the green light will appear when you began to speak. but four minutes, a yellow light is the signal to you to began and wrapup. when the red light comes on, that means your time has expired. we ask you to conclude with a death sentence a total possible. you may complete your sentence, but i must ask that you stop. dr.all, doc -- first of all, dr. [unintelligible] i hope that i pronounced that right. he will be available to answer questions.

the associate deputy chief of the u.s. forest service. dr. jonathan gasset, commissioner of the kentucky fish and wildlife service resources. approved the executive director of conservation international. mr. peter young there -- bear white nose syndrome society. dr. justin boils, the department of evolutionary biology at the use it -- university of tennessee. doctor, you are recognized knell for five minutes. >> thank you, mr. chairman. mr. whitman. in the science adviser to the director of the fish and wildlife service.

i would like to recognize with me doctors [reads names] thank you for the opportunity to update the committee on white knows syndrome in the effort to address this crisis. this is an emerging disease that when first reported it was 2007. unlike a lot of the familiar wildlife diseases that we know, like avian influenza, this is very destructive and is a new species to science. we were confronted with an entirely new disease. it was a case where bats hibernate during the winter. found in the environment, it grows on living tissue as the

bats are hibernating. in the affected hibernating bat populations, 80% will die. bats have only one pup each year and leave -- live only five years to 15 years. while it is challenging to estimate the number that were killed, losses have been significant in cases with white nose affected bats. now found from canada to tennessee, confirmed in 16 states and four canadian provident -- provinces. evidence indicates that it might be spread by human activity. the role of bats in ecosystems, as i mentioned, is critical and important. the department of the interior, two years ago, when the disease

was recognized, started to lead a coordinated effort together with the bureau of the department of the interior geological survey national parks service and usda department of agriculture affecting federal agencies and states in private, non-profit organizations. we have assembled a team of 100 experts that call from different organizations. and they conduct and assess relevant research and conduct efforts through outreach and the national plan. the team of partners is working to identify the impact of the syndrome on the bat population and the eco system as a whole. the mechanisms through which the

disease is transmitted and which it contributes to mortality in affected bats. to the management and containment options for federal and state wildlife managers. the team of partners as a science based approach leading the framework of the international plan. we had established executive committees to oversee the work of the partnership and facility for nations. co-chair by the u.s. fish and wildlife service. the united states geological survey is the science branch of the department of the interior. conducting much of the research supporting our response to the white knows syndrome. the national parks service educates about white nose

syndrome and had developed recommendations for units affected by the areas. the bureau of land management is an active partner, working closely with research communities to improve contamination protocols and limit the spread of the fungus through human activities. we understand and share concerns about all loss of recreational opportunities in the economy. many of the lambs serve our stakeholders and we endeavor to find new ways to organize the impact. white knows syndrome is the greatest challenge we have ever faced. we are happy to be here and are happy that the committee has a strong interest in this issue and i will be happy to answer

any questions. thank you. >> thank you, doctor. thank you for your testimony. next, we have mr. pina for five minutes. >> thank you for the opportunity to testify this morning. the subject is important to first managers. agricultural producers, members of the public as well. services contributing to the larger effort to better understand the syndrome and plays a role in understanding the spread of white nose syndrome. sustaining the health, diversity, and productivity of the nation's forest and grasslands to meet the needs of future generations, including the health, diversity, and

productivity for those that use it as a grasslands habitat, including bats. we are trying to coordinate and collaborate rather than rehash science topics. coordination in addressing the spread of the syndrome is committed to partnerships and tribal wildlife non-industrial and non-governmental conservation ... societies. a coal operator in the development of the national white no syndrome response plan

actively involved in the plan. there is evidence to suggest that humans can spread this from caved to cave with their equipment and in an attempt to seize the spread, we have abandoned eastern and rocky mountain regions. expectations and expectations to the orders are for research, monitoring, search and rescue operations, and any case specifically posted as open. the implemented because we observe the syndrome jumping from new york to south west virginia in one winter. the next winter the syndrome was detected in the oklahoma panhandle. a far greater distance than that could travel in a short time frame. there is no known cure, so we

must rely upon trying to limit the spread between geographic regions. our two closures may have slowed the western spread, but it is likely to early to tell. we held to delay the west would spread enough for more effective ways to manage and contain the fungus. given the growing concern over the viability of the bat population and the awareness of the role of that's maintenance in healthy ecosystems, research has been developed throughout the united states. we have expanded research to address challenges posed by the white knows -- and white nose syndrome. including potential biological controls, planning for the recovery of the attempt --

populations and assessing the ecological importance of bats in agricultural systems. finally, the effect of forints -- forest management on baths. we understand the impacts the closures are having and will continue to have on the recreational public. we will continue to evaluate these decisions as the science becomes available but accessing greater balance while striving to maintain healthy populations, in conclusion, there is a serious threat to the bat population posed by the white nose syndrome. the forest service is committed to cooperation and partnership in non-governmental organizations.

are there any questions at this time? >> thank you for your testimony. now, doctor, you have five minutes. >> thank you. in the vice president of the association of the fish and wildlife agency working group. over the last several year my personal involvement with white nose syndrome has moved from the advancement to the varying responsibilities in my own state. i am encouraged by the amount of commitment from these individuals, here and abroad, that cared deeply about our resources. here to bring you the message about where the battle will be won or lost, we are known for a few products, including

thoroughbred race horses and urban being great products of the limestone between our feet, indicating a home to thousands of limestone caves and caverns, some of them so small that you could not fit a single person inside. kentucky is home to a number of that species. including the federally endangered gray bats and indiana bats. experiencing the disease to devastate those numbers causes us concern. the discovery of white nose syndrome a few years ago has brought aggressively increase surveillance and the importance of minimizing caved disturbances on non-public lands that were known to house baths

and we have assisted the service in the close revisory. have we taken drastic measures? yes. will they affect the spread of the disease? there is no way to be certain of that yet. several years prior to the initiation in kentucky, we began to close the caves in kentucky. one week before 900 residents were to participate in entering the cave, we decided to stop the potential entering in of infected material. and the local economic impact was significant in a small community. we followed the closures by turning towards private land caves.

we asked be advisory committee to actively close their caves. only three refused. once again, landowners are responding to the disease. closures have not been the only controversial approach. once it was founded this spring , once it was founded in a high of this spring we wanted to make sure we had not missed it. unfortunately the disease did turn up in western kentucky. we began an immediate recall of the system and it turned out that this was an isolated event. we took what some people call drastic measures to determine not only the threat to endangered bats, but removes n.v. infected -- removing the infected, non-endangered that's.

we made a difficult call to alter them to keep that from the structure from roosting there. obviously there were folks from the caving community is that were very upset about the fact that we physically altered the caves and it was not worth the risk of allowing those 3500 that's the opportunity to roost in an area that was not infected. if that is what states are going to have to do to win the fight, there are a litany of needs within the realm of research. we asked research activities for on the ground management needs to be presented. as the syndrome moves across landscapes, and informed effort is more important than ever before.

we have thousands of caves in kentucky ended his difficult to survey them all. effective management on a broad scale is critical if we are to conserve this national biological treasure. officials in this room realize that this may be -- treatment and controls will continue to be attentive to be found. mr. chairman and other subcommittee members, thank you for the opportunity and i will be creek -- pleased to answer these locations. >> you are now recognized for five minutes. >> good morning, chairman, members of the subcommittee, thank you for providing this opportunity to testify on this important issue.

in the executive director of bat conservation international, headquartered in austin, texas in all 50 states and abroad. thank you for investing in this issue that can only be described as a massive wildlife crisis. it has been described as the most precipitous decline in wildlife in north america. more than 1 million bats have died and although the official numbers are more than 1 million, they can be hard to count and the number is likely in the millions. that's that sleep through the winter, 25 of them hibernate and are at risk. knowing this species, including the two endangered, researchers

are predicting the extinction of the little brown bats, one of america's most common mammals. that's provide enormous benefits to humans and there are ecological consequences. there is a critical nature to maintaining the balance of nature. they consume huge numbers of insects that can damage crops. a conservative number of the ballot advise the bonn would have consumed 700 tons of insects each year, which is a lot to lose. the study published in the journal science, as you mentioned, estimates the value of bats culturally at around $3 billion per year. impacts on this are as little

as four years to five years. there could be an economic burden as well as pollutants to the environment. there's a possibility that it could spread disease. including a month mosquitos. that's may become listed under the endangered species act, which could cause further problems for the economic impact. many states are actively listing the bat species and there could be economic impacts on energy, forestry, construction, transportation, and outdoor recreation. attempts to manage the syndrome and combat the syndrome and address critical needs for a national plan for this crisis,

we understand that and must stress that agencies that quickly identify access for fighting the syndrome are address. in the fiscal year 2010 the fish and wildlife service gave a grant process where the demand and westward spread of the disease had federal response funding as well with a higher portion of funding and beyond that, not much is known with the rugged terrain making data gathering more difficult. significant white nose syndrome expenses will go towards 400

western caves and baseline populations. but the point out that money spent on this syndrome is a wise investment. businesses listed by additional listings and species recovery have announced an ounce of prevention is a pound of cure. the syndrome will continue to move across the country unchecked with possible consumer taxpayer residents published by biological diversity. it is a serious matter. thank you. >> next is mr. youngbear. >> thank you.

i appreciate the opportunity to return to speak with you. in testifying on behalf of the [unintelligible] society and we are celebrating our anniversary is the largest and oldest agency that is dedicated to cave resources. there have been dozens of cases throughout the country, including several afflicted with white nose. we have provided you with an april issue of our society news including several articles addressing the questions asked today. -- the westt'syork virginia society tells us several things that we no apparent white nose. in contrast to the bat deaths,

in indiana to third showed signs of the disease and population doubled. in virginia they showed no signs of the disease. we know that it affects bat species differently or not at all and cave requirements are a factor. her when we know that no human had entered the cave and that that's transmitted the disease. there is not a single documented case of human transition. how much fun this is necessary to in fact that, disease transmission depends on sufficient hosts and environmental conditions. a perfect storm. the same fungus is widespread in europe, but the bats are not dying. finally, we still have no treatment. many substances kill the

fungus, but can also kill other forms of life. the logistics of treating these that's is staggering -- bats is staggering. we may need to shift to conservation. that's our fascinating part of the ecosystem -- bats are a fascinating part of the ecosystem. but the canceling a major cave events have cost travel and tourism industries and the state coffers. there is a report for a depressed the environment where they are receiving calls of why they are open or if they are open. every new headline that trumpets that the government closes caves is harmful and does little to help bats. funding a rope -- minority,

there is a published amount of research put together in boston, university. indeed together they have funded 32 projects tiling over $32,000. spending over $11 million on the white -- white nose, but very little on research, this is the wrong balance. the national plan has major problems. there is little more than a broad outline. there is no budgetary component or means of prioritizing the restrictive environment. it is narrowly focused only on biology concerns. the second changed little this fight over 12,000 comments. we have seen no evidence of a blanket closing slowing or

stopping white nose. as the scientist and owner of the underground laboratory points out, it is akin to fighting a forest fire. further this -- further the strategy is a potentially unproven human vector that calls for private landowners to be stigmatized as environmentally insensitive, moving against collaboration and conservation. we asked for the help of congress for evidence that is not speculation with significant increases in research funding. we asked the to listen to the people that know those caves best.

thank you for the opportunity to testify. cave softly, cleanly, take nothing but pictures and kill nothing but time. >> thank you for those words of wisdom. finally, dr. boils, you have five minutes. >> thank you. linking members of the subcommittee, thank you for allowing me to testifyn. theew i have been involved -- i have been involved in research for 35 years. and this species is the primary creditor including cotton boll worms and the spotted beetle. these pests that attack a multitude of products amongst

along list. melons, pumpkins, apples, spruce trees, for trees. how many insects are consumed by bats? a study from indiana reports an average colony may have 1 million intersex each summer -- in sets each summer. 12 million may roost in colorado alone. the second study from the northeast of the united states suggested that a single brown bat may consume 12 pounds of insects each summer. all the bats by white nose in from syndrome mean that these insects are going uneven. -- and each and region and eaten. -- uneaten.

