international settlements said that the market amounted to more than $614 trillion at the eed of last year. there is enormous innovation that has been going on, financial innovation, there is enormous complexity in these contracts. i understand that they are very useful for hedging purposes, and i think that as a perfectly legitimate purpose. i think you need some speculators in order to allow hedgers to effectively enter into positions.

i am concerned about the enormous growth of purely speculative transactions in the market, and i wonder what your view is as to the economic benefits to our society from that speculation. >> i wrote a letter to congress on the s&p index future. overwhelmingly i would distinguish between the killing and gambling. gambling is creating a risk or no risk need be created. speculation, and you're speculating what surprises will be. that is a risk that the system has to make. but when you start wagering on stock-index futures, gambling

instincts are very strong in humans. people what 1,000 miles to a bunch of sand and would travel on planes and go to mathematically on intelligence activities. this contrasts are made on the big scale, and they're very easy and you don't have to break >> you don't have to put down any money. >> and the more complex, generally speaking, the more profit is for the originator. you can take that as a given. they became known as plain vanilla contract because there was not any money in that. you get more exotic instruments

and that is where the money was. >> i'll ask that the 1982 letter from mr. buffett be placed in the record. >> is the to rivet markets still a time bomb -- is the derivatives market still time bomb? >> i believe so. >> i appreciate that testimony because what you said about derivatives was that you need to manage our balance sheet. that is an unusual statement in the context of these characters we've heard again and again that whether it be citigroup or fannie mae, they did not manage the balance sheet.

they got over well with something so large that they could not manage it. something that large could not have emerged. it is important to come back to that and it is important in the light of this hearing, because part of this question is, what was the management of the balance sheets of these rating agencies? was due diligence done in pricing for the risk of work collided with the most important thing going on in the economy, or was it looking at the ability to manage volume and take advantage of for the prices are? thank you. >> i would yield commissioner wallison the remainder of the time. i like the more dramatic way that i said it.

>> it's a man and which is an empty offer. but one of the issues that the central to the hearing is whether the problems at moody's, and we agree that there were some problems, are systemii in the sense that they extend across the board throughout moody's. or are simply you need to the housing mortgage area. -- unique to the housing mortgage area. mr. mcdaniel, what i would like you to do is to assemble as much information as you can on the other kind of non-housing back securities that moody's has rated, and give us a sense of the number of downgrades or even upgrades that occur in those

securitizations. that way we can compare the way moody's operates as a general rule against what happened in a very unusual housing area, which as you pointed out, has shocked everyone, including the estimable mr. buffett. what we want to do is see that data and get it together and furnish it to us, that would be very helpful. >> i would be happy to do that. >> i am struck with the fact that with respect to the credit rating agencies, practices, and models, it seems to me that the question is not so much why did the system fail, but why at lasted that long. and i want to ask you to take what risk you say from the

current credit rating bottles? are there current risks from the model, essentially unchanged from where it was? >> the huge question if you are running a rating agency now is how would i would rate states and major menace of paladin's. -- major municipalities. if you are looking now it's something -- a look back later on and say these ratings were crazy, that would be the area. it's by mobile -- bimodal. it's a bet on how the federal government would act overtime. >> while the discipline is

still there? >> i don't think moody's or standard and poor's war i have come up with anything terribly insightful about the state of the municipal bonds is set that there will be a terrible problem, and then -- >> is the model one that still presents risks? >>all the associated issues did you have raised with respect to moody's. >> they're still utility and the rating agencies. i think that there is utility in the model. >> i want to end on a high note

for it if we're looking at the states and municipalities, which then makes the states and municipalities aaa, there are a lot of people out there wondering who watches over the water and terms of other federal government being able to do that. they had been doing that for some time now. there is some concern about that as well. i like to go back to what we talk about and the beginning, behavior should have consequences. that should apply to people, institutions, and government. >> we're going to take a break, members. until 2:30 p.m. and we will convene in this room. thank you, mr. buffett and mr. dannels. [captioning performed by national captioning institute] [captioning performed by national captioning institute] [captions copyright national

cable satellite corp. 2010] >> president obama to date challenged his republican critics in a speech. referring directly at one point to the upcoming november elections. the president's remarks focused on education, energy, job creation, and other issues. from carnegie-mellon, this is about 45 minutes. >> ladies and gentlemen, the president of the united states. >> thank you. thank you very much. thank you, everybody. please have a seat. thank you very much. let me began by thanking dr.

