narratives and after june '07, aig got a composite rating of two which meant that aig was fundamentally sound. going into it quickly. the march 6, '06, examination noted that the amount of transactions increased and no safety and be soundment assessments were made. i would like to enter into the record the relevant portions of that report from march of '06. that's page 9. relevant portions of the march

2006 examination. in 2007 ots adopts a plan but as part of that it lays out limitations. including a section limitations of the review saying there's no absolute assurance that the ots evaluation of a firm will uncover all serious problems or deficiencies which may exist. in an internal ots document here's what it says. it says background for internal purposes only at the time of the 2007 plan was being drafted, the eic over the prior two years had been permanently assigned elsewhere. no replacements or additional resources were being provided for additional leadership or

examination. it goes on to say the authors of the plan i think the final thing i would like to say in this regard, if you look at the april 23, 2007, a idg visitation review, a i g designed its credit to match its activities and risk management personnel adequately addressed them. the board and senior management provided adequate oversight. we saw those guys yesterday and, frankly, we would disagree. the minimize financial market risk by offsetting derivatives transactions and hedges. the mitigated market risk

exposure. i would like to enter into the record the relevant portions of the april 23, 2007, report of examination of aig. it appears to me that ots did not get this right. >> the commission has a lot of information on aig that we did not have in april of 2007. at that time, just to clarify what we looking at, ots was looking at a company that over with a substantial change in 2005. the longtime ceo left and was replaced. they felt like they needed to redesign the company. what we were looking at in the 2006 and early 2007 reduce or

policies and procedures that were put in place to the response -- were put in place in response to the actions of 2005. do they conform with what we are seeing elsewhere in the marketplace and due date appear to position the company to be able to respond to a range of risks it might face over the long term? it had a strong earnings platform. the major weaknesses in the sub- prime lending areas and the build up in that area had not manifested themselves. what we were evaluating where policies and procedures that had not been tested. one of the topics of conversation was that the proof would be in the pudding. the people that they had hired and the framework that they had

constructed would be tested and we would know if they were adequate. obviously, when they came under pressure in late 2007, they did not respond. their risk management process was a different from what the company had indicated to us. what you see is ots responding immediately to that new information once it came into play. >> what time. it? >> that would have been late 2007, early 2008. aig was under pressure from counterparties. once we realize the risk manager at process -- >> let me probe that. what we understand is that ots in april says that it will conduct an in-depth review in

subprime disclosure. this was during a target review in 2008. they decided to put it off and it did not get done. there was never a targeted review. he said it was downgraded from a two to three and you are saying that that was your response? i might add that the september 2, 2008, review which begins a couple of weeks before the collapse and is concluded on october 17, at that point includes a representation of our risk confrontation to a ig. >> you have to understand, i had

been in dallas, texas, at that point. >> it is a little stunning that a finding is made in october -- finding is made on october 17. what specific actions were taken? >> in late 2007, obviously there are a number of public filings that the company is making. there are conversations with the internal auditors. we began to pick up that aig was under pressure from counterparties. aig had always been something that we looked at as an indicator of control over subsidiaries. it was not chartered by ots and the products were not regulated by anyone, least of all us.

>> as a regulator of the holding company, you're supposed to look at all risks. >> we were limited by the fact that it was not a bank. we could take into respect that it was a holding company. rather than attacked them directly, we went after the board of directors. the ones that are most able to deal with these issues -- as they come under pressure and we understand the problems they are encountering with their modeling systems and at risk management, we follow up by recognizing that reality with our ratings. we sent a supervisory letter that directs the company to take ssecific steps.

we directed them to immediately to deal with the known risks that we had in front of us at that time in dealing with the subprime exposure. we wanted top level decision makers to make the decisions they needed to save the company. we ask them to immediately take the steps and provide us with a plan as to how they were going to do that and how they were going to correct the issues. that is what we did. >> i would make the observation that the cake was well baked by this point. >> the chickens that were coming home to roost at that time were hatched. in an interesting way, when the issue of subprime exposure came up, the company's argument was

that they had gotten out of the products before everyone else as an indication of how smart they were. they were arguing that they were ahead of the curve in the sense of spotting the curb. >> smart only in part because they could not hedged. >> i want to move on it very quickly. i or want to move on to other members. -- i want to move on to other members. >> all like to comment on the liquidity profile. i cannot speak to a ig's motivation -- i cannot speak to

aig's motivation. the only way someone could enter the banking business is to be a thrift charter. they could not by a state regulated banking company. i do not know what their motivation was. this was not a situation where they could have chartered a bank. they chose eight thrift because it was -- they chose a thrift because it was the regulator they wanted. there are about six years of difference between the financial conglomerate coming into play in europe and the ots regulating this company beginning in 2009. >> thank you for that on the record. i want to comment on one last thing and that is subject to counsel's review, i am going to

enter the september 2, 2008, targeted review of a i g -- targeted review of aig and the relevant portions of that report. >> i am it right handed. it comes so naturally to me to look right. >> that is what everyone tells me. thank you all for coming. if i could start with you, i do not know if you solve the ig -- i do not know if you saw the aig panels. ig got caught in the crunch.

why did they need a decrease in the supply of liquid funds? i have been trying to explore both whether or not now they think they mismanaged the credit risks that they had or do they think that they mismanaged their ability to predict the collateral calls. could you give me your views on this whole realm? where did they follow up? what i thought i heard was that the model was right, the model is still right, they let me go and if they had kept me on board to keep negotiating they would have never gone under. mr. dinallo, i will go to you if you have comments as well. >> it was a liquidity crisis in

2008. one of the frustrations we had with the firm while we were engulfed in 2006 and 2007 was that there was a extra -- there was an extraordinary amount of risk. that is irrelevant if you are holding assets on a capitalized -- that is irrelevant if you are holding assets and you are going to hold these products over the long term. he placed a lot of emphasis on it credit risk modeling. the board tax ax -- i think the cortex they got caught up in is that they were modeling it as a banking products. . that is a distinction that was lost on the company. they put too much on the products they were ensuring.

they do not get to pass the fact that there is a collateral trigger in their. you have to come up with cash to pay for it. they're planning was not sufficient. >> the reason why the distinction between treating it as a banking product or a mark market product is because of the collateral traders. >> if you're holding a housing loan, you do not have to mark that long every day. these were securities that either had a market price or you began to get more dysfunctional pricing out of the market. that proved to be a real challenge for the folks who were trying to assess the evaluations on the accountant side. the counterparties began to take greater marks on this.

it raises the call on aig which would not have been the case if you're looking at a particular loan. >> this was something that was an argument they made over and over again. they thought they were protected because the underlying products had a low probability of default. i have read in the papers that the characteristics are still pretty strong as far as cash flow. what heat nest -- what he missed and what he failed to take into account where the extraordinary demands that could be put into place overnight. they could downgrade the ratings of the overall company or the company could demanded collateral as a result of their

mark them. the company did not get that. >> i want to explore that. in your judgment, setting aside questions over whether or not there model was correct, all of those other risks -- do you think they did not understand this rest or they understood them and did not care about them or any knowledge of them? someone characterized aig as the world's biggest hedge fund and they knew it. what i heard from the panel was that they did not consider themself a hedge fund. >> i do not have a clue as to whether they thought of themselves as a hedge fund. >> did they understand these risks? mr. sullivan and mr. lewis and sounded like they did not

understand the risks. >> presumably, they understood that there was a probability. i am not going to speculate on what they were thinking, but the representations they made to us was that the probability of those things being recognized were very remote. >> in effect, they understood the rest and were willing to bear them because they figured they were and are low probability events and they did not have to worry about them. >> that is probably correct. >> in my written testimony, i had a lengthy "from an article that i thought was helpful. it pointed out that the type of credit defaults slot they sold

-- credit defaults swap they sold -- it is antithetical to an insurance book. the insurance department has never permitted disclosing collateral or any such aspects. i believed that they did not otherwise set aside the billions of dollars that it would take to sell that kind of product coupled with the liquidity that they would have needed if the date are correct in their direction all that. -- correct in their directional bet. i think it was a huge miscalculation. the article explains how they

were so profitable. wall street was willing to do a lot of business and pay for credit default insurance that gave you money when values went down. i also think having been there and heard the discussions and being involved with the notcyies that they did realize that if they accessed the line of credit that that would cause a 8 rating downgrade. i think that is an important point. i can't imagine the debate with the ceo. -- i can imagine the debate with the ceo. i do not want to sit at the holding company level. then someone would ask how to do

the lines of credit. they went and got all of these lines of credit. when you access them, the ratings agency ask you to bring them down three notches. thatalls -- that causes more collateral calls. >> the first part of your answer sounded like they were unknowingly taking huge bets on the credit risk. the second part where you are talking about the lines of credit, the words you use suggest that they did not understand how sensitive it they were making the survival of their firm. >> i do not know if i can get in their head on that. i am not trying to be evasive. i think that they knowingly sold at a certain kind of attractive credit default

insurance with the belief that somehow these chickens and would not come home to roost. however, when you are regulated as an insurance company, the regulator requires that you go over the standard deviations of the event and that you put aside and of capital for those events. that is the difference to a large extent between a regulated entity and a non regulated entity. the winning aspect -- they would not have seen the capital there. somehow, they got away with it because the world fought -- the world thought they had the balance sheet to back up these possibilities. >> they were getting away with taking a lot more risk than they

otherwise would have been able to if they had been a stand- alone entity. the market thought they had credit protection. is that the basics? >> yes. >> bid. -- good. >> if you were a regulated insurance entity with capital requirements, he would also be back stopping policies which paid out on economic loss. in this assistance, you had neither the capital plus you had the uncertainty of the marked market events. you had eight double-whammy. -- you had a double-whammy.

