>> do you have any numbers that are more updated and yesterday? >> they have contact with 12 americans. many have moved out of the country. these are all americans that might have been on these ships. we expect that they will be leaving israel in the next 24 hours. >> is that something that you can agree to? >> they had to sign something. >> that includes the one that was injured? . . .

has the u.s. consider calling on the israelis to this the siege

of gaza as several of this country's allies has done? >> we support the expannion to the people of gaza. we are recognize that issue has legitimate litigious me concern. we will be talking to israel and other countries about ways in which we can improve the flow of assistance to cause that and support the people of gaza while meeting israel's security concerns. >> there is the man that of militants of the release. can you confirm that? >> yes, i did.

and during the course of the secretary's meeting, he expressed concern about the status of turkish citizens. he wanted to see them released. i believe the israeli government has indicated that all of those involved with the flotilla will be released. you are seeing the flow of turkish citizens back to their home. question of this came up in the secretary's meeting?

looking more to the south korea model? statement in the security council indicated, we support an investigation that meets international standards. there are a number of ways of doing that. we'll be talking to israel about how it can best lead an investigation that is broadly viewed as credible by the international community. >> and that could potentially be led by the idf itself? >> again, i'm not going to prejudge what -- how the investigation proceeds. we obviously recognize that not only does israel have its own interest in understanding what happened, there are a wide range of countries that had citizens represented in that flotilla. they, too, will want to see that this is a credible, transparent,we support that

objective and israel, have there been any officials and israeli officials other than the mitchell talks today, either the secretary or the white house or nsc, that you're aware of? >> i'm not aware of any that would involve, say, the prime minister today, although i can't speak for the white house. but the secretary has not had a high-level discussion with either the -- any top-tier israeli official today, to my knowledge. >> does that include the defense minister? >> she last talked to him on monday. >> p.j., can you give us a little more precision on the sanctions -- push to bring up the sanctions at the united nations? it's been tabled or at least, i should say, circulated, correct? for vote. is that where we are? >> i think there are -- there's still work being done on --

technical work being done on the annexes to the resolution, so it's hard for me to say precisely where this process is. obviously, we think this is one of the most important issues facing the international community. and as i said yesterday, the iaea's latest report underscores that iran continues to refuse to comply fully with the international obligations. we're going to put forward this resolution in the coming days and we expect all responsible members of the international community, especially those entrusted to serve on the un security council and deal with these matters, to support the resolution. >> so when you say put forward, you mean for a vote? >> as we said yesterday, the president has indicated he wants to see this accomplished by the end of spring. we see that date on the horizon and we expect to meet that objective. >> okay, some international

diplomats -- some brazilian diplomats and others are saying, "why now," when you do have this agreement that the brazilians and the turks worked out with iran, that they have still a month to follow through on giving up that 1,200 kilograms of low-enriched uranium. why not give it the month even if you're skeptical, as the secretary obviously is? >> well, first of all, this is one of the most urgent matters. we are very conscious of the statements at face value. uranium to 20 percent. that is a clear violation of the safeguards agreement and resolutions. so we are moving based on what we know, which is that iran continues to enrich.

indicates, it is not in compliance with its international obligations. the united states has reached a judgment shared, we believe, by the p-5+1 that iran is only going to change course if we apply the kind of pressure that is represented in this un security council draftso while the trr -- the joint declaration in tehran may technically -pfulfill what had been the proposal back on october 1st, we don't think that it fundamentally addresses the larger concerns about iran's noncompliance with its international obligations. turkey understands that. brazil understands that. and when this is put to a vote, turkey, brazil, other countries will have to judge how to proceed.

>> can i go back to the human rights council, though, for a second? >> yeah. >> you said there was a rush to judgment. it didn't agree with the initial findings. i'm wondering, in light of that, what you make of the fact that only the dutch and the italians voted against this with you, and that some of your closest allies, including the french, the belgians, the japanese, the brits, and the south koreans abstained. >> well, i mean, we understand that. one of the reasons why we joined the human rights council was that we hope that over time that it would take a more balanced and appropriate response to urgent situations. >> right. >> and as our statement indicated, we believe that this particular resolution is a rushed judgment. it risks further politicizing a sensitive and volatile situation.

so we made our judgment that this was not the right vehicle to advance the understanding of what happened on these ships. but we respect the fact that other countries may have a different view. >> so in the 18 months that -- or 15, 16 months that you've been on the council, have you seen it improve? >> we think our presence on the council is positive and constructive. >> and how did that manifest itself in this vote? >> well, there was -- i mean, all we can do -- we have a vote. [laughter] we don't dictate what the human rights council -- >> well, the previous administration didn't -- i mean, didn't -- they basically ignored the whole council because of situations like this. >> and we don't think ignoring these issues -- >> so your no vote is enough? >> well, i mean, the no vote is what we're empowered to do as part of the human rights council. we will continue to work -- i

mean, we'll engage in the human rights council just as we're engaging on the margins of the international criminal court review conference. you had a briefing about that earlier this afternoon. we are willing to work constructively with countries around the world on the most urgent issues that face us all. but we understand that there'll be times where our view may carry the day, and there'll be times where our -- other countries have different points of view. yes. >> mr. crowley, it is the israeli's actions that need to be investigated. so how can israel, too -- best investigation -- why is the united states opposed to un investigation? >> as we've said, we are completely supportive of an

impartial investigation that helps us understand what happens -- what happened on these ships, and more importantly, working collectively, how we can meet our common objectives of increasing the international support for the people of gaza, and at the same time, supporting israel with its legitimate security concerns. we believe that israel is in the best position to lead this investigation. but as the secretary said yesterday, this has to be credible. the international community will be watching this very closely as it unfolds. we want to see this done in a way that meets international standards. we'll be talking to israel about how best to accomplish this.