factoring in many capacities like crop density in a given year. values may be different because of the monetary value, but the amount used in each area simply extrapolates to beacon -- to all of the united states. importantly, bats have been shown to limit the delivery of in sex and does not consider the cost associated with secondary fax on ecosystems and public health. available evidence suggests that bats are extremely important to the economy and i would suggest they are the most important non-domestic animals in the united states. a controversial step in the syndrome, several people have

argued that there is little or no at -- evidence of white nose syndromes spreading. it is misleading because in my opinion it is very difficult to testify in would be difficult to refute or support. quickly mounting evidence suggests that these are possible and may be disproportionately more devastating because of the distances that humans can move. humans moving into the destructive western united states is a fate that is unlikely in the next five to 10 years. my professional opinion, the risk out way as possible benefits and i believe that policy is currently implemented

are warranted and prove it -- prudent. in the five years since the syndrome has emerged, given the scale of the product -- the problem, we have done a lot with very little but large gaps do remain and many of them are vital to control in restoring populations. the only way to fill these gaps is through targeted and coordinated research. to be frank, limited funding and lack of coordination has hindered our progress and the recently assigned plan has address some of the shortcomings between parties but as is often the case, funding will remain one of the most limited factors. the ecological impact warrants larger and better understanding

some of these diseases. only with increased understanding will we be able to develop a solution to these problems in time to make a difference. i welcome your questions. >> thank you. i want to thank our witnesses for their valuable contributions. this is an extremely deadly fungus and i hope that federal, state, local, and non- governmental organizations will attempt to stop the spread of this the great -- disease. at this point we will begin with questions that allow all members to participate. members are limited to five minutes for their questions, but if the members have additional questions, we can have more

than one round. i now recognize myself for five minutes. quick questions for me to get a better understanding, the name of the organization is [unintelligible] correct? i am not sure who is best trained to answer this question, but i will take it from everyone. the doctors seemed to know much about the pathology. how does it actually kill the ?athws of >> this is something that we do not know. >> when it was initially discovered we describe the fungus as they her metaphytes, affecting the dead layer of skin cell at the service. this is actually different.

it is invasive and destroys reason -- destroys skin tissue. they surmise that the fungus causes over 85% of the damage to the surface of the bat, performing more than simple surface barrier functions. the exchange of air and other gases, blood pressure regulation, we believe it is at the heart of the destruction of these numerous physiological causes. >> i understand that the organism has been endemic to europe. and that maybe some, if not all species, have been resistant in the past? yet we have eight species are

nine species here that die at a rate of almost 100%. we have an understanding of why certain species in certain geographical locations are resistant? >> it may come down to much more than just differences within the species themselves, but the interaction between pathogens. research will ultimately support that stet and haven't different areas within taves may be less susceptible compared to a little brown bat that inhabits a very humid portion of a cave. as the numbers declined, there

are fewer hosts available for the fungus and as the number is reduced we are finding that the american bat populations that were numerous are becoming much more like european bat populations. it may be that not all of the populations will go to zero and that we will see a much different deposit with regards to how much it persists as we are seeing in europe. >> is that to say that the main host is the affected species? >> looking at the little brown bat, which was numerous in these caves, the fungus grows to a certain degree in soil and on the presence of a lot you can go from infectious agents to literally trillions.

remaining infectious as the carcasses are removed and further deterioration. >> has there been any attempt, from a research standpoint, to actually sprayed or treat with anti-fungal treatment? just to see if reducing the spores can actually make a difference? >> there has been work along those lines in the laboratory but it is difficult to transition those treatments. one of the real concerns is that these diseases of the fungus are on the rise in humans and there are very few pharmacological compound suitable for treatment even within humans. there is a risk of breeding resistance in these compounds

amongst wild animals and fungus in these environments, possibly creating a super-bugs that are a risk to humans. >> is there any national creditor for the fungus itself? >> i would imagine that they're likely is it if you make an analogy. there are what they call micro- viruses that can weaken the fund this and there is a constant battle where the fungus can be designed and change and the virus must keep up. bio-control is another active area of research. >> interesting. next i will recognize the ranking member. the gentle lady will -- is

asking if we will have a round or more than one round. would you like to have a second round? >> [inaudible] [laughter] >> ok. >> [inaudible] so alive. if they are not cover the first time, we will go back to them. >> my first question is for the doctor. what is the scientific basis for using caved closures to manage the syndrome. is it possible as someone limiting how successful had he been in closing those caves and what percentage of those taves

are still open? >> you heard the chair talking. they have had strong support from kentucky landowners. the service has allowed managers to close or not close the caves as necessary, most of our working is not open to the public. just for research. >> doctor? >> with regards to the scientific basis of the disease , be it common cold viruses or viruses amongst the bats in a cave, it is about a susceptible

host and the disease agent. in the case of this syndrome, the environment is caves. we have shown that the fund is remains viable in the soil at the bottom of a cave. based on basic principles, it provides a means for persistent environmentally resistant spores produced by the fungus coming out of affected caves. it is a two-way street. mounting molecular forensics evidence is being developed by my laboratory and collaborative live with other groups to indicate that the likely source of this north american fungus is europe and that it happened through human transition. >> has there been any

anticipated decline since closures? >> [unintelligible] >> can you answer that? has there been decline? >> sure. >> what we have not seen as it was instituted was a major jump, which is what we were trying to target with it these actions. the creation of an epicenter of that is far removed from the current disease. for example, oregon. if white nose were to suddenly show up there as a result of human transition, we have not seen that but we know that the bats themselves are capable of transmitting the disease. but we have not seen the major jump that shows signs of policy effectiveness. >> you do not know if there has

been a decline, is that what i am hearing? >> in disease transmission? >> recognizing that there are more bats infected. >> we know that there has been an increase. >> even with cave closure increasing. >> yes, that's themselves are unable to move. >> how successful have you been with closing public or private lands? do you meet a lot of resistance from private landowners? you know that there is a group of people, i guess they are out there for recreational activity, looking at caves. i wonder, could you give me some idea? do you have any resistance to closing those caves?

>> i would say that there is some resistance from those who fear loss of recreational revenue an opportunity. but the position has been that this is the scientifically justifiable route to take to protect the species upper white nose -- species of bats. >> in kentucky we have identified 80 private landowners that have we would consider significant problems and only three private landowners refused. 77 of those 80 complied with a voluntary request. >> that is kentucky? >> yes. >> what about other states? >> i do not have their data. >> i am trying to get an idea on resistance. >> each state has their own response plan.

in those response plans they treat the issues differently based on whenever the priority is within that state. kentucky has seen much success with public and private landowners. some states have not seen fit to close caves as a response white nose. some have chosen a medium ground. it depends on the interaction of the landowners. >> are they all cooperating in advising these activists on the situation? and the risks they are taking? >> each state has chosen a different approach. some have been in favor of these closures. >> even if they are not closed, are there signs that you are entering at your own risk?

>> states, it is up to their jurisdiction everyone has handled it differently. >> i understand. >> if i might pick up on that question, this varies vary widely. state agencies and federal agencies have varying authorities over lands that they own or control. take a state like tennessee or missouri, the vast majority are on private lands. unless there is an endangered species that is present, all that can be done is to suggest. many people visit these caves. private landowners have private property rights and tend to be wary of governments and there

are iterations of that across the country. people lead visit taves are not just members of the national taves society, but you have many other groups from churches to colleges that know that the hole in the ground has been there for a couple of hundred years and that every tom, dick, and harry in town has the signature for cooling off in the summer heat. these are not closed in a physical sense. they are closed by administrative orders in most cases and therefore they are free to come and go to transmit this disease. that is why tom caylee, who like quoted in my testimony, says that this is like putting up a fire line. it simply does not work in containing the disease. >> thank you very much, you have made it very clear.

>> thank you, mr. chairman. this is a very interesting discussion and a very timely topic. in the past we heard that the population of that has been affected by the reduction of 1 million. i was wondering if you could give us today's estimate given the reduction in that population. can you give us an indication of which species might be the most affected by this? you have alluded to some that were not affected but we would like to learn about which ones are. is there a likelihood that any species would become extinct by this? we have talked about population dynamics in relation to a response to this particular fund this. but is there one particular

species that could go extinct? i will leave it up to the panel members that are most qualified. >> the first part of the question? which species was most affected? >> let's start with the question about the current numbers as far as the population but the disease is based on? >> estimates from before are based on approximations and an unknown number of deaths and the data that we had to show, there were known declines in the system from the four and white nose after a arrived. before a and after white nose are arrived. we are currently working on ways

to come up with new estimates. we do have new data and as many have quoted, we are looking at numbers that range from 60% to 100% declines. on a statewide basis, numbers are consistently in states that have been affected for multiple years. so, the number, as mentioned earlier, is likely much higher, but we do not know the answer and are working on it. the project as funded by the service a few years ago showed that the likelihood of the expectation of a little brown bats in the northeast within the next 16 years based on the declines that we were seeing.

we could be looking at something much sooner than that for a little brown bats, which were the most common in the northeast. there is real potential, at least within the current range of the syndrome. nor other species that are likewise affected. try cover, nor the long hair, showing the results of white nose syndrome. >> i know that the smithsonian conservation research center has at -- allocated dollars for the virginia long year. can you tell us the current state of that particular effort in what might be the long-term impact and a relation to addressing this particular disease? >> yes.

we did initiate a program with the smithsonian institute a few years ago. they brought in for the animals in 2010 to explore what it would take to house them. from a conservation standpoint, it was hell did rose through. there were only a few instances of species that were not successfully kept in captivity without very little success in propagating or keeping them in captivity. we have used that program to look at what it might take and that the time, white nose was on the doorstep of west virginia and we did not know how they would respond to the fund this

presence. since there are so few sites that house the population, it could have potentially wipe them out and there were only 20,000 key individuals to live at this point as far as we know. the program has gone down over time but was successful and we learned a considerable amount from that exercise. success for leave coming out of winter over the last year, they are doing quite well in captivity. the question right now is what we do with those last ones and we are working on that issue. >> thank you. >> all right. thank you, gentlemen. i have a couple of more questions. are there others? all right, i will go ahead and

ask a couple of questions and then open it up to the ranking member. whenever you have an epidemic like this amongst human or animal populations, you tend to find that there is a sub- population that is resistant or survives. so, my question is, are you seeing that amongst some, if not all species? that would certainly give us encouragement in terms of exchange possibilities. certainly, over time they could reproduce as a resistant population and involve themselves into healthy, hardy, resistant populations. which is what i was touching on regarding europe and other species. >> so, i do not have access to

the big data regarding population persistence. as there are reports of some populations disappearing, others are reported to have declined while maintaining small numbers of other animals. that could happen by development of the immunological resistance or for behavioral traits that have given some bats the ability to weather the disease even in the absence of a system that can become naturally suppressed by a leading to this emerging disease. as was previously said, rather than populations disappearing, demographics may become closer to those that we see in europe with smaller populations persisting more in isolation. >> is that to say that maybe

this fungus or some other might be the reason that we see a slightly different behavior between the populations in europe and here? to say that what is happening here is really the fact that whenever is going on happen to their first and instead of isolated groups, that is what you are suggesting? >> it is possible. one project is the right -- collective analysis that is being done by the fbi for molecular forensics worked at the beginning of 2000 regarding anthrax, for example. given enough we might be able to reconstruct the history regarding how long it has been

in europe and has been dispersed and source pinpointed. >> when you talk about humans being the intentional maker of this, becoming temporary posts, it might perhaps be on their shoes? or there der? >> inadvertent chemical transmission. yes. >> is there a treatment where we can educate to say that when you finish your work in one case you put your of your through research and treatment or process that might be helpful? >> that is certainly the case for the response that is within our means, including regulatory

measures like site closures that have been instituted and recommend them -- recommended to halt the spread of the basis for why you come back from another country. >> is this a methodology that we could pursue to open up a cage, perhaps? >> working with protocols, one of our scientists has been very much involved in testing materials and treatments, refining those protocols that have existed for 2.5 to three years. there is an element of safety were people involved chemicals

in treatment of equipment. biologists have i can tell you that is probably limited to the organized caving community that is within this loop of knowledge and network. it is very difficult to get it out to a lot of the other public. as a vice president of the northeastern cave conservancy, we have a cave with a kiosk that has white knows centrum protocol were we educate literally thousands of youth group visitors and camps that come and visit these caves. they were -- they learn about white and knows syndrome. --white nose syndrome. >> what is the nature of the treatment? >> for example, you need to remove wash with a woolite to

remove organic material because the bleach or lysol ic compound you use interact with our galaxy a duty to make sure they are clean before they are treated. private range of different treatments and some are available in the laboratory and some you can do in the field. some of them are boiling water for 50 minutes and that will kill the fungus. and then you rent. depending whether it is soft or hard material, their different ways to control that. we have major regional caving advance and we have large decon stations and we do that at regional events. we have been doing that for years. >> would this opened the way to a permitting process therefore allowing only those people who have a permit and paid for a permit who may have been through

a coarse and demonstrated that knowledge so we would only have people who are properly trained in these decontamination process these? >> in fact, in a number of government-unmanaged sites, that is the current practice. if you are doing a permit on a bom or national park cave, that is required. >> very good. >> may i had -- within the department of interior, the national park service has a lot of recreational caves that are visited by millions of people every year. through education which is a big components of the national plan, we are already educating a lot of people visiting these caves we have control who comes in and out of the caves. they pay a ticket.