the kind they sold was so toxic that it was something and insurance regulator would -- if you have a house and they have to pay on the dilapidation, that is the kind of answer as they sold. that is really not insurance. >> your focus was on aig. my question is about the counterparties to it. i have heard the view about what people think would have happened had aig not been bailed out.

they were hypothesizing about what they could not possibly know. what is your view? was there a systemic financial risk as best you could tell had the fed not stepped in? >> i am reluctant to speculate. at that point in time, i was not involved with the firm. i read about it in the paper. i was not on the ground at the time looking at the facts. >> when you were still there, aig was a significant counter party to a bunch of financial firms. can you give us some sort of qualitative feel for how important was the continued existence of aig to other

significant financial firms? >> clearly, aig played a pivotal role in the marketplace. if you look at the information that we collected -- we began in 2006 to collect regular data -- they clearly had concentrations with the various financial firms. each of those concentrations in and of themselves and did not write -- did not constitute capital out of the ordinary. there was exposure to a number of these firms. if you would have seen the information from the other banks, he would have seen the same thing. when you have the perfect storm

and we had the situation where there is a lack of transparency about housing exposure, there is no market indicator of price. >> when i got the call on friday, september 12, we started a series of dialogues with the as of saturday, tim geithner was of the view that we cannot help them. if you are the insurance regulator, see what you can do. by about tuesday, it was clear that his views had changed pretty dramatically. i believe after talking to him that the views or changing because they saw the impact of lehman, they saw that the paper would not roll over all and

major institutions, and there was the fear factor that you would have a full-blown credit seizure that we have not seen since 1907. you could just about smell it. having said that, there are other ways it could have gone about, but it was clear to me that people were informing us and that they were very concerned about what would have banned the headline risk in the credit markets around the world. when i came on board, i was more skeptical because insurance companies were essentially good. when i came on board, he began to see people get in line in singapore. thaa was very concerning because the headlines and that all of these companies -- i

think it could have caused the last leg of the storm. -- at the time there was the claim that if aig failed, some of the entrance of products particularly in construction bonds, would fail and we would have to bailout every construction site in the united states. what was the real degree of spillover to the non-financial part of the world? >> that is an overstatement. by a twist of fate, the renewal. for many of the property lines

were very near on the horizon. the way an insurance company ultimately fails is that if you andot get people to readup they go somewhere else, you will feel it like a sledgehammer. if it had failed, risk managers all over the world would have said that they would not renew our buy insurance from aig. you have had eight big blockage in their system. >> just a comment on this, peter and i have different perspectives on this question. i think there is a burden on the

perspective that i have to explain -- i do not explain it well -- i do not understand it well enough -- how did that system that failure occurred? ? ? i think it is really important to understand which domino is knocking at which domino over and why. i do not feel like i had a good understanding of that. mr. gensler, let me give you a different question. you can answer that question and what i was asking before. back to this question on leveraging -- let me see if i can state this as succinctly as possible -- is there a problem with the leveraging that can

occur from a naked credit default swap that is separate from capitalization and transparency? when properly capitalized naked credit deval swaps have assault whenever -- naked credit defaults swaps have contributed to the housing bubble? >> i think the financial sector, aog being the best example -- aig being the best example, minimized risks. often, some of these rest were not even price.

-- often, some of these risks were not evenly priced. they do not take into consideration that bad things happen in the markets. >> they underestimated certain properties of that scenarios? >> they did not prepared themselves just as an individual household has to prepare in case bad things happen. >> the price is what ever you and i can't negotiate. is that what you're getting at? >> i think they underestimated rests between counterparties sometimes -- under estimated risks between counterparties

sometimes. many things that can happen then. normal distribution for economists does something like this. i left wall street 13 years ago. we often in this price at the risks. fundamentally, they incur under estimated. ultimately, it was a house of cards built on a housing bubble. they had so much debt in the housing market. >> when i am talking to people

who do not do this stuff, my one line description is that everybody made the same bad debt. >> the confidence of was shot and they could no longer find themselves. they could no longer borrow on the overnight market. they had a liquidity issue. if i just had more time at the gaming table, i would be all right. sometimes you run out of chips and no one will hand you any more chips. >> i would make the point about failing to gain al be liquidity -- the liquidity. -- failing to gain out the liquidity. that parent company does not

generate a generous amount of liquidity. it had subsidiaries underneath it. i think if you look at the liquidity analysis that we did in our 2007 report, the company relied on a number of facilities. it relied on bank alliance, debt instruments, and dividends from the insurance companies. then they could use those to fill the pot. i think a key factor is having that overreliance. yet the company at the top with a guarantee, you end up with a situation where liquidity is not available. you get into a position where

you are not able to meet a call on an overnight basis. i think it is not only modeling about the shock scenarios, but having real access to the liquidity the market perceives you have. >> what i have seen coming up over the past several months are some of these firms getting into trouble because they mismanaged their liquidity rex, the weakness of those firms saying that it was a once in a thousand years storm and nobody could prepare for that. in that case i say, how come you guys died and this one did not? aig seemed to stop with liquidity risk.

they are unwilling to admit that there were other risks that they underestimated which then caused a loss of confidence. these were not just runs on the bank because of some rumor. there was an actual underlying reason for the fear. >> thank you, mr. chairman. there is so much material to talk about. let me start with this. we note that everyone miss estimated the risk. -- mi everyone -- everyone misestimated the risk. i will not get into why we had this disaster in the subprime mortgage market. one of the things i think we

have to understand about credit defaults swaps is that it is a two sided transaction. the party that had to put up the cash is the party that is suffering when it is out of the money. the other party, however, has reduced risk. it is a more sophisticated type of arrangement than a normal bank loan. if something happens to a client during a -- client during the time a transaction is ongoing, the bank is stock and the client does not have to put up any additional collateral after the loan is made. we have a different kind of instrument here. i do not think there is enough understanding of this. commissioner hennessey has

raised the question in the past , why would draining credit default swaps replicate another type of loan? if aig had simply bought these mortgages or other instruments and helde in the cdo's them on their balance sheets would it have made any difference? i think you can say it may have made a difference because as these of things declined in value because everyone was

beginning to recognize what was happening in the housing market, then they would not have had to put up any collateral. it was the collateral that we can get them. we had a little bit of discussion about marking the market. i would like to start with you, mr. lee, because its -- because if an institution of any kind, would it not be true if the assets of that institution were declining in value as of were the assets of any financial institution that was holding subprime mortgages, what would happen to its financial condition?

>> i think what happened was what happened to a lot of the institutions that were carrying these instruments on their books. they would have to recognize the new valuations and mark down the portfolio to a market price. goldman sacks talk a lot about how hard it was to -- goldman sachs top of a lot about how hard it was to value these prices. they would have simply taken a mark down which would have reduced their tangible equity capital. then the company is presented with a dilemma. do they rely on it with lower capital on the books which could jeopardize their overall rating? it is the traditional problems

that a bank has when it marched down a loan. >> it is a very important distinction, but what we have to understand is it is a two sided distinction. the difference, as you point out, a bank has to write down a -- if a bank has to write down a loam, it typically does not have to put down any cash. position ispartie's enhanced. -- the counterparty's position is enhanced. when goldman sachs made a demand on collateral for aig, they were improving their position. all we are saying it that a cds

is a different kind of long transaction -- different kind of loan transaction. if it begins to weaken, one party has to restore some of the loss to the other party while the loan is weakening. it is two-sided. as the market's move up and down, the collateral moves back and forth among the parties for just that reason. we are blaming an estimate -- credit defaults swaps -- are something that is unique to that estimate and is different from any other financial relationship. you have to wonder whether it is the instrument that is the problem or whether it is, in

fact, the underlying asset that is the problem. do any of you want to respond to that? we will start with you, mr. lee. obviously, if someone else is willing to respond to go what you are saying -- obviously, if someone else is willing to respond -- >> there were other characteristics that made it more risky than the loan. they had to produce cash. aig would have been the borrower

in this case. they would have to put up the money on first sign of weakness. you have a situation where you have a product with inherent weaknesses that this allowed to exist in a structure without any sort of transparency as to what the witnesses or. i think the lesson learned from this is that credit default swaps carry with them risks that outpaced what we can measure in the credit characteristics of the ensured product. it is those issues that we have to address going forward. >> let me follow this up before i give mr. gensler an opportunity to speak. you are perfectly right. a lot of the properties of this credit default swap were not understood by the people to work with them. we heard testimony that some of the senior officers did not even know that they had collateral

obligations. i do want to make the point and make sure the point is understood that that aspect of this estimate is also makes it less risky to the lender. we are talking about a new device in the market. people have to get used to it and understand a little bit better, but it is not as though it is something we ought to react against or attack because it is something new. but for settling, we do that from time to time if we do not understand the principle -- unfortunately, we do that from time to time if we do not understand the principle. >> the housing market was a bubble and it burst. there is no exchange up front

and rarely any strange in principle for derivatives. aigaig never had to go out and t that $547 billion. that is why i am a real advocate for derivatives reform. we regulate these new products, we have significant new aig -- ons where deep dthe we are supposed to be talking about what contribution this might have made to the financial crisis. i understand your point. mr. dinallo, do you want to make