we'll be talking to other countries that may want to play a role in this. and as we -- as the secretary said, we are open to ways of making this as credible as possible, including international participation. and that is our view. >> why -- i think his question, though, was essentially why? and can you explain why israel is in the best position to lead the investigation [inaudible]? >> israel is a vibrant democracy. it has effective, competent institutions of government, and israel is fully capable of investigating a matter that involved its forces. and so can israel conduct a fair, transparent, credible investigation? the answer is yes. >> on the u.s.-russian adoption talks, can you tell us how far adoptions agreement? during the previous round of the talks, the russians gave

their american counterparts the draft agreement. any chances that this agreement will be initialed or adopted or >> huh? >> that those documents -- >> yeah, it's a good question. i mean, we're committed to improves safeguards and procedures for -- to better protect adopted children and families. i believe we have a text that has been tabled on this issue, but whether we will resolve the remaining issues, i think iwe want to get it done as quickly as possible. whether it happens in this next session or takes a while longer -- these are complex issues and they have to address the legal

and policy aspects of both countries. so we'll have the next round and let's see how that goes. >> and who's going to take part >> we'll -- it'll be led by the -- an interagency team. i think -- we'll check and see. i mean, we had -- we had one at a -- that was led by our principal deputy of consular affairs. we had another that was experts. i'll take the question as to who we expect to participate on our end. >> p.j., on mexico, as you know, there's a lot of concerns and frustration in mexico due to the arizona law on immigration. these have raised due to the death of a migrant worker that was detained by the u.s. border patrol and beaten and shot with a taser. what is the position of the u.s. government with regards with this incident? i understand the mexican government have already sent a diplomatic note about it. >> well, let's separate the two issues. certainly, we are sorry for the loss of life involving anastacio hernandez-rojas.

we are in touch with the mexican government. we believe that his family has been paroled into the united states following his death. we have received a diplomatic note from the mexican government. it is being investigated both by dhs and by the police department in san diego. and this obviously represents the challenge of securing the border on both sides, and we are very mindful of the fact that those who try to enter the united states illegally, there is a significant loss of life every year along the border as people endeavor to come here. it's why the administration

supports comprehensive immigration reform. the president the other day, i believe in a press conference, talked again about his concerns but we continue to see immigration reform as the only way to normalize and expand the opportunity for immigrants who want to come to the united states and do so legally. i'll come back. >> on north korea? >> mm-hmm. >> the united states has extended economic sanctions against north korea under the un security council resolution 1874. is there any the u.s. has additional sanctions against north korea? >> well, we do have existing authorities under 1874, other sanctions. we did have a meeting here vice foreign minister. i believe he is in new york

today. and we will follow the lead of south korea in terms of when this matter comes before the security council. we want to see the international community provide a united response that sends a clear message to north korea that these kinds of tragic and provocative acts will not be tolerated. but as to the steps that the international community takes, we'll wait to see when the matter comes before the council. >> stay in the region? promised arshad first. said that secretary gates will not be going to china next week the region. and i wonder if you regard the chinese decision that it is not convenient for him to come now as a disappointment, particularly given that senior officials had told us that they

were hopeful that gates would make a visit within a few weeks of the secretary's trip last week. >> i can't judge. i'll defer to -- i'm not -- i don't know what the explanation was from china. clearly, the kind of senior- level engagement that we have with the likes of secretary clinton, secretary gates, others, we think it's important. during the course of the recent strategic and economic dialogue, regional security issues, military-to-military issues, were discussed. i think that was one of the bases for secretary gates's trip to china. i wouldn't hazard a guess as to the rationale in postponing this visit. >> can you take the question, since you -- it seems like you

haven't had a chance to look into it, but as to whether or not you're disappointed about this? because it seemed like one of the things that the administration has been trying to do, and for quite some time now since the taiwan arms sale, has been to get the military-to- military contacts back on an even keel with the chinese so they don't get torn up every time there's something that annoys them. >> well, i mean, we share that view. and there were some very detailed and direct discussions of these issues during the course of the strategic component of he s&ed. but i think the pentagon is fully capable of expressing its views as to the reasons for a delay in this visit. >> okay. well, i'm just -- i'm perplexed because a senior official said to a group of reporters, "i think you will see one of the takeaways over the course of the next couple of weeks that

suddenly chinese friends might have time for secretary gates's visit. " and it just seems like they got that completely wrong. i wonder what changed. >> again, as to the basis of china's decision, china can explain that. as to our -- the impact that that may have in terms of military-to-military engagement, obviously something we do support, i'll let the pentagon talk about that. >> but do you think -- >> can i go to the un issue? >> okay, i'll come -- go ahead. >> do you think it's going to impact the two sides' relationship, especially consider the fact the two sides' relationship's gotten better in a couple -- past few months? >> okay. try me again? >> i said, do you think the postponement will influence the relationship between u.s. and china, especially consider the fact the relationship's gotten

better in the past few months? >> i mean, i think we value the current state of the relationship. the s&ed was wide-ranging. there were a number of cabinet officials there. we certainly see the value in having our secretary of defense talk to his counterparts in china. we have vitally important regional security issues to discuss, not the least of which is the current situation with respect [inaudible] sinking of the cheonan. again, as to the reasons why china thought that this was not the best time to have this meeting, i'll defer to china to explain that. >> hear the un -- what is he, special rapporteur or special something-or-other on extrajudicial killings, has come out today with a pretty critical report on the targeted assess of the drone strikes? i presume that the administration still believes

