institutions are forming. and with the help of a really brilliant three-star general, there are security institutions developing. so i would try to nourish those two things. and particularly try to connect what's happening in the west bank with the negotiations that people are trying to get under way. and it's interesting to me that the developments in the west coast bank are being supported by jordan. and to the extent you can keep jordan involved, then you have a state to deal with that can help the palestinians. so i would be nourishing that development, which i think is quite promising.

>> how do you nourish that kind of small growth? how do you do it? every time you get close to something, a couple of bad guys throw a few grenades here and there, they kill some people. governments have to defend themselves. suddenly everything is thrown out. how do you manage this sort of thing? >> i think it goes back to your question about diplomacy. for instance, there's a story on the front page of "the new york times" today about the living conditions in gaza. and it does talk about exactly what fiyad is doing on the west bank and saying that the people in gaza don't like what's going on in the west bank. i think through diplomacy, what should happen is the arab world

needs to be more helpful, and working through encouraging the saudis and others to try to sort out some of the issues in gaza. e -- we can't do it by ourselves. in the experiences we had at camp david, for instance, i wish that we had been able to spend more time getting what were known as the moderate arabs to be more supportive of some of the proposals that have been made by barack that then the palestinians would have support to accept those. so i think that the diplomatic sub text of this is very important. i actually would try to figure out some way -- i find one of the most interesting countries at the moment is turkey. turkey is in a fight with israel at the moment. on the other hand, they have a very interesting influence in the whole region, and there has

to be more buy-in by other countries in the region. the problem that you mention is there is always somebody who has a steak in not having peace. and the question is how you get those in power to be able to get above that and criticize those that have done the grenade and keep going through. that was the brilliant. he kept saying we had to negotiate as if there was no terrorism and fight terrorism as if we weren't trying to negotiate. so you have to do both at the same time. >> let me go back to the example i gave. the reason why i think it's so worthwhile to try to build on it. i spoke to the people involved the day after the flotilla incident.

and i asked, well, how do you think this is going to play in the west bank? and the answer was, this is going to be a test. will people upset the apple cart, and so on, as you said, somebody throws a few grenades, and so on. well, they passed the test. but they didn't ruin themselves. i think that's important. it seems to me, even when things look bleak, it's important to stay engaged and keep working at it. people often tell you, you can't reach a solution so why get engaged? you have to keep engaged. i do have a cartoon left over from my days in office. i've been in the area for a week and a half pedaling some yts. the cartoon appeared in "the

jerusalem post," and it showed me fending off -- there's a piece of paper on the floor that says schultz peace proposals. the palestinian in the club beating on me. the caption says, well, at least they agree on something. [laughter] but you've got to have a thick skin and keep working at it. >> there have been a couple of studies on this. tom freed man has talked about it repeatedly in his column in "the new york times." and that is when there is an islamic instigated outrage against islamic people, why aren't islamic leaders screaming against that? why is it that most of the time there is the outrage, most of the time it's against islamic

people, done by islamic fanatics, and islamic leaders say something about this. how do you deal with that? >> i actually think that there has been some, which has allowed there to be some action against al qaeda. >> tell me about it. >> well, i think we are making some progress against al qaeda. >> which arab leader is speaking out? >> i think that they have spoken out against violence against muslims, that that has happened, the king of jordan has done that. >> the king of jordan has on a number of occasions, but in pakistan, for example, this happens repeatedly. a couple of times a week we're reading about it. where is the leadership of the muslim world in opposition to this kind of violence? >> well, i think dealing with the muslim world is one of the big issues that has to be dealt with.

what has happened is president obama has worked -- i mean, in follow up on the cairo suggestions he made, i am now been asked to run something called partners for a new beginning. we have to understand what islam is all about. we can't lump them all together. even the terminology we have is wrong. we talk about moderate muslims. moderate muslims actually believe in moderation passionately. we don't have the right terms. we have to find those leaders and support them. fiyad is one of those. i think that there are people in pakistan that speak out. we need to somehow not isolate them but try to figure out who they are and how to proceed. >> secretary schultz? >> actually, in saudi arabia,

the government has done, as i understand it, a very effective job in cleaning out the al qaeda that was starting to give them a lot of trouble. a develop in nearby, which has become a country with a democratic government, which has had its uprising. you remember bally, jakarta and so on. they're going about it in a rather impressive way. so there are some good spots to look at. >> let's take another moment now to remind our audience that you're all listening to the commonwealth club of california radio program. our speakers today, former secretary of state, madeleine albright and george schultz. we're discussing the challenges facing the nation. i'm marvin kalb.

we have another question from the audience concerning u.s.-russian relations and the questioner asks that there's been this exchange of "spies" a few weeks ago. is it perhaps a return to the cold war? >> no, i think it signifies practically nothing. [laughter] these characters here, they didn't have the intelligence to know that they could get whatever they wanted off the internet. [laughter] i thought it was handled quickly without a lot of cafuffle. >> you are quoting tom friedman. he had a great column today about what are they looking for? what is this all about? but i think our relationship with russia is fascinating, and many of us have spent our whole

lives looking at it. and i think that there are those in russia who would like to see us as an enemy. but the majority that a lot of the people within various people in russian society. it behooves us to push on the reset that is a very good idea to see what relationships we can develop. what i love, though, is one of our colleagues has a great line that there two camps in russia. there's the putin camp, and the medvedev camp, but the question is which camp medvedev is in. [laughter] but we haven't quite figured out how the relationships are evolving and what it is that the russians feel will bring them into a responsible role in terms of managing the global system.

>> >> let's talk a little bit about rab. we've been reading for years now that the iranian regime is developing the capacity to have nuclear weapons. a couple of questions. do you agree, first of all with that judgment? >> i don't think there's the slightest doubt that they will ever get nuclear weapons and are getting fairly close to getting them. >> that being the case, and the president of the united states and the secretary of state having said repeatedly that this is something we cannot allow to happen -- >> i agree with that. >> you agree with that, too. we are trying -- the united states is trying, and i think many o'members of the world community, to do something through the u.n., by sanctions, to do something that is not outright military force. do you think that sanction regime can succeed in heading off the war?

>> it can be effective, but i noticed when the director of the sigh yea was asked about that, he was skeptical that the sanctions would be much. soing it's a very hard problem. i don't know that some all-out assault is what's needed. let me give an example of something going back to the reagan period. we had a period where the iranians were playing games with cue weighty shipping, trying to prevent it, and so on, from getting out of the gulf. so we reflagged the ships. when the president of iran was at the united nations, making a speech, saying the last thing iran would do would be put a

mine in the persian gulf, our navy was taking pictures of them doing it. then we boarded the ship, took some mines off, took the sailors off, sank the ship, took the sailors to dubai, and said to iran come and get your sailors and cut it out. it turned out to be reasonably effective communication. iran has done all kinds of outrageous things and nobody calls their bluff. i read that they have little boats going around our ships in the gulf. we should take them out. >> take them out meaning destroy them? >> destroy them. because you have a right to self-defense. look what happened with the u.s.s. cole. these little boat can ram you and cause a lot of damage. and we just say we're not going to prevent it anymore and we don't per met it. there's got to be some push

back. the iranians had a huge protest. it was sparked by the phony election. the reason for the protest was only partly the election. the iranian inflation is way up there. 40%, 50%. unemployment is high. they're obviously not doing a good job for the people. the people know it. so we should be supporting the people who are expressing that point of view. and i think we should be broadcasting to them things like your government is so preoccupied with their nuclear weapons program that our energy engineers are working on that. meanwhile, your oil capacity is dwindling. your refinery, you don't have the refining capacity to supply

your own product. we should be banging away. >> after the united states moved afghanistan in 2001 and after the united states moved into iraq in 2003, do you believe that the united states are in a position in that part of the world to take military action against another moslim state? >> well, i think going back to the dates that you mentioned, it was interesting. those were times when our -- we seemed to be riding high. we were winning everything. all of a sudden the iranians got very reasonable.

and maybe we should have moved in very hard then to try to construct something that might have been a missed opportunity. >> i agree. i think that we missed a time when we could have worked with them on dealing with some of the issues on the taliban and a variety of ways of working, but nevertheless, that is what happened. i happen to think the idea about the ships is a very good one. the problem that we have, we cannot -- there have been discussions about what a military auction might be. we can't bomb our way out of the nuclear installations that they have. this is not like the iraq nuclear act that the israelis took out. we don't really know where everything is. some of it is underground. some is among civilian populations. to go back to my tool box, i think we really do need to keep all the tools in play.

i do think the sanctions need to be pushed and rork. what's interesting, again, there's a story today which says that some of the merchants in the bazaars are striking, because they don't like the idea that there's some new tax coming on. it's actually quite -- this sounds like a weird thing to say. it is actually quite a democratic society in terms of what is going on there. so i agree that we need to be supportive of those that are disquieted about what the reseem is doing. the problem is that even the most liberal people, if i can say this about those in iran, are for iran having the right to have a nuclear program, a peaceful one that they like the idea that the persians are, in fact, going to be treated in a way of respect. >> then you appear to envisage a world where we're going to have

a nuclear-armed iran. >> i think that world would be a catastrophe. because you would have not only iran with nuclear weapons, but other states. it would be a proliferation. >> you mean throughout the entire region? >> and elsewhere. you're going in the wrong direction with that. and sooner or later, as more countries have these weapons, as countries who are clearly affiliated as iran is, it's a big sponsor of terrorism. you're going to wind up with a nuclear weapon going off somewhere. so maybe more than one. and once that happens, people are going to say, my god, why don't we do something about this?

>> do it means what? taking military action against iran? >> really push to get nuclear weapons under control, phased down and ultramaltly out. that means that you don't start in another country. you stop them by doing it. >> stop them by taking military action to stop them. >> i don't claim to know all the ins and outs, but i wouldn't be so confident as madeleine seems to be that a military strike wouldn't have much of an impact. i think it could have a major impact. i don't think you have to say it's that or nothing. for example, working on this nuclear issue, you say what are the steps you need to take to get there? well, one of them, very clearly, is to get control of the nuclear fuel cycle. people are billing nuclear power

plants around the world. you use enriched uranium, or plutonium. if you can enrich the uranium for a power plant, you can enrich it for a weapon. that's the iranian situation. and you can reprocess your spent fuel and get plutonium. remember the nagasaki bomb was a plutonium bomb. so on a world scale, if we're going to have more nuclear power plants, we better get control of this fuel cycle. there has been considerable headway in that regard. to try to work toward a situation where there is

international control of all enrichment facilities. now, if you had something like that in place, you could say to the iranians, ok, it's for peaceful purposes, put it in the international setup. that means not just that you're going to have inspectors there, you're going to have people in the operation of the plant, so we know that it's not enrichment going on. >> there are obviously many different ways of handling this problem of the possibility of iran developing a nuclear bomb. secretary schultz appears to be saying that one of those has to be recognized as the u.s. using military force to stop that from happening. do you buy into that view of a settlement of the problem? >> first of all, i would not take the option off the table.

because having it on the table has a psychological impact. i am not privy to intelligence material that would indicate that a strike would actually accomplish what it is supposed to. what is terrifying is that the iranians have possibilities of funding more hezbollah and hamas and terrorist organizations that, as a result of that, if one could set them back and it would not create this unintended consequence, i think it's -- we are in a very difficult position, because i fully agree with george that if we could get control of the nuclear fuel cycle, that would be the solution. it would be great to get rid of nuclear weapons. in the meantime, there are more countries that are working on nuclear programs, and so -- and also, we just happen at the moment to have a crisis over oil. and there are people that are building peaceful nuclear

plants. my unintended consequences, go back and listen to presidentizen haur's adage for peace speech. how do you think all of this really -- what is the process here? so we have to find out a way to live with nuclear power. i believe that. and whether it's been getting control over the nuclear fuel cycle, that is the way to go. but we are in a very tough situation where we're not clear whether a military option in iran would work without unleashing something that we couldn't control. >> well, now, supposing the israelis say, you guys keep on talking, you keep on talk, you keep on worrying, we're on the firing line and we're going to take action. now, that issue apparently came up. i have no idea what was said. but the issue came up. now, would you, secretary

schultz, sit on the israelis and try too stop them from taking military action against iran? >> look at israel's position. the u.n. security council says hezbollah should not rearm. meant nothing. they are rearmed. they have rockets that can hit tel aviv. they say they want to wipe out israel. iran says the same thing. repeatedly. hamas and gaza says the same thing. they want more weapons. iran supplies them. so israel has a threat to its existence. no kidding.

and i don't know why we don't learn when somebody repeatedly says they intend to do something to take them at their word. they've armed them, they give them money and so on, and they're ready for some sort of assault, without any doubt. the only reason it's held up, i think, is the last time they did it, israel went back at them so hard that the lebanese population says, wait a minute, you're bad news for us. i think there's a threat to israel's existence out there. if you say israel should lay down and die, i don't think that's a good posture. i'm not in favor of that. >> on that same issue, do you feel fa that the united states

should be leaning on israel to stop even thinking about taking unilateral movement action against iran? >> i don't think that the united states is in a position to tell them what to do. i do think that it goes back to one of the original questions we were asking here, which is how does this all go together. and therefore pushing in terms of pushing is absolutely essential. trying to figure out some way to have containment of iran, because i am just not sure what the effect of bombing iran is generally. you raised the question, are we prepared to have thared war with a muslim country? >> that's right. we are not in office, so people

that are have to consider what the effects of all this is going to be and whether there aren't other ways to go about dealinging with this. there might be some moment satisfaction in bombing, but the question is where does it get you? the arming of hezbollah and hamas and israel is living in a terrible neighborhood. what has to be done is work on these various other aspects before one says go for it. but i think that we don't have a right to tell israel that it is under existential threat. one would just hope that they would see the issue in a way that would not threaten them more. i'm going to ask you for answers that are very brief. was there a big moment that passed that you wish you had

grabbed? once it was passed, it ended up being a blunder for the u.s. >> let me read everything just right. >> no blunders at all? >> no blunders. >> of course no blunders. >> was there a time -- [laughter] >> was there a time when it was less of a success than you opened? >> my worst moment in re began administration, and for me it was an awful moment, because i'm a marine. was when the marine barracks in

beirut were blown up by a suicide bomber. so that's one that i look back on and say, what could have been done? the military people look at it and say, well, the marines didn't do anywhere decent job of protecting themselves. >> but you know very well at that time we could having because we knew exactly who did it, we knew exactly where they were. president reagan, in fact, was thinking about a retaliatory strike. it never happened. >> the secretary of defense wouldn't do it. >> he stopped the president? >> he did. >> here's what i would have den, second-guessing myself.

>> we don't have the moments, alas. >> well, i have the solution, but you don't have time. [laughter] >> that's television for you. well, we could probably go on. maybe we should. maybe we should. my instinct tells me, marvin, get off when you can. but we do have only about three minutes left. i'd like to ask you each a question here. you have both watched presidents at work, during intense times of national security crises, when there was a war, one was at hand. what is the character quality, the characteristic of the president that on reflection, you say that was absolutely essential that he had it.

>> i think it is the capability of allowing people to disagree in front of him. and to state their views clearly and listening to them without a preconception and then being able to make up his mind. i think that people that go in not knowing what they don't even know don't even have that capability. the presidents that i work for i think allowed there to be that kind of a discussion and to not threatened by it. >> secretary shuttle? >> i agree with that. but i also like when they're the cool hands. they listen, they don't panic, they try to think it through, and have a strategy. i think you always want to look for a strategy. >> in advance, that you know essentially what it is that you want to accomplish.