a comment? my thesis is simple. i looked at all financial products and i put them into four categories. there are bank deposits, futures, andambling and future there are bonds and stocks. there is no fifth category. a credit defaults what is either a gambling speculation -- 8 credit default swap is either a gambling speculation or a bond. when we told the world that

there were no capital requirements if you did those things by a derivative, wall street will always go for the lowest capital opportunity because that is how you do the business. you use the leverage to make a profit. basically, my view is that the -- if you permit the wholesale substitution of those for financial tides and the regulatory financial requirements, that is how you get the ratio we got. that is how you should look at a cds. >> when you get into the question of to protect whom,

people, especially consenting adults, should be able to look at the capital of the people they are dealing with and decided there is enough capital. >> we have a very strong roles. can i just say one thing? we have regulated the shorting of equities. i think that really hurt the financial system. >> thank you very much. let me turn to you, mr. demler. -- mr. dazzler -- let me turn to you, mr. gensler. derivatives have $300 a , larger than the

economy. does that represent risk? >> the derivatives market is about half of the world market. the underlying loans or underlying market value -- it is called notional amount. >> it is what you used to calculate with, right? you are calculating it on the basis of a notional value but you are not really spending that amount back and forth, right? >> you may or you may not depending on the derivatives. if you bite $50 of gas at a filling station, roughly speaking, there is $1,000 of

derivatives associated with that. it means that of that $300 trillion of derivatives which are not currently regulated our risk at the back of the system. >> does it mean $300 trillion in risk is somehow 20 times the economy of the united states? is there that much risks somewhere? >> it is what the risk is calculated against. let's hope it is a lot smaller than that. >> how much time do you need? >> why don't we start with three and go from there. >> we have to clear out of here. >> the numbers that i have heard is six tenths of 1%. that is the risk.

for credit defaults swaps, what is the percentage of notional value involved in trillions? do you have that number? >> the credit default swap market, the figures are between 25 trillion and at 30 trillion. >> is that an actual risk number? >> as it relates to credit default swaps, that is a good measure of the underlying corporate loans, bonds, and mortgages. there is something called compression that compresses it down to a smaller figure than $30 trillion. >> the number that i have heard is something like 2%. let's not argue about it now because we are running out of time. >> i have heard much bigger figures. >> they are not bigger bite

multiples. it is somewhere in the lower percentage amount that is the actual risk because -- if i make a credit defaults swap with you for $10 million, that is a total of 20 even though there is only $10 million involved. everything is counted many, many times. i am going to have to push ahead. these are statements for the record, but i will have a question for you. that has to do with interconnection. that chart was put up and it showed that goldman sachs was interconnected with other firms. there were losses automatically to everybody for many, many people who are interconnected when aig failed.

is it not true that there is a third party and called in all of this? for there to be a loss in a credit default swap, the records entity actually has to fail. >> i would say the third party is the u.s. taxpayers. what stands behind its current regulatory regime is the u.s. taxpayer. let's assume that we are talking about two small institutions that are dealing with one another and not talking about a one to systemically imported. the u.s. taxpayer is not involved. if the reference entity does not fail, is there a liability under a credit defaults swap between a and b. >> absolutely. even without failures of the underlying mortgages, we had a

calamitous situation. >> aig -- the only liability between the two of them is the collateral unless there is an actual default. it makes the interconnectedness of so hard for government officials to lead institutions of fail when they are so interconnected. >> let's move on. we will swing back if we have time. senator graham. >> thank you, mr. chairman. i do not like to disagree with my friends here, i think there are some other differences

between a credit defaults swap and a typical mortgage. just to mention a few, the gentleman from aig when i asked how he evaluated the derivatives, said he did it on the rating services. there was a note due diligence as to whether the specific estimates were behind those derivatives. if you are looking at an individual mortgage, you will be interested in who the person who is responsible for servicing the mortgage and all the conditions that led to the mortgage being issued. there is a dramatic difference in the level of due diligence. second, the scale of the matter. a mortgage is a mortgage, but once you get it into the

derivatives world, won a mortgage can become many, many times the level of risk of the starting point. the whole system is aggravated and expanded in terms of its risk. finally, a mortgage on a home is different than a loan on a truck or a commercial airline. a home is part of a network of society and went one home starts to get into financial difficulty, it has a contagion effect on a much larger set of americans. i think there are some real world differences that are worthy of our consideration in the difference between a mortgage and a credit defaults swap.

going back to the time of the failure of aig, mr. lee, i know you were out of the ocs at this time, but you made the statement that there were not a lot of options available. . . aig. to you or the other two panelists, was that because of a lack of imagination of what the options might have been or a lack of legal alternatives that could be looked to or both or some other reason why the options were as narrow as they were? >> well, i'm happy to speculate. i don't know if that would be helpful to you.

but i think that -- i think clearly the magnitude of the problem that the government was facing with aig whether it's in reference to the interconnectivity or just the dollar amounts that were involved made and the atlantic transparency to be fair behind the instruments made things very difficult for policymakers at that time and not being privy to what they were looking at and not looking at, it does seem like that given the pace at which following the failure of lehman brothers and the ripple effect through to aig and the pressure that game with the downgrade in the ratings of the parent company, it did present a vet extremely difficult scenario to the policymakers at that time. and again, i wasn't there. i wasn't in the room. so it makes it very difficult for me to talk about it, but perhaps some of the other panelists could offer more observations. >> for instance, if there were something available to a nonbank

institution like aig and i recognize that it does have a banking affiliation, similar to what happens when a real bank gets in trouble and the fdic shows up on friday afternoon and does a more or less orderly transition, if that option had been available for an aig, a, would that have been a desirable option to have available, and if so, how might the outcome have been different? >> well, i think that's a good point because as i pointed out in my testimony, i think any guarantees in this area going forward you know have, to be specific and enum rated because from the guarantee flows the government's ability to intersect with the problem and define a range of options. you pointed out deposit insurance being a great example that it brings withing it regulation which allows regulators to be heavily solved

not only in the products that are on offer on the deposit and the lending side but also give the regulators a clear window into the deterioration of the balance sheet and there's a well-established fdic process as you know, for resolving failed institutions. i think one of the real challenges of the system that we were operating under prior to the aig failure is that you had a lot of products that were not subject to these sorts of prudential regulatory authority. we didn't have the transparent sit to understand how they would perform under a range of circumstances and there was no back-end process for dealing with a failure. i think it was the having to make it up as we went that brought, you know, a very chaotic atmosphere to the whole situation. i think it made things extraordinarily difficult pore followsmakers at that time. which i think some of the work done by congress in the time

since is very important and again i've not read the bill and i don't know if the scenario is perfect but it does begin at least to build a structure around how we would deal with the failure of a systemic institution. i think having all of that defined and enumerate and subject to process beforehand is critical because trying to do it over a weekend under extraordinary pressures from the marketplace and elsewhere dealing with multitudes of billions of dollars makes things they difficult for the policymakers. >> any other comments on that? >> senator, i would say that having such resolution authority for nonbanks, i believe is critical. i know that the bill congress is addressing itself to that and it looks like that will be part of the law. absent that, then you can't go in and abrow gate contracts or negottate out that somebody's going to get 90 cents on the dollar, 93 cents. it was sort of an all or nothing. as i said to commissioner born's

question earlier, i do thinkful aig went, after lehman went, there would have been enormous liquidity, runs on liquidity for all of these other financial institutions and then the next one and the next one. you know, it would have been a very quick i believe domino effect, i was already happening. >> i would add that there would be a resolution authority kind of like what the insurance department has over the monolines currently. you would have stepped in and you would have in an orderly way not permitted collateral postings and claims jumping. you would have, as we did, we negotiated and commuted sort of safely softly landed several monolines and did not, you know, become the lynchpin of the financial crisis. part of it is because you have the resolution authority, you can commute some of the contracts. you can resolve them and you work it down the way you're alluding to. i think that would have been

enormously helpful. i also say that, again, i think i raise it had at the time that under tell for t.a.r.p. or whatever the term was then, all of that if the u.s. government could have stepped in and basically just substituted itself, i think it would have been much more orderly and we would not have had the optics that i think caused a lot of very angry justifiably angry americans. >> if i could have one minute for what's going to be a summary comment. >> one minute, yes, absolutely. >> i think there's an interesting parallel here to the other big crisis we're dealing with now, which is this deep water horizon collapse. for 20 years, the deep water exploration industry spent enormous amounts of money to develop very sophisticated technology to be able to drill at depths which would previously have been thought to be impossible.

what didn't -- and they did that largely because there was a big financial reward for being able to reach those new reservoirs of petroleum. what didn't happen was a parallel investment in the safety and the capacity to respond to an untoward event caused by that deep water drilling. it seems to me that we've had somewhat of a similar situation here, that the financial community with very innovative, creative large little driven by the high financial rewards of success in developing these new instruments and processes has outstripped it the safety, soundness and capacity to respond to a bad outcome. and that one of the challenges for us as we diagnosis this problem is to think about how -- to what degree can we suggest a

diagnosis that would encourage people to put those two levels, the profit-making innovation and the -- and the non-profit actually costly investment in the safety, soundness and capacity to respond on a parallel track. so whether it's a mile underwater or on wall street, we don't end up with another situation as we are today. end of commentary. >> thank you, senator. mr. who else hulse aiken. >> i want to thank everyone for taking the time to do this. thank you, mr. chairman. chairman gensler i want to push a little bit on the listing you gave of the contribution of drivlts to the financial crisis if i understand it, in particular, the notion of special interconnectsness that comes from derivatives.

