ongoing business that had growing concern value, a lot of shareholder equity, subsidiaries that are trying to sell off substantial value. it was our assessment they had plenty of collateral to repay the loan because it was a separate business that didn't have a lot of our value or assets. it is true that in the fourth quarter, they lost more money than any country in history, $62 billion. that made things more difficult and required additional help from the treasury in terms of capital. when we made the decision, the problems at aig didn't relate to weaknesses in the insurance business. it related specifically to the losses of the financial products division. the rest of the company was a sound company with a lot of foul

you. >> so you can stop it eventually. >> as long as they have collateral. >> the same is not true for lehman brothers. >> they did not have collateral in terms of financial assets. was tied into financial operations. they didn't have a separate business that provided additional value. >> last question briefly, what would be different now? with the new authorities of the fed how would it have played out if you had the authority you have now? >> remember bear stearns was acquired by j. p. morgan. >> it was a subsidized acquisition. >> the existence of this resolution may have changed the bargaining position somehow. if we could have gotten required -- without any kind of subsidy.

barring that, in all three cases they would have been appropriate candidate for application of this regime. >> in particular a ig -- aig had held the ongoing concern that would have been resolved. >> i don't see what the alternative would have been unless we stopped for run through keywords of some kind. i don't know how to do that. if you figure that out let me know. >> senator graham? >> thank you, mr. chairman, for your excellent insights today. it seems to me we sort of have three options in looking at this issue of what to do when the too big to fail institutions get in

trouble. the legislation has provided some what neater and cleaner funeral of circumstances to bury the body. the others are steps that might be taken to keep the institution healthy, such as the kind of more rigorous oversight regulation you have discussed. or the other option might be the option of the late 19 food and early 20th-century to try to change the basic structure of the too big to fail. after the civil war the growth of the commercial and industrial trust became the source of concern in the federal and state level with efforts made to try to contain more predatory policies. finally people despaired and

they moved towards breaking up of the trust to keep them from fundamentally damaging our capitalist system. this legislation, the option that these institutions, growing rapidly. a dominant force within the economy. indicated some optimism about the ability to supervise these institutions and you stated there would be indicators that would indicate that would be indicative of this more strenuous regulation is accomplishing its intended purpose. i would have to say i am not that optimistic.

i am not optimistic domestically for the last three decades, american people have elected governments, both republican and democratic which tended to support looser and looser standards of regulation. some of the most significant occurred during democratic administrations. at the international level, we see the influence of the largest institutions. it has been reported currently is at the committee is under a great deal of pressure to weaken the standards that basel for collateral and liquidity that had originally had been proposed. what is the basis of your optimism that domestically there

is the political will sustain stronger supervision and there will be international support for that kind of effort so that it is stronger supervision at home that is not seen as a means of neutering our ability to be an effective competitor in the global financial markets? >> you raise some good issues. it is lack of political will. there is no solution that is sustainable. the combination as i said before, ideally we would like to see firms restructured in a way that makes economic consensus consistent with markets. the best way to do that would be to combine tough oversight regulation including such things as surcharges for firms that are systemically critical which would make them safer but also

more onerous to be sustainably critical complaint with the resolution regime or similar things that create more market discipline. in principle, i recognize this may not happen but we should work to make it happen. in principle that would give firms the incentives to restructure and change their form in ways that will respond to market, the size and complexity that is really needed that becomes too big to fail. the bill doesn't give us the authority but it does give us the authority if we despair of these other methods that we believe the firm in size and complexity is dangerous we have both of the living will requirement but also the authority regulators collectively to break up firms.

i don't know the answer to that question. that is the charge congress has been -- given the regulators and we take seriously that charge. we put in place some reasonable approaches, but i appreciate your historical perspective which says over the long run you have to take into account the political influence of these large institutions. >> in terms of the will of the institutions themselves, there is a division in american industry. some industries have adopted levels of self regulation, in depth, an acceptable behavior for instance nuclear power

industry has developed impressive processes. best practice and enforcement, on the other hand. they had just seen one of the manifestations. the financial community or nuclear power industry or more like deepwater drilling. defense in depth for his own actions. >> going back to historical analogies, there was a time when the principal regulatory or clearing house in the banks themselves. if they recognize if one bank failed they were another risk as

well. i don't think we have the nuclear power type of model at this point. >> can i have two additional minutes? >> i can't say no to you. >> two minutes for the senator.

>> i was intrigued by your statement that there were some indicators, some markers of whether this more rigorous supervision is accomplishing its objective. in the vertical column, what are those indicators particularly that have some capacity to be quantified to answer the question is the tougher regulation working? >> one importance of indicators relates to the cost of capital to these firms. if they are not too big to fail, then an important source of their market advantage would be eliminated. you would expect to see wider

risk spreads reflecting the increased conviction of the market that they could fail. those could be more responsive to market developments. that would be one set of things and also look at things like return on equity which should not be artificially increased by too big to fail characteristics of the firm. >> do you see the fed developing this report card of indicators and periodically making it available to the public so there will be a capacity for continued public monitoring of how well the supervisory system is functioning? >> some of the indicators are public when you look at them. we are well along in developing

a quantitative surveillance mechanism which will be looking at a whole variety of financial and other indicators of individual firms and using them as a supplement to the on-site supervision that supervisors do. i am not sure what form you will communicate this to the public but we want to make sure the public is confident that firms are safe and sound. we will try to find ways to communicate that effectively. >> to conclude going back to the importance of the public seeing that this is not only their individual interests but also the broader societal interest to have effective regulation, we reduced the likelihood of firms getting into the extreme situation where you have to plant the cleaned up funeral. i believe that keeping the

public informed is a critical element of building that support so i would urge you to make this as communicative and publicly available as possible. >> thank you, senator. mr. thompson? >> thank you, mr. chairman. it is out of order. >> that little switch from last session. >> keep us on our toes. thank you for joining us. while this hearing is about too big to fail i would like to go back to the broader issue of the crisis if i might. would you describe for us the role that the federal reserve place in monitoring or managing credit standards in our country? >> as i mentioned earlier, the

federal reserve has had a role in consumer protection, so we have created rules for example on requiring documentation, escrow accounts and other standards of underwriting that apply to mortgages. the other main area i can think of is like other bank regulators we want to make sure banks -- is their decision what risks to take and what loans to make, that they are adequately capitalized to deal with any losses that might occur. so we are pressing on the one hand for stronger sensitive capital standards to tie the amount of capital banks have to hold to the risk of the loans that they make and therefore if they make a riskier loans they

need to hold more capital and judge for themselves if it makes sense to do that and we want to continue to work with the accountants and the sec and others to make sure banks have adequate reserves against losses. by providing adequate capital reserves, banks have the right incentives to make adequate loans. some countries, it is an interesting idea, some countries the authority is in loan to value ratios. we haven't done that in this country. but i think we ought to look broadly at how we might in short we don't have a system where credit gets too easy. and too tough in the downturn. >> you commented about the innovation that occurred in the market primarily around the

distribute model and what have you which clearly was facilitated by lax lending standards. could the federal reserve not have stepped in as its of this model being developed in this innovation, really putting the economy at risk? >> as i said, we bear some responsibility. primarily in two areas. the first was in the underwriting standards and application of the regulations. the problem, acknowledging the concern. one of the problems is although the federal reserve had the authority to write rules, we would have had to rely on state and other regulators to enforce those rules and it was partly because we weren't supervising these firms we didn't see what was going on as clearly that we didn't respond as quickly as we

should have. that was an important failure has a i agreed many times. the other area where we and other bank supervisors should have been more effective in risk-management more generally. the firms did not have enough information about what the brokers were doing on their behalf or what standards they were applying. they didn't know their own exposures to sub prime and other types of mortgages as was pointed out. they rely too heavily on credit rating agencies who themselves had flawed models that ignored risks of housing across the country. those were the two areas where the fed and other bankers could have done more. was at the underwriting level, in general risk-management to understand their exposures both in terms of their own losses but

also their operational risks they were taking and they were packaging these mortgages. >> my background in the technology business, i have an appreciation for the value of innovation and stronger appreciation for the role technology place in the financial services sector, largest consumer technology as a sector in the economy. getting the role of innovation in that sector, what more should be done to manage the innovation process within of a financial services sector in such a way that someone creates a systemic risk to the economy? >> one of the lessons of the crisis is innovation is not always a good thing. there are innovations that have consequences, there are innovations whose primary purpose is to take unfair advantage rather than create a

more efficient market and there are innovation that can create systemic risks even from the perspective of the individual firm. that this is not evident. i am not sure i would go so far as to say we need a new product approvals safety commission or something like that although the cfpv will to some of that. the we ought to pay close attention to financial innovations and regulators as we look at the risk-management and systemic consequences of these decisions need to be assertive if there are developments we find counterproductive from consumer protection or systemically risky. we ought to intervene there. >> you made a comment in your

opening statement about your longstanding background as a student of financial markets and financial crisis and often in a crisis leaders are asked to do things they never had to do before, often times that means asking for forgiveness as opposed to permission. in hindsight, would you have preferred to ask for forgiveness and done something to save lehman brothers in such a way that this crisis would not have unfolded the way it did in our economy and our country? >> it is hard to know what would have happened. one possible scenario is -- the only way we could have saved it was by breaking the law. i am not sure i am willing to accept those consequences from the federal reserve and for our system of laws. i don't think that would be appropriate.

i wish we had saved lehman brothers, we tried very hard to do so but it was beyond our ingenuity or capacity to do it. [talking over each other] >> willing to be creative -- >> you did see it coming. >> we saw a lot of risks in lehman brothers and other companies as well but the actual failure was not preordained. we were hopeful even up to the last day that we had -- >> my reference was to the consequences of their failure. you predicted that. >> i was personally convinced. i guess i would add in our decision to rescue aig, i was taking a risk that it could have happened that after a few days of market upset the market would have digested the lehman event

and people would have said what were you doing with aig? i was very confident that lehman's devise would be a catastrophe and i thought aig would be a catastrophe so i did everything i could to prevent that. >> no way in our system that someone with your perspective and insight could have influenced the white house to say we cannot let this happen? >> the white house was well informed and very supportive. the previous administration and the new administration were very supportive. we've of all kinds of creative things but could not find a way to do it. i am not prepared to go beyond by legal authorities. that is appropriate. >> thank you, mr. thompson. mr. wallace? >> i am full of surprises today.