education with the cave experts and the general public has become a critical piece of the plan. >> thank you. i yield to the ranking member. >> thank you. i have a couple of questions for dr. boyles -- if some that species are not affected by the white nose syndrome or are thriving in its presence, why should we worry about other bat species dying? >> the simplest answer is that not all species are equivalent. if we just talk about the agricultural impact, each species has a different diet. some of them moth specialists or beetle specialist. each species is different. regarding white nose, the

important part is the species that is being affected and as the little brown bats. we are seeing a huge collapses in a very common species. species that are doing well are endangered or have small populations anyway. we are not seeing any 1:1 replacement of individuals in the species cresting and announce a common species doing well as of right now. >> can you comment on the role that insect-eating bats play in the ecosystem and other animals would be able to fill this role? >> that are the primary and, in many cases, the only predator of nighttime flying insects which are pests. even the ones that are not passed to humans are still important and ecosystems. unfortunately, there really isn't any other natural alternative to bat. there are a few birds that are

nocturnal insects devours but they tend to be uncommon. they're much more limited in their foraging and will not be able to replace the bat. >> thank you. ms. fascoine, are there caves where bats are the main attraction and what impact would there be if they died from this syndrome? >> there are many examples of cases were bats are the major attractions. carlsbad caverns is the best known example. millions of people have been educated and have known that over the years. in the white nose centrum, my home state of pennsylvania as many caves that advertise. they will advertise for bats.

there are small business owners with families that run some of these commercial caves that rely on the bats to bring in tourists. >> what is the percentage of caves that are problematic? the syndrome is their verses the once free of any of this fungus or disease? >> researchers are monitoring -- >> throughout the united states. >> it is being monitored county by county pennsylvania, for example, had the fun this a few years ago. this year in maryland in there were additional counties impacted. i don't know of anybody has a percentage >> a percentage of all the case throughout the united states and canada that are affected? >> i can tell you that we have over 190 sites known to be affected at this time and there are thousands and thousands. >> is a small percentage but

still spreading? >> that is true but the other thing that is important is that many of these sites have never been visited and we don't know where all the cases are. we diagnose the syndrome based on the bat population for refunds could be at these sites and it could serve as an environmental reservoir for the infection even though bats are not there and the wintertime. -- in the wintertime. >> mr. chairman, i don't have any further questions but i think we have to proceed with finding a solution to this problem. >> i quite agree. that concludes our questions today. we have had a great pommel, very informative. we thank you for that. members of the subcommittee may have additional questions for the witnesses. they may want to submit them in writing. the record will be open for 10 days to receive these responses.

i want to thank members and staff for their contributions to this hearing. if there is no further business, without objection, the subcommittee stands adjourned. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] [no audio] [room noise] >> coming up shortly, we will bring a live coverage of the day-long conference of the impact of the financial regulations law. it is hosted by the pew

charitable trust and we will have remarks by the federal reserve bank of kansas city. live coverage starts at 1:30 p.m. eastern here on c-span for it until then, your phone calls on republican support for defense cuts from today's "washington journal." post" story this morning. gop opens the door to defense cuts. our question is whether you think defense cuts should be on the table a way to cut

spending. going on deepernto the story in, let's check this out -- some democrats say theplace a higher priority on defense cuts -- and here is where is the potential for compromise, according to some republicans. this is representative barney frank, democrat of nashua to

ships -- massachusetts. looking a how folks have weigheon this and the past, we have an article from a few months ago, back in january, talking about the minority --

then minority leader eric cantor. this comes from cnsnews.com. he said everything would be on the table. let's look at how conversations are expected to go down between minority leader mcconnell and majority leader harry reid and the white house. this piece from "politico." david rogers reports today's meeting is an important first that for both men --

let's go to of bonds and hear what a viewer has to say from caon city, nevada. caller: how are you? i just think i is ridiculous in terms of barney frank, when asking about defense cuts, whether we should have them. barney frank has never served in the military. we need to turn to the people who have, the people who know what we need and how much of it we need. and the people who are willing to look belligerent -- belligerently in the sky and screen -- host: looking at what is going on in the meetings today. back to "politic" seeing how these meetings between president obama and minority leader mcconnell may go down. our question to you is, should defense spending be on the table? if you are a republican who

favors defense cutting -- among gop leaders, david rogers of politico reports, mitch mcconnell has the most insistent that the president play a larger ro in talks going on right now. looking at "the washington post" story, this is one other top pieces about the gop opening the door to defense cuts.

it goes on to talk about how defense spending could actually go down. at the end of the piece, it says -- jim in redding, pennsylvania, a democratic caller. good morning caller: i was just wondering why we have -- host: yes, sir? caller: why we have some innate

aircraft carriers, 11, andhina has one and we have so many submarines. why can't we cut some of them? that's all iave to say. host: william joins us from north carolina. caller: how are you doing this morning? listen, where i live at, we have a man named frank -- and he raises chickens for a living. he feeds them lots of grain and corn. it just give me a few minutes. he kee some feds so they can sell them and cut the heads of judy off. the republican party thinks as much about a poor person as frank perdue thinks about chickens. the republican party thinks nothing about the poor. theyre giving everything to rich people. what do you think about that

question a host: let us find out what america thinks about it. massachusetts. john joins us. caller: how is it going? i just found out that the fed had just given another $3 trillion to banks all over the world. so, what's the purpose of the patriot act if we are giving money to our enemies all ove the country? host: what do you think? caller: my thing is the patriot act is to keep us frofinding out what the truth is. if we are bailing out -- the fed is bailing out banks in arab nations and other countries, what is the purpose of the patriot act? is this a big act to take money from the poor and give to the rich? host: we are talking about defense cuts. you think it should be on the table? defense spding? caer: that is kind of

ridiculous. host: barry, virginia. caller: i think defense cuts shoulde on the table because there is a huge ahmad of money to be saved just to change the way the pentagon does procurement, for example. without getting too much in the weeds -- for example, way back when the air force procured aircraft starting with the f-16 and half a century ago, you have to find a perfect price contract and the one that came in under budget, pretty amazing. we have seen in the last half century cost overruns in major systems. again, not to get too much into the weeds, but contract officers generally don't do their job to assess all of the needs that are necessary. the military then comes up with more and more needs that glom onto systems as they are developed and tt leads to huge overruns. if we do an accurate mes process -- assessment at the beginning of the process we could cut the

price of weapons systems dramatically and we could go to a firm fixed price cost system and we could save an immense amount of money and probably have little if any impact on our defense readiness. host: a comment from twitter, monte writes -- brands in the charleston, west virginia. good morning. caller: thank you for taking my call. i am very muchpposed to defense cuts at this time because we have our troops committed overseas in several places. they are in harm's way in several countries. and and not only that, but we have a situation where we could reduce the defense budget to zero tomorrow and it still would

not resolve our debt problem. if we do not think about social security, medicare, and about medicaid, we may as well throw in the towel right now and all of these negotiations and talks beuspended and we just let the government default because those are of a three major leaders of money, federal money, if you will. -- eaters of money. to look everywhere but the three ant elephant in the room is a complete waste of time. now, once we get to a point where we have somewhat of a stable world and we can responsibly and sensible way remove our troops from places like afghanistan and iraq -- not what the president proposed last week -- but if we can give to the point, then, yes, we did get to those things. the last gentleman talked about.

-- procurement issues. that of a great place to start. but for now we need to go to where the heart of the problem is, and that is entitlement and we need to change the mentality of the american people and tell them, you are not entitled to these programs. host: looked -- let's take a look at comments from twitter. let's take a look at minority leader in the house nancy pelosi talking yesterday on cnn's "state of the union," looking at how the debt talks are going between democrats and republicans and weighing in on eric cantor's position. >> there won't be any agreements for such an agreement unless the house democrats are part of that. unless the speaker comes up to the table with 218 votes. but i think the president has been involved.

he talked about bipartisanship. he tald about balance in what we do. obstacles have come because majority leader kantor has what with the table because he doesn't want to deal with special interests -- cantor. >> the republicans don't want any tax increas and is a debt ceiling. >> it is not a question of tax increases -- and >> sorry -- yes, right, they don't want chang in revenue. >> yes, but what we are talking about -- some of the things -- leader cantor can't handle the truth when it comes to attacks of the dislike big oil inc's sendg jobs overseas, for giving tax breaks to wealthiest people in the country while they are asking seniors to pay more for less as they abolish medicare. host: nancy pelosi speaking yesterday on cnn and she is

talking about discussions going on what the republicans and democrats related to the debt talks, talking about how leader eric cantor needs to acknowledge in the fact that democrats, in her opinion, have to get some of what they want to be at the table. l's go to alex on the democrats' line from albuquerque, new mexico, and the question is what the defense cuts should really be on the table in a serious way as politicians look at how to bring down the debt. caller: if we were to cut the military budget by at least 10%, maybe 15, we could save social security and that would ge the republicans a huge advantage with their constituencies. there might be other programs, too -- public schooling, education. and we would still be no. 1

militarily, even with that cut. host: let's go to carolyn who is in favor of seeing some defense cuts, joining us from illinois. good morning, carolyn. u are a republican question of caller: yes, i am. i might ron paul supporter. i was a delegate forim the last election. we have bases all over the world. people areorgetting, we still have bases in germany, bases in japan. let those of other countries jarrod -- either if we are going to be there, they should be giving us money or supporting themselves. we could cut our military in half. my brother is a colonel in the army and he is the first one to tell you how much waste there is. they don't even know -- billions and billions have been given away during these wars and nobody knows where the money is. the other guy who is a

republican who says we should cut medicare and medicaid -- i know it is a big amount we are spending and they could cut medicaid -- medicare, cut the waste, but to say that not touching the military -- it is a sacred cow for republicans. i think that is why they lost the last election --i hate to say it because i am a republican. they will lose again -- we just can't afford the military. 10% of budget -- if it is, it is 5% to hide. they need to get away down. host: as a republican what do you think about representative michele bachmann? she is officially announcing she is running for president. caller: i kind of like michele bachmann. everythingagree with she says -- but none of them -- they all get up there was

talking points. what i their plan? nobody is talking about the middle class, except maybe ron paul. we need to get jobs. i say take the money putting in the military and open up factories. host: let's take a look at michelle bachmann of the talk shows -- michele bachmann on the sunday talk shows. she will be announcing today she will be running for president. >> governor mitt romney has had a history of varying his position on this issue. i think clearly we need a candidate who is pro-life -- that is reflective of our party and my position. >> mitt romney is not? >> mitt romney has to say wha he is. but i will say that he is saying now that he is pro-life, this was a tremendous opportunity to demonstrate that by signing the susan b. anthony pledge. and i think it is disappointing that he didn't.

host: representative michele bachmann talking on fox news sunday about candidate mitt romney. looking at "the wall street journal" it talks about how the two are fairing in early polling. michele bachmann was the first choice of 22% to mr. mitt romney's 23%. her numbers are lower in national surveys -- she will be making her announcement today. it will be carried at 10:00 on c-span get she will be doing that in waterloo, iowa.

she was born in iowa, so it is sort of a homecoming for her. ms bachmann is serving her third term representing the sixth congressional district and was the first republican woman to be elected to the u.s. house from minnesota. a question is what you think congressional republicans should be open to defense cuts. pennsylvania, where jason opposes the cuts. caller: hello. thank you for taking my cal always too shosighted. we' got to stop that. quit commenting on michele bachmann and ron pollack -- barack obama won t presidency for two reasons. we were so conscious -- we got to make sure we can show everybody we have a black president and we found the person to elect him, and he told everybody what they wanted to help. that is what ron paudoes.

