a chance to make the most of their god-given potential. now, the good news is we know what works. we can see it in schools and communities across the country every day. we see it in a place like bruce randolph school in denver. this was rated one of the worst schools in colorado three years ago but last may graduated 97 percent of its seniors. and by the way, most of them are the first in their family to go to college. we can see it in mastery charter school in philadelphia, where four times as many students are proficient in math, and violence is down 80 percent compared to just a few years ago. and of course, we can see it right here at miami central.

a little more than a decade ago, when the state exams started, miami central scored a d in each of its first five years. then it scored an f in each of the five years after that. halls were literally littered with garbage. one of the buildings here was called the fish bowl because it was always flooded. in one survey, only a third of all students said they felt safe at school. think about that -- only a third. today, mrs. turner, all the outstanding

students here, all the students here, you've put those days behind you. you've put those days behind you. i mean, i know that -- i know you still face challenges. i know you still face challenges, things aren't perfect. but over the past five years, you started to excel academically. performance has skyrocketed by more than 60 percent in math, about 40 percent in writing. graduation rates went from 36 percent -- now they're at 63

percent. and i expect them to be at 100 percent. you are proving the naysayers wrong -- you are proving that progress is possible. it's possible because of your principal, it's possible because of all the great teachers that are going above and beyond for their students, including the teach for america corps members who are here today. we're proud of them. to all of the teachers here, i

hope you will stay with the miami central family as long as you can -- because this community has already benefited so much from your teaching and your mentorship and your dedication. you know, i was reading the other day an article -- this is just a couple days ago -- in the new york times about how teachers were just feeling beat up, just not feeling as if folks understood how much work went into teaching and how dedicated they were to the success of their students. and so i want to be very clear here. we are proud of what you guys do each and every day. we are proud of what you do each and every day. we need to honor teachers. >> yes. >> countries that are successful right now academically, typically teachers are considered one of the top professions. now, let's face it, i mean, we also have to make sure there's accountability for our schools.

and turning things around here meant replacing a principal and replacing some teachers. and that's tough work. it shouldn't be undertaken lightly. but your school did it the right way -- with a process that even had the support of teachers and their local unions, because you recognized that partnership among teachers and school administrators and the community, that's the path to reform. it isn't easy. but i want to thank the school board and the superintendent and the union for working together to do the right thing for your students. you guys deserve a lot of congratulations. we appreciate you. progress has also been possible

thanks to math and science coaches, and extra learning time in after-school, and saturday school, and summer school. i didn't get as much applause about that. but it's good for you guys to get more learning and be in the classroom more. you still have time for the video games. you guys never catch a break -- you don't even get snow days down here, do you? and you've got a technology program here that's preparing kids for the manufacturing jobs of tomorrow. i saw some of the work that was

doing -- that they were doing in this lab. it was outstanding stuff. and it matched up with -- when i go to factories all across america, you can't work on a factory floor today if you don't have training in computers and you have basic math skills and understand technology. those are the jobs of tomorrow. you've got an entrepreneurship program that's helping students start their own businesses. and you have mentors from the local business community. you've set up a parent academy to make sure parents are meaningfully engaged in their children's education -- because you can't expect the schools to do everything, parents have to step up, too, and set high expectations. i say this wherever i go -- when i hear people complaining about the schools, nothing we do at school will make a difference unless all of us parents step up at home -- and instill in our kids the self-confidence, but also self-discipline, and a work ethic that -- a work ethic that's at the heart of success in school and in life. school is not supposed to be

easy. nothing worthwhile is easy. nothing worthwhile is easy. i mean, the football players understand that. i know training to be state champs can't be easy. but why is it sometimes we think -- we expect people to be working out hard on the football field, and then suddenly everybody is surprised when you've got to work out hard in the math lab. same principle applies. you've got to work hard to achieve your goals. so outstanding teachers and principals, a common mission, a culture of high expectations - that's what it takes to turn a school around. that's what accounts for progress here at miami central. and that's why we are going to support you with what we call school improvement grants. you're one of nearly a thousand schools across america that we're helping turn around by

spurring reform from the bottom up. the bottom up. and the approach that we're taking with school improvement grants and school turnarounds is the same approach that we're taking on all our education reform efforts. the idea is very simple. instead of pouring money into a broken system, we launched a competition that we call race to the top. and it basically says to states:prove that you are serious about reform. we said to all 50 states, if you show the most innovative plans for improving teacher quality and student achievement, boosting low-performing schools, then we'll show you the money. and for less than 1 percent of what we spend on education each year, race to the top has led 40 states to raise their standards for teaching and learning. and those standards weren't

developed by bureaucrats in washington, republican and democratic governors across the country developed these reforms. that's the kind of bottom-up approach that we need to follow. we want to work with congress this year to fix the current education law and make sure that it focuses on responsibility and reform and results. and because we know the single most important factor in a student's success from the moment they step into school is the person standing in front of the classroom, we want to recruit and prepare a new generation of teachers, including 100,000 new math and

science teachers over the next decade. we've got to get them in the classroom. with all of these steps, i am confident that by 2020, america will once again have the highest proportion of college graduates in the world. that's our goal. that's our goal. that's how we'll out-educate other countries. that's how we'll out-compete with other countries tomorrow. that's how we'll win the future for the united states of america. so i'm going to keep the pressure on everybody in washington. i know jeb and superintendent and everybody here, you're going to stay focused on students in the sunshine state. and i know that ms. turner, she's not going to let up until miami central goes from that f- grade all the way up to an a- grade. ms. turner means business. mrs. turner means business. you know, she has that nice

pretty smile, and she's all quiet. but you can tell she's like, "no, don't mess with me." that's right. of course, ultimately, ms. turner, she'd say for herself she's not the only reason miami central has been making progress, she's not the only reason you're turning this school around. the most important reason is you, the students here at miami central. a few years ago, when it looked like the state might have to shut down miami central, the students took matters into their own hands. you took control of your own destiny. you said some things that are worth repeating. here are some of the things that students said:

"we're going to do more than pass the [state] test. we're going to kill it." quote -- "i don't want my school to close. we can't let that happen." "we really, really tried hard this year. we don't give up." "if we were going to get through this successfully, we've got to come together as a student body." so that's what you guys did. you came together as a student body. you didn't give up. and that's why i'm going to be leaving here so full of hope. i'm full of hope about miami central's future, i'm full of hope about america's future, because i'm full of hope about

your future. and, rockets, if you keep on reaching for success, and show the same passion, the same determination, the same hard work, the same devotion to excellence as you do, i'm confident we're not only going to lift up our schools, we will produce the best-educated people in the world, our economy will grow, our country will prosper, and a new and better day will come for the american people. thank you, everybody. god bless you. god bless the united states of america. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

washington journal continues host: unemployment right now at 8.9% down from a high of 9% what does this tell you about the economy. in february, slightly better than the forecast. ee con midst consider full

employment. we have a way to go to heal. slightly less? slightly more? we are seeing a little bit of growth in construction and manufacturing the state and local jobs as i'm sure your listeners know quite well. we saw 30,000 jobs lost in february in the state and local governments please call in

we had private survey reports polling for factory owners and service companies does it look positive? adp gave us a positive report on wednesday given that, expectations were quite high. looking for more like 240,000, 250,000 jobs i don't have the

exact figure in front of me encouraging businesses to spend some of the cash stockpiled in this economy we are starting to see strong gains in business investment showing up as well. we know a couple of years ago, some of t

>> now and others cite a hearing on the relief program. now the argument. them president obama talks with miami high school students about the importance of education. >> tomato paste -- tomorrow, they talk about the latest unemployment figures and his predictions on job growth this year. michael leroy looks at negotiations. meghan mccarthy talks about the trouble between the executive branch and state governors over the status and medicaid.

>> wi-fi more and more of the behavior -- i find more and more the behavior of sports owners to be there. the 100 million some dollars. >> remarks came during the final public hearing when the overall impact of the target program. they are due to issue their final report later this month.

let's take a moment to imagine that the challenges could be far worse. many lost their jobs in just two months. the highest financial institutions were beginning to

topple like dominoes. it is fair to describe this in there as dire. yet, that is precisely these in their that faced our economy in late 2008 around the time congress passed t.a.r.p. into law. today, the panic of 2008 is a slowly fading memory, and t.a.r.p. played a role in turning that grim chapter in american history. or all of its programs successful? not that a long shot. even so, any hearing on t.a.r.p. should begin by recognizing its greatest success, that in a moment of financial panic, it helped to pull our market back from the abyss. despite this accomplishment, the t.a.r.p. remains deeply despised by the american public. most of the anger is understandable, as the program is viewed for having done far more than -- for wall street

than average americans. some of the unpopularity is due to misunderstandings about its track record. a recent bloomberg poll hits the point in terms of anecdotal evidence. 60% of americans believe most of the t.a.r.p. money provided by banks will be lost. 33% believe most of the money will be recovered. many of t.a.r.p.'s greatest spectacle -- skeptics first were shocked at the price tag, $700 billion. the amount congress approved a bailout the financial system. what they may not know is that the congressional budget office today estimates that t.a.r.p. will lose $25 billion. best, that is a sum of money, but it is far less than anyone expected. the news is not all good. most starkly, the t.a.r.p. has

fallen short of its efforts to help home owners stay in their homes. the president first announced the goals of t.a.r.p. to prevent 3 million foreclosures. it is no wonder then that many americans view the t.a.r.p. as a program designed for wall street ceo's rather than home owners. it would be a mistake to account for just a taxpayer dollars lost. the program has a far more greater cost, moral hazard. that lingering belief that america's biggest banks are too big to fail and the rules apply to everyone else in america do not apply to them. this belief continue to distort our financial markets, advantaging the largest banks on wall street, while disadvantaging everyone else in the country. the cost of moral hazard is not easily quantifiable, but it is real and reprehensible. today's hearing consists of

three panelists. first we are joined by acting assistant secretary who currently manages all t.a.r.p. programs for the department of treasury. i particularly hope that you will share with us your lessons learned after working with the t.a.r.p. for over two years. what can our nation learned from this ugly experience and how can we prevent it from ever happening again? our second panel includes witnesses from the fdic, fha, and federal reserve. these offices played a critical role during the crisis, often coordinating with additional t.a.r.p. programs. i hope these witnesses will help us place t.a.r.p. in its proper place. finally, we will be joined by four of the country's leading economists, who bring exceptional credentials to scrutinizing t.a.r.p. and it's a

fax. i look for to hear your views. all of our with this testimony will provide material support for the oversight hearing. the report will be issued to congress and the public later this month. before we proceed, i would like to hear from my colleagues. >> thank you, senator coughlin. welcome to our distinguished witnesses. although the congressional budget office has recently estimated the cost of t.a.r.p. is down only to $25 billion, such metrics should not serve as a sole determinant of success or failure of the program. we should remain mindful that the overall contribution of the rest to the u.s. economy was relatively modest, when considered with the hundred dollar -- million -- multimillion hundred dollar bailout of fannie mae and freddie mac. the trillion dollar intervention

of the federal reserve and fdic, as well as the impeccable experts. it is particularly difficult to label t.a.r.p. or any other government-bonds a program aimed at an unqualified success when the unemployment rate hovers around 9%, the combined unemployment and underemployment rate equals 16%, and millions of american families are struggling to escape foreclosure. it is of cold comfort to these families that the too big to fail financial institutions aided by the t.a.r.p. and other generous below market rate government bonds of programs are reporting a near-record earnings. to this day, t.a.r.p. carries a substantial stigma with the residents of main street should come with little surprise. the professor and i noted in our views in september's oversight

report that the payments to t.a.r.p. recipients advanced on the program is a misleading measure of the effectiveness of t.a.r.p., and therefore should not serve as the standard by which the top -- t.a.r.p. is judged. the bailout by fannie mae and freddie mac's in the purchase of $1.25 trillion of gse- guaranteed mortgage-backed securities in the secondary market by the federal reserve under its first quantitative easing program no debt materially benefited the t.a.r.p. recipients and other financial institutions. these institutions were not required to share the cost incurred in the bailout of the gse's. in effect, the bailout of fannie mae and freddie mac permitted t.a.r.p. recipients to monetize their gse guaranteed prices above what they would have received without the guarantees and used the proceeds to pay their obligations outstanding

and under t.a.r.p.. there by arguably shifting a greater portion of the t.a.r.p. from the recipients themselves, to the taxpayers. costs such as this should be thoroughly considered when evaluating the t.a.r.p. after reflecting upon the analysis conducted by the panel, its individual members and panel staff over the past two years, it is all but clear that the success or failure of the t.a.r.p. remains an open question, and that neither a favorable adjustment to the subsidy rate, nor repayment of the t.a.r.p. funds buy some recipients tells the entire story. it is critical to note although t.a.r.p. played a need for role in the rescue of the u.s. economy, during the closing days of 2008, its enduring legacy may have been to codify the guarantees of the too big to fail, notwithstanding the moral hazard risk arising from such action. the t.a.r.p. reinforced the

bailout cycle, as the government's preferred business model. along these lines, the panel offered the following observations in its june 2010 reports on the aig bailout. "the government possible actions in rescuing a.i.g. continue to have a poisonous effect on the marketplace. by providing a complete rescue with no shared sacrifice among a.i.g. creditors, the federal reserve and treasury fundamentally changed the relationship between the government and the country's most sophisticated financial players. the a.i.g. rescue demonstrated that treasury and the federal reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of america's largest financial institutions and to insure repayment to the creditors doing business with them." so long as this remains, the worst effects of a.i.g.'s rescue on the marketplace will linger.

likewise, in the january 2011 report on the rescue of general motors and chrysler, the panel noted, "treasury is now on court to recover the majority of its automotive investments within the next few years, but the impact of the actions will reverberate for much longer. treasury's rescue suggest any sufficiently large american corp., even if not a bank, may be considered too big to fail, creating a risk that moral hazard will in fact the economy far beyond the financial system. further, the fact the government help absorb the consequences of their failures has put more competently managed institutions at a disadvantage. for these reasons, the effects of treasury's interventions will linger long after the taxpayers have sold their last shares of stock of the automotive industry.

in closing, it is important to consider the reasons underlined in the distinct and popularity and stigma associated with t.a.r.p. that the t.a.r.p. help to rescue the economy from collapse in the closing days of 2008 should not have served as a basis for the public outrage and scoring that shadows the program to this day. from my perspective, the public rejected a program because hundreds of often-ill managed financial and other institutions, and their shareholders and officers, received taxpayer funded bailout as well as other subsidies from the treasury, federal reserve, fdic, on remarkably favorable terms. many senior officers of these institutions retain their lucrative employment, and although they suffered meaningful dilution, the shareholders of most t.a.r.p. recipients were not wiped out.