>> you know that if i do this, there will be reactions to it, and how i'm going to do that and so on, to have a strategic end that i'm looking for. so you don't get drawn into the business of some immediate response to a particular thing without thinking through the repercussions. >> i think next time we do this program, we're going to start with you giving us the answer to the last essential question, your secret of getting to peace. but our time is up. i want first to thank the secretarys george schultz and madeleine albright. [applause] i want to thank our wonderful audience, those on television, radio, and the internet. this has been co-sponsored by the commonwealth club of california, the united states institute of piece, and the

shornstein center. i'm marvin kalb. as ed morrow used to say, good night, and good luck. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> coming up next, a look at challenging facing veterans returning from iraq. later, an accounting conference with representatives of the federal government on the new financial regulatory law and the state of the industry. at 7:00 a.m. eastern, it's "washington journal." sunday on "newsmakers," massachusetts congressman edward markey talks about the gulf of mexico oil spill and its impact on u.s. energy policy. he chairs the select committee on energy independence and is interviewed by jeff cost of c.q.

and david farenhold of "the washington post." >> the span -- c-span networks, it's all available to you on television, radio, online, and on social media networking sites. find our content any time through c-span's video library. we take c-span on the road with our digital bus and local content vehicle. it's washington your way, the c-span networks, now available in more than 100 million homes, created by cable, provided as a public service. >> joining us from boston is michael fair el, a

correspondent for the christian science monitor, he has the recent cover story looking at the issue of the veterans who return home from iraq and afghanistan. they're home, what now? what does this story mean in light ofhe end of formal operations in iraq? >> well, i think that it really gives what what we hope to do with this piece is really kind of focus our readers on sort of the next stage for as many as 2 million service men and women who have served in iraq and afghanistan. many of themre coming back, moving out of military back into society. many of them are returning, many of them are going back to war in afghanistan. and we wanted to kind of paint big picture about what the service men and women face as they reintegrate back into society. some of the issues that have

gone on in iraq wh the unique aspects of that warfare. and i think that now is the time that there should be a great deal of reflection about how we transition people who are coming ba from some intense fighting, some people have h multiple tours of duty, some people are coming back dealing with issues like traumatic brain injury or post traumatic stress disorder. and so there's just a lot of thing that is we wantsed to bring up and it now was the moment to do that. host: you in the piece as far as talking about these larger issues, you have a picture of marine lieutenant connell mike zakia. tell a little bit about his story and how it fits into the story. guest: sure. mike is a great guy, really has a really interesting story.

he is sort of a third generation marine. he signed up i think right out of high school, ends up going to college and then enlisted, becoming active right after that. he ended up going into iraq to train and serve with the first iraqi army battalion. and he moved into fallujaha during the heavy fighting there in 2004, if i'm not mistaken, and it was really an intense me. when he was in iraq, he was diagnosed with post traumatic stress disorder. he was injured and received a traumatic brain injury while he was there. and then when he came back, things just kind of if he will apart for him. he -- fell apart for him. he couldn't cope.

he knew he has ptsd but didn't know what else was going on. he had a really difficult time with t v.a., with the military trying to get his b.i. diagnosed and get the treatment he needed. his tory is reflective of a lot of stories that you hear in the media, stories that you hear from other soldiers coming back. i think his case is interesting because he is kind of made the transition back. he's in business school now, he's dealing with his ptsd and t.b.i. through various means and has become a very active hern who is helping other vets from iraq and afghanistan also kind of transition from war. host: on the larger issue then, how are v.a. hospitals and the like ready for especially this new influx of people coming in from iraq? guest: i think the varmint would say they aren't -- v.a.

would say they're n as prepared. there's been a lot of progress made from 2007 when the v.a. was really kind of under water with this issue. they've frankly everyone's been playing catch-up with the problems in the aftermath of iraq. we just didn't anticipate the war was going to last this long, that we were going to be facing the kind of warfare that we face tre with improvised explosive devices and suicide bombers. so -- and so there's been a tremendous political effort, there's been a lot of money thrown at the v.a. and they've testified before congress that there's still a lot of work to be done. granted the military and the v.a. have made great strides in coping with this issue. but i think that from everyone from the service men and women coming back who are now dealing wi the bureaucracy of the

v.a. to president obama have said that there's still a great deal of work in front of them. host: our guest is with us until 9:15. the numbers are on the bottom of your screen. tennessee is our first call. go ahead. fred on our independent line. caller: thank you. i would like to bring up that we have a record amount of suicides, 120 a week from the vets from these illegal wars. someone definitely ought to be prosecuted for war crimes. that's it. host: when you're dealing with these issue or at least the

people you talk to, the notion hoff of how it affects a family often comes into play. you talk about one man's story. how do families get affected? guest: it's for many families very tough. you have on one hand husbands going off to war and wives for multiple trs. so that extends the amount of time that they're away from their families. that's difficult. but then when you have people coming, transitioning back, if you have someone coming back like as mike, barely handed with his experience at the time with his fiance. he almost set his house on fire. and after that happened, which was sort of the trigger to get him the help he needed, they deal with counseling and work

to get the issue straightnd out. but i think for many families it's a financial burden. it's an emotional burden. and but for many others i think the reunion of coming back from war is one of plenty of joy as well. the caller brought up suicides and that's definitely a problem. and i think it's hard to say where the numbers are. we've seen numbers that are kind of all over 2 place. but it's -- over the place. but it indicates that something is going on with this generation of soldier, either it could be ptsd related or possibly connected to t.b.i. issues. host: does the military mandate that a soldier go through some type of counseling or at least process before they go back into normal civilian life? guest: there's a screening.

there has been implementation of screening processes. and i think that there's a recent piece by npr that probed that and found some real holes in it. one of the other issues that we found in talking to the troops coming back is that it's easy to kind of fudge these or cheat on these screening tests. because there's a stigma attached to mental health issues within the military. i talked to one marine who came back recently from afghanistan and he said he was dealing with some ptsd issues but he doesn't want to go through the military in having to be evaluated rough the v.a. because he is afraidhat it's going to sort of be a black mark on his military career. so i think there's screening.

i think some people uld like to see more intense screening. and that is something that i think the military will continue to evaluate and improve on. host: there's a story this morning that gives a list of some of the process that's gone through for someone coming back. it says that before a troop returns, their families attend seminars. the first day after arrival soldiers receive legal counseling including contract insurance, entire units go on group leave typically for a month, enter a restoration phase. and after several months troops will go back to operational training, i guess if they're going to be refolded back. anything you want to add to that? guest: i think that shows that the military is really taken a hard look at some of the problems of many of the soldiers coming back from iraq and have worked to deal with that.

i think it was a different kind of exit process for a lot of people who came back aer some of the most intense fighting in 2006 and 2007. and so i think that shows a real degree of progress in the military. there's certainly a lot of room for improvement and the military is, you watch some of the congressional testimony, there's certainly take a lot of heat for not addressing issues relating to some of the mental health problems that we're seeing as a result of iraq and afghanistan. but those sorts of programs certainly show some progress and attention to the matter. host: dayton, ohio, republican line. good morning. caller: good morning. and thank you for taking my call. i work with an organization, we train disabled and we've been working a lot with veterans coming back from the war.

and i'm really dappointed in our government. they do not take care of these gentlemen. there's no funding available for them. for these dogs. they need these dogs desperately. a lot of guys can't even leave their homes. and with these dogs they can do that. there's nothing out there for them. i'm really disappointed in our government. there's just nothing. we've been told we can only take care of their basic needs. their food and their shelter and their medical care. it's all we can do for them. really? that's sad. us as a country? they're giving their lives for us and that's all we can do for them? host: to add, you also talk about the role in outside groups in helping in this proces go ahead. guest: the sentiment from the call ser something that we heard often when talking, especially to advocacy groups but also the number of sort of charitable organization that is are out there.

express a lot of the same frustrations with the government and the process that's going on. you know, there are tremendous amount of service organizations nonprofit gros, many of them are run by former veterans of iraq and afghanistan who are out there to assist perhaps where the government can't, where the government won't perhaps where the government say shouldn't be. there's an organization that builds houses especially equipped houses for troops that are coming back with multiple amputations and the found there says,isten, i'm doing this i don't think the government should be doing it but i think we as a society should be helping these guys out as much as possible. it's a group called troops for our homes.

and they're out of connecticut. they'll go out and seek out thesmen and women, they'll often start out of walter reed building connections with guys coming back with double, triple amputations. and they'll work with them through a process to find a house for them, find land, and build a house completely free. it's an incredible process. and i had a chance to meet with this organization and see some of the guys that they were working with. so there's a vast amount of -- there are a lot of people that want to do something out there and there are a lot of organizations that areelping. i think it's a matter for many who are coming back to for finding the right ones. host: i mentioned leslie lit foot she founded something

called veterans me sted. she is standing in front of a group of homes. guest: leslie is an incredible person. she has been involved with veterans issues for a long time. and she has started up basically a kind of residential facility, if you will, for the vets coming back from iraq and afghanistan. and it's billed as being the first all-encompassing facility . it's in a lovely sort of rural setting in massachusetts. at the moment i think there are only a few veterans there. it's still kind of finishing up construction. but there are groups like hers. for instance, if you get accepted into her program, you get brought in. you can go to counseling for t.b.i. or ptsd andhen you can

attend near by college. so leslie is one kind of representation of a lot of groups that are out there. i think she is doing something really unique in that it's this all-inclusive facility. and i think that if she had her way there would be one like that in every state. and she is also someone who is talking and working with the v.a. and so you have a lot of people who are out there and the nonprofit sector who are doing interesting things. they are also working within the system so the v.a. can learn from them and see, what are the best practices? and to go forward and deal with people who are coming back with some really unique issues. host: michael farrell is a correspondent with the christian science monitor and writing about veterans issues.

next call is missouri on our democrat's line. caller: good morning. thanks for taking my call. first obviously i'm a veteran and proud of it. but i just wonder if mr. bush and mr. cheney and mr. rumsfeld ever goes to a v.a. hospital and actually sees our veterans that are coming back wit their arms are blown off, their legs are blown off, their eyes lost their eyes and severe head juries and all that. these people don't have a conscious. i don't know how they can li with themselves. i think they should be brought up on war crimes. and not only the numbers of americans veterans, but we should talk about the whole number, the total number of injured people and killed of the american veterans, the coalition forces, the iraqi

people. how many iraqi people have been forced out of their homes living in refugee camps? how many of iraq have been killed because of this unjust war? host: michigan. josh on our independent line. caller: thanks for taking my call. i want to get back to what the guy from missouri was saying. homany millions of iraqi civilians have been slaughtered by people we're fighting and by our own actions? i mean, the fact that we go to iraq f what reason do we even go there? and i understand that, i mean, i have all the respect for our soldiers, but these people did sign on the dotted line and they do deserve to be treed a lot better. but all the attention placed on r troops. there's places where 3,000 people get wiped outn the blink of an eye and nobody cares. host: if you would like to respond? guest: one of the things that's interesting and reflective from

these two calls is that you hear even in opposition to the war from iraq, you hear great respect for the american soldiers. and that's something we kind of dealt with because it's really kind of shows where we have moved since, say, the period after vietnam. you know, there's a tremendous regard for the service men and women coming back. so i think what's interesting is that, yes, there's tremendous opposition to iraq but you still see a great deal of respect for service men and women who are coming back. the other thing i would like to y, we do in the same issue that my piece is in, we talk about sort of where iraq is seven years later after the war. host: there's an accompanying piece, iraq's score card what's been left behind.

fort payne, alabama. republican line. caller: yes, sir. i would like to make a couple of points here right quick if i may. first, i've been a disabled vet foover 24 years. every three months i have to go for a mental evaluation, counseling. every month i have to get my pills renewed. now, the v.a. is supposed to pay mileage. they don't always do that. and, unfortunately, being a disabled veteran, what you get for that is $649. ok? people of america speak about how they respe us and evything else. but what they don't ins is we're living homeless, we're living well below the poverty line. we didn't sign up for that. we did not sign up for actions that were unbecoming of the united states of america. and thirdly, john mccain has been in the senate and in

congress for i don't know how many years. and from a band of a brotherhood, i would expect a whole lot more action from him on veterans issues. now. i don't know who you have to talk to or how you go about it or how america actually wakes up and actually starts takin care of the thing that is are important like the children that are going without checks from their dead beat fatsers or their disabled veterans who are basically killing themselves because their minds aren't right. host: we'll leave it there. mr. farrell. guest: i think the caller brings up a couple of interesting things. one of the issues that's very frustrating for especially younger veterans is once you have these 20-year-olds coming, 25-year-olds coming out of iraq and having to deal with a

system like the v.a. the v.a. is improving but it's still very antiquated bureaucracy. it's an all paper system. and so one of the vets we talked to in the piece, a guy from virginia named ryan, he is just -- he goes to the v.a. and he is just kind of blown away that everything is going so slow. to make an appointment you call up or you go there and it's not like anywhere else, any other doctors appointment you have where they give you the day, you go home and you wait in the mail and they mail you what yourppointment will be. now, i think that the v.a., as president obama said recently, is moving quite swiftly to try to change that. but this is a dinosaur of a bureaucracy and changing it is going to take time. the other interesting thing the

caller brings up is mileage. and i think for a lot of veterans who live in rural areas where there aren't many services for veterans driving places is becoming a real burden. and finding out that, one, they pay for mileages kind of a big issue or for many, and then having actually having them reimburse it for many is another headache. so i think that for guys like brian and there are many others like him, they just get frustrated with the v.a. and sort of dealing with the level of bureaucracy and just give up. and sort of trying to cope with their issues, especially mental issues outside the system. so i think there's a great deal of frustration among all vets and i think you're seeing that especial among a lot of the younger ones. host: one of the fackyoids in

the piece says it has hit 14 pft 7% in march of 2010. guest: and interestingly enough, i found out from one of the groups we talk to that a lot of people who will continue going back essentially because of the dim outlook for finding a job. especially a resoistis -- reservist. if they have an opportunity to go back they'll go back because there are very few job prospects out there. and i think the cautionary note is the more times someone goes back, the more likely they are to suffer severe injury, death, or possible t.b.i. or ptsd. host: florida, mary on our democrat's line. thanks for waiting. caller: thank you. my name is mary from bradenton,

florida. i have a beef, sir. with the media. i don't think the media pays attention. i totally agree with the last caller who said about the homeless vets and the guys with brainnjuries. but i have a total -- the media is not right. they're more focused on who is sleeping with who than the vearnts who are coming home. the other day when they went into war you had tons of media. when those guys came home, how many media people did you see focus on that? everybody is scared to say something about the media. they're more focused with who the congress is sleeping with. and that's why i've got a beef with the media. the government can do a lot better. i have a 23-year-old nephew that has been in the air force fo23 years. 23 years. he's going for 25. but they do n focus on the

right things with these veterans. that's what's got me angry. guest: well, here we are talking about the issue. i have to say the caller has a point. if youurn on much of the media on television there's little coverage any more of iraq or the veterans issues. but i was sitting at my desk the other day and did see every network news channel is focused on the last combat troops leaving iraq. and i think the media has done -- if you go back to 2007 and look at the incredible "washington post" series that revealed all the problems at walter reed, and so i think that is it's outhere. where some media may be falling down in more interested in

other things, the stories are being told. host: next call is cincinnati, ohio. ronald, independent line. go ahead. caller: one of the issues is these guys coming back, i'm a vietnam vet. so you've got these people coming back. they don't want to deal with it because of the repercusions of society. can you see what the brand is you tell your neighbor that you're a vet? they look at you and they worry about you. but they don't really worry about you really. they worry about what could happen to them. so there's a lot of stuff about coming back to society and it makes it hard on them. and then when you hit somebody, yodon't know you do it, you're asleep, you don't even wake up. and then there's somebody stding there with a knife in their hand. you realize i made a mistake. how do you deal with it? well, i go to the couch and she sleeps in the bed by herself.

but then nobody is going to deal with this. and then the verans are going to get kicked to the curb like we did in vietnam. they'll slet them slide away. host: go ahead. guest: i think that a couple of things. . .

there is certainly at a societal of you -- veal. i do not think it is the same as it was in the 1960's 41970's. we know all lot more about mental health issues than we knew perhaps then. >> you think the situation is developing because of the repeated tours of these guys to iraq and afghanistan? guest: yes. there is also more awareness within the military about diagnosing it. in vietnam, it was never diagnosed. now, at least ware at a point where we have these issues out there and there is an effort to do something about it.

