comments indicated that the changes and tax cuts were band- aids. they tried to make it more sustainable over a 75-year time frame and beyond. it was not a fundamental attack on it. clearly, if you were to rethink it, you might have a different structure of how you to social security, but i do not think the country is there. i think people recognize that we need to do some things and sacrifice in various areas for the solvency of something like social security. the cop -- the caller is correct about the demographic issues, you know, people are aging and that is going to be an issue. we need to make tweaks to things like social security. but we do that because everybody feels like there is something going on, not just entitlements and that upsets democrats, or not just on taxes and that upsets republicans.

you try to we have all benefited. we were living beyond our means for so long that we're going to have to have some pain and we need to spread it across the board. host: steve ellis of t axpayer.net. that's all for "washington journal" today. thank you for joining us. have a good day. ♪ [captioning performed by national captioning institute]

[captions copyright national cable satellite corp. 2010] >> president obama on this monday is spending the morning and in briefings and meetings with senior advisers. the white house is working with congress on a number of issues, including federal spending for the remainder of the budget year. government spending runs out on tuesday. the senate is working on a measure to provide funds through march. >> today on the floor of the senate, continue debate on the start treaty. the revised agreement with russia to reduce nuclear arms. a number of amendments are pending. any changes to the measure could send a treaty back into negotiations with russia. you can see that debate live on our companion network, c-span2. the u.s. house returns for legislative work tomorrow. they're waiting for the senate to act on temporary spending. congressional quarterly reported the deal debated now would

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span video library. it is washington, your way. the c-span networks, now available in more than 100 million homes. created by cable, provided as a public service. >> the federal reserve is proposing to limit how much banks can charge merchants for debit card transactions. the proposal is mandated by the dodd-frank financial regulations bill passed earlier this year. these and mastercard stock dropped significantly after the announcement. this lasts about one hour. >> this provision of dodd-frank deals with the regulation of interchange fees on debit cards and related matters. u.s. regulatory agencies have been given new responsibilities under dodd-frank. in a number of cases, the law requires the board and other agencies to address complex and challenging issues within a

short time frame. this is certainly true with respect to this particular rule making. although it is important for us to act expeditiously, both to meet the requirements of the law, and to establish regulatory clarity as soon as possible, the proposal today is one that deserves careful attention from the board in light of debit cards increasingly important role in system. team sent sompayment we gather data from a variety of sources and we look forward to receiving the public's comments. let me turn to vice chair 'sllen, who leads the board committee that reviewed the staff's proposal. janet. >> thank you, mr. chairman. as you noted, the stafwe will cr steps proposal for implementing the debit card interchange fees and transaction routing provisions from the dodd-frank act. the background to this proposal,

it's important to note prominent roles debit cards now play in our payment system. the results of a new federal reserve survey published earlier this month showed that nearly 38 billion debit card payments were made in the united states in 2009. debit cards are now used in 35% of noncash payments transactions. they have eclipsed checks as the most frequently used noncash payment method. the dodd-frank act specifically directs the board to set a standard for debit card interchange fees. theses fees are paid by merchants to card issuers through each debit card transaction. over time, interchange fees have

grown. the level of rates have risen. this is precipitated a national and international debate over the appropriate level of the fees. in 2009, at debit card interchange fees totalled over $16 billion in the united states. payments clearing and settlements committee has discussed with the staff numerous difficult issues involved in developing this proposed rule. staff'sve staf proposal reflects a reasonable approach to implementing this requirement to dodd-frank. that said, we've included a number of questions in the federal register notice about alternative approaches to limiting different parts of the rule.

we will be interested in reviewing input on the proposal as we determine what refinements' should be made when it is adopted as a final rule. i would like to now turn to mark manuszak, who will discuss the staff's proposal. >> thank you. i will be discussing proposed new regulations ii, which would govern debit card interchange fees and routing. the proposed implementation has two main components. thest, it discusses some maximum permissible level. second, it prohibits network exclusivity arrangements and merchant routing restrictions. since enactment, we've held numerous meetings with debit card issuers, merchant acquirers, merchants, industry trade associations, and consumer groups and to deepen our understanding of the industry. these organizations provided

understanding of the structure and mechanics of the debit card system, froaud losses and mitigation activities. we have posted the meeting summaries and the written submissions on the boards website. to obtain further input, earlier this fall we surveyed debit card issuers, payment card networks, and large merchant acquirers. we requested information about the volume, cost, fees, fraud losses, and fraud prevention activities associated with debit card transactions. also, network exclusivity and routing. the information has informed the proposal before you today. let me now turn to the substance of our recommended proposed rule. i will summarize each major statutory requirement and then describe how we propose to implement it, including alternative approaches. the first major aspect of the

proposed rule is the interchange fees standards. the statute requires that the amount of any interchange fee in issuer receives feet reasonable and proportional to the issuer's cost. the board has required standards for assessing whether the interchange fee meets the requirement. restrictions do not apply to issuers that have assets of less than $10 billion. the restrictions do not apply to debit cards used in several government administered payment programs and certain reloadable general use cards. to implement this portion of the statue, we determined which should be allowable and how best to measure the costs. we looked to the two considerations congress included in the statute for the interchange fee standard. first, the functional similarity

between debit card transactions and checks. the second is the issuers incremental cost to authorized clearance, and not to consider costs not specific to a particular transaction. the approach includes only the cost specifically mentioned in the statute. we consider limiting the allowable cost to include only those of included with authorizing a debit card transactions. this approach would reflect the key distinction between debit card and check transaction. the debit card transaction is authorized by the issuer. the czech transaction is not. merchants may purchase a third party check guarantee service. because the statute expressly and trucks the board to consider clearing and settlement costs,

we believe it's important to include those, rather than limiting the definition to authorization cost only. the also considered other cost included. such cost might include the cost to providing cardholder rewards and the cost to responding to ies.holder increainquiry we recommend that the board proposed to limit allowable costs to those that the statute explicitly references for consideration. as i mentioned earlier, the statute directs us to consider the incremental costs of a particular transaction. there's no single definition. we propose to interpret the incremental cost as average variable cost. this measure, which is relatively easy to calculate using cost accounting data, gives the cost of a typical or

average transaction pre we also considered interpreting it as marginal cost. we determined this would not be practical. marginal cost cannot be accounted. the average variable cost will provide close approximation. in measuring issuer costs, also we considered a fixed costs or overhead costs. fixed costs of debit card transactions should be -- fixed costs as well as common or overhead costs generally could not be avoided by ceasing production of any particular transaction. we recommend the board request comment on two alternative standards for determining whether an interchange fee is reasonable and proportional to the issuer costs. the first adopts a standard

based on each issuer's costs with a safe harbor and a cap. the second adopts a stand-alone cap. under alternative one, a issuer would comply with the standard if it received an interchange fee that did not receive the lesser of the average cost. we recommend 12 cents per transaction. if the interchange fee is at or below the safe harbor, it would not have to determine the fee based on allowable cost. we recommend the safe harbor amount initially set at 7 cents per transaction. under alternative two, in issuer would comply with the interchange fee standard as long as it is not above the cap. we also recommend that the cap initially be set to 12 cents

per transaction. both alternatives provide economic incentives for covered issuers to improve the efficiency of their operations. the safe harbor in alternative one and a cap on an alternative two reduce the administrative complaint burden on industry participants, compared to a standard based solely on issuer costs. the standard authorize the board to allow for an adjustment in the interchange fee, provided the issue were complies with standards relating to fraud prevention activities. the proposed rule does not include an adjustment to the amount of interchange fees. instead, we recommend the board request comment on two general approaches and asked a number of questions related to those alternatives. under the first approach, the fraud adjustment would allow issuers to recover costs incurred for implementing major innovations that will likely result in substantial reductions in total industrywide