>> it is called chairman discipline. >> something simpler working from the outside. [talking over each other] >> thank you, mr. chairman. thank you for coming. i would like to explore something called the discount window a little bit. my understanding of the purpose of the discount window for banks is it is an opportunity for a bank to take assets that are not liquid and provide them as collateral to the fed and the fed in turn monetizes them and use that cash to meet its obligations. one of the purposes of that is to address runs. when a bank is facing runs,

assuming it is solvent, it can present collateral, including loans, which are liquid, to the fed and if the fed judges those loans have some value given an appropriate discount, it provides cash to the bank to meet the loans, to meet the obligations. the fact that the fed is doing that is very influential with the market. people say as long as i can make these withdrawals, that is in a run and the cash is always there, and the fed, lending the money, the fed must think they are solvent and that is only the circumstance under which you would do that, then it is supposed to come to an end. that is kafiri. the market is quite satisfied that the cash is always going in

there. wachovia is different. i can understand the only thing that was considered for wachovia, i would like your judgment on this, the only thing that was considered for wachovia was an acquisition. whereas wachovia, at least as far as we understand it, was solvent but subject to liquidity problems. there were runs. why was it then that as an alternative, wachovia was not able to use the discount? >> they were allowed to use the discount window. perhaps i could come back with more information subsequent to this hearing, but their liquidity range was quite serious. it was their judgment they were not going to be able to open up

in a day or two. they fought liquidity rates for such they could not meet them even with the discount window. >> wachovia's judgment? they were the ones who said we can survive this? >> considered by the richmond federal reserve bank. >> it wasn't that anyone considered them to be insolvent. it was simply a matter of their view, wachovia's view that they could not survive this even if they were able to provide collateral to the fed. >> i think there was uncertainty as to whether if they were solvent or not. even if they had regulatory capital, that capital was not very risk sensitive.

more. s that were similar and what wachovia had -- part of my problem is i don't recall the discussion and i would like to get back to you on that. >> the lehman case is slightly different. although the media had said that the fed had given access banks to the discount window that was not exactly true. what was done was under 13-3 or special powers to deal with serious financial consequences, enable you to make available to investment banks funds from the fed for which you would be getting some kind of collateral.

we were told by mr. fuller yesterday and no one disagreed with this that lehman brothers was solvent. it had plenty of assets and subject to a run. my question to him. i am hesitant to put words in his mouth when he responded, my question to him was what could the fed did the same thing with the discount window for banks as a matter of law? we will take all of your liquid assets as far as we put a value on them and we will monetize, provide the cash. so you can meet this run. mr. baxter said to me there is a way for the fed to do that but only if the fed board adopts a resolution of some kind which changes the nature of what they

normally do under 13-3 to make it more like the discount window. they can take assets that are not liquid and use them for the purpose of making a loan to the institution that is suffering a run. you said you are willing to do anything to save lehman. is mr. baxter correct? could the fed board have adopted a resolution that will take any good assets and monetize them? provide the liquidity so that lehman can continue to meet withdrawals or the run that people are referring to? so lehman brothers had a holding company and a rubber deal. i'm talking about only the holding company. >> for everyone's information,

the appropriate dealer was eligible to bar from the primary dealers facility and was allowed to do so so the question was should we create a new lending provisions to allow loans to folding company? >> yes. >> we were able to do so so long as we had sufficient collateral and we were prepared to do that. i was ready to call the board together to do that if that was going to be helpful. when i was informed by those working on lehman's finances, it was far too literal collateral available to come to the window to get enough cash to meet what would be the immediate liquidity runs on the company. if we were to land, what would happen would be a continual run. not nearly enough collateral to provide liquidity to meet the run. the company would fail anyway and the federal reserve would be left holding this billliquid

collateral, very large amount of it. it was our view we could not lend enough to save the company and do the restriction we could only lend against collateral. >> you were saying even if the collateral was illiquid, you concluded that there wasn't enough of such even illiquid assets? >> that is correct. >> did you do a study of the collateral? does new york fed have a study of the collateral that was available? >> i refer you to them. we were working with the sec to do these stress tests we did over the summer and over the

weekend, there was 24-hour analysis that included not only the staff of the new york fed but also assistance from the private sector companies that were gathered there. i don't have to my knowledge any study to hand you but it was the judgment made of -- by the leadership of the new york fed and people charged with the books that there was not enough cash to meet the run. that was the judgment given to me. that was my understanding. >> since i have a minute i will ask another question. a somewhat different subject. wachovia failed or didn't fail, apparently in the view of the fed it was not viable and had to be combined with some other

institution. one of the things you said in your testimony was there were vulnerability is and weaknesses in the system and one of those vulnerabilities you identified was the fact that the investment bank's would likely regulated or not sufficiently regulated. investment banks were in fact lightly regulated but banks like wachovia and wamu were heavily regulated by the fed at least in the case of wachovia -- i & wamu was regulated differently. but what about when the outcomes seemed to be the same? the banks got into the same kinds of trouble the investment banks get into? what does that say about the idea of providing yet more

regulatory power? >> wachovia was a national bank regulated by the holding company supervisor. part of what was happening, frankly, which is why some of the ceos feel they were blindsided by a truck is there were systemic problems and individual institutional problems. there was a panic that went across a variety of firms. one of the sources of the panic was the sub prime lending which was done by banks and nonbanks and we all share some responsibility for that. another set of problems had to do with this high reliance on unstable short-term funding.

that was much more a situation in investment banks and other shadow banks. that is why if you look at the chronology of the crisis, what you see is the firms that were hit first were not banks, they were bear stearns which was under pressure in march of 2008. they were fannie and freddie which had separate issues. they were essentially all the investment bank's, came under very large stress early on. it was only when market conditions got a very severe that banks began to face liquidity problems and banks like liquid -- wachovia and city which had some substantial reliance on non core deposits that the liquidity source came directly under pressure. we had to improve on all dimensions.

i would say the sub prime lending in particular was done more outside regulated banks sector than within it. certainly i don't claim there were stakes in that as well. >> you have a quick follow-up? >> here is what i don't understand. mr. fuld said all he needed was a liquidity breach and he had collateral. if he were to give you the collateral, you are protected. why replace his judgment with the fed's judgment? >> when we make these discount window loans we have two sources of production. one is the collateral itself which we really don't want to

own. the second is the signature of the firm. we don't generally loan in the banking sector. we don't make loans to failing banks even against collateral because we want to have the double protection of the firm quality and the collateral itself. it was our sense based on the information developed in new york that lehman was far short of the collateral they would need, they were essentially making a hail mary pass at that juncture and so what was going to happen was we would lend to them on illiquid collateral. they would certainly fail anyway but the other consequence would

be that the fed would have a large amount of illiquid collateral which would be risky at least for the taxpayer. that was the reason. it was our view that they did not have enough collateral and the run is based on a variety of short-term funding obligations got downgraded, there would be more collateral calls and there was not adequate collateral to meet the run and it would only be exposing the fed and taxpayer to make those loans. >> that taxpayer risk was larger than your perceived catastrophe? why not try the hail mary pass? >> the view that the failure was certainly the case. >> you had a quick -- >> just 30 seconds.

we may be pounding this nail but based upon yesterday and ongoing discussion, final point you responded to was where i want to focus a little bit more. if there wasn't sufficient collateral, the other thing i want to add to it that it wasn't sufficient collateral by an inch, by a mile, because you were looking at an ongoing process that you essentially decided wouldn't be worth starting, so that there was just no question about the shortfall, that it would have been ongoing -- >> my general tone and attitude was is there anything we can do?