host: go-ahead. guest: the perception is different, but it is lingering. host: you said there was the perception if someone talked about this it could affect their career. guest: i do not know. thats a good question. i think many of us in the military would say, yes, there is a reality. perhaps it is not something many will admit to. but i think that again is also changing. it is definitely a real perception of the active-duty servicemen and women. host: do you know if some type of counseling is available for people who are over in combat during these types of situations? during the pross, not waiting

until they come home? guest: sure. mike was in a combat stress treatment center in iraq. others have been in that. there have been efforts to deal with this in iraq. there is also a greater effort to cope with traumatic brain injury. that is more a difficult thing to do in combat, but it is definitely starting to happen. host: sanford, fla. on our democrats line. caller: i want to say to my grandson who keeps me supplied with the christian science monitor subscription, there is nothing any better. please everyone, listen to me. every war there is, a lot of the wealthy become much more wealthy on the war.

and my lasremark -- i hope that full brainless bush has to swim in a river of blood until he draws his last breath. host: next call is frank on our republican line. caller: yes, i want to know where is the bin laden? where is he and wh can we do to catch him? host: you can address those -- guest: i do not know where bin laden is. i wish i knew where he was. host: talk about what the v.a. does in rampin up their programs to deal with this. manpower, that kind thing. guest: sure, post-walt reed scandal, there is a lot of political will and pressure on thea and a lot of money spent

to try to cope with these issues. they have opened several, what they call polytrauma units around the country. they closed one in washington. i know there is one in richmond, va., for instance. they have people coming back with multiple trauma as, mental issues, other injuries, and really dealing with the affects of iraq and afghanistan. i think one thing people should realize is that people are surviving injury much more than they would have in previous wars. the va is starting up those centers. they are also doing lots of work on ptsd an traumatic brain injury. they are trying to streamline

the claims process, which i mentioned, talked about a little bit before. there is a lot of attention at the v.a. to try to get to where we need to be. they also have a lot of veterans of other wars they are trying to deal wh. i think one sort of military experts i spoke wh, he said, you know, the va is a system that was kind of -- the money was going away, and they were seeing their clients passed away, they had mainly second world war group before the iraq war started. they are having to catch up pretty quickly just within seven years. there has been a lot of money spent in a lot programs going on. i think for veterans, they will see this improvement probably over the next five years at the va. >> fort campbell, kentucky is

next. and on the independent line. -- ed on the independent line. caller: i have always had great respect for you, and my respect has shot up 50% from the questions you have asked your guest. there are no politics in this question. what are you going to do, and how much are you going to betray and ask these questions when this war is done? after all is said and done, i could care less about the politics. are you going to tell the american people what is going on and help these veterans? thank you very much. i will get off and listen to your answer. host: mr. farrell? guest: i hope so.

the hard question is when the war is done in the combat troops have moved out, there is still 50,000 in iraq. everyone is supposed to be out by the end of 2011. i guess that could be a date when the war is done. yes, there are losses. what we did with this piece, we try to give a broad view of the issue that veterans are facing and society is facing as the war cometo a close in iraq. i hear many stories that could shoot off in facets' that we only brushed over. there are issues of female veterans coming back and entering into a male-dominated v.a. system. where in some places there are very few services for a 30- something woman, now a veteran, dealing with ptsd, sexual

dramatic issues. there are issues of homelessness and suicides. i think the monitor will continue to shine a light on these issues. i hope i get a chance to do more of the stores. host: brian on twitter asks if the are thoughts on the roles of veterans in e american legion and vfw? guest: i think both groups are definitely trying to help veterans in iraq and afghanistan. there are some other gups out there. veterans for common sense are doing really great work. these are staffed by iraq and afghanistan veterans who are very smart and are veryort of strategic in their advocacy and the mining for data, and they are talking to the va, so there is a dialogue that is going on between these groups and the

administration and governing agencies that is healthy. host: birmingham, alabama on our democrats line. caller: hello. host: go ahead. caller: i work for the birmingham the day, and i think there are things that are misrepresented -- i work for the birmingham v a -- va, and i thin there things that are misrepresented. we provide services for mental health patients. we provide services for people experiencing problems p ptsd. we have world i and world war ii veterans. there is a detailed population that is out there. we also have a particular social worker that is helping to bring

these people back into society. to teach them social skills and recovery skills. there is also a program out there that is trying to get every homeless veteran of of the streets. we have a gentleman who is the coordinator of the program. not only does he make an effort to pull these veterans from out of the streets, he also tries to get them back into the work force. he also has a lady who meet one- on-one with these patients to give them more assistance and teach them more skills, so they can help to push them and let them into the work force. host: a queion, if i can. for those looking for others services, what is the average time between signing up for these services and getting them? caller: we see veterans on day one. day one. i cannot speak for the va in

other areas, but i can speak for the birmingham va. all we want is for them to come in. they need to take the first step. host: ok. we appreciate your input. mr. farrell? guest: she is right. there are a lot of services at the va, and part of the process is getting there. the claims process can take some time. the va has programs and they are adding programs. but when you talk to veterans, there is still a great deal of frustration in dealing with the bureaucracy of the va. many veterans are not close to the birmingham va, even the ones with sort of rural issues, getting to the veterans' centers and hospitals. but sure, there are programs out there. part of the issue is finding the right one and mining the va

bureaucracy. i think that while there are programs and they are doing things, i think the va would admit there is still much work to be done. host: one more call on the republican line. rudy, go ahead. you are on, sir. caller: nobody is talking to me. host: you called to make a statement. caller: i am sorry. i do not understand. i will call back later. host: reporting on this piece, what is one thing you have not addressed? guest: i think one of the things i would have loved to follow and get more into is the issue surrounding female veterans

coming back and their unique issues. you know, some of the work i did looking into the piece was talking to female -- a female veteran. it was really difficult for many women first to go into the va. a large percentage of female veterans are taught not to do it at all, to seek outside care. at is really interesting and troubling. that is also the largest-growing segment of the military. one of the things about your back is, you know, -- about iraq is, you know, there is comt everywhere. even if you are not serving in an official combat capacity, with iraq being an asymmetrical war, they are in a combat mind.

there is sexual trauma in the military which is largely unique to female soldiers. that is an area that is ripe for exploration and more reporting. the homeless issue is also something that i think -- there have been some figures that suggest the homelessness among vets' in this generation are rising faster than in other generations. i would love to probe that issue and figure out why that is and what is the dynamic there, the factor of the current economy. i think there are a lot of issues, a lot of issues to tackle as the war comes to an end. to start looking into. host: michael farrell, correspondent for the christian science monitor. you can find this artic

help me welcome gene dodaro to the podium, acting comptroller. [applause] >> thank you very much, frank. i appreciate the opportunity to be with you again today as you undertake your annual update for the government practice and issues that are emerging in the government. the past few years have certainly been a very challenging time for our country with the turmoil in the financial markets and the most severe recession since world war ii, but it's important as we're dealing and have been dealing with these issues that in the accountability community we continue to look ahead as to what the emerging challenges and issues may be.

this is particularly important for the gao since we provide assistance to the congress in carrying out its constitutional responsibilities, and we continually strive to help p improve the performance and insure the accountability of the federal government for the benefit of the american people. and with that in mind, today i'd like to share with you the major themes that have emerged from our new strategic plan for serving the congress over the next five years, 2010-2015. and the work that we are planning to do to tackle some of these issues. secondly, i'd like to share with you some new responsibilities that gao has been given by the congress to help it in several different important areas and upcoming decisions. then thirdly, i'd like to alert you to a change in the generally-accepted government

auditing standards that will be provided to all of you in an exposure draft later this month. and also to share with you some of our efforts to coordinate with our counterparts in national audit offices around the world since we're dealing not only with domestic accountability issues, but those that are shared accountable issues around the world in today's globalized environment. first, to our strategic plan. gao follows the generally-accepted best practices and strategic planning. we have a plan that is in place to serve the congress for the upcoming five years. we update that plan every three years, so while we were helping deal with evaluated and troubled asset relief program and the american recovery and reinvestment act, we were also simultaneously developing our plans for the future. that's very important for us since we continue to receive

over a thousand requests a year from the congress to make sure that we're working on the most important pressing national issues. we confer with congressional committees across the congress. gao serves every standing committee in the congress and 70% of the subcommittees have requested our work over the past few years. we consult with them, we gain outside input from experts, we do research, scan the environment, try to understand the emerging trends as they take shape. we produce an annual performance plan that focuses on that year, and in keeping with best practice we produce a performance and accountability report every year to champion strait to the -- demonstrate to the american public and others how we use the resources congress gives us to provide assistance to them and our country. all of these are available on gao's web site, www.gao.gov.

the goals of our plan are straightforward in terms of providing congress support to deal with some of the most important issues and reasons why government exists. our first goal is to support the congress in providing timely quality analysis to help them make informed decisions and address current emerging challenges to the well being and financial security of the american people. this includes health care, education, transportation, the environment, energy needs. we address issues across the full spectrum of activities in the federal government and address things across the breadth of its scope of expenditures and also regulatory issues and goals that it has. second is to help the congress address issues and respond to changing security threats and the challenge of global

interdependence. this has become a particularly challenging issue given the free flow of capital across the world and other major issues. thirdly, we work on making sure that the federal government is changing and transforming it practices in management and program management and evaluation in order to meet 21st century needs of the government and our citizens. and lastly, we make sure and have a goal to make sure that the gao has the right type of work force and tools and techniques in order to carry out this plan effectively and follow the same practices that we hold others accountable for. i want to share with you eight trends that emerge from our strategico highlight the nature of these trends, why we believe they're important and also to share with you some of the activities that

gao plans to focus on in addressing and helping congress be prepared to make informed decisions in these areas. first, these are threats confronting u.s. national security interests. i'll continue to have threats that have been at play for a number of years, the threats in terms of long-standing threats in extremism and terrorism and cybersecurity, proliferation of weapons continue to be important issues for our government to focus on. now, the nature of these threats keeps changing and evolving, and so while they're longstanding, that doesn't mean they're static, and it means the government continues to need to be in a position to address these issues to understand what the threats are, to stay abreast of them and to deal with these issues. cybersecurity's a very important example of this for all of you

that are dealing with red star computer systems, and people are trying to manipulate, steal or destroy information or disrupt operations. there's emerging new threats as well, a global recession, for example, has affected a number of countries around the world, and since social and economic development is an underpinning of extremism in a number of cases, it's important to be abreast of the challenges. the potential implications for food security around the world, number security as well -- energy security as well is another challenge that's emerging that's important because of the global competition for energy to help fuel economic growth around the world, and so there's a need for new capacities and capabilities and an understanding that the full breadth and scope and dimension of these challenges to national security. some of the work that gao's

doing, we continue to do work looking at u.s. efforts in iraq, afghanistan and pakistan. there are a number of logistics issues in the drawdown with iraq that we've been monitoring. we've issued dozens of reports over the years on all these issues. in afghanistan we'll be focusing on issues such as the training of the security forces in afghanistan, the efforts made to help them develop institutions to run and operate, manage their own government and deal with social and economic development in that country. as it relates to the homeland, obviously and very appropriately, the federal government's been focused on challenges in airline security. many of you who flew here for the conference will recognize the measures in place there. and we continue to focus on evaluating that. but there are threats to other forms of transportation and

other types of threats that our country needs to be prepared for. for example, we just issued a recent report looking at the existing and emerging technologies to detect explosive devices on passenger rail. there's issues and threats on a nuclear, biological and chemical front that our nation needs to be prepared for, and we're looking at efforts underway by the department of homeland security and others to understand those threats, to put measures in place to protect ourselves. the funding and costs of our military operations continues to be a challenge with two major conflicts abroad in terms of replenishing the equipment, providing additional training, making sure that the defense department improves its business practices. we've done a lot of work in trying to make recommendations,

and the department's trying to improve their acquisition of major weapons systems to try to improve the efficiency of their business operations in order to make sure that there's enough funds to provide direct support to the war fighters and to prepare adequately for readiness. gao evaluates a wide range of these initiatives. additionally, in dealing with the effects of climate change, we've issued reports recently on carbon injection technologies. we're starting a technology assessment at go engineering which is dealing with carbon dioxide, the environment, and reflecting the sun's rays back to cool the earth. so it's very important for us to help the congress understand the need for research and development and new technologies that are at the underpinning of solving some of our most difficult problems. trend two is fiscal

sustainability and that challenges. this chart shows the percentage of debt held by the public as a percent of gross domestic product. in other words, how much we owe versus how much we produce. it's a standard measure used to gauge debt burdens by governments around the world. the dotted line that goes across horizontally is the historic high which in world war ii where the federal government's debt was 109% of gross domestic product. as you can see, over the last decade while the debt held by the public has been around 40% or so, it's escalated recently as the government has taken action to deal with stabilizing the financial markets and also to help stimulate economic recovery due to the recession. there are various scenarios here

that shows the cbo baseline estimate and an alternative estimate by gao. this was based on our last major update in january 010 -- 2010, and it reflects the trustees' report for social security and medicare for 2009. just recently they've issued an update, 2010 cbo will be coming up with new estimates later this month, so we'll be updating these simulations as we go forward, but the main point to take away from this is that the federal government absent policy changes is op a long-term -- on a long-term unsustainable fiscal path, and action needs to be taken. there's consensus developing on this, and i'll talk about efforts underway both by the congress and the administration to plan for this in the future. some of this is being driven by short-term changes in demographics. in 2008 the oldest members of the baby boom generation became

eligible for early social security retirement benefits. the social security, this year's running its first cash deficit since 1984. this is due in part to the reduction of payroll taxes due to the rise in unemployment during the recession, but it's significant because it has impact on the federal government's need to borrow and also it's expected that the the program will result in a cash deficit for the next few years before it returns to an alternative path. but there's long-term issues associated with this program as well as health care expenditures. the oldest members of the baby boom generation hit the medicare system next year. now, one thing that we do in addition to trying to understand the long-term challenges facing the federal government is we've added simulations of the state

and local sector as well. and what this chart shows is that the top lines are the cbo estimates. the solid line is the federal government. the dotted line is if you add the state and local government to it. the two bottom lines are the gao's latest simulation. top line, again, federal government deficit path and adding the states to it in the bottom line. the basic message of this chart is that the state and local sector is on the same path as the federal government is on which is a path of structural deficits and the need to take action. now, at the state level this simulation will never happen because the states need to take action to maintain their balanced budgets. according to most of their constitutions in and laws. but it shows the magnitude of the challenges facing state and

local governments. so, in other words, all sectors of the government will be under fiscal stress and need to take and address these issues directly. the debt and deficit challenges are not just the u.s. challenge. many industrialized countries around the world are tackling similar challenges as well, but it also means that the u.s. is competing with other countries to finance their debt. but this is an issue that's one of a global nature, not just domestically. moving forward, we're pleased to see the congress put in place budgetary controls for new programs and activities that are started under these new budget rules, new programs will have to be paid for by increase in revenues or directed revenues to fund them or cutbacks in other areas. the president has also created a

bipartisan commission to come up with long-term strategies to address the deficit situation. that commission is made up of 18 members. it has many sitting members of congress on it as well as others. they're due to report to the president in early december this year, and if there is enough consensus there, congress has agreed to take up some of their proposals next year. so it's a very important step. a public debate, public education, continual dialogue on these issues are needed given the magnitude of the challenges and the importance of addressing them to our country. some of the work that we're doing, in legislation that the congress just enacted in order to raise the total debt ceiling for the u.s. government beyond $14 trillion was to provide a

requirement for gao to produce an annual report highlighting duplication and overlap in the federal government's activities and making recommendations to address that. we plan to issue our reports following the submission of the president's budget to the congress in the february of each year. we're going to take sections of the federal government starting with discretionary spending this first year and then move to address tax expenditures as well as mandatory spending in future years as we carry out this new mandate from the congress. we'll continue to do our work auditing the consolidated financial statements of the federal government and major entities including irs and public debt. it's important that in this time of fiscal stress that we continue to make strides to improve the accountability of the federal government and accounting for taxpayer resources in it activities that