fraud losses. under the second approach, the fraud adjustment would reimburse the issuer for reasonable and necessary steps to take to maintain an effective fraud prevention program. the board would not prescribe specific technologies that must be employed as part of the program. after considering the comments, we will recommend the board issue a specific proposal for public comment. the statute grants the board authority to address circumvention or evasion of the standard. under the proposed rule, the finding of circumvention or theion would thendepend on facts and circumstances. if it occurs, when an issuer receive compensation from a payment card network said it sees the total amount of fees that the issuer pays for the network. under these circumstances, the net compensation from the network would effectively serve as a transfer to an issuer in excess of the amount allowed in

the interchange fee standard. we considered whether a network fees charged to merchants should also be considered circumvention or evasion. we decided against this approach because it would effectively locked in each network's current allocation of fees between issuers and merchants and would prohibit some networks from changing their structures to resemble those currently employed by other networks. the proposal request comment on whether this or other forms of circumvention or evasion should be addressed in the world. in addition to rules related to interchange fees, rules related to the routing of debit card transaction. first, prohibiting networks from restricting the number of networks to fewer than two unaffiliated networks. second, the board must adopt rules that prohibit issuers and

networks from inhibiting the ability of merchants to route debit card transactions for any network that must process such transactions. these provisions are generally designed to give merchants a choice of networks. this will apply to all issuers, including small issuers, and certain prepaid card programs that are exempt from the interchange fee standards. we recommend two alternatives for the prohibition on network exclusivity. the first would require a debit card to be able to be routed on two unaffiliated networks. in issuer could comply by having one signature network and one unaffiliated pin network on a card. this may have limited effectiveness in promoting network competition. about 6 million of the eight

million merchant locations in the united states that except debit cards currently do not have the ability to except pin debit transactions. there are currently market into -- impediments. the second alternative would require a debit card to have at least two unaffiliated payment card networks for each method of authorization available to the card holder. for example, a debit card that can be used for both signature and pin transactions would need to have two unaffiliated signature networks and two unaffiliated pin networks. this would better insure merchant routing choice, but would require issuers to of multiple networks, such as the set and mastercard, on their cards -- visa and mastercard, on their cars.

it would require substantial operational changes. greater merchant routing choice may promote market discipline and discourage networks from setting high interchange fees. the proposed rule prohibits issuers and networks from prohibiting network choice. such as issuer or networks rules that require a particular network when multiple networks are available. the statute requires the board to establish final interchange fee standards, as well as rules prohibiting circumvention or evasion no later than april 21, 2011. these rules take effect three months later on july 21. the board must issue final rules that prohibit network exclusivity arrangements and routing no later than july 21, 2011, but the statute does not

establish an effective date for these rules. the draft federal register notice requests comments on the lead time required. the amount of lead time required will likely depend on the approach of the board adopts in its final rule. my colleagues and i would be happy to answer any questions you may have. >> thank you very much. this is a very complex issue. i want to thank the staff for a great deal of effort that's been put into this. a lot of hours and a lot of outreach. a lot of analysis. thank you for bringing us this proposal. we have an opportunity for some questions. let me start off. there's a presumption that prices will be set by market competition, generally, but of course there are counterexamples, such as utilities, where government

intervention can be justified by various -- for various reasons. can you help us think about why -- what are the arguments for and against allowing interchange fees to be determined in the market versus regulatory intervention? >> as you know, in most markets, increased competition leads to lower prices. however, and payment card markets, competition between networks tends to drive the fees higher. the reason for this is that in these markets, the party that decides what method of payment will be used at the point of sale -- that is, the customer -- is different from the party that enters the costs associated with that decision, the merchant. in general, customers do not tend to take into account the cost incurred by merchants as a result of their decisions.

the networks want banks to issue their cards. they want customers to hold and use their cards. they provide an incentive to the banks to issue cards by offering higher interchange fees. the banks use the revenues from these interchange fees to offer more attractive deposit account terms to their customers, including, in some cases, rewards for making payments with debit cards. meanwhile, the merchants, who ultimately foot the bill for their customers payment choices, have little or no ability to implement the customer's decision with regard to what payment method to use. in addition, given the near ubiquity of card acceptance and the expectations of customers, many merchants believe they do not have the option of refusing to accept card payments. even though merchants would

prefer lower interchange fees, unless the fees are extremely high, they're likely to continue to accept cards. as a result, competition in these markets tends to focus on the issuers and the card holders, who for for higher interchange fees. >> ok. thank you. i know this is an issue that other countries have looked at. have you review the experience of other countries? how does your proposal compared to other countries and what they've done in this area? >> we looked at various foreign models of interchange fee regulation, including those of the reserve bank of australia and the european commission. in australia, the reserve bank of australia was given authority to regulate both credit-card and debit card interchange fees. rba had broader latitude

regarding how to regulate interchange fees than the board does have currently. nonetheless, it did use a cost based criteria to arrive at their benchmark interchange fee, which is 12 cents for signature debit cards. in europe, the european commission had investigation of cross border debit card interchange fees. in recent v settlements inisa and mastercard, the european commission used a different criteria that was not based on issuer costs, but rather merchant benefits and costs. they arrived at in average at 0.2%, which corresponds to eight cents on a typical debit card transaction of $40. despite some of the differences in the statutory authority and the approaches, the staff recommendations of 7 cents for the safe harbor and 12 cents for the cap are not materially different from what the others have determined to be appropriate. >> ok.

thank you. vice chair yellen. >> yes, i can think of a number of different ways in which the rule will affect consumers. i wonder if you thought through what the likely overall effect of this rule is going to be on consumers? >> we think the effect on consumers is difficult to predict, but we do have some observations. today merchants generally pass on the cost of debit card acceptance, which includes debit card interchange fees to consumers through higher prices for goods and services. because merchants generally do not distinguish between various points of pricing -- various forms of payment and the pricing, consumers that use cash or checks may pay more than if the cost of card exceptions were not reflected. given reductions in interchange fees and overall debit card

acceptance, merchants could choose to pass the savings through, which could benefit consumers, as well as debit card users. we expect this would be most likely to happen -- that is, lower costs will most likely be passed onto consumers in those markets with lower margins and intense price competition. however, any savings consumers might realize that point of sale could be offset by fee increases at their banks and changes in terms that debit card holders face for card use and deposit accounts. holders at covered institutions may face higher fees for debit card use. they could receive less favorable terms for their deposit accounts and related services. for example, one of the first things issuers may do is reduce or eliminate debit card reward programs. these changes that may happen at a bank may be somewhat more visible to consumers than any

savings they realize that the point of sale. overall, i think it's hard to anticipate the overall effect on consumers. >> thank you. i have just one other question. i noted in my opening remarks that debit cards are growing as a means of payment. is it possible that this rule could affect debit cards the debit cards as a means of payment? is that something you anticipate? >> it is something we put some thought into. as you noted, debit cards are an important method of payment in the u.s. today. they provide a convenient way for consumers to make payments, as well as to track and control their spending. we're very interested in the outcome in this way. with regard to the proposed rule, effect on debit card use overall will have differences depending on how consumers respond to the incentives provided by either merchants or

card issuers. merchants, because of the lower interchange fees, and because of the ability to direct customers or encourage customers to use debit cards, will have the incentive to both be more likely to accept debit cards and steer customers in the direction of debit cards. this puts the market in the direction of greater use of debit cards overall. on the other hand, issuers will have more of an incentive to perhaps encourage their customers to use other forms of payment or to back off on any existing rewards programs for debit cards. we do not know what the outcome will be in the market. again, it will depend on how consumers respond to the incentives they're facing. >> governor warsh. >> thank you, mr. chairman. the first reading of the statute says the board shall establish standards for interchange fees.