i believe that that goal was shared by the other principals. by timothy geithner and secretary paulson and chairman cox. none of those folks were known for timidity in previous episodes in terms of finding ways to prevent a worsening of the financial crisis. what are heard from them was this sense of defeat. it is too big a hole. my own view is the company was insolvent, not just illiquid. >> thank you, mr. chairman, for being willing to appear before us today. you previously said that over the counter derivatives were a mechanism that transmitted shock

during the financial crisis. i would like to explore with you some of the ways that they did so and their relevance to systemic risk. as you said today, the potential failure of aig was caused by aig financial products divisions enormous sale of credit default swaps without sufficient resources to boast collateral as required by their contracts. was aig considered to be of importance because many of the girl's largest and most important financial firms were aig's counterparties and could have been impacted with aig's failure? >> it is a subtle point but i

will distinguish from the actual financial exposure and the fact that the world knew that aig was the counterparty of many global financial firms. in some cases those exposures were manageable. in some cases they would have been more substantive. at the time, we were at the brink of a global run on all financial institutions. the progenitor of runs is uncertainty. people don't know whether a bank or a company is sound and that is when they take their money out. two years later we are not entirely sure what the net exposure was. certainly on the day that aig failed if it had failed, investors are around the world would not have known what the net exposure of a given bank was to aig. my sense was over and above the

direct losses that it the capital that would have experienced not only through these derivative counterparty agreements but also straight commercial corporate bonds and other vehicles that this would have triggered an intensification of the general run on the international banking institution. that is a significant concern. as i talked to the commission when we met a year ago there were a number of other features of aig that were also concerned but that was an important one. >> so in other words, in addition to the real credit exposures and financial difficulties that might have been expected there was uncertainty about what the exposures were and what institutions had them, how much

they were, lack of transparency in this market, in essence fueled the panic. >> absolutely. >> you quite appropriately in your testimony distinguish between derivatives transactions themselves and the infrastructure for trading clearing, settlement of those instruments. ..

so in your review, was the trading of derivatives over-the-counter as opposed to exchange trading and derivatives a problem i posed some risk because of the lack of transparency, because of the existence of counterparty risk in the over-the-counter arena. >> yes, certainly. and ahg is the poster child for that. it was not so much the loss of their counterparties experienced under themselves, but rather the counterparty risk that was the problem. i'm sure you know that the fed was quite concerned about teer

one settlement arrangements in the federal bank of new york and a lot of work to try to improve arrangements for credit derivatives and also some other types of derivatives. and we were very supportive of the provisions in the recent financial reform legislation to standardize derivatives and put the month until counterparties and the lake. the point that should be making a know you fully recognize if you're going to concentrate counterparty risk in central counterparties, that they must be saved. and for that recently that it was important to entitle the fed and other agencies work together to make sure that potential standards for a post on this counterpart -- central counterparties as well. but i agree with what you just said. one final comment is that another area where the are active in strengthening the trading boat in the capital requirements for banks, which essentially will make it more

costly to the extent that things still use over-the-counter true for days the capital costs will be higher, reflecting the underlying risks, both counterparty and fundamental risks. so that's another incentive to put these instruments on exchanges. >> we have heard from the fed -- the federal reserve staff yesterday about interconnectivity of large financial institutions through their counterparty exposures and oct derivatives, contracts and that the relevance of that in assessing systemic risk of those institutions. and i wanted to ask you about lehman brothers, for example.

and you have said if it had been -- you knew before it was allowed to fail as this failure would be catastrophic. in mr. baxter said yesterday that there was a significant concern beside it the otc derivatives market would be severely impact to pay the failure. was this a concern of yours with respect to lehman brothers? didn't also enter into your concerns about bear stearns and wachovia and other large institutions with concentrated derivatives positions? >> yes, it's not the only aspect of interconnectedness.

there's a lot of a lot of funny relationships on so on. but it certainly is an important one. it's very difficult to unwind these positions and when you lose a counterparty, then you have to replace your protection. and so, it was a significant concern and one indication of our concern about lehman was we took a lot of steps to try to put foam on the runway so to speak is the expression went. and one of those things is to work with otc markets to get them to address these concerns. another dimension of this, by the way, what are the things we got to work out very quickly with the credit default swap's in lehman that others were trading and trying to range for settlements of those as efficiently as possible to get into problems with counterparties and ambiguity security that itself is a fairly complex process. so the short answer to your question was this was an important aspect certainly for the investment they, lehman,

bear stearns and a certain extent to the other institutions that have broker-dealers in this kind of exposures. >> and i just have time for one last -- >> two minutes at >> that would be fine. with respect to these concerns, i assume that the concerns went beyond credit default swap's two-out over-the-counter derivatives. as you know, credit default swaps were relatively small amount of the over-the-counter world of two rivet is at that point. and there were massive connections with other kinds of over-the-counter derivatives between the big dealers like the investment banks and their

counterparties. and that the same problems of potential credit exposure, lack of transparency, potential, concerns about what the exposures were applied generally to the whole over-the-counter derivatives market. >> yes, there is some types like equity trivet is that shared some of the problems, operational problems they had in terms of clearing the settlement. the more generally, when they spoke derivatives, for example, you had both counterparty risk and he also had the complexity of trying to value the positions and that becomes serious when you're trying to come in a crisis, trying to figure out what exposures are and whether a company can solve it or not. so, yes. >> thank you. >> mr. hennessy. >> thank you. thank you, mr. chairman.

yesterday mr. fuld argued it was unsupported by the reality of the day. we heard the same thing from bear stearns that there found was financially healthy and they're what down by whispers and rumors and unsubstantiated fun. i believe i heard you just say it that lehman is probably insolvent. in your view, did lehman and they are fail all my because of unjustified the quiddity runs or were there also general solvency problems that arose? >> so as i said before, one of the reasons the ceos also coincided with there is a general planet. it was obviously general financial crisis that will put the companies under extraordinary strain. that being said, there were certainly a hierarchy and weaker companies were certainly the first to feel pressure.

the bear stearns is widely viewed to be the weakest of the investment banks and lehman was widely viewed to be the second weakest and so on. and they were clearly lost his in the quiddity issues that those companies. in particular, in the case of lehman, they had raised some capital and the spring, but they have not succeeded in spinning off a substantial position that a lot of embedded buses and they've not succeeded in raising additional capital that they were able to persuade new investors to come in. and so it was a combination of general feel, certainly, but also some legitimate concerns about both the asset position of the company. you know, its balance sheet, but also i think some concerns about the longer-term viability of the firm, business model and other issues that are concerning hoax as well.

and it's the nature of financial institutions that they live on compliments on their counterparties and customers and predators don't believe there is sustainable, then the pressure amount greatly. >> i hear a lot more discussion on how to present prevent failure and what will happen and what failure occurs. now the government has a new resolution authority at one point these large non-bank financial firms will have living wills. but those mechanisms are not yet in place. it takes time to implement them. we were discussing force of the international aspects of resolution authority which i imagine our nightmarishly complex. and at the same time, you're 13 authorities are curtailed and they won't be t.a.r.p. around. are you confident that the government, including the fed has the tools and means to deal

with a failure of a too big to fail for if and when they should next occur? >> while i prefer that to be tested in the next few days if you wouldn't mind. that being said -- >> case. >> that being said, the fdic has embarked on this at admiral urgency at chairman bair will tell you in a little while and then moving to set up the rules which we needed to implement this and it's not only a question of implementation, but i think the benefit of this and i'm sure mr. wallison would agree to have been certainty in advance about how the process will be run and what the effect will be on predators and so on a firm. so it is a work in progress right now for sure. but we're working very quickly

to try to put it into operation. >> if i could come is it just a timing thing of getting his mechanisms up and running. if you don't have the ability to provide a firm number anymore and the t.a.r.p. isn't there to provide capital injections, is there a scenario which you might meet the money into a firm where there is or is not a tool to actually do that? >> remember the treasury can provide the loan as long as it's repaid, either from the company in receivership or if necessary from an assessment of the financial industry. so if money is needed to prevent the disorderly failure or to facilitate the bridging process, et cetera, then the government can provide that. and the fed meanwhile is of course limited in our ability to go beyond just our normal lending to a sound company.

but that was a change we were comfortable with as long as these alternative authorities were provided. systemic risk. i hear a lot of people talk about it. i haven't heard a precise definition other than people usually say it means risk to the system, which doesn't -- [laughter] and i understand there's always going to be discretion involved in than it's been much more of an art than a science. are there efforts underway or is anyone dead in the good work in trying to turn this from an art to science to eventually some sort of engineering where you can measure this and analyze systemic risk? >> yes, there is right now and academic research literature looking at some of these things, trying to identify, for example, with some of the material are, how big, how connected, those sorts of things. or some criteria involving things like correlation, how correlated it is a stock of

company acts with other shares of other companies and what does that say about it systemic importance? dearth of academic literature under way. the federal reserve has to set up a set of rules that will govern how we recommend to the oversight council which companies are to be treated as systemically critical for the purposes of oversight. and so we're going to have to read which puts down on paper, in a way that is likably sensible what are the criteria were looking at. so to some extent, it also remains subjective and the criticality of the firm depends on the environment. so our decisions vis-à-vis his own firms redress in a calm environment. for the overall economic and financial betterment matters, not just the firm.

but we are cognizant we need to be more specific. as i said there was literature to draw and we have a project in the fed right now trying to write this ruled that will govern our recommendations. >> good. i'll end with an easy one. other then your speech is, what do you think are the most important writings on the crisis of the whole? if you could recommend that people read two or three really good speeches, books, papers, whatever they happen to be. what are the most important are underappreciated work? by the way that pre-pre-13 when i book comes out. >> i think there's a lot of interesting work. i know you're familiar with sort of the narrative histories and so on and i won't bother to go over those, but i cannot stand to profit cereal, there's an interesting academic work

already looking at these issues and i even made reference in a testimony to carry gordon's work, where he is pretty clear to identify the analogies between what happened to the shadow banking system and classic tinkerings, 19th 19th century style bank runs. i think those are interesting. there's also quite a bit of interesting work, people like marcus britton meyer at princeton, which looks at the turning max of a panic in the repo market and how the cycle of increasing haircuts and margin were. and he and others have also done the the work or for trade moment ago in trying to identify critical firms are looking at their characteristics. maybe i could come up with a few other things given it a little bit of time. but there is some interesting work underway in this area. >> could you provide is chairman bernanke's fall pretty messed?