the public intuitively recognize that such policies were an wherema anin an economy investors retain their business profits without question, but are accordingly expected to bear the full losses with transparency and accountability, and without subsidy. main street quickly realized t.a.r.p. was heavily tilted in favor of wall street, while main street was that with unemployment, neighborhoods decimated by foreclosure, banks that refused to lend, and the general sense that the residents were left on the run." thank you. i look forward to the discussion. >> thank you, mr. chairman. good morning. this is the last hearing of the congressional oversight panel. i would like to express my gratitude to senate majority harry reid, minority leader nancy pelosi, for giving me the

opportunity to serve my country. i would also like to express my profound gratitude to our chair and elizabeth warren for their leadership on our panel. also, to my staff. in particular, my staff director, for all they have done in the past 2.5 years to make our panel a success. finally, i want to thank my fellow panel members. we have worked together as a team in a manner that is tragically rare in our national politics today and i am honored to have been a part of that. today, we hear from acting assistant secretary timothy masson, from representatives of the key agencies but worked together on restoring financial stability, and from some of the world's leading economists and experts on financial crises. while i am grateful to our witnesses for joining us today, i want to know, that over the past two and a half years, we

have benefited from the assistance of professor masson, stieglitz, and johnson, and it is fitting that they should be with us today. before i conclude my remarks, it is important i unclear about mike final conclusions about the t.a.r.p. program. one, i believe t.a.r.p., through initial investments and large banks, securitization markets, was a substantial contributor to halting a global financial panic. it is frankly, irresponsible to suggest our nation would have been better off having taken no action. two, and there is overwhelming evidence to support our position -- that at the time these initial t.a.r.p. investments were made, the public did not receive anything like full value for our money. however, over time, management of these assets and execution of for the transactions by the team at treasury managing t.a.r.p. became systematically

fairer to the taxpayer. the team at treasury, secretary masson, his predecessor, deserve a great deal of credit for that. 3, the paulson treasury department was not truthful with the public when it said the capital purchase program funds were only going to help the institutions. the gang the treasury department has compounded this lack of candor by -- geithner treasury department has compounded the lack of candor by refusing to admit that citibank and others were on the verge of collapse. four, the failure to replace bank management, to do a rigorous evaluation on the state of bank assets and to restructure bank assets accordingly, has left the u.s. with a week major banks and a damaged sense of trust between the american public and our nation's elected leaders. 5, although more than half a million families have been helped by the foreclosure prevention programs, foreclosure

prevention has been subordinated to the needs of the banks. the truth is, the continued foreclosures of homeowners are a powerful source of systemic risk and and more pressure on our economy and jobs. in december 2008, this panel held its first hearing in clark county, nevada. we did so to make the point that the american people would judge t.a.r.p., not on the wealth of bankers, but on the help of our communities. in december 2008, unemployment in southern nevada was 9.1%. today, is 14.9%. in december 2008, 6.58% of all home mortgages in the data weren't delinquent. today, 10.06% are. the most recent statement of the better reserve's open market committee states "the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor

market conditions. growth in household spending picked up last year but remains constrained by high unemployment, modest income growth, lower house and wealth, and tight credit." that is assessing this and they're the majority of this panel warned in our april 2009 report, would be the likely consequences of failing to restructure the major banks. although this panel is going out of business, the task of managing t.a.r.p.'s the remaining programs of regulating the banks, of overseeing systemic risk, goes on. the mask foreclosures continue, but it is never too late to act to make change. thank you. >> thank you, senator coughlin. i would like to think by thanking the witnesses before the panel today. i recognize all of you are busy people with a number of other responsibilities, so i appreciate you coming to help us

with our oversight responsibilities. given the focus of our last hearing, it seems appropriate to comment on the overall impact of t.a.r.p. and financial rescue efforts in general. i was recently asked by a reporter about whether my assessment of t.a.r.p. would be different if it ended up costing $356 billion, instead of the current estimate of 25 -- i answered any complete assessment of the t.a.r.p. needed to take into account a number of factors, such as the role that t.a.r.p. played in preventing a collapse, the risk taxpayers were exposed to, the impact t.a.r.p. will have on the market, and the likelihood of future financial crises. so while the actual cost of t.a.r.p. is an important component, it is only one factor affecting one's evaluation on the success of t.a.r.p. so my answer was, yes, i could

see t.a.r.p. as a success, even though the cost taxpayers $356 billion. if the government's actions were circumscribed by the expectations of the market, that in the event of a financial crisis the government would bail out firms whose bankruptcy threatened to increase systemic risk. these expectations were based on past government bailout of large financial firms. in fact, as i have argued previously, these expectations the fed and the severity of the finance a crisis since the market responded to these expectations by encouraging firms to grow until they became too big to fail, thereby increasing the number and size of systemically risky firms in the economy, and in turn increase in the amount of money needed to stem the financial crisis. also, once they attained to big to fail status, the bill and guarantee provided these firms, give them incentive to increase risk behavior, thus increasing the likelihood of a crisis.

ultimately, in my mind, the success or failure of t.a.r.p., in particular, the overall rescue in general, will hinge on whether we are able to eliminate the problem that caused the crisis, too big to fail firms. unfortunately, at least so far, it appears we have not taken the necessary steps to end too big to fail. the first step to fixing these firms is defining exactly what we mean by systemically important firms or risks. that way, the market has a clear understanding of which firms will receive support in the next crisis and which will not. then the government needs to start charging market-based fees to these firms for insurance provided to them, very substantially higher reserve requirements, which has been advocated by prof. meltzer, among others, by requiring them to hold systemic holdings, as opposed by others, by charging

the bailout insurance, or through some alternative mechanism that forces these firms to pay the cost of the insurance that is currently being paid for by the american taxpayers. only by ending the taxpayer- funded survival guarantee for large firms, both domestic and foreign, will we return visit market discipline to wall street and ensure large french firms face the same competitive pressures faced by firms operating on wall street. in turn, this will ensure future financial crises will be less severe and the fixes to these crises will not involve putting trillions of taxpayer dollars at risk. since this is our last hearing, there are people that i would like to thank for their work with the panel. first, i would like to thank the panel staff and our executive director for their work. looking over the totality of the panel's report, one realizes this work will become one of the

definitive source of information about the financial crisis, and this is due largely to the hard work and patience of our staff. i would also like to thank my fellow panel member, mark waters, for having me become familiar with the issues. he was always available when i needed to bounce ideas off of someone, which helped to formulate my ideas around t.a.r.p.. leadership wasn's important to build on the spirit of cooperation that we first built under the first chair elizabeth warren. finally, special thanks to the longest serving panel members. richard had been a part of 30 report issued by the panel on damon has in the jim participated in 27. after being exhausted after a mere 10, i do not know how they had done it. reading over comments and

reviews over each draft of the report. richard and damon have performed these tasks while recognizing the import responsibility they had to detect the interests of the american taxpayers. so as one of these taxpayers, i would like to say thank you. i would also like to thank the witnesses once again for joining us and helping us with our discussion today. >> thank you. superintendent neiman? >> when the financial crisis hit in the fall of 2008, we had a republican president and a democratic congress. this panel was created by that congress, to help hold the administration accountable in implementing the t.a.r.p. program. there was no shortage of ideological objections from the left and the right when t.a.r.p. was passed and there are no fewer today. but the american public's concerns, it seems to me, has been far less ideological or partisan. rather, they have retained the

pragmatic focus, asking the question, is the investment of our money serving the public well? it would have been difficult for this panel to assist with answering that question if we ourselves got distracted from it. congress wisely placed both democrats and republicans on this panel to force us to be as pragmatic as the people we were appointed to serve. and our efforts toward that goal over two years, as the nation gained a new democratic president and then a new republican house of representatives, remain the same our five different perspectives and backgrounds could have led to more disagreement an agreement, and ultimately, a failure to shed light and create accountability regarding the most complex financial issues of the day. but one of the things that i will personally take away from

this experience is a renewed optimism that people can still work together for the public good during the increasingly partisan times. even in the beginning, when ideology was at its height, prior panel members, who all had something important but different to contribute, found ways to come together. elizabeth warren deserve great credit for her leadership in the early days of this panel. we have not been perfect, however, and our oversight was always finite. so if someone asked me, what is the single most important public service we were able to provide? i believe the answer could only be one. i believe we helped to power the american public to fulfill their critical role as the true watchdogs of government. that is why we consistently called for more public data and

more public transparency. we demanded more information on t.a.r.p. expenditures, mortgage modifications, bank help and lending, and other t.a.r.p. related areas. our goal was to obtain information on a systematic basis, communicated as clearly as possible. with this, people can assess what is happening today and others in the future can, with the benefit of time, truly assess what happened back in the first global financial crisis of the 21st century. so our monthly reports and hearings come to a close this month but the end of t.a.r.p. oversight does not. i would humbly encourage our skillful fell oversight bodies and the many reporters and bloggers who so often got the facts right to focus on ways to empower the public with clear

information that provides opportunity to understand and have an impact. the fact is, free markets work, but the other fact is, they do not work as well as we would always like. a reason for this apparent inconsistency is often a lack of broadly available information that allows market participants and consumers to create a fully functioning markets. we need continued like shedding over inside and reforms to make free markets work. it is simply good for the housing market, the financial market, and the greater economy. i would like to conclude by thanking today's witnesses for the past and current support of their work, and by thanking all of our earlier witnesses. i feel compelled -- particularly compelled to express my gratitude to my colleagues for solidifying a belief that people with different philosophies can still work together for greater good

in washington, d.c. thank you. >> thank you. i am pleased to welcome timothy massad, the acting secretary for the office of financial stability. we asked that you keep your testimony to five minutes so that we can have adequate time for question period your statement will be printed in the official records. >> thank you, mr. chairman. chairman, members, thank you for the opportunity to testify today about the continued progress of the troubled assets relief program. as this is your last hearing, i want to begin by thanking you and your staff for your hard work in overseeing t.a.r.p. your reports have provided useful insight and your suggestions and questions have helped us to strengthen and refine our programs. t.a.r.p. is a success story, and

was made possible by the efforts of countless people at treasury and the other oversight bodies. as you noted, there is some symmetry to this moment. i appear before you today as the acting assistant secretary for financial stability, but i began my work with you in december 2008 when i volunteered as your special legal adviser to help prepare the first under nearly 30 reports. it has been an interesting journey for all of us, and i think we can conclude the program was successful by any objective measure. first, t.a.r.p. help prevent trent -- catastrophic collapse of our financial system and economy. in the fall of 2008, we were falling into the abyss. now we are on the road to recovery. t.a.r.p. was not a solution to all of our economic problems, and there is still more work ahead. unemployment still remains unacceptably high and the housing market remains weak. but the worst of the storm has

passed. second, we accomplished all of this using much less money than congress originally provided, and we are unwinding t.a.r.p. faster than anyone thought possible. congress authorized $700 billion, but we will spend no more than $735 billion, and we have already recouped two-thirds of what we spent. third, the ultimate cost of t.a.r.p. will be far less than anyone expected. the total cost was initially expected to be approximately $341 billion. according to the latest estimates, the overall cost of t.a.r.p. will be between 25 and $50 billion, and most of that will represent the money we used to help americans keep their homes. finally, our financial system is in better shape today than before the crisis. it is stronger and on a path to recovery, and congress had adopted the most sweeping overhaul of our regulations in

generations, which will give us the tools that we did not have in the fall of 2008. this work is not yet complete, but we have made great progress since this panel held its first hearing. t.a.r.p. was a bipartisan success. the bush administration acted quickly to stop the panic. when this administration took office, we adopted a broad strategy to restore economic growth, free of credit, and return capital to the private system. today, people no longer fear our financial system is going to fail. banks are much better capitalized and the weakest parts of our pension system no longer exist. the credit markets on which consumers depend are open. businesses are able to raise capital and mortgage rates are at historic lows. we have moved quickly to reduce the dependence of the financial system on americans to support. we have already recovered almost all of the funds invested in the banking system. where this administration provided funds to particular

companies, we did so with tough conditions. those companies are stronger today and we have already begun to recoup those investments. for example, the assistance we provided to aig, one of the government's most controversial actions, was necessary because the failure of the a.i.g. at that time in those circumstances would have been catastrophic to our financial system and economy. now two years later, the company has been restructured, and taxpayers are in a position to potentially recover every dollar invested. and now, it's not impossible. similarly, we provided assistance to general motors and chrysler on the condition they fundamentally restructure their businesses. our actions helped prevent the loss of as many as 1 million jobs and helped restore the company and industry to profitability. and we have completed a highly successful initial public offering of gm and are working to exit our investments in chrysler finally, i want to

respond to the struggling american homeowners. by reducing mortgage rates and providing incentives to avoid foreclosure, our policies have helped hundreds of thousands of families stay in their homes and have helped to change the mortgage servicing industry generally. we have not held as many homeowners as we it estimated and much more work needs to be done, but we remain committed to doing so, to help as many eligible home owners as possible, in a manner that safeguards taxpayer's assets. mr. chairman, the panel members, t.a.r.p. succeeded in what it was meant to do, bring stability to the financial system and laid the foundation for economic recovery. our comprehensive strategy and decisive action made our economy far stronger today than it was two years ago. we are proud of our actions and appreciate all the help he provided along the way. thank you for the opportunity to testify. i welcome your questions.

>> there are a lot of different reasons for this hearing. we are going to go back in history. what i would like to focus in my opening questions are, what are the lessons learned? this is difficult to do. when t.a.r.p. was originally set up, everybody at treasury and the fed wasn't under incredible pressure. a lot of decisions were made. i am not here to be a monday morning quarterback to look at these decisions, although i am sure it will be in the report, but in terms of lessons learned, how in the area of moral hazard, which everyone has referred to, what does treasury believe you could have done differently, if, in fact, you were faced with this problem again?

>> that is a good question. something we have thought a lot about. the main lesson we learned is we did not have the tools to deal with this crisis at the time. unfortunately, that is what necessitated this program, which nobody wanted to do, but we had to. we have now passed dodd-frank, the most comprehensive overhaul of our regulation system, which gives us a variety of tools which should allow us to minimize these sorts of conditions again. much work remains to implement that. but, to me, that is the principal lesson we learned, the way we are trying to address the moral hazard issue, which many of you have rightly noted. >> specifically, what with dodd- frank would reduce moral hazard? >> the fact we have resolution of order with respect to non- banking institutions, the fact

that we have a manner for regulating systematic risk, the fact that we have the office of the venture research, oversight council, higher capital standards -- all of those measures, i think, enable us to say we now have the tools to try to prevent and minimize the effects of crises like this in the future. therefore, render the sort of assistance we had to provide under t.a.r.p. unnecessary. >> how about the method of the assistance? how would that have changed? with dodd-frank, would you have done it differently? >> dodd-frank gives you the tools to dismember a non-bank. that was a problem we had with a.i.g. now we have that authority. >> when you listen to economists

talk about our economy, what do you believe the two big to fail? >> moral hazard is a serious issue that we have to continue to look at and address. i think, though, the focus now should be on implementing dodd- frank. >> i understand that. i am just trying to figure out what you learned specifically. you are saying that all the things treasury would like to have had, that would have helped them resolve -- eliminate or minimize moral hazard? >> i guess i would say that we have all the tools congress decided to give us. >> this is your chance to lay out anything in the bill that you would have liked to have, if we're move forward with this. >> i do not know that i want to read litigate the battle over dodd-frank. the main thing is we did achieve, in a short time, a

dramatic overhaul. i think our focus should be on implementing that. now, at a future date, we may look at, was that enough, do we need to do more? those are great questions and we will continue to address those. >> there is a widespread perception that main street did a lot worse than wall street. things that treasury could have done at the beginning of the program to provide better balance of what was going to main street as opposed to wall street? >> the main benefit to main street of this program was that we did stop the panic. again, when i say this program, it is in conjunction of all the other actions taken. we stopped the panic and we stopped a second great depression, which could have resulted, as many economists have estimated.