it does not say we should establish prices. where we in the price setting business? is that because that is what people are reading implies, or is that a judgment that it will be more pro competitive, more useful for the industry with clearer rules? >> there were really two reasons why we decided not just propose an issue were specific standard, but put some actual value and the standard. that is to avoid negative economic incentives. and to minimize administrative burden. if you think about an approach where the standard just says you can get an interchange fee that is the same as your cost for authorizing a clearing and settling a transaction with no

cap. it would not provide incentives, we believe, for issuers, to have sufficient operations and control their costs. if they have very high cost operations, they would be able to recoup those cost from the interchange fees. if they implemented efficiency improvements and reduced their costs, interchange fees would go down commensurately. that gave us some pause. if you think about the way that the safe harbor works in our first alternative, or the cap in the second alternative, it gives some positive incentives for issuers to reduce their costs. if they can reduce costs to blow the safe harbor, they could reap the difference between the actual cost and the safe harbor amount.

in alternative two, where it is just a cap, to the extent that there below the cap, they would be able to benefit from the difference in the cost and the cap. the other thing we're thinking about is administrative compliance burdens. to the extent that in alternative one, and the issuer can rely on safe harbor. they would not need to calculate each year what they're average variable cost for authorizing, clearing, and settle in a transaction would be. reporting the cost to the network, and therefore, the network would know what the maximum permissible interchange fee would be for that issuer. they would be able to rely on those numbers. between the economic incentives and the reduced administrative burden, we thought it would be desirable to have those limits

in the standard. it is something that we requested comment on. n response to the question about market killdee failures, you talked about the incentives within debit cards. you talked more broadly about substitutes. it is a highly innovative area. i presume we will see new means of payment for on-line transactions than others. what does our establishment of crisis set by the board in this area due to the broader set of payment services? in that context, with the utility setting mechanism here be pro competitive, if we think about substitutes along the way? >> it is interesting. if you look at today, there are certain kinds of payment --

credit and debit cards, that have the interchange fee associated with them. checks and wire transfers have no interchange fees at all. we're already in a mixed environment. certain kinds of transaction has a slower payment. other forms of payment do not. in the future, if innovations are within the debit card space, moreet's say there are efficient ways to do debit card payments on line, they would be subject to these restrictions. if we're looking at a totally different forms of payment that would be outside of the scope of the difference of payment card in this rule, they would not be subject to this.

it is somewhat difficult to tell how this will change the competitive landscape going forward. >> thank you, mr. chairman. >> gov. duke. >> thank you. can you talk about the impact of the exemptions? the exemption for prepaid cards and for government cards. how will the existence of the exemptions impact competition, pricing, and the usefulness of the cards? >> with regard to the small issuers, we do not know what the net effect of the rules will be. it depends on actions to be taken by the networks and the merchants. we cannot predict those actions. the statute and our proposed rule permits but does not require the networks to establish higher interchange

fees for the exempt issuers than for the covered issuers. the networks may decide it is simply too costly or too complicated to maintain two separate interchange fee schedules. therefore, they may say that everybody is going to operate under the same interchange fee schedule, which complies with our standards. in that case, obviously, the exempt issuers would face the same reduction in interchange fees, as with the coverage issuers. if the networks decide to establish two separate interchange fee schedules and allow a higher interchange fees for small issuers, it's possible would discriminate skin rat against those because there are higher fees. currently, most, if not all the networks, have rules in place

that would prohibit that kind of discrimination. it's not clear how quickly those rules would be in force. it's possible the rules would change in the future. in addition, the exemptions for both the small issuers and the government programs do not cover the exclusivity and routing provisions of the rules. for example, small issuers would be required to ensure that their cards can operate on multiple networks. there might be costs associated with doing that. cars that currently do not have the ability to be routed over multiple networks, there would be costs associated with meeting exclusivity requirements. likewise for the government cards. the merchant routing provisions would tend to put down the

pressure on interchange fees in general because now the merchants can steer transactions toward lower-cost networks. even as the networks and establish a higher interchange fee schedule issuers for the schedule, those issuers have somewhat of an increase in costs and declining prices, so they may experience a reduction in the province. -- in their profits. with regard to the government programs, a lot of government agencies currently use prepaid cards as a low-cost way to distribute benefits that they provide. issuers of those cards typically in pose little or no cost on the agency'ies. in the current environment, they can earn significant revenue through interchange fees.

the intent of the exemption of the government cards comes from the interchange fees restrictions was to allow that model to persist and to allow these cards to continue to be issued at relatively low cost to the government agencies. however, like the small issuers, they are not exempt from the exclusivity and routing provisions. there may be some increase in cost in enabling them to operate on multiple networks. there may be some reduction in interchange fees as market forces, to play -- come into play. we do not know the magnitude of those adjustments might be. it's possible they may be large enough that the issuers of the government cards would no longer be able to cover their costs strictly through interchange fees and they may need to recover costs from the agencies

themselves, increasing the government cost of administering the programs. >> on the exclusivity and routing provisions, on the signature transactions, it seems that those are the ones where there's a large number of transactions where signature is the only method offered. what's the competitive structure of a networks in the signature space versus pin space? >> you touch on an important point regarding provisions for network exclusivity. currently, the signature debit networks are proprietary to the cards. as i understand it, two signature networks appearing on the card. if the merchant is faced with a transaction where the authorization method is signature, the merchant has the only option, which is to route

that over the signature network displayed on the card. under the exclusivity provisions we are offering as possible alternatives, the alternative that would require two signature networks and two pin networks. that is the only way by which there would be an additional network as a competitive alternative in those situations. however, stepping back, we would say that because merchants will have the initial ability to steer and to this council and a provision that entirely separate from the rulemaking we are discussing today, we would say that there will be some pressure on the signature debit networks just due to the fact that merchants will have more flexibility. >> thank you, mr. chairman. l> > in the initia

presentation, mark noted that there's no well-established economic definition of incremental costs. you have proposed the, using average variable costs. in all the comments, were there any plausible measures or forms of costs suggested for implementing the concept of incremental? plausible. >> i think the three major alternatives that were presented are the ones i discussed in my presentation. the first would be marginal costs. the second would be something along the lines of average variable costs. the third with the average total costs. >> that is not plausible, given the language. >> that is why we excluded fixed

costs. >> mark, on the, enter superposed using marginal costs , what was their argument? other than the fact that it was probably lower? what was the legal argument? >> i do not believe we got any comments that for theiat detailed. >> thank you. you proposed using a safe harbor. putting aside the important question about whether we should or should not have safe harbor, assuming that we do, why use the median price as opposed to maybe a lower cost? >> we looked at a number of

different options. we thought about median cost. we thought about average costs. one would be a simple average, taking the average cost of each of the issuers and averaging that. another one would be a weighted average based on the transaction. the simple average ended up skewing very high because there were some issues with issuers with very high costs. frankly, in several cases, they were higher than the interchange fees that they received today. there were some -- when we looked at the weighted average, that ended up skewing very low because there were certain very large issuers with very low average costs. we thought if we put the safe harbor too low, it would be more

unlikely that issuers would want to avail themselves of it. one of the purposes of the safe harbor is to enable issuers to avoid the need for calculating costs. they would be waiting the administrative costs versus the foregone interchange revenue. was more of a judgment call. >> the question is, given that the language of the statute is that the amount of interchange fee a issuer shall receive -- if you set a safe harbor at 7

cents. and the actual cost is four cents, is that outcome consistent with the statutory requirement? >> we would be deeming any fee at the safe harbor to be both reasonable and proportional to cost. in that 7e land 7 cents is the median. >> we were looking and proportional across the experience of issuers more generally. >> reasonable and proportional is different than equal to or less than cost. reasonable and proportional has been in other contexts read to include some profit. it is not disallowing -- we are not required to disallow all