that these are legal, but i'm wondering if you can -- if you have any reaction, specific reaction to this report. >> i don't. >> you -- >> i don't have a reaction. >> your legal advisor was on the telephone with some of us a little while ago, saying that there would be some kind of reaction to this report. >> okay. i'll take that question. >> can you check with his office, perhaps? i -- realizing that he is halfway around the world. >> one of my favorite lawyers. >> and since he addressed it in an on-the-record session not so long ago, i'm also a little surprised that you have nothing to say about -- >> well, you asked me if i have an immediate response. the answer is no. then you asked me if i would -- >> do you have an explanation of administration policy on this? >> i will not get into the matter at this point. i'll take the question as to whether we've had a chance to evaluate the un report and if we have any reaction to it. i'm not aware that we've had a chance to read it. charley. >> please, following up a

question from yesterday, are there conversations with the mexican government about the extradition of the television producer bruce beresford-redman? >> my understanding is we have not received an extradition request. >> thank you. hold on. two more. >> on cuba, any reactions, or what reaction does the u.s. have to cuba's transfers of political prisoners to prisons closer to their families, conditions that they have been negotiated by the catholic church? >> let me just broaden that point slightly. we continue to hope that prisoners of conscience will be released rather than just relocated, and as soon as possible. >> thank you. >> wait. hold on. hold -- >> let me follow up on jill's question on iran, the iranian resolution. could you be a bit more specific with regards to the

timeline, when you, approximately, hope to introduce it for the vote? are we talking about a week? two weeks? >> well, again, the president said he'd like to see this done by the end of spring? is that june 20 or 21? >> twenty-one. >> [laughter] so sometime between now and then. >> do you have any update on the status of this american lawyer who was arrested in rwanda? there are some reports that he tried to kill himself in prison this morning. >> i can't say. >> and apparently, his wife or his family is trying to -- is seeking a meeting here at the state department. >> all i can tell you is that we have visited and spoken with peter erlinder. he was taken to the hospital this morning and remained there overnight for observation. his u.s. and rwandan attorneys have had access to him and we expect that due process will be accorded by the rwandans in a timely and transparent way. >> do you know why he was taken to the hospital? >> i do not.

>> p.j., one other thing. you know, i didn't flag these to you guys so if you don't have an answer, taking it is fine if you wish to do that, but i presume you're aware of the case of the kuwaiti blogger who has been detained over accusations that he insulted the emir of kuwait. and i wanted to know what, if anything, the administration or the department may have done on behalf of his case. >> thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> john ashcroft discusses terrorism. warren buffett in the head of the moody's credit agency. william hague discusses the cause a stir. >> in the that the efforts to sit here the u.s. less mexico border.

who, brian o'neill represented a fisherman in the exxon valdez oil spill. this week, what book tv on primetime with the managing director on the back room deals. piper on her experience with the american the closest imperative. booktv prime time.

>> noted feminist author and legal scholar modern nussbaum, chicago law professor has contributed to more than 20 books on liberal education, ethics, sx system, in liberal justice. former budget administration attorney john ashcroft discuss the legal history surrounding the rights of terror suspects a day at a heritage foundation forum. a court ruled last month that detainees held at the air base in afghanistan do not have the right to appear in federal court. it said the possible challenge to a 2008 supreme court ruling that did extend the right of habeas corpus to guantanamo detainees. this is one hour and 15 minutes.

>> it is a very great pleasure to welcome all of you to our auditorium this morning. we continue to recognize the second annual "protect america" month without concluding lecture today. our live web cast is getting under way at this time i extend a special word of greeting to all those who are joining us on myheritage.org. thank you for joining in. if the of a question, please it tod speaker@heritage.org.

cars to be collected after the lecture. staff members will bring them up. we will go through them and cover as many as we can. with this announcement, and if the caveat that my colleague has problem yardy given to turn off all things electronic and mechanical, it is my great pleasure to introduce our colleague and good friend, jim to introduce today a special guest. he joined is at the heritage foundation in january 2007 after serving as a member of the senate armed services committee. he represented missouri second district for eight years. fretted that he was in the state house in jefferson city. as a member of the house, he

u.s. directly involved in some of the most critical debates regarding national security policy prior to and immediately after the 9/11 world that we live in today. he specializes in issues involving foreign policy, military readiness, and his old favorite, welfare reform. he is when the most of us did commentators in the realm of ideas. we are pleased to have him with this. can you please come up? [applause] >> my thanks for getting the privilege of introducing our guests. he is a fellow missouri him. he has accomplished so much

across a wide range of responsibilities and offices across the year. it would embarrass him for me to try to list them all. i do want to touch on the highlights. john ashcroft entered office for the first time in 1973 when he became missouri state officer. he followed that with two terms as missouri's attorney general. he followed that with two terms as governor. silage is summarized as by saying and i would summarize those pressing wheat traded 330,000 jobs. the balance the budget eight years in a row. he left office with a surplus. we had the 49th lowest tax burden per capita in the whole country. we had the second-best tax policy in the country.

after that, he went to the united states senate. we did criminal justice and regulatory reform on a broad range of issues as well as cutting taxes. dealers said the center of much of that activity. he became attorney general in 2001. those of us who knew him realize at the time that he was enjoying that office immensely. then the night states was 2001.ked september 11 i am sure he will address many issues that he had to deal with in those days. when i ask today, and i do get

asked this a lot, when i am asked why the united states has not been successfully attacked again, these of the two top reasons. the vigorous activity in -- i work with them on a number of instances. he is in his personal life a model of integrity, humility, and humanity. it is a great pleasure to

introduce to you the former attorney general of the united states, john ashcroft. [applause] >> thank you. it is a pleasure to be with you. i would like to way they scoot across the top of history to avoid the peaks. ine lost more elections three of the last four decades. i happen to be the only person to have lost a senate seat to a deceased opponent. willingness is something for which i am grateful. i have a lot to say. it may mean that i make a lot of mistakes. i am not as immune as i might have them now is a member of the