before i do that, let me back up. we're trying to be as focused as we can about the contribution to the financial crisis, which is our mandate not necessarily policy towards derivatives in general. for the record, there appears to be, i'm not asking you to agree or disagree, no particular contribution from interest rate swaps, currency swaps, commodities, that in fact the derivatives in play are cdos and credit default swaps so that we should focus on that. do you agree with that? >> no, i don't believe in that. i believe all derivatives played some role. the entire marketplace contributed to interconnectedness, dealers that were concentrating risk and not necessarily just lowering risk and the lack of transparency. i respect that some people disagree with me on that, but i have -- >> can you give me an example of

concentration of risk from interest rate swaps? how did that play into the crisis? please elaborate. you were the first person to assert that. >> i understand your question. i understand your question. i that i that all of the large financial institutions are so intersect connected. when you see this, this is the interest rate side. the bigger bubbles. and then the credit default swaps are over here somewhere. that interconnectedness limits the flexibility of government regulators whether in europe or the u.s. to let something fail. i mean if one believes as i think you and i probably both believe that there should be a freedom to fail in our economy, we really do limit the ability of government policymakers and leaders of any party to let one of these institutions fail. so i think in the not the cause in '07, but i'm talking about in the critical weeks in '08 in september, it really limited the

flexibility of government leaders, this interconnectedness and the concentration that was there. i agree with you though that large narrative of it credit default swaps is the more specific tangible narrative, but in the middle of the crisis, i think the interconnectedness and the concentration of derivatives in five or six dealers here and ten overseas made it far more difficult to maneuver. >> so in that crisis, in 2008, had there been no derivatives, would the financial system not have been interconnected in repo markets? lending, asset bankcorp rat paper? >> one of the luxuries -- >> do you need derivatives to get interconnectnesses or is the financial system not interconnected to begin with by definition? >> i think there are many ways it's interconnected and derivatives is a crew critical one but you're right repo, stock loan, lending itself there

additional ways and we would agree that there's probably five or six key ways, but this way which is sort of modern finance in the last you know 15, to 20 years has made it far more difficult to let something fail. i remember my personal experience long-term capital management and looking at its long-term exposure, though no government money went into that institution in '98, a sig reason when i was at treasury and working at the new york fed at the time that we were concerned was its $1.3. >> trillion derivatives book and its interconnectsnesses to 12 to 15 other institutions. >> so let's back up then to a place which we've been talking about, aig, where it was not permitted to fail. would you point to derivatives as the source of this failure or as we had the discussion earlier particularly with commissioner hennessey, the managements'

enterprise failure to manage its various risks? >> oh, absolutely. i would agree with if it was commissioner hennessey that said that or just commissioner hults eken. >> i think we share this view. >> i think that will enterprise that, management underestimated its risk and thus mismanaged its risk and probably mispriced its risk ultimately on the housing market but correlation risk, credit risk and so for the. but then it put the u.s. taxpayers at risk, particularly through its driskts book it, put it the taxpayers at risk that each one of news this room have $600 obligated. that's 1 $0 billion divided by the population. >> so if i go back to mr. wallison's example, mr. wallison's example aig could have had the securities on its balance sheet. they could have diminished in

value and then aig would go have had the sad necessity to go out and raise more capital. it would have needed to go get more cash or it could have left the securities on someone else's balance sheet entered into the contract which says there's a credit default swap when they diminished in value, the other entity automatically got the capital it needed through this contract, cash went out and aig was in the sad position of having to get more cash. what's the difference and what's the contribution of a derivative? >> it's a significant difference. derivatives allow risk to be held by a party without putting up the principal, the public, the money up front. $527 billion of credit default swapz, $2.7 trillion total but that that $500 billion book, they didn't put any money up front. they were collecting premium like an insurance company collects premium. >> where are the cash flows.

>> but the same scrutiny and exposure to the real risk which is the risk that the underlying security will diminish in value because the housing bubble is over is present in both transactions. >> with all respect. >> this is my point. and the failure to assess correctly and provision for that risk is the ultimate failure. not the presence of a derivative. >> i think whether it's a cash market or a derivative, you can have the same inherent risk and i would agree with you the same inherniate risk of a housing bubble. in this circumstance, the derivatives added significantly to aig's circumstance because they didn't up that $500 billion initially and secondly it, wasn't regulated for whether it be cash markets or derivatives wasn't regulated to have capital in that aig financial products with all respect to what the office of thrift supervision was doing. so it was so ineffectively

regulated, it almost -- it was a horrible calamity that that entity had that much risk and short of regulation and short of putting up a half a trillion dollars, you know, the result was the housing bubble caught. >> and short of regulation, i just want to make sure i get your thinking on this and i'm sorry i have such a short amount of time. have we pull that had particular unit out, financial products, the market would have also disciplined them toll have more capital but it's inclusion within aig that disguised that risk? do you agree with that? that's an assertion we heard before. >> i certainly believe the marketplace was transacting with aig financial products because it had a aaa rating at the holding company but the largest derivative dealers are part of large complex financial institutions. so that's why i think it's been a gap in our financial

regulatory system. a gap that i somewhat was associated with if i might say. looking back, i think all of us should have done more to protect the american public. but that gap we really need to regulate the derivative dealers whether they're independent or they're part of a large complex financial institution, we desperately need to regulate these dealers. >> my time sup. i want to thank both you gentlemen. i'm sorry i didn't have timetom% inquire, as well. >> i should disclose we've seen each other in the campaign trail in 2004 and in 2008 and it's good to see you again if i might say, doug. >> mr. giorgio. >> this bipartisan love fest is nice to observe in this town. it doesn't happen very often. you know, there's been some indictment of the derivatives causing a problem because they weren't exchange traded. it's the case that is cash cdos

and cash rmbs residential mortgage backed securities are, also not exchange traded. i wonder if any of you might give us a comment on whether you think the financial crisis might have been smaller or different if the cash securities themselves underlying some of these derivative instruments were also required to be exchange traded so that there was more transparency of pricing and counter party risk. mr. gensler i guess, i'll start with you. >> well, i think that transparency helps lower risk to the american public. i also think it benefits end users whether it's in the cash order derivatives marketplace. within the derivatives marketplace, you need enough standardization you need enough liquidity and many of the products of aig were so customize that had they may not

have lend themselves even to being on exchanges. but i do think that the more transparency whether it be in the cash markets for mortgage-backed securities or the distributes markets, the more transparency we have it lowers risk to the american public. we're less vulnerable because even the customized product then can be prized in reference to that which is exchange traded. >> and where do you think these -- what exchange ought they to be traded on if -- >> well, i can best speak about distributes products, but i think that and congress is hopefully about to adopt this. that where there are derivatives that are cleared and are listed so this may be only a portion of the marketplace, where but where they're cleared and they're listsed they could be traded on

electronic platforms called swap execution facilities or could be traded if the retail public is involved on fully regulated exchanges. most of this is between institutions so it could be on these alternative trading platforms. >> to use the old can nard we ought not to let the perfect be the enemy of the good or whatever it is, you know, the mere fact that you can't exchange trade all the customized distributes or particularized rmbs or cdos, you know, that does not mean you ought not to try to put the rest of them, the runs that are relatively easy to standardize on an exchange because at least you're theory ret tickcally reducing the risk to the system by standardizing that exchange, insuring counter party credibility and credit behind it, and transparency. >> i'm in complete agreement.

i think it the transparency of the standard part of the markkt then becomes a reference to the rest of the market. i think it makes markets more efficient. it's what we have the in the securities an futures markets and it also makes these clearing houses far less risky because then they have a reliable price on upon which to price the daily mark to markets and the posting of margin. >> messers dinnal low and lee, any thoughts on this. >> well, sir i would point out that i completely agree with what gary says about transparency because obviously that brings better information to all sides of the transaction but you know, during this disfloeks late 2008 as a indicated i wasn't looking after aig at that point but i was regulating a number of financial institutions that did have these securities on their books. i think the difficulty that we had then was not necessarily getting information bush administration trades but just the lack of trades and the only trades that occurred were at

distress sales. had you hedge funds that were unwinding and dumping these things on the market at 20 cents on the dollar. there was a perceive disconnect between the economic intrinsic value of the security over time versus what it could price. so while i think you know, the virtue of transparency stands for itself, i think that i'm not sure an exquhing have helped us in that is instance because you just had you such an incredible spread between bid and ask that we were not able to ascertain the true market value based on the traditional market signals. >> at the time, a lot of our banks were coming to us saying we're holding these things and our customers were asking you need to take other and temporary impairment, they weren't mark to market because they were in the bank's portfolio but it was nonetheless an attempt to discover price. they would show us a lot of material about the trades within the tranches of securities.