profits that might come along. the question is whether 7 cents is a reasonable amount, and is the proportional to cost? it is reasonable. there is a proportion. the proportion is within the discretion of the board to determine. >> reasonable to the cost, as only applicable to the proportion. >> reasonable but then proportional to the cost? >> yes. >> the statute does not require the proportion to these the same for every issuer. >> of course, this is a matter we're getting comment on. there are a variety of approaches one could take. this is one. >> ok. my third question is on the issue of fraud prevention and adjustment. for someone to clarify in

standing. i want to make sure i understand this correctly. is it -- do we currently anticipate that there will be a rule in place before the time of the statutory deadline on fraud adjustment -- fraud prevention and adjustment? >> it's unlikely we would be able to have one by april. up -- on probably end u the comments from this proposal, we would go back and proposed a specific fraud adjustment that would be better informed. >> you do not think that will be

done in a sufficiently expeditious fashion? >> i do not think so. >> there's been a bunch of litigation over the years, most of it, i think, antitrust on interchange fees. is there anything still pending, or have there been any recent decisions that will affect the economics of the industry against which our rule is going to be judged? >> there are still some cases pending in -- i do not know the current status of those cases. the cases out there are generally surrounding credit cards more than debit cards. credit-card interchange fees are generally higher. i do not think anything we're doing here in our proposal will have many ratifications for the existing lawsuits.

>> there was a recent department of justice settlement involving visa and mastercard that did the types of things rabin referred to earlier, in providing merchants more flexibility. that may also have the effect of the ability of merchants. >> thank you, mr. chairman. >> the governor raskin. >> thank you. want to talk about the functional similarities between checks.rd interchange fes and a great extent, a debit card is really just a plastic check. when somebody uses a debit card, it debits from the consumer's account at the bank. my reading of the statute, and i want to know if this is correct

, shows a purposeful analogy between the appropriate fees for a purchase with a debit card to that of a check. know that checks clear at par value. did you take this into account? alternatively, did you compare debit cards with features of alternative payment methods? >> we did take into consideration the similarities between debit card transactions and check transactions. this entered into our thought process in thinking about the allowable cost that an issuer should take into consideration in determining the maximum permissible interchange fee that they be able to receive. there are two considerations. one that you just mentioned on the similarity between checks and debit cards.

the other one that directed the board to distinguish between the incremental cost of the authorization, clearing, and settlement of a transaction, which we stood consider, and other costs which do not relate to specific debit card transactions that we should not consider. taking both those considerations into account, that is how we determine that we should probably limit the allowable costs just to those functions that were specifically mentioned in the statute. authorization, clearing, and settlement. as mark mentioned, we thought limiting that further to just authorization costs. in a check transaction, the

paying bank inccurs costs, but they do not get reimbursed from the merchants. since congress specifically asked us to consider that, we would include them in the allowable costs in the proposed rule. also looked at whether we should have a more expansive definition of allowable costs that would go beyond authorization, clearing, and settlement, and look at other costs that are specific to a transaction. costs that the act is silent on on whether we can take them into consideration. certain things, like costs associated with rewards programs, or the cost they incurred to handle cardholder inquiries. again, if they were to have been incurred in the check context,

the bank would not be able to get reimbursement of those costs. because of that, we did not put them into the bucket of costs that would be determined the maximum interchange fee. that is the with the comparison into consideration. >> thank you. >> thank you. are there any other questions? >> thank you. that was very helpful. what we have before us today is not the approval of final rule, but rather agreeing that we will take the proposal presented by the staff and issue it for further comment. after which there will be additional work ultimately resulting in a final rule. let me go around and take positions. vice chair?

>> i support issue in the proposed rule for comments. i would like to add my thanks to the staff for all of the thought and hard work that you put into preparing this very thoughtful proposal. >> thank you. i also support putting it forward for further comment. i think we should be bound by a couple principles. one is, we are looking for a dynamic competitive marketplace for payments broadly. recent evidence suggests we continue to see more convenience, more options, more choice for consumers. this is a development that our rule try to encourage. secondly, it's a new set of responsibilities for the federal reserve. likewise, vice chair yellen said, i really compliment the staff on bringing together a lot of analysis, a consumer oriented

knowledge in terms of how they will understand differences in these provisions, and legal knowledge. it's a new set of responsibilities for us. in part, because of that, we should be particularly keen to listen to comments and hear people's perspectives. finally, the other principle is that it's not our job to substitute our judgment for the judgment of congress. congress has given us some clarity on rules and we should try to adhere as best we can to it. with that, i support the proposal. i would be particularly interested in comments on whether there's a viable, more pro competitive alternative to setting prices. consistent again with the legislation. an understanding the impact of the post rule on the broad -- impact of the proposed rule on the broad set of choices.

>> i support the proposal and would like to add my compliments to staff. i think you've done an excellent job of identifying issues and posing the questions so we will get some very robust comments. thank you for the work you've already put into this. you have my sympathy for the work you have ahead of you. [laughter] >> thank you, mr. chairman. i support issue in the proposed rules, but echoing a bit of what governor warsh said. we need to be particularly open to comments. sometimes we are pretty convinced. i think that difficulties in implementing this legislation -- it suggests to me that we should be more than perhaps usually open to a variety of

comments on how to implement the final rule. with that, i'm happy to vote for this proposal. >> thank you. gov raskin. >> thank you. i believe it's critical the board moves forward on requesting comments for the proposed rule. i want to say a couple of things that have been brought out through this process. first, the interchange fee system is one that's pretty much hit in from consumers and the public. most people have no idea that interchange fees exist and that they're paying for services that they may not even use. as you have brought up, the interchange fee is charged by the issuing bank and paid by the merchant. the merchant, as you told us, will likely pass the fee to the consumer in the form of higher prices for the underlying product or service. as a result, it's likely that all consumers, whether or not they're using a debit card for their purchase, are paying more at the store because these

interchange fees are passed on to them. again, regardless of whether or not they're using the interchange fees for their purchase or not. in addition to potentially higher prices, the non transparent nature of the interchange fee suggests the interchange fees may or may not be in line with the costs to what the banks are offering. this process is an attempt to ascertain these cost and determine whether they are reasonable. more precisely, from the terms of the statute, whether they are reasonable and proportional. the process is intended to understand the nature of those costs and determine if they are reasonable, and require that the interchange fee be in line with those costs. what we have heard in other comments around the table is that this kind of regulatory intervention in which eight

regulator has to intervene in a market to better align pricing in costs is unusual. in my mind, the directive for this kind of intervention results from a market that is working less than competitively. from that perspective, i would note that the credit card issuing market has become significantly more concentrated over the past few years as numerous card issuers have emerged. the network, as we know, is also dominated by only a few -- in fact, two players. there appears to be substantial barriers to entry. these market features have had significant consequences for consumers. we know it is not the intent of the rule to do more than what congress has directed. it is worth noting that this kind of regulatory intervention will not be appellative to all the wrongs that may arisefinall,

as is the case of all regulation is the effectiveness of particular regulation depends in part on the ability to be complied with, and forced, and the diligent and care used in the enforcement effort. like all of the regulations, one regulation is adopted expectation is it will require enforcement by all of the applicable bank regulators. in other words, bank examiners will need to examine issuing banks for compliance with the final form of this regulation. supervisory and enforcement action for noncompliance would be expected to follow. thank you. >> thank you very much. again, this is a very complex area. within the parameters set by congress it is important that we do all that we can to preserve

the dynamism, competition, and innovation in payments that has been an important feature in that area for quite a long time, and at the same time, we should do all weekend to minimize the administrative and regulatory burden implied by these rules. with those injunctions, i think we can now take a vote to formally approve the issuance of this rule for public comment. may i have a motion? >> so moved. >> second. >> all in favor of approving this proposal for comment? >> aye. >> ne opposed. the motion passes. thank you to the staff, and the audience for your attention. >> president obama today is telephoning lawmakers to win