jared cohon and the entire carnegieemellon community for welcoming you once again -- welcoming me once again, and for the terrific work that he and the administration, faculty, and staff do here every day. i also want to in knowledge your outstanding mayor, who doesn't look any older the last time i saw him. there he is. it is great to be back at carnegie mellon, and in the beautiful city of pittsburgh. i love visiting a good sports town. last year i stole dan rooney to serve as my ambassador to ireland. [laughter] to make it up, i invited both the steelers and the penguins to the white house to celebrate their championships. [applause]

seeing how the blackhawks are headed to philly tonight with a 2-0 lead in the stanley cup final, i am just glad that we're on this side of the state. [laughter] i noticed a couple of people said they were rooting for the blackhawks which tell me something about the rivalry between pittsburgh and philly. we meet here at an incredibly difficult time for america. among other times, is a time when the worst environmental disaster of its kind in our nation's history is threatening the gulf coast and the people who live there. right now, stopping this oil spill and containing its damage is necessarily the top priority not just of my administration, but i think of the entire country. and we are waging this battle every minute of every day. but at the same time, we are continuing our efforts to

recover and rebuild from an economic disaster that has touched the lives of nearly every american. that is what i want to talk about today -- the state of our economy, the future we must seize, and the path we chose to get there. it has now been all over 16 months since i took office amid one of the worst economic storms in our history. and to navigate that storm, my administration was forced to take some dramatic and unpopular steps. the steps have succeeded in breaking the freefall. we are again moving in the right direction. an economy that was shrinking at an alarming rate when i became president has now been growing for three consecutive quarters. after losing an average of 750,000 jobs a month during the winter of last year, we and now

added jobs for five of the last six months, and we expect to see strong job growth in friday report. the taxpayer money it cost to shore up the financial sector and the auto industry, that is being repaid. and both gm and chrysler are adding shifts and operating at a profit. so the fight -- so despite temporary setbacks, uncertain world events, and the resulting ups and downs of the market, this economy is getting stronger by the day. now that does not mean that this recession is by any means over for those millions of americans who are still looking for a job or a way to pay the bills. not by a long shot. the devastation created by the deepest downturn since the great depression has hit people and communities across our country very hard. and it is not going to be a real recovery until people can feel it in their own lives. in the immediate future, this

means doing whatever is necessary to keep the recovery going and to spur job growth. but in the long term, it means recognizing that for a lot of middle-class families -- for entire communities, in some cases -- a sense of economic security has been missing since long before the recession began. over the last decade, these families saw their income decline. this all the cost of things like health care and college tuition reach record highs. they lived through a so-called economic expansion that generated slower crop growth than at any prior expansion since world war ii. some people have called the last 10 years the lost decade. so the anxiety that is out there today is not new. the recession has certainly made it worse, but that feeling of

not being in control of your own economic future, that sense that the american dream might slowly be slipping away, that has been around for some time now. and for better or for worse, our generation of americans has been buffeted by tremendous forces of economic change. long gone are the days when a high school diploma could guarantee a job of a local factory, not when so many of those factories had moved overseas. pittsburgh, a city that was once defined by the steel industry, knows this better than just about anybody. and today, the ability of jobs and entire industries to relocate where there is skilled workers and an internet connection has forced america to compete like never before. from china to india to europe, other nations have already realized this. they are putting a greater

emphasis on math and science and demanding more from their students. some countries are building high-speed railroads and expanding broadband access. they are making serious investments in technology and clean energy because they want to win the competition for those jobs. so we cannot afford to stand pat while the world races by. united states of america did not become the most prosperous nation on earth by sheer luck or happenstance. we got here because each time a generation of americans has faced a changing world, we have changed with it. we are not feared our future -- we have shaped it. america does not stand still -- we move forward. and that is why i have said that as we emerge from this recession, we cannot afford to return to the pre-crisis status quo.