on obliterates 16% and higher. it also allowed us to get credit flowing again. -- unemployment rates 16% and higher. under the capital purchase program, we invested in 500 small banks, banks that small businesses and communities depend on. i agree, the perception was that this program provided support to wall street and many people did not think it did much for them. i understand that. this is still a tough economy. people unemployed are in danger of losing their homes feel that way. we understand that. >> it is a tough economy on wall street, may everywhere else, but not on wall street. >> thank you, senator. following up on dodd-frank, if i

may quote -- and i hope i am not doing so out of context -- professor stieglitz's testimony. he says resolution a party has made little difference because few believe the government will ever use the authority at its disposal with these too big to fail banks. so we have dodd-frank, a blueprint to take down not only financial institutions, which we have the authority under fdic to do before, but now a.i.g. and others. would there be courage in a time of panic to actually do this, take them down, as opposed to simply another bailout? >> i would certainly hope so. i believe now on these tools are very good ones. but obviously, it remains to execute on this. it remains to promulgate the

regulation necessary and to act. and it will require regulation that is nimble. regulation that is responsive to changes in the industry as we go forward. but i think we have come a long way, and we should give these tools a chance to work before we judge. >> i know in one of the foot notes to my opening statement, i make the observation that there was not the courage to take down some of the most insolvent financial institutions in the early to mid-2009. i do not mean the last quarter of 2008 when the markets were frozen. that may have sent another message. but once the markets stabilized, begun to stabilize more in 2009, and certain institutions came back and say, by the way, we are still

insolvent, by the tune of many billions of dollars, at that point, there were rules on the books for the fdic to take out these institutions and they were not. it makes me question -- now you have new rules for new institutions. when it comes around to it, will that happen, or will more checks simply be written? and as more checks are written, more moral hazard will be created? any thoughts on that? >> certainly. you referred to the events in 2009. the obama administration did not provide a single dollar to a large bank. all of the money provided to the banks -- most of the money -- was provided under the bush administration. i think they made the right decisions under the circumstances, although i was not involved. the obama administration

provided a $11 billion in additional funds to banks. most of that went to small banks. where we provided assistance to additional terms, we did so with tough conditions. if you look and what we did with the auto industry, we imposed some tough conditions required them to restructure. general motors is not profitable. first full-year profit since 2004. chrysler has an operating profit. so i do not think there was a lack of courage. i think we acted forcefully and decisively. >> there were other action going on underneath the surface, underneath t.a.r.p. admittedly, t.a.r.p. was grabbing the headlines, that the fdic was taking action, federal reserve was taking certain actions, quantitative easing, where the federal reserve purchased trillions of dollars of mortgage-backed securities, government-backed mortgage- backed securities, which would

have not been purchased at fair market value if fannie and freddie would have been permitted to fail. so the bailout of fannie and freddie, seems to me, to have a direct correlation to the help of financial institutions and their ability to pay back funds. so there were a number of things going on here. >> happy to respond to that. first of all, i agree with your opening comments, that one must look at the cost of this in terms of all government programs, not simply t.a.r.p. but when you do that, the overall cost currently estimated at 1% of gdp, which is far less than the cost to resolve the s&l crisis. secondly, you mentioned the pricing of credit. in the crisis, the government is acting because private capital is not falling. so we are pricing that under

what the market would charge. the trick is to still price it properly so that we do not encourage excessive reliance on it, number one, and to impose conditions so that we do not create a " bigger moral has a problem than is necessary. i agree any government comes with a moral hazard problem. particularly, when the obama administration launched the stress tests and provided the capital assistance program, we said that will come with tough conditions. no one took the money. >> my time is about up. i will leave it by saying, i think there were some profit market participants, mr. buffett, among others, who cut better deals. >> thank you. mr. silver's. >> mr. secretary, before i asked any questions, i want to

expand on my opening remarks and the work of you and your predecessors. i think it is no secret i have been critical of the economics of t.a.r.p. transactions. but i want to come on the record, commend you and your predecessor for the work you have done since the spring of 2009 in managing the t.a.r.p. assets that you, so to speak, inherited. the execution of the transactions that occurred since you and your predecessor came to work managing the t.a.r.p. i think, particularly, the improvement of the economics in the public's perspective. the way in which both citi and a.i.g. investments have been handled as purely investment assets. so i want to be clear that i think you have done a fine job in that respect. the overall cost numbers that

you are siding are substantially driven by that achievement. now i want to return -- the exchange that you just had with my colleague mr. waters. it is important, in this final hearing, to maybe shine a light on a couple of key moments in history of t.a.r.p. do you agree, -- i take your point, and i have noted, under the obama administration, there was not significant additional capital in fused into large banks. but do you agree there was a set of decisions made by the obama administration on what to do with the large banks, government investments in t.a.r.p., in the early months of the administration? >> there were decisions made by treasury and regulators, but as you know, with respect to the

obama administration and treasury, particularly under t.a.r.p., we inherited those investments. our focus was on managing those investments and exiting them. the regulators really had the primary responsibility to look at the help of those institutions -- >> that is not exactly what i was asking you. the treasury department released a plan in early spring of 2009 which included the stress tests. the centerpiece of that plan. the regulators executed that plan in substantial part, but it was an administration and treasury department plan. is that correct? >> yes, that is correct. >> to me, that represents a key decision making moment for the administration.

could you amplify that a little bit? if you believe it is true, those strategic decision that were made at that time by the current president's administration? >> certainly, it is a very good question. a central component of the financial stability plan was to re capitalize the financial system with private capital as efficiently as possible, and to do that, we worked with regulators to formulate the stress tests for the largest 19 bank holding companies. those tests were done with an extraordinarily and unprecedented transparency. without those tests, the market was not willing to reinvest in these institutions i think the record of the stress tests, and what followed is evidence of the success. banks were able to raise a large amount of private capital following the results of those tests. so i think it was a very good

strategy and executed successfully. >> i would just observe that i hink another of mr. waters' dispute with you -- perhaps my evaluation of t.a.r.p., has to do with that set of decisions, with respect to the question of restructuring banks. i do not want to spend what time we have arguing about that, but i want to be clear for the record, that is the key question. before my time is expired, going forward, what are your greatest concerns? what worries you, about t.a.r.p. and about the issues t.a.r.p. was meant to address? >> i am very focused on our housing programs. we have not helped as many people as we would like, but i think the programs are very important and continue to help tens of thousands, and i am concerned about efforts to

eliminate those. without those programs, many, many americans, who otherwise could be held into an affordable mortgage, will not have the opportunity to do so. secondly, i am very focused on managing and exiting our remaining investments as quickly as we can. i think it is important to get the government out of the business of owning stakes in private companies. i think we have got a very good record there, we have made a lot of progress, but we have a lot of work to do. in particular, with respect to our smaller banks, their path to recovery has been a little harder. we need to continue to work with them on that. >> thank you. my time has expired. >> dr. toske? >> thank you.

hopefully, we can come back to the questions about the stress test, but i wanted to start about talking with t.a.r.p. mandate. in addition to the goal of restoring liquidity to the financial system, legislation directed treasury to consider such goals as maximize the overall returns and minimizing the impact of the national debt, protect american jobs, savings, retirement security, help families keep their homes, stabilize communities, and on and on. do you think the mission of t.a.r.p. was too broad? clearly, a number of people have indicated -- in terms of stemming the financial crisis -- agree that it is a success. we will hear some comments later on these other things that seems to be where the economy is struggling. i tried to throw all that into a single piece of legislation, in

some sense, did that do t.a.r.p. to get the stigma that it has today? >> that is a good question we interpreted the consideration that you referred to as things that we should take into account in how we went about executing the authorities we were given. the authorities we were given were narrower than that. the authorities we were given was to purchase troubled assets from financial institutions. we were not given $700 billion and told, reduce the unemployment rate in any way you see fit. we were given a specific mandate to promote the stability and liquidity of the financial system, we were given the authority to do that through the purchase of troubled assets, and in doing so, we were supposed to

take those other considerations into account. i do agree that because of the breath of those, many people did feel it was up to t.a.r.p. to solve all of these economic problems, important economic problems we needed to resolve. but i do not think it was the job of t.a.r.p. to do that alone. >> do you think treasury has done a good job communicating its action regarding its actions -- to the public? do you feel the treasury could have done a better job of articulating its objectives? >> again, a good question. we certainly could have done a better job explaining what we are doing, why we were doing it. i think there is a tendency, when you are focused on a crisis like this, taking action, to assume that people know a lot about what you are doing, no more than they may know.

i recognize most people in this country do not follow what goes on in washington, day-by-day, the way that many of us who live in washington do. they are focused on their families, homes, keeping their jobs, getting the kids through school. we certainly could have done a better job communicating what we were doing. >> i want to return to the question about the stress test. i do not know -- there was a column in wednesday's's "new york times" alleging that banks supplied the measures used in the latest round of stress tests, ensuring they would look good, rendering the test rather meaningless. i think part of this comes from the fact that these latest rounds of stress tests, the results have been kept somewhat private and not as public the first time around. i guess i would like you to address why -- obviously, this

is the fed's decision -- but whether treasury pushed to make them public, what are the benefits and costs to making these results public? do you have any idea why the fed thinks the benefits were less than the costs to making the results public? >> the current round is being conducted by the fed. it was designed by the fed. i had no involvement and treasury generally did not come to my knowledge. so i cannot really answer why the fed structured it the way they have, their decisions about what they were going to publicize, other than the fact -- i would note the following. traditionally, bank supervisory information, testing that our regulators do -- and they do so on an ongoing matter -- is not made public. the exception was the stress tests of spring 2009.

we did that, at that time, given the gravity of the crisis. >> but as you noted, you attributed a lot of success to that. one would >> and i think one has to do extraordinary actions in a crisis. in the crisis, it was appropriate to conduct those tests with the transparency in which we did it. i think there are good reasons why we have a model in this country of bank regulation and supervision in which a lot of the detailed information is not made public but other conclusions are made public. >> one of our later panelists who won his nobel prize for his work on it asymmetric information is going to be interesting to hear his take on keeping information -- >> i look forward to that.

unfortunately, i cannot stay but i look forward to reading the transcript later. >> thank you very much for your role. i was here when you volunteered your work on the panel which was very helpful at the time. by also very much appreciate the fact that you continued in that role when asked to serve up by treasury. i went to the knowledge the work of your predecessor for his efforts and coordination with this committee. i want to follow up with your answer to damon's question. the first point you mentioned a related to the housing program, your concern that those could be eliminated. that is my area of interest because this week there were

calls from lawmakers to eliminate treasury foreclosure programs. some refer to the approximately $50 billion set aside for american homeowners as a waste of money. you mentioned that very little of the money has been spent, and that lack of spending frustrates us that it is essential for further stability and economic recovery. with only $1 billion spent so far, and nearly 600,000 mortgages permanently modified, it is difficult to conclude that it has been a waste of money. that is around $2,000 per mod. we know there are certainly other more complicating factors , a default rates, incentives, and the role that the gse's have played. can you comment from a cost- benefit analysis of the value of

those dollars spent on those 600,000 permanent modifications? >> i think it has been dollars a very well spent. let me say that the money is spent over time. once there is a permanent modification of a mortgage, the payments are made over time as long as the homeowner continues his or her payments. we estimate that over time it permit modification will cost the government about $20,000 -- a permanent modification will cost the government about $20,000. we expect more people will enter. keep in mind it also, we have the reallocated some of that $50 billion, actually $46 billion total, but weak reallocated debt to other programs -- but we

reallocated that to other programs. we are looking at the total cost we think will be spend. it will be below the 46 but it will be significantly higher than where it is today. >> can you caught -- can you talk about the benefits of those programs? >> certainly. this is the worst housing crisis we have seen since the great depression. what we are trying to do through these programs is to help people modify the market where it makes economic sense to do so. by doing so, you avert a lot of cost. a foreclosure for any family is a terrible economic loss and a great social, psychological, and emotional loss. the community suffers from it because neighboring house prices fall particularly where you have

a vacant home. it hurts the community. the situation is a drag on our economy as a whole. the more we can help people get into a sustainable modifications which is the focus of our program -- it is not simply kicking the can down the road. we are helping people get into a sustainable situation. i think our country is much better off. >> could you comment on the impact of ending those programs would have on the economy? >> certainly. i think it means tens of thousands of people who could otherwise get help directly will not get that help -- >> do you see a direct correlation -- >> absolutely. excuse me. absolutely. i think one of the things our program has done is set standards that have now been followed by the industrywide

the. there were no modifications getting done prior to the launch of this program. dual track, for example. the procedure where some of the servicers were talking to a homeowner about a modification at the same time they were foreclosing. it is very confusing for the homeowner and very frustrating. the elimination of the program could certainly jeopardize -- >> absolutely. >> thank you. >> i saw a quote by secretary -- thner and died jus in the future, we may have to do things. is this backing away from the fact that no time, no way are we

ever going to bail out a bank again? >> a very could question. i talked to the secretary about that statement. he was referring to the tools under dodd-frank. i think it is clear that we do not know what the next crisis will be. we believe that the tools we now have under dodd-frank give us the ability to minimize the effects. it requires, as i say, in an effective implementation of those tools. >> is there any concern or what could believe that there are still banks that are too big to fail? the people all over the world -- i know there is a new study coming out which has not been dealt with in dodd-frank and would be -- any kind of the concern in terms of moving forward? >> certainly. i think the moral hazard issue

is a very significant one. as you all have noted, it is a very significant issue in light of what we had to do. again, i think it is up to us now to take the tools that congress has given us and work to minimize that risk. >> one of the frustrations that everyone has is the fact that we went in and helped out the banks and corporations, and then the jobs did not come. the banks held on to the money. is there some way tarp could have been structured? it sounds like trickle-down to a whole lot of people and it did not trickle. >> i think the key thing was tarp alone wasn't enough.

>> again, we are just focusing on at tarp. it could tarp have been structured in some way so that we would have at least mitigated this? >> i think policy makers, historians, probably this panel will explore that issue. i think it is one that we should explore sitting here today. i am very focused on -- >> one final thing. one of the simple things right in the beginning was there needs to be better support for tracking of funds. thinking in retrospect, tough times, everyone running around, looking back two years, do you think there would have been a better way to track the funds better? >> we implemented the recommendations in this regard. it was done later after a lot of

the money went out the door. on the lending point, i would simply note that the lending issue is not simple a suplly of capital issue. it is also a demand and regulatory issue. you are going to see that fall in a recession. these are complex problems. while it may be that we may have done things differently under tarp, i think the focus now should be to work with the tools that we have -- >> what i am trying to get at is a history so that if something happens again, we do not have the best suggestions. walter some of the things we could've done to have mitigated that -- what are some of the things we could have done to

have mitigated debt? >> i will go back to the written testimony, first page, and i will read a quote, and there would like to hear your comments. toward the bottom of the first paragraph, the professor says the normal laws of capitalism where investors must [unintelligible] for their decisions or aggregated. a system that specializes losses and privatized gains is not fair nor efficient. admittedly, the big banks were given money -- were given many enormous gifts of which tarp was only one. the united states government provided money to the biggest of the bank's during the times of need in generous amounts and on generous terms. but they have been forcing ordinary americans to fend for

themselves. do you care to comment on that? >> certainly. first of all, i agree that we need to have a financial system where firms can fill regardless of how big they are. the question is when you were in the midst of the crisis that we faced in the fall of 2008, what should we have done? again, i think the actions taken were appropriate in light of the situation we confronted in the tools that we had it. we obviously have to work toward a system where that never becomes necessary again and where firms do fail if they have taken excessive risks. >> ok. moving to the testimony of anothe professor, page three,

the last full paragraph of the page. tarp was the largest welfare program for corporations and their investors ever created in the history of humankind. some of the problems have been donated -- worker unions does not make it any better. it makes it worse. it was premeditated pillaging of defenseless taxpayers by powerful lobbyists. do you agree with that? do you not agree with that? >> i do not agree with that. >> on what basis? >> again, i think we were confronted with an extraordinary situation in the fall of 2008, and we took actions that are necessary to prevent the collapse of our financial system had terriblef beehave

effects in this country. >> my time is up. i do not think any one of these gentlemen are saying that in october 2008 the response was to do nothing. it is more of a nuance issue as to, ok, once the meltdown threat is over, just a few months later, from my recollection, then we need to be able to turn on a dime and apply the rules somewhat differently. my time is up. i will end their >>re. >> we have had a lot of confrontations in this room probably with the treasury department which end with the issue or problem that it is a good idea but we do not have the power to do it. in that vein, as you look at the

powers you have and do not have to manage tarp after this committee disbands with the notion that congress is listening, what powers would you like to have that you do not have? >> well, i guess i assumed we are not amending the tarp. >> we are trying to build a record. >> i think the work that remains to be done in the area of housing is obviously critical. >> let's take housing. i think a lot of us agree on that. the idea that you expressed a few minutes ago -- let's take housing. you have agreements, a legal structure with participants. if you could not rewrite those agreements today knowing what you know, what would you do?

>> if we were to rewrite the agreements, again, within the framework of the powers that we have, we would have simply -- >> as soon as someone gives you a magic wand. what would you do with it? >> it is difficult to answer the hypothetical is in terms of regretting the history. in terms of going forward, i will leave it to the congress. i do not mean to dodge the question, but i think there is a variety of things that is been considered it. we concluded that we could not even use tarp funds to pay for legal aid and broad counseling in the housing program. >> would each have been a good idea to do that? -- would it have been a good idea to do that?