senate approval of a new arms pact with russia. the senate democratic leaders say they are getting votes won by one. deputy press secretary is saying the president is continuing to call senators as a preface for passage of the new start treaty before congress adjourns. it would cut nuclear arsenals by roughly one-third. today on the floor, the senate continues debate on the start treaty. revised agreement with russia to reduce nuclear arms. a number of amendments are pending. any changes could send the treaty back to negotiations with russia. you can see the debate live on c-span2. the house returns for legislative work tomorrow. they are waiting for the senate to act on temporary federal spending. congressional quarterly reporting the deal being considered now will increase spending over a billion dollars over the next four months. most agencies will see no increase. most existing funds will go to

veterans programs and low income heating assistance. also, continuing signs education programs. >> it is hard to get here and it is also hard to leave here. but all of us do leave, and the senate always continues. >> search for farewell speeches and hear from retiring members of both the senate and house on the c-span video library, with every c-span program since 1987. newark -- more than 160,000 hours -- >> coming up at 1:00 eastern live with a discussion on the health care law. the head of the white house office of health reform will begin a discussion on implementing the law. live coverage starts at 1:00 p.m. eastern. >> tonight on "the communicators," with the holiday season in full swing a discussion of the internet sales tax with scott pearson of the

streamline tales -- sales tax board and jerry cersale from the direct marketing association. >> discussion now on the wikileaks release of classified state department document. we will hear from a panel of former u.s. government officials. the heritage foundation here in washington is the host of this event. it is about an hour and half. >> good afternoon on the first wonderful snow we day in washington, d.c., and radio personalities are probably already hearing it is time to abandon cars now. we do welcome everyone to our auditorium and especially those joining us on our heritage.org website and those doing us on a future occasion on the c-span network. if we would ask everyone in the house to check that sell phones have been turned off as a courtesy to presenters and those recording the session and we will post the program later

today on our website for everyone's future reference. our internet viewers are always welcome to e-mail us with questions during the program or comments following. hosting the discussion is ambassador terry miller. he serves as director for center for international trade and economics. he directs the centers ongoing research into the role of free markets in international trade and fostering economic growth around the world. prior to joining heritage he was a diplomat and public servant. in 2006 president george w. bush appointed him as ambassador to the united nations economic and social council and before that was the. assistant secretary of state for economic and global issues. overseas he served in italy, france, barbados, and new zealand, including as head of the u.s. observer mission to unesco and also headed the u.s. the locations of the u.n.

conference of trade and development in 2004 and lead negotiator for the monterey consensus on financing for development. please join me in welcoming my colleague ambassador terry miller. [applause] >> thank you very much and let me join my welcome to all of you at the heritage foundation and those of you who braved the washington whether to join us here in person. as you will hear during our discussion, the fast and disclosure of a large amount of u.s. government classified information through wikileaks presents formidable challenges to our diplomatic, defense, and legal establishment. we are going to have to rethink what we communicate within the u.s. government and how we communicate. we are going to have to repair breaches of faith with farmers who shared information with us in the past, who will be more reluctant to do so in the

future. we are going to have to restore -- and this may be the hardest part of all -- our reputation for competence. first, i would like to say that this was a predictable and preventable occurrence. predictable because of the growth in both the quantity and the dissemination of the information of classified information throughout the u.s. government. a tens of thousands of people had access to this information, legitimate access to this information. unless you believe in a world without sen or error -- sin or error, you must be prepared for treason or treachery or, indeed, accidental disclosure. we always have traders -- traitors, always have accidents, but we can limit the damage that

they do. that brings me to the preventable part cared their -- part. there were massive failures in book design and management in our system that makes it susceptible to the kind of catastrophic failure represented by the wikileaks disclosures. the first failure of design in our system involves the erosion of hierarchy within our foreign- policy, defense, and intelligence establishment. the erosion of hierarchy, diffusion of power and responsibility, requires the same kind of increase and diffusion of information throughout the system. that leads to the violation of what is probably the most support the principle of secrecy, to limit the number of people who have access to the secret information. to be blunt, there are too many people in the loop.

the basic question that must be asked and emphasized his who has the need to know. those people, and no others, should have access to secret information. and with very few exceptions, access should be granted on a case by case basis, not general access to all issues at all times. the second principle is not to treat as secret that which is trivial or unemployment -- and important. we have communications systems and procedures in which it is to easy to classify information. far too much information gets classified as a result. things that don't need to be secret are treated as such. it leads to a certain casual tourists -- casualness in mind on what to white -- right and how to read it. the reaction of some of my foreign colleagues to the recent weeks has been, i can't believe you guys put that on paper.

well, i agree. we also have to many levels of secrecy. individuals classifying information for the u.s. government gets to ask themselves questions like, would this do just a little bit of harm if it is released or will it do massive amounts of harm? can it be released safely next year or in five years or never? we need to be asking one question only. is something a secret or not? if there is a compelling public reason to hide something from the general public. if so, then we need to hide it. don't make it available to thousands of people who may not understand its significance. finally, technical, systemic failures. u.s. government data runs primarily on closed systems

with loads of interaction, some technical, and some personal. we need to do a much better job in guarding those collections. the subject of the conference is the black eye to u.s. diplomacy from these leaks. fortunately, i don't think the reputation of u.s. diplomat has suffered much, at least not with the u.s. public, as a result of these disclosures. for the most part we found out that u.s. officials are saying the same things in private that they say in public. we have no conspiracy, no conceptions on the part of u.s. diplomats and senior officials. the same cannot be said for foreign officials. when we find them in some cases saying is very different things in private than they are saying in public. those revelations have caused

embarrassment and perhaps worse to those people. and they are certainly going to reduce the free -- free flow of information to u.s. diplomats in the future. about that flow of information. the first question i would ask is, who it was reading this material? most embassy reporting is read by a very small number of people in washington. for some embassies there may only been -- two or three people throughout the u.s. government that actually read and embassies cables. the material disclosed by wikileaks is probably getting far more attention now than it ever got in its initial formal distribution with and the u.s. government. the information that our senior decision makers need is not wrong data, not the thinly decide -- disguised gossip, but rather information and analysis

that has a direct bearing on our ability to defend ourselves. our interests, our diplomats, are still capable of providing such information and analysis, but it now floats in a sea of information of often uncertain provenance or meaning. we need much more attention to separating the wheat from the chaff and more of that attention needs to be in the field. the basic question before committing information to a communications channel should be, what value does that add to our understanding of any real issue? what are the government's interest or positions, or even the way a foreign individual or leader might act in a crisis? if the answer is, it doesn't add much, then it probably shouldn't be put in a cable were written in the first place in june or written in the first place.

as government expand and information becomes more diffuse, in exchange for analysis and judgment. there was a time in the state department when individuals were given substantial authority and held accountable for results. in today's greatly expanded state department, individual authority, responsibility, and accountability are all greatly reduced. and they have been replaced in part by bureaucracy. bureaucratic systems and processes. the wikileaks disclosures came about as a result of a breakdown within those bureaucratic procedures. given the size and complexity of the systems and information flows and questions, such breakdowns are inevitable. step one to be to reduce the size of the flow of information and the number of people who

have access to it, thereby reducing the risks when a disclosure does take place. i would like to close with just a few recommendations. first, i think we need to clamp down on the use of classification offered. we need to reeducate our employees and diplomats to the idea of working in an environment in which you can count on nothing being secret or secure. we need to train people to think before they write. we need to rethink the concepts that there are different levels of secrecy. something should either be secret or not. in handling secret material, we need to reinvigorate the concept of limiting access to those with a need to know. we need to redesign our systems to eliminate the nodes of connection between secret and non-secret channels of communication.