heells people what they want to hear. people love him. the fence -- why did we win against russia? remember the long war against russia, the cold war? they had a huge military, but it was technologically nowhere near as advanced as ours. we won by staying the course, by devolving our military, by investing in technology, by being severe -- superior to them. we cannot look to a short cut solving a budget issue and then endangers our safety for our children in the future. host: coming to us from twitter -- writes to us by e-mail --

dennis, democratic caller from upper marlboro, maryland. caller: good morning. thank you for the opportunity. first of all, i want to say the lady from illinois, she kind of stole my thunder. i do believe that the military budget can be cut, a can be cut substantially. the wars in the future are going to be fought electronically. they are going to be fought in cyberspace, and they are also going to demand seal teams like the one >> we will surely bring you live coverage -- we're actually going to live coverage on the conference of regulation financial critic financial regulation law hosted by pure research. we will have remarks by the

federal reserve bank president of kansas city. this is live coverage of cspan. >> dr. hoenig has had a distinguished career with the federal reserve bank of kansas. he joined the federal reserve bank in 1973. he has been president for 20 years, since 1991. dr. hoenig has the legendary jackson hole sun -- seminar every year which we either have attended and enjoyed for which we had intended but were never invited. [laughter] his kansas city federal reserve bank bio says that dr. hoenig has been especially outspoken about the regulation of the financial industry during the recent crisis. to share his thoughts on why we have not sold tved the too big o

fill problem yet, i am honored to introduce president thomas hoenig. [applause] >> thank you very much for the introduction. it is a pleasure to be here. i have to note that we put the wrong embargo on my remarks today. we said 1:00 so it is out. i assure you have read it already. because of that, i will try to present my comments informally. and be sure and leave time for questions because i am sure there will be questions of one kind or another. as already noted, we are approaching the one-year anniversary of the dodd-frank bill. given all the work that is yet to be done and the uncertainties that surround it, i think it would be a little premature to celebrate. i think it is an opportune time to take stock where it is and

what it might imply for the future. i want to congratulate the organizers of this conference. i think it is important that we take this opportunity. i want to note some of the colleagues nyu-sterns school as they have done some great analytical work on this and some pretty practical ideas that have come out of that that have served us all very well. as we talk about dodd-frank, the discussion revolves around the disruptions, the difficulties we have had over this crisis and the distortions that have come from the systemically important financial institutions. in fact, part of the discussion around the title that i have for these remarks, the title given was due cities have a future?

that is really what it is about. as we talk about the ciffies, i ask myself some fundamental questions. how in the world could we have investment banks that have relatively minor importance on a global basis justify a bailout. ? hulk and other banks that caused the collapse -- how can other banks because the collapse around world? how can a large insurance company that has failed be bailed out and left in private hands to go forward? finally, have been a country the size of greece hold hostage most of the world's financial structure. there are no good answers to those questions.

it has been my experience those are very hard to answer. that is because i think they are inconsistent. having them and having these kind of the events makes it very inconsistent with the concept of capitalism. they have been increasingly powerful. they have been increasingly destabilizing to our economy as to have seen by the recent crisis. they have required special support. they have the availability of different rules. that is why we have to go beyond dodd-frank to address this question as we now have it. we have to end the artificial complexities that come with these very large systemically important institutions if we are to restore a more stable financial system. it won't be a system without crisis but one that is more stable as we enter and exit a crisis.

i want to start by pointing out that the united states has been one of the most successful economies in history as an economy, as the wealth creation it has been able to provide us. that is because i think it has been mostly, over its history, bound by the rules of capitalism which rewards success but also it compels the participants in the market to play by open rules, have a market that is free in a sense of transactions, and compelled to fail when, in fact, they make poor decisions. the key to be efficient and vibrant and renewed. i think in that way, it is how we allocate credit in this country to the most valued endeavors that have made this country great and build the

wealth. i think it is very important that while history has done this, we have changed. as recently as 1980, in this country, we still have 14,000 financial institutions competing across the nation,., locally. we have large institutions that provide credit for the largest firms on an international basis. the largest five of those institutions controlled managed about 29% of the deposits or financial assets among those institutions which was the equivalent of about 14% of gdp. since then and today, we have a far more concentrated and far less competitive banking system as we have seen. there are fewer banks operating in the country and the largest

five control more than 60% -- more than 50% of deposits and assets in the industry. it is the equivalent of almost 60% of gdp. their impact is somewhat larger and the largest 20 institutions control > 80% of the financial assets in the industry and over 80% of gdp is a very different environment we have today. the irony of all this that is important to keep in mind is that this very significant change has come from our efforts to make sure that we were able to deal with financial crises without having the consequences of these financial crises. the federal reserve, for example, is a product of the 1907 crisis in which we were setup in part to make sure there was liquidity in the market when it was needed as people lost confidence. then we had the deposit

insurance come after world war two to make sure the small depositor was taken care of and had a more stable financial environment. over the last 30 years, we have expanded the safety net debt by bit -- but by bed to -- bit by bit to cover financial liabilities. in the late 1990's as some of the instability was in place, we eliminated the glass stiegel act which separated out the high risk activities from those activities that had been protected by the safety net and created the incentives for ever increasing risk that we saw with those failures in that period, starting with continental, we confirmed to the world that some institutions were too big to fail and they were not subject to the same capitalistic standards that everyone else was. in that instance, the ciffie was

born. it is no wonder we have this great recession. it is no wonder that lending practices became weaker and we began to trade very significant amounts at the desk and that we increased leverage by almost twice what it was before we had the elimination of glass- steagal. the candling was there and the housing market struck the match and had this great financial crisis. the belt out the best crisis has cost the american taxpayer billions of dollars and that is just the down payment. the 10% unemployment certainly was contributed to by this financial instability and their actions. the ciffies argued that we're

pushing too hard on capitol standards and it will make them competitively less viable. they said will keep loans from growing. my answer to that is pretty much nonsense. i don't believe that. one of the things we know and when i outlined some of those issues in the remainder of my speech, after the crisis, congress began to once again address how we deal with these crises and the abuses that took place. we pulled out the same old tools. we will enhance supervision. we will improve capital standards for a while and we will have a resolution process that is fail-safe or at least make sure they are not too big to fail. remedies like the glass stiegel act have two principles that i

keep in mind when they start talking about the issues of the ciffies. institutions that have access to the safety net should be confined to the core businesses for which the safety net was established. secondly, the shadow banking system should be preformed in its use of those activities but also add to the instability. that is money market funds and certain repos. those of the two principles that are important as we try to think about greater stability going forward. institutions that are -- that have the privilege, the advantage of the safety net should be confined to commercial banking which is deposit that taking and lending and they should still be allowed to underwrite securities. they can do advisory services and asset management for welfare

purposes like trust activities and related activities. these of the activities that would be prohibitive and that includes dealing and market making, brokerage, proprietary trading, because you give them these activities plus the safety net, you are inviting an expensive rest incentive which will return, in time,. certainly, i would not allow them to trade for customer accounts because it will begin this and as a little of it in terms of inventory preparation and the reasons you will see given very quickly. these are the activities that are inconsistent with the purpose of the safety net that we should not forget that or we will repeat the mistakes of the past. critics argue that when you scale and scope, we need complexity of we're going to be globally competitive and take advantage of bringing costs down

to make more loans and expense. it is important to have one-stop shopping, it is argued. that is absolutely part of meeting an expensive system that we are going to conduct monetary policy, some argued. . i think these arguments are unconvincing and they mislead especially when they say it will keep us from being competitive. it would be inconsistent with our 200 years of experience or we have had below concentrated financial system and one of the strongest economies in the world. just the logic of that -- people say things have changed. even with glass-stiegel, when we have had the activities of various institutions and aging, we had a successful economy with commercial banking serving their customer because their business depended on it and investment

banks and dealers separate from that serving their customers and we were the leader in the world. we issued as much new equity and new opportunity as a merchant bank has in europe. history suggests there is a better way without the incursion of this terrible crisis that we have recently and may have again if we don't correct things. when i go to greater specialization, you serve the client better at it is about the client and about the public as well as about the return on equity through the institution. i don't have any objection to return on equity if it is safe and reliable and does not put people out of work. the second reason i think we have to keep that in mind is that economies of scale they argue or achieve that size is far less than the size of the ciffies.

it is clearly been shown over and over again that our economy is in scale but you don't need to be anywhere near $2 trillion to gain them. one-stop banking for most activities would remain in place under this proposal. the trading -- the high-risk trading activities will be out but the customer will be well served and those activities can be purchased elsewhere in a very efficient environment. finally, it seems improbable to me the argument that they would just pick up the marbles and go to another country. i have to ask that country outside the united states if they really have the gdp size, the ability to pick up the tab on too big to fail. all countries should be focused on bringing stability to their economic systems and many are

and i think the united states has an opportunity to leave that way rather than undermine the progress in that area. it is absolutely essential one other thing that is brought up the recognize it and that is concerned about the shadow banking system that you push these more risk-oriented activities into the shuttle banking system and that is an area where we have to pay attention. there are a couple of things we can do. a big source of instability in these is the money market industry that was created to get around reg q and it is a major part of the instability. offering going to be those, you cannot have -- you cannot break the buck on deposits for the have to float with the value of the assets. that will discourage the use of those as deposits and discouraged the runs on them that would otherwise calm. will not ended but it does discourage it. the second is repo market.

we have had short-term liabilities issued secured by long-term assets. that is what happened in the mortgage crisis and it is very illiquid when you have a crisis. we need to go back and go back to the pre-2005 bankruptcy rules where if you had a problem, you could grab the collateral and liquidated right away and make it subject to the same rules that everyone else has to deal with in a failure. that will discourage the use of these repos to fund long-term assets again. those are a couple of things we can do to address that. it is my argument that by pushing out the high-risk activities that will help get them priced correctly and take the risk into that part of the market where it belongs.

it leaves the commercial banks to do what they are supposed to do under a protected banking system, make loans, make sure the soundness of the payments system stays in place and we in the long run will have a much healthier economic system in the united states and globally. finally, as a member of the open market committee, of course, i am well aware that there are dishes around primary dealers. the fact of the matter is, primary dealers are the counterparties for most of the transactions at the desk and so forth. there are now about 20 of these primary dealers. most of them are affiliated with commercial banks. the fact of the matter is, you don't have to be affiliated with the commercial banks to be a primary dealer or counterparty. before we had the break up for the end of glass stiegel and the introduction of the new law, we

have many commercial banks that are primary dealers. it's a matter of changing the counterparty is. it is not something that cannot be accomplished. i would go further and suggest there are other opportunities to broaden the base for monetary policy. one of the things we learned in the crisis was the use of the turn "option facility --auction facility -- you could conduct an auction-type functions. you can build your military -- your monetary base or reserve this is the primary dealer to find an on a daily basis and make sure you could get close to your fed funds target. there are opportunities from this to expand the democracy elements of conducting monetary policy. there are many opportunities a

route restructuring our financial system in a sustained way and a long lasting one. it would allow the safety net which will not go away to be directed appropriately and allow risk to go on outside the banking system and make sure the two don't intertwine. i think we will all be better off and certainly our businesses in this country will be better served. i will and with that right on time and i am open for questions or challenges. if i am wrong, i want to know that. if you are wrong, i want to tell you you are wrong. [laughter] thank you very [applause] . [applause] in any questions? yes? >> you describe this scenario over the course of 20 years with

massive concentration in the financial space, yet you did not explain why that might be the case. do you have any thoughts, assuming you are not alleging any illicit behavior, how is it that those bags got to be the size that they are -- those banks that to the size of the artist does that say about the market structure? >> there will be a couple of arguments for that. the first is that prior to that period, you had limits on interstate banking and remove to those limits which is a reasonable thing to do, i suppose. the second thing will be that there are these economies of scale. admittedly, there are economies of scale. they are usually captured before the size they are. the third reason and this is a reason that gives me great

concern is that if you are perceived and it is confirmed by actions that you too big to fail, you have a capital cost advantage over all -- over other institutions. you can see it if you are a regional bank of only $15 billion in size. everyone knows that if you fail, you will be taken over and they will wipe out the stock. many of the uninsured depositors may, in fact, be losers in the transaction. where you go is where you think that will not happen. you go too big to fail institutions. there is clear suggestion that that means their cost of capital is lower. if you want an advantage to

expand and have a lower cost of capital in your expansion efforts than anyone else. the fact that you can raise deposits more easily and the cost of capital was left and you see that, if you look at the leverage ratios of those largest institutions as a change from 1990 through the crisis -- it went from roughly 16:1, real equity, to 30:1. obviously the market was not paying attention to that because they knew there would be bailed out. the action that the government did confirm that. that is a huge advantage. i think that is hard to dispute. that is why i think that has been as rapid as it has been ve. others?