we cannot go back to an economy that was too dependent on bubbles and debt and financial speculation. we cannot accept economic growth that leaves the middle class owing more and making less. we have to build a new and stronger foundation for growth and prosperity, and that is exactly what we have been doing for the last 16 months. .

the that is why we need to open the market. we need to double our exports of next five years.

we need to make sure that our competitors play fair and our agreements are in foresenforced. some of you may have noticed that we have been doing without much help from the other side's. they have said no to tax credits for small businesses, and note to investment in clean energy, and note to protecting patients from insurance companies and consumers from big banks. before i was inaugurated, they had a calculation that if i failed, they would win.

when i went to meet with them about the need for a recovery act, the announced they were against it before i even riots at the meeting. before we even had a health care bill, a republican said that if we can stop obama on this, that will break him. those were not very helpful signs. to be fair, a good deal of the opposition's agenda is rooted in their sincere and fundamental belief about the role of government. the belief that government has little or no role to play in helping our nation to meet its challenges. this offers a key answers, more tax breaks for the wealthy and less rules for corporations. the last administration called

this recycle the idea the ownership society. what it means is that everyone is on their own, no matter how hard you work, a paycheck is not enough to pay for college or health care. you are on your arm. if misfortune causes you to lose your job, you are on your own. if you are an oil company or an insurance company, you can play by your own rules. there are different consequences for everyone else. i have never believed that government has all of the answers. government should not replace businesses as the engine of growth and job creation. government cannot instill good

values or a sense of responsibility in children. that is the parents' job. it too much government can deprive us of choice and burdened us with a debt. minder stand the arguments of. that is reflected in my politics. -- i understand the arguments. the when yowe passed reform that maintains private health insurance. i also understand that for out our nation's history we have balanced the threat of overreaching government against the dangers of an unfettered market. -- i understand that throughout

our nation's history we have balanced the threat. we might need some help getting back at our feet. there are times not government is able to do what individuals cannot do and corporations would not do. we have road, highways, police forces, public schools. that is how we have made possible scientific research that has led to scientific breakthroughs like the vaccine for hepatitis. that is how we have social security and minimum-wage and also protection of the food we eat and the water we drink and the air we breathe. that is how we have rules to make sure that mines are safe and oil companies pay for this bill is that they cause. there have always been those that have said no to such

protections and investments. there were accusations that social security would lead to socialism and medicare was a government takeover. there were banks that said creating the fdic would destroy the industry. of they said that forcin!!thered that forcing automobile companies to install seat belts was unnecessary. that clean water and air would bankrupt the economy. all of these claims were false. all of these reforms will lead to greater security and prosperity for our people and our economy. what was true then it is true today. november approaches and leaders of the of the party will

campaign fiercely on the same arguments that they have been making for decades. fortunately, we don't have to look back too far to see how their agenda turns out. much of the last 10 years, we have tried it their way. they gave tax cuts to millionaires that did not need it. they put industry insiders in charge of industry oversight. they shortchanged investments in education, research, technology. despite all of their current moralize in about the need to curb spending, this is the same crowd that took the surplus that president clinton left them and turned it into a deficit. we know where those ideas lead us. we have a choice as a nation. we can return to the failed economic policies of the past or

we can keep building a stronger future. we can go backwards or we can keep moving forward. i don't know about you, but i want to move forward. i think that america would like the same thing. the first step in building a new foundation that allows us to move forward is to address the risks that has made our economy less competitive. outdated regulations, crushing health care costs, and a growing debt. we cannot compete as a nation if the irresponsibility of a few people on wall street can bring our entire economy to its knees. that is why we are on the verge of passing the most sweeping financial reforms since the great depression to help prevent another aig. this will help to end bank

bailouts. this contains the strongest consumer protections in history that will empower americans with clear, concise information they need for for signing up for a credit card or taking out a mortgage. financial reform will not guard against every instance of greed and irresponsibility on wall street but it will enshrine a new principle in our financial system. instead of competing to see who can come up with the most clever scheme to make a quick dollar, financial restitutions will compete to see who can make a better product and service and that benefits wall street and main street. that is why we need to get this legislation done and cannot afford to go back. we have to move forward. we also know that we cannot