finally, we need to make it hard to classify information and also hard to access it. i am going to end with just one sort of extraneous thought almost. and that is, why do we save everything within the u.s. government? in my view we benefit greatly from a type of secret communication in which information is transmitted and then destroyed. the written equivalent in effect to an oral private conversation. i know historians and lawyers love a written record. and i understand that that can be useful when we have questions of accountability. but an obsessive devotion to archiving everything -- and that is what we do in the u.s. government now -- that obsessive devotion is increasingly debilitating to the actual

process of communication and will be even more so following the disclosures of wikileaks. we have put together an outstanding panel to discuss these issues in greater depth here this afternoon. and i want to introduce them to you now. lisa curtis, senior research fellow inheritance foundation's asian studies center, focusing on america's relations with india, pakistan, and other south asian countries. before joining heritage in august of 2006, lisa was a member of the professional staff of the senate foreign relations committee where she was in charge of south asia issues for then chairman senator lugar. she has also served as a white house-appointed senior adviser, analyst with the central intelligence agency and in the foreign service where she was assigned to embassies in pakistan and india. paul rosenzweig is a visiting

fellow at the center for legal and judicial studies and douglas and sarah allen center for foreign policy studies. founder of red branch consulting, providing legal and strategic advice on national security and privacy concerns to individuals, companies, and governments. from 2002 through 2005 paul was senior legal research fellow at the heritage foundation's center for legal and judicial studies where he specialized in civil liberties, national security, and criminal law. he has also served as deputy assistant secretary for policy in of the department of homeland security and acting assistant secretary for international affairs. last, cully stimson, senior legal fellow at the center for legal and judicial studies here at the heritage foundation. before joining heritage in 2007, he served as deputy

assistant secretary for defense or detainee affairs where he advised the secretary of one detainee issues worldwide, including guantanamo bay, iraq, and afghanistan. while at the pentagon he chaired the joint detainee coordinating committee and cochaired a defense senior leadership oversight committee. he has also served as an assistant u.s. attorney for the district of columbia and as a criminal prosecutor, defense attorney, and law professor. we are going to start with lisa curtis. >> thank you all for coming and braving this weather. ii spoke on it panel on wikileas about a month ago, which was approximately 10 days before this latest transe -- tranche cables was released. what is said about that cable --

about a war in afghanistan, released in july and then a few months later on afghanistan, is that most americans were already aware of the general thrust of the information released in the documents. i also noted, that the report to not necessarily the crown jewels of u.s. intelligence, meaning they did not contain the most highly guarded secrets on which tentative u.s. policy decisions are made. that said, the release of the reports, as the most recently released diplomatic cables clearly compromises u.s. national security. i want to differentiate between the afghanistan-iraq war cables that were released -- revealed u.s. battlefield techniques, ways of communicating intelligence gaps, all of this information that our enemy on

the ballot -- battlefield can exploit. and even groups like amnesty international faulted wikileaks for revealing the names of iraqi and afghan civilians who were cooperating with the coalition forces, highlighting that such recklessness put people's lives in jeopardy. also, with the previous releases of information, i noted that our allies called into question their willingness to share sensitive information with u.s. officials. unfortunately after this latest release of diplomatic cables i think this point would only be reinforced to them. while the release of the iraq and afghanistan war archives seem to indicate that julian assange had a strong anti-war agenda, and that he may be even hoped to spark a broad based and

time war movement in the u.s., the release of the diplomatic cables shows he has an even larger anti-u.s. agenda which involves sabotaging the ability of the u.s. government to conduct relations with foreign governments. and this is quite ironic sense it is the practice of international diplomacy, which allows nations to communicate effectively, to cooperate, to negotiate and, yes, even to avoid wars so it is a bit mind- boggling julian assange think he is doing the right thing by of ending u.s. diplomacy. it simply makes no sense. knowing is this -- no one is disagreeing with obvious need to be the to expose government corruption and even misguided policies. but this sort of non discretionary massive dumping of classified information on to the internet is not the way to go about it. since the reports were only recently released about two

weeks ago and only about 2000 of the apparently quarter of a million reports that they intend to release have actually been posted on wikileaks, we cannot yet predict what the full impact of this situation. will be. the media has reported some countries are already limited the number of american diplomats who can attend meetings and not allow diplomats to take notes. yet other embassies seem to have not experienced any changes regarding their interaction with foreign government officials. so, the impact is likely to be felt it differently in different countries. secretary clinton went to great lengths to make clear that the opinion expressed in many of these cables do not affect official -- reflect official u.s. policy is pretty simple spot field reporting, from officials in the field. and interestingly, some of the commentary in the u.s. media

noted how professional, balanced, and well written many of the cables are, which means the release of the cables may have actually lifted the opinions of some about the work of diplomats. i think people often think of diplomats as attending parties, signing treaties, however, these cables revealed the diplomats are working very hard, often under difficult -- difficult circumstances and with difficult partners, to achieve very worthy goals like keeping nuclear weapons out of the hands of terrorists on the one end, to reducing conflicts, and even promoting democracy and human rights. every government -- not just the u.s. -- requires the ability to have protected conversations with both foreign officials and human rights activists, democracy workers, and journalists. this is the bread and butter of the diplomatic service. because of the wikileaks fiasco, people will simply not trust their american counterparts or be willing to share information that helps

solve many of these global problems. there is also concern about the safety and security of the foreign service nationals -- the local nationals of the host country who work in the embassy, they help set up meetings, they gathered information, so they are often reference and the diplomatic cables. so, they -- there are some concern about their safety because they're living in these countries. i agree with terry that the wikileaks phenomenon is likely to create a shift back to more traditional policies of sharing information on a strict need to know basis. there is likely to be a backlash against the concept of a broad information sharing which we have seen in the post 9/11 world and both of the intelligence and foreign policy- making community. twith regards to interagency

information sharing, we are now in the post wikileaks world. hopefully the barn door will not be completely shut down because clearly breaking down barriers to information sharing has helped secure the u.s. homeland. so, my hope is that people use discretion. certainly there will have to be more scrutiny in deciding who gets access to information, and terry explained very well walt -- why that is the case. but at the same time i think we have all benefited from increased information sharing when it comes specifically to threats to the homeland. it is clearly a balancing act we have here. my specialty is in south asia so i focus particularly on the impact of u.s. policy in south asia. there have been some interesting developments. one was the reporting of faked wikileaks in pakistan for propaganda against india. a pakistani news agency fabricated a report that said

there were cables reporting on india meddling in pakistan. when it was learned that this was indeed a complete fabrication, the newspapers that ran the story were forced to apologize to of their readership to maintain credibility. the on-line news agency itself said it regretted the release of the story, and it noted the consequent erosion of public credibility. but i think this was a rather bizarre case and not likely to happen again. wikileaks, when it comes to the diplomatic cables, are most helpful when they involve sensitive relations like the one for between the u.s. and pakistan. interestingly, i think the pakistan cables, but, ever present a case in which people, the public can see how complicated and difficult it is

to pursue diplomacy in the country in which the leadership is so for a grant -- fragmented. this is the kind of thing people know already pared people but seeing it in black and white i think certainly brings the issue home. another interesting point is some pakistani commentators have even pointed out that wikileaks show that the americans really don't have such awful intentions toward their country. and that perhaps the pakistani media needs to cut its bombastic and the american government. one writer wrote -- and i am quoting -- wikileaks provided the pakistani nation another chance to reconsider and revisit so many disconnects that the holes between the realities and its perceptions -- it holds between the realities and perceptions the way the world is shaped. not saying the wikileaks will contribute to a lessening anti- americanism in pakistan. i am merely noting that the impact of wikileaks has been