>> only if you take a test on it. last night we're taking a test. >> all do that. >> and we may post this on the website feature benefit day. all kidding aside, there would be great if there were few pieces. >> if you understand the lord a finance book which was pulitzer prize of the history of the great depression and you feel sometimes this seems awfully familiar. >> ms. marin. >> thank you. and thank you, mr. chaiman for your time today. my question begins actually in your written testimony for you referenced the glamour each bliley act by having limited to regulators to get any enterprise of risk in financial position and activities. and i was wondering if when you think to back to how the crisis unfolded, part of our churches determine what caused it. in your mind, does the fact rise

to the level of causation or isn't simply one of many fact there is were part of the whole unfolding of the crisis? >> i think it was one of many factors. and you could point to specific examples where cost problems. for example, the fed was somewhat reluctant to examine nonbank subsidiaries, bank holding companies, feeling that the sense of the love we needed to do for whoever was nominally the regulator. and so, for that reason, we were probably not as aggressive as we should have been in identifying some of these were issues that arose from mortgage companies and other nonbank lenders. for that would be one example. another example, which is more complex, has to do with the role of off-balance-sheet vehicles. and this turned out to be a big

problem and not under the existing accounting -- under the existing accounting rules at the time, but the bank did not have a majority ownership of an off-balance-sheet vehicle, it didn't have to consolidate that vehicle and its capital charges were limited only to explicit commitments of liquidity or capital to the vehicle. and so, in actuality, it turned out the exposures of the vehicles were much greater than understood because the banks themselves to have monitoring systems and also because in the event for reputational reasons they often came to rest you these few clothes as i got into trouble, even though they weren't contractually obliged to not cost them money as well. and so, there were some -- i think a little bit of uncertainty about giving it thought she vehicles might have

been sponsored by the bank, which therefore would make them responsibility some sense of the providers like the occ, but they were obviously also part of the overall holding company. you think there was a little bit of uncertainty of whose responsibility these were immediate was not sufficiently aggressive potential paid to those off-balance-sheet. i'm sure there was not attention paid to the saatchi balance. i think there were some things that fell between the cracks. i wouldn't want to elevate it to the principal cause of the crisis, but it was one of the reasons that some of the risks that face the overthrow overall companies were not appreciated. >> in a bind with the new legislation is recently passed, had that been in place at the time, but actions would've been taken that might have been

different or what would've been different about the body of knowledge that you another regulators might have had that would've allowed you to act perhaps more preemptively? >> well, i think the clearest cases the nonbank subsidiaries were we, for example, did not -- we only began a pilot program to look at nonbank wending subs in 2007 or so, working with the other regulators of the substring to identify consumer protection issues. in the absence of the gop i think we would've been earlier looking at some of those problem areas and less reticence going into those. again, the issue of off-balance-sheet vehicles is more complicated, but i think that the situation in the legislation now, rather than letting these issues fall between the cracks, especially gives multiple responsibility that says you have to post look at this is more likely to

identify those problems in the future. >> thank you. another question just to touch back on something earlier which was the housing bubble. could you talk about your feeling as to the relationship between securitization of the housing bubble? the america think there was a relationship. so securitization was the other end of the originate distributed model. and there's a big sea paradise project that came from foreign investors, but not entirely of course, to create the wrong material for security is a tax, you had to have lots of mortgages be made. and as a result, to expand the number of potential homebuyers come you had to lower the standards. so you got increasingly weak underwriting and more and more exotic mortgage instruments being used to expand the number of people who could get mortgages and therefore buy

houses. and what this did was -- i don't member the exact number, but this is very substantial action of the mortgages issued in 05 come a 06 were released nonprime mortgages and that obviously increased the overall demand for houses. so you see a chain going from the demand for securities products, the demand for material to pressure to weaken underwriting standards to expansion of a number of people borrowing to increase house prices. another was a circle because again as house prices rose, lenders became more comfortable making more risky loans. and not just was a self-fulfilling prophecy of this until prices cut to the point where they can be sustained any further. so there was indeed a connection there. >> for your feeling is really where the demand of us driving the process as opposed to the push from the originators who stood obviously to do rather well in that environment where they could continue to originate mortgages? or do you think it's both clacks

>> so, i figure there's a push would've come not so much from the ultimate mortgage makers who themselves are agents of the bank for investment banks. there was probably some push coming from the folks who were creating the securities products, the salesman going out and saying he's an attractive investment vehicle. it's rated aaa. so there certainly was some pressure coming from outside. but clearly there was an awful strong demand is domestically and abroad for given how low, in particular, you know, given the treasury yields are pretty low and given the demand for longer-term states fixed income assets. that demand, hardly from abroad, drove wall street to come and you know, to create these products, to satisfy that demand. >> teeny mac. >> you're welcome. >> all right, mr. chairman, just

a couple of quick wrapups items i know very quickly member giorgio and also senator graham have a couple of quick questions. and i want to ask you about historically and going forward, we talked about the challenge of the factory is too big to fail institution and going forward we have institutions that may be not only to date, but too few to fail. fewer institutions, larger scale. and there be a challenge of political will for regulators to be as tough as they need to be. it seems to me there was and is in the company in question and that is one of resources. and adjusting resources in sheer numbers. i mean, let's be blunt about it. a lot of the wall street guys are likely spades. they're hard to catch. and you know, there's many new products. sometimes even call it innovation. as you noted, that may be a kind word in many respects. and i guess my question as to

what extent was the kind of mismatch here a problem and both will be the future? and i don't just mean come you know, there's been a damning nation of the ethos of public service. it's been growing compensation deaths. in the public arena as we all know it's no picnic. and i guess my question is, what is your confidence level that we can chart resources. i saw almost no debate during dodd-frank of the talent level you need to be able to have effect of oversight. and to what extent was not a problem and will it be a problem? >> no, it's a very good question. and you're right that we can't outspend wall street in terms of hiring people, obviously. i'm a very strong incentives to evade regulation in certain circumstances. just a couple of comments. one is that this is one of the reasons why haven't the market discipline both be very helpful.

we need to have the additional set of eyes that comes from investors and what we see spread open enough for stock prices going down, that's a signal we should pay attention to because clearly have very talented people who are in the markets and are assessing these firms. and their information is transmitted to prices we should pay close attention to that. the other comments and i think one of the things we learned from her stress testing this in other areas is that we willingly choose all our resources geared so it's one thing to have experienced supervisors and collectively among us and the fdic and the occ we have a cadre of experienced supervisors, but given the institutions and global capital flows and like a movie to bring another expertise as well. and so we have come at the side, we have -- as i said come with taking a rumbled to disciplinary and buy him some financial and

other experts to support the supervisor for. so i think i will be helpful. and mr. thomas mentioned how the fed had come to know, retained a lot of supervisory authority. i think one of the reasons for that was because we have a lot of those skills, which are going to be necessary to make this work. all that being said, you know, it's just simply never going to be the case that the government can pay willful streak and pay and we're going to have to work very hard and watch very carefully to make sure, you know, that we are successful in oversight. again, we don't have to replicate every business decision or evaluate every asset. we can't do that. so we can try to do was make them convince us that we have systems and management in place of a plausibly deliver the right answers and give us confidence to do in the right thing.

but you're absolutely right this is a poor issue of practical matters is we try to implement this fall. >> final question for me and it's something we've talked about and we've talked about internally. i know my friend john thompson and i have wrestled with this a little. he talked about the magnitude of sometime monday. ..

>> i believe very strongly that wasn't subprime lending per se although it was a bad thing. it cause problems. but rather it was the fact the system as a whole had structural weaknesses. and so if you like the e. coli got into the food supply and that created a much bigger problem. but the fact that was a housing asset which is a broadly held by 67, 69, 65 to 69% of the

population, the middle-class, the fact that e. coli got into the most widely eaten food product, did that exacerbate, or didn't make sure the securitization exacerbated it? could have happened with other asset classes? again, i don't know if we want to gain time, but were the unique features that allow this to metastasize? if you were just do a macroeconomic model and looked at the effects of house prices up and down and ignored all a financial crisis affects, just look at the effects on consumer wealth and the like, you would not find anything like the crisis that we have seen. this magnitude would not be big enough. what caused the crisis was essentially, there are many things that caused a crisis, but it's the e. coli effect that it was an awful lot of dependence on short-term unstable funding which is analogous to the deposits in banks before the period of deposit insurance.

since these deposits were not insured, they were prone to run. and when people think there's something wrong with the assets, even if it's only 1% or 2%, they say what the hell, i'm going to be my money out. why should i lend against this potentially risky product? that panic was a very, in turn force people to sell assets into a liquid assets, created more problems for other firms. it was that dynamic that was a very important part of this. i still think of this as more of a trigger the e. coli than the fact is that itself would have system to seize up. >> chairman georgiou, for your remaining -- >> thank you. to follow-up on that, dr. bernanke, another problem what a great deal about in our hearings was this notion of regulatory arbitrage and capital arbitrage, where institution held assets off-balance-sheet to avoid capital requirements.