there just wasn't a lot of them in the first place and in the second place, the prices were extremely distorted by the nature of the say. i'm not sure we faced in the fall of 2008 that it would have benefited having them on an exchange or not. it was a complete lockup of the department in that instance. >> mr. dinnal low, any thoughts? not necessarily if you don't have any. okay. let me harken back to something that i guess probably everybody here has heard from me ad nauseum that the proliferation of these securities, the rmbs, the cdos based on the rmbs, the cdos squared or cubed, the derivatives based on all these products was -- it's asserted were all created because people

demanded that clients, potential clients demanded that they own all of this risk. and that was sort of being pulled like pulling teeth out of the investment banking community who were compelled to create these instruments because there was so much demand for them. the other argument, of course, is that they were pushing them out. because everybody made money on them at every stage of the process. and this is to follow up on senator graham's point. you know, everybody made money. the orange natures of the mortgages, the brokers that originated the mortgages, the securitizers, the lawyers who drafted the instruments, the auditors, the credit rating agencies, everybody got paid a fee in cash at the time that all of these various esoteric securities were created without regard to their ultimate success or failure. and i've been trying to make the

point that maybe if more people had skin in the game or had to sort of eat their own cooking who were originating all these products that there might have been a greater degree of safety in the products, in the origination. that is more -- more articulate due diligence and more care would be an taken in the creation of the products if everybody knew that their economic future depended upon the success or failure of these instruments. and one suggestion some have said is maybe they ought to take their fees not in cash but in the instruments they create so that both the institution they work for and maybe even the bonuses to individual employees involved in their creation was dependent upon the performance of the instruments. does anybody have any thought on whether the financial crisis might have been averted if off emil yoriated or lessened in the event that the participants had

more of a stake income personally with regard to their earnings in the securities that they created? >> i have testified previously that i think that the originator of the loans no longer had any interest, you know securitization was a good thing on the first round but there's not that much risk in a community. i agree with commissioner hennessey's observation along the way that i think it was, i apologize if i'm wrong that, what credit default swaps did was permit these trading books to basically havinging this i believe false sense that they had insurance on the downside for all of these exotic cdos that you just ticked off. without the ability to sell insurance without adequate capital you would never them basically take on and create, buy and take on those kinds of instruments because essentially, they became aaa when people said

we have a cds oven it, it's aaa and they were leveraged out again. i think there will needs to either be radical changes in the origination responsibilities or there will can't be this belief that you have some kind of back stop wila thousand years of insurance experience shows us requires a certain amount of capital that we think we've magic little evaded with a derivative. . >>. >> any observationing? you don't need to feel compelled if you've got something compelling to say on it or any strong view? okay. do you believe the premise is essentially zplekt. >> i do. i think the. >> that's all. >> the products were extremely complicated and the atlantic transparency played a role here. so when the markets rose up, you had extremely sophisticated people who had package it had extremely sophisticated products and they didn't know what was in them and the ratings agencies

were a proxy for knowing and when that process broke down, then you had a market lock up. >> let's do this very quickly. ms. born and mr. wallison each have a question and then we'll wrap this down, members. >> i just have one last question for mr. dinallo. you said in your testimony that the deregulatory effect of the commodity futures modernization act played a role in the financial crisis. and i wondered if you could elaborate a little bit on how that worked. >> i believe that there are core financial products that the regulatory regimes of different regulators, whether it was the banking regulators, the insurance regulators, futures and even legal gambling

regulators over bonds and investments understood through good learning what the right capital requirements were for doing that business. and sometimes it's called net capital. sometimes it's called reserving. and what the cfma did, in my mind, was it told all of wall street you no long ver to told capital to do that kind of a business. you can replicate it through a distribute in an unregulated entity and like magic, you don't have to use billions of dollars of holdback capital. you can do it with very little capital. and it's unregulated. and no one can go over there and argue with you. this is not about enforcement. this is about regulation which is what regulators do, they set capital requirements basically. and within eight years you saw in my view, this huge rampup as wall street figured out how to replicate what otherwise used to

cost more capital into much more leveraged and apparent profitable ways, and that to me is what led to a large extent to the financial crisis was this is belief that we were going to get less risk when in fact, we completely crushed through the risk. whether it was -- i don't like to make this just about insurance but that would be arguably my expertise, but in all areas you saw a migration away from capital requirements, which i thought were wise and were good laerngsing into basically capital-free enterprises and to me that's how you ended up where we are now talking about it. >> thank you. >> mr. wallison. >> thank you, mr. chairman. very quickly il have three questions but i'm going to only pose one now and i'd like to you respond to the other two in writing and even the third in writing. this is for mr. gensler. my first question would be, the posting of margin nur a clearing

house in a situation in which people don't understand the risk as the case we've just had. why will that not cause a problem for the clearing house in the future when a lot of failures occur. don't answer now. the second is aig failed in a market where everyone was not weak if it had failed in the market where everyone was not weak. would there have been a need rescue aig, in other words, is it interconnected in such a way as to create serious problems if they're not already weak and we will, the experiment that we're talking about here is one in which everyone weak. don't answer. please respond in writing. lehman brothers is the one example we have of a very large player in the market, and this is the question i'd like to you answer now, lehman brothers. failed. out of business. the one area that we know it was

interconnected with was the reserve fund that was a simple loan. reserve fund held something that lehman brothers of would -- was unable to pay and so it suffered the loss that broke the buck and that caused a run on the reserve fund. but other than that, is there any evidence, and you can actually provide this in writing, too, if you want, don't have time to think about it now is, there any evidence of other institutions actually becoming insolvent as a result of lehman brothers' failure? that would be a validation of the interconnection argument. >> we will gladly to check to see if there's evidence of somebody becoming insolvent directly but it's the indirect effect of the interconnectedsness when lehman brothers fails, all risk premium, all concern about

financial institutions is heightened and in part, the interconnectedness. now clearing houses to your first question, no, it's lehman brothers actually. >> all right. >> there was a clearing house on interest rate swaps that moved in 27 trades, they moved the interest rate swap positions of lehman, and then also over at the chicago mercantile exchange clearinghouse for futures were able to move by that monday, you know, it was failing over a weekend, was able to move those futures positions. so lehman's futures and interest rate swap positions were able to be moved very quickly. whereas even over many months later, there are still people trying to get some of their money out of lehman. so i apologize if i connected your first question to your third but it was evidence to lehman brothers in clearinghouses. >> if you can put more of that down in your answer to all three questions, that would be fine. and i appreciate.

>> i'm looking forward to it. i'm hoping one of my colleagues wrote the questions down. >> we always send the questions out anyway. you don't have to worry about that. >> yes. all right. any other questions from commissioners? are we sateed? not really. seated for the day. before we adjourn, i want to thank the witnesses for coming here today. thank you for your time, four your preparation, for your answers to our questions. i want to thank as always the members of the commission who are really extraordinary in the way they prepare for and take seriously the mandate and the charge we've been given. i want to thank our staff who works endless hours in preparation for these hearings and just the public what, you're seeing is the tip of the iceberg. our chance to discuss issues in public. we are trying to do in the limited time frame that we have an exhaustive look at the causes of the crisis and on behalf of the american people and the staff is doing a great job of assisting us.

i want to thank the public who tuned in today or may see it on c-span as i did at 1:45 a.m. last night. i got to watch commissioner born and vice chairman thomas doing their questioning and finally i want to thank senator dodd and the senate banking committee and the staff of the committee for being such good hosts to us not just

.

>> yeah, this is a good question. first, i said stimulate now, not spend now. i think that tax cuts could play an important role in

encouraging stimulus, especially on the business side, and kevin is the guy to ask about that. one way to address the concern you mentioned is to explicitly state in the legislation that, you know, we're doing this until the unemployment rates sort of sliding scale, so that you're agreeing not just on the impact spending a tax cut now, you're agreeing on the path, right? and that would then feed very nicely into shaping what a medium term fiscal discipline package would look like. granted, it's probably a heroic thing to expect, given what norm described in terms of dysfunctionality. but in terms of, you know, in terms of like figuring out what the right solution is, i think that has the feel of the right solution and how we implement that is what we're going to

find that to norm. >> yeah, i think i'm going to give a quick comment. because the spending trends, the cost trends for entitlements are long term, we can act well ahead of time to get on top of the issue. just as an example, with social security, the last reform was passed in 1983 and raised the retirement age from 65 to 67. the increase didn't start until 2000. it doesn't finish getting to 67 until the 2020's. when the retirement age started rising in 2000, nobody said anything. i did a radio show yesterday talking about the retirement age, and the host of the show didn't even know it increased at all, which might not be optimal policy, but the point is, people have a lot of warning on these things, it's not -- it's not so hard to do. people say, when thinking about the fiscal commission, oh, we can't cut social security during the middle of a recession, and that's true, but nobody's thinking of doing that. what they're saying is, over

the long term, we're going to reduce the rate of these programs so they'll be smaller, whether you're in expansion or a recession. so i think it just has to be understood more clearly what's going to go on with these types of reforms. >> ok. we've got time for one more question. [question unintelligible] >> ok, one of the reasons why -- there are many reasons to focus on tax expenditures as opposed to rate increases, but the reason, in context of your

question, if you raise the rate but you've got this swiss cheese kind of tax space, then people are going to find ways to void the rate increase. the elasticity is precisely a function of how broad the tax base is, that is, of how many loopholes, deductions, credits, special allowances, set. so my preferred approach is essentially what happened in 1986 on the base, which is clean out the tax base, get a broad, consistent base, and that will raise revenues without necessarily imposing much in terms of rate increases. it will rate the effective rate, of course, that's the same thing as raising revenues, but the idea that we have all these things subsidized and then we're going to jack up the taxable rates more, to me, it doesn't make a lot of sense. i'd like to see us attack the base first, and then think about rates only after that. >> thanks very much. thank you all for coming.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> on this morning's "washington journal," a conversation on immigration policy with the national immigration forum. after that, journalist and documentary filmmaker sebyast an junger will talk about his recent film on the u.s. military in afghanistan. after that, elizabeth lynam of the citizens budget commission