compete in a global economy if our citizens are forced to spend more and more of their income on medical bills. that is why businesses are forced to choose between hiring new people for getting health care. that is why we finally passed health insurance reform. let's be clear, the costs will not come down overnight simply because legislation passed. in an ever-changing industry, we will continuously need to have more cost-cutting measures. once this reform is in full effect, middle-class families will pay less for their health care and the worst practices of the insurance industry will end. people with pre-existing that conditions will no longer be excluded from coverage. people who become seriously ill will no longer be thrown off of

their coverage for reasons that are not clear from the insurance industry. the new businesses will get help with their health care costs. small businesses are already learning that they are eligible for tax credits to cover their workers this year. with less waste and greater efficiency, this will do more to bring down the deficit than any steps we have taken in more than a decade. the other party stakes their claim on repealing these reforms instead of making them work. they want to go back. we need to move forward. we want to make health care more cost-efficient and we cannot be

competitive if we remain dragged down by our growing debt. by the time i took office, we had a one-year deficit of over one trillion deficit and projected deficits of a trillion dollars over the next decade. most of this was the result of not paying for tax cut skewed to the wealthy and a prescription drug program that was not paid for. i always find it interesting that the same people who participated in these decisions are the ones that charged us with fiscal irresponsibility. the truth is that if i had taken office in ordinary times, i would have liked nothing more than bringing down the deficit that they created but we took office amid a crisis. the effect of the recession put a three trillion dollars hole in

our budget before we even rocket through the door. -- walked through the door. we had an additional trillion dollars added. if we had spiraled into a depression, our deficit and debt levels would be much worse. the economy is still fragile so we cannot put on the brakes too quickly. we have to do what it takes to make sure that we have a recovery that a strong. improving the economy will help our fiscal situation as well as the steps to get people back to work. that is why i signed a bill to give tax cuts to businesses that hire unemployed workers. also we would like to give small businesses the credit they need to create jobs. it is critical that we extend

unemployment trends for several more months so that americans get the support they need to see -- to provide for their families. we have to work with state and local governments to make sure they have the resources to prevent layoffs of hundreds of thousands of public school teachers across the country in the coming months. as we look ahead, we cannot lose sight of the need to get our fiscal house in order. and maintaining economic growth this number one. health-care reform is number 2. the third component are the belt-tightening steps to reduce our deficit by a trillion dollars. in 2011, we will enact a three- year freeze on all discretionary spending outside of national security. this was never enacted in the

last administration. we will allow the tax cuts for the wealthiest americans to expire. we have identified more than 120 programs for elimination. we have restored a simple rule called pay as you go. we will charge the largest wall street firms 8 p to repaid the american people for rescuing them -- firms a fee to repaid the american people for rescuing them. by the way, the $90 billion represents about 1/8 the amount that they will pay out in bonuses over the same amount of time. finally, the fourth component in improving our fiscal health is the part partisan fiscal commission that i have

established which will provide a specific step of solutions by the fall to deal with our long- term deficits. this will not be easy. i know that some might to make the argument that if we would just eliminate pork-barrel projects and foreign aid, we can eliminate our deficit. it turns out such as spending makes up just 3% of our budget. if you combine all foreign-aid and earmarks, that this is 3%. we have tough twist to make about the the other 97%. i strongly agree with my friends in the other party. what i don't agree with is that we should sacrifice critical

investment in our future. if you are a family who is tightening your belt, you will definitely sacrifice going out to dinner. he will not sacrifice saving for your child's college education. it is precisely our investment in education that will make americans more competitive. [applause] the countries that out to educate us today will out compete us tomorrow. the day that you were born through whatever career you make. last year, we have improvements based on a simple idea.

we will only invest in reform. reform the racist didn't achievement and inspires students to excel in math and science. to achieve my goal of ensuring that america wants more has the highest proportion of graduates in the world, we passed a law that would make college more affordable. it will save billions of dollars that would go straight to students. [applause] this will also revitalized our community college.