senate. i'm grateful for this opportunity. i believe the defense of america is tantamount to the defense of freedom. freedom is worth defending. freedom is what the alchemists were looking for in the middle ages. in those days, it was thought that if you could just was a magic substance dixie dustman bank is what we hoped we could be. there is not any such thing. we know that. we understand that the elements have their own character. there is a pixie dust in human existence. it is freedom. it is what changes ordinary

people into world features. it is what makes america exceptional. some people walker of thinking we are better than other folks around the world until it dawned american not be better than other folks. we are other folks. the thing that made america a special place, that made it different, and that made it a priority place like a city on a hill was that freedom was respected here. it to a special alchemy that changes base metal into gold that changes the wretched refuse of the teeming shores. freedom is a value which is simply without parallel prada as

attorney general, people came to me on a consistent basis and said he had to learn to balance freedom and security. we all have a sense of the necessity. i always wanted to reject the idea that freedom head freedompeer terms of value. there is no such thing as the need to balance freedom. there is the need to enhance and support freedom. there is the need to safeguard freedom. when you think about security, there is the need to secure freedom. free them stay intact. security is not a competitor to freedom. when we speak give security, we

should specify the object. we should seek to secure freedom. that is what the security of america is about, providing security for this environment, which establishes an honors human dignity in ways that have never been reinforced or honored in human existence. when the declaration of independence recites the we hold these truths to be set evidence, lee notes that in this related to freedom. we have long known that the pursuit of happiness defines freedom. the ability of individuals to pursue the things to which they aspire. we are fast learning however that the provision of happy by

government defines and delivers debt rather than freedom. when it does, it impairs freedom. the pursuit of happiness is the definition of freedom, the provision of those things that people say might make them happy. it frequently has a high cost for the the reason i'm delighted to be here is that it is a foundation that understands the opportunity to see productivity and create and advance, this reinforcement of human dignity that comes from mankind, that is what this institution is about. whenever our culture converts means into rights so that it is not pursuing things that meet our needs, it enhances my

liberty. is liveense of freedom ar this enormous responsibility of a culture. i am thankful for this constitution purda. it may not mean the same to others. that is what is important america is the last best hope of freedom.

the conditions exist here that reenforce human dignity and reward the achievements of individuals and the risks taken in those achievements. they are willing to exercise freedom. freedom is under attack. it is such an attractive and appealing by the fed is hard for us to believe that freedom is under attack. it is under attack by those that say -- we watched nazi germany say the rest the world was racially inferior. freedom has been under attack by this to say we do not worship the right got. they do not believe that spirituality is something of inspiration they think it is something of imposition. they want to impose upon us their views about t-- and they

cannot understand. we need to take church. there are people who might even -- there may be a roomful of people who can make better decisions about people in my and i could predict the mere fact they might make better decisions and i could this not mean i want you to make the decisions. there is a virtue in my being

able to make my own decisions. i cling to the ability that america offers me to make my own mistakes. freedom is this important quality. i believe it must be defended aggressively put th. that is why i express my appreciation to a heritage for having this month long discussion in defense of america. it also must be defended legally and in accordance with principles. it must be defended in a way that respects freedom itself. the law provides an intersection where to this expectation of freedom come together. when the principals might be in question, we seek to adjudicate this. most frequently, that has happened in a legal process

called habeas corpus. i am no latin scholar. i'm a really a legal scholar. it stands for "half the body." if you challenge someone's detention, and they will say we will have the body. this is a rich part of america's history. perhaps the most charming is exciting because it is old. it comes when injured jackson was fighting in the battle of new orleans. he remembered the old song about that. i think this crowd is far too to know about that.v

[unintelligible] jackson was a pretty aggressive defender of freedom. he loved it. america button for it. you know that was not the age of the blackberry or even a cell phone or the telephone. hedgefund even think they had invented to 10 cans and a -- i doonot even think they had invented two tin cans and a string at that time. even after he pretty much slaughtered the british, it was a brutal battle.

no one knew about the treaty having been signed. it became pretty apparent that the british were not a threat like they once were. an editorial appeared in the french-speaking newspaper that great general, but please give us our freedom back. you have declared martial law." he had. he was running the city his way. the editorialists requested to please give them their city back. jackson was not a civil liberties and the easiest. -- in enthusiast. he found the right ear and had been jailed. is what the writer does?

he files a writ of habeas corpus. the judge who is the federal judge in the area issued and said bring the right to be for me. we will indicate the appropriateness of thihis detention. jackson was not -- you know we have this difficulty with members of the judiciary later on. jackson was not to be intimidated. in some of bringing in the editorial writer coming incarcerated the judge. -- instead of bringing in the editorial writer, a key incarcerated the judge. he took the judge to the edge of the military district. he gave them the right foot of fellowship. this story has all the charm

that fiction would have, except you would not believe it were it fiction. the news of the peace treaty comes. civil government is restored in new orleans. the judge to let issued the order of habeas corpus which had not been followed, orders and finds jackson in contempt in court. he fines him $1,000 in 1815. $1,000 in those days was rough enough money to buy between 2.5 and three midwestern states. that was a lot of money. it jackson paid it. he became president of the united states. the footnote, which is amazing,

is that on his deathbed, the congress of the net state votes to refund the $1,000 to and redaction. the two and a reduction. habeas corpus has been is a vivid and part to adjudicating the limits on what can be done to defend the constitution and to defend freedom in america. the executive branch of rates and limits. at times, it the judicial branch has operated with in limits. they reserve the right to migrate or a ball or more of. they say they have an organic constitution. what did they do it when the japanese shape the trees? it is the bond side of the

constitution. we provide shade in one area. never mind. [laughter] i would like to run through a series of cases of habeas corpus that i think will help you put in a frame of reference what has happened. we are gonna take a big jump from andrew jackson to get up into the world war ii area. when the most interesting habeas corpus cases -- it is part of a history that somehow escaped my junior year at history. they told me all there was to know about the world war. i did they missed it or i missed it. there were eight individuals released from submarines off the

coast of long island in new york and florida. they came in and were apprehended. and they were released on about the 15th of june. by the 15th of august, those who had been adjudicated and eligible for the death penalty and not reprieved in some way, they have been executed. president roosevelt had convenes not as a result of military commissions to establish prior to their appearance, but created specifically to deal with their cases. president roosevelt convened a commission. the supreme court during the commissions were appropriate. they have been executed in 60 days. it is not about time in american history prope.