it is such a convincing argument, isn't it? it is hard to dispute [laughter] >> my question is about your observations repos and money- market funds and reining in those two sources of instability. it strikes me that there is a kind of cycle where you regulate more tightly which makes the traditional products less attractive. it has said unrests -- it has hidden risks or systemic risks and people might know about that at a certain point and that might inhibit. adoption after a while, it does not really matter. it is that evolution of complacency that i see

particularly worrisome. how you deal with the potential in your frame of things for effectively core banking operations, finding a way around the core banking regulatory system? >> there is no perfect solution, obviously. the first and i would tell you is that having money market instruments where you have this dollar protection and it is treated like a short-term deposit is a flop. falw. flaw. if you read the paper, you know how much people are worried about the markets again. the personal investment thinks they have a deposit. when they got -- when the get doubtful that will run for you have to eliminate that. will something else to merge? perhaps. if you split this out from the

commercial banking industry so it has a different mission, is more smaller and focus on lending a non-bank activity, you will at least mitigate the likelihood that a vast remarked on a daily basis, people will pay more attention, maybe more -- maybe a lot more attention, and you not have the build up of the excess to the extent that we have had that is part of why you have to think of the shadow banking part of the system. need to be aware of what might happen there and try to preclude it. don't do things that encourage it. having therepo market given special protection was a serious error because it caused people to have a false sense of security and, in fact, it fed the idea that you will get bailed out and they were bailed out because of the nature of the

crisis. that has to stop. if we're going to have any kind of real capitalist system with a more effective market discipline to it. you can't say what you will about the dodd-frank bill and i would hope it would work but it will be the first time ever -- i can't imagine it working because i know what that friday afternoon is like when a liquidity crisis is upon you and the markets -- the asian markets opened sunday night. it is hard to go through all the steps in dodd-frank and i suspect -- i would not want to be the secretary of treasury when the world melts. i would want to build an accurate as to be well before the crisis that you put in the stops, if you will. that is my point. are don't know if you familiar with the research out

of stamford. when you talk about the public too of the big to fail, the research is huge. that has been quantified at a number of ways. i would encourage you to be stronger on your assertions there because the research is there. i don't know if you were here when we started early as monday but there is a discussion about that which is policy optimal and politically possible. i lived through the politically possible and impossible as a senior staffer in the senate on the hill. many of the things you're talking about or attempted to get on the floor as amendments. it was difficult to get them up and a few that did got very few votes. senator durbin said the banks on this place for it was not referring to the senators, he

was referring to washington, d.c. whether that is true or not on whether one agrees or disagrees with what you suggest and i certainly agree, the question is how we get from where we are to where you think we should beat in the current political environment? how do people make that happen? how do you see it happening, if? well, i thought a lot about it. i think it is possible or i wouldn't be putting my point of you out so strongly. but i do correspond with her. i think she has done some great work, as her colleagues have and as you have done, that the capital issue is, it is almost propaganda in terms of what the impact would be. because the stronger and safer the institution is, the lower the return on equity needs to be to draw the capital. before that a group of capital

seekers, and so forth. so what you are trying to do as manager is take advantage of the environment you have been given, the return of equity and in your bonuses up. that is human nature. i think she has done great work. i think it was reviewed in this idea that somehow we will not have growth in this country. we have a lot of the institutions with never strong capital and you always do better when you are working from a position of strength, in terms of decisions and allegation -- allocation of resources. i hope work continues. the second point is -- yes, it is difficult. and it should be difficult because you have different parties. one of my concerns when i do read the concentration issues -- these institutions are far more powerful today than they were just 20 or 30 years ago. i didn't put in these remarks but it is a fact that when the federal reserve was formed -- remember, j.p. morgan -- and we

can have that. the five largest at that time controlled and assets of 2.5% of gdp. i am not so worried about that. but now it is over 60%. now they are more important than ever and i have seen the size of of their political contributions, or whenever you call them, and they are dramatic. a very significant. so, they get a lot of hearing on that. but there is a way -- because i have seen it, where i find that whoever it is, they do want to hear what you have to say. and if they are willing to listen if your point is cogent and you can demonstrate it. you can't just assert. in fact, one of the reasons why we put out a white people -- white paper on how to do this. nice in theory, but how we do it? we say, here is how it works.

talk to them one at a time. and if you think about it, if it is in the best interest of the economic system of the united states and the growing of businesses and creation of real wealth across the country, and you make that point, the research they are doing, then it becomes a more powerful argument itself. i think there are a lot of businesses, they are all tied up in their daily activities but when they hear this and they begin to think about it, they become an important part of support. glass-steagall, who would of thought? and we did get it. >> john -- from penn state university. i have a question -- if you look at the shadow banking system it seems there at least three legs on the stool, not more.

you talk about money market funds. you talked about the repo market place. but you didn't talk about the securitization market place. i was kind of curious if you left it out intentionally or if he had thoughts about that. i have done some interviews with folks up and down that arena to try to understand more about the dynamics that were happening. it seems like there is kind of a natural story -- i am not a statistician but and economists so you have to accept my shortcomings. but my sense is banks -- loan institutions create loans. they have reserves they can loan against those. but they can take them off the ballot she. they get put any special purpose vehicle which is not any size, and there is a market based capital requirement that goes with that that is much lower than what the federal reserve has controlled with with the institutions and the safety net, and essentially the assets are put either on the short

term, to paper market through sips or the pension she balance sheets, said representative. one of the interesting things we found is part of the dynamic, despite the capital requirements, is at least in the housing market, the advance in technology -- loans could be created, put in the special purpose vehicles and passed on, accelerated of the process. we saw a building up of the asset bubble. almost a monetary policy question with the wrong phrasing, but it seems like to the extent you have reserves creating assets and the speed at which they can create assets, it seems like that is and in ports of thing to consider reforming also. -- it seems like it's an important thing to consider reforming. you think that is it can't -- substantial concern, and the ability of the fed to maintain

the stability of the economy? >> i think you make a good point -- to just directly answer your question, i think it is an area that needs and deserves more attention. it is not in our white people -- white paper, but i do think it is important. dodd-frank has something -- a certain percentage move off the balance sheet. so, that is an area i think we probably should pay more attention to as we move forward. you are right, if that becomes the vehicle -- but there are a whole host of other things around that problem. the bad ratings system, phony off balance sheet instead of real off balance sheet. that is why the capital requirements, i think, were less, because everyone had a kind of wink and a ninth that we will provide a bailout as an institution -- a wink and a nod.

but i think in a systematic way we need to address that. i think it is a good point. morris? >> tom, you made the case of why to big to fail is a problem. but in talking about how you discourage or stop it, at least in the oral remarks you put emphasis on bringing back glass- steagall. what about size caps? if you are worried about size, that is the most direct way and you could argue well, even with glass-steagall you could get mergers, very large institutions, $2 trillion. they could lose their money on cni loans rather than investment banking. what about size katz, 3% to 4% of gdp, and that half a dozen u.s. institutions would be already above the cap and would

have to come down over some period. you also have much bigger capital surcharges than what was agreed to over the weekend. that would be another way to go. i am just curious as to why he chose the glass-steagall route as opposed to the other routes for discouraging to big to fail? >> we did it and think about size. but part of what we thought about its size it isn't really the factory -- it is one of the factors, but not the primary factor. it is the nature of the risk -- whether you are bear stearns -- which probably wouldn't have the -- have been caught underneath the size limit. it is the nature of the risk that you are bringing on that gives us pause. second of all the digging -- if we could give them marginal capital requirements above, i

think that could be fine but i don't have any faith in it at all because it will be coopted within three years of the recovery. for example, the resistance to 7% equity it for a tier one equity and then adding on to that. once the economy and the institutions are supposed to be sound again, we will start eroding the capital requirements just like we have in every instance in the past. so i don't think it will last. but separating out the nature of the wrist diving will give you a more stable economy over time and you will be able to enforce the rules more clearly. one of the difficulties in terms of supervision of these is it is so horribly complex their directors don't understand it, their management don't

understand and and the supervisor can't deal with all of the issues. so you have to simplify the system. then you can have capital standards that are enforceable over time. and i think your long run outcome will be better. size limits is another option but i don't think it will be taken very seriously. ken? >> tom, i was thinking about what you said about the friday night challenge. the classic example -- push comes to shove. of the problem i have with their description is, i could see the same thing happening for the non-ring fenced institutions. even though they are not banks, they could be systemic in another way. well the treasury secretary pull the plug? if not, don't they have the same problem we have that with the current system? >> that is the risk.

but if you have them separated out and you don't have and there isn't confusion with a safety net that has been, then i think their capital standards -- the market will demand more and the market will pay more attention to it because if you subject them to the real bankruptcy laws, then it becomes a greater risk to those creditors that are outside. right now the assumption is, because you are tied to the safety net, the safety net will because the impact on the primary financial institution will be the main concern and can't take any chances of you bail out over here. that is why the one to limit their ability to do it. that is what is behind that. understand, i am not saying crises go away. i am not saying risk of goes away. i am sending it gets better allocated, better price, and

therefore we can handle the crisis that will inevitably come, more successfully, without a 10% unemployment rate. i am not thinking about the 800 billion -- and we will get a good part of the back, and we will already lose a fair amount. it bothers me that speculators were able to go in knowing the institution would not wipe out or we would not wipe out the common stock holders, that speculate and make a ton of money off of the taxpayer. that bothers me. and i think we can do much better than that. yes. >> yeah, i hear what you are saying that maybe there are no size limit on bank, but the nature of the business might force them to downsize. there was a trend in the 1970's, 1980's, and 1990's, that banks were having a hard time getting a good price on a loan for big corporate -- exxon, wal-

mart, target. if you are causing the banking system to sort of reduce its size, do you need that in the real economy, too? and if it doesn't happen, are we back to the problem in the 1970's and 1980's, banks did not make money lending to big corporate soap that is what -- why they wanted the expanded powers, to catch up. >> i heard that argument. i am not convinced of the argument because you have this desire of the non-banks to get to the banking business. they thought they could build their return on equity that way. i think there was an ability -- consortiums for large industrial companies, that you could get the loan out. so, i don't see that that is

necessary -- necessarily what follows. and if you have a strong capital, you have the right size and you can do consortiums, you can fund just about any loan because that is how we pretty much did it for decades. i mean, i did not see the evidence that the suggested to me that they were being disadvantaged that much. now remember, part of the issue is -- and they made this statement before publicly -- if you are too big to fail, and if you have access to almost an unlimited safety net, you are a gse and a gse should have lower return on equity. it still brings capital in. and you can still make loans. and from a position of strength even make sound loans. will the corporation go somewhere else? yes, if you allow money market and other kinds of activities that are high risk. and the perception is they would be bailed out.

then you will just transfer the problem. >> but if you have banks that are 15% or 20% of credit card lending or mortgage banking, those of core banking activities. that is ok as long as everyone is doing their job? stakeholders, rating agencies, investors. that is okay? but with -- combined with specter to purposes that is when it's out of control. >> not only combining but when you give the state collective activities a safety net so i can gamble. look, if a large bank or any bank can make $100 million offer of a trade, guess what? they lose 100 million of of a trade -- even though they say they can't because they are perfectly hedged. >> jimmy diamond should agree with you, if he wants -- jamie dimon should agree with you on this.

wholesome american business. >> i don't know about wholesome. i do know there are certain acts in this commercial banks can do well and should do well and i think the market is there is to define at that point. i don't want and using the safety net to build their reserve that the date then trade on one aspect of basis to make their earnings. >> now that we have the volcker role we should be getting it to the that. >> we are already gearing towards it but it is already being gamed to death. we will see. >> i am a reporter with "huffington post." my question is -- when you talk to policy-makers in washington about the market concentration, you point to the top four or six. they say, well, it is not like it is in the u.k. or in switzerland. it is not that concentrated. double the size of the economy.