it's used. we also continue to focus on a couple of major issues that are important to contribute to greater efficiency. one is that right now there's estimated tax gap between tacks owed -- taxes owed under the current tax laws and taxes collected of $290 billion net. so we're continuing to work on ways to highlight where the tax compliance issues are using data from the irs and our own analysis and making recommendations for addressing some of those areas. also the federal government last year reported $100 billion of improper payments, payments that should not have been made, were not well documented, potentially went to people who were ineligible to receive those services. fortunately, the administration and the congress are both focused on these activities. there have been new efforts on

the part of the administration and new legislation recently passed by the congress and signed into law by the president to make officials more accountable for reducing these improper payments, setting targets focused on providing more visibility on web sites and more transparency to the efforts of the federal government to deal with reducing these improper payments. trend three is economic recovery and restored growth. obviously, as has emerged from the recession there's a great deal of anticipation and focus on the pace and scope of the recovery, and uncertainty exists, and that's why it's important to continue to focus on these areas of replacement of lost jobs, employment trends in the country, consumer spending and savings patterns as analysis

go forward. and many sectors of the economy, particularly the housing and the commercial real estate sector. it's very important to continue to follow this federal reserve, as i'm sure all of you have been following, has been monitoring the situation very closely anded thing how to time -- deciding how to time fiscal support both to insure continued recovery efforts, but also to deal with potential problems with inflation in the future. just to show you the significance of the recent recession in light of prior recessions, the chart in the gray vertical bars that are shown before you here are recessionary periods dating back to 1950. as you can see, we had a very significant recession in 1974-'75 period of time. the line graph shows the level of private investments and what happened during the recessionary

period. obviously, during a recessionary period the level of private investment falls, and then resumes with economic recovery following the recession. the latest recession that we have is to the far right, and it has the widest bar because it was the most significant recession since world war ii, and it shows the dramatic drop in private investment during the recessionary period. now, it's rebounded, it's starting to recover, but it will take time to get back to the levels of investment that predated the recession. some of the efforts by the government including gao responsibilities to deal with the situation, first, was the american recovery and reinvest thement act which was signed into law, and it had many objectives; preserve and create jobs, promote recovery, assist people that were affected most

by the recession, provide some stability to state and local government budgets, and to make investments in infrastructure and other areas. it's estimated to outlay, now, $862 billion. now, this does not include the most recent action by the congress and just signed into law by the president to include an additional $26 billion to the state and local governments to assist them in the health care and medicaid and education spending. of the original $862 billion, about $280 billion of that was to flow through the states and localities. gao was begin the respondent for doing bimonthly reviews of the use of those funds by selected states and localitieses, and we've been monitoring that, and i'll talk in a second about the findings from our reports. but first, just to put this in perspective, as of july 23rd

this year about half of the $280 billion have been outlaid already. there'll be an additional 60-some billion to be outlaid in 2011, and then 2012 through 2016 there'll be additional outlays of funds. now, the nature of the outlays, however, changed. in the early years, in 2009, a lot of focus was on health care which is represented by the red portion of the pie chart to your left. ..

>> across the country, and the district of columbia. these 17 jurisdictions received two-thirds of the amount of money allocated under the recovery act represent about two-thirds of the population of the country. we've made over 50 recommendations so far, most of the recommendations focus on improving the accuracy and quality of the reporting of the use of the recovery act funds and also the transparency of those funds. and the focus on monitoring, the appropriate use of those funds, particularly at the sub recipient level at the state and local level. so all of our recommendations have an accountability transparency theme to them to

make sure the money is spent as intended. we've also, in terms of trying to strengthen the accountability for the funds, then recommending both to the administration and to the congress changing the nature of the single audit legislation, which is one of the primary vehicles for ensuring accountability at the state and local level. to have a single audit through internal control work up front before large expenditure of the recovery act funds take place. to strengthen the controls, to understand the nature of risk. many of these programs are delivering funds through existing programs and activities, but in other cases that are new programs that are being created, or programs like the weatherization program which provides a great deal more money through the existing mechanisms than what occurs on a normal basis. so the risk level is different

for these programs, plus they are one time expenditures of governments are not well posture to assure accountability up front. the ability to refute the money, diminishes greatly if problems occur. omd has initiated a pilot in 16 states to try this early warning system and detection. it's an process of being a guy he waited now. we made recommendations to the congress to legislate these changes and also provide some additional funding to help the state and local audit community carry out these responsibilities, legislation is passed the house pending before the senate. another major effort of the government, along with actions taken by the federal reserve and other areas was the creation of the troubled asset relief program and the emergency economic stabilization act of

2008. this passed in october of that year. this is the legislation that provided the secretary of the treasury up to $700 billion to help stabilize the financial markets. gao was required to be on site immediately upon initiation of that program, and to provide reports every 60 days to the congress on monitoring the implementation of that program, which we have done. our reports have included many recommendations to increase the accountability and transparency to achieve the ask object is, articulating a better communication strategy. as trouble as that received graham was played at the beginning by poor communication, both within the administration for the congress and with the public and we have been making recommendations to ensure a better strategy communicating what was done in more of an

open, transparent fashion, and to improving the management of treasury, activities over this program. the new financial regulatory reform legislation which was just passed by the congress was signed into law by the present last month, reduces pars authority to end into new activities. as this chart shows him as of july 31, 2010, treasury has dispersed about 386 billion of the $700 billion it was authorized to disperse. so the full range of money that was available under the $700 billion was never used your of the 386 billion that was distributed, treasury has received repayments back of 199 billion, largely from some of the largest financial institutions that had received

money under the capital purchase program. so the outstanding balance right now, or as of the end of july was $184 billion, slightly over. a lot of that owed by back from assistance from aig and the automakers, general motors and chrysler. in addition to loan balances, the federal government has taken shares in the activities. these are the shares owned by the federal government right now, common equity and beneficial interest, and the federal governments determination of being repaid for its assistance for largely depend upon the liquidation of these common equities and other assets in these companies. gao is carefully monitoring the situation. aig, general motors and chrysler, in terms of their financial status.

we highlighted a number of indicators that we are watching very carefully to help gauge the ability of these entities to repay the federal government. so we will stay with this until this issue is resolved. in addition to our continued work on the troubled asset relief program until all these activities are terminated, we also focused on highlighting for congress areas in the financial regulatory structure that needs addressed, talk about that in the second and with the legislation does there. we've also highlighted and issued reports on options dealing with the ultimate disposition of fannie mae and freddie mac. since these entities are now under federal conservatorship. that's the one area that was not addressed, although there was a requirement include in that

legislation for the administration to submit to the congress early next year proposals for resolving the status of fannie mae and freddie mac, which is a very important decision that needs to be made. we will continue to provide our reports on the recovery act until all those expenditures have been made as well. in january 2009, to help congress understand what led to the problems of the financial markets, gao did a study where we trace the evolution of the financial regulatory system over 150 years, that was put in place over time largely in reaction to earlier crises. try to help understand the deficiencies of that system, and how proposals to evaluate and craft solutions to those problems could be made to help address these concerns. we concluded that the system

that was in place was fragmented, outdated, and ill-suited to meet the needs of the 21st century. so we issued this to the congress. we put a need to modernize the regular system are high risk list in january 2009, and congress and the administration have acted to address many of these issues. the new law signed last month addresses many of these concerns, although a large portion of it depends on actions to be taken by the regulators in exercising the new authorities under the legislation, creates the consumer protection bureau, the federal reserve, gao will be the auditor of this new bureau. part of our findings earlier was the fact that there needed to be additional information provided to consumers to help them make informed decisions, particularly in light of the development of

complex financial instruments that have emerged, the power to seize and liquidate large failing institutions was given to the administration, providing more transparency for derivative, a very important issue, was dealt with although there are details to be worked out with the regulators. there is a creation of a financial services oversight council. this is very important. one of the findings that we had earlier was there was no one was responsible for monitoring systemic risk across the financial markets. this new law vest that a third with a financial council and gao has been provided authorities and expectations to audit the activity. so this council as well as the implementation of the legislation, wide range of areas. in fact, we have 44 mandated studies that were included in the legislation for gao.

more than 15 of these have to be completed within the next year. we will be studying the different appraisal methods in the housing area providing recommendations better, analyzing gaps and the regulation of financial planners. and i know financial literacy has been an important issue for the aicpa, and we're hoping to get input from you in carrying out this responsibility. we will be consulting with a wide range of people at the federal, state and local level about the financial planner aspects of this industry, which is very, as most of you know, there are many different definitions of this, and that will be part of the challenges of our study. we've also been asked to look at the accounting process that is set up at the state and local government level, in terms of

the municipal security markets, and the way that accounting standards, the government accounting standards is set of an organized. we are also charged with auditing all of the lending facilities, credit facilities that were setup by the federal reserve during the recession or period to help stabilize the financial market. previously gao was statutorily prohibited from auditing these emergency credit facilities, and now we will be auditing them for the first time. we did gain additional authorities earlier to audit individual institutions provided assistance by the federal reserve, aig, bear stearns and others, in order to carry out our statutory responsibilities under the troubled asset relief program, since the federal reserve and the treasury department had partnered with many of the rescue efforts in

those areas. we will also be looking at the scams and fraud issues. this is just a sampling of these studies. trend for are the changes and dynamics in the global interdependence issue. this chart shows the top line, dotted line, is the international reserves that are held by central banks globally. as you can see, the trend has been increasing holding of these international reserves, but one change i want to point out to you, the solid line at the bottom starts out at the bottom line, in 1990, and by 2008 it's the middle line. those are the international reserves held by developing countries, china, brazil, india.

the solid line in the middle, the dotted line, more dotted line in the middle, or the international reserves held by developing countries. in 2005, the reserves, international reserves held by developing countries exceeded, for the first time, the reserves held in industrialized countries. this begins to show the economic influence of the developing countries in the global economic environments, important trend for us to continue to focus on to understand the dynamics of global markets. some of the work we're doing is trying to understand the importance of this for the global supplier base for our defense industries, and to protect critical technologies. also, it's not just capital flows. it's the flow of goods and services.

for example, most of the fruits and vegetables that we received right now, from outside the united states, and a great degree of ingredients for prescription drugs, medical devices, are produced in other countries. we listed the need to reform food and drug administration and other oversight over food, security, and also medical devices on our high risk list that we keep for the congress. basically, a lot of our regulatory structures were setup for domestic production. that has changed. the production is more global, and our regulatory structures need to adapt and to change in order to accommodate these changing circumstances, and to be in a position to protect the public as best as possible. emergency health facilities are the same way, planning for

global pandemics, et cetera. and understanding the export promotion programs, and other trade related jobs. trend five advances in science and technology. nanotechnology is exploding in growth over the past decade. have been billions of dollars invested with the national science foundation estimates by 2015 it could be a trillion dollar industry and will affect everything from the close that we where to the structure of airplanes, the medical therapy and technology. and this has important implications to improve both the quality of life for people and the competitiveness of the u.s. industries, but also brings with it the need for new regulation to protect public health and safety, and to understand the implications. same things true and computer

technology, cloud computing, offers a lot of opportunities. for example, for more efficient and economical ways to acquire computer support that would help improve competitiveness, drive down costs of those activities for many companies, but it brings with it and tended security issues and risks that have to be well understood. and we have issued reports recently on this area. it's also important to understand the u.s. position that has had predominance in science and technology areas. just a highlight on this chart, the top bar, solid bar, is the number of scientific researchers in the united states. the dotted line under it, which has been closing the gap, is the european union. the line below that, which is

not almost caught up to the united states, and the rapidly escalating lying there, sort of thick dotted line, is china. china now has as many scientific researchers as the united states, and so it's important to understand the investments that need to be made in this country, in science, engineering, math and technology training programs as well as research and development so that united states can maintain its position, and to be able to not only come up with solutions for many of our problems, but to maintain competitiveness from an economic standpoint. gao has done a lot of work in this area. we've highlighted, since 1997, the risk associated with computer security across the federal government. we expanded that to critical

infrastructure protection in 2001, both in the public and private sectors. we continue to make recommendations to strengthen the need for public and private partnerships that deal with protecting our critical infrastructure in this country. and also investments that are being made in our education systems, and in research and development for science and technology issues. we are also dealing with a number of issues, the development and installation of satellites, both for whether purposes as well as for defense and other related issues, just to give you some examples. trend six is the increasing impact of networks in the virtualization. how we are learning the amount of people nowadays estimated 239 people in the united states use wireless technologies. it has exploded from growth

earlier. the cost of transmitting data has gone from dollars down to sense, the same for storing data, how we learn, how we communicate has changed dramatically and will continue to do so. but there are important policy issues associated with this that we are doing a lot of work on, who has access to the information, broadband access and network, how does the federal government allocated spectrum technology to usher public health and safety, and the interest of her government but also allow for competition among the wireless service industry and telecommunications network. and one of the big policy changes following september 11, 2001, was the need to allocate additional spectrum for public safety purposes. so first responders could communicate effectively during emergencies. and that was part of the move

and television from analog to digital was to free up technology in our space and spectrum in order to allow for that change. and so the allocation of spectrum it continues to be an important issue that we are focused on. and also, protection of our national assets, the energy grid, and other communicate and and our financial markets. everything now is so dependent on technology, and the seamless delivery of power and sources throughout our country that any major distraction could have significant consequences to us. trend seven, the shifts in governance, and government. there are many changes here in terms of contracting, for example, federal government is very reliant on contractors. and there's a move by the administration to look at balancing that need over time and looking at the areas where federal government has focused

on contracting, and need to re-examine that and we think that's a good initiative. we are focusing on many areas here and looking at the reevaluation of the strategy, the need to improve the acquisition of goods and services, many areas that are on our high risk list, acquisition challenges the federal government has not yet solved. so the focus on these areas is very important. use of contractors is very important to provide the types of services and operations the government has, but the government has to be in a position to effectively manage the contracting work, and to also make sure it has a core competencies to be able to do that within the federal government as well. and so it's important have the right workforce. it's important have them train. it's important that proper

oversight over the contractors so the government gets what it pays for, in an effective and cost efficient manner. trained eight are changing demographics and societal trends that are going to confront both young and old in our country. this chart shows the ratio of workers to retirees in the united states. when we first established in a country social security system, we had double-digit workers for every one retired person in the united states. i 1960, we have five workers for every one retired person that right now it is 3.2 people working for every one retired person that it is moving to 2.2, and then projected to go to 2.1. so we'll have to people working for everyone retired person. this obviously has implications for system which was set up to

basically have current workers through payroll taxes generate enough money to provide benefits to our senior citizens. but it goes beyond just read you waiting our social security network, safety net. he goes to transportation issues, to housing issues, to how we operate and provide through these changing demographics. now, these projections unlike many other projections i showed you earlier, these people are here, they are living. these trends are marching forward and have implications for a wide range of government policies and issues. and so we are focused on helping congress evaluate many of these activities, health care, financing, and reform efforts are very important. we have a number of studies that we are asking for affordability and access, legislation, the health care bill that is passed,

as well as focusing on retirement security. not just retirement security for social security, but also retirement systems, changes that are underway and the private sector to provide additional retirement security to workers across the spectrum, the federal government's activities. in terms of other and ongoing work, we will be updating our high risk list of issues that are need of broad-based transformation, war, challenges from broadway's and abuse in management standpoint. we do this with every new congress. our next major update will be in 2011, january. also i wanted to mention just briefly one of the other new responsibilities that we have been given is under the patient protection and affordable care act. gao has responsibility to appoint a number of commissions and boards that were deemed

integral to implementing legislation. the first was a bore to provide the secretary of hhs on consumer oriented and operated health care plans, to make grants to increase the co-op nature of these plans. we did that according to the statutory, made the appointment in june. recently. the next two that are up, setting up a national health care workforce commission to look at the knicks and needs of the health care workforce in our country, and also on a governing board for the patient centered outcomes research. this is to understand the efficiencies of new medical treatments and other things that could make the process more efficient and cost effective over time. those appointments are due to be

made by next month to we received hundreds of applications from people who want to be considered for these appointments, and were going through a very detailed interviewing and screening process to be able to do that. i mentioned the yellow book update. this is to keep the standards that all of you used to audit the federal government expenditures, and others use across the country. we have an advisory committee made up of people that represent us from the aicpa on that group, as well as the federal, state and local audit community and other private sector input, to keep the standards of today. bill be an exposure draft that will focus on using more of a principles-based approach for determining audit independence, for example. i would encourage you to review the exposure and providers your input. about it shortly. will hope to have the revisions in place early next year.