it is interesting that the president seems so intent on making sure there is such a dispatch in the way the case was process. some of those individuals who came in and immediately went to the fbi and said "we are here to destroy the infrastructure." you better stop this operation. it is not a proud moment for the fbi. the first exposure resulted in "you guys are kidding." a second approach resulted in the actual taking series of this. i think the president, it is reported that he was upset. it is reported that j. edgar hoover was upset over the idea that americans could be so susceptible to damage in this way.

the president said, "we better move quickly as possible and resolve this issue and signal that we are not week in this respect." if that is the case, i think the president deserves at least the credit for preserving the safety and security of american freedom. the principle involved is that the way in which to deal with individuals will signal and set a standard for and provide either a disincentive to our invitation to individuals who might think that the way they are processing would provide an opportunity to disrupt the freedom of the united states.

oddly enough, in the meeting, whose basic charges that they operated without uniforms and violated the laws of war -- the penalty for the violation of the law of war has traditionally been up to and including the death penalty. they were given the death penalty for that. the supreme court that is hearing the case so that these things were on parallel tracks, this is not a sequential operation. this is a multi track. there are times in government when you should be multi tracking things. the verdict was rendered in early august. the court said that it affirmed the right of the commission at

and that the opinion would follow. it is something of an embarrassment of belief to their respects to have for freedom in the united states. the opinions and not follow until october. the crime had been committed. it is not a normal crime. it is something adjudicated by military commission. it was a war crime. it may have been a violation of the statute. the adjudication rebates to the adjudication of war crimes. we do not try code matters as we do in a civil matter. it invalidated military commissions used to try

individuals who had committed these kind of crimes. the second case happened to be a group of germans who were involved in china. at the time the war was declared over, between the united states and germany, and it is ceasing to fight, they went on assisting the japanese. it is a war crime once your country has surrendered for you not to obey the terms of the surrender. 27 individuals were charged. 21 were convicted. they are being held in a prison in germany. they fought a habeas corpus a to get this out of prison. the court basically said, although it is now in dispute, we do not have jurisdiction to handle things that do not have a nexus to a u.s. district court

territory. this is the territory of germany. the court refused to grant the writ of habeas corpus there. one of the things that struck me about this was the 27 -- of the 27 cases brought to the commission, only 21 were convicted. there is a mythology about military commissions that needs correction. there is a suggestion that they do not operate fairly and that they do not provide an opportunity for innocent individuals to be adjudicated in a context which is acceptable. what i have noticed in my understanding of military commissions, and that is about 77% conviction rate, after the second world war, military commissions had upper-80's in commission rates.

they are used in the mid-90's. anything below the will be an embarrassment. it is not an automatic that if you have an adjudication or due process that is undertaken by way of military commission rather than civil court that some of it is unfair or unlikely to provide an outcome which is acceptable. the rights of individuals are respected by military. they are the people who give their lives. it is less than fair to suggest that because you have a military commission somehow you will be disrespecting justice. this case pretty much said that if you are outside the limits of the united states you are not going to be having habeas corpus. i want to the crowd -- leapfrog

to the cases the relate to the modern circumstance of the war on terror. they take this to the cases said relate to the attention of individuals at guantanamo and other settings.

questions. >> thank you. we will begin with the questioning. i will start and the vice chair and mbers who led this research and investigation effort into credit rating agencies. let me start by saying the two issues of like to property gentlemen are the following -- first of all, business and

management practices. corporate responsibility, management accountability. second issue is the model for credit rating agencies in the financial market. let me start with you today, mr. mcdaniel. let me ask you very direcy. the reason i want to say that these issues are important is in trying to assess howe had this run-up to the financial crisis, we have found over the course of months that there is very -- there is very little self examination. but mr. with you. under your leadership, there were very significant failures at moody's. the product that your company offered proved to be highly detective. not just by small measures but by a large amount. 83% of your aaa rated

securities were downgraded. in 2007, 89% of those which were investment-grade ratings were downgradedo junk. massive downgrades started in july of 2007 when housing prices have declined just 4% from the peak. some have said that the very enterprise was fraudulent if not -- if not in a legal sense but in a practical sen because the product is not closely approximate what they represented to be. if we flipped a coin, it would have been five times more accurate in terms of the result. your shareholders lost 73% of the value in the stock from peak to today. the ratings enabled the issuance of trillions of dollars of mortgage securities which we now know were rife with significant problems from fraud to srepresentation and mahave well fueled the housing bubble.

investors relied on the ratings suffered enormous losses intercompany's reputation, something i know that mr. buffett has held important, is certainly under a significant criticism. my question for you is really who should be held accountable? we have a system of capitalism are there are regutory mechanisms. we have owners, boards, and magement of who should be accountable if not you? >> the performance of the housing sector, and as a result the ratings, that are associated with housing assets clearly ve exhibited in variable performance in recent years. there was decades of strong performanc leading up tohe current crisis. we believed that our ratings were our best opinion at the me that we assigned them.