in some cases mischaracterize assets to put them into categories that require them to hold less capital under the rules. you know, we talked about safety at its peak, if you brought on in all the dispersed assets had some 3.3 trillion in assets with roughly $75 billion in capital, which is a little only over 2%. the third of that got used in one liquidity put on one set of cdos. obviously, in hindsight almost everyone agrees including her predecessor as fed chair that more capital less leverage would have been media rated the financial crisis. it may be facile to say the system would've been safer, been required to raise and hold more capital but the mere fact it's facile is not astounding make it untrue. i wondered if he details what the feds use are going forward regarding capital requirements and what particular provisions to put in place to insure that the financial institutions that

have grown so large and are prone to be rescued are well capitalized on a go forward basis? >> thank you. i think it's important when you think about the situation going forward is recognize that there are two big things happening. one is the financial reform legislation recently passed in the u.s. congress and signed by the president. the other is a substantial reform of international capital standards which is currently going on and i will be attending the basel meeting next week in switzerland. so the united states agrees, secretary geithner is talked about this, we agree, secretary chairman bair, that stronger capital standards are essential as one of the key components going forward to ensure the safety of the system. and so what we're talking that with their international colleagues in basel now is first having more capital, having higher quality capital, that is

not using intangible assets and other things that are not loss of serving as capital, making capital for risk sensitive so that it responds more to losses and absorbs losses more effectively, creating some counter cyclicality in capitals, capital can be built up in good times and run down in bad times. and, finally, we are working with the accounts and others, you know, we've gone beyond the situation you talked about, where citi had always off-balance-sheet assets which were not consolidate has been very largely changed now by new accounting rules. which will require consolidation where there is substantial ownership of those assets. on top of that we are looking for international leverage standards and international liquidity standards. we expect of some very substantial improvements in those regulations. internationally create a level playing field and i do believe as we go forward those rules and

their implementation will be the same order of magnitude and importance of ensuring a safe financial system going forward as the changes, very important changes, been made in the recent legislation. >> thank you, dr. bernanke. >> senator graham, a quick closing question? >> yes. chairman -- [inaudible] spent the chairman answered the question i was going to ask, which related to what is the status of off-balance-sheet items. but i cited earlier a report that there seems to be a weakening of resolve i a basil group in terms of liquidity and capital standards. does that coincide with what you're hearing, and if so, do you think that we can participate adequate resolve at the international level to get

the standards where they need to be? >> so when you're developing complex and capital standards, it's important to consult with the banks to understand, make sure you understand what indications are for how much capital they hold and how it will affect their business and so. it's important understand that you're not making good policy if you don't understand the implications of your decisions. that being said, that's not the same thing as weakening standards. we want to make sure the standards are rational and effective. and we are committed to very strong standards, and i think you will see when they come out that they will be substantial improvement over the standards that we've had the last few years. >> thank you. >> just one question. bank regulars have for many years been concerned about fair value accounting, mark to market accounting. and some have said that have something significant to do with what happened in the financial crisis.

what's your view of that? >> well, i think that mark to market accounting at times increased the procyclicality of the system there were times when markets were highly illiquid and it was very hard to value assets. that being said i think we should do our best to get appropriate market values of assets that do not market prices. this is a somewhat different issue when you're dealing with long-term credit in the banking book. where there is no secondary market and appropriate valuation requires, yeah, a model are some assumptions. i'm in favor of accurate accounting. i think that there are sometimes problems when markets are very illiquid and the fasb tried to move in the direction of clarifying how to deal with so-called level three assets and illiquid markets.

but i'm also very cautious about mark to market accounting to the long-term loans, the bank loans, the banking loans of the banks. if i could say one quick thing about a question you asked me before. i would just point out that the decisions there, the interventions are there were fdic decisions. they must've made, i'm sure they make independent judgment about the best way forward. they're concerned about protecting the deposit insurance fund. i'm sure they're trying to find the least cost solution to that. >> my question, thank you for that, but my question really was what importance do you think market to market accounting might have had in the financial crisis as we understand, that is, this huge decline in asset values? >> i think it exacerbated it somewhat, the nature of financial markets that asset prices move up in booms and down

in crashes. that is an exacerbating factor, but, you know, we don't want to sacrifice accurate valuations to eliminate the issue. i don't think you could. so it was an issue, but i don't think we should abandon mark to market accounting. >> mr. chairman, thank you very much for this second appearance before us. during our deliberations i also want to reiterate something that the vice-chairman and others have said. douglas holtz-eakin i know mentioned specifically, you understand and the federal reserve have been very forthcoming, very cooperative in terms of providing documents information, we appreciate the way in which you have helped conduct, us conduct our investigation, our inquiry for the benefit of the american people and for history. you have been very good in this regard and we look forward to continue to work together as we do our final report. thank you very much for being here this morning. >> thank you, mr. chairman,.

>> will now take a 10 minute break, members. and then chairman bair will be before us. [inaudible conversations] [inaudible conversations] thinge

term limits in the 1990's and, of course, has always is available at your books or on-line. now to the marketing phase we can turn to our program. about a year ago almost exactly to the day i had lunch with a friend of mine the work of a

high level and the barack obama presidential campaign years subsequently after dinner he went into the white house also a high level and still serves there. the thinking back about that, however, one thing strikes me about this luncheon august of 2009 and it's this: we talked about many things, you mentioned what a great surprise and a dream like element that obama success have been that barack oba was president. he was still stunned by and talked about going to the white house and try to figure out how the presidency had grown to be what was in a country that started out to be critical of monarchy. we talked about various issues of the day. bowie did not talk about where these kinds of town hall meetings that have proved so truculent, so difficult for members of congress that had been at the summer of 2009 began

considering the health care bill. we did not talk about what that might mean for the barack obama administration, whether it might be a threat to him. looking back inseams really striking. i did not say to him but aren't you guys were about all these angry people showing up at town hall meetings and being very aggressive and confrontational with members of congress? i think we both innocence had an inside the belly attitude and the attitude was there is this kind of issue out there and people are upset that the academy is bad, this movement will go away. well, it's been a year now since that dinner and, of course, the movement hasn't gone away and that's what we're here to talk about today. the town hall meetings more ten to a genuine what might be called tea party movements and has no continue down to this day and is replete not only with

anger and confrontation but also political candidates. candidates that might not otherwise be the candidates for e senate for example with iran paul in the state of kentucky who is a tea par favorite. today we're going to have several distinguished speakers talk about the tea party movemes. i want to set the stage a little bit by talking about three things. and some questions associated with. what is the movement? what does it have to do and relate to campaign and ultimately how might relate to governing which is the big issue. first issue of the movement itself. one of the questions that we don't know lot with the answer to your dad is the question of who exactly are the people that make up the tea party movement. what do ey want? that's the question that has been posed i think an already talked about at this meeting in some respects. what they say they want and what

they remain remarkably focused on i think is the idea that spending debt and deficits are a danger of to the future of the united states. this is the focus and they're for cutting spending, limiting government, and also you hear often in return to the constitution to what the constitution means and a sense we are losing that. is that really what they want and really what the movement means? one of the questions also that's been raised not least by new york times survey is despite the critical attitude toward the welfare state that has grown up since the new deal, do these people within the tea party movement actually support many of the major planks, not least of all entitlement parts? of the new deal state and afterwards. and while they therefore find that their views are in a sense contradictory that they want to both cut government and its

support important parts of it. these things will be talked about i think as we go forward during campaigns. then, of course, when it hit tea party movement and the candidates and republican candidates to as well as expected this fall, when it comes time to govern this will matter. another question about the movement is, will the process? movements arise in american politics from time to time and the question is do they persist over time, how did they affect the political system and in this particular case the question is will they persist beyond november to make a difference in exactly what happens next year in congress and in 2012 with a presidential election? on the questions of campaigning as well as movement, what will it mean in terms of our congressional campaigns. of course, one of the central questions is can tea party

candidates win and actually get elected. can share in a goal whin and so on. and if they do, how often will it be that the tea party is the crucial element to it, that we're in an era right now with the political movement that will be away election that will help republicans enormously, but what extent will this be one be responsible for these elections. finally on the question of governing which in a way our topic here goes to that is, the tea party seems to be a against big government coming to do something about that will mean to do it in terms of actually governing and havingongress passing laws of getting things change. oneay to do that or perhaps the only way to do it is through the organization of congress and

parties. there's a fair amount of evidence that the tea party will be associated with republican party and the candidates importt ndidates to the tea party dam in yet t question becomes will the gop in congress and the gop in washington change because of the tea party or will the gop that we have seen in washington for some years now, the george w. bush era, the party that does support substantial spending and increase in the size of government, will they change the tea party? this came down about two or three months ago in an unguarded or perhaps guarded moment, former majority leader trent lott said of the tea party people, when we get them to washington we've got to co-op them as quickly as possible which was a remarkable statement but, indeed, that is a question that comes down. you'll see it and things like in the kentucky senate race among

paul working with the majority -- minority leader mitch mcconnell. it will become more like mr. mcconnell who is much more of a traditional republican or remain a kind of libertarian person who works very hard and brings about some changes and limiting government. over time i think another big question is with these candidates who are elected the tea party have been a sensible way up to victory it seems likely to happen, how they develop and mature as members of congress? nba also there's a question of whether they will go on to other causes, cabinet officials down the line. but if members of congress will they, in fact, become more traditional, traditional republicans and perhaps more adapted to the spending ways they have made the new officials, the new members have made it their task to change and

two critique and run against. so down the line, in other words, will the mature and become a just like a normal expanding member of congress. well, i thought all of these issues in the spring were worth discussing so we set up this panel. .. he was editor of the libertarian magazine.

welcome. we look for your comments. >> welcome, dave, and we look forward to your comments. >> in case it wasn't on the microphone, i was just an edor. i was at the editor. >> that was a good introduction that explains exactly what our relationship to t tea party movement is. i've been covering the republican party since 2006 when things were at a prettylow ebb. when it was clear that they were big, not a majority of people in washington, but a substantial number of people in the congress, most of the base that was unsatisfied with i was a collaborating republican party that didn't challenge the government. i commit a tea party movement from february 2009 through this moment right now and have seen those people get activated,

people have these problems with republican power in party are now defining what it's going to do when it gets back. so i guess for somne to provide a little history based on what i've seen before and after the start of the movement. the best way to start the history probably is like comparing the way this developed, the last time one party ran all of washington. the minority of truck party was trying to reestablish its a. look back to january 2001. george w. bush wins the presidency after a very close election that a big part of the country doesn't make you one. with the republican party behind him that it lost seats in the election. it goes back down to 50 seats in the senate. so he, on paper, -- really?