last slide deals with the international coordination. now, we do a lot of working with, not only you and the aicpa, those who audit the federal government programs and expenditures, but also the state and local auditors throughout the country. it's very important to our efforts on the recovery act, but we also coordinate with national audit office's and 189 countries around the world. and two of the major activities underway, one was to sign an agreement recently with many of the donors that are listed on this slide in terms of develop the bank, international bank, international monetary fund, the european commission, and our international organization to provide support the national audit office's in developing countries to increase the accountability of the governments in those countries who receive a lot of foreign aid

assistance for social and economic development. this is an important breakthrough to help increase accountability throughout the world, and i wanted to bring it to your attention. also, the issues concerning the global financial crisis are ones that are interest and import not only in our country, but the countries throughout the world. i've been asked to lead and chair a task force of 25 national audit officers from different countries to look at the impact and causes of the current global financial crisis, in light of earlier crisis that occurred in asia, japan, sweden, mexico, would have been other breakdowns in financial markets, to look and see if there is common trends and challenges, and also to evaluate the different stimulus efforts that were made by countries around the world, china for example,

had a massive stainless industry in their part of this study group as well. part of solving our problems, is not only to implement a strong financial radar system within our country, but to make sure it is coordinated with other countries. i know secretary of treasury and chairman of the federal reserve focus on those activities as well, but from an audit standpoint, we need to be organized as well, and were taking steps to understand that and figure out how best we can interact with international organizations as well. i appreciate the time and attention that all of you have given this morning. i look forward to continuing to work with all of you to strengthen accountability. you have a very important mission to support and carry out those activities, and to make sure that the federal government, state and local governments, that all of you are involved in auditing, are held to accountability standards.

i wish you well in the remaining portions of your conference, and i hope that you have a very successful time. so thank you all very much, and best wishes to you. . . >> let's move on to our next speaker. the office of federal financial management knows that decision makers and the public must have confidence in federal financial management. omb's concerns are right in line with what we as cpas do in the

government auditing and accounting fields. whether it be matters like improper payments, financial reporting, single audits or financial systems, we're there. so the aicpa thought we should make this presentation available to both the east and the west sessions of this conference, and thus, it is being recorded by the aicpa. as to current financial issues, expectations are very, very high. taxpayers informed by the press want to know things like the cost of the wars, the cost of oil cleanup, jobs saved and created and why there are any improper payments at all, to name a few. the office of federal financial management which, of course, is part of the office of management and budget, led by danny attempts to answer these questions. but often this is challenging and stressful because the

information systems in play sometimes just don't go there. ernest hemingway used the phrase, grace under pressure. the controller and leader of offm exhibits grace under fresh pressure. he is a polished professional able to cite in the same breath how they analyzed arr spending in chicago and then how his young boy did in last night's baseball game. maybe it's his master's degree in public policy or his law degree from duke and unc respectively. more likely, it's his extensive omb service as a policy analyst and a budget examiner. please, scwoin me in welcoming -- join me in welcoming danny. [applause] >> thank you, john, for that, for that warm introduction. i think you hit all the right points, in particular i know the

audience is dying to know, but my son went four for four with six rbis. so, no, i'm just kidding. i want to thank the aicpa for having me today. i often end up following gene dodaro in the speeches and presentations that i give, and i'm just awed by gene and his breadth of knowledge and the challenge that gao has is very similar to the challenge we have at omb. i just have such tremendous respect are for gene and the organization, and they're a true partner in our work. i'd like to start my remarks by telling a little story about something that happened to me on the way to work this morning. i heard a commercial on the radio, and it kind of blared out at me, and the voice on the radio said, attention, controllers, cfos.

so that got my attention. this information is for you. looking for places to save money in these tough economic times? and then the radio announcer proceeded to inform the listening audience for the potential for 20% in savings on standard shipping costs. now, this is certainly not a remarkable commercial, and it's obviously tapping into a nerve, and that nerve is the strain that today's economy is placing on the corporate world. and it's further recognizing a reality that we are all aware of and that when corporations are belt tightening, they often look for efficiencies in basic infrastructure like shipping costs. but for me the part of the commercial that caught my attention was the way that it called out specifically to corporate controllers and cfos with the clear implication that the role of the cfo and the controller is to help protect and secure the fiscal health of the organizations they serve

particularly during tough times. now, for most people listening to this commercial, i would imagine that this seems an obvious point and an obvious role of the cfo, to help figure out how an organization meets its bottom line in particular during tough times. but i would argue that this role has not been as clear and obvious for federal cfos, controllers and accountants. in fact, the role of the federal cfo, controller and government accountant is one that is continuously evolving, and what i'd like to do in my remarks today is talk about the journey that the federal cfos have been on. and i believe a little history is timely given that in just a few months we are going to hit the 20-year anniversary of the federal cfo act. and in my remarks i'd like to describe how emerging challenges today are shaping a new role for the federal cfo, in some ways one that is closer to the image

of the cfo that was painted in the commercial that i heard on my way to work this morning. so let's go back in time 20 years, as i just mentioned. actually, let's go prior to 1990 and go into the 1980s and look at the condition that government financial management was in. and there was a two-binder report put together by gao. it looked about this tall in total pages and words that went through just numerous financial management weaknesses and challenges, accounting issues, southwestern controllish -- internal control issues, reporting issues, and what the report essentially concluded was that there was no unified framework for dealing with these issues. that it was kind of a buck shot approach that existed at the time to try to tackle different financial challenges whether they were related to fraud or error or the inability of

federal agencies to timely report what was going on with the financial condition of their organizations. and so that started a dialogue in this community and on capitol hill around defining a framework or a solution to start to tackle these issues. and that really is how the cfo act came to be. it was searching for a framework to fix and address these many problems where previous to that no unified framework had existed. so when the cfo act was passed, it really had three objectives that it was going after. first, to improve the transparency of the government's finances because the conclusion reached at the time was that there wasn't good insight into the financial situation of the federal government as a whole or each federal agency. the second objective was to get

financial information in place to support government decision makers. so there was a sense at the time that the cfo act was passed that financial information could help government leaders manage day-to-day and longer-term issues and that that information was not flowing timely, reliably or in a relevant manner to our government leaders. and the third objective was to establish internal controls that didn't exist at the time to more comprehensively and aggressively mitigate the risk of waste and error in government programs. these are three very critically important objectives, and the strategy that the cfo act framework put in place to tackle them was essentially twofold. i'm going to oversimplify, but twofold. one was to require the appointment of a chief financial officer in every major federal agency, a requirement that had

not existed beforehand. and second, to put that cfo in charge of a very important responsibility, and that is to produce annual audited financial reports that are modeled after traditional corporate financial reports. and this is the basic backbone of the federal financial management effort that we have been on a journey on for 20 years. the emphasis of having an accountable official such as the cfo to be responsible, and that further emphasis on corporate style, annual financial statements as the gathering principle of framework or follow crumb by which we were going to coordinate our financial efforts and do the three things that i mentioned; make government finances more transparent, drive information to decision makers in a timely, reliable and relevant way, and finally, establish internal controls that get at the root problems that we

face in government in terms of waste and error. and it's an interesting dialogue that we can have now 20 years later in terms of how it's all working and what are we seeing today after 20 years of having a cfo in place and putting together these financial reports. are they answering the call on each of these three areas? i think what we are finding is that there are gaps that exist in today's financial management framework and answering the call to these three object i haves -- objectives. and that, i think, impacts the role of the cfo, the role of the controller, the role of the government accountant in a way that right now, today, we have emerging priorities and emerging challenges that make those gaps in our -- [inaudible] more acute and make them more urgent to address. but first, let me talk a little bit about the '90s and the

most recent decade to bring us to where we are today. in the '90s soon after the cfo act was passed, the government faced a steep learning curve to tie together transactions with their accounting ledgers and produce financial statements because, really, what financial reports are really about, to simplify it, what this whole concept of producing audited financial statements was about was taking all that information that exists in what we sometimes call the transaction layer of an agency. agencies are paying out money, they're taking in money, they're buying inventory, they're offloading inventory, they're doing a lot of different things, as you all know, at that transaction layer. and the goal is to pull that information out in a common language, a common way bumping it up against a standard general ledger that puts it into boxes and pieces and presentations that we all have studied and have been placed for centuries about how to read and report on

what's going on in an aggregate way in that organization. so produced out of this transaction information that goes through a general ledger are these standard financial reports. like a balance sheet and an income statement and other. and that provides what i described earlier as this common framework to evaluate the organization's financial conditions similar to the way a corporation can be analyzed as someone on wall street is looking at a corporate balance sheet. and as i mentioned, a steep learning curve. it took us a while to figure out how to pull this transaction information seamlessly and in an automated and error-free way into our general ledger and produce these reports. and what happened as we were learning, and this is very important, is that customized technology and diverse accounting processes emerged at each federal agency as they tackled this very challenging issue. it's one of those things i wish i could go back in time and explain all the implications

that we would face 20 years later of these diverse customized and very different approaches to how not only federal agency by federal agency dealing with these accounting practices, but within agencies. bureau to bureau and sometimes within bureau you see diverse, disparate accounting practices, and that continues to raise issues for us; cost, lack of reliability, things that we're still tackling today. as we look into the past decade, the 2000s, we started to see the emergence of some success, some very important success. more and more clean opinions were produced by federal agencies achieving that passing grade from their auditor that their financial reports are reliable. but one of the things that happened over the past decade is each agency achieved that plateau of getting a clean audit opinion and some of them started getting good at it and doing it

year after year after year, the resource investment that those federal agencies put into producing those annual audited financial statements did not level off. we, i think we had anticipated that as agencies got into steady state and got into standard operating procedure with achieving a clean opinion that that cost would start to plateau or at least perhaps even decrease allowing more bandwidth for those agencies to tackle other areas of financial management. but, unfortunately, as we achieved our clean audit opinions, we found that the resource investment did not level off. there was a demand from our auditors, a rightful demand, for automation in the way we prepare reports, and the promise from our financial leaders in the government and others for better data management. and these two things, better data management and the drive for automation, caused a very

keen interest in federal agencies to modernize what were now becoming outdated financial systems. and a commercial off-the-shelf solution emerged as the best practice. but what happened was as agencies moved from their legacy diverse accounting environments to start to leverage these commercial, off-the-shelf modern solutions, customization occurred rather than integrating, configuring these solutions right out of the pox in order to close -- box in order to close the gap between our legacy complex environments with a more streamlined, simple environment that supports these new solutions, we needed to make customizations cut some corners in order to get it done, and that continues to drive our costs up today. the very end of the decade something critically important happened that gene mentioned and i want to talk about today too. so the recovery act occurred. and the recovery act beyond all

the different things that it did looking at it just through the lens of the government cfo, controller and accountant, the recovery act exposed a gap between the public's demand for financial information and the capacity of the cfo act-based accounting systems and infrastructure to produce it. so when we got the recovery act and we saw all the various transparency requirements associated with it, there was a mixed feeling within, i think, federal circles. on the one hand, we were excited by the challenge. we agreed, of course, on the principle that in this important legislation that tracking these funds in an unprecedented way with more detail than has ever been done before to provide the american people with clear insight into exactly how this money was flowing through federal agencies out to the public sphere and what was happening with the money once it

hit state and local economies, that was what it was all about. that's what we signed up for. going back to my objectives of the cfo act, the transparency. so we were excited about this challenge, and in particular it put the cfo community in the forefront in terms of the challenge was levied straight at them, at us to meet this challenge. but at the same time we recognize that our accounting systems that are set up to produce these corporate-style balance sheets, the infrastructure that we developed over the last 20 years was not as nimble as it needed to be to meet this complex array of new data requirements that came out of the recovery act. and so we were left a little bit back where we started as we started to take on the challenge of recovery act reporting. we'd done extremely well in terms of meeting the transparency and accountability requirements of the act. we've met every deadline, and

the information that's flowing into recovery.gov today is an enormous quantities, and i believe growing quality. but behind the scenes there's a lot of work that's going on to get this done outside of the infrastructure and system investments that have been put in place over the past 20 years. we've got tiger teams and work sessions and working groups and excel spread sheet reports and all the types of things that our automated solutions that we invested in are supposed to make standard fare and supposed to limit the resources that we need to do to produce this information. and so while i'm proud of federal agencies and the federal government for meeting the transparency requirements of the recovery act, i still have to look at how we can sustain them over time. and we have to look at how we develop the infrastructure and

the systems to support financial reporting and whether that infrastructure is nimble enough or diverse enough, versatile enough to meet new requirements that are going to be coming down the pike. so where does that leave us today? today, i believe, we have a foundation of very strong accounting practices at the federal agencies. as i mentioned, more and more clean opinions. almost all, 20 of the 24, major federal agencies today achieve a clean opinion, and that's a result of discipline and consistent financial reporting that has emerged. and we have what i would call high-functioning risk management frameworks that are driving internal control improvements this financial reporting. shortly after sarbanes-oxley was passed, omb initiated changes to omb circular a-123, and there was a lot of excitement and energy around management's responsibility to evaluate it

own internal controls over financial reporting. and that has really stuck and had a lot of momentum early on, and i believe now we do have very strong and robust risk management frameworks that were envisioned by sarbanes-oxley for the corporate environment now exist in the federal government. but i think one of the important things i should stress is those are robust risk management frameworks of internal controls over financial reporting. there are a whole other array of internal control environments outside of the financial reporting realm. where our risk management frameworks are not yet robust and not as strong as those that were developed in the wake of sarbanes-oxley for financial reporting. i believe we have achieved much more so than we've ever had in the past and continue to do a better job on it effective integration between our transaction processing and our accounting records. the complexity, though, in our financial operations is leading to, as i mentioned earlier,

unnecessary costs and inefficiency. look no further than the costs of what it takes to modernize a financial system in the government today. project delays, suboptimized deployments, i'm going to spend a little bit more time delving deeper into that a little bit later, but the financial operations that we see today are these increased costs. core financial functions such as accounts payable are still not fully automated across the government, we still have gaps in terms of where we think we can be to be more efficient in our financial operations. and we still have, unfortunately, even though we're getting better at it nonstandard and inconsistent business processes, accounting codes and feeder system data. as i mentioned earlier, in addition to having a foundation of strong accounting practices yet a complex array of financial

operations that are driving our overall costs up, one of the things that we're learning today is that our traditional financial reports are not meeting our user needs. either the public -- neither the public, nor the government decision makers appear to be looking at our standard reports such as our balance sheets or our net operating costs or statement of budgetary resources to advise public policy decisions or to advise day-to-day management decisions. but what's happening -- and certainly, let me emphasize that we don't see a growing public demand of any kind to read these basic and traditional financial reports -- but what we do see, as i mentioned earlier, is a very strong growth in public demand for spending data. there is a clear trend that we're seeing from the public in terms of what they're interested in terms of government finances,

and that is not on the what we owe and the what we own of our balance sheets, but the public's demand is zeroed in on where the money is going. so when we stepping back, again, to the cfo act, when we put together fees gathering these principles of a unified framework for financial reporting, we focused on these corporate style financial statements, in be particular the balance sheet which really does do an effective job of answering that question of what do we owe and what do we own. but today what we're seeing is more interest and focus on the cash flows of where the money is going, who's getting the money and what's happening with the money. we also see an overwhelming quantity of financial data, and many of our new cfos have reported this to me as we

transition into the obama administration and new cfos came onboard. they pointed out to me that they're finding enormous quantities of financial data in their organizations but no framework to meaningfully put it in management reports that would prove helpful to them. so they're having trouble wading through this enormous amount of financial information. another thing, and this was mentioned by gene and john, that improper payments has emerged as a critical metric of financial management success. this is something that is really intuitive when you think about why it's such an important metric. first of all, i think it's important to point out that we hit an unwelcome milestone in 2009 this terms of crossing the $100 billion threshold in term of annual improper payments. and i think the recovery act as we started to launch into it

brought questions about the government's track record on fraud and error, and here you had programs that had existing bases of high numbers of improper payments, and we were going to flow this money through that same infrastructure that was producing these unwelcome and unacceptable levels of improper payments. and so this became, i think, and has become a very important centerpiece and message and priority for how we think about financial management today. i think if you go back four or five years from now and you are having a session like this, i think the key metrics that would define financial management success would be around the number of agencies that are achieving clean audit opinions, the number of material weaknesses identified by auditors in their audits of our financial statements, how quickly we're producing those financial statements. are we doing it in the time frames that were established to

accelerate financial reporting? but today i don't think those are front and center in what people are asking about the success of financial management. i think we have reached a point where we've moved beyond the compliance of financial reporting, and we're now more into the sweet spot of the performance of financial reporting. and so when you think about just to kind of break it down, you think about accounting in very simple terms, you could argue that thein and the yang are payables ask receivables, and we've spent an enormous amount of time and effort, rightfully, of trying to build that foundation of being able to accurately value and report the nature and amount of our payables and receivables. but something is happening right now, i believe, in the federal government today that is placing an urgency on moving beyond just whether we're reporting the value of those payables and

receivables, but how we're performing on them. and that reality is the budgetary situation, the economic situation, the fact that not just those corporations listening out on the radio for ideas on where to cut money, but federal agencies and the federal government are all dealing with the same reality of needing to do more with less. and so when you hear about payments that are going out to the wrong person in the wrong amount for the wrong purpose or at the wrong time, that's an area of potential efficiency that we can tap into or potential inefficiency where we can close the gap and start to be able to save and be more efficient and do more with less. and on the receivables side, again, once you have that foundation of knowing how much money is coming in or supposed to come in, the question, the critical question then becomes

how are you managing that receivable portfolio or your debt portfolio. how are you doing in terms of your timeliness of making those receivables come in on time, in their full amount so that we are, again, managing to our bottom line more effectively. and i think that this is a really critically important point for the role of the cfo going forward. and right now. and what we have done in the administration is establish a set of priorities. we call it the accountable government initiative. and in within the accountable government initiative are a whole host of different priorities that get at a lot of different themes of better management and performance; eliminating waste, improving transparency, improving human capital outcomes. for the cfos, i think if you

were to lay a heat map over all the president's priorities for improved government performance, you'd see a lot of red dots around the emphasis on eliminating waste, and you'd see a lot of red dots around the emphasis on transparent and open government. .. >> and i think we're being held accountable today for the first time in such a broad and comprehensivive manner.