i am curious to know why the current level of the new -- in the u.s. is dangerous. what is the counter of the argument that it is not as bad? >> not as bad is not my standard. we have had -- the u.s. economy has been the most innovative, has -- if you look at our history you have a distribution of financial institutions similar to the distribution of industrial companies. and you can meet the needs either at a local or national level. now we are concentrating it increasingly where the small business and the community has to have some way to deal with this very large institution because that is soon become their only choice. that is the mechanism in europe. it is not as innovative as in the u.s., at least historically. we have a strength here that we are saying -- because europe has done that it means we should

give up our strength? it is a fact of life. i mean, i talked to firms that have been pretty much told by some of those largest most powerful institution words like, why should we make this along to you? convince me. when you have a locally-owned there is a mutual gain because the community does not do well unless that -- that institution as well. we ought to play to our strength rather than see it go away because it is not as bad as europe. it just not a good reason. honestly, it is just not a good reason. thank you all very much. i am out of time. [applause] >> that is going to prove a difficult act to follow. we have a panel now? everyone is here. so, don't move.

we will assemble here in less than a minute. -- i aming there'd hoping. all right, ladies and gentlemen. up until now it has been

prologue. we now get to the needs of the issue, which is a systemic risk. -- meat of the issue, which is systemic risk. it has become the meat of the issue the last several years. everything else is spinning around this target and now is our chance to hone in on it. greta, the floor is yours. >> the ledger to be here. it is kind of surprising that we have forgotten already -- in the headlines this morning we armed reading about the new rules on capital surcharges that will be imposed on large banks in basel, switzerland. the volcker roll, arguments thejamie dimon and ben bernanke dominating the gossip columns in the financial papers. we forget we are dealing with the aftermath of the banking crisis.

in the united states it was not a banking crisis at all, it was non-banks. 2007, the event was an announcement by hsbc. the problem hsbc originated in the non-bank, known as household finance, subprime lender. the problem tended to propagate from there. the way i look at things it essentially started the darkest and most rick -- least regulated and went up like a disease or a flood that essentially attacked the ramparts of the strongest building. so, we worked our way through the non-banks, household finance, and worked on commercial paper and then monoline insurers, finally brought down their stearns and lehman brothers in the repo market. only then that the center did not fold -- the citigroups, washington mutuals, bank of america saw their lives threatened.

the panel we will talk about now -- will ask the question, with all the focus on the but banking system, what happened to the shadow banking system where all the problems began? you can think of it in two ways, at least i think of this. two opposing forces. the first immediate force is flight to safety. basically in the aftermath of the crisis, the weakest have collapsed. the ones associated with the excess is that brought on the crisis, they are don baird -- gone. bought out or change the very -- changed the charter. the banking -- shadow of a new system basically immolated itself. time goes on and memory is short, know where shorter than wall street. the natural tendency is the focus the regulatory efforts on the guys who had the misfortune to survive that we will create a two-tiered system when the banks will have to endure higher capital liquidity standards, and

someone, which will then create an unlevel playing field and open the floodgates for the shadow banking system to reappear in some other form. and some ways i think it is quite possible the end result several years from now is looking at some of exactly the same issues we perhaps of blowing -- unknowingly allowed to bring on the crisis. to discuss these issues and to get into the weeds with a great panel of kurds who will discuss the various aspects of the shadow banking system. other than introducing them all but once you have biographies so i will launch right into it with a question focused on the area of expertise. to my left is tobias adrian who works for capital market issues for the better will reserve bank of new york. anyone following the issues is very familiar with his work. extremely good and extremely necessary. i would like to ask you a few things about the areas you are focusing on. specifically, it seems like in the housing crisis you would not

go without reading the pieces of the alphabet soup bringing us down. are they still around and are they still a threat to the system? >> thanks for the introduction. and thanks for pew and nyu to organize this great conference. i will talk about structured credit markets and in particular the way and that dodd-frank is changing securitization. there are some slides that were distributed just over lunch, so you can basically follow the slides. talking about two areas -- securitization and acp conduits, a subset of securitization. first of all, let me start by saying that my views are my own and not necessarily representative of the federal reserve bank of new york for the

federal reserve system. when you think about that shadow banking system, securitization is really key to it. and when you think about the financial crisis, securitization is one of the key building blocks to the crisis. particularly underwriting standards deteriorated rapidly in 2005, 2006, and 2007 in the deterioration also linked to the ability of our originators to securitized and sell off risk. so, when the securitized there's -- securitizeers and other holders, when the incentives are not aligned and there is moral hazard, linked to the deterioration. so, dodd-frank makes a big effort to address this issue in developing rules for risk

retention. there is a little charts in the handout that shows the buffalo of funds, the total issuance of abs, which are private label mortgages and credit-card trust and of the securitization vehicles, as well as the gse. you can see the front of the of securitization and the five years prior to the crisis and a sharp contraction during the crisis. we will review the credit risk retention rules that are coming out of dodd-frank. section 941.b requires the reserve board, fdic, sec, to prescribe regulations to do mainly two things. number one, securitizers have

to hold at least 10% of credit risk issue of any abs the issue. any abs issued, constructed by the securitizeers, they have to retain 10% of dots -- 5% of that, and furthermore prohibited from hedging the credit risk. in principle, the securitizer might hedge the risk. an approach where securitizers had a choice of several types of risk retention tranches. there is an extension -- exemption for qualified residential mortgages. and there is a premium capture mechanism to prevent -- i will not talk about that very much.

basically what i am reviewing is coming out of the proposed rule that was issued in april 2011. so, the risk retention -- % of aggregate face value of the security. the issue must basically does go -- it is close to the investor how it is constructed, what is the amount and what are the assumptions that are going into the construction of a abs. there are basically two different types of risk retention. one is a vertical tranche. a horizontal tranche, at the bottom of the abs, basically the equity tranche that has to be retained by the securitizer. the vertical one will be an equal piece of each of the different tranches of the abs.

if there is 80% aaa, 5% of the 80% would have to be held by the securitizer. and there is also the possibility of an l-shaped retention, so 50% split between the vertical and horizontal tranche. then there are particular rules for abc-p and -- i will elaborate about abcp but not cm bs. the securitized air can choose -- securitizer has a choice, but from an economic perspective some of the risk retention of a better than others. in particular, the horizontal

piece aligns incentive is the most and have the most beneficial effect for underwriting standards. however, it might be the most costly of ways to securitized from the securitizer point of view. there might be some concern that there is a choice to effectively choose these vertical tranches, which provide less benefit in terms of moral hazard retention. going to the qualified residential mortgages -- so, there is a set of mortgages that is exempt from risk retention rules. these are called qrm, and they are very similar to what are conforming mortgages for their gse's.

qrm's -- mortgages used for family properties with very conservative underwriting standard light debt to income ratios. 80% of more and various restrictions on debt to income ratios. so, you would basically expect that these qrm's will become sort of high-quality collateral in the financial system going forward. and they are constructed to be very conservative and very safe. so, there's a particular section in the dodd-frank, a particular section of the abcp market. that was one of the markets that grew very rapidly leading

up to the crisis and implode very quickly in 2007. of particular concern to the regulators. just to remind you, abcp, asset backed commercial paper which is issued by a special purpose entity or sometimes structured mass of vehicle. and did these entities can be abcp converse, which essentially hold mortgages or loans in these fp's and issue commercial paper against the mortgages or loans. the key to these conduits' is they have 100% backup line of credit from a commercial bank. so, prior to dodd-frank, abcp

conduits yielded kind of a capital savings mechanism from the point of view from the bank if they could move assets off balance sheet into the conduct and writes a credit line to the conduit and get typically a lower capital charge on this credit line than on the out ride -- out rights possession of these mortgages and balance sheet. so basically, the dodd-frank act is also requiring risk retention for the abcp convert. again, 5% horizontal tranche. firsts -- piece of any sbe. this is strongly intertwine with another section of dodd-frank, 165, which describes standards

for -- for that case dodd-frank is asking for enhanced provincial standards, including the off- balance sheet activities of the sifys. what used to be an off-balance sheet activity now has to being subjected to new capital requirements, which were developed and construction with the basel committee. the committee came out with the new rules, new capital rules, that includes different treatment of these off balance sheets exposure it. the capital rules, in conjunction with accounting rules are making off-balance

sheet vehicles such as abcp conduits a lot more capital intensive from financial institutions perspective. in particular, the degree to which of the balance sheet vehicles can be used to achieve lower capital requirements has essentially been closed by the dodd-frank role and the accounting rules. i guess i will finish on that. >> and ask you touch on another ?hing -- reposs what we see on the regulatory front on the safety net, or regulatory net worth around repos? >> i went to a dodd-frank act and i don't think there is i direct application of dodd-frank

to repo reforms. there is an initiative under the auspices of the federal reserve bank of new york, which is an industry initiative, which is working on reforming the way the tri party repo market works. but not directly related to dodd-frank. and the primary objective of the tri party repo market task force is to solve a sort of technical issue that arises in the tri party repo market during the day. in that market there is secure credit overnight between 5:30 p.m. and 8:30 a.m. and intraday between 8:30 a.m. and 5:30 p.m., and expose exposure of cash investors in the tri party repo market and is an unsecured

exposure can give incentives to run in try party. so the task force is actively working on solutions to that. one of the factors that was often -- that has often been blamed to of contributed to some of the instabilities in the repo market. >> what you are telling me strikes me as one of the leftover piece of business we have not grappled with. >> yes. >> thank you very much, tobias . i would like the colombia from the far left, he is right -- i like to call on bob on the far left. bob, i would like you draw your out of where you are on that, applications of systemic and stability and what you're working on and perhaps other

parts like hedge funds and easy as that might relate as well. >> thank you very much. before i start i also have to give a disclaimer that my thoughts this afternoon on my own and did not necessarily reflect the commission, commissioners, or my colleagues on the staff. >> you guys are no fund. >> if for -- before i left this morning my wife would like me to tell you they did not reflect her views, i did. one of the los significant events in the crisis the not involve the hedge funds, the maximum risktakers in the management face. rather, the money market funds. this simply pulled commercial paper and bank obligations. what possibly could go wrong there? rhetorical question, please. the september 2008 run on money market funds began with the reserve fund breaking the dollar and ended only after intervention by the treasury and federal reserve board. massive intervention of unprecedented nature.

both of the fed and treasury and of making money on the deal. and so, the taxpayer came off rather well. but these interventions, i think, raised troubling questions about moral hazard. i think everyone knows the money market industry will never be the same again, nor the way regulators look at money market funds will be the same. but interesting, shortly after these events occurred, two narrative's emerged as to what happened and why it's happened. they are fascinating and they are really important to understand because as you look and you hear and the commission weighs options to address money market funds, the fear is underlined -- underline what happens emerge in different ways. the first analogizes of the events of september -- september 2008 as a bank run that could not have occurred of money- market funds were subject to bank regulation, including deposit insurance and access to the discount window. some articles suggest money market funds are not

credentialing regulated -- they are very heavily and deeds are regulated by the sec and ways that could only be compared to provincial regulation. ms. said it never to suggest weaknesses in the financial sector during the 2007-2008 period -- uncertainty about the ability of the issuers in the short-term market to make good on their obligations. investors in money-market funds, particularly the growing number of institutional investors, simply looked through the portfolios of the issuers and lost complete confidence. beginning with lehman brothers, when it collapsed, and thereafter, aig and other players of commercial paper issuers that. to be in play at the time. this simply lost confidence in the short-term market. this narrative suggest if there were not money market funds and folks simply were holding commercial paper obligations of the underlying issuers they would have ceased rolling over and you would have had the same crisis.

the first narrative is best articulated, i think, paul volcker in his rawest form -- of money-market funds of the culprit, the so-called shadow banking system. at the other narrative i think ethically by paul stevens president of ici, told money- market victims too powerful destabilizing forces in the financial markets. beginning with the subprime crisis and moving on to lehman brothers. and again, which never to behold -- and there is truth to both -- depends on where your outcomes is. if your narrative is the first, then let's turn these things into bank obligations and they should be issued by banks. that, of course, involve the extraordinary expansion of the federal safety net, the deposit protection system, to cover approximately $3 trillion of assets in money-market funds, and that would be a substantial

change from the way money market funds are currently managed. the second is a there is simply a liquidity crisis created by an anomaly in the short-term market that occurs once every generation or so, suggested the issue is liquidity. and we need a way to inject liquidity into the markets that would provide liquidity to money-market funds. of course, the ici's suggestion was to form a liquidity bank, a special purpose bank that would exist in order to fund liquidity from money-market funds in times of stress only, the bank would operate and only if it had access to the federal reserve would know, which raises questions whether the window should be available other than banks during times of crisis to fund a significant part of the cash market. money-market as part of the money-supply and has been part of a number of years. depending on your theory of what happens is, very different outcomes.