we will have research common infrastructure that will secure our economic future. the security act that puts us to work helps. we have to make the investments such as high-speed internet access. the first row rose for the eye with station, this has always been built to compete. we are investing in new infrastructure and expanding broadband, health information technology, the first high-speed rail network. we are investing in the idea that college will need to lou --

new jobs. the tax credits and loan guarantees of the recovery act alone will leave seven of the 20,000 -- will lead to 720,000 jobs. [applause] the west used to make less than 2% of the world's advanced batteries for hybrid cars. by 2015, most of the investments we made will be up to 40% of these batteries. this brings me to an issue that is on everyone's minds, namely what kind of energy will ensure our prosperity. the catastrophe in the gulf is

possibly the result of human error or a corporation taking dangerous short cuts or a combination of both. i have launched a commission so that the american people have answers on exactly what happened. we have to acknowledge there are inherent risks to drilling in the earth. [applause] the these are risks that are bound to increase the harder extraction becomes. we have to acknowledge that america runs solely on fossil fuel but this is not the vision that we have for our children and our grandchildren. [applause]

we consume more than 20% of the world's oil and have less than [inaudible] of the oil reserves. we will continue to send billions of dollars of our money to other countries every month including countries in dangerous and unstable regions. in other words, our continued dependence will jeopardize national security, smother our planet, continue to put our economy and environment at risk. i understand that we cannot and our dependence on fossil fuels overnight. i an-- i and a stand that we cannounderstand that we cannot

our dependence overnight. the time has come that we accelerate the transition. the time has come once and for all for this nation to fully embrace a clean energy future. [applause] that means continuing our efforts to take everything from our homes and businesses, cars and trucks, to become more efficient. this means tapping into our reserves and moving toward the planet expanding our nuclear power plants. this means rolling back tax breaks to oil companies so that

we can prioritize investment in clean energy research and development. the only way to transition to clean energy is if the private sector is fully invested in this future. capital comes off of the sidelines, the ingenuity is unleashed. the only way to do that is by finally putting a price for carbon pollution. many businesses have already embraced this idea because it provides a level of certainty about the future. we can help people adjust. if we refuse to take into account the full cost of our fossil fuel addiction, we will have missed our best chance towards a clean energy future.

the house of representatives has already passed a comprehensive energy and climate bill. there is a plan in the senate that was developed with ideas from democrats and republicans that would achieve the same goals. pittsburg, i want you to know, the votes might not be there but i will continue to make the case for a clean energy future whenever and wherever i can. i will work with anyone that gets this done. we will get it done. [applause] the next generation will not be held hostage. we will not move backwards. we will move forward. this overarching principle, we must invest in and didn't race innovation and technology of the

future, not the past. this goes beyond our energy policy. that is why we have decided to devote more than 3% of our gdp to research and development to spur the development of services, products. we have proposed making the research and experiment tax credit permanent to help businesses afford the high cost of developing the technologies. last year, we made it the largest investment in basic research funding in history. the possibilities of for this research might lead our and less. a mention any treatment that kills cancer cells but leaves healthy once untouchees untouch.

a mention educational software that is effective and engaging. -- educational software that is effective and engaging. imagine all of the workers and small business owners and consumers who would benefit from these. we cannot know for certain what the future will bring. we can not test with 100% accuracy which industries and innovations will next shape the world. i am sure there were times when the city cannot imagine life without the steel mills and the heavy smog that filled the streets. when that industry shrank, who could have guessed this bird would fare better than many other bossed that pittsburgh --

that pittsburg would fare better than many other cities. who would have thought that -- would one day adorn the u.s. steel belt. all of this came to be because as a community, you prepared, adapted, invested. even if you were not sure what the future look like. that is what america does. that is what we always do. the interest of the status quo will always have the most vocal and powerful defenders. there will always be lobbyists for the banks, they don't want more regulation. a corporation would rather to

see more tax breaks and investment in infrastructure. let's face it, a lot of us find the prospect of change scary. even when we know the status quo is not work -- working. there's no natural lobby for the clean energy sector. there is no law before the researchers that want to make a breakthrough. -- there is no lobby for the researchers. there is no lobby for the students. it is our job is to advocate on behalf of america that we hope for. make decisions that will benefit the next generation.