on new york state's budget deficit. "washington journal" each morning at 7:00 eastern. later in the morning, an update on the latest job numbers. live coverage from the joint economic committee begins at 9:30 eastern. that's on c-span span2. >> sunday, your questions for syndicated radio talk show host bill bennett live on book tv's "in depth." he's the author of more than 20 books for adults and children. join the discussion on american history, education, and politics, three hours with bill bennett, sunday, part of book tv's three-day holiday weekend on c-span2. get the whole schedule at booktv.org. >> in a surprise turn of events, australian prime minister kevin rudd was forced to step down last thursday after months of political debate over a 40% tax on the mining industry opposed by his government. he lost a leadership battle

within his governing labor party with his deputy leader, julia gillard, june 23, clearing the way for her to become the country's first female prime minister. hours after accepting her new position as prime minister and party leader, she addressed members of the australian house of representatives in her first question time. this program is a recap of last week's events, which include remarks from ms. gillard and outgoing prime minister rudd and a portion of prime minister gillard's first question time. >> thank you very much, and thank you for joining me in this jam-packed room. and can i say, australians one and all, we have the greatest resolve and enthusiasm that i sought the endorsement of my colleagues to be the labor leader and to be the prime minister of this country. i have accepted that endorsement. and i am truly honored to lead this country which i love.

i'm utterly committed to the service of our people. i grew up in the great state of south australia. i grew up in a home of hard-working parents. they taught me the value of hard work. they taught me the value of respect. they taught me the value of doing your bid for the community. and it is these values that will guide me as australia's prime minister. i believe in a government that rewards those who work the hardest, not those that complain the loudest. i believe in a government that rewards those that, day in and day out, work in our factories and on our farms, in our mines,&in our mills, in our pubs and in our hospitals, that rewards that hard work, decency, and effort, the people who play by the rules, get

their kids off to school, stand by their neighbors, and love their country. and i also believe that leadership is about the authority that grows from mutual respect shared by colleagues, from teamwork, and from hard work, teamwork, and spirit. it's these that have been my comfort during the 3 1/2 years of the most loyal service i could offer to my colleague, kevin rudd. i asked my colleagues to make a leadership change, a change, because i believe that a good government needed to be in its way, and because i believe fundamentally that the basic education and health services that australians rely on and the decent treatment at work is at risk at the next election.

i love this country and i was not going to sit idley by and watch an incoming opposition cut education, cut health, and smash rights at work. my values and my beliefs have driven me to step forward to take this position as prime minister. today i want to make some commitments to the australian people. i want to make firstly a commitment that i will lead a strong and responsible government that will take control of our future. a strong and responsible government improving and protecting the essential public services and basic rights our people depend on, including, so importantly, their rights at work. i wish to make two acknowledgments. i take my fair share of responsibility for the rudd government's record, for our important achievements and for the errors made. i know the rudd government did

not do all it said it would do, and at times, it went off track. i also certainly acknowledge i have not been elected prime minister by the australian people. and in the coming months, i will ask the governor general to call a general election so that the australian people can exercise their right and choose their prime minister. between now and this election, i seek their consideration and their support, and i seek that consideration and support as we emerge from the biggest financial crisis the world has faced since the great depression, with the lowest debt, amongst the lowest unemployment rate, and the highest growth of the world's economy. this is an achievement we should be proud of, the working people, the employers, the employees, the trade unions, the small and big businesses, the employer associations who

all made this possible. i give credit to every hard working australian for what has been achieved during these difficult economic days. i give credit to paul casey as the architect of today's modern prosperity. i give credit to john house for continuing this reform. and i particularly give credit to kevin rudd for leading the nation in such difficult times and keeping people in work. and today, i can assure every australian that their budget will be back in surplus in 2013. so, having seen the global financial crisis and how our nation has responded, it has reinforced in me my belief that when this nation pulls together, we can do great things. it's my intention to lead a government that uses that

spirit and that will to do even more to harness the talents of all of our people, to do even more to make sure that every child gets a fair go in life and a great education. it's my intention to lead a government that does more to harness the wind and the sun and the new emerging technology. i will do this, because i believe in climate change. i believe human beings contribute to climate change, and it is a disappointing to me as it is to millions of australians that we do not have a price on carbon. and in the future, we will need one. but first we will need to establish a community consensus for action. if elect as prime minister, i will reprosecute the case for a carbon price at home and abroad. i will do that as conditions improve and as our economy

continues to strengthen. there's another question on which i will seek consensus, and that is the proposed resources super profits tax. australians are entitled to a fairer share of our inharntance, the mineral wealth that lies in our grounds. they are entitled to that share. but to reach a consensus, we need to do more than consult, we need to negotiate. and we must end this uncertainty which is not good for this nation. that's why, today, i am throwing open the government's door to the mining industry, and i ask that, in return, the mining industry throws open this mine. and today, i will ensure that the mining advertisement paid for by the government are cancelled. and in return for this, i ask the mining industry to seek their advertising campaign as a

show of good faith and mutual respect. negotiations will occur with the mining industry. they will be led by the treasurer and new deputy prime minister and minister martin. can i say, dealing with these issues, that as incoming prime minister, i want to say something to our troops, to our men and women at home and abroad. we're a grateful country, and we acknowledge your sacrifice. our country relies on you to keep us safe. to keep the peace and to honor the u.s. and the other alliances that are so important for our nation. the most recent loss of life of brave soldiers in afghanistan and the injuries that befallen our troops remind us all of the depth of the sacrifice that our serving men and women can be called on to make.

our thoughts are certainly with the grieving families. finally, i want to pay a tribute to kevin rudd. ultimately kevin rudd and i disagreed about the direction of the government. i believe we needed to do better. but kevin rudd is a man of remarkable achievement. he made wonderful history for this nation, but wonderful history. he was the leader who with drew our troops from iraq and had the foresight to reinforce our commitment in afghanistan. he was the leader who saw us through the global financial crisis, the leader who determined intelligence and determination to health reform, combating homelessness and closing the gap for indigenous australians, and he came within a breath of brokering an

international agreement on climate change, truly remarkable. of course, i will be talking to kevin rudd about his future in the parliament air party. i'm also delighted to be standing here with a new deputy prime minister. wayne guide us through the very difficult waters of the global financial crisis. now he's guiding us back into surplus, getting the budget back into black. wayne is an outstanding treasurer of this country, and i know he will make an outstanding deputy prime minister. of course, there will be some consequence yal changes in our cabinet and ministerial arrangements, and ale nouns them at an appropriate time. in conclusion, can i say to my colleagues assembled, to the men and women of the press, i will dedicate my abilities to what i believe in, a nation

where hard work is rewarded and where the dignity of work is respected. a nation that prides itself on the excellence of its education system, where government can be relied on to provide high quality services for all australians, an australia that can achieve greater things in the future. we should not be afraid of the future, a strong australia respected as a global force for progress, for peace, and for tolerance. a bright democracy for the world to admire and a sanctuary for all of our people. can i say to the australian people, there will be some days i delight you, there may be some days i disappoint you. on every day, i will be working my absolute hardest for you. thank you very much. >> i was elected by the australian people as prime minister of this country to

bring back a fair go for all australians, and i have given my absolute best to do that. i've given it my absolute all. in that spirit, i'm proud of the achievements that we have delivered to make this country fairer. i'm proud of the fact that we kept australia out of the global economic recession. i'm proud of the fact that had we not done so, we would have had half a million australians out there out of work. because that's what happened round the rest of the world. i'm proud of the fact that we got rid of work choices and restored decency to the work place. i'm proud of the fact that we started to build the nation's infrastructure, including a national broadband network which i fundamentally believe will transform this economy in ways we have yet to concede.

fundamental it will transform our businesses in a way in which government cooperates, health services are delays, and a way in which education is delivered in our classrooms, the missing piece of 21st century for our country. i'm proud of the fact that we have begun the education revolution. 300,000 extra computers in classrooms is a pretty big thing for a kid in a classroom who's never seen a computer on their desk before. i'm proud of the fact that we now have a training centers built to service every one of our nation's secondary schools. i'm proud of the fact that new libraries are springing up across the country, often in schools which have never had a library before in their lives, or in some places, have never had a new building built in their school since the war. i'm proud of the fact that we now have nationwide early childhood education. i'm proud of the fact that we now have a national curriculum

for our schools, for every state of our nation and the territories. i'm proud of the fact that we now have 50,000 more university s and the fact that we've had invested so much more in our universities, in our research. i'm alley proud of the fact that we've reformed the health system, a national health network. when we look back on this in a decade's time and the fact that we've made the australian government for the first time in our history the dominant of our nation's hospital system. this will be seen as a very, very, very deep reform. i'm proud of the fact that we are building 20 regional cancer centers right across our country. if you go out there and people are suffering from cancer, it

does alter your priorities. many of us have never had cancer services before. never. i was always stunned by the fact that people out there are three times more likely to die. in the first years of their diagnosis. we've done something to change that. and it speaks. the biggest investment in cancer services our nation has ever seen. i'm proud of the fact since some people have probably never heard of this one, that we have

a national organ transplant authority. as somebody who bore othered someone else's aortic valve, i feel a particular responsibility as to that. there's nothing like having a bit of somebody else in you. it focuses the mind, and in my case, also focuses the heart. what i'm really pleased about in the last two months, the organ donation rate for the first time started to rise.