they both contain truths. but from our perspective and policymakers perspective, it is very interesting -- they are helpful to understand different points of view. but regulators -- and let me go back to my original disclaimer, speaking for myself, here. we are on a roll, we have a $3 trillion money-market industry and starting over doesn't seem to be optional at this time. if i can tell you we understood that the sec today potential systemic implications of money market funds, we would have done things differently in 1970 when the rulemaking came into place that allow money market funds to exist as they did today, that is, with a stable nav best competes with the banks and savings deposits and see the's for consumer dollars. we would have done things differently. but back then it would simply a pool of cd's, a pool of commercial paper, and it was a

very small part of the market to which the dealers, much larger commercial paper market, provide a ready liquidity. very simple. and the commercial paper issuers, the banks, always paid in full on time. certainly the money market fund industry today is such a large part of the cash funding market, very different than it was then when decisions were made then. turning back the clock, as some would suggest, fighting battles we fought in the 1970's when banks and money-market funds were competing, doesn't seem like an option. it doesn't seem like a wise path. first of all, we have $4 children -- $3 trillion industry that provides a significant funding. if that funding were cut off you would see certainly this glut -- this location. certainly, we have large investor community that depends on money market funds today. retail as well as institutional investors. the question is, why are money market funds exist today?

we know why they existed in 1970, ways to avoid the limitations -- of interest rates banks could pay on deposits. but today, that certainly isn't the case. in fact, money market funds that force bank regulators to do to permit banks to pay some interest on their deposits. money market funds are paying just a few basis points, yet large institutional holdings, $1.80 trillion. what explains that? the institution market uses money market funds to diversify risk. moving to a bank is not an alternative to most of the investors because the concentration of risk in certain banks, which in some cases they all right -- already maximize in terms of their balance sheet. they seek in an institutional area of diversification. retail area, certainly convenience of money-market funds which are combined with a large number of investment products such as cash management accounts, variable insurance

products and other things that people use that result in people keeping money in money-market funds even if they are just paying a basis point. but money market funds are susceptible to runs, and that is a problem. when shareholders perceive a risk that the fund will suffer a loss, each shareholder has an incentive to redeem shares for the others. because everybody is getting out at a dollar, the first movers do not acosta of their liquidity. instead, it is socialized and the last folks out -- losses are concentrated in the last movers, those least aware of the situation. strategic redemption from knowledgeable shareholders can lead to panic by others. in the october 2010 working group report, it articulated and identified and explained this panic that ensued in 2008. the commission in 2008 proposed

rules -- that even before the dodd-frank statutes, before penn was being put to paper, we proposed rules to make funds much more resilience. giving you some examples -- it is a large number of roles but money market funds are required to maintain 10% overnight liquidity, 30% seven-day liquidity. this liquidity and security is not dependent on secondary markets, as we saw in 2008 rose, but contractual either tracy -- treasury obligations. overnight or within seven days. it added a huge amount of liquidity to the system. second, boards of directors of funds are able to -- something directors of the reserve fund did not have the authority to do, before they break the dollar. this, of course, could damage the shareholders of the fund but brought the dollar -- but as we saw and 2008 with the money market fund that was having problems, prevented from dumping

portfolio securities into the market, which begins the panic and affects the prices of all the money market funds are pressing the securities act. we still have the same structure of money market funds and the same problem that could lead to a run, even though we are more resilient than two or three years ago. the commission identified that concern and i knew the rules were not going to address all of the issues. there was going to be a phase two of will making, which we would rethink the structures of money market funds. that was followed by a president's working group report that laid out the dynamics i discussed about. just last month, a roundtable here in washington which many of the players and stakeholders got together to talk about -- what are the options? one option continues to be requiring money market funds to float their nav. there is an essential assumption that if the net asset value

floats, investors will be a differently and treat them instead of cash items, which they can expect like bank accounts to get the money back dollar for dollar, that they would treat them more like they do short-term bond funds, essentially that there are risks here. but what if they don't change their behavior? what if their behavior stays the same and in fact in just rates are raised? there are other options -- and perhaps we can change -- save for question time -- but there is a range of options considered by the commission and in the months to come you will see further of the commission detailing what approaches we will take. >> thanks very much. i would like to turn to viral acharya now, and needs no introduction because he organized this event. from new york university, he has two books out now. i will address other issues of the shadow banking that we have not talked about it. >> thank you for being here.

i have a bit of a long -- to take across the remaining parts of shadow banking and it gets larger as we keep talking. i wanted to just offer a few high-level talks and then sort of give my main punchline concern. whenever i thought of shadow banking, i think of it something -- sometimes as a good, useful financial innovation but whenever i think of the word shadow banking, i am used to thinking about it as what is supposed to be banking but isn't treated like banking. i think that is probably in some ways a useful definition because it makes you look into areas where there might be gaps in the regulation of these entities. i think tom hoenig touched on one thing -- unless and until we

regulate leverage for an asset at the level of the assets or an instrument, it is going to be very hard to get a good grip on the regulation of the shadow banking. there is sort of this untainted. in the market that risk will travel from balanchine to balance sheet until it has found the balance sheet with the lowest capital requirement to hold that a risk. uc transaction taking place because it makes sense for a one along the chain to the transaction, because all the leverage in the financial sector is maximized. it is the end part of the pipeline keeping the lowest capital -- everyone share some of the benefits of the higher leverage, of the party originating the the risk. several tempore and forms that the risk transfer takes place, and that is what i wanted to highlight first.

the argument that if we regulate the capital stronger in some parts of the banking sector, the risks and activities will leave that part of the banking system i think this is not entirely true. in the following sense -- which is, sometimes when the transactions ploy to leverage, the risk transfer is complete. you can think about something in which it is the gse's, which is actually taking on the credit risk of securitized production. in that case contractually those holding the mortgage-backed securities, they actually don't bear any the credit risk of the underlying securities. then there are other parts where the risk transfer it is not completed -- that is because it is structured in the form of guarantees. for example, tobias adrian mentioned about asset backed commercial paper conn the woods that have lines of credit from

the parent commercial banks. on the one hand they transferred the assets out but through the lines of credit the risk has only traveled back to the commercial banks. you can think about private -- private mortgage backed insurance. the risk transfer is not complete because the monom -- if the monoline thoughts of this will affect the holder of securities. what it creates is that you don't necessarily get a shadow banking system that completely disjoins from your banking system, but is intertwined in a very complex ways depending upon whether the full risk transfer was actually the efficient way of exploiting the bridge or a partial risk transfer was actually the official -- efficient way. therefore, it suggests that the regulation of shadow banking is

important, not just to contain the risks in certain parts of the system that are outside the regulated banking system. it is actually important even to control the risk of the regulated banking system itself, because if the counterparty risk in transfer is not managed well, the risk will come back, as it did, for example, and the case of citigroup which provided huge lines of credit to condiments and liquidity insurance kick in and came back to the balance sheet of citigroup. now, coming back to dodd-frank and how it touches on all of this -- so, therefore i want to think about the shadow banking and some sense, depending on how fragmented the regulation is for a particular asset class, certain risk repositories get created out there. so, in case of the money market funds that bob just talked about, i think about it as

systemic risk of the financial center. the risk remains in financial sector paper at the diversified it it, but depositary is the money market funds because they are basically diversified holders of the papers. gse's, you can call them fannie and freddie, broadly speaking credit markets, credit risk repositories of the economy. you could think about the new centralized clearing houses that will come about as the counterparty risk repository of the system. and you could broadly think about insurance, massachusetts , etc., as is the of the other people are not willing to do -- insurance, monoline, etc., as but things other people and not willing to do. how do we think about dodd- frank and all of the risk repository's who are out there in the financial system?

the focus of my comments is going to be mainly on orderly liquidation of the ready, which is, what is not clear to me is whether in the next systemic crisis that we might witness, the problem is only going to be the two big to fail institutions, which is really the primary focus of the orderly liquidation authority under dodd-frank. i wonder if outside of dodd- frank or within its limit, if there is something -- as academics, regulators, of to be devising ways of how we deal with the resolution of the money market fund run, that we can deal with the resolution of failure of the clearing house, that we could deal with the failures of insurance funds and monolines, and perhaps maybe the biggest elephant in the room, whether we can find some way of

dealing with winding down fannie mae and freddie mac at some point in time. then you look at the various options that are out there, and uc dodd-frank doesn't sort of puts the envelope as far as someone -- you can see that that a friend doesn't sort of push the envelope as far as many would like. resolution, or orderly resolution that might exist on these various risk repositories. i often think, which of thinking that maybe if the european crisis took hold but didn't become so bad that it would affect the banking market and hit the banking sector so directly, maybe it would just trigger a national deaf of the money market industry. what i had in mind is that the risk rises enough that the risk of breaking the book on the

money market funds, that you think the well-capitalized banks are there, let's go put our money back into deposits to our traditional banks. i think there is a good reason why this might happen. we are in a very low interest rate environment. i think, if i am right, there is already a flow of money market funds back into the banking sector. and i am sure it has picked up speed in the last few weeks as the great problems have surfaced. but there are other reasons. we don't have a -- on to additional deposits. i think dodd-frank also removes restrictions on banks paying deposits on corporate deposits, paying interest rates on corporate deposits. it seemed like other than capital regulation, which is not extended to money-market funds, many other things are harmonized. so of risk rises from money market funds in some episode, i

think it might actually revealed a systemic risk they are taking. but if that doesn't happen, i don't know if we have a solution right now to deal with the resolution of the next money market fund ron. my duty thought axel is maybe we would have to come out with -- some suspension of redemptions but a scale of the problem beyond a certain size you might have to use of a lender of last resort, the top authority of the federal reserve again. it would have to be again a blanket money market assistance program, because they cannot support any one individual marked -- money-market funds in the future. going back to derivatives -- i think as michael suggested and others, there is a lot of good in the derivatives regulation in the dodd-frank act. much more than what one might have expected.

the primary concern is that we are putting all our eggs into one basket, into these clearing houses. and now the risk management standards of these clearing house will be very important. white is the clearing house, again, a risk repository? because it is only going to fail of one or more of the dealer members fail. it is large enough that the current capital is exhausted -- which it would have built through initial capital contributions, etcetera. and it wants to go and make capital -- capital calls to other dealer banks or broker- dealers, but we are in a difficult situation in terms of capitalization. inherently, and it will most likely fail in a systemic crisis.

we can use of the exception of to provide the -- thedodd-frank assistance.emergency exit som what worries me here is the issue of international competition. clearing houses are not under regular regulation -- under basil regulation. it is the expectation that you want to force things to happen on a clearing house. i think there is quite an

important need for the central banks internationally to come together and provides a minimum risk management standards here. one of the big problems was lack of information. we knew aig was large. we knew bear stearns was a risk, but we did not know to what degree. i suspect the transformation has not changed much since then. if a large dealer were tomorrow to get into trouble, our primary concerns would be rude to be

concerned about in a situation -- who've to be concerned about in a situation where there is panic. the last thing i want to touch upon is standing and freddie mac. dodd-fran k had one sentence on shouldhat the treasury come out with one by 2011. nevertheless, the treasury has a plan -- three plants. an affordable solution in housing through the eighth -- the fha, a private solution in good times, and equivalent of a gse to support

-- to support new lending. the most important thing is they do not have a plan for the involvement of these plants. political forces suggest this will be more likely in march of 20 -- of 2013. currentlyare monetizing 90% of those that have been relocated. if we do not get private sector in this market any time soon, then most likely the united states, will gradually along the

entire mortgage credit risk of the country. i think it is a scary thought at a time when the gse and base is technically not on the balance sheet of the united states government and much money has ahriman spent in the form of taxpayer losses. -- has been spent in the form of taxpayer losses. how will we deal with money market fund runs? maybe that is an immediate risk. how will we deal with ccb under capitalization? maybe that is a five-year 410- year concern. and then there is the unwinding program -- a five-year or 10- year concern. and then there's the unwinding program concern. >> i would like to go straight to questions now. we have about 10 minutes left i

think. does anyone have any questions? we will start with you right there. >> just to tie up a loose end, as the way peter falk would have said, it seems like anyone wit should have known, given the authorities claim, but no one did not know about angie -- aig. authorities andortie those would be, say, the treasury, and the united states. which of those is serving the blame?

new york in a lot of respects is charged with being a serious enough supervisor when it chooses to become law because it is the financial capital. and it tells washington -- when it chooses to be, because it is the financial capital. and it tells washington. how do you see that? >> caniglia, leader of those groups are presented -- represented on this -- conveniently, neither of those groups are represented on this panel. do you want to answer this? >> aig bottom of small savings and loans and they were of -- and they were regulated by the offer of serveand supervision. london have a very light treatment for credit derivatives through most of its financial sector.

that is exactly the international concern i am concerned with on the clearing house for rent. rather than being a relatively high standard of regulation, regulating capital of clearing houses, you get what is toward the bottom because you attract the auto flow. >> [inaudible] the treasury is the one institution that could have dealt with the british authorities on an even basis. >> i thought of fannie mae more than the market runs issue. let me just give an example. jpmorgan in its disclosures reports how much collateral it will have to dispose of since

the first quarter of 2006. goldman sachs started doing things the last quarter of 2007. aig, until almost 2008 had only stated its collateral goal for one month downgrades. no one in the system really knew what the collateral pool that aig would have to meet if there was a commercial downgrade. it turned out from one notch to a multi notch downgrade. this is the kind of opacity i was referring to.