even if it is not always popular. even if we cannot always see those benefits in the short term. we make decisions like this on behalf of our own children every single day. this is harder to do with an entire country as large as ours. the role of government has never been to plan every detail or dictate every outcome. at best, government has knocked away barriers to opportunity and laid the foundation for a better future. our people always end up building the rest. if we can do that again, if we can continue building the foundation and making those hard decisions, i have no doubt that we will lead our children a better government. thank you very much, everyone.

god bless you. god bless the united states of america. [applause] [music playing] [applause] ♪ ♪

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>> coming up next, benjamin netanyahu discusses the israeli raid on ships followed by reactions from the state department. john ashcroft discusses the rights of accused terrorists. the financial crisis commission hears from warren buffett. >> this weekend, martha nussbaum has written or contributed to more than 20 but asman liberal education. join our discussion with your phone calls, e-mails. >> oh, my god, this president will be impeached.

woodward said, we can never use that word around this news room lest anyone think that we have some kind of agenda. the all of that moment stays with me. >> watch woodward and bernstein from earlier this year and hear what others have said about the break-in and cover-up. the c-span library is free and available on line. >> on monday, israeli commandos killed nine people aboard a ship headed to the causes strep drawing -- to the gaza strip. this drew condemnation from around the world. here is the comments from benjamin netanyahu.

>> good evening. the state of israel is confronting an international hypocrisy. this is not the first time. two years ago, we acted against -- hamas shot at us and hid behind the citizens. we wanted to prevent a the pain to the innocent populations. who is accused of war crimes,

not hamas but israel. regretfully, something similar is happening now. here are the facts. hamas is continuing to arm itself and iran is continuing to smuggle weapons to the gaza. the rockets that they are smuggling are intended to hurt the settlements around gaza. i remember that they warned about it and today, i am telling you that the rockets that iran is planning to send to gaza and will hurt tel aviv, jerusalem, and even beyond. some as it is already within gaza. this is our duty and right according to the international

law and the common sense to prevent these weapons from entering gaza. the previous government understood this and they impose a naval blockade on gaza to prevent any smuggling of weapons to hamas. last week, this was an attempt to break the blockade. we allow merchandise to come into gaza. if the blockade would have been broken, as a result this flotilla would have come with tens or maybe hundreds of ships. the amount of weapons you can bring on a ship is different than what you can bring through

tunnels. if you can smuggle 10 tons -- we stopped a ship last year and there was hundreds of tons of weapons that iran was sending to hezbollah. in another ship, we found weapons that iran sent to gaza. it is our duty to inspect each of these ships that are going into gaza to take out the weapons and allow the other merchandise to enter. we need to clarify it this, what is the difference if we would not have done it? the result would be an iranian --

it would have significance for every citizen in israel. i'm telling you and i am telling your friends that the iranian port n the middle east that we are forced to stop every ship intended for gaza. after we inspected it, we took it to gaza. unfortunately, the operators rejected it out of hand. therefore, we had no other alternative but to go on to the ship.

in the first five ships, everything went smoothly. on the sixth ship, we encountered something completely different. our soldiers encountered a very extremist group that supported the international terrorist groups and is now supporting hamas. they would not allow those. this was not a flotilla of peace, this was a flotilla of terrorist supporters. the soldiers that amounted to the ship were thrown off the ship. their weapons were conductetake. there was an attempt to lynch the soldiers. i want to ask you, are these

peace activists? are these pacifists? knees are extremely terrorists -- extreme terrorists. the soldiers conducted themselves with terrorism and restrained and i am proud of them. i am asking myself what would soldiers of other countries had done in a similar situation. they would have acted similarly.

what would you have done in similar circumstances? what would your soldiers have done in a similar situation? we all know the answer. therefore, we will continue to protect our citizens and we will continue to allow our soldiers to protect our citizens and the state of israel will continue to insist on its ability to self defense. our first duty is to secure the citizens of israel. security is above everything. it is important that we all be united. this is our heart.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> the the raid was one of the main topics at today's state department briefing. the u.s. voted against a u.n. human rights commission condemning israel. >> the secretary will meet with the indian education minister in about an hour. they will discuss u.s. in the cooperation and higher education. education is a key component.