[siren] >> what is t protocol? >> may have your attention please? may i have your attention please? a fire has been reported in the building. please leave the building. do not use the elevators. [siren] >> you all turn off your cell phones but not your flamthrowers. [siren] >> i guesse should leave. >> can we stay here and continue? >> can have your aention please? there has been a fire reported in the building. please leave the building.

>> i apologize to i went to the numbers of how many seats george bush had. make, liberals were very slow to coalesce around real efftive opposition. you point out that everything was turned upside down

september 2001. that's true. if you look at the first seven and a half months that bush is operating, liberals in congress went along, not with everything, with bush's biggest initiative. they were kind of flummoxed but not very good at opposing things. moveon.org which i don't need to reintroduce here or anywhere else. at the time was only focus on passing campaign finance reform and also on protests about energy. that was the first, seven months of george bush, the switch was important but go back to look for liberal activism. you don't find much. compare that to january 2009 when bark obama assumes the presidency after the biggest popular vote win in 20 years that he brings in democratic senators, most of them unlike previous democratic majorities,

very liberal. and he passed his first agenda which is the stimulus package without any republican votes in house and with a massive struggle in the senate when he gets three votes in the end. let's break down that timeline. the day of the senate vote and activist named mary organize a protest against the statements in fort myers florida. most accounts say there's about six people there. one day before he signs a seamless legislation in colorado and activist organized a protest in seattle and that gets coverage and that gets support from conservative blogs, everyone hears about it. two days after obama signs the legislation cnbc commentator goes into a story about the homeowners affordability and stability plan. and that inspires very quick, very quickly the first tea party protest nationwide on favor 27, 22009. republicans are hesitant to

embrace that but as soon as that happens and gets positive coverage, really the republican party and the conservative movement infrastructure embraced it completely. michael steele, is denied because they don't want partisans there but john boehner spends april 15, 2009, going from tea party to tea party in california. so i'm pushing together a lot of history here, but look again at that time. the senate and house in 2009 -- sorry, 2001 are pretty accommodating even with a lot of democrats and liberals don't coalesce pretty quickly. within a month there's extremely effective and problematic activism on the right in both the obama administration and buttressing everything the republicans are doing. why did that happen? it's important to go into this because we don't want to treat the tea party as generic.

the perception that john mccain was with george w. bush collaborator in big government, that depresses republican turnout in 2010. he loses an election. he gets round as many coat votes as george w. bush did, but there are states like ohio where the population is a static or as the republican turnout drops. in my own reporting on the tea party movement, i've encountered plenty of people, dozens of people see either they didn't vote for him or they'll make some commen about how they voted for payment but not him. a norm in fall themselves by did not die because they didn't like what the republican party stood for. so people were there in 2008 weren't really activated. the second reason is the conservative media. the media generally and the conservative media. so the conservatives who make up the tea party movement have immediate access and an immense

number of organizations. have access to things we all know about like facebook and twitter, other things you can rattle o that let you connect. i'm thinking specifically that these, this movement had organizations like heritage foundation, media talk rare, fox news. it had adequate chambers, reinforcing network out there that was one, providing it with information about why they were right with the obama administration, why wasn't going to work economically, why the stimulus, and they have access to find out where tea party events were happening, and two, how to contact members of congress to complain about bills. and three, proof that what they

were doing was happening. this has always existed. in the past if you showed up at a rally in the media didn't cover it, there might not have been a rally. in 2099, 2010, you take a photo, taken the of it here a lot of tea party people, i'll get to this, they're not like the obama movement, they are not as young. they still hadn't enough to prove these events happen into the cell lines were melting, or the switchboards were melting. i think that was important. i will get more into the media. there hasn't been anything before in our politics like this instant access to organizations that can supplement your work and organize for your. i guess i'll use another historical example to explain how important this is. the reporter will bunch compares the way this looks to a photograph from the late 1950s of a billboard that says in

peach or award, find out for more information, send a lette to p.o. box, and the nae of the p.o. box. that's a lot different hurdles to get information, a lot of hurdles to organize. those just don't exist anymore. i've mentioned the internet already. the "new york times" poll tea party activist there ran april 2010, for the deaths and the amount of data in the, ad has the most interesting questions and figures about the movement, finds that 40 for 7% of actors get most of their information from television. that's about twice as many they get from the internet. what was on fox news in january 2009? glenn beck show had just started, star star the day befoe inauguration. republicans who di't have any power at that point had a platform on fox news tocome d express themselves about why they opposed the obama

initiative or that obama initiative. republan critics on this conservative infrastructure, heritage, cato, aei, all that of that, had places to talk. injured activists who were confused -- they weren't activists yet. they were worried about spending by the government. information that could use to inforce what they thought. activists tell me frequently at tea party ross petty a lot about, a lot of information, to hear a lot from him and they fall up on it. they also get information from twitter account about particular politicians, or from feow tea party activist uploading information about their own event. another thing we find is more tea rty's trust their fellow activists and than information from newpapers. i don't think this panel will get much intsome of the things

that are popular, is fcing the media has collapse a lot of thinkers, especially among nservatives. facing which reported i friends are what told by friends, friends or people they just met and information is more trusted because you feel like there is a filter. you don't have a filter if you' talking to a like-minded people in the like-minded media. let's go back to february 2009. the effect his head was clear from the start of this. the activist in seattle had never organized a row before. she was a conservative but hadn't tried anything like this. so in trying to organize a tea party rally she found a list of economists who oppose the stimulus and had been compiled that cater. she wanted help and she got help from mhellmalkin whose a fox news contributor who is a columnist. she helped her out. she sent full force as food for

that and for a second tea party rally. she did all this by google. she found that it was an echo that you to organize. you know, it's difficult. difficult to get permits and difficult for people to shore. as soon as people started showing up, as soon as she started getting the names of economists whom i speak after event, it just kept rolling. this is what has repeated around the country. that's how the tea party got organize. how has it changed the republican party? we are all familiar with cases where tea party activist help certain candidates to the detriment of republicans recruited by the establishment in d.c., the estalishment in various states. they knocked off a couple of incumbent. they knocked off people that pulled very well in primaries in kentucky is a good example would be knocked off the secretary of state. i think there's a bit of too much focus on how these candidates are upsetting the republican party's plans.

whether they been winning or losing, the tea party activist have been enforcing and conservatives or the docks docs, republicans should believe they may be work confident to run. but they believed it. look, what's a good way to forget what tea partiers are demanding from the republican party. every tea party group has a list of principles. glenn beck's 912 list is a pretty useful screen. one screen baggage is is a contract from america which is a 10-point plan for leadership that tea party activist in texas developed. freedom work picked up, activist put it online and decided which 10 principles they want republican candidates for congress to follow. or any candidates but is going to be republicans for the most part. the principles were protected constitution, reject cap-and-trade, demanded balanced budget, at fundamental tax

reform, restore fiscal responsibly, constitutional limited government, and runaway spending, runaway government spending, replace government run health care, passing all the above energy policy, stop work and stop tax hike. there are two things there, there's overlap because items one and five protect the constitution and restoring constitutional government are basically the same. this importantly but if you look at the policies, those are what republicans supported at the end of the bush presidency and at the beginning of the obama presidency. extending tax credits, opening more drug, opposing carbon tax, climate change relation legislation, things like that. this is what the republican party stood for. so what effect do they have on the agenda? i think they provided pressure, pressure to an cover for republicans to support all of this. they wanted to already but after you lose an election, and you have been rejected and your internal division.

the ordinary thing is to say what you stood for was a popular. they took that off the table right away. republicans no longer -- the activist organizing and telling them they wanted to stand for those things. they been begging george bush and not giving. arguments of libertarian and conservative think tanks. there's an example, at one point how tea partiers can't cap-and-trade cap and ask. they do refer to cap-and-trade ascap and tax but that is because conservative organizations have been chatting into the lotus for a number of years referred to that way. they refer to it that way when me people like newt gingrich who are more compromised, people who are now more in line with what they wanted to do in the first place that they'll might be politically unpopular, have

been giving room to the democrats, not calling it that. these ideas with the rise of tea party movement took on credibility because regular americans uld show up at events and repeated to reporters and reporters would write down. it doesn't use a exist when the party is out of power. it's what you can do when you're plugged into the media. what effect does the tea party have on nominees? is a popular misunderstanding that the washington establishment prefers moderate republican becuse whatever reason, because they're more compromisedon k. street o they're easier to control, i just come in my years as a poor i n't think this match is a. the area, the issue area on which republicans in d.c. are more liberal, the social issues are more liberal. they know more gay couples. abortion should a deal breaker but there's otr choices.