as we obtained new information and were able to update our judgments based on the new information and transgendered we were seeing in the housing market, -- and trends we were seeing in the housing market, we adjusted our ratings. i am deeply disappointed with the performance of ratings associated with the housg sector. that is injurious to the reputation of the firm and to the long-term value of the firm. the regret is genuine and deep with respect to our ratings in housing sector. >> the april this further. -- let me probe this further. i know it is hd to keep the peaks and valleys. but me just say there is almost a common-see test. your firm rated 42,000 tronches

of rmbs aaa in a context where there are four corporations in the country and the context you were writing about 90% of the securities as aaa in terms of the corporate debt world where we have more transparency and understand the corpora data. only 1.4% side of that was rated aaa. you lead an enterprise for which you were compensated handsomely, $39 million, over this period. if american capitalism is about risk and reward, reporting says, should there have been a management change at moody's? do we need a culture in which success and failure are essentially accounted for? >> as i remked a moment ago, we'd certaiy believed that our

ratings were appropriate when they were assigned. i rognize that those ratings have not performed well in the housing-related sector. as a result, we did make management changes. >> but not at the top. no board or ceo changes. >> if you are asking with respect to me, which i can see you are, it is a fairuestion. if we reach a point where either our shareholders or our board of directors or i do not believe i am in the best position to lead the firm through this period and into the future, then i will not be in my job. >> ok. mr. buffett, any observations on the responses by mr. mcdaniel? >> i have been more draconian in my view of the ceo's responsibility.

in terms of financial institutions that have failed and have required assistance by the government, i think when society has to step in to save institutions for societal reasons, the ceohould basically the way of broke. there should be a rea downside. incentives are an important aspect in behavior in the end, i do not know who except for maybe john paulson would have been coming up with different kinds of ratings? it was the greatest bubblehead ever seen. -- bubble that i have ever seen. the entire american public was caught up in a belief that housing prices could not fall dramatically.

freddie mac believed it. fannie mae to the debt. congress believe that. the media believe that. i believe at. very few people could appreciate the bubble. that is the naturef bubbles. the become massive dilution. i am much more inclined to come down hard on the ceo's of institutions that cost the united states government to come in and necessarily bolster them. >> let me prove that a little. i just want to sit for the record, i do think around the country there were people who thought the bubble was unsustainable. there were a number of experts. robert schiller, the real rub been a, a dean baker. -- nouriel roubini.

this was something we had never seen hhstorically. moving beyond that for a minute, the rating agenciesid play a fundamental role accelerating the securitization and thereforsome would argue that the origination of products intended to be highly efficient. we are talking about low teaser rates,-and a transition. there was a warning in 2004 from the fbi that mortgage fraud became so epidemic that if unchecked, it would result in a crisis as big as the s and l crisis. there were many flashing lights along the way. there is a country song by don mclean where he says when the gates are all down and the signatures are flashing d the whistles are screaming and you stay on the tracks of boarding the fax, you cannot blame the

wreck on the train. was the role of the rating agencies to be referees in a game that got out of control? you told our staff that if they had not done the ratings come up they would have been hunted at by congress. do we not expect referees to make the call even if they get booed? >> they made the wrong call. they've basically believed, as most of the public did, you cannot have this as possible without overwhelming believe, it did not mean anything in 2006 to listen to henry pauon. lo at me. i was wrong on it too. i recognized something dramatic was going on. i actuallcalled a bubblette that was wrong. it was a four-star bubble. the rating agencies missed it. you can look to the march 30,

2007 report by congres which had 200 people overseeing freddie mae and -- in may and freddie mac. they gave them a green light. >> f i take a different view -- i take a different view. they raised a number of issues. you said the ratings business was a wonderful business. q saidhat because it is a to wobbly, little capital is required. it turned out to be a good model for a short time. not necessarily. you are the largest sreholder. i realized by all accounts you caot -- you were not particularly active or aggressive. you had a very infrequent contact. i want to probe the

responsibility of shareholders. this was a company where 50.5% of the shares are held by five large orders. you had this tremendous spike in revenue coming from structure products. we have heard today and in the course of our interviews a lot of concerns about thehange of culture and the pressure for profit, sacrificingatings, what are the appropriate roles of shareholders and boards of directors and monitoring companies? what responsibility to look in to the problems arising and did the board and shareholders do at they should have done in this respect? >> in 2006, i was not sitting there thinking that the houng bubble was going to get as large as it did or as it was and it was going to burst. if i had, i would have sold my

stock. >> given the dramatic consequences that have happened, and i do think there have been reputation of damages. you said it takes 20 years to build a reputation, five minutes to ruin it. if you think about that, something about doing things differently. the question is, in the end, the ratings were wrong. there are reputation no issues. there has been a massive loss of shareholder value. should there be a new board? should there be new management? i would say that in this particular case, they made a mistake that everybody in t country made. march 30 of 2007, it was reported the overall asset quity is strong. all they owned was mortgages and that was march of 2007. >> i will just say, arguing with

you about what the markets were saying, this was not a b secret. this was "the economist." there were a lot of warngs. even movies -- moody's.com you are saying this does not warrant lookingt the culture of the company? it's certainly not put it is not necessary. >> this was 2005. let me move on. we interviewed a member of the moody's board who indicated the board was not particularly involved and did not discuss significant issues but the ratings proces there was a recent press accounts about the disengaged nature of the board but it's as the two senior executives approached with significant problems at the company.