>> you know, i think there are a range of things reform of the bigger to coach, so that -- range of things, reform of the bankruptcy codes, but i think we can certainly provide you with potentially others. i am very focused on executing the authorities that we have the. >> i do not know if i am allowed to ask one more question, but several witnesses have suggested that we ought to have a sliding scale capital requirements for larger banks. that was in this panel's regulatory reform report. it is within the powers granted to the bank regulators and the systemic risk regulators. what is your view of that

proposition? >> i will leave that one to the regulators and to the financial stability oversight council. i think it is a very important question, but i would note simply that we have raised the level of capital in the system significantly since where we were. banks are better capitalized today, but as to the exact details as whether there should be a sliding scale or what it should look like, i would defer to those with that power. >> if the treasury department has a view on the question, i think we would appreciate that in writing. finally, we had a number of back-and-forths with you about strategic decisions made into a dozen men. our expert witnesses have had a

lot to say about that -- about strategic decisions made in 200010. >> thank you. >> i want to refer back to the quote that chairman kaufman referred to. treasury secretary geithner did say that you do not know what is systemic and what is not until you know the nature of the shock. this statement seems to be sort of in contrast with some of the calls by many economists including some of our next panel and myself in my opening statement, that the government needs to clearly define what it views as a systemic risk so the market has a very clear understanding of what that means and what we view thaas

systemically risky. could you tell me why we think -- why are we not defining what we mean by systemically risky? >> i think there is a process going on to address that. it is not simply a quantitative determination or is simple determination. it is also going to be a determination that changes over time. i think the dodd-frank legislation gives us the ability to do that. i think the initial work in that area has indicated there will be a variety of criteria used that is both quantitative and qualitative, involvement look at capital levels, leverage, interconnectedness, and other factors. i think the meaning of this statement was simply that it is a complex determination.

>> i guess -- do you do that at some point there will be a clear statement to the market's that this is what we view as systemically risky so that someone outside looking in would come to approximately the same conclusion of the firms that are systemically risky? >> that is a subject that the financial stability oversight council and its members will look at and consider and will have more to say about in the future. >> going back to the original tarp legislation, both involving the purchase of troubled assets and toxic assets off the books of banks, that is not the way it was implemented. i guess those troubled assets presumably are still sitting on banks' books. do you have a sense of how big the problem is today?

do you have a sense of whether the federal reserve's alta meant purchasing of the mortgage backed securities was in addition to the other effect on the way of removing those troubled assets from banks' books and shipping them to the fed's books? >> it is a very good question. we have seen it substantial write-offs from the industry. number two, we have seen asset quality improved. number three, we have seen the performance of the big banks, at least, has been better than what the stress tests predicted. they were designed to look at what was of the riskiness of those assets and the bank situation. is there more work to do? i would refer to the regulators on that. we are obviously still on the road to recovery.

>> thank you. >> i would like to come back again to the foreclosure issues. as i mentioned in my opening, i think the best thing this panel can do is establish a precedent in the process to get good information to the public. that is why some of our greatest frustrations are around the program have been with respect to the release of this obtaining of information. the first around modifications. i think in defense of the program, you rightfully point to the fact that not only did you create a system for modifications, but also the fax pointing that it encouraged non modifications outside of the program. despite our continued calls for

information, and it is been supported by the secretary himself -- secretary geithner acknowledged how important that kind of information was, and he pledged to us we will look for ways to get better information out there to access these programs. what progress has been made since december? >> thank you, mr. neiman. that is a very good question and i know it is an issue that you have been focused on. i agree that we need more information on those non-hamp modifications. they are outside the reporting system that we set up. there was no reporting on any modifications in this country prior to hamp. we have suggested that to several of the services it. i know you raised it with your conversations.

i know the regulators are also looking at that issue. >> again, i think we would encourage you to certainly put a process in place. this is something that certainly, if not voluntarily, submitted should be a high priority to find a way to require that information to be submitted and publicly released. the other area -- we have been talking about this web portal to allow not only housing counselors and borrowers to submit data directly through a web-based system to their servicer, but more importantly to allow them to assess the status of that modification. we continue to read and hear about the slow implementation and even the slow pickup on usage. can you give us an update as to how frequently the usage is on

that system? >> let me get back to you on that. i know that it is taken a lot of work to get to where we want to be. there are issues of making sure that if not all the works but it protect privacy. i would be happy to be back to you on that printer >>. >> regarding the need for a national foreclosure data base -- i have been given a polite responses each time. what is it? what would be the reluctance of starting a program that would provide mortgage performance data across the board, across state or national, all lines,

banks and non-banks? >> again, a very good question, mr. neiman. to see awe are going dramatic change overall which will lead to things like national standards on a number of these issues. it has been clear throughout this crisis that we did not have data or standards and that is been a large part of the problem. i think there is a lot of work going on on a number of fronts to look at those. i cannot give you a specific prediction of where we will be when, but iraq think we will see some significant changes there. >> i look forward to your followup response on the web portal. >> thank you for being here. thank you so much for your public service. one question i have the -- you said you raised bank capital requirements significantly. if you could submit in writing

what you did to raise bank capital requirements -- >> certainly proved what i meant was bank capital levels have increased -- certainly. what i meant was bank capital levels have increased -- >> of the next panel come forward please? -- would the next panel come forward please? >> i am very pleased now to welcome our third panel of distinguished economists. joseph stiglitz, nobel laureate, and professor part

allan meltzer, -- professor. allan meltzer, a professor at carnegie-mellon. a senior fellow let the peterson institute for financial economics, robert c. mccormack, from the university of chicago. thank you very much for coming. i want to thank you you off. keep your oral testimony to 5 minutes. we' begin with mr. stiglitz. >> thank you for this opportunity share my views about the success and failures of t.a.r.p.. the t.a.r.p., and the recovery of troubled assets were not ends in themselves. t.a.r.p. was justified to the american people as necessary to contain the flow of credit. it was hope that it would play a pivotal role with mortgage

foreclosures in the collapse of the real-estate market that led to the financial crisis. in these alternate objectives, the t.a.r.p. has been a dismal failure. three years after the onset of the recession, unemployment remains unacceptably -- unacceptably high. lending to small and medium- sized enterprises is still constrained. while big banks were saved, smaller, to in the regional banks are in trouble. the mortgage market is still on life-support. t.a.r.p. has not just failed in exclusive objectives. i think the way the program was managed has contributed to the economy's problems. the normal laws of capitalism whereon -- where a system must

be regulated. t.a.r.p. has made systems less competitive. there were six critical fair winds of t.a.r.p.. -- critical failings. first, they did not restrain bonuses. they put no dends that they lent money that were given to them. they did not restrain the predory practices. secondly, giving money to the banks, they should have danded appropriate compensation for the risk borne. is not enough to say we will be repaid, or almost repaid. we demand arm's length terms, such as warren buffett outlined when he provided funds to goldman sachs if we did that, our national debt would be lower. it should be judged as an see, not exposed. thirdly, there was a lack of transparency.

fourth, there was a lack of concern for what kind of financial sector should emerge after the crisis. there was no reason. fifth, from the beginning, t.a.r.p. was based on a false promise, but the real estate markets were temporarily depressed. the reality was there was enormous bubble. it was inevitable that the breaking of the bubble, especially given the kinds of mortgages that had been issued would have enormous consequences that had to be dealt with. many opposed articles have been a result of building on that false promise. typically falls was a program designed to have a government bear a disproportionate share of the losses. they would also receive a disproportionate share of the gains.

the prices that would emerge would be the prices of options, not underlying assets. the standard wisdom in such a situation is summarized in a single word, "restructured." t.a.r.p.ade things wor. the sixth critical failure was that some of the money went to restructure securitization under the cost program, without an understanding of the deeper reasons. these attempts to revive the market failed. it is not a surprise. evident at the time of the crisis, and even more so as time when on -- these approaches, had a been taken, would have led to a stronger economy today, and to our government to be in a stronger fiscal position. we might say that all of this is water over the dam, but is not. we're not repaired our banking system, and increased region

with increase global hazard, the economy remains very much at risk, in spite of dodd-frank. our economy is not back to health. this means we need a more competitive financial sector, and one more focused on its core mission of lending. there is a wide array of the important activities performed by the financial sector, but not all of them should be undertaken by government-insured banks. banks will not focus on lending if they can continue to make more money by publicly- underwritten speculation and trading, or exposing credit and debit card markets. to many of these oppose and i'm going restore our economy and the soundness of government finances. we should not forget the process by which t.a.r.p. and this oversight panel was created. that political process does not

represent one of the country's finest moments. at first, a short, a two-page bill was presented given discretion to the secretary of treasury without oversight and review. given the lack of transparency, and the potential abuses, that. even with full knowledge that there was to the oversight, one can only imagine what would happen to have their regional bill been passed. congress decided that it was incompatible with democratic ocesses. on the other hand, the politic deals required to get t.a.r.p. past, ich an estimated one and $50 billion in unjustifiable -- $150 billion bid on justifiable tax breaks, do not speak well for our economy. we think of the cost of t.a.r.p., the tax breaks should be included. nor should we underestimate the damage or correct perception that those were -- who were

responsible were the recipients. it is only reinforced public perception that something has happened. for tse, and other filling the t.a.r.p., our economy and society have paid, and will continue to pay very high price. >> thank you, mr. meltzer? >> invitation to this hearing, like most discussions in the t.a.r.p. program as square carps exceeded. my answer is yes, t.a.r.p. avoided a potential financial disaster, my concern is the depression. congress should not start with the crisis that followed lehman brothers failure. it must ask and demand answers to other questions -- why was it necessary to issue about $1 trillion of public money to prevent financial collapse? what if anything has been done to reduce the significance of

the process that another -- prospect that another t.a.r.p. will follow? like many other bad decisions, the use of public funds to prevent failures began small. in the 1970's, the federal reserve began the policy and became too big to fail by preventing the failure of first pennsylvania bank. soon, banks and other financial firms recognize the becoming large was a way to reduce risk. some recognize they could take more risk. this is known as moral hazard. the process works like this -- i have been present for some of these -- bankers and treasury, or federal reserve staff warned the principal policy maker that failure invites a domestic or world crisis. sometimes, they say "mr. secretary, your name will be on that crisis in the history books." i have never found a way of overcoming that when when the

crisis happened or seems imminent. it does not help to point out that in the few occasions that there was no dog, financial crisis. , but no crisis followed. one example is the penn central railroad in 1970. was a major issuer of commercial paper. the federal reserve chairman, arthur burns, was anxious to protect the market by bailing out penn central. president nixon made the mistake of appointing an outside counsel from his old law firm. congressional leaders view that as an effort to assist the republican party. that ended the bailout. there was no crisis. the commercial paper market decline, but borrowers got the accommodation at banks. no crisis happened. after a few months, the commercial paper market revived.

with a major issuer of non- investment-grade debt at e time went bankrupt. other fancial firms took over the business, and drexel went into bankrtcy. the main reason the policy makers resorted to too big to fail is regulato failure. regulators do not require financial firms to hold enough capital. in the 1920's large banks held capital equal to 15% to 20% of their assets. many small bks, but no large banks failed. even in the early years of the great depression, very few large banks failed. stockholders, not the general public, bore those losses. that is as it should be, in my opinion. after the recent crisis, congress passed the dodd-frank bill. dodd-frank did nothing to increase capital requirements.

the international regulators said basel did better, but did not increase capital and off. dodd-frank put the secretary of the treasury at the head of the committee to decide on too big to fail. if that in beds two errors. the time to implement bailout is not when the crisis happened. it has to be established ality. we profess to believe in the rule of law. we need allow them beds a rule and a policy that applies it. secondly, the secretary of treasury is very often the principal person who favors too big to fail. nothing in dodd-frank changes his incentives. it continues bailouts and provides money for them. i'll repeat the proposal i have made in several hearings. at some minimum size, to protect community bks, congress should require banks to increase capital relative to their assets as asset size

increases. instead of subsidizing large banks, we should make them pay for the costs that they impose. it said bank increases assets by 10%, capital must increase by more than 10%. the proposal has three major benefits. first, stockholders and managers ar the losses, not the taxpayers and the public. second, the rule encourages prudence, and eliminates the improved and by replacing owners of failed banks. third, congress can eliminate many of the regulations in dodd- frank because they will not strengthen financial a institutions. more capital well. in most recent crisis, bear stearns was the biggest. the federal reserve took assets onto its balance sheet, shifting losses to the public. the market read the decision as a sign that too big to fail remain the process -- the

policy. they had a big shot. lehman brothers was allowed to fail. the seven policy change without warning in the midst of a recession created massive uncertainty. i believe secretary paulson and chairman bernanke were wrong to change policy without warning, but i praise the response called t.a.r.p., that provided the equivalent -- liquidity to all parts of the market. they avoided compounding the error. notice what has happened. chairman bernanke told us the t.a.r.p. funds were short term. they would run out in due course, thereby shrinking the balance sheet. instead of shrinking, the fed bought mortgages, more than offsetting the original t.a.r.p. funds. again, chairman bernankeold us off the mortgages would be repaid. so, the balance sheet would shrink. again, that did not happen. qe two purchased more than

offset the losses. i do not believe the federal reserve has a strategy to reduce the balance sheet. we face the prospect in future years of high inflation. how can congress continue to justify a system that makes the public pay for bankers' mistakes? second, rememr that capitalism without failure is like religion without sin. does not wor third, congress should demand a detailed statement of how the federal reserve plans to shrink its balance sheet, incding an estimate of how high market interest rates will have to rise. >> thank you. mr. johnson could >> thank you. i completely agree, and would like in -- like to endorse the views of both professor stiglitz, and prof. meltzer. let me frame my agreement in the form of the following question. does anyone here think that goldman sachs could sell? if they hit a hypothetical

rock, does anyone believe that it would be allowed to collapse, sal go bankrupt unencumbered by any type of bailout now or in the near future? i have asked this question around the country and across the world, and i have yet to find anyone who realistically thinks it could fail. i have found some people who wish it could sell, but that is a different question. goldman sachs is too big. they have a balance sheet around $900 billion. it is 2-highly leveraged. -- too-higkly leveraged, and cross-bordered. we do not have a cross-border

revolution- regulation authority. there can beo cross-border resolution authority in u.s. legislation. indeed a cross-border agreement. i know well the technical people, the g-20, the g 10, various responsible parties in the alphabet soup of international regulation. i know these people. i talked to them. there will not be a cross- border resolution in our lifetimes -- no mechanism, no. 40. you cannot handle, and an orderly fashion, the failure of a bank like goldman sachs, jpmorgan chase, or citigroup. you could let them collapse, but then you face another lehman brothers, where you could bail them out with some form were you protect the credit, and that is the key point, and then you have all the complications that professor stiglitz and prof. meltzer put forward, or it gets

woe. you enter another phase of what the bank of england now calls a doom loop, where repeated cycles lead you not to just some unfortunate situation where there was always a transfer from the public to the bankers, but it leads you to fiscal ruin. look at the experience of ireland if you do not believe me when three big banks became to times the size of the irish economy and blew themselves up. when we should have done, along with t.a.r.p., or in addition to it, is implement a form of leverage cap relate to gdp, just as was proposed in the amendment to dodd-frank, which failed on the floor of the senate, 33-61. we should also implemented a cross-border frawork. given that those resolutions have failed, we should do exactly what prof. meltzer and

professor stiglitz have suggested -- which have higher capital in these banks. his astonishing, but unfortunately true that basel 3, with all of the supplementary questions and implemeation we will see for systemically- important institutions, will, i believe, leave us with a tier one capital requirement below that which lehman brothers had the day before it failed. lehman brothers had 11.6% tier one capital, and we will end up between 10% and 11%. how can this make sense? the swiss national bank is acquiring 19%, the bank of england is actively pursuing and try to implement closer to 20% requirements? -- requirements. it is not socially-costly. i know bankers claimed to the contrary, but they are wrong.

you should consult research at stanford and other leading and universities from the top people in finance are not captured by the industry. they say we need more capital, it is not costly and we need a version of what prof. meltzer just laid out for you. we are not going to do it. in conclusion, let me quote larry summers in his 2000 lecture to the american economic association where he reviewed the experience of financial crisis around the world to that point, particularly in the 1990's when he was with the u.s. treasury. "it is certain that a healthy financial system cannot be built on the expectation of bailouts." >> mr. segales. [unintelligible]

>> we need to establish what is the counter-factor. what will happen in the absence of t.a.r.p.? chairman bernanke and then secretary paulson represented the alternative as the collapse. if that -- if the alternative is the abyss, t.a.r.p. was a success. even if we have escaped the abyss, we have to conclude the t.a.r.p. was a success. we estimate that the bankruptcy of the 10 largest banks would have wiped out 22% of their value, for a total of 2.4 trillion dollars. the financial system was at

risk, and some intervention was needed, yet it is misleading to say that there were no walker alternatives. -- no other alternatives. there were feasible and superior alternatives. it made t.a.r.p. appear inevitable. i stated clearly -- by stating clearly where intervention was needed, it would of been possible to design plans that were more effective and less expensive. this is not hindsight. in 2008, i wrote a proposal to address the since instability of the financial system to an emergency reform of the bankrucy court that could transform the debt of financial institutions into equity. the feasibility of this idea lies in the fact that they are designed to deal with future bailout. the same would deal with the

bankruptcy of gm and chrysler. i did not write a plan for aig because i did not understand what the role -- the real plan for the bailout of aig was. if we agree that other feasible alternatives did exist, we have to concede that the co of benefits -- cost and benefits of t.a.r.p. the city alternatives. it cost $32 billion for the taxpayers. in spite of the enormous value created by the government intervention, taxpayers and a with a large loss. in older companies come the auto workers was the winner -- autoworkers' union was the winner. the taxpayers were the losers, who lost $59 billion in the rescue. park was the largest welfare program for corporations --

t.a.r.p. was the largest welfare program for corporations ever created. it shows that this distribution was no accident. itas a premeditated pillage of defense taxpayers by powerful lobbyists. t.a.r.p. is not just a triumph of wall street, it is a trmph of k street over the rest of america. the worst impact is the incentives that it generated. it insured that led to the assistance recapitalized smaller banks. second, the way subsidies were distributed under t.a.r.p. showed any merges -- enormous return to lobbying. any phone call from the 202 area code had one mesge.

eventually, this request became government policy. third, the way the bailout was conducted destroy the faith that americans have and the financial system and the government. in a study conducted in 27 -- 2008, 80% of the american people said government intervention made them less likely to invest in the financial market. it enshrines the the large financial institutions cannot fail, and their creditors cannot lose. these expectations lead investors to invest money in the bank's most politically- connected, not the mt financially-sound. this is the end of credit analysis, and the beginning of political analysis. >> thank you. now, we will begin questions. thfirst question i have is -- moral hazard. one of the things that has been incredible about the way this

panel has functioned since i have been here is how bipartisan things have been. moral hazard has been raised in every one of our discussions. this is kind of the history of t.a.r.p.. could you each talk about how t.a.r.p. impacted moral hazard? mr. stiglitz? >> i think the point that has been made by paul four of us, and we did not coordinate our testimony, and this is reflecting where the broad span of the economics is from, a whole spectrum, but we do agree that incentives matter. if you know you are going to get bailed out, no matter what your losses are, then you have an incentive to take on more risk. the market gets distorted because the too big to fail banks get capital-letter a lower cost.