people now are getting transplants. because we chose to make a difference. nice thing about health, isn't it? it has an effect on you. i'm proud of the fact that we've restored decency to the age pension. it's pretty important. making sure that people in the compensation had some compassion for human dignity. an extra $100, the biggest

increase in the pension's history. i'm proud of the fact that we now have paid partneral leave. it's been a long time coming. i'm proud of what we've done on the homelessness. i'm proud of the fact that we are on track through work like common ground in which we're directly involved. i'm proud of the fact that we're adding 20,000 additional units of social housing. i can't stand it when you go to places, and there is literally

no place at the end. i'm proud of the fact that the first thing we did in government was ratify the kyoto protocol. also proud of the fact that we boosted the renewable energy target. 20%. i'm proud of the fact that we tried three times to get an emissions scheme through this parliament, although we failed. and if i had one point of future policy, it must be our ambition to pass a carbon pollution reduction scheme within this parliament, the one that follows, i mean, so that we can make a difference, a real difference to climate change.

i'm proud of the fact that we have a mason authority, and for the first time in our history, a basin-wide plan and a basin-wide cap on water. also proud of the fact that, on the global stage, australia is now at the table of the g-20. this is big for the country. when we look back on 10 years' time, having a place at the table when stuff goes on around the world is pretty useful. we lobbied hard and long for that. it is a good achievement for australia for the future. i'm proud of the fact that we are closing the gap between indigenous and nonindigenous australians. little things and big changes, putting hundreds of our

indigenous kids with scholarships into our nation's leading boarding schools, backing such things as an academy, now 22 we fund around the nation to get kids to school and boost their attendance by providing a.f.l. training. i'm proud of the fact that we're behind a commitment to create 50,000 additional jobs for indigenous australians with the private sector. and i'm most proud of the fact that, about here, we greeted the stolen generation.

as i was reminded, that was a big day. what i remember most about it, for those of you who weren't here, was as the stolen generation came in from over there,, they were crying. our job was to make them welcome. the apology was unfinished business for our nation. it is the beginning of new business for our nation. what i'm most proud of is the fact that i have now blubbered.

i hope i've been able to demonstrate to you that this has been a very busy 2 1/2 years. we have thrown our absolute all at this. and i believe when we look back at this, these reforms will endure into the future. and make australia, i believe, a fairer and better place than it would otherwise have been. the prime minister.

>> thank you very much, mr. speaker. mr. speaker, this morning i was elected as leader of the parliamentary labor party. i was subsequently sworn in by the governor general as prime minister. the honorable wayne swann has been elected ads the deputy leader and will be the deputy prime minister of australia. our table for the information of the house, a revised ministry leaf reflecting those events. i have the doult incorporated in. with your indulgence, mr. speaker and the indulgence -- >> no objection. >> i will make some very brief remarks. mr. speaker, obviously i've already had the opportunity to speak to the australian people through the press about my intentions and plans as prime minister. i will not repeat all of those words now. but can i simply say, it is mm intention to lead a government that is focused each and every

day on meeting the needs of working families around the country. i accept that the government has lost track. we will get back on track. i have taken control for precisely that purpose. i say about the former prime minister, the honorable kevin rudd, who is in the parliament with us today, that he certainly has the gratitude and respect of the labor party, and i believe that every member of this place would be full of admiration for the remarkable and dignified way in which he has conducted himself today and the fortitude and strength of character he is showing, including by attending in question time today. can i say to my deputy, wayne swann, congratulations auto

taking that position. i very much look forward to us working even closer together than we have since the days that the government was first sworn in in november 2007. can i say to the leader of the opposition, we are very different people. we are very different people, different outlooks on life, different policies, different views, different apartments. we've made very different life choices. i believe we both understand what an honor and a duty it is to serve as prime minister and leader of the opposition, and i also believe we know the responsibility upon us to lay before the australian people clearly and precisely the things for which we stand and the things that we will do if we are elected at the elections this year, which i will call in coming months. thank you very much, mr.

speaker. >> the leader of the opposition. >> well, mr. speaker, i note that the deputy prime minister has become the prime minister. i note that the treasurer has become the deputy prime minister, and i congratulate both of them on their promotions. i understand, perhaps not as well as they do, but i certainly understand that the to hold high office is a great privilege, and we all understand how it must be discharged in the best interests of the australian people. may i, mr. speaker, offer come isrations to the member griffith. he was elected prime minister of australia by the australian people, and he should have been allowed to face the judgment of the australian people. mr. speaker, a midnight knock

on the door, followed by political execution is no way that the australian prime minister should be treated. >> hear, hear. >> now, i accept that there is a big challenge, a big challenge before all of us in this place to offer the right policies to the australian people. the new prime minister has admitted that the government has lost its way, and her challenge will be to demonstrate how things will be different given that she is as committed, it seems, to the policies of the former prime minister as he was himself. regardless, i think the australian public can expect a fierce contest. it will be a tough contest. i respect the abilities of the prime minister, and i hope, as well as being a tough contest,

it will also be a clean and fair contest. >> order. order of the house, so the house will come to order. order. >> question about notice? are there questions for the leader of the opposition? >> sprile be spiesed to know that my question is indeed to the prime minister. given the prime minister's claim to want genuine negotiations over the design of her great new tax on mining, i ask, as a sign of good faith, will she remove from the budget the $12 billion in net revenue estimated to be generated by the tax in its current form? >> the prime minister. >> thank you very much, mr. speaker, and i thank the leader of the opposition for his first question to me. what i can say to the leader of

the opposition is this government, led by the treasurer, with the minister for resources here, martin ferguson, the responsible minister, will negotiate with the mining companies of this nation. i have said to the mining companies of this nation publicly that the government is opening its door, and we are asking them to open their mines. i will also feared, as a show of good faith, and this has been -- this fab enacted that the government will remove its advertising from australia's television screen. in return -- in return, i have asked that the mining companies do the same, and i advised, c.h.p. has already taken that step. the negotiations will proceed in an orderly fashion step by step, piece by piece, led by the treasurer, and, of course,

at the appropriate time, the government will make further announcements about the super profits tax. >> hear, hear. >> and that's all we have for this edition of question time from australian parliament. we're now entering the mid winter break, so that means we won't have another dose of australian politics until august. that is, of course, unless an election is called here between now and then. i'm david lipson. thanks for watching. >> up next on c-span -- yesterday's confirmation hearing for supreme court no, ma'am neerk elena kagan. topics on "washington journal" include immigration, afghanistan, and new york state budget deficit. "washington journal" each morning at 7:00 eastern.

>> c-span is now available in over 100 million homes, bringing you a direct link to public affairs, politics, history, and nonfiction books, all as a public service, created by america's cable companies. >> next, witnesses testify at the confirmation hearing for supreme court nominee, elena kagan. topics include military recruiters at harvard and labor issues. this portion of yesterday's senate judiciary committee hearing is an hour and 15 minutes. good afternoon. i apologize to everybody who has been waiting patiently. we have respect for our former colleague and long-serving colleague senator robert byrd whose body is lying in repose in

the senate. something extraordinary until just a few minutes ago, we decided not to hold hearing during that time. this, there are a number of panels. any one of you have a st-stateme post-statement, we'll put the statemt on the record no matter what. you can submit your statement. all of it will be on the record, and then i would urge you to each one keep it in the five-minute limit a then senators will be recognized for five minutes each to go around. i would ask all of you to stand.

sorry. just the witnesses. i'm beginning to feel important, at that point. i've never had a roomstand before. colonel, i know about your shoulder. you should not worry, we're not going ask you to raise your right hand. if you repeat after me. do you solemnly swear the testimony you will give in this matter is the whole truth, nothing, but the truth so help you god? all you have to say is "i do." thank you. frankly, i can't imagine any member of this panel or the other panels doing anything, but. our first witness miss leadbetter, lilly leadbetter served at the goodyear tire and company plant in alabama for more than 19 years. she was the plaintiff in the

employment discrimination in the goodyear and she's a tireless advocate for workplace fairness and that had been kept hidden from her until well after she was out of retirement. the lilly leadbetter, please go ahead. >> thank you, mr. chairman and members of the committee. my name is lilly ledbetter, and it is an honor to be here. i am not a lawyer, but i know two things. i know that the supreme court cisions have a profound effect on everyday americans, and i've learned that who is on the supreme court makes all the difference. i never in a million years would have thought that one day i

would have in my fate decided by the supreme court, but i did. it all started in 1979 when goodyear hired me to work as a supervisor in their plant in gaedston, alabama. i worked hard, and i was good at my job, but goodyear did not make it easy. i was only one of only a few female supervisors and i faced discrimination and sexual harassment by people who didn't want women working there. at the end of my career someone left an anonymous at work compared how much i earned compared to male managers. i was earning 20% less than the lowest-paid male supervisor. the next day i filed a complaint with the eeoc. goodyear tried to say i was a poor worker and that's why they had given me smaller raises than

the men, but after hearingll of the evidence the jury didn't believe them. it found that goodyear had discriminated against me because i was a woman. that was a good moment. the jury wasn't going to stand for a national corporation paying me less than others just because of my sex. but then by a single vote the supreme court took it all away. five of the justices said i should have complained after the first time i was paid less than the men even though i didn't know what the men were getting paid and had no way to prove that it was discriminatory. the court said that once 180 days' pay, the smaller paychecks no longe counted as diskrim nait nation, but it sure feels like discrimination when you're on the receivingnd of the smaller paycheck and trying to support your family with less money than the men are getting for the same job. goodyear continues to treat