unpredictable in some cases. so, in conclusion, i doubt julian assange will be perceived by most americans as a hero. i, for one, certainly cannot think he should receive the time person of the year award. i think many americans view him as someone who does not have best interest of the american people at heart. and is playing fast and loose with u.s. national security. thank you. >> thank you, lisa. >> good afternoon. i join my co-panelist for thinking you for braving the weather in washington and to come out and listen to what. my goal for functional the panel is to talk a little bit about wikileaks from a cybersecurity- internet architectural perspective. i confess at the outset that that leads me to some places that are a little different from where i think terry and lisa are in terms of their thoughts about

the way going forward. to my mind, the fundamental take away lesson from we deletes -- wikileaks is the death of secrecy is inevitable. or, to put it any more technological frame, the half- life of secrets is a decreasing as we go forward. it is not to say that there will not be secrets in the world and had a bus. -- ahead of us. as long as their value in secrecy and information there are incentives for people to maintain it. but the virtue of the internet, the major virtue, is that it serves as an open architecture for the conveying of information at a distance, almost instantaneously. it has produced all of the good things we have come to expect in our lives, whether purchasing

and amazon or the facebook phenomenon. but because of the unique open architecture nature of the internet, it is inevitable that it is as readily usable by those who would do malfeasance things then it is -- as it is for those who would make good. that is true whether it is cyber criminals seeking to steal identity or money, or people like assange, who seek to use it to destroy some of the fundamental purposes of american diplomacy and national security. with that as kind of the background to what i see as the absolute reality, that no amount of american policy making or any countries policy-making will change, what lessons about cybersecurity or keeping secrets within that context though i think we can learn from the wikileaks?

for may, the first and foremost lesson is one that everybody in the cyber domain tends to forget, which is that most of the problem is with human factors, which is to say, notwithstanding the fact that we live in the world and which there are espionage attacks from outside the system or bombs, things external to the system, often, indeed most of the time, the threats to the security systems, information assurances to the data but you are holding our from insiders. i thereby mistake -- as when people -- either by mistake, mistakenly giving someone a password, or in the case at hand, if reports are to be believed -- and i would hasten to add that i will assume the the truth of public reports about how the cables were exfiltrated by pfc manning,

although he has been charged but not convicted so entitled to a presumption of innocence -- but if it is accurate, and insider -- until we outlaw sin, we will experience. a set of thing we can take away from an event like this is we need to do a better job of security vetting. pretty simple. we need to define who gets access. i'm not sure it means we need to cut that on a number of people who have access as much as we need to make sure people who are granted access to america's secrets are deserving. and more important, on one -- one of the lessons that i think get lost all too often in the security realm is the need for continuous betting, which is to say that, as i understand, there are indications in a person's

past that might have indicated that as time goes on, private manning was growing more frustrated with his life in the army, there would of been indicators of a change in attitude. so one of the pieces we want to deal with is not just granting people access but i constant vetting of who gets access over time. the second piece that i think we assuredly need to learn from this is that america needs to upgrade the systems assurance utilities of the programs. we have a system that does not alerts -- alert of the downloading of 250,000 files at the time is remarkable. granted, it is not like you can flip a light switch and assistance upgrade to all dod systems worldwide overnight.

you cannot. i certainly understand it is a process that certainly needs to be paid for and ruled out any way that does not interfere with ongoing operations -- it needs to be debated tested, all that sort. at the same time, that is a commonplace of an operating systems of major companies throughout the united states and throughout the world. when people who have access to the system engage in an unusual pattern of downloading excessive information, it trips and alarm and somebody has a security function that needs to be alarmed. likewise, with an american systems there needs to be, ought to be, programs that monitor unusual patterns of access to information. it makes to make perfect sense that a private in an intelligence unit in iraq might need access to cables that are derived from the iraqi embassy.

there might be a well of information. you could say, yes, as well to iran, afghanistan, jordan, israel, saudi arabia -- but when he is accessing information in cables from holland or venezuela or mexico or north korea, to cite a whole host of cable traffic that has been apparently been accessed or released, that suggests somebody engaging in a pattern of activity that is outside the zone of the types of things what -- one would expect from a person in that situation. again, it is not trivial to design alerts that monitor that kind of information access and provide that kind of analysis, patterns of activity with people -- of people with access to the system. at the same time, it is not impossible. indeed, it is also the type of system in place in many companies in the united states,

some of our more highly classified regimes in u.s. government agencies. so that is a perfectly reasonable expectation, i think. i would, i think, disagreeing y with -- disagree gentlin some of what terry said about a third possibility -- that we need to clamp down on information sharing and go back to a need to know mechanism, and as well that we need to start limiting the amount of information that we collect, exercising some filtering before information becomes part of the collection of u.s. data. i think that that would be the wrong way to go. for one thing, i think the lesson we've learned from 9/11 is that we need to really break down the need to know paradigm and make it need to share paradigm.

that is the most effective way of breaking down silos and coordinating information amongst u.s. government agencies for counter-terrorism purposes and counter insurgency purposes. i would be reluctant to welcome back the idea of a need to know kind of paradigm because it is inevitably in a u.s. government or agencies protect jealously, that would be seen as a signal to a return to pre 9/11 mode of not sharing. i would not go in that direction. the other piece is, the thing that we learn not just on 9/11 but from all forms of kind of internet data aggregation and analysis that occurred in the last 20 years is that you never know what the relevant factoid is going to be to a piece of analysis going forward. you should not be editing

ourselves at the front end and purging from our data set, things that we cannot possibly know might well be relevant going down the line. what we have in the internet is a system with a much greater capacity for data integration and analysis that we have ever had in the past. this system allowed us to discover new patterns of human activity, whether social activity on facebook or criminal activity in bank fraud or terrorist activity or patterns of activity among insurgents in iraq. that comes not by limiting data at the intake, the front end, but rather using better analytical tools for assessing the significance of data in the midst of the process. never knowing what the right

piece of data will be in the end -- who would have known, who would have known that the travel patterns to afghanistan of david heddly before 9/11 would be relevant and post 9/11 investigation. we would not have. we might well have discarded that information. now we have a much better sense that we can know in advance what the necessary connections are going to be paired on that one little piece i might diverge from my colleagues on the panel and say the promise of a debt aggregation and analytics is not met by cutting back on sharing and data intake but better met, the threats of wikileaks are better met by ensuring that only the right people have access to the data and ensuring that people inside the system r

monitor. one of the things people say about the internet is everybody lost their privacy on it. that is not necessarily -- the one set of people would should lose all of their privacy our system users inside the u.s. government's secret and top secret networks. i think i have done my 10 minutes. >> thanks allot, paul. cully? >> thank you, terry, for hosting this and i am certainly delighted to be here with lisa and paul and i welcome you hardy souls that braved the whopping 1 inch of snow. in washington, one flight -- flake turns into gridlock on the roads. my task is to discuss the legal parameters, namely whether or not the assange or wikileaks or both could be held criminally liable. i would say at the outset that

because i am a commander in the united states navy reserves, i am under order by the secretary of defense not to read the wikileaks lakes. i have not. so, my remarks are based more generally on the law as i know it, and certain reporting about what has been leaked. >> thank you for making that clear -- >> because of his security clearance, in his capacity as a business owner. wikileaks -- intentional dissemination of hundreds of thousands of war-related classified and sensitive u.s. cables while our country is engaged in armed conflict in at two theaters of war, two theaters of operation, has no doubt, as you all know, opened a vigorous debate about whether wikileaks or its founder, julian assange, can or should be held criminally liable. some see a signed as a -- julia

or spy -- buttor a traitor is someone who is a citizen -- or other applicable laws which have been debated in the blogs, the legal blogs. others, what would characterize more as a smaller group, perhaps a french, c. wikileaks and julian assange as a hero -- perhaps fringe -- see wikileaks and julian assange as a hero. a certain do not subscribe to the second category. there is no doubt in my mind from the various positions i

have held that the information disseminated by wikileaks has damaged our national security but i would associate myself with all of the panelists remarks, but specifically the concerns that lease at an elegantly laid out and talked about in the past. it certainly harmed our diplomatic efforts. imagine if you are deployed in an embassy somewhere, certainly in the middle east or in a sensitive area, and your job, among other things, was to report back on the day-to-day happenings are around you. you would take a pause. it is your natural instinct in terms of carrying out your function and supporting exactly what you are seeing, given this disclosure. no doubt it because of the negative collateral consequences to the united states and allies, some of which we probably have not encountered yet thought

through and have not yet become obvious to us. i believe the primary beneficiary of wikileaks is the enemy. however you want to define it. on the ground -- taliban, al qaeda, and those associated, but those who want to see the degradation of the united states -- united states be harmed in the eyes of the world. that scene -- being said, this saga, which i believe will continue, because as we all read, wikileaks has not only promised to disseminate more information but, as according to what i have read, pushed out there information to various co- conspirators so that if something bad happens to assange, they would push out the information.