-- get capital at a lower cost. money fails on us idea of connectedness, as professor zingales put it. it is manifested in every way. his also manifested at a higher level. the banks have gone much higher returns out of their political investments than any other corporate investmt. you might say, from the point of view of a firm obligated to maximize your returns to your shareholders, where is the best way to put your money? it is on tasty. >> mr. meltzer. >> -- it is on case street. >> mr. meltzer? [unintelligible] [laughter] >> i agree. he is right. those incentives will never come.

we have to do something about it before. we have to have capital in the banks. we have to give incentive for bankers to be prudent in the risks that they take. no set of regulations is going to do that. i have given this talk to a lot of places, including the council on foreign relations, where i said regulations are made by bureaucrats, regulators, and circumvented by lawyers and markets. the first question was a man who got and said "i am wall street lawyer, who do you think shows them how to circumvent them? we need to have capital so that e incentives are on the banker a the stockholders to avoid. we started small. before the 1970's we did not

bail out large banks. his only something that has been growing, growing, and grow it -- is only something that has been growing, growing, and growing, and is time congress puts an it. to it get >> mr. johnson? >> it was recently said to be to fail is not a market, it is a government subsidy scheme, and it is an abomination. it should end. the new gse's, the government sponsored enterprises of today, include the largest six bank holding companies in the country -- bank of america, jpmorgan chase, wells fargo, goldman sachs, and morgan stanley. they should -- they can borrow more cheaply because they are backed by the government. they have an advantage of about 50 basis points. they want to become more global.

these are the things we cannot deal with when they fail. it is what makes it harder for any secretary of the treasury to refuse a bailout. jean farmer suggests that we should be looking at capital requirements closer to 40% or 50%. this is the% of their assets -- percentage of their assets financed with equity. they're not following the principles of basic finance. i would refer it to the website where it has been written aut for a broad audience and explained to newspapers. the technical people get this, and bankers refuse because they want to get paid on a return-on- equity basis, so they can get a lot of cash out in the boom, and walk away long before society bears these horrible alternate .ostost

>> increasing dividends, how does that fit in? >> it makes no sense at all. the federal reserve and other responsible authorities have not yet determined what systemically-important financial institutions should hold. there are the issues discussed with the previous panel with various lawsuits and put? and so on. we do not know how much capital they will need to weather the next stage. why would you allow them to pay out any of this capital in dividends? this is allowing them to have more leverage in their business. the bankers want it because they get paid on a return on equity basis. if there is a put option, we write the put option, bearhe cost of that, and you are increasing it by allowing them to pay dividends. it is irresponsible. the federal reservehould back off fromllowing this increase

in dividends, which is apparently where it is internally headed towar. >> i look at this time to have mr. zingales comment. [inaudible] >> we always think about shareholders doing crazy stuff, but more authorizes on the side of investors. during the crisis, i was talking to a cfo who had to park liquidity -- this was in europe -- he had very large liquidity. he was worried and said i needed to invest in a safe place. what is a safe place? the banks with more capital of the banks that are more politically connected. he is creating incentive for lenders to actually lend more to the banks that are politically connected independent of their safety.

bankers who find that extremely cheap found -- find it irresistible. sometimes they want to speculate. sometimes they do not see the end in sight. in the case of lehman brothers, at the end, dick fuld was not playing on strategic risk taking. he was simply not seen the mistakes he was doing, but the credit market was not there to stop him because the credit market failed to insure by the too big to fail policy. let me add something that is slightly different to my colleagues her i would say that it is not feasible. it is like trying to stop a parent from sitting a child. we should not bailout our children.

when their life is in danger, we cannot resist pre-- resist. even if we promise not to do it, eventually we will do it. the way to lay out this system is making sure a system is in place. it is not the they do not have the instruments. let's take a case where they did have the instruments, like in citizens loans, or in the case of washington mutual. the regulator hadhe instruments to intervene. do you know where they intervene? where the credit default swaps price was $3,305, ending a 33% read over the break. if you do go washington mutual and shareholders, you will find there is a suit because shareholders are complaining that regulators intervened too early cardboard -- early credit

you are a turkey, thanksgiving always comes too early if you are a shareholder of a bank that is out of money -- always comes too early. if you are a shareholder of a bank that is out of money, intervention always comes too early. we need to ask for them to intervene early on, and give them a choice to either recapitalize, or you are liquidated. in a sense, what the gentleman from the treasury was saying with the stress test was exactly at -- and out and o choice -- either you recap -- either you recapitalize, or we take you over. all the problems of raising capital descanted -- disappear. >> thank you. mr. mcwatters? >> that is a tough act to follow. when i read your testimony last evening, a little bit after midnight, i was running through the pages, and i thought there were four minds thinking pretty

much the same way. i happen tagree with most everything i was reading, which was delightful. it raises the question -- if we go back to september, 2008, if president bush, secretary paulson had called you and said we were in a really bad jam, which should we do, what would you have said? mr. stigtz? >> well, i think it is clear that there had to be some government action, and it is also clear that we have all said the real mistake was letting things get to that position. it is also the case that given what we know now, the fed knew that there was a lot of turmoil in the financial markets well before everybody knew -- the financial inquiry commission pointed this out.

after bear stearns, the argument that lehman brothers did not have authority, it was nonsense, because if they really believe that, theyhould have asked for authority. they needed to do something. the problem i had, and i try to emphasize in my remarks, is the way they gave money to the banks was wron interesting, when t.a.r.p. was passed, they said they were going to buy the troubled assets. everybody pointed out that that was a flawed approach, and to their credit, paulson change the strategy after several weeks. he would have then an even worse disaster had he not change that strategy. the way the money was put in come without conditions, without thinking about the structure of where you want to go, and without thinking about the mortgage market most importantly, which was the underlying source of the problem, it seems to me that they went in without any vision

or understanding of how get relending started, they had had plenty of time to think about that. it is not the intervention. it is how the intervention was done. >> mr. meltzer? >> i am in a good position to answer your question, mr. mcwatters, because i appeared on a program when the program was first announced, and i said i am against it. he has not explained how is leadwort. he does not have a coherent plan we need a coherent plan. -- coherent plan. we need a coherent plan. i have been on television many times. i received overwhelming response from the public. nobody that i knew, it was 149-1 on my side. i got a call from treasury.

they said not in so many words, but the message was clear, "ok, wise guy, what would you do?" i told them what i would do. i said, the banks in, raise capital in the market. if you need $20 billion, raised $10 billion in the marketplace, and we will give you $10 billion in subsidized rates. if they cannot do that, they are done. the treasury to benchley did something like tt, close to that, but at the time they did in which he eventually did something like that, close to that, -- eventually did something like that, close to that, but at the time they did not want to hear. capital is what protect the public and incentivizes the management and thetockholders. >> thank you. mr. johnson? >> if you give me the choice between global come get --

calamity and unsavory bailouts, i will suggest unsavory bailouts along the lines that mr. meltzer was suggesting. i think all of the suggestions we are making with regard to how to learn the lesson and reduce the chance of a global come and -- calamitous and they're going forward, i agree that capital is the concept. we need a lot more capital. he needs to be pure, real capital, not hybrid capital, not contingent capital. he needs to be real, equity capital. if this is not costing from a social point of view. if the bankers do not want this. all the arguments they put forward against this is pure lobbying. it is a complete public relations exercise. we need a lot more capital, and we need to persuade anyone that wants to do a banking business, that they need to be just as

well capitalized >> the question is not hypothetical. what i did not speak directly to treasury, i did speak with the chairman of the committee who spoke with pauon and i had a very clear proposal that articulate into the pieces i referenced in my testimony. one, and the second, where i would say, simple. youasically acqre a bank -- require that banks with the long term debt that can absorb the losses and if you think this requirement is coercive, you give the option to buy back their shares for what is known and literature, which is very fair. not being course of at all would have been immediate -- coercive

would have been in media. american idea, the market is not ready to provide the capital. in that case, there was not even that objection. the plan was feasible. as i said, the credisqueeze is proposing it as the law of the land in switzerland. why? because banks in switzerland know they are too big to be saved. they're ccerned about what is going to happen in theuture. in the u.s., they're not concerned so they lobby in a different direction. >> thank you. i will ask one more question. this is my second round. if you fast forward to today and look at the other end of the buchan, march 4, 2011, problems we have now, the chair has described moral hazard and the like. we talked about that. what did you do? i can anticipate your answers as i think you've given them, just to make it very clear on the record, what would you

recommend march 4, 2011? >> briefly, first, i want to emphasize the things we have said. one, you need more capital. and that you need increasing capital has to be with the size of the bank's, the risk of too big to fail. it has to be that this distortion has to be eliminated. secondly, if you have a problem, you should play by th ordinary rules of capitalism. when you go into bankruptcy, you convert that to equity. it is really a version of the standard rules of capitalism. you look a the numbers back in citibank, they had enough long- term capital it was more than enough to manage them, more than we put in. the answer -- the resolution

authority ought be nothing more than basically the rules of capitalism. but i do feel that because there are agency problems, that the owners or the managers of the banks do not necessarily act in the interest of the owners. the kind of a managerial capitalism, that you have to go bad -- be on that to have regulations and restrictions. for instance, it should not be allowed for government insured institutions were very large institutions to be writing these kind of risky derivatives and under other high-sk activities. so i think we do need additional regulations and more transparency that would circumscribe excessive risk- taking by either government answered institutions or large

institutions, because i do not think capital is enough, is a full solution. >> thank you. >> at the sk of sounding as though simon johnson and i collaborated, i would say i would change capital to equity and picking up what he said, and what i would do is raise the requirement to say that for every -- after minimum size to protect community banks, and you start to phase in capital requirements which start at 10% and really increase as the size of the bank increases so bad -- so that going up to 20, said the largest banks would be paying with their pain in the 1920's. i would face that in beginning now because the big banks are

reporting subantial profits and i would give them three years to get to the required capital. as far as other regulations are concerned, i am a believer that regulation only works when it is incentivizing the regulated. that is, if you compare drug regulation reese said, well, we will give you a monopoly and you produce this drug. then you have someone who wants to protect his right. we have to do the same thing. capital is one way to do it. there are other ways to incentivize the bankers. if we just give them prohibitions, you can see it happening, you can see the number of lobbyists, bankers, in washington every day trying to write the rules that were passed i dog-franc. that is not the way we're going to restrict future risks.

>> thank you. >> do not allow them to pay dividends today. we all agree you need more capital. nobody knows how much capitais necessary. even the banke will conceded the easiest way to increase equity in the business is to retain earnings. they have profits now. that money stays in the bank, belongs to the shareholders. pain that equity under these circumstances makes no sense in econom terms. it is irresponsible, encourages risk-taking of these banks, high leverage and deb it is completely contrary to the stated policy both in the broad of the administration. mr. timothy geithner says we need capital, capital, capital. it is completely against the process. the federal reserve process stress test and how it will apy to financial institutions

systemically is not done. why would to let them pay capital under the circumstances? it makes no sense and they should not do it. >> thank you. >> i agree with more swhat has been said with one situation. if it is done in accounting terms, it is not particularly useful. washington mutual did not violate any capital requirement before it failed. lehman at 11% of capital, just the day before it went bust. i do not think this accounting based measure of capital, particularly use for, what we need to do is market based. we have a proposal based on a swap. he to be based on other indicators. i think the notion is, we don't want to treat everyonthe same because there are people who behave properly. why should they be subject to the same walls? i think the rules should be --

you cannot pay dividends or pay cash bonus. you have to transfer the bonus you want into equity. that would play a bigger role in recapitalizing banks than even stopping dividends. >> thank you, tournament. -- thank you, gentleman. >> if i have learned one thing from this panel, it is to not ask you all the same question. [laughter] i have several questions, but i will ask thepecific questions. first, when secretary spoke, one thing i took away from his testimony was the argument that while we had a lot of problems in our economy, those problems are not really related to tarp.

perhaps even problems in credit are not tarp problems not. professor stiglitz, i think your testimony to be the view you do not agree with that. cayou explain what it is in relation to those macroeconomic matters that are related to tarp? >> in the short run, and in the long run, but in the short run, i was turned argued if they had given money to the banks in ways or in other ways, they could have induced moral lending. and induced more restructuring. for instance, by the time we bailed out citibank and bank of america, we were very large shareholders. we could have been even larger shareholders if we had shares --

>> money for the value, so to speak. >> yes. if we used that shareholder voice to say you cannot go make your profits out of speculation or go pay these bonuses -- back to the paying out bonuses -- and decapitalizing the banks, wt was the to boy's recapitalization. we allow the capitalization of banks through the palace of bonuses and dividends -- payouts of bonuses and dividends, we did not put any pressure or constraints on the behavior of the banks. so there were, including the restructuring of the mortgages. so given the amount of money if you're putting in hundreds of billions of dollars, it should have some voice in what happens in the rult of that is that we did not get what we wanted, which is restarting of the economy. the long run, the more difficult

or even more worse problems because we have a more concentrated banking system in interest rates will be higher, spreads will be higher and the result of that is not only is there longer risk we been talking about, but in the short run, because the market is less competitive, the flow of money in the long run will not be what it should be. >> prof. johnson, treasury seems convinced the banks are healthy, sound or something like that. i wonder if he would comment on two things. is that right? and happen anyone know that is right? with top and a lot about the liability side, given -- we have talked a lot about the liability side, but what about the asset side of the balance sheet? >> that is exactly right. there's a great deal of uncertainty around asset values.