starting with improper payments. now i've been working on the improper payments issue for a long time. since congress first passed legislation back if 2002 for eight years. and i've seen and watched this initiative move in a lot of different directions. but what i haven't seen in the past and what's really eye-opening to me is that in the last eight months we've had three different presidential directives and announcements associated with the concern over improper payments. and the demand from the president that we tackle the problem and do a better job with it. and so in the previous six or seven years of improper payments being around, i have never seen such attention from the highest levels of government around doing a better job on this issue. most recently, the president announced an extremely aggressive goal of preventing $50 billion in improper payments

within the next two years, by the end of 2012. that's on top of a preexisting goal that we recapture going back to the receivable discussion that i had earlier by 2012 as well. to get at it there's a whole sweep and set of actions that the federal government is taking with our state government partners it off achieve these very tough goals. we've launched the public dashboard, paymentaccuracy.gov which provides for the first time information for the public not only on the improper payment total of each agency but the names of the government officials at those agencies that are responsible for tackling them. there's information there like the top ten improper payments that were measured and found over the past quarter.

and target for how we anticipate achieving this $50 billion reduction. the president has charged us to find new incentives that don't exist today for state governments to get more involved and tackle the improper payments with the government agencies. the president has asked us to provide more forensic accounting tools used sometimes on the audit side of the house over to the management side of the house so that we can get out in front of this problem. in fact, the vice president recently had an event where he celebrated the success of the recovery board, the board of inspector generals set up to look at fraud and error and other issues in the recovery ac . ha put together a forensic fraud detection tool that is having important success. and the vice president announced in june that that tool is going to be now leveraged or some similar type tool by hhs and

their challenge in battling fraud and error in medicare and medicaid. so we're starting to see some momentum and the lev randalling cutting incidental agencies and fraud detection . act and expanding it to other programs in government where we're having the challenge. we're looking at the acreage audit. the single audit process to determine how we can alter that process through scrutiny and more direct questions are asked where the money is going? is it going in the right place for the right amount for the right purpose. so this project is looking at the various priorities that exist when we run our single audit process. and determining are we doing enough to prioritize the bottom line line question did the right money in the right amount for the right purpose. if you ask 10 members of the

public off the street what they care about in terms of when we're evaluating money federal dollars at the local level, really that is the bottom line. the president announced somewhat recently the creation of a do not pay list. for the first time we're bringing databases together that exist . . gardless. these are information like is the individual or entity suspended and debarred from receiving further government pay? are they -- do they have an outstanding delinquency, whether it would be tax or otherwise? are they no longer living? and these are all things that we have databases that exist today, whether it's gsa's excluded party list, whether it's delinquent files at the treasury

department or whether it's the social security death master file. yet, continuously we continue to make these payments. the do not pay list is bringing together this information through a single portal that we hope will put an end to any more payments that are made to entities that are suspended or debarred. that are tax delinquent or otherwise. in this area of eliminating waste, it's not just about improper payments. we also, the president announced recently, an $8 billion goal to improve the management of our real estate. this is about getting rid of properties that we own but don't need anymore. this is about improving the way we manage the properties that we do. the operation and maintenance costs, the energy costs, the way we use space. and are we really aligning our real estate footprint to a 21st century workplace? and we believe there are a lot of efficiencies there.

again, this is about a world where we have nondiscretionary freezes, cuts in government agency budgets. we need to figure out how to do more with less. and what this accountable government initiative is about, it's identifying these areas where there are efficiencies that can be had. and who has to lead the charge? the government cfo, the government controller the government accountant has to start expanding beyond their traditional roles of just evaluating the reports and start getting into these issues. now, when i first brought together the new cfo council and we recognized that efficiency in government operations is going to be a major priority and has to be a major priority, i asked them to lead by example. and let's figure out our own operational efficiencies and inefficiencies.

in our financial operations. and over and over again, the common theme and common issue came up that our number one source of inefficiency is the manner in which we are modernizing technologies. it takes too long to deploy a new technology and stand it up and get it up and running. it's becoming too expensive, hundreds of millions of dollars in some cases more than a billion dollars to modernize a single accounting system. and once that system is up and running, it often underperforms from what we anticipated. the efficiency that we were hoping for in terms of automation and integration and data capture are not materializing once those systems are finally deployed. after all these years and after all those taxpayer dollars are expended. and so we diagnosed this problem and looked at it.

benchmarked it with a public sector. in fact, the president held a forum in january of this year with ceos from around the world to talk about closing the technology gap which is one of the major elements of the accountable government initiative. and in this forum of ceos, there was a specific discussion and focus on modernize business systems in particular, modernizing financial systems and one very clear message came across. and that is when you try to do too much -- when you modernize the system, you often fail. it was a very simple proposition. that our projects are often too big. that we're taking on too much change management, too much business process engineering, too much data cleanup for these projects to deploy quickly and efficiently with the performance that we expected. and so we come to the recognition that we need to right-size our financial system

modernization projects along with some variables. the first variable is our systems have to be rescoped and right-sized to our most important business needs. we can no longer be in the business of nice to have. we can't procure technology solutions for things that are directionary that are nice to have. we have to focus on what we need most, what our mission-critical. what are the most important we have. second, we have to right-size these projects to the capacity of our organizations to manage change. we can't take on these large gigantic footprints of business transformation if our organizations aren't ready to undertake them. and their readiness might be based on a number of different factors. it might be they're facing other issues, whether it's the housing crisis, a hurricane, war. it's not just about the ability of that organization to manage that project in standard

operating procedure. it may be that there are certain factors that are impacting. so we have to right size our projects to what we can achieve as an organization both the staff capacity and the other priorities that are emerging. the third factor is pretty basic too, we have to right-size the project to the capacity of our staff to leverage these technologies. often what we're finding with these technologies we put them in place and they have so many bells and whistles. they are so high-tech that the staff doesn't know how to work on them and we're not getting the full efficiencies out of the system. so by rescoping the projects to a narrower footprint of critical business needs, of the capacity of organizations to manage change and our staff capacity to leverage the technology once it goes live, we believe that we're going to not only save money but actually improve the performance of the systems and improve the pace by which we modernize.

because quite simply, what this project does and what this initiative does, if you have four business requirements that you believe you need to be met in your new solution, the current way of doing things or the previous way of doing things is to try to get all those four business requirements at once. and that's when you start to see the years lengthen on the project and the cost. the new approach is just a very simple twist. it's go get the top two business requirements first. deploy those. and once you're successful and do it within 18 to 24 months and once you're successful on deploying those two business requirements, then turn your attention to the next two. make sure you pick the two that are most important. and two or three things are going to happen when you switch to this approach. one, when you get 18 to 24 months in, you can reevaluate your business requirements. maybe the two that you had previously ranked 3 and 4 on your list aren't 3 and 4 anymore. maybe there are new ones that have emerged that you want to

put in place. there are new technologies that may have emerged. as you may know 18 months is a lifetime in technology. imagine going to the apple store and buying a laptop and bringing it home and not opening it for 18 months. by the time you open it, there's probably been two or three versions that have changed and you're just cracking open a very old version. so a technology refresh is possible. plus, very simply two requirements are smaller than four. and that means that your change management footprint is smaller, the amount of business reengineering, the amount of data cleanup. what we've done is very bold. we have stopped all modernization efforts in financial systems across government by saying there are no longer any new acquisitions, new task orders, new contracts. you can finish out the contracts and tasks that you're working on today. but no new work until your project has been reviewed for these types of rescoping opportunities along these

variables. and approved by omb for going forward and we've established a board to help us, the financial systems advisory board which is made up of very talented cfos and cios in the government today with enormous experience in modernizing large technology projects. and they're providing us advice and counsel on each project and we are in the process. this is a tough summer at omb and for the financial systems advisory board because we're going through every single project in great detail for possible scope and savings. so we've already had more than half of the reviews done. i'm hopeful that sometime in september you'll start seeing the outcome of these efforts and hopefully you'll see a consistent theme. the project is now less expensive. the project is now more targeted on a smaller set of business requirements.

the project deployment schedule is now accelerated. the last part of my remarks within this accountable initiative in addition to eliminating waste to things like improper payments in real property and tackling this very persistent problem of weakness in the way we modernize our financial systems is the open government piece. what i call promoting accountability in innovation through open government. i won't spend too much time on this piece. we have to fix our reporting model in a way, i believe, that aligns it more closer to these types of priorities than i've described. so i started this whole presentation by talking about corporate styling financial statements and asking the question, how are we doing in terms of transparency? how are we doing in terms of internal controls? is it leading to the right set of internal controls being reviewed?

and how are we doing in terms of government decision-making? and what we find and you can see in the descriptions of the initiatives that i had, whether it's going after improper payments, whether it's going after real estate where it's managing our debt more effectively, whether it's figuring out how to manage large scale i.t. modernizations more effectively to impact that bottom line as taxpayer savings, a lot of that is missed, is offcentered, is off target from a financial system reporting process that we have today. tug through and you read all of our financial statements and all the audits associated with those financial statements you will not find a lot of discussion around the management of our debt, the improper payments. you'll see agencies with clean opinions yet large numbers of improper payments. and you won't have a lot of insight although you'll see that their receivables portfolio has been valid and reliable in terms of its reporting, you won't see a lot of insight in terms of how

that portfolio is being managed. you'll see information whether the inventory, the real estate inventory, is comprehensive and valued and depreciated correctly. but you won't get great insight into how many of those properties are no longer needed. or how many of those properties are being maintained at costs that are outside of good benchmarking goals for keeping costs in line. and so -- and as importantly on the transparency front, what you'll see or you won't see is a lot of emphasis on spending transparency. and what we see is that websites, public websites like usaspending.gov which was required of the transparency act of 2006 which has every payment the federal government makes over $25,000 in a searchable format and recovery.gov which as you know tracks all the recovery dollars, we can continued to have -- although we're getting better at the recovery element

but liability issues with those payments in terms of making sure they're comprehensively reported and timely reported but those are not showing up in our audit reports. more basically, we spend an enormous amount of time and energy and effort to produce annual financial statements and get them up into public databases like your agency websites and seeing very little negligible foot traffic. yet, in the same breath we're putting the spending information into public websites that are getting an enormous amount of foot traffic and an enormous amount of hits but yet we're not using the same corresponding let me of effort in terms of audit scrutiny, in terms of all the efforts that go into validating the reliability of that information. so what we want to see going forward is relook at the 20-year act -- a relook at this reporting model. in no way, shape or form can we throw the baby out with the bath water.

we built a large system of accounting, internal controls and financial controls that we need to build on but we need to start with this expansion and emphasizing new areas. and that's what -- that's what i'm entitled to work on. -- excited to work on. the cfo council has a project to look at this reporting model. we have a very important provision that was just enacted by congress that not a lot of people saw but when they passed a new version of the improper payments bill a few weeks ago, that was provision in there that required the cfo council and the inspector general community to report back to congress on lessons learned in the 20 years of the cfo act. and in particular, lessons learned on whether this financial reporting model is meeting our needs. so i think this is an important opportunity we'll have to debate and dialog. in the meantime, agency efforts are underway. agencies are being held accountable today to improve their performance on these key areas. and i think the reporting model,

hopefully, will end up dovetailing well into these agency efforts so that we have these common investments in infrastructure and performance. so i see john standing here. i assume that means the time is up. i appreciate being here today. and i look forward to working with all of you on these challenges. thank you. [applause] >> you know, we got a number of really great questions and thank you so much. it's hard for these speakers, gene and danny pack this. we have a session tomorrowing where we go all over the questions. hopefully we can have omb and gao there. we don't want to speak for omb or gao. so your questions will be addressed in one manner or another. and thank you so much. danny thanks again and now i think it's break time. [applause]

>> our coverage of the conference of the american institute of certified public accountants continues now with a discussion on the extent of the financial crisis and the effects of new financial regulation. we'll hear from representatives from the federal deposit insurance corporation and the government accountability office. this is a little more than an hour. anticipated, the you are i the wrong session. we've got two excellent speakers to speak today. the first speaker is richard brown. richard serves as the fdic's chief economist and associate director for regional operations in the fdic's division of insurance and research.

as chief economist is responsible for developing and committing the fdic's perspective on a wide range of economic risk management issues. prior to coming to the fdic, he held research positions at the resolution trust opening, the federal savings and loan insurance corporation, and the federal home loan bank board. we also have susan offutt. e is the chief economist of the government accountability office. from january 1996 to december 2006 she was the administrator of the is department of agriculture's economic research service. prior to that she was the executive director of the national academy of sciences board on agriculture which conducts studies on a range of topics on agriculture science. without further ado i would like to introduce richard. thank you very much. [applause] >> thank you and good to be with you this afternoon, and having the economic session right after

lunch. conveniently placed. i'm happy to have the chance to come and talk with you today about how the fdic is seeing the progress in recovering from the bank, from the financial crisis of the fall of 2008. how we see the situation playing out chronologically with the recovery of the industry, some geographic patterns, and some idea of what we see next, what's down the road for the banking industryand for the deposit insurance fund. i'd like to start by focusing on the bottom line at the banking industry. as you can see, before the recession started at the end of 2007, the banking energy was earning pretty steady in that income in the range of 130, $140 billion a year or more, breaking it down quarterly there. since the fourth quarter 2007, the last 10 quarters we have seen earnings low and ad even. the average of quarterly

earnings during that 10 quarter period is less than a billion dollars. a big downturn from what we saw for the recession started. the fourth quarter of 2008, just after the peak of the financial crisis, produced the largest quarterly loss in the history of the fdic, for the banking industry. industry. $37.8 billion. industry earnings picked up in the first quarter of 2010. e latest data we have available to $18 billion for the quarter. and while this is a market improvement from what we saw before that, we are still obviously not fully back to health from a bottom line perspective. what are the sources of these losses been? we have seen large goodwill impairments on the part of some institutions, escially in the late 2008 perid. we've also seen losses on securities, and some of the nontraditional, some of the exotic securities, mortgage related securities experience big losses during 2008 and 2009.