this saga of highlights the natural act for boys and a free society -- as my old boss testified in from the judiciary committee, on one hand you have protecting government secrets and the other hand you have a pull the first amendment protections for the press, unquote. whether wikileaks is a traditional media outlet i think is certainly open to debate. but there can be no doubt that if julian assange were prosecuted in the united states, that they would claim and wrap themselves in protection of the first amendment, saying they are a media outlet, however broadly defined. begin our legal analysis with a known and unknown -- known and then murkier

territory. as we all known the army has charged private first class bradley manning for, among other things, willfully delivering delivering class might of the nation to those not authorized to receive it. according to this report he provided the information to wikileaks. i have a copy of the charge seat -- charge sheet. somewhat familiar with it as a navy jag. as paul rightly pointed out, bradley manning is presumed innocent unless and until he is proved guilty by evidence beyond a reasonable doubt and he enjoys that resumption of innocence. but what about julian assange and wikileaks? the fact that manning can be prosecuted is not in doubt -- he is a service member on active

duty at the time he allegedly committed the act -- he will be prosecuted. how it turns out, nobody knows how the case will turn out. but the assange, former national, wikileaks, non- registered entity not registered in the united states, can it be prosecuted? before we try to peel back, let's put some indisputable facts on the table. first, it is a given -- and i think my colleagues that have touched on this quite well but i want to talk about it in a legal context -- it is a given that there is and has been for some time over classification of information in our government. no doubt about it. when i was deputy assistant secretary -- you have your regular unclassified computer screen and then you have your classified. when you get ready to use that -- i am sure it happens to you,

ambassador -- you have your screen right here. when you wanted to send it e- mail over the cpr given you had no choice to classify it one way or another and you alone made the decision. it was not black and white. you decided based on your training and experience how to classify it. i have no doubt some of things i'd thought of gone on that net may have been on further inflection should have been on the regular internet. i don't know. but that is neither here nor there. that said, it is not necessarily a legal problem, over classification, it is a policy challenge. and the fact that we over classified information is a dubious legal defense for manning, or anyone else impact -- properly charged with illegal collection or dissemination of classified information. two, some, including paul and me and others, have argued congress may find it necessary in this

age of internet can and instant communication to update the text and not act. -- espionage act. our recent brief and hopefully helpful web memo is available outside, updating -- covering prior conduct unless charge what we talk about of the paper, continuing course of conduct, which may be a stretch. it may work and it may not. focus a look at more closely on the espionage act, because i want to think through and hear the language because the language matters, before i wrap up my thoughts. the act -- remember, it was a 1917 act that has been updated over the years. the crux of the act says " whoever for the purpose of obtaining information

respecting national defence, with intent or reason to believe the information is to be used to the injury of the united states, receives, obtains, or times to receive or tabor and person is guilty of espionage." now, congress today continued this a debate about whether the act really encompasses all of the right language for this age that we live in. but i would cautious congress not to rush to amend the espionage act without knowing all the facts in this case. facts i suspect even our own department of justice is still gathering. as the saying goes, bad facts make bad law and i would say incomplete facts make bad law as well. and i would reserve rushing to a legal judgment as the stakes in this case are too high. let me illustrate why i say that. many politick -- commentators and politicians, including

senator dianne feinstein, concluded the espionage case against julian assange is clear cut and dried. they have said so in there is publications. other folks like former bush administration olc attorney jack goldsmith are not so sure. why are so angry at julian assange for allegedly violating the has been that act and not just as an irked by "the new york times" for not publishing the same classified inflammation or not as angry and intent of getting bob woodward for the classified information he solicited and then published pick in his recent book "obama's wars." what is the difference? prosecuting assange for classified information from manning, if that is how he got it, and publishing it is not much different from a newspaper

reporter or author soliciting class by the burmese and from a source and then publishing it, so goes the argument. -- classified information from a source and a publishing it. this is the argument against prosecuting julian assange for violation of espionage act. but rather than engage in to the rest -- a rush of legal judgment, allow me to suggest a way forward. this is where i will conclude. it seems to me -- and maybe i'm old-fashioned -- that there is simply no substitute for a thorough and penetrating an exhaustive investigation into all the facts and circumstances are around this entire affair. in my experience in this type of investigation takes a long time and oftentimes it cannot be accomplished without the use of a grand jury and subpoena power. because of these exact concerns regarding first amendment

protections for the media, however broadly defined, and the department of justice, our top prosecutor, has internal rules for press related cases and those rules, i would argue, serve a vital interest which, in the long run, -- freedom of the press. those facts, once developed, may lead prosecutors to conclude any number of statutes may be violated, that may or may not include espionage or solicitation or obstruction of justice or conspiracy. they may conclude, however, there may be senate -- no way of prosecuting him under current law. thank you. >> thank you very much, cully. now it is your turn in the audience to ask questions of the panelists and make comments as you see fit. if you have a question or comments, please, raise your hand and wait until we bring you a microphone so that our

participants that are on line or in the media watching us can also hear your question and, please, also identify yourself and ask your question. >> the voice of america. you talked about the perception in, for example, pakistan, how people after the leak would deal with the united states. if the view of the people has been changed or impacted. there are a lot of conspiracies and pakistan, as you know, about a lot of things. one of the conspiracies that people have been talking about is united states trying to get a hold of the nuclear weapons, taking control. and one of the cables -- cables

actually strengthened the conspiracy because back his is what happened. the united states trying to take out particular nuclear material from a research lab. and i think it strengthen peoples' view of the united states, this conspiracy that the united states wants to take control of the nuclear weapons of pakistan. how would you counter that? you talk about different aspects. the majestic clarified, i am not with the u.s. government -- >> just to clarify, i am not with the u.s. government any more site not under those restrictions -- but in the public realm, and against the fact that these wikileaks tables have been released, i am not going to certainly my information or exploit it or

take advantage of it. but at the same time, i am commenting on some new things that make it into the south asia press. so, i am familiar with the cable that you raised. i would say that i think you are rights, i think it has reinforced skepticism from a large part of the pakistani public on the nuclear issue. that is a particularly sensitive issue for pakistanis. unfortunately, i think the u.s. media has said some of the suspicion. unfortunately i think there has been a lot of hype surrounding this issue. i would look at it as a low probability/high risk scenario of terrorist actually accessing pakistani nuclear weapons. it is something that we have to pay attention to, but at the same time it is not as if taliban elements are going to take over -- and all of a sudden

have their finger on the button. i think the threat is more insidious threat, that gradually over time people with sympathies with some of these militant groups would gain access overtime to technology in -- and these issues. but that said, the cable in question talked very much about cooperation. there is nothing said about the u.s. trying to steal the uranium. it is a negotiation that is taking place between the u.s. government and the pakistan government about safeguarding pakistan that a nuclear assets. -- pakistan's nuclear assets. unfortunately i think the reality is it would reinforce concerns within pakistan that the u.s. is trying to denuclearize pakistan but i think if you really read it closely, it is a