>> no. >> no? >> no. >> ok. not accurate. it seems to me that it was the worst of many worlds. the model by its nature creates pressure to produce credit ratings that serve the beneficiary and of those. it was said that whose bread i e to, whose song i sing. -- whose bread i eat, whose song i sing. you have the duopoly with enormous pricing power. you have a whole set of legal protections, including first amended protections. it seems to me like a pretty toxic brew of corporate non responsibility. do you think radical surgery is necessary? for example, mr buffett, should

be out of the issue of pay model? should we adopt the franken provisions in the senate bill which would say that when selecting rating agencies, they should be selected by the sec? what kind of radical surgery, had it been performed early enough, would have helped in the sense that the spreading agencies would not have enabled this flood of toxic mortgage securities? >> as the chairman, i hate issue are pay. we pay a lot of money and we have no negotiating power. >> i deeply resent the model myself. >> it makes for a wonderful economic model but as a practical or model, i have no negotiating power. i need a rating. it is required in many cases. if they say that it is $1 billion and i say it could be

900,000, there is no guy on the street. that is the nature of that. if you go to something other than user pay, it gets carried tricky. if i will buy a $10,000 municipal-bond, she will hear the ratings someplace published. >> united labs is a nonprofit model. you do not have the profit pressure. consumer repts does it. is this a broken model? if they wanted to rate bonds and people would accept them, i suppose it could happen. it would require a fair the large -- to require aarge expenditure to rate all of these bonds. >> what about selection of raiders by people her than issue worse? >> and defect, -- in effect, i

am told which raider's eye and to use. >> what about that as a change? >> i do not know the answer to that. the wisdom of somedy picking out raiders, will thabe perfect? -- picking out raters. willhat be perfect? >> the largest rating agencies operate under an issuer pays del. i think it is important for us tocknowledge and recognize that a business model in which the feet payer has an interest in the outcome is a model that has potential conflicts of interest and those conflicts must be managed proply. >> can they be? fannie mae and freddie mac,

these four institutions that had this bush poll. -- this push-pull. can it really be overcome? it is like transparency. everybody loves it. they also say we can handle our conflicts. it does not appear to ve been based on this leaders period. >> the poor performance of ratings from the 2006-2007 period and residential mortgage- backed securities and other related securities, housing related securities, it is not -- has not been replicated elwhere in the business. to the extent that there is a concern that there cannot be superior ratings quality and even in the midst of a severe

economic downturn, i think it is a misunderstanding. as i said, because the parties that are willing to pay fees for ratings, whether they be issuers or investors or government, have an interestn the outcome of those ratings, i do not see how to avoid potential conflicts of interest. we also have an important public good that is produced which is the ratings are made available to the general public for free. there is no selective disclosure of the ratings. large institutions to not have an advantage over smaller institutions or individuals in terms of the accesso ratings. i think thais an important public benefit. >> this goeto management. this structural products division was a cash cow. this is a classic case of s growing like a weed so it is a weed.

there are questions about what staff had to do to increase revenues so much. pnecame 52% of ur revenue. the mess was huge. 90% downgrade. even the dumbest thing in the classets 10% on their exam. it seems theesources 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 evaluati 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 at is a do diligence provider in a sense. you can ask a third party, but if you're goi 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 airman. 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 wante 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 reqres a whole new level of thinking. i think you are absolutely right. when you run a huge financial initution whose stability or instability can affect the entire society, i think there should be a tremendous downside. i thinkhat ifomeone's personal equationor 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 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 ware able with the resources that we have. one of the reasons i was pleased to have you in process of us -- i would hop the answers you would give me your questions is not the ones that vtually 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 good as or baldacci -- -- the

reputations ar 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 thend 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 riewing it to make sure it is. what do you tnk 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 denl that is ok. >> i have two thoughts. one is the question of incentives. i think it is very impornt. 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 dnside for the c e zero and a significant downside for the board. e 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 he no right to ask you

this, but just as the rating agencies producedhat 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 morebout 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 needso 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 tha 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 >> 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 coury that represented about half of the outstding 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 tha were taken. >> i believe the rating committe 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 u 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 kee pac 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 thatist? 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 funion is

important. we've h 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 duringhe ratings seemed to be devoid people either from the real- estate industry or from the banking industry. therefore, they had little personal capacity to evaluate whatas happening in those areas. had you taken some steps to broaden the pool on the rating committees? >> that, again, 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-bked 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 mhodologies 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 additiona 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 t in mu more trouble with a good premise than a bad premise. when y have a sound premise, initially that makes a lot of see.

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 argoing to go up next year, you will stretch to buy one this year. after a while, rising prices became their own rationale. people thought tha 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 reasong 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,he 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 nowas 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 representativesf various regulators from financial records -- institution regulators to the sec, visit new to talk about's your mhodologies 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 came effective in september of

2007,here 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 asart of the management of regulated activities that -- activities.

>> i cannot speak for the commission, but i believe the regulatory oversight opportunitieere more limited prior to legislation passing, said they were not -- so they were not as extensive in their oversight of moody's are e industry. >> thank you very much, senator graham. >> thank you mr. chairman. thank you both for coming here. let metart 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 he 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 rais 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 talen-- to produce ratings. is that what you meant by enhanced analytil integry? 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, analysto 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 thaose 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 csed

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 kds 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 see 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 bore? >> 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 h 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 ile. 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 tips 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 risin 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 toerksre hathaway. looking back, i should have figured out what i did n 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 owneof freddie mac. you are familiar with alfred may -- fannie mae and freddie mac operates. do you see their activities as ving any role in the growth of this bubble? >> i think they were doing what they were instructed b congress to do to a gre 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 youell 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. >> thi 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 afr that d they decided that this was a societal problem. congress gave the federal serve the authority toegulate margins. the federal reserve still has that authority, as i understand it, 70 years later.

we put in derivativ and swaps, at that point you can borrow 100 percent. i brought this up a hf 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 stree 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 pre. hundreds of end-users wod 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 ther 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 n. 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 toy 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 maetplace. you have also said that everybody should have a lot to lose in this marketplace. in and the securitization process, we have lrned 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 th3 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, tt 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 bos the people that did the job with the same security. if the succeed, they get 7% interest for 10 years. what do you think about that idea? >> i liked it. or, t it in a deferred account. i think the most can be achieved by getting at thbig institutions. i was at solomon almost 20 years ago trying to put in a new compensation system. it can be very difficult. i not retract any of those earlier remarks. i agree with them. >> it was said that it was a

great idea, but they are not re to like it. it seems to me -- i want to go back to at happened at moody's to some extent. 100 years ago,ohn 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 mcdael is on this question. somef the -- some of them are skewed in favor of your property rating. inour pricing, i have learned from our investigation, our nds on residential mortgage-backed securities, you