on economics and one, republicans agree with the issues they are not always confident. survey were not top in january, faber 2009. barack obama had a 70% approval rating. the country was clamoring according to polls for government to take more interventions, to correct the hills of big business. wall street was unpopular. mortgage lenders were unpopular. not to get on this, but it's important that one reason, one way tea partiers and republicans have waged against the democrats is by portraying them as the party of mortgage lenders and wall street and fat ats. americans don't like those things. they were not risking disagreement on how much better american oppose that stuff. charlie crist was supported by the national republican editorial today not because they

lack that much abo what you said at a time. it was because he was up 30 points in the polls and look like he could hold theseat for free basically, instead of a conservative candidate, marco rubio. they were wrong about that most because the economy was collapsing and because of the lost faith in government. republicans as far as i can tell are very happy to have rubio and pleased and surpsed they will be able to elect him, possibly, instead of having to put up with a moderate republican. i really do think most cases here, people pushing on the open door. i'll talk a bit about the future of this arrangement between tea partiers and republicans. i think we are coming to the end of this time of entry republican victories. borne out lease. we've only had a few primaries let. the primaries that tea party's

have one have been special cases, mostly. let's look at bob bennett in utah, and alaska. if you're looking at a map and looking at the easiest on paper, those were the easiest races to win on paper. bob bennett in order to get reelected to the senate had to win a republican convention. that meant winning a majority of 300 -- 3500 republican activists. if you stop that from happening he couldn't run again. they stop that from happening. the case of lisa murkowski, about 105,000 voters in the end. i think you'll finish counting soon, food. she needed to win a majority of that and it did so by very small margin. we are talking about to setors who had their careers ended by activists with five, about 53,000 people making that decision.

this really ripping people out of the senate and replacing them with the candidate you want, i don't think it will be that much more possible this you. there's a few chances in the primary states, but the more important thing that tparty activists are doing has already been done. it's that they made it impossible for rublicans to do with the didn't really want to do, and compromised. made it impossible for them to support new cap-and-trade legislation, to waffle on tax cuts. the orthodoxy those are their that was waving a bit in the beginning of 2009, there's a question anymore. they're just not going to waiver on a. john mccain i would ague is the biggest tea party victory. he beat haworth in his primary, but he went from some seen by people and press in december 2008, chamber 2000 as it possible compromiser twit very dedicated opponent of

barack obama. i don't think he did all of that. i think he wanted to oppo barack obama, but they kept him honest and they kept honest by using the resources of the media, think tanks, the resources of each other, putting public pressure on him, on immigration, on the things he thought might be unfaithful. where do they go into take power? the model to look at is jim demint, from south keller. he is the more important figure in the movement that sarah palin on policy because demand has power in congress do. he has gotten specific about what it is he wants reublicans to do he thinks that congress needs to reckon with them, programs and east to cut spending and asier things he saw as been very unpopular to actually have a debate about them. he has tried is in the past

republicans have majority that the working social security through. he introduced legislation to start taking social security money out of people's taxes and putting it into account instead of -- taking the runoff and putting it into private accounts. his bet is he will have a senate, certainly we'll have more likely to have a house where people will agree with them. he thinks it will work this time because things are so that people will be willing to give up very popular program. they're going to give him option because they have options outside of congress reinforcing this. that's what to look at. is that possible? we haven't had that before but we have a collapse of government. we've had one for arguably since the iraq war and the response to hurricane katrina. we will specifically have a response a collapse of faith in big style of government. are people worried enough and

convince enough it will fail in to suport his even though it's not popular? that's what he might try. is a good for the republican party? we'll get into the question i'm guessing but i think it is good. i can't think of a case when it active powerful bass is bad for political power to have. it's going to be a test. it's not hard for republicans to win election and cut taxes. and 94, they did that in 2001. the task is whether or not there's enough here, enough ace to produce the enthusiasm for spending cuts. that really is the test because if they fail to do that, for will be the third time, let's not get into weeks. they were not the cuts -- they made the cuts they want and 95. they got some.

if they can't get this time with this movement i'm not quite sure where it's ing to go. but that is to test whether the movement. so thank you for inviting me. i want him and everyone else has to say. [applause] >> thanks, david. very insightful. we will turn to mark tapscott. mark tapscotour next speaker is an editorial page editor of the washington examiner and a member of the examiners newspapers national editorial board. he's also provide of tapscott blog that you want to take a look efore it joined the examiner he was director of heritage foundation in washington. at heritage he found the foundations widely praised daily database 101 slashed 201 computer research and reporting good camp to the national press club. he continues a urnalism fellow at heritage.

mark received a journalism lifetime achievement award at the 2008 conservative committee action conference and was inducted into national freedom of information act hall of fame in march 2006. he has been recognized by the national press foundation for his contributions to journalism, education that has testified widely before congress on transparency and government issues. and has appeared wide on television and in the media on these issues. he's a memr of the board of directors and media bloggers association and adviser to new stross.net. mark is a long-term observer, a very smart observer to politics. i really want to see what he has to say about the tea party. mark? >> thank you very much, john. it's a pleasure to be here. i have to ay thatall his

worries me a bit when selling make scum it's like john has made about my intelligence, because i really think, well, they won't think that after they hear you talk. but we will see what happens today. hopefully it will be a better outcome. i have to say that i think john's book, "the struggle to limit government," is an extra important book. it's one that bears a great deal of serious thought and contemplation. and i mean that in the most fundamental sense of what can we learn from what has happened on this issue, how do we limit government. from the past because that is the central issue and it's very likely to continue to be the central issue for probably the lifetimes of all of us in this room today. paul johnson, the historian in modern times, describe the 20th century athe century of government demonstrating the evils to which it is susceptible

and totalitarianism. i think that when he first century is going to be the century of crisis for government, because of entitlements, for exampe. and we are going to have politics dominated by the question of, well, do we really want all that government after all? and that's why john's book i think it's going to be so useful. i hate to admit this but i've been around these issues for a long time. i was in the reagan administration as a political appointee before became a journalist. and, in fact, that they can interest in political things and spent some time in graduate school studying political philosophy for several years. because of his speech that ronald reagan gave in 1964. some of your probably for money with it. that was of course the speech the time for choosing. and one of the lines in that speech just absolutely gripped

me, and i was a 14 year old adolescent at the time. and that was that this is the last best hope of freedom on earth. and being young and idealistic does exactly theind of sentiment that would encourage a young man too, as i then did, go out and organize a teenager club and become committed, am member of the young americans for freedom, then to enlist in the site to say for you. d ronald reagan of course was the great hope r that. i think it's especiall important today, with the tea party, to remember that ronald reagan was elected on a promise, among other things, abolish department of education and the department of energy. they weren't in office very long before they said, well, you know, maybe we're not going to be able to do that this time.

maybe we will do that in the second term. and in a second term role around and the idea was, you know, we have to redo the tax codes and/or some the other things we have to do. in 1988, the senate voted unanimously to repeal a medicare catastrophic, reduction, that it had adopted just a year before that, less than a year. e public uproar was so intense thatenators literally were running to get to the floor to make sure they were on record as yes, i voted to repeal this because we are going to protect your entitlement. i think it illustrates something that john makes reference to on page 74, about the public attitudes of the time that reagan and republicans at the time, conservatives, had to

confront. john notes on page 74 that in october of 1980, those who favored some decrease, or a large decrease, in federal spending composed of 49% of the population. 49%. it's hard to build a madate to cut government when fewer than half of your taxpayers, supposedly, at the very best ambivalent about whethe or not there really is, in fact, what we want to do. is is all conventional wisdom. and that's exactly why i think it's wrong today. a column a couple weeks ago that i strongly encourage you to read if you haven't already, and assure everybody in this room probably reads joan every day, right? i do know if any hands will go out. the title of the column is the rules have changed. and the point, just put it most

but he was vy simply that the old rules, such as people will not give up an impediment once they have it no longer apply. and if that's the case, and i believe the evidence is abundant and growing, that that is, in fact, the case, the context in which whatever happens in the 2010 elections is going to be fundamentally different from what happened in 1980 and again in 1994. in 1994 the contract with america group promised to abolish, jeff, i believe it was 105 programs, federal programs. and, of course, they never did do that. again, because of his a look ambivalent about do we really want entitlements or not, that's the longer the third rail of american politics. and i think that tea party

movement is not a cause of that. it's a reflection of that. people typically outside of washington are ahead of politicians in washington. and those of us in the news media, especially opinion part of it, like to make hay out of that fact. but we ought to be happy that's the tactic as if it reflects that day at some degree of intensity, or interest, are listening to what people are saying and trying to reflect that, one of the fundamental problems that has contributed to this change of the rules is precisely as government has grown, in the last three decades, it has become increasingly unable to deliver on its own promises. the examiners michael brown has thcolumn i think in sunday's paper about big government has

gotten too big, too that, it can't do what used to be able to do. this again reflects the crisis that is going to ei think the determining factor of american politics for the foreseeable future. and that is very simply big government not only cannot deliver what it has promised, but the attempt to deliver it has such comprehensively negative impacts on so many people now that trying to implement a really radical left agenda like president obama has attempted, elicits the kind of response that you see with the tea party and makes it impossible to continue. continue, with the agenda. the tea partiers the day after 9-12 demonstration -- can what you guys pour me a glass of water? i'm about to lose my voice, and

i'm sure this guy would not like that to happen. two days after the 9-12 demonstration here in town, i voted column in which i encourage the tea partiers do, that's fine, it's hundred demonstrations and to do all the things that you do when you have a demonstration. but that's merely a statement that it doesn't change anything. wife jeanette have got to do is to move to the next stage for any political movement, and that's to organize and begin collecting people. and i have to say at the time i wrote that column i wasn't all that convinced that was in fact going to happen. because at that point i wasn't persuaded that this was a movement that really reflected a

fundamental change in american attitudes. but i think they've made very clear they are, in fact, going to be run and they are very serious, and they do reflect this fundamental change because that's exactly what they have done. i think it's a remarble story that too many folks, too many of my colleagues, the mainstream media, they just don't know that it's there. but there has been a remarkable reorganization of grassroots politics on the right side of the spectrum. and we're going to see a big part of the results of that come november. i'm going to repeat my remarks because finally, i really want to hear what jeff bell has to say, having heard davis will. but want to close with one thought. and that is this. the focus right now understand is on what's going to happen,

with the tea party be effective in elections coming up, and i think it's a pretty good assumption that they will. but as important and interesting as that is, a vastly more important question will be what happens in 2011? if the republican party in congress fails again to deliver on its promises, it's going to be a very, very chaotic political year in 2011 and beyond. and, frankly, speaking as a journalist, that's going to make, going to make a target-rich environment for those of in journalism. thank you. [applause] >> thanks very much, mark. we will have jeff bell here. we also want to get to questions because i'm sure a lot of you ve questions and want to ask.