>> in 2002, pnc and aig were called offsides on a transaction and pnc got a memo. these were the precursors to the big aig trades. there were ways to figure it out, but the question of what is material, what a significant, and when to laugh and when to care it depends on how contrary in the you are or if you just want to make money. i think their worksho-- there we market authorities that new things were going on, but they did not choose to ask.

>> i would like to ask about the money market area and your two views of the world. some research done by two stern professors, it is a broad work, but they had some startling figures with their prime fund. if you look at when they loaded up on risk, they went from about $780 billion in assets to about -- went from a 17 billion, or $18 billion in assets to about $60 billion. it shifted after the crisis started to almost a year time frame. they loaded up on asset backed commercial paper and some risky

paper. it was pretty willful what they were doing. you think currently about what is going on with the european banks. they are in it because the spread is higher. it seems the searching for yield is a problem in the commercial bank sector. we do not have that in the money-market fund area. we do not have that ability to fix the problem because we have what is going on in greece and elsewhere. >> i think there was a fundamental change in that money market fund that occurred. and what is going on right now. the money market funds, the

european banks have fundamental core investments. it was about 50% of assets across the broad spectrum. money market funds are in those banks because the money market fund managers believe in those banks. we have only had access to information in about the last six months. since we have been monitoring it is a pretty stable, or about 50%. and you're to go, you would see ireland market money -- money market funds that there were none that did not have exposure today. there was an orderly exit out of commercial paper market in ireland. and there have been in other markets, too. in the short run, at least, they are very sheet strong investment. -- a very strong investment.

the system natural -- naturally forces them to go abroad. the spanish bank, for instance, is a global bank, and there are exposures. what the managers i talked to said, -- i do not think the analogy exactly works. notwithstanding that, there is concerned. while there is an orderly disorderlyt is a dissolut process. >> one subject -- this is almost a question for you, greg. this weekend in the economist there was a piece on the etf's. exchange traded funds and exchange traded notes, basically, looking at the

exchange side of the market and its growth potential in asset backed markets. are any of you worried about it? >> what is the cause of the next crisis? etf or something else. etf cover a broad swath of investments. they are limited in terms of what they can do. the europeans and the etf's, entire index -- exposure index is due to a single counterparty. that situation cannot happen in the u.s., at least with a securities-based etf.

we are concerned about those issues, but i do not think the intensity of those issues here are quite what they are in other places. >> i guarantee that if it is in a "the economist" you should be concerned. [laughter] >> what else is there in the banking system that we, perhaps, need to lie awake at night thinking about? [unintelligible] thanks very much -- >> thanks very much. it has been a very good panel. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> and now, for something completely different, to " monty python.

our next speaker is a professor at university school of law [unintelligible] the only other person that has an acronym for their title that i could think of is potus. he graduated from new york law school in 1995. i cannot believe that. is that right? my god. he has won about 98% of the criminal convictions that have fallen out of the crisis.

>> a good place to start would be to ask you what your brief was tarp where you were -- at tarp. were you responsible for -- >> we had a very broad mandate. the government regard the $700 billion of taxpayer money to bail out institutions. several things were created. one of them was placed in the executive branch tarp. the mandate that congress gave us was really brought. we really had two different missions.

the first with law enforcement. we became the country's newly created law enforcement agency. we have full enforcement powers. guns, badges. we did a search warrant, raid jackets, arrested people. we were given jurisdiction to arrest people for crimes. the second part of our mandate was much broader and it was really just a generalized oversight transparency and recording function. specifically, we were given the authority to audit all things that happened under the tarp and all actions taken by the treasury, but also to be till quarterly everything going on at tarp and at sig-tarp as well as the other acronyms and programs, and to make recommendations.

it is almost a congressionally sanctioned monday morning quarterback role. that was part of the agency. we were a brand new agency. we did not exist before i was sworn in on december 15, 2008. we built an agency around these two core functions to carry out this role. >> when you look at bankrolling the crisis and how it was managed using the resources, are there any things that stand out as particularly good, or wasteful, were lessons to be learned? >> it is like anything. in washington, there is this incredible political rush to put labels on whether something was successful or unsuccessful. you'll hear administration officials and treasury officials tell you that tarp was the

single most successful program in history of america and you will hear members of congress talk about how it was the worst thing. of course, the accuracy lies somewhere in between. to pierce the political noise that was around the tarp, and there's a tremendous amount of political noise, you ought to go back and look at what it was intended to do. what was the original intent of congress? when you look at the different roles, you set some goals were met and some were not. for example, preventing financial armageddon which is the goal that the treasury points to in saying it was a success, it is without question it was successful. it may have created some very negative long-term consequences, but on the short-term goal of helping to pull us back from the abyss of armageddon financially, there where some --

there were some success was. other aspects were failures. for example, when the program shifted from what it was originally sold to congress and the american people as, assets into a world of recapitalizing the banks, it came with the promise that it was one to restore increased lending. this may have been unrealistic, but nonetheless, that was the stated policy. and as we all know, that did not happen. 10 of the last 11 quarters, lending has continued to contract. >> why was that extended to the banks without any conditions? my impression was that some banks did not want to take it. was that why? >> it depends on what the policy goal is. the stated policy goal was not just to prevent financial armageddon. the stated policy goal was to

take tarp funds and give them to banks to restore lending. having those strings attached release sealed the deal of having it be an unsuccessful policy. along with the assignments of those funds. it would not have to be requirement, he mandates. here are these funds that we are focompelling you to take, and by the way, you need to lend this percentage to businesses and this percentage to families. that would not be a very helpful policy mechanism to accomplish that goal. but it could also have been done through incentives. if the tarp contained shares of the treasury estimate could have been built around incentives. so that increasing lending over the baseline would earn the bank a better dividend.

the second problem is the lack of transparency. this policy goal was set forth, but when i came to office, and it was literally a week after i got there and there was a recommendation that there be a mechanism so the banks can report how they are dealing with the fund so that we can measure qualitatively and quantitatively to see how this goal is being carried out, there was a lack of a mechanism. maybe we could adjust those policy mechanisms. it was utterly rejected. i was told that i was out of my mind and i was going to destroy the country and the banking system. it was a lack of accountability. >> so, a lesson learned there. >> i think so. if you are going to have a policy goal and you are one to state your credibility on that policy goal, which is what treasury did, -- treasury came

out and said, listen, the reason we will be shifting gears and not buying troubled assets, which was very important in the compromise legislatively in getting this passed. they had to have a justification for it. the justification was to increase and restore lending. if they did not have a policy mechanism to carry out beckel, -- to carry out that goal, you need to have those mechanisms next time and maybe you need to be a bit more careful about what the policy is to justify the behavior. >> as dodd-frank was passing through the legislative machine, how you think it was influencing things? >> ultimately, not as much as that should have been. we often hear statements that dodd-frank had its part in the

right place, and i think it did. -- it's hard to in the right place, and i think it did. -- its heart in the right place, and i think it did. the president said, never again will we have to be allowed a financial institution. and because of tarp and the deep unpopularity of tarp, in some ways, i think, is justified -- it justified tarp. in many ways, it has not have the courage to justify that goal. the regulators, even if they have their hearts in the right place, will they have the regulatory and political will to do what is necessary to truly in a guarantee from the largest financial institutions?

it is extremely unlikely. >> that is depressing. [laughter] you mentioned to me when we were talking earlier there is a lot of resistance to transparency in treasury. would you just say if you have a policy goal, you should try to measure id? -- it? why do you think in the treasury's case that transparency was such a big issue? >> this has come up in general earlier as well. the reflective antipathy toward transparency among the regulators. you saw this not just at the treasury, but at the federal reserve. john mentioned this this morning. every attempt at transparency was met with the same "the sky will fall" mantra.

it is not that we thought it was a bad idea or maybe we should think about this in more detail, but over and over again it was going to armageddon. you may remember when the vice chair of the federal reserve board suggested that the closing of the main facility where the federal reserve purchased the underlying cdo's on the credit default swap -- not the real ones, but the synthetic ones that aig had underwritten. this was so deposed -- opposed on the grounds that it would destroy aig. ultimately, the information was disclosed and nothing happened. what happened was that we had accountability and we can go back and look at the decisions that were made in connection with the bailout. the times said it was unpleasant

for the fed, i think -- at times it was unpleasant for the fed, and i think it caused some of embarrassment. but it did not cause damage to the long term economy. i was told point-blank that i was going to destroy the start program and, perhaps as a result, destroy the banking program. and of course, that did not happen. i think the banking institutions were afraid to do a rather easy and simple qualitative analysis of their capital. i think they probably should not be the recipient of any capital. i hope the lesson will be the less of aill be a

reflexive tranposition that transparency is bad. by the time i left, the conversation -- the last audit i did was on citigroup and there was tremendously less of a battle to get that information out. of course, there are times when disclosure can be problematic, or to giddily in times of distress -- particularly in times of distress. hopefully, we have helped to break down a little bit. -- break it down a little bit. >> i do not remember quite when it started.

did it start when you arrived or the day after? >> the day i was sworn in, which was december 15, 2008, by secretary paulson. most of my professional career was as a federal prosecutor and most of my interaction was investigating bank fraud or investigating the general use market, but not understand in the auto industry other than the car i have. secretary paulson, it was one of the first things that he asked. we are thinking about investing in the auto industry. what you think? i think i mentioned my camaro. the decision making process was well on its way. the first question i thought of

for my perspective was, ok, i have this new job and i have a staff of one sitting in the basement of the treasury. i have no stationery. but i have a computer. first we will just look at the statute and see if it is legal. at first look, how could tarp be used to investing in manufacturing company? it was sold to congress as managing mortgages and mortgage- backed securities, but it was written in a way that was so broad that the money could be used to invest in any regulated company in the u.s., essentially. we did that first quick check and we saw that we did not think it was going to be illegal and we went to work on some broader anti-fraud recommendations rather than anything else.

that was the initial recommendation by the paulson treasury department to keep them afloat. >> when you are reviewing the statutory language, does that make you -- i find it is very broad. does that make you comfortable with the kind of bait and switch that the treasury has been accused of, going from toxic assets into bailing out institutions? >> i really think it was not a bait and switch. i think that would be an unfair statement, for no other reason than it was something that not every member of congress voted for, but some certainly did. many in leadership anticipated this when their caucuses did not. that there was going to be a shift in focus. while i have some sympathy for those members of congress, more from my perspective of where i

think there really is a potential acquisition of a bait and switch with the promises involving the foreclosure crisis in housing. because those members, or to italy in the democratic house caucus, and very particularly -- particularly in the democratic house caucus, and very particularly in the cdc, their perspective was that $700 billion in mortgage-backed securities were owed to the investor. the concerns of these members of congress were in their constituents who were feeling the ravages of the foreclosure crisis in late 2008. that is where you have the betrayalsense of the trai

because once there was a switch into audio companies -- is which into investment into auto companies, the big question is, did that work? i think that is one of the mainstream failures of of the tarp. >> why don't we open it up for questions? i will ask one more to give people a chance to think of something provocative. you have been listening to the presentations here today. how comfortable are you, given your experience at tarp and plinking about dodd-frank that we are on the right road? i'm not sure that a proper frame

has been put around shadow banking. >> when you look at the mechanisms of dodd-frank and you see some of the people speaking here today, you are certainly some remarkably intelligent and deeply patriotic people. it gives you a sense of a good feeling. but ultimately, one of the failings of dodd-frank and one of the concerns of the shadow banking is that ultimately whatever work they are going to do is going to depend on the political process. i think that dodd-frank really politicizes the vocal