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] 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 yo actually structured the fees payable to new peace in that wayhat gave you more if u 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 plications 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 compreheive 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. >> loing back to this chart thatommissioner 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 anyme. there are not nine basis points

cdo's 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 opinion on. we obviously want this opinions to be predicted. we want his opinions to incorpore 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 thanot correc >> 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 dog 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 testifi in your inrnal testimony that you thought the governmenmade the right decision in backing up these companies and that the markets needed reassance -- 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. enn was the seventh largest corporation in an america -- in america. none of them are required trillions of dollars of taxpayers' moneyo bolster the private sector, and yet you still it was necessary at the time. could y elucidate? >> in december 2008, our financial system basically came to a halt. you had 30 million americans with their money in money-market funds compring three and a half a trillion. in the first three days of that week, 170 billion cleared out. that was all institutional. inviduals had not caught on yet. when 30 million people began to

worry about where their money market funds are going t 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 eugh. >> we are not proposing redies

. >> you can change how people work with incentives, and you can change with leverage when they get the benefit of government-guaranteed money. >> your company, for example, has a huge cash cushion, that you would like to keep because this puts you in a protected, safe position to take advantage of opportunity. many individuals did not do this, but in every capital arbitraged possible and it seems that this is related. >> the derivatives were to get

around the capital requirements. there are a lot of abuses and if you let them exist in this form, they will be used in an unlimited manner. >> thank you very much. we will move on. >> thank you for being here. mr. mcdaniel, i have a question about the financial crisis. when you look back at the financial crisis, i wonder if the rug -- the legislative requirement that asks certain investors to invest only in rated securities, if these had not existed, how would your business have been different? would you have to compete on different terms, at which you have to reward people differently? >> i do not know exactly how the business would exist if there

were different or lesser regulatory uses of the rating. 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 preparness, 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 credits. it is easier to measure them at the broad level than the narrow level. >> 90. mr. buffett, with the investing worlde 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 toompete on either price or a black city. independence and relf come with strength in business. -if you had a situation where there was a lot of competition, i am not su 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 f 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 fedal 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 apl 1 -- i cannot rememberhe was september 21 or 23rd. at that point, but not only wanted to shore up confidence. and the worldas 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 woulnot 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. hodo 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 tohe firm, and in addition to consequences for the larger econy 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 creed 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 demstrate 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, goin ahead and reading them aaa. -- going ahead and breaking them aaa. -- rating them aa >> we thought that all the information that we had was relevant to e 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 revant information, and we thought we were using the best information

that we had available in the rating process, it prod 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 g this stuff done. it strikes me as central to your role, and you have a chief ris officer. and knowing the way in which these ratings were done, waiting

get more information -- we heard from a panel earlier today abo 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 towa short- term gain at the expense of what turned o 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 te -- more interested in straight equities. >> were you satisfied with their risk measure and do due diligence on all the agencies -- all the products ty 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 tir 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

they should be doing this at another price and they should read as near where standard and poor's has us. the issue of pricing power is that if you are an insurance company, with your issuing securities, people expected to have this rating. and this is very small, the amount of money that is spent as a percentage of the total, but this is required. you are not going to come to market without this. and as they doubled the price -- i will pay this. and there are certain things that are required as part of issuing these securities. an important part of the securities is to have this

rating attached. >> have they ever lobbied congress or the regulatory agency to have regulations or a requirement for the ratings? >> not to my knowledge. just the opposite. note, just the opposite. we are repeatedly going back at least 15 years >> we have gone back 15 years with the risks of the regulations, and the use of these regulations. >> and i would say that they are required by regulation. they are required our regulations. but if they were >> the world may be different 10 years from now. but there is no way that berkshire hathaway -- we would not say that the $20 billion in

cash is there. and we will not be able to issue the bond. >> from the long-term -- prospective, the internal controls were not a great concern to you. >> can you deal two minutes? >> and the conduct of moody's and standard and poor's? >> i am not talking about the internal workings of procter and gamble. >> we have a significant position in proctor and gamble. i do not know their internal controls. -- 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 u have. theris 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 u and says about it after 30 mines, 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 matterof 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 pect them as normal human beings to be. >> it talks about threshold

issues like adequacy of resources, affecti 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, viously i want to have a very successful business. and i believe the way to have a successful businesseto 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 whyt 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 youbuy a the most pt 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 tim 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 inoduced 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 w tied to the number of securities they rate or the number of companies that follow. >> fo 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, andinding leverage, which is really tough, doing it with ratios is not the answer. not the sole answer. leverage is what gets people intorouble. 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 diffent 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 wld 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 ju 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. >> 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. there is anything that we have not provided, we will instruct our people to do so. >> and the company did a

revi of the retaliation allegations. can that be made available to us? >> i am not sur 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 ofhe 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 clring 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 uelievably 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 mi around that. i had ninthcounterparties and i could not print out thnames 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. that was my problem, 23,000

of them, i had passed ay -- 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 exame 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 overnigh >> 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 nional amount. can such an enormousomplex 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 ishat 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 difrent 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 rect shareholder letter, the 20081 that i am referring to, and bought the 20091, that it i 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,ut 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 contrac. 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

coras 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 las year. there is enormous innovation that has been going on, financial innovation, there is enmous 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 istinguish between the killing and mbling. gambling is creating a risk or no rk 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.

ople 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 hea again and again that whether it bcitigroup or fannie mae, th 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? s 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 t 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, wh i would like you do is to assele as much information as you can on the other kind ofon-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. at 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

mol, 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 w 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 proble 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 thestates 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 le 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]