also, the undersecretary met with -- as part of our discussion of u.s. foreign policy. we have the indian officials now arriving. the leaders of democracy fellows, a program under our middle east partnership initiatives, this is a program that we provide to young civic and reform leaders from the region and they have the opportunity to study at syracuse

university. this year represents syria, to nietzsche, the west bank, morocco, algeria, saudi arabia. george mitchell spent the day with the delegation at the palestinian investment conference as part of our efforts to build reform. during the course of the day, he had the opportunity to meet with president abbas.

liberia has is not open to this type of business. the u.s. and liberia are united in a strong partnership to combat the national drug trade which poses a serious threat to both of our countries. alss, the africa is troubled by the government of perinde's decision to eject him a human

rights worker. they are a nonprofit organization that is observing the human rights decision. we cannot approve of this decision and we urge them to allow the worker to return to the country. we have been granted access to alan gross in cuba five times. the most recent access was on may 25th and we continue to ask that he be released immediately on humanitarian grounds and be allowed to return to his family. also, our next round of russian talks are scheduled for june 14th-16th here in washington.

finally, regarding georgia's municipal elections from the weekend, gradually the people conducting these and are monitored by the -- they will be looking to meet the standards for democratic elections. there were improvements in the administration of these elections although we did observe some irregularities in individual precincts. those concerns were noted. we are encouraged by the central election commission's efforts to increase transparency and responsiveness but we also agree that there are significant shortcomings and need to be addressed. >> the u.n. human rights council passed a strong resolution about

the flotilla incident. among the items in this resolution is the creation of an independent fact-finding mission to investigate violations of international resulting from the israeli attacks. i realize that you voted against this. it passed overwhelmingly. is this the kind of thing you were thinking about when you're talking about an international component to the israeli investigation. >> we considered this to be a rush to judgment. i would call attention in the resolution that it actually condemned the attack by israeli forces before israel or anyone else has had the opportunity to evaluate the facts.

that is righwhy we voted against this. >> that is the only reason? >> this puts the complete responsibility on israel. we thought that that was inappropriate. we thought this was a rush to judgment. we have called on and supported the u.n.'s statement calling for a prompt, creditable, transparent, impartial investigation. we believe that israel is in the best position to lead to that investigation. the secretary indicated yesterday, we want to assure

that there is a credible investigation and we will continue to talk to israel about a possible international participation. >> a fact-finding mission by the human rights council is not welcome. >> we did not support that proposal. >> the japanese prime minister resigned yesterday. the government's made an agreement last week. the u.s. is innolved. how do you see this affecting japan?

>> we respect the japanese political process and the decision of the prime minister. we will work closely with the government of japan and the next prime minister on a broad range of issues. the chief cabinet secretary stated that the agreement will be respected given that this is a government to government agreement. >> according to a recent poll, 80% oppose the relocation. -- oppose the location. how can you say that this is still politically sustainable? >> we value the u.s.-japan security alliance.

we think that the presence of u.s. forces in the region including in japan is of tremendous importance and value to both of our country's. the importance of our presence in the region and the u.s. japanese alliance is underscored by the current tensions in northeast asia. we have reached a fair resolution that sustains the alliance. we understand the burden that this places on the japanese people as part of our agreement. we have pledged to do everything we can to help manage the impact that this has particularly on the people of okinawa. this will be something that we continue to work closely with

the japanese government. we have reached 80 resolution and we will work with japan to carry this out. -- we have reached a resolution. >> do you think this has damaged the alliance? >> i will leave it to the prime minister to explain the circumstances under which he felt it was important to resign. our reliance is about just more than the future of the base. this is a very important issue but this is one of many that we share with japan. we will continue to work on this program with the japanese government. >> do you feel that the issue

might not come back? >> everyone went back over the details and i think that the japanese government came to reaffirm that this new plan, the modification was the best way forward. we think that there are tactical details still to be worked out. we think that this is the best way forward. way forward.