of course, the correct way to assess the state of any banks is to do a stress test. the downside scenario needs to be much more rigorous or negative, pessimistic than the one they used in 2009. i fear the stress test they're doing now, although they have not disclosed anything really about them, i fear the tests are even more gentle. my answer is, we don't know. there are many bad things that can happen. are not out of the recession as my colleagues have mentioned in many dimensions. the sensible, a prudent thing to do is to require the banks retained earnings and build a bigger equity buffers against potential future losses. that is in respect of of whether you accept my view or other fees. -- that is a respective of what the except my view or other views. the head of the bank of

england, even if you do not agree with the views of those people, just today, the only thing that makes sense is to have the retained earnings right now and not pay out dividends, given what we know and the many things we don't know, fear about the economy going forward. >> prof. meltzer, you're suggesting that we have size adjusted capital requirements. as i noted in the prior panel, it was one of the recommendations of this panel in our regulatory reform progress to congress. >> good for you. >> thank you. it seems the most obvious idea to me and i'm heartened to see some of your experience having recommended it. >> said vitter introduced a bill to do it. >> i have also been involved in the arguments on the hill that prevented it from being mandated it in dodd-frank. i find it is being treated as

though you're suggesting a perpetual motion machine in the political process. can you explain to me why something so sort of straight forward cannot seem to be taken seriously? >> yes. the bankers do n want it and they come down with the lobbyists and hordes to tell the congressman that you are facing disaster. there will not be loans for the public or capital to build industry, all of that stuff. >> the me ask and then i will stop. >> we got to the 1920's with capital requirements. >>ince we're talking about size-weighted capital requirements, would that not as many would be a powerful incentive for institutions to be smaller and then they would lend more when there were smaller? i mean, would it not move rashly to step away from the too big to fail structures and the amount of credit provision would not be

affected? >> we would remove the incentive, which pushes them to be bigger and bigger all the time. that would be good. i do not think they would be small, but i think it would be smaller. there isn't any evidence that i know that says their economies scale of that size, which makes them want to be bigger. i want to add one other thing. in 1991, i believe congress passed the audition. are you familiar with that? did they use it at all? no. what did it call for? it called for early intervention. just completely ignored. they gave reasons. they said it did not apply to holding companies and such things as that. given all the things they were doing, they could have made it work. they closed them down. we have to legislate it. thank you. >> i am allowed to keep going, i

am told. [laughter] >> my understanding, theres not economies or evidence of scale or scope and banking over about $50 billion in total assets. the macy $100 billion if he wanted -- you may say $100 billion if you want to be generous. >> i want to emphasize one more theoretical point, the requirements of leverage, basic idea and economics that says leverage does not buy you anything except hire probabilities of defaults. and so the argument that they're making that it would interfere with the efficiency of the economy has no support in the economics profession. >> one argument i want to dispose of. there is the notn that -- you suggested various levels of

capital be required. but how much capital should be recorded in a given size, just the notion of a sliding scale does not -- is there any basis for the argument that a sliding scale would bring on a credit crunch? >> no. >> no. >> can i dissent on this? >> i think i found a point of disagreement. i feel proud. >> i have to say i have great respect for prof. stiglitz. i think since miller, the level is not irrelevant. am surprised to say to see now is completely irrelevant. i do not think is relevant i think in the current situation, if you were double

the capital requirements to banks to mark, you would have a credit crunch. there would be a consequence. why? the managers do n want to raise more equity, regardless if this is in the interest of the shareholders. they do not want to raise more equity. the alternative to raising more equity is to lend less. i think there would be consequences. i think the argument they're going to use to say why the slidin scale is bad is that it is going to unfairly affect the large banks. i completely disagree with this argument. i tnk now we unfairly favor large ban, so a sliding scale with only bring a level playing field, but that is the argument they will make. >> your point about the credit unch i aonstitutionalist argument. >> why? >> you get more collective form

of lending, that is, if a bank -- one argument made is of the corporations are so big that they need to have big banks, but they can syndicate the loans for hundreds of years, syndicate the loans and service e banks. >> known is proposi you immediately double -- no one is proposing immediately double it. you could dump assets. look for example at the plan put forward by david. experienced treasury and to this demonstration. now the proposals out there, ways you canime the shift in capital requirements to phase in these kinds of either higher level overall or step level as prof. meltzer is suggesting. it would not a contraction mary. >> my chair has some of this

must come to an end. >> this is been a fascinating conversation. i'm certainly not one to try to compete with you on yo field. i will pull you over to mind as a mere labor economist and start talking about ecutive compensation, which has received a certain amount of attention. my own view of this issue and combined with the current crisis sort of has evolved over time. to one in which it seems to me when you have a too big to fail financial institution, it is the case that shareholders very much value risk and are going to move toward more leverage. they are going to compensate executives in a way that would have them shift the risk profile of the investments they make out to a more risky environment. you do not need to take a very strong stand in terms of what

you think executive pay is set optimally or not. in the presence of too big to fail, both shareholders and executives are willing to move towards more risky forms of investment and are going to be compensated. i guess i would like your thoughts and my hypothesis. i will start with you, professor stiglitz. >> the important point you're emphasizing is that the decisions made by the banks are made by managers, not the shareholders. and there cannot be misalignment of interest -- there can often the misalignment between the two dead. i remarked before, the needs to be regulation affecting shareholder compensation, regulations in general, including those affecting shareholder incentives. those incentive structures can leave them to want to undertake excessive risks and there may be

limited ability of shareholders to constrain the ability of managers in that way. there is a second problem in managerial compensation you did not mention that i think is important to realize. when you get shareholder stock- option kind of compensation, it provides an incentive for you to distort the information that you are providing. so it encourages non transparent accounting. there's always going to be a lot of discretion, a lot of the issues that we have ignored the mistakes that have been associated with the ability not to keep on bad mortgages at full value and the whole distortion in the assessing of the asset structure. but the point is, if you have compensation that is related to the seeming performance of the share market, you have an incentive to distort the information proded by the

market and to the regulators. >> does anybody have anything different to add? >> yes. if i may, i agree theoretically if the two big to fill guarantee holes, then the interest of management and his guard can be aligned to they want them to take risk. as a practical matter, the kinds of concerns professor stiglitz engines comes into play. i would refer you to a paper that went carefully through the compensation of the top 14 executives of the top 14 financial institutions in the u.s. between 2000-2008 and on as executive stick out in cash bonus and three stock sales, $2.6 billion in cash. the top executives took around $2 billion in cash. if you're a shareholder in that time, you did pretty badly. that suggests as a practical matter, maybe because of misrepresentations and maybe some other reasons, the

shareholders do not do well the when the managers take a great deal of risk and get paid on more less immediate return basis, equity basis, not properly risk adjusted. >> i worried about this problem a lot as a practical thing because i was a chairman of an audit and composition committee for a fortune 500 committee -- company. i face the problem of how your award chief executive and a subsidiary executive. i do not think there is an easy answer. dodd-frank , up with the proposal, and on finding -- non- binding vote. so far, i think the evidence shows that the shareholders do not care much. i think that should be evidence enough to leave alone. >> professor -- >> except in this case. >> i want to ask you a somewhat

different question. a more related to your recent paper "paulson's gift." yet estimate that's tarp preferred equity infusions and the fdic debt guarantee costing taxpayers $44 billion. you talk about an alternative plan. the government could a charge more for both the equity infusion and the debt guaranteed as one of the day when invested in goldman sachs three weeks before the polls and plan. can you elaborate on the difference between private party transactions undertaken at the time of tarp and the actual tarp transactions? >> yes. i think they're two aspects. first of all, the capital infusion that was done was done

not in market -- known in market terms, worse than the one that warren buffett got in return. the same is true for the debt guarantee. what is interesting, when the debt guarantee was extended, we observed the overall cost of insuring, the institutions dropped. even if we take the value of this cost after the announcement -- think about systemic effect an individual affe. even if we sort of take away the systemic effect, the cost of insuring institutions was too cheap and was not really been varying according to the type of institution. for jpmorgan, this was not very convenient. for citigroup or gdman, tremendously convenient.

the nuer are doing does not give a good picture is sort of the cross-section was -- j.p. morgan was heavily penalized by the plan. the market expected them to buy on the cheap and the other worked expecting to sell. citigroup, morgan stanley and morgan wer tremendously helped by the plan. there's sort of this cross- section aspect. it is important because it distorts the market incentives. by treating everyone the same, the good managers are not rewarded in the bad managers are not penalized. >> let me ask a final question. as anoften characterized able to out reached consensus on any issue. i would argue the five independent economists and the war room, i will be arrogant enough to put yourself -- myself in your group, agree about the importance of incentives and the effects the distorted incentives

have brought this problem and continue to have today. this is a point i have made repeatedly since being on the panel. i can understand why folks ignore me, but i struggle to understand why they ignore you. and i guess i am curious on your thoughts. what are we doing wrong? what are we doing wrong as a profession? i think these issues are something the economists do agree about. i guess i would like your thoughts. i am tired of shouting to the wind. i don't know about you. professor stiglitz, i will t you lead off. >> i think what is interesting about this particular case is that there is a broad spectrum of support from the left and right in the economics profession, but this goes back to the particular groups who are big beneficiaries of this

particular system. they have a lot of money. they have a lot of money to invest both in trying to shape public opinion and to get what they want. i do not find it that mysterious, and a way, that ere is a lot of money at ste. a lot of money. the money on the other side of try to create a more efficient, more fair system, the point that a number of people have always made, those are lots of people and you have concentrated in fisheries and the alternatives are much more diffuse, very hard to get a fair ttle we have this much money at stake. >> prof. meltzer, you have been doing this for a long time. what are your thoughts? >> i'm a strong believer in what is called political economy, that is, making policy the first

four letters of policy and politics are the same and the money is very important. we are fighting a battle -- i agree with my old friend who said, our job as economists is to come up with proposals and when the crisis comes, we will be better than the proposals that will occur at that time. he and we have had a record of getting things done that way in crises. in the ordinary course of events, you're fighting tough political battle in which, as joe just said, is much at stake and a lot of money that goes into campaigns coming from wall that makes a big hurdle to get over.

when my bill was produced, there was not much support from the senate banking committee. >> it is a fascinating question. when confronted by these proposals, the bankers were going to move to the u.k. when confronted by the u.k., they said they were gog to move to new york. you have to have the world financial centers. there are people within the federal reserve system and other regulatory agencies who totally get this. i am not saying we convince them. they came by this opinion by themselves. there are other people who have said they are adamantly opposed to apply the logic we have presented here today. they do not comeut and discuss it enough and clearly enough.

ultimately, the reasons make no sense at all. it was the legendary republican senator at the beginning of the 20th century who said there are two things that mattein american politics. the first is money. and i do not know what the second one is. [laughter] >> i think there are a couple of reasons. we are rinded that there are people who are well organized and there is a lot of money at stake. i believe in democracy. on some topics, this can be overme. it requires that the topic is sufficiently interesting and easy to understand -- easy to explain in the media that it generates public outrage. in terms of the developmental

issue, people are much more sensitive because you can explain it easily to be ordinary human being. when it comes to capital requiremts, it is hard to be successful in explaining or pushing the political agenda against the entrenched interests. this is not a selected sample. there are people who are actively engaged in public speaking. i do not think you can say the thing about most economists. most economists do not write in newspapers and to not actively take positions and they are not public figures. the type of policy advice you

give is not strong. i think they do not care. >> thank you. >> superintended? i say to the best for last. >> we know that liquidity is a firm's failure. lehman brothers is a good example with respect to the capital position at the time. the impact of short-sellers, the fact that short-term funding can dry up at any point in time. i would be interested in your views on the relationship between capital and liquidity and your views on the proposals out there, particularly under iii and the proposals with respect to liquidity

requirements. >> the way that it represents a short-term debt can run quickly. i do not want to take any risk that the other party will fail over night. over a day, it is not large enough to compensate for the risk. when the market sentiment shi and there is a fear that the, the party is an solvent, the short-term lenders stop lending. that is why it is important to have a cushion of long-term debts. the ball low requirements -- the ball so -- the basel iii requirements for long-term debts are important.

short-term borrowing is favored on the part of institutions. the bankruptcy in 2005, by exempting personal bankruptcies, they made them cheaper than anyone else and make them more fragile. i am favor of some requirement in terms of compositional liability. >> the iss you raised focuses particularly on thquestion of the shadow banking system. this is a serious problem.

a lot of discussion is focused on the banking system. the point where lehmann brothers showed up was the collapse of the reserve fund. people thought they could use the shadow banking system for a substitute -- as a substitute for the banking system. we have to see them as an integrated whole. we should not use the shadow banking system as a way of circumventing the banking system. that is one of the important aspects. i want to agree with the professor. the incentive structures that are built steadily to the structure, like the banking provision, is an example of something that is a major distortion that got little attention at the time it was adopted.

it is an example of the kind of concerns. another examples where you have incentives where some of are done in a transparent market and some are done over the counter. that is an incentive to move things into the dark area where there is no way to regulate. the way we are going right now is to create new opportunities and incentives to move things away from where we canee what is going on to where we can. these liquidity issues become all the more important. >> i did want to ask about the regulatory reform efforts about riskier activities, proprietary trading, swap activities and moving those activities, the proprietary trading, had to fund -- proprietary trading,

hedge fund activities into a holding company. i would be interested in your views. are you shifting those activities into a less regulated area or would you prefer to see them within the bank holding company structure with a higher level of oversight and capital requirements? >> there are two separate issues. we have to deal with the too big to fail banks and the financial institutions, whether they are banks or non-banks. we have not talked about the to court -- the two core letters that failed. that represents -- the two correlators that failed. that represents systemic risk. where ever they are, there needs to be transparency.

and the movement to allowing large segments of transactions to be in a non-transparent been you seems an invitation to problems. >> i would like to say that on the money market funds, the biggt part of the off banking system, how did the crisis come about? they had to mark their assets to markets until they got to the point where they no longer could do that and pay the face value. they got the sec to change the rules. they did not have to mark their assets to market. when there was a run after lehman brothers, if they had been forced to mark their assets to market, that would have been the normal course of events.

that w just a bad ruling. we ought to reverse that ruling and say when the liability is only worth 95 cts, they are only wor 95 cents. that is a mistake. i agree with a comnt you made quickly. it is a major problem you have to think about. if you regulate too much, they are going to shift and someone has to bear the risk of the full movement of the american economy. if we shipped those risks out of the banks, the most regulated -- shift those risk out of the banks, the most regular -- most regulated part of the system, that will not be in the long- term interests of the economy. you have to be concerned about what we do to keep the risks where we can see them. >> the most descriptive is to

a-mole.he whack- >> that is another reason why capital requirements are much more desirable than regulation. >> i agree completely. many of the chateau structures were constructedo get around from -- to get around capital requirements. i agree that we have constructed incentives fotoo much short-term funding of longer-term assets. they should be funded with equi because of the nature of the risks. i would emphasize we need high capital requirements across the board. we were discussing an incentive for a management to get big enough so they can fail. i would end by quoting someone i

know in the hedge fund industry. he said, let's face it, on the too big to fail debate, you lost. now what we are working on in the hedge funds is how did we come too big to fail? >> can i endorse strongly with the professor said. i think the single evil rule is the one that provides an appearance of safety in money market funds that helps the market themselves as safe deposit when they are not. have 2000 pages of legislation. we could have changed that rule. i do not think it isubject to coressional approval. it is a rule of the sec and no one is discussing doing it.