and an in addition we've seen large provisions for loan losses. during the camcorder period, provision for loan losses were $550 billion, more than half a trillion dollars. and that rally explains how we got there in terms of the earning transfer the industry. let's look at problem loans for the industry, and it's hard to remember this far back, but the middle of 2006, the industry's noncurrent loan ratio, the 90 days plus, 90 days or more past due or non-a cruel loans amounted to just seven-tenths of 1% of total loans. that's the lowest percentage in history of this data series. but since then you can see what we call the hockey stick graph, especially led by real estate loans in the blue construction into government loans come in the red, one to four family mortgage loans. rising rapidly with the disruptions that we saw in the mortgage markets and in the fall

in real estate values, residential real estate guys in particular, leading to losses on construction develop a loans to be the highest really since the peak of the last crisis. we had another big crisis with construction lending in the late '80s and early 1990s. that racial kyrgyzstan to 16.8%. that is the highest in the history, but coupled to the previous cycle. but one to four family mortgage is in red, the noncurrent as of the first quarter were 8%. that's unlike anything we've ever seen in the history of that data series. first lien mortgage loans were always busy this resave asset class, and obviously that is such an has been turned on its head by the housing bust and related mortgage credit disess that we have been experiencing for the last two to three years. now in terms of the other asset categories, we have some mixed results. the asset categories the purple

income if you can see that, backed by nonfarm, nonresidential loans, these are permit commercial real este loans. we've seen some elevation in the problem loans, and we expect that, those problems to persist going forwd. that's an emerging risk for the industry. but to date it is still not all that high. in addition, for commercial and industrial loans, the light blue line, we saw a decline in the ratio of problem loans in the first quarter, to 3.1%. commercial loan portfolios are actually getting better as we have seen tightening standards and actually an improvement in corporate sector finances, as corporations have been able to raise money in the money markets, in the bond markets, and we've seen an improvement in those portfolios. we expect that to continue into 2010. i do want to focus on little more on commercial real estate lending, and tell you tht it's not only an emerging risk, but

it's also in a merged list. the bread slices the pie they are, $451 billion in construction and development lending. as you can see here about almost $100 billion of that is one to four family residential development. the remainder, about $350 billion, for commercial development. these tend to be high risk loan categories because the collateral essentially is the project and process. could they hold and greta, could be a half finished building, a half finished residential developer. and that's w when we saw the dislocations in residential risky markets you saw the large volume of noncurrent loans, large lawyer in charge us. also, actually a bigger exposure for fdic insured institutions is down at the bottom, commercial real estate, permit commercial re estate loans backeby nonfarm nonresidential lendin and you can see that breaks down

just less than half ou owner occupied. these are essentially commercial loans too small businesses, other commercial entities that are backed by the cash flow of that business, that also have commercial real estate collateral in abundance of caution. the other part, the 611 billion-dollar portion are non-owner occupied. these are loans for income producing properties, hotels, office buildings, industrial warehouses, things of that sort. and the primary source of repayment is that income from those properties, and when that income is disrupted, the credit, the repayment capacity could be impaired for those loans as well. now, i did want to mention in terms of the losses that we've seen in the construction loan losses, we have seen this portfolio decline in volume by a quarter since the crisis started. we are well along in realizing losses that instrument and

many of the failures we've seen. there have been $55 billion in charge us already in that portfolio. with regard to the permit commercial -- actually, that continue to be an emerging risk. there was so a high point of lending in the middle of the last decade, 2005-2007, and we saw the lending against properties with relatively high vibrations. and i'm going to show you how we measure those valuations, why hide violations at the time of origination turns out to be a risk going forward. let me move forward. this chart shows the capitalization rates for u.s. office markets on average throughout the last decade. and the capitalization rate is sentially the inverse of the price to earnings ratio. it is essentially the employed rate of return based on the sale price of the property and its net operating income. as you see in the middle part of the last decade, 2005-2007, the prices on these properties were bid up to such an extent that

the cap rates were bid downto maybe make them a single digits, maybe six, 7%. but has invested became much more risk-averse during the financial crisis since the financial risis, those cap rates rose as investors demand a much higher rate of return. the inverse of that is the valuations placed on those properties decline. we saw valuations on office properties p. could later that housing prices that they peaked made in 2007. that by many measures they declined even more than u.s. residential values that the average price of a home in the u.s. declined by about a third, between 2006-2009, and the average office property declined may be in excess of 40%, depending on the measure. so that represents a very large dislocations for these borrowers. we know they can see rates are higher. wins are lower as result of the difficult economic time. but that big decline in

violation represents a decline in the collateral died which makes it difficult when that lone comes up for renewal. there's not enough collateral to cover the loan at a reasonable an to value ratio. so as all those high-volume of loans made in 2005-2007, for refinancing, at lower valuations, the loan in many cases has to be restructured. the good news is for the loans held by fdic insured institutions, is there is a great capacity to restructure those loans around today's cash flows, today's interest rates, which are highly advantageous. the transit and the other regulators released guidance back in october of 2009, instructing the industry on how to restructure those loans in ways that still conform to gaap. may be part of it has to be set aside for a loss portion, some of the rest of it can be -- it has to be held as non-accrual for six-month period, but as long as it performs adequately it can be brought on an accrual

list. some people have called this policy extended again. we beg to differ. we think it conforms to gaap. it's a restructuring that does take into account a loss for the institution in many cases. but it does a result in foreclosure and the distressed sale of the property back and drive prices further and further down. and i think that's what we saw in the residential market, more foclosures, more prices, less credit, more distress. i do think we're going to see that, th cycle in commercial real estate. and in addition, i would add that as investors that pulled back, as you see with higher cap rates, renewed investor confidence as they get a little more appealing of what's happening with the atomic of what's happening with these markets, their risk aversion showed diminished somewhat and those by you wish and could recover somewhat over the next couple of years. so this will play out over a couple of years. i did want to point out where

the highest median concentrations for construction and commercial real estate loans were. i will point out that the highest concentrations tend to be at small and midsize institutions, not the very largest institutions. small institutions have been intermediated out of commercial lending -- skidding, consumer lending and mortgage lending in many cases, and they turn to what they know best that they have local knowledge and expertise in financing commercial real estate. the states in red, the median conctrations for institutions in those states is more than 360%. that's 3.5 times capital. and you say also that those economies that were very dependent on commercial real estate construction activity. before the recession and had been hit hard by declines in construction activity since the recession. for example, if we look at construction employment in the

recession, in arizona, has fallen 54%. california it's fallen by 43% to oregon, 39%, and saw. so i think you get a picture of these economies were very dependent on construction. thes institutions they depend on construction and commercial real estate in fnancing, and we're seeing difficulties, dread difficulty in those portfolios, especially in those particular regions. let's move forward and talk about the effect on credit availability. certainly credit availability is something of great concern right now, and credit has been tight. you see from the senior loan officer survey of the federal reserve or and this is a survey related to commercial and industrial loans made by large and medium firms, and the maroon line and small firms in the light blue line. you see on the left that banks have been tightening terms throughout the recession, and really terms of just sort of flattened off. they're getting ready perhaps to

loosen somewhat going forward as we move further into 2010. but that's not the only story with glee. we also see that the man on the right side has been week. for the same firms. in fact, the demand continues to weaken at the margins for those firms, according to the fed's survey. and so what's the cause of each of those? well, the experiencing of credit problems on the part of the lenders and the impairment of it -- we understand that. on the borrower side, the reluctance to lend toward a different depending on whether you are a large firm or a small firm. for the large firms, there have been many cases been able to go straight to the bond market and issue papers at historically low interest rates. and it does so in large volume, hundreds of millions of dollars, which has met their credit needs in this economy. for small firms, they have been reluctant to take on new debt because they are concerned about

what they see as falling demand for the profits, falling pricing, falling sales, and some concern about what lies over the horizon in terms of regulation and insurance rates and some of their traditional concerns. so demand has been week somewhat on the small business site. i would add, and linking back to the discussion we had about commercial real estate values, if you look at total nonfarm, nonfinancial -- excuse me, nonfarm, noncorporate business, essentially small business, half of their liabilities are secured by real estate, resident -- residential risky or commercial real estate. those eyes does interfere with the ability of small businesses to attract credit to secure the credit with real estate, and represents a disruption in that cred process. so that's mething to be dealt with going forward. >> in terms of the lending capacity of the industry going forward, this shows capital ratios for fdic insured

institutions, according to different measures. and i will focus you on the red line, tier one riskbased capital. we see that it declined to a low of 9.79%, a weighted average in the third quarter of 2008 at the height of the financial crisis. since then it has recovered quite nicely to 1211% that i'll also point out that small institutions tend to have higher capital ratios. banks are under $100 billion as a 17.8% tier one capital risk-based assets. so the catapult his position of the industry has recovered somewhat since the height of the financial crisis, and this represents to some extent dried powder, the ability to make loans when demand comes back. so we would view that as a part of the road to recovery. it's a rocky road, to be sure, but it part of what has to happen in order for the industry to be in a position to meet

credit demand when, especially small and midsize businesses are ready to come back and bought in e market. i also point out that part of the recovery in capital values has to do with the dividend policy at fdic insured institutions. and just to point out in the greater 2006-2007, total dividends were running in the range of 20 to $40 billion per quarter. that has been dramatically reduced, dividends in the first quarter his year were just four points for billion dollar so that's a big part of the capital bill for the industry. and again, its progress towards meeting credit demand in the future. let's move on to the effect on the deposit insurance fund, problem institutions. this shows the number of institutions on the fdic is probably as. well, what is the problem list? you may bea win our supervisory

scale there are five grades, one being the best, five being the worst. problem banks are those with rated either four or five, the two lowest supervisory ratings. and as you can see the number again follows the hockey stick pattern that was nearly an all time low of about 15 problem banks in 2006. most recently, first quarter this year, 775. the good news, i suppose, is there are only about half as many problem institutions as a soft at the peak of the last crisis. the bad news is there are really about half as been institutions in exixixist now as there were thin. we are very much at comparable levels in terms of problem institutions. the rapid decline in the health of the institutions is evident in the steepness of that increase, bu if you look very closely i think you'll also notice this increase is beginning to taper off. the impact of the crisis on supervisory ratings is just

beginning to taper off, and we do expect, i do know that we've seen the height of the number of problem banks yet, but we do expect that to begin to diminish as we go forward here in the next year or so. i also point out to that most problem institutions do not fail, and that's a common misconception. we've done a historical study looking at each problem bank episode going back to the mid 1980s. and we showed that only about 19% of failed or required assistance over the long period of history. that percentage does tend to rise any period of distress. to maybe a quarter or more. but i think we can safely say that most problem banks do not fail. to either earn their way back to health, or they are a card on a voluntary basis, or they rai capital on their own to bring themselves back to financial viability. let's look at the effect on the failed institutions. this chart tends to get out of

date very quickly. it was a bt, this is as of july 21 of the actual number of failure so far this year now stands at 110, after last friday. we had 140 last year. it was the most since 1989. excuse me, the most since 1992. and it looks, it's pretty goo bet that we will surpass last year's total of 140. this year we are on a path to do so. but we are also recently confidence this will be the peak ar for face. is a bit of a lagging indicator august it takes a while for the problem to go through the credible to the income statement to the capital account the felicitation. and we are seeing that essentially lag, the credit problems, with the industry. but we think we're making progress india with those cases, and we don't expect it, the failure levels at this intensity to persist indefinitely. i want to also point out the

regional patterns again, and this goes back to her statement. looking at the total number of bank failures by state, during 20, 2009 and through the first half of 2010, as a percent of the charters existence in each state, at the end of 2007, the incidence of failure during that two and a half year period. and juicy once again our familiar regional concentrations. where the western states, we have the southeastern states, states it very hard by the nontraditional, well, concentrate and nontraditional mortgages, institutions that have high concentrations in construction lending, commercial real estate lending, and where, incidentally, we have seen large declines in residential real estate values, and subsequently and sub som commercial real estate categories as well. so i think is pretty consistent with, this is shaping up to be the regional story, the southeast, the far west, into a certain extent the upper

midwest. i don't think you can quite see it as well there, but the manufacturing economy has been under stress for quite some time. there certainly were concentrations in commercial real estate in that area as well so i think there's a minor concentration, in paris in the upper midwest states as well. if we look at the effect on the deposit insurance fund, we see that the fund went from being about its statutory minimum of 1.15% of insured deposits. it was last there at the beginning of 2008, and steadily declined. most recent period being negative, negative $21 billion almost. and every server a show to ensure deposits of negative .38%. a couple of things to point out. this represents the net worth of the deposit insurance fund after accounting for our contingent loss reserve. we set aside money to $41 billion to be precise, to

cover failures that we expect over the next year. in addition, this doesn't represent the cash balance of the fun which also pointed to stand at $41 billion at the end of march. those are the resources that we need to protect depositors, to affect the orderly resolution of failed institutions when they come about. so our cash resources are strong. in addition i'll point out that we have access to treasury line of credit that runs up to $500 billion, and that's the ultimate line of defense. fdic's obligations are baked by the full faith and credit of the u.s. government, and no depositor has ever lost a penny in ensure deposits, and none ever will. i will point out that the cash resources that we do need to affect our operations were bolstered by a prepayment of three years of deposit insurance premiums at the end of 2009. that brought in $46 billion.

it had no affect on the earnings are the capital of the industry. it was a prepayment, accompanied by prepaid asset on their books i will burn off as those premiums otherwise would have become do. the benefit that has is it gives against cash injection to the fund that let's us to our business in the near term. it has no effect on the network of the fund, the dif balance. i want to close by saying a few words by what the future might look like for fdic insured institutions comment and i will say up front i think it's going to be a bit of a tale of two industries, the larger institutions, a lot of them were hit first by the great recession. a lot of them had more can concentrations, loans concentrated to a very early in the crisis. small and midsize institutions more vulnerable perhaps to commercial real tate and construction exposures. their problems have lagged somewhat of the problems start

on main street and -- steven, start on wall street has been moved onto main street where we are seeing it in small and midsize institutions that if you look at is as a whole, would've wanted it is i want to replay for you what happened after the last banking crisis. 1989 through 91, a three-year period, the worst that we saw for the s&l and the banks. what happened in the three years after that and what can we expectaybe in the three years going forward. if you rewindto look at the 1992-19 a for pay, if you look at the upper left, return on assets bounced back pretty nicely after that, after the peak of the last crisis. going up above 1%, the net income of the industry also bounced back pretty admirably to the 10 billion-dollar or more per quarter range. in the upper right. a big reason for the resrgence of industry earnings in that cycle was the decline in loan loss provisions every qarter,

the lord of the q-card not setting aside money for bad loans, that money and to your bottom line. so it improves the bottom line for the industry. and we saw the number of failures in thbottom right also taper off. the next chart shows the big story for industry earnings in the last cycle and that was net interest income. net interest income as you see any upright onthis chart increased by the nearly tens of billions of dollars per quarter over the cycle, and that was due to two factors first, the yield curve spread, the spread between the yield and the 10 year treasury and a three-month treasury widened to very historically wide levels in the upper left there. three, 3.5%, pushing 4% in the 1992 period. and that had a very positive effect on the net interest margin of fdic insured institutions. that's in the lower left, and it showed the margins went up above 4%. so you're earning a 4% spread on

your business that really helps net income. the kicker in the lower right was finally the industry stopped shrinking its long, its asset portfolio and started growing its asset portfolio as we head into 1993, 1984. so if you have wide margins, growing to asset portfolio, you are adding net interest income to the bottom line. so that was a pretty rapid recovery, a good news story. let's look at the current situation and see what we might expect when forward. fit of all, we did see a bit of a bounce back in return average assets in the first quarter. i will have to caveat that and say part of that was driven by the fact thathe industry brought back onto its balance sheet about $219 billion in loans that were previously securitize, and that was due to 167166 coming into effect. brought their income back on the ballot sheet so that increase in