our next speaker will be jeff bill. just without policy director of the american principles project which is a new job for them. he said many jobs and a very distinguished career. as an author and republican political consultant, he's a former president of the manhattan institute. he ran for u.s. senate twice in 1978, 1982. that's where he first came in my reader. i was living in new jersey at the time and demand against bill bradley, which was a remarkable under 10 as a young reagan conservative at the time to g also worked as an aide to president reagan, president nixon. jack kemp from new york. he's been a fellow at the kennedy institute at harvard, a visiting professor at rutgers. and also got the link indication at the american enterprise institute. he presents is on the board of directors of the american conservative union and the campaign finance institute, also george washington university.

many of you who may know their work. from 88-2002000 these are the president of canada, nick not an potical forecasting forecasting company in arlington. he's also now continue to work in capital city partners, the public relations are here in washington. he's a graduate of columbia and a backing of the vietnam war. jeff, we're looking forward to your comments. >> thanks very much for having , john, and i would just like to start by asking a very simple question. what will historians 50 years from now, looking back on this time, see as the most important development in american politics of say, the past four years, the period roughly from 1970 to the present, 2010. now i know that the political science are not necessarily historians, but a lot of the

political scientist at this national convention in washington will be writing the first draft of what that history is going to windp being. and i'd like to tell you something that i don't think everybody else here, will tell you. and that is i think the most important development in retrospect he is the rise of two movements since 1970. the first was the social conservative movement which arose in that decade. you could really argue exactly what part of the decade or what triggered it. but by the end of the '70s it was very much in existence, factor. and the second movement is the tea party movement, which i think as has been alluded to can be, stated to be a certain date. a date certain. naming february 19, 2009, because we can tell he talked

about having a tea party out at lake michigan which he said, among other things, we will be dumping some derivatives securities into lake michigan. and he said nothing about a national movement called a tea party. but very son, as dave like a midget, he was up on the report, he was viral on youtube, and tea parties were being announc all over the country. i think the conventional wisdom at the time, and i certainly read artics in politico and elsewhere indicated that this was a terrible mistake. to do something just 30 days after the inauguration of president obama. the conventional wisdom in polics is that that is much too early in the honeymoon of any president to start attacking him the way ricky did and the subsequent tea party stalled upon. history is when the stratosphere, 70% or more. and he had a lot of goodwill of

someone who is a completely new look in american politics. i don't ean that just in terms of being black, but also our first black president, but also in terms of style and the hopefulness that he projected in his campaign and in his inauguration. and i read articles in politico where people were off the record, republican officials saying this is a terrible mistake, we've got to divorce ourselves from this movement. and a lot of that remained even onto through this year. but why would i couple the tea party movement with the social conservative movement? they are involved in very different issue clusters. the social conservative movement, such issues as abortionsame-sex marriage, the role if any of g in the public square. and issues of that type where is the tea party movement is mainly about economic issues, and

particularly the federal spending, the big government type issues that are on the subject line of this panel. in fact a lot of obervers have argued, including conservatives, have argued that the rights of the tea party is going to marginalize social conservatism is not totally equipped it because they're doing with the whole independent set of issues. now, i don't deny for a minute that they are getting with separate issue clusters that are very different, or at least seem to be very different. but i would also say that what little polling we have done in the 18 months since the tea party became a factor, suggests, and this is tentative, but suggests that the vast majority of the tea party voters, people who consider themselves part of that movement, are social conservatives. and also, that the vast majority of social conservatives are sympathetic to the

antigovernment thrust of the tea party. now, you might ask -- so what's the big deal, if these people were already conservative, some of them on social issues, some of them on others, and they suddenly became mlitant on economic issues, why would that make a difference in the alignment of the country. or more specifically, ask yourself if the tea party didn't exist, would the voters who got involved in the tea party be open to voting for barack obama and his reelection in 2012? well, at irst glance you might say no, these people are dyed in the wool conservative and have that mentality or they never would've risen up. but i believe that the correct answer is more voters than you might think mit be open to a liberal candidate like obama. and the reason i believe that is that is the issue of ideological coherence.

for many decades, on the left end of elected politics, voters have been predictably liberal on both social and economic issues. to be specific, if they voters open to changing the law to permit same-sex marriage, there's a very high probability he or she is opposed to the kind of deep cuts and federal income tax rates favored by backers of supply-side economics. on the surface but to use are completely unrelated. but rightly or wrongly, many voters on the left see the two issues as part of the same larger argument. now, perhaps it's because american conservatism is a newer movement than american liberalism. . .

a ry prominent role for social issues. we can argue to i think there are very few democratic strategists had to do it all over again with advised governor dukakis t defend them to commit a rape in maryland or advise the governor to defend his veto of a bill that would have required the pledge of allegiance with its phrase under god to be set in the state's public schools. even fewer i think would have encouraged the nationwide movement for same-sex marriage to time its successful court fight in massachusetts which

have been the beginning of 2004 in a manner that triggered 12 state referenda ana presidential year including a pivotal ohio. i guess all so it would not have encouraged john kerry to say in the final debate with bush with an air of visible irritation to cbs bob schieffer, that the following words about mary cheney whose name he did not mention. we're all best children, bob, and fewer to talk to dick cheney's daughter who is a lesbian to tell you she is being who she was, who she was born as. that was the most memorable line of any of the debates may be in the entire campaign and i don't think if kerry and that's blind to do over again he would use it. but social issues are very often not as prominent as they were in these two presidential races which also happen to be the last two presidential elections in which republican presidential

candidate won a popular vote. two out of the last five has social issues, and the same two also had republican pluralities or majorities in popular vote. but in a cycle where there hasn't been a major social issue of such as 2008, voters are still socially conservative, they vaguely know the republican party is better on quote on quote aborti up receive six marriage, but on the republican side that they feel very free to wander over and make their decision based on economics and national security. that was unhelpful for the republican party on economics in 2008. the social issue voters are kind of loose cannons en it came to e other issues. the's a reason for that and that is that very often votes on economic issues are more related

to situational votes, based on conditions that exist at the time. how is the economy doing? how is the wargo in? when you ask those two questions about any cycle you can see that the voters in answer to those two questions may well determine his over all the votes for or against presidential candidate or set the stage for something depending on the situation in the economy or if there is a war going on is going to have a major impact on the chances of the incumbent presidential party one way or the other. leland -- the big reason optimistic about the copacetic nature of the tea party and its relationship to the social conservatives is that these voters are likely to make for much more ideological coherence

in the conservative moveme in the republican party. and other words they issue like big vernment which might be economically related or due to the fact and many democratic consultants believe this is just due to the fact the economy is weak could also gain an ideological dimension and encourage voters to vote republican even as the economy improves. i do believe at some point it's almost the law of averages the obama economy is going to improve and that will be the first big test as to the ideological state with the tea party. will tea party voters stripped away because the economy is good and obama's policy seems to be working or will they still have that ideological edge as represented by the term big government in our panel today? the other reason and i will close with this, as a conservative i'm optimistic

about the convergence of social issues and the tea party and ys think this could be seen in retrospect as such a big political development, it's that they are both routed in the same thing and that is a view of the american founding. on the tea party, look at the term, tea party -- that's a populist rally that happen in the 17 seventies in boston and that term when brick said kelly turned it did seem to take off. i don't deny the point that conservative organizations were fostering that and the minute it seemed to take off they were on top of it givi them the know-how, maybe a few pork sandwiches. still, tea party has a lot of resonance for american voters who are interested in the founding. one feature that became evident over a year ago, johns organization with the kate

institute, 80 heritage in a few other conservative advocacy organizations, have given out free pocket-sized copies of the declaration of independence and the constitution. over a year ago and that wave of town meeting rallies were democratic congressman were virtually chased off the stage over heal care over a year ago, a lot of these pocket copies of the declaration and the constitution which kato have been giving out -- john could tell me for how many years, but for a long time without any great presidents were a fact that i know of. all of a sudden the t partiers were observed with these copies and is also come to be known that a heckuva lot of the tea party are having seminars and the values of the founders. how about social conservatism and the founding? the men who founded the organization i'm working with that john