females like second-class citizens and workers today because my pension and social security is based on the amount i earned. goodyear gets to pa my extra pension as a reward for breaking the law. justice ginsburg hit theail on the head when she said that the majority's decision didn't make sense in the real world. people can't any around asking their co-rkers how much money they're making and in lots of places thatould get you fired. plu even if you know that some people are getting paid more than you, that's no reason to suspect discrimination right away. you want to believe that your employer is doing the right thing, and it will all even out down the road and anyway, it's hard to fight over a small amount of money early on, but the majority didn't understand that or didn't care. how it could have thought congress would have intend the law to be so unfair, i'll never

know. so congress had to place a new law to make sure what happened to me wouldn't happen to others in the future. my case shows that who gets appointed to the supreme court really makes a difference. if one more person like justice ginsburg ear justice stephens were on the court, one more person who understandwhat it's like for ordinary people living in the real world then my case would have turned out pifferently. since my case i've talked to a lot of people around the country. most can't believe what happened to me and want to make sure that something like it doesn't happen again. they don't care if the justices are democrats orepublicans or which president appointed them or which senators voted for them. they want a supreme court that makes decisions that make sense

that's why these hearings are so very important. we need justice who understand that law must serve regular people who are just trying to work hard, do right and make a good life for their families, and when the law isn't clear, justices need to use some common sense and keep in mind that the people who write laws are usually trying to make a law that is fair and sensible. this isn't a game. real people's lives are at stake. we need supreme court justices who understand that. thank you very much for allowing me this honor. thank you, sir. >> thank you very much, miss ledbetter, you've been before this committee before, and i always appreciate you being here. >> our next witness is jack gross. he recently retired from the bureau of financial services for

29 years. he was the plaintiff in fpl financial services inc.. the supreme court filed a 5-4 decision and the case in 2009 made it more difficult for employees to prove they were victims of age discrimination. i advocate for the passage in protecting older workers against the discrimination act. please go ahead, sir. >> thank you, chairman leahy, ranking member sessions and committee members for inviting me here to tell mytory and state my position regarding the outcome and implications of the supreme court decision in my case. it's an honor to be given this opportunity to speak out. on behalf of millions of older workers, all too many of whom have faced discrimination in the workplace. my story is being duplicated daily across the country, and my

case has been cited hundreds of times to deny remedies to victims of many other non-title 7 forms of workplace discrimination. i certainly never imagined that my case would end up he when it all started over seven years ago or that it would have such far-reaching implications. very briefly, my employer, farm bureau insurance, or fbl dismissed employees 50 or over and had supervisory or higher positions. i was included in the demotion even though i had 13 consecutive years of performance reviews in the top 3% of the company. my career and contributions were exceptional and very well documented for the jury. with very strong evidence of age discrimination, i filed a complaint and two years later a federal jury spent a week listening to all the testimony, seeing all the evidence and being instructed on the adea, your law. the verdict came back in my

favor, and i thought the ordeal was over in 2005. as we now know it was just the beginning. fbl appealed and the eighth circuit overturned my verdict because i had the next motive, and they said that required so-called direct evidence insad of just the preponderance of circumstantial evidence that we had provided. with four decades of legislation and core pcedent overwhelmingly on our side, we appealed to the supreme court and we were elated when they accepted it on that one issue on the requirements. at the hearing, however, the supreme court broke with their own protocol and allowed the defense to advance an entirely new argument, one that had not been briefed nor were we given an opportunity to prepare a rebuttal. it was a bait and switch on us. ignoring that question to use my

case as the vehicle for the clear intent by creating a new hierarchy of workplace discrimination. those specifically covered in 2007 were now at the top and required the standard approved while all letters including age and require a new and significantly higher standard of proof. i believe congress, the branch of government closest to the people clearly intended to abolish discrimination in the workplace and not to create exceptions for it or to stratify it. we came to d.c. last june believing the highest court would uphold a rule of law and apply it consistently to all areas of discrimination. we were disappointed and quite frankly disillusioned by putting their arrogance ahead of the clear will of congress and their own precedence. since the supreme court's decision i've been distressed over the collateral damage

associated bee others. i hate my name associated with the pain and injustice now being inflicted on other victims of discrination because it is now nearly impossible to provide the level of proof required by that decision. my case went largely unnoticed by the media and the public, but its tentacles will impact the lives of millions of workers. i have to keep reminding myself that i'm not the one who changed your law, five justices did. by that i'm not labeling the court a bad court, but they did get it entirely wrong and it is unjust, mistakes can be fixed and we can move on. >> congress has a long history of working together on a bipartisan basis to create and maintain a level playing field in the workplace. the adea is one example. i urge you on behalf of millions of workers who only want an equal opportunity to revive the bipartisan spir and the passed

the protecting older workers. soon, before more constituents back home ar hurt by the new court made law. over the decision to pursue this case, as much as i hate discriminati and all its forms i knew i would be burning my career bridges behind me once i ran it a litigious. my wife marlene and i prayed about it and decided it needed to be done and left the outcome in god's hands never expecting that he would bring us here. if my experience eventually prevents anyone else fromaving to endure the pain and humiliation of discrimination, i will always believe that this effort was part of god's plan for my life. thank you. >> thank you very much and thank you for coming here again. jennifer gibbons is with the leading environmental advocate

organization from prince william sound, alaska. i went there once years ago with former senator ted stephens. it's a beautiful area. she lives in a remote fishing town of cor coach a the site of the 1989 exxon valdez oil spill. she's informed the public about the ongoing environmental, economic impacts of the "exxon valdez" oil spill. miss gibbons, go ahead. >> thank you, mr. chairman and commit members. i am honored to be here today and speak briefly about the still ongoing impact to people in my community and across prince william sound. i am myself and not an exxon plaintiff. the precedent-setting decision in that case equated exxon's punishment at the time, the most profitable corporation in the world to a loss of individual working men and women after 20 years of litigation. when the decision was announced in my town, the streets were

silent and people were somber and they just did not speak for days. you walked into the local breakfast dive which is bustling with activity and fishermen talking about the upcoming season and it was quiet. people worked days, they stared at the wall. there are five key messages that i wish to deliver to you today and they're important with what's going on in the gulf. above all, you cannot clean up an oil spill, period. second, the more than 32,000 victims of the "exxon valdez" spill were never made whole as exxon promised regardless of compensatory and punitive damages, life as they knew it was permanently and irrevocably altered. third, oil persists in prince william sound this very day and you don't need a shovel to find it. fourth, there's a pervasive sense that the government and courts have failed the people to the point that many questions are relevant and the questions go beyond the fundamental right

to justice. they question its simple existence. fifth and perhaps most sadly, almost 20 years to the day it is as if there'sn echo coming from the gulf. the people of prince william sound stand in solidarity with the people of the gulf and i don't know a single person who is surprised by what has happened. we tell them clearly, don't believe a single word that bp is telling you. do not expect anyone to help you and sadly, don't hold your breath when it comes to the courts. i'm going to speak very briefly today to some of the impacts thei four primary areas, environmental cultural, economic and social, and i'm going to skip most of those and just focus on the societal impacts. one of the least understood pacts of the exxon valdez spill is the impact of litigation that continued for 20 years. victims are omised in exact words and we're hearing similar words today that you're lucky it was exxon. that exxon will make you whole, that the litigation will not go

on for 20 years. after the spill there were divorces, suicides, there were families that lost everything and a lot of people left. men speak to this very day of the psychological struggles due to losing their identity as family provider. one fisherman, now , described to me as sinking into a mental abyss over the years following a spill when his wife was becoming the sole breadwinner that he fantasized about killing her. >> another fisherman declaring he had recently been contemplating suicide because of his feelings of worthlessness and about that same time a woman in cordova told me the endless court case made her feel that she simply did not exist as a human being. persol resource loss, chronic stress, anxiety, social disruption. these have been studied by highly credential social scientists in our towns for0 years and these same scientists

are now in the gulf. because exxon has such ep pockets which expanded exponentially over the past 20 years, they can litigate endlessly, wearing down their victims who even as they stood together were dwarfed. exxon knew that if they played it as long as they could memories would fade, the context could be anged and they could win big. in 2008 a representative for exxon speaking in the media called the punitive damages as originally awarded, quote, an excessive windfall for the plaintiffs. exxon fought hard to avoid a precedent and the cruellest irony for the plaintiffs is that a precedent was indeed set, one that diminished them further. to be dragged through litigation for 20 years is to be victimized over and over again. the burden of proof is always on the victim and we are now hearing this from bp. they will pay all legitimate claims. we in prince william sound know exactly what that means. somewhere along the way america has forgotten that corporations

do not own the air or the lakes or t rivers or the seas. our privilege to use them has been granted on behalf of millions of citizens who do, in fact, own them and the business community is not living up to that privilege. how often is the root of disaster a cost-cutting profit margin issue? citizens need a better way of ensuring that people d business take the time to do what is right. i support the big oil polluter act, and i believe it's time to update open 90. today, in prince william sound we are working to move on, and it's been a long haul, but the journey is just beginningor the people in the gulf. i think elena kagan seems like a fine nominee to the supreme court. she clearly knows the law and she has a passion for it, and she wants the job. i just wish the nomination procs was more about thinking and thoughtful discussion and less about sort of a silly