>> i have been around this place for almost 40 years. i have never seen a paddle or witnesses in the more agreement in my entire life. let me tell you something, i know you know about disparity in the political ideas of the witnesses. there are different use about this about everything between everyone of here on the panel. it is difficult to get some of these ideas that seem to be straightforward and widely held by people who have been thinking about getting it into legislation. i really want to thank you all for taking time out of your day to come down here and do this. we really appreciated. the record of the hearingill be kept open for one week. i want to finally say, banks.

i want to thank my fellow panelists. i came in on this late. the welcome and the ability -- i have never seen a gro that is so easy to get along with and is so easy -- so willing to come to common ground. having been a staff person, when you show up at this point when the staff is in existence, you are a little scared. i want to tell you, this has been a top staff. they are absolutely incredible. naomi and elizabeth do an incredible job. i want to thank everybody. with that, we will close the hearing. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> will there be a public

report? >> next, the supreme court or a arguments in the ashcroft versus al-kidd. then, president obama speech to my school students about education. after that, "washington

journal." this author wrote several books on the american revolution. her latest was published last year. join our conversation with auline maier sunday at new eastern on c-span2. this weekend on "american history tv" live from the u.s. capitol, the 150th anniversary of abraham lincoln's first inaugural address. we will go to f street in washington and visit the home of woodrow wilson. christopher wright talks about dwight eisenhower, the cold war,

and the buildup of our nuclear arsenal. all weekend every weekend. it the complete schedule online at c-span.org/history. >> on wednesday, the supreme court heard oral arguments on whether former attorney general john ashcroft could be held mars -- held liable for the detention of an american muslim. he says he was detained as part of a plan to arrest muslim men suspected of having terrorist ties. a lower court rejected mr. ashcroft bought the assertion that he was immune from lawsuits. justice kagan did not participate in this case. this is about one hour.

we'll hear argument next this morning in case 10-98, ashcroft v. al-kidd. general katyal. >> thank you, mr. chief justice, and may it please the court -- this lawsuit seeks personal money damages against a former attorney general of the united states for doing his job, allegedly with an improper motive, yet the attorney general, like the federal prosecutor in idaho who sought the material witness warrant at issue in this case, was performing the functions of his office. there are three reasons why the petitioner should not be personally liable for money damages. the first is because the prosecutor's act of seeking the material witness warrant is integrally associated with the judicial process and entitled to absolute immunity. to view it any other way is to expose both line prosecutors and high officials to lawsuits by highly incentivized litigants based on their purportedly bad motives. that is something this court has manifestly resisted and for good reason, because improper motives are easy to allege and hard to disprove. allowing such suits to proceed

would result in burdensome litigation and interfere with the ability of prosecutors to do their jobs. the second reason is that the fourth amendment was not violated, and, therefore, qualified immunity applied. there can be little doubt that the statutory requirements of section 3144 were met in this case, and, equally, there can be little doubt that the subjective motivations of attorney general ashcroft or the line prosecutor are thoroughly irrelevant to whether a fourth amendment violation exists. this court has repeatedly rejected subjectivity, explaining that otherwise time- consuming, vexatious, burdensome, and, indeed, destabilizing discovery and litigation would be the inexorable result. and the third reason, and the easiest reason, is that whatever one thinks the applicable law is, what it -- it was manifestly not the law in 2003 when the warrant in this case was issued by a neutral judge in idaho. >> can i ask whether your second reason doesn't boil down to saying that it makes very little difference whether ashcroft is held immune by absolute immunity or by qualified immunity? >> oh, no, it - >> once you say that -- that

motive is not introducible with regard to the qualified immunity question, and once you say that he's using a witness subpoena, and you can't look behind it as to whether he was abusing it for some other purpose, is there any difference between absolute and qualified immunity? >> well, i take it there may be a difference. we think the court should first decide the absolute immunity question, which is the way that this court has historically handled questions when there's an absolute immunity question and then a qualified immunity. i take it that the qualified immunity question in this case is one about whether motivations matter for the fourth amendment. whereas the motivation question in the absolute immunity sense, as respondents see it, is something broader. it's not limited to the fourth amendment, per se. their argument is if the prosecutor is -- has bad motives essentially or a certain bad motive, an investigatory or purposeful bad motive to engage in preventive detention, that somehow official - subject to final review pierces the veil of absolute immunity. that is something this court has never accepted.

>> well, i thought the -- i thought the argument, rather, was that this is not as close to the core of the prosecutorial function as some of the other functions to which we have given absolute immunity, and since it's so dangerous, since there is such potential for abuse, we shouldn't confer absolute immunity on this absolute immunity on this particular conduct. but i don't understand why if we agree with you on qualified immunity, there is any difference whatever. >> justice scalia, to be sure, they are now making that argument in this court, that this doesn't fall -- this isn't intimately associated with the judicial process. below, of course, they said the reverse, that material witness warrants were associated with the judicial process and that the only difference is that - that, here, they had a bad motive. so i've talked about the bad motive point. now, with respect to whether

this is intimately associated with the judicial process, these are material witness warrants being sought in connection with an ongoing investigation by a prosecutor. it is quintessentially a prosecutorial function to obtain these warrants and has been for -- for hundreds of years, and it's the exercise of the prosecutor's professional judgment, which is something that this court has looked to. >> was the prosecution already pending when this -- when this warrant was issued? >> yes, it was. the indictment of mr. al- hussayen was in february 2003. the prosecutors learned in march that mr. al-kidd was about to board a plane and go off to saudi arabia for an unspecified length of time. they then acted immediately. they went to the court and said we need this warrant to secure this testimony. that is, to me, essentially what prosecutors do and protected by imbler. to see it any other way is to expose prosecutors to lawsuits for - >> was mr. al-kidd -- was he released after -- i understand

he didn't testify at the trial, and there was an acquittal, and then other charges were dropped. was al-kidd still in custody as a material witness after the trial was over? >> justice ginsburg, he was in -- he was detained for only a period of 16 days total in 2003. >> but he was restrained much longer -- for 15 months. >> he had travel restrictions placed upon him until the trial was over and until the government -- because after the resolution of mr. al-hussayen's case, which was acquittal on some charges and a hung conviction -- a hung -- a hung decision on others, the government thought about retrying mr. al-hussayen, took it very seriously, and 20 days after al-hussayen's verdict by the jury, we reached an agreement with them in writing that mr. al-hussayen would leave the country and -- and not come back, and in exchange we weren't going to prosecute him

any further. and so, immediately -- i think quite soon after the jury verdict, the conditions placed on mr. al-kidd were lifted. and i should say that the material witness warrant statute laces into it a whole suite of safeguards to prevent against -- as, justice scalia, you pointed out -- the potential abuse for the -- for material witnesses by prosecutors. i think congress has set up several different things to prevent that. the first is, in order to get a material witness warrant, the prosecutor needs to show both materiality and then practicability. the second is that there are strict limits placed on the conditions of the -- on the ability of the prosecutor to detain anyone. section 3142 says that a detention can only be allowed by a judge if, quote, "no condition or combination of conditions will reasonably assure the appearance of the individual." and then there's a formal procedure where they have a right to counsel, they have

the right to cross-examine witnesses, to present evidence, to proffer evidence at the hearing, and the like -- all to show that they shouldn't continue to be detained. >> well, in light of these restrictions, i would like to come back to the question that i understood justice scalia to be asking. if the court were to hold that obtaining a material witness warrant does not violate the fourth amendment where the statutory requirements, and in particular establishing materiality, are met, why would it be necessary for the court to decide whether there's absolute immunity when a prosecutor seeks a material witness warrant? >> for two reasons. number one is i think that's the way this court has historically gone about it, probably for reasons of constitutional avoidance, to not reach constitutional questions if there's an absolute immunity question. and the second is, here, you have a ninth circuit decision, justice alito, that says that absolute immunity can be pierced by a prosecutor's bad

motive. that is something that infects not simply material witness warrant cases but, indeed, virtually any case. as we point out and as the dissent below pointed out, that kind of argument could be run kind of argument could be run by any defendant who says you didn't intend to actually indict me, or, you didn't care about that, you really wanted to flip me to get testimony against some higher-up. and to allow defendants to make those kinds of arguments and to expose line prosecutors and attorneys general to that form of liability is an extremely damaging proposition. the -- with respect to the fourth amendment question about whether or not motive applies, i think this court has quite clearly said in whren that motive is not something that should be looked to, that the subjective motivations of the prosecutor are not -- >> but that's after there is probable cause to suspect that criminal activity has occurred.

and then you -- once you have probable cause, they're not going to look behind probable cause. but, here, the whole reason for using this material witness statute is that there isn't probable cause to believe that al-kidd did anything. the violation -- there was no violation of the law. so whren is different. it's a different case. >> justice ginsburg, it's certainly different in -- in that respect, but i do think that difference doesn't matter, because i think what whren and edmond and the cases were getting at is, is there some objective, individualized determination by a neutral judge? and, here, as i was saying earlier, there is quite clearly that laced into the 3144 statute itself. that is, the judge must find materiality and - and impracticability of the testimony. and that is a standard performing, i think, a long-

standing government function of making sure that testimony, important testimony, is available at trial. so it is not like a situation in which the government, just on their mere say-so, can put the - can detain someone on the basis of them saying, well, we think this person has information. i think there are strict standards placed on that, and, indeed, federal rule -- federal rules of criminal procedure 46 adds standards to it by saying that a prosecutor must report to the judge every 10 days about anyone who is detained and assure no more detention is necessary. so that - >> i don't see - >> how does that - >> i don't see how that would make any difference to the -- at least to the absolute immunity question. you wouldn't assert that there is absolute immunity if there's a statute such as this, but there is not if there isn't. i mean, either this is core prosecutorial function for which he can't be sued or it isn't. so what difference does this statute make as far -- as far as absolute immunity is concerned?

>> absolutely, justice scalia. i was just answering justice ginsburg's question about qualified immunity. >> okay. >> i imagine one point about the statute might be that the statutes, going all the way back to 1789, do reflect that this is a prosecutorial function to the extent there is any doubt. so, for example, the 1846 statute said that an attorney -- excuse me, an attorney of the united states must apply for a material witness warrant. >> so for us to agree with you on absolute immunity, we would have to believe that even if there were no such statute and if a prosecutor simply detained somebody as a material witness without any check of an independent magistrate, he would be immune? >> i think that is correct, that that is quintessentially what prosecutors do in the exercise of trying to get a trial going. now -- >> suppose that a prosecutor reads the statute, there must be an affidavit that says this witness is material. witness is material. and there is irrefutable

evidence that the prosecutor said to colleagues and others, i do not intend to try this person, ever, no matter what -- i just want to ask him questions. in that case, has the statute been violated because he is not material? >> well, if the -- i'm not sure i totally follow - >> i'm not saying it's this case. i'm saying it's a hypothetical case. >> if the evidence shows that the evidence is not material, then the statute is violated. >> and the reason it is not material is because the prosecutor has no intention whatsoever of ever bringing this person as a witness in any trial. >> i do think that that would generally mean that materiality would be violated. i could imagine some theoretical construct. >> if materiality is violated, does not then that -- that prosecutor -- since he had no intention of bringing him to trial or of having him as a witness at a trial, that prosecutor would not be immune? >> justice breyer, let me -- just make sure that i understand the contours of your

hypothetical. i don't think that subjective motivations of the prosecutor go to materiality. so if - >> well, how does it -- >> here's how i think it works. so i think that congress set up the objective two-part test to decide whether or not an arrest warrant would take place, which is materiality and impracticability. now, that isn't subjective. that is simply, does the person have material information that can be used that -- that's relevant to the trial. now, if the person has a -- the prosecutor has a subjective intent that says i'm never going to use this testimony, then i think that that doesn't -- that will almost always reflect the fact that materiality just objectively hasn't been met in a given case, but theoretically i could imagine a circumstance in which the prosecutor has that subjective intent but yet is material. with respect to that, congress has a different safeguard at the back end, in 3144, and that is the language in 3144 that says a judge in the detention hearing is to inquire as to

whether or not the detention is necessary, quote, "if there will be a failure of justice" if the person is released. >> and you can't look behind that, right? you can't look behind that? if the judge has said it's material, that's the end of it. you have absolute immunity, right? >> well, i think that the - the defense can litigate that and appeal that set of issues, but i don't think - >> can appeal the judge's determination that it's material? >> absolutely. >> well, then how can you have absolute immunity? >> well, they did, because we're talking about - >> oh, you mean at the time it's issued? >> exactly. >> i see. >> at the time itself. but i think that's an important point, justice scalia. with respect to absolute immunity, this court has often said that it is the crucible of the trial process itself that often is a safeguard against abuse. >> well, what if you didn't have -- again, what if you didn't have this prescribed

judicial process? >> i take it that the logic of this court's precedence is that absolute immunity would still apply. and the reason for that is that absolute immunity isn't some rule to just protect prosecutors willy-nilly. it's to protect the public. and as this court said most recently unanimously in the van de kamp case, that -- quoting learned hand -- that there is a cost to this. no doubt that certain individuals will be harmed, but the cost of rooting out the bad apples through damages lawsuits is far worse, that it causes prosecutors to flinch in the performance of their duties. >> there is a difference between calling a witness at trial and arresting a person. how is it a part of the prosecutorial or the trial function to arrest someone? isn't what's protected absolutely is your use of that person at trial, not your arrest or detention of them? >> no, i do think it goes quite a bit further than that. i think it -- and i think burns v. reed -- and the relevant

language is at page 492 -- i think is relevant because it says that it's pretrial conduct, in order to secure the testimony for trial or the like is what is protected as well, that it would be far too narrow to just focus on the trial itself. itself. that would be the contours of absolute immunity. i think justice kennedy's opinion in buckley is also instructive in this regard, because what that opinion says is that allowing only immunity for the trial would just allow individuals to constantly replead their allegations and focus only on the pretrial conduct and be an end run around absolute immunity. and, again, absolute immunity is important not for the prosecutor for his own sake or her own sake, but because ultimately that is what -- that causing -- damage liability will make prosecutors flinch the performance of their duties more generally. >> you don't -- you don't think there's a reason to make prosecutors flinch against

willy-nilly -- that's not what i'm claiming happened here, but if you take the point that you're raising, then prosecutors can out of spite, out of pure investigative reasoning, out of whatever motive they have, just lock people up. >> justice sotomayor - >> and you're basically saying - >> making prosecutors flinch is always a bad thing. what i'm referring to is this court's precedents that say damages liability on prosecutors is the wrong way to go about it because the costs are too high compared to the benefits, and there are other ways of dealing with that -- from professional discipline, as malley v. briggs and imbler said, to bar actions, to the crucible of the trial process itself, which is a way of dealing with that. >> well, there are procedures set forth in the statute, i'd say you would add, which you think are not necessary, but are there in order to make them flinch in a different -- in a

different - >> that is precisely correct. we don't think those are constitutionally compelled, but we do think they provide a very important safeguard. >> what's your best authority that at common law or the common law tradition, there is absolute immunity for witness -- for the issuance of witness warrants? >> i don't think it's come up with respect to public prosecutors, and so our argument here, to the extent the court reaches that question - and, again, it wasn't -- it wasn't raised below in the brief in opposition, but if the court wanted to reach that question, i think it would be that the argument would derive the same way as the arguments in this court's post-imbler cases, which is, as long as it is intimately associated with the judicial function that the prosecutor is doing, then absolute immunity should extend to that context. >> then a second question, quite apart from immunity, just addressing the substantive constitutional issues under the statute, suppose that the prosecutor has probable cause to indict and try the person

for the crime. suppose also that there is good reason to show that he would be a material witness as to another participant in the crime. does the government have any duty to proceed with the indictment, or can they just hold the person as a material witness without indicting? >> i do think that the government -- i'm not sure if we have any policy with respect to that, but i think that -- that we -- that at least for fourth amendment purposes, there wouldn't be a violation if the government held the person for essentially a dual motive, and that is what i understand they have now conceded at page 31 of their brief, which is in dual motive cases, the government's action is permissible. if there are no other questions, i'll reserve the balance of my time. >> thank you, general.

mr. gelernt. >> mr. chief justice, and may it please the court -- in dunaway, this court emphatically reaffirmed the bedrock fourth amendment principle that a criminal suspect may not be arrested, absent probable cause to believe there has been a law violated. the rule is fundamental to our traditions, is widely viewed as a defining feature of our country, and has been steadfastly protected by this court for more than 2 centuries in both good and bad times. the material witness statute represents a dramatic departure to the rule, allowing the arrest of uncharged, innocent, even cooperative people. if a material witness arrest is constitutional, it can only be because its purpose is to secure testimony and not to preventively detain and investigate the witness himself. >> do you acknowledge that it is then constitutional? your opening comments make me think you don't even acknowledge that it's

constitutional then? >> justice scalia, we are not pressing that argument. i would say that based on the legal historian's brief there is a strong argument to be made that it is not constitutional, with respect at least to cooperative witnesses. the statute the framers enacted in 1789 would not allow the arrest of any witness unless they came voluntarily before they came voluntarily before the magistrate and refused to even promise to return. not even a surety or a surety or a bond was allowed. so we do think there is a strong argument, but we are not pressing that argument. our argument is that it cannot be used for ulterior purposes. and i just want to pick up, if i can, with justice breyer's hypothetical that he posed to the government, which is of course our hypothetical. the government started out this case throughout the lower courts and in the opening brief saying purpose is wholly irrelevant. this is whren, even though whren is probable cause to believe a law has been violated. this is whren, purpose is wholly irrelevant.