auto a is substantially increased by that accounting effect. but we saw the same accounting, the accounting effect also for net income, it's probably less of an effect on net income because it also brought loan losses to the portfolio as well. but with regard to provision for loan losses in the lower left the industry peak was in the third quarter 2008 at $71 billion. those provisions ve been consistently running in the 50 to 60 billion-dollar range, intel we actually saw a low, a decline in the first quarter of this year to $51 billion. you know, moving down from 60 billion or more to $51 billion is $10 billion to the bottom line. so that sort of gave the industry a shot in the arm and explain some of the increase in net income. in terms of the number of

failures, we have seen the highest interest in recent quarters. i think we already know what the second quarter figures are going to be, and they're going to be somewhat in the '60s. or 50s in with. based on historical events have already taken place. so we know we haven't seen a peak, or the 41, the decline to 41 is not going to be a trend that is staying there. let's move on to look at net interest income fell. the yield curve spread it again as of the end of the first quarter was pretty seek, about three, 350 basis points are that it has, down somewhat, about 260 before i came here today. and as you can see in the lower left, not much effect on net interest margin jet. margins have still been pretty flat, 3.83 in the first quarter, and again th's exaggerated somewhat by bringing those assets back onto the ballot sheet. the other factor here is that the industry hasnot been

increasing, it's outside the accounting change with the fas 166, 16 e-7. we saw assets declined for four consecutive quarters and witnessing a decline in the first quarter except forhe accounting change. so when net interest margins are pretty flat, when the asset portfolio is not writing you're not getting a lot of attention to net interest income. so i don't think that that is shaping up to be a very big income driver in this cycle. i think the reduction in provision aches dangers -- expenses is shaping up to be a large driver for the industry. and i think in terms of the outlook, we're likely to see than the earnings of the industry recover to at least mid-level as compared to the lows wsaw the last two years. during 2010 going into 2011, it's going to get there sooner

for the large institutions, and a bit of a liking basis for the smaller institutions. and again i think we see a fairly stead recovery in erms of problem institutions and failed institutions, but is going to take into 2011 i think to really be starting to see those trends. so with that i'm having to turn it over to susan offutt. [applause] >> there we go. great. i'm very pleased to be here this afternoon. i have to tel you though, full disclosure, i've a very broad title that i'm going to be very selective in the 15 minutes that

i have. you might not be surprised by that what i'd like to do is select to view the events of the past few years, and government response to them, particularly in financial markets, or exclusively in financial markets. i think that will though provide the basis for making an assessnt of whether or not we can answer the question in the affirmative, the question that was posed in the session data about whether or not the financial crisis is over. i will talk about the connection between what the government did and was going on in markets, and i will do all that in 15 minutes. but enough about me. all right. let's just briefly review, as if you didn't have to read this in a newspaper, continually. but how the crisis evolved. you know that the housing market, we believe, was the source of distress that was introduced intohe financial system. it was a long, relatively long boom in housing prices. when the bus came into thousand six-2007, we saw it first in the

subprime markets. and the subprime markets, the loans started to really, the losses accelerated in 2007-2008. if you think back to 2008 it was quite a year. it started out in an exciting way. of course, in the spring, with the purchase of bear stearns by j.p. morgan. but really towards the d of the summer and into the fall, the pace picked up. freddie mac and fannie mae were placed in conservator share. lehman brothers fifth at aig wa rescued and at the end of the day, or towards a the beginning of october credit markets essentially began to freeze. we saw stress in other parts of financial markets. the stock market of course is been one of the best examples in terms of the losses that we experienced there. i'm going to focus on credit maets today. primarily because the importance of these markets, and rich has already given us a preview and a

nice discussion of what's going on in commercial lending and consumer loans, as well as mortgages. but those markers are really important to recovery in the real economy. the ppose of the financial sector is to provide the greece, if you will, of course helps the real economy option. into the extent people cannot bar and they cannot find new activity, that's the source of stress do so we're going to focus on credit markets today. the credit market this of course means people want to borrow money cannot do so, except at extremely, may be prohibively high interest rates. so when markets freeze that means there's no borrowing going on. if there is no bombing going on, then capital is not going effectively through the economy, and that essentially can keep you inin, and it, give us into what we now refer to as the great recession. so we know that recovery in financial markets will be

necessary, but it will be a sufficient contion for recovery in the real economy. the foundation has to be laid and that's the story we are going to explore today. the bottom line i think would be that while the financial crisi is fairly well behind us, it's still the case, as you know, that growth in the real economy is shaky at best. the u.s. government, and there are many aspects from fdic, the federal reserve, treasury, reacted strongly to the signs of stress in 2008. and this is true of most developed economy, governments across the world. and this is largely a reflection of the sson that we believe we learned from the great depression, which is an et you respond strongly, actively and quickly, the game is lost. so the mistake of the great depression was not made.

you ow that chairman bernanke of the federal reserve, the scholar of the great depression and you can bet that he was not going to make the mistake. and, indeed, the fed moved very strong. which is here to tell you about the role of fdic in addressing food and weaknesses at deposit for institutions. he has shown you some very nice diagnostics about what had gone on in that sector. we also know, as i mentioned, the federal reserve among other things increase liquidity to the system, and we usually think them and their role in the monetary policy and the effect on interest rates. i'm going to focus my remarks on the department of treasury's troubled asset relief program, which is called t.a.r.p., which among many other activities injected capital into banks ad other financial institutions. now, we know initially from the name that the legislation was aimed at line trouble assets. that is, the bad mortgage loan. why was that a problem? we weren't sure of the extent of

those losses and we weren't sure where the bad loans resided. so the idea was we would come up with a mechanism, in fact, there would be these fancy options which is very exciting for economists to design, but as soon as the legislation was passed there was a feeling we need to move more directly to capital purchase, and patrolled assets, although they're still with us and we'll talk about them in a minute, were less of a focus of t.a.r.p. moving out in the fall 2008. in addition, t.a.r.p. also took on secondary markets, secure the markets where the -- how should i say this? the securities market. we know that in rder for banks to continue lending they have to sell the loans that are remade into a secondary market. so the function of secondary market again is critical to keeping the real economy and cattle moving through the system. i'm not going to talk to the auto provisions of t.a.r.p. i'm not going to talk about the

edgy baylor. there are a lot of us -- is really a huge portfolio of activity, or initiativefrom all parts of government. so i'm just going, again, be selective for the prospects of recovery in the real economy. i'm going to draw largely on material that was in the gao report on t.a.r.p. and the progress in 2010 and you can find that on her website at www.gao.gov. i'm going to talk first about briefly because ch is really laid the foundatiofoundation of that weakness, continued weakness in housing and the small business sectors. they are key to recovery in the real economy. someone to be sure we have an understanding of how t.a.r.p. and those markets have interacted and what's the prospects going forward. this i now know what we call the hockey stick graph. learned that from richard just now. and this is a look similar to

one of which is charged of a look back on what's gone on in the housing market. here, this chart starts here in 1979 and it shows the portion of outstanding mortge loans that are 90 days past due in foreclosure and sriously delinquent. i want you to focus on the top six -- the top six blue line at there. that's the some of the loans that are 90 days to liquid, and those in foreclosure. youcan see the shaded areas represent periods of recession. again going back to 1979. and thhockey stick, isn't that a thing and cimate change, too, the hockey stick? we don't mean that one. you can see again disappointing 2007 when there begins to be stressed in the subprime market, and the panel on the extreme right is from 2005 going forward, where you see the very sharp and unprecedented rise in

loans in trouble. now, if you look, there's a tiny little piecet the top of the hockey stick that looks like things might be getting better. and it is just a tiny little piece right now. we know that distress is continng, and while the initiation of the crisis came from distress and subprime markets, we know as an employment rose, the problem spread to the primark. so we are talking about diress over all classes of loans, although most subprime loans are ing away. they haven't been made for a few years we don't have to worry about them anymore, but the prime market for missing stress. and, in fact, we went from a concern about people's payments not being affordable, because the characteristics of the loans they got, to a situation now where people cannot afford their mortgage loans at all because they are unemployed or the their income is falling and the

programs that treasure is introduced under the making home affordable, or is it home making affordable? this financial crisis, just as an aside, we have an explosion in acronyms. and if you struggle with dyslexia, you just were going to make it through this period, because there were more acronyms and more that were reused. so making homes affordable is the overall name for the program, under t.a.r.p., that treasure used to assist distressed borrowers. hand, home affordable mortgage modification of modification, thank you, program. that's the part which we are dealing directly on helping people to refinance their loans, and then more recently under t.a.r.p. there's beenan effort to help people who have lost their jobs and cannot make their payments with what i sort thik of as bridge loan's. so the housing market is not getting any worse, but it's not

geing better as fast as we would like, and it continues to get support through these government measures. now, rich has been a nice job of talking about distress in the smalbusiness seor. that's a conrn because unemployment is not fallin and we would like to see the small business sector begin to generate more jobs. this is a chart that shows you, from 1993 frward, and to about the spring of 2010, the interest rate spread for smaller loans, that's the thick line on the top, and bigger loans, that is loans of about 100,000, to 1 million. desperately represent the premium, a riskpremium that investors want in order to lend towards to the sectors and make the size loans, and measure of relative risk of you see that over timefrom 1983, or onward, this spread drifteddownward a bit. is a bit of a downward trend there, and then again this is

not quite as pronounced as a hockey stick but you can see in 2007 and into 2008 where there is a sharp turn up in the premium and this again is a symptom of things freezing up in the credit market. the dotted black line that you see, which is measured on the right hand scale, comes from the survey that rich mtioned, and the question is what percentage of small businesses find that their borrowing needs are not being met. not surprising, that tracks pretty well with this rate spread, and you can see that recently, are back in the spring, as much as 10% of small businesses said their borrowing needs were not being met. the t.a.r.p. small business loans, the financial regulation, financial regulation reform act in july, that facility that t.a.r.p. had not been challenges, but other federal support continues primary, or

most notably in the small business administration under the terms of the recovery ac. again, that 16 is action. i haven't had much to say about that, nor will i. as i mentioned, t.a.r.p. almost immediately turned from the purchase of small assets towards capital injection into banks. this is an indicator of stress in banking markets, and i don't think you did show this spread, did you? [inaudible] >> we are so well coordinated. you have heard about this. the difference between the libra, the london into banks offer rate, and treasury of comparable. it is essentially a measure again of us. the libor is the rate at which banks lend to each other and treasury of course i a measure of, a measure of, a safe investment. so when this spread gets big, libel is going up and it means

banks are worried about lending to each other. you can again see the trouble began to emerge in 2007, and obviously, maybe, it seems obvious, obvious in hindsight. a lot of clear hindsight that was in his is, as you remember. but banks weren't sure of the extentf the losses. we thought they might be confined to perhaps some portion of the leading sector of banks in u.s., but it turned out as we know they were spread very broay across the globe through various financial instruments, that people have now come to understand in hindsight much better than they did at the time. so the libor, whe the spread gets big it is done you the libor is going up, banks are reluctant to lend to each other except at fairly high rate. and that's also importantly because a lot of consumer rates are tied to the libor. so this is definitely an indicator in the financial system. you see that it peaks in the

fall 2008 when government moved, governments across, across the developed world move to take action, and it has really fallen down close to historical levels. and a little bit of the n at the end. i think that you your center that was a concern that began to emerge about greece and sovereign debt problems in western europe. so the ted spread is an indicator that is troubling banks. when the spread dreases things are calm or. so you might say itself, and rich has an information about this, if banks when better shape our them anymore? this is just another look at the markets that rich is give you. this is new lending episode at the largest bank in the country, the ones that received, well, that were made to take capital injection in some cases, this is charged that begins again in the fall 2008 and measures new lending in dollars and billions. i slep. .

it's another -- is another factor that all this is very difficult to separate one from the this is very difficult to separate one from another at this point. certainly they're on a sounder footing. as rich suggests to you, a large part is associated with

the largest banks, smaller banks perhaps not in quite good shape, but the real economy, as measured by fairly to date borrowing and lending, has yet to make full use of what foundation has been provided in the financial sector. e. we can look at some other areas that are important of credit, which are important to the real economy. and we can also talk about another part of the t.a.r.p. besides inject capital into banks to improve their soundness and to facilitate lending, t.a.r.p. also worked on restarting the secondary market. that is the securitization of loan casino and that is necessary to get new loans flowing. noticed her shows the asset for a court kinds of security that were eligible for t.a.r.p. or support under the t.a.r.p. in and working the federal reserve.

student loan are coming in though, that's the problem. the color change. everything looks blue. while at one point these were the same color. the private student loan is a thick line with the top and then down below there is kind of a turquoise train and a credit card. there is also equipme loans and that thin line as loans for auto purchases. the asset spread again vicious risk premium, what people have to be paid iorder take the other side of these market. and again you see a hockey stick shape. starts than two dozen -- towards the end of 2007, ran for 22,008 and student loans in particular were and remain risky as for most people's perspectives. you also see the consumer loans, auto loans began - were viewed

as less risky going forward. and again, that's related currently to allied tanks are but it's still gmac. that is the support under tyre contributed to that and again at the treasury working in concert with third actually intervened and we can see that more easily in this chart. how did they bring those rates breaks down? well, this is a new acronym. we're going to talk about tal, turn asset backed loan security. but the acronym is talf.

if you put the other letters in there you would've to say that all your photos as measured? this volume in these markets and also in the commercial rl estate market that ridgetop about in the total insurance by d starts in 2008. and you can see how protected cfo. new los orhe new issue of asset securities almost enough at the end of 208. and then, under t.a.r.p., treasury was able to contribute the port to a federal reserve program that lined your firm's money to buy the securities and the t.a.r.p. money was used to back up any losses that occurred, which actually it's been a very successful program. you can see that at least as a matter of correlation the support that talf gave for the

total issuance and talf has tailed off it was designed as the private markets recovery and able to come in without these extraordinary guarantees to participate in the securitization again. it eventually will cost you more to borrow from the side in order to buy the securities and you are going to make from them. suicide of a self liquidating, very delicate solution to an exit strategy, which is always a good thing to have. and in fact, given the financial reform legislation in july, the rest of talf had never used -- they've never used all the money that have been appropriated to it and congress took it back in the financial reform bill. the message here then is in the markets have shown you on the largely true that government has ended its support as financial markets have strengthened, as prive capital has moved back and been willing to perform

its usual functions and securitization in the lake. bank capital has increased large banks. again, this is a sanctioned between larger and only banks. they been able to raise their capital and private markets. we have my gosh i've had a dyslexic moment here. asp, that should be asset security. we've seen recovery. i just showed you some pictures that adjusted that the risk premiums are declining me. and the troubled assets. where are the troubled assets? who began by saying that really got got into this business. well, the troubled assets have been purchased in partnership between the federal government through t.a.r.p. and private investors, not in large volume, but that market appears to be working better. they're being priced. for a long time they were troubled because no one knew what they are worth a needed know whether you should give them up. if you wanted to buy the need to

know how much you should pay. so there is some thought that the tar program that was aimed at getting this market moving again has had some success and in any weight while they're still still troubled assets up there was strength in capital positions, we hope that things are in a better case -- better position to absorb those losses and in fact back in the spring they were stress test. you read about that and that was essentially the exploration of scenarios in which the loans jumped u and caused trouble again. but their areas of the real economy where recovery has not occurred despite the fact we think the financial underpinnings are stronger. one of those is the housing market. there's continued weakness. this is associated with what's going on the macro economy. interest rates are at record lows, we know that. so the problem is rather different than a credit freeze

or the inability to get mortgage loans and afford a mortgage loan for many people. small business lending is still a problem. we're not sure again whether the problem is really that banks will lend to small businesses or how much of it that small businesses are robust and to borrow in the face of continued uncertainty. certainly i think we can say that the fincial system is stronger in 2008, but it does remain vulnerable as long as the macro economy continues to work its way out of the death that it reached quite recently. unemployment will stay elevated, perhaps thre, four more years. if it doesn't return to our expected long-term levels of about 5.5% and as i menoned earlier, the problems that come up like sovereign debt crisis increased and in euro, they will