we posed a hypothetical which we actually think is this case and is consistent with our factual allegations, that the sole reason this arrest was made sole reason this arrest was made was not to secure testimony but to preventively detain and investigate someone for whom there was no probable cause or violation of the law. that is a difficult situation i think to reconcile with whren, i think an impossible situation to reconcile with whren, or with the text or history of this statute. the government has now come back and trying to have it both ways and saying, well, the statute wouldn't naturally allow that. but if purpose is -- as justice breyer pointed out, if purpose is truly irrelevant why they want to make the arrest, the government should have answered "that would be fine. the only things we need to satisfy are the objective components of materiality and impracticability." >> is this a -- is this a realistic hypothetical that you've posed? now, in order to detain someone under the material witness statute, that person, potential witness, must have material

testimony, not just relevant testimony, material testimony, testimony that would be of some importance in the criminal prosecution. so your hypothetical is a situation in which there is a witness and this witness has important testimony that could be used in a pending criminal case, and yet the prosecution has absolutely no interest in calling that person as a witness. how often is that going to arise? >> well, justice alito, i think a few points, one is just as an initial matter. the statute has not actually been interpreted to go beyond relevance, in the way you're posing it. interestingly, earlier statutes actually said the testimony needed to be necessary. and so, that's - that's actually an important watering down. but putting that aside for the moment, we think that what -- it did happen in this case, it happened after 9/11, i think that goes to the crux of our case here. we are not trying to fiddle with the use of the material witness statute in the everyday context, and i think that's the point the federal prosecutor's brief is making.

what we are saying is simply that the principle has to be that if you do encounter that extreme case, this court should not bless the situation where it literally can be used as a preventive - >> the problem, and it's, i think, the problem that i think whren highlighted is that the allegation can so readily be made in every case under the material witness statute is that this is one of those bad intent cases, and the case has to proceed so that we can prove that. one of the ways we prove that is by asking everybody who is involved in the process. why did you do this? what was your intent? i mean, the whole purpose of whren is to make sure that kind of stuff doesn't happen. >> yes, mr. chief justice, but let me say that i think i -- i understand whren, i obviously don't want to tell the court about its own cases, but is that it was drawing a conceptual line, that the first point about whren, and i think the fundamental point, was the conceptual point that as the whren court put it, only an undiscerning reader would

conflate cases in which there was probable cause of a violation of the law with cases in which there wasn't. so i think the whren court is not saying we wouldn't look at purpose. i think that's the teaching of the special needs cases. now, to your practical question about why would this be hard to allege? i actually think that this is one of those unique situations which it would be very difficult to allege. take the government's cases, for example, that they've cited, like daniels and betts, the material witness cases, you have witnesses being arrested, not showing up for trial. as the court of appeals made clear in those cases, they were the main witnesses, not showing up on the day of the trial or right before trial. it would be virtually impossible for those witnesses to turn around and say the only reason i was arrested was for investigative purposes. and i think that on top of the fact that this statute is used very rarely, i mean what we have pointed out is other than in immigration cases, which the person is already subject to custody, there are only a few hundred each year. and again, i think what the green brief is saying by the

federal prosecutors is, look, the settled understanding of this statute among line prosecutors has always been, you use it to secure testimony. maybe there's a windfall in the back of your mind that this person might be a suspect, but you certainly can't use it where you have no intention of using the testimony. i think then the limitations on this statute become meaningless. i mean, take - >> so every time the prosecutor elects not to call one of these witnesses for a variety of reasons, you would have a claim that this wasn't designed to elicit testimony? >> no, no, we don't think so, mr. chief justice. i think what we have -- we have said is that calling the witness or not calling the witness can't be determinative. i think one reason is you wouldn't want to create a perverse incentive to have prosecutors simply call the witness just to cover themselves. so i think you would have to allege much more, and i think that's what we have done. i think there is an entire set of allegations with respect to mr. al-kidd, and they fit a national pattern. and i would importantly say in

the questions presented, the government raised an iqbal claim as to plausibility only as to a small part of this case which is no longer part of the case, which is, was mr. ashcroft involved in the specific statements in this specific affidavit. they did not allege that the allegations of a pretextual policy were implausible. so it is not before this court, it is not a question presented, and i think it is telling that the government didn't raise it. they are sitting on all the information about what happened after 9-11 as a policy matter, and they did not claim it was implausible. >> just a point of detail. i may not be recalling correctly. you said this statute is rarely used. i thought there were 4,000 material witness hearings a year. is that mostly because of the immigration? >> yes, justice kennedy, and i apologize if i wasn't clear. that what the -- what the court of appeals showed and what the statistics also show is that roughly 92% of the cases are immigration cases, where the person is already subject to custody, and there wouldn't be any need to use it in that pretextual way. so what we're talking about is a few hundred each year throughout the country, and

again when it's used properly, it's going to be virtually impossible to allege something like this. >> do we have statistics for the states, how many states hold - how many people are held under state material witness statutes? >> we have looked for those, justice kennedy. we have not been able to find them. what we do know about the states, though is that more than 30 of the states have statutes that are much more restrictive than the federal government, because what they do is they follow what the framers did in 1789, which is to say the witness has to be given an opportunity to comply, and that's what the framers did. you have to ask the witness if they will continue to comply. if they won't -- or you have to make a showing of why it's impossible to ask them. so, i think in many states it won't be a problem. i think actually, you know, the state issue is an important one because what the federal government is arguing here is, of course, well, our prosecutors are very well supervised. well, that doesn't take into account if there is a deliberate attempt to misuse it. but i also think what we're looking at are states, local counties, cities where there may not be the resources necessary to put checks on, and what the government's asking is

for this court to hold that as long as you can make the minimal showings of impracticability and materiality, which don't even require the evidence to be important or that the witness be uncooperative, you then can have any purpose you want. so you could have states, cities, local counties saying every member of this gang or every member of this business must know some information about the person that's been indicted. >> your argument is that the constitution does not allow a material witness to be detained, so long as the witness says in court that he or she will show up for trial, no matter how much evidence there is that this person poses a great risk of flight? if the person says in court, i will be there, that's the end of it, the person cannot be detained? >> do i think the constitution requires that? >> yes. >> i think it probably does, but we are not taking a position on that. i mean, what we are basically saying is that it is out of whack historically. it wasn't until the mid-1900's where that could happen, where even if they said they would

come back, you could hold them. so i think it's out of whack historically, and there may be a real constitutional argument. we are not pressing it. we are simply saying that if it's used for its proper purpose, then we are going to assume it's constitutionality, which the ninth circuit did, but it can't be that it can be used as a preventive detention. and i think any reasonable official -- and i want to go to the qualified immunity if i could -- would have seen that, because i think the analysis would have been the following. you would have pulled out dunaway, and you would have seen that you need probable cause to arrest someone, probable cause of wrongdoing. and you would have then said, well, we don't have probable cause of wrongdoing, so you would have pulled out whren then, because whren talked about pretext. what whren would have told you is do not conflate cases in which there's probable cause of wrongdoing with cases in which the court has granted an exemption from the probable cause - >> you might turn out - >> if you were writing a law review article, you might have done that. but we're talking about an

officer. i think the first thing you would do is say, well, let me see these material witness statute cases, and what would he have found? >> well, i think what he would have found, your honor, is that the court has not specifically -- i grant that it has not specifically ruled on the fourth amendment, but what he would have found in barry and the other cases, is that the court repeatedly, repeatedly referred to statute as a means of securing testimony. so i think the reasonable official would have said to themselves, well, it's clear under the fourth amendment that i don't have probable cause, but maybe the statute is allowing me to do it. now, first of all, it statute can't authorize a fourth amendment violation. but putting that aside, just a - >> but, again, you're talking about the officer, he reads the statute and then doesn't say, well, but maybe the statute's unconstitutional, so i need to do more research? >> exactly, your honor. and i think what the research would have been done, they would have looked at barry and all this court's other cases and would have specifically said it's to secure testimony, and then i think a reasonable official would have looked at

the text of the statute, everything in the text of the statute is about securing testimony, including the deposition requirement, you must be released if your deposition is taken, you must have a deposition. all of those things do not suggest -- if the government's interests could be simply we want to hold this person because for preventive detention reasons, none of the statute would make sense. i think that a reasonable official could not have turned to this statute and said, yes, i'm looking at the statute, and it seems like i can use it for whatever reason i want. >> so the eight judges taking the opposite position in the hearing en banc below were just being unreasonable? it would have been unreasonable for an officer making this determination to agree with eight judges from the ninth circuit? >> i think, your honor, the -- mr. chief justice, the only way i can answer that is to say this court has never made determinant of whether there are dissents. i mean, take the brogue in this court, two justices of this court descended on merits and yet you still found that the law was clearly established. >> what we said in wilson, i'm quoting, judges -- when judges disagree on a constitutional question, it is unfair to

subject public employees to money damages for picking the losing side of the controversy. >> i mean, but i think brogue goes the other way. ultimately, all i can say, mr. chief justice, is i think the fact that there were dissenters can't be dispositive, and ultimately this - >> well, i agree with -- i agree with that, of course, but at the same time, it does seem that you're imposing a very heavy burden on the officers in this area when do you have a situation where eight judges, when they conduct their research, come out the other way. and that type of burden is particularly heavy when you're talking about if they guess wrong, it comes out of their pocket. and if i'm the officer in that situation, i say, well, i'm just not going to run the risk of, you know, having to sell the house because i agreed with eight judges on the court of appeals. >> well, your honor, i think - you know, of course, i'm not sure it will actually come out of their pocket, but i get the crux of your point. i do think ultimately, though, that this is a situation where a reasonable official would

have had to say to themselves, "i can use this as preventative detention." because i want to be very clear about our position and how narrow it is. we would concede, for purposes of this argument, that if they wanted to use this for dual motives, then there would have been a real question there. if they said, look, we want the testimony, that's what the statute talks about, but we also hope that maybe something else will come out of it, that's a closed question. but if they would have said to themselves, which is all we're saying this case is about, is, "look, we don't want this testimony." in justice breyer's hypothetical, there's clear, objective evidence. we don't want to use this testimony, perhaps it's counterproductive in our case. we're not going to use this testimony, but we would like to hold the person. i think that is very difficult for a reasonable official to say to themselves, this statute grants me preventive detention powers. i mean, i think you would be looking at a statute going back

to 1789 that this court has repeatedly commented on that is only about testimony. you would be saying to yourself, this statute allows me to engage in preventive detention even though congress has never passed a statute like that, congress specifically rejected preventive detention powers - >> you don't think that an official reading all this court's cases saying subjective motivation is not proper in determining the application of the fourth amendment would be able to think that this would apply here, too? subjective motivation doesn't count here. what counts is whether there's -- there are objective criteria that would permit the detention? >> i don't think so, justice alito, respectfully. i think when you pulled out whren, which, of course, is this court's landmark decision on pretext -- whren could not have been clearer. the court specifically said only an undiscerning reader would conflate the two. and i think the conceptual point whren was making is straightforward. the fourth amendment says you

need probable cause or a violation of the law to arrest someone. if the government wants to walk in and ask for an exemption from that standard and says, the reason we want the exemption is because of the purpose of the arrest, then the court in whren said, well, then they must adhere to the purpose. otherwise, it's simply an end- run about the probable cause. i mean, consider two cases - >> but the fourth amendment doesn't say you need probable cause. there are situations where you can conduct a search without probable cause. there's the terry search. there's administrative searches. there's a lot of exceptions. >> yes, justice scalia, but i think -- well, the terry -- the terry stops, i think we put to one side, because as the court in terry said and as this court has interpreted terry, those were because those were not full-scale arrests and the administrative -- sorry. >> administrative searches, automobile searches, you know. >> absolutely, and those all fall into the special needs

category, and those were cases you, your honor, in whren distinguished as conceptually different than when there's probable cause of a violation of law, because what you yourself said in whren was, look, the government is asking for an exemption from the traditional fourth amendment standard and they're saying the reason we want the exemption is because of the purpose of our search. you said, well, then, of course we're going to hold the government to that purpose. they can't tell us, look, we don't want to meet the fourth amendment standard because of the purpose of what we're doing, but then turn around and not adhere to the purpose. and so if you had two cases, one where there's probable cause of wrongdoing and another case where there wasn't, the judge would say fine to the first one and then he would say to you, well, the second one, you don't have probable cause. the only thing the government could say at that point was, well, that's true, but we're not trying to investigate or prosecute the person as in dunaway. we have a different purpose. maybe it's administrative. maybe it's to secure testimony. maybe it's a roadblock. maybe it's something else. and then if the court said, well, fine, then go ahead and

do that search on less than probable cause, if that's your purpose, you couldn't turn around then and not -- and then not adhere to that purpose. i mean, i think that's what we're talking about, is that - >> you seem to acknowledge that in -- a dual motive case would not violate the fourth amendment, or wouldn't necessarily violate the fourth amendment. isn't that right? >> yes, your honor. >> do you think that a reasonable official would appreciate, well, it's okay for me to have a dual motive, but i have to stop and think -- is my interest in investigating this individual further the but-for cause of my desire to get a material witness warrant? do you think that was apparent? >> i think it actually is, your honor, and the reason is because i think it's -- i think it actually gives cushion to the reasonable official, because i think once you are saying we want to secure testimony, it might be very difficult, as the chief justice was pointing out, to say, well, how i do know if i could have ulterior motives or not? that might be a very difficult situation. but i think a reasonable official -- this court's proposition that this court would have to - would have to

bless, based on the allegations here are, the official said, look, we think we can show materiality and practicability because mr. al-kidd is taking a trip, he is being cooperative, but he is taking a trip and he works for the same charity. we do not want the testimony. we can't use the testimony in this trial. the only reason we want to do it is to hold him, and we don't have probable cause of a violation of the law. i think any reasonable official would have understood that as preventive detention, and there - >> i'm not sure why that just can't be resolved under the issue of materiality. the magistrate asks the prosecutor why he wants to do this, and he infers from what the prosecutor said that -- just what you say. then it's not material. it's not a case. >> that goes to the crux of, i think, what is going on here. we have said that both the fourth amendment and the materiality as well as other parts of the statute would deal with it precisely. the government's opening brief and throughout the lower courts

said, no, it doesn't matter if you're going to use the testimony or not or we have any intention. we posed that hypothetical in our brief. the government came back and said, well, maybe that could be done with materiality. if the government was going to stick to their position, their conceptual position, they would have come back and said, look, the objective components of materiality and of practicability have been satisfied, because he's taking a trip and he worked for the same charity, and who cares whether -- so if the court is prepared to put a limit on, you have to use this for its stated purpose, testimony, that's all we're asking for. i mean, the case has changed now because of the concession that the government's made on pages bottom of 15, top of 16, where they're now saying, yeah, that is a tough situation, and maybe we can deal with that through the statute. but that's all we're saying. the ninth circuit understood this as a sole motive case. the government understood it in their cert petition and in their brief to this court as a sole motive case. we have said we think the

analytical test is a but-for, but we're prepared to go with sole motive, and our allegations, our factual allegations, are consistent. in the proposition, we are simply saying, we don't think this court can bless it. you satisfy practicability in some objective way. you don't care whether you're going to use the testimony, you may have no use for it, but it's an end-run around locking people up. >> where did you allege that the desire to detain was the sole motive for this? >> your honor, i think that the clearest allegations are at 111 and 112 and 154 of our complaint, in the joint appendix. what we said is it was not to secure testimony. and i think the ninth circuit certainly understood it that way at pages -- i apologize -- 25a and 40a of the opinion. and the government, in its cert petition and its brief, understood it that way in saying, we don't know how the ninth circuit would deal with a

mixed motive case, clearly suggesting that the ninth circuit was a sole motive case. and so again, all we are saying is it cannot be that this statute be transformed into a preventive detention statute, and i think particularly so because the government after 9/11 specifically -- as the green brief notes -- specifically asked congress for preventive detention power, and that power was denied. what they granted was a very limited seven-day hold only for noncitizens. and so i think what we're talking about in many respects -- at a macro level is a separation of powers case as much as a fourth amendment. i think it's not -- it's not dissimilar to the dialogue this court has been having in the guantanamo cases with, look, you need to go beyond the fourth amendment. if you think you need such a fundamental change to our country's traditions, congress is going to have to take the first step, we'll look at it and there will be a back and forth. but here what happened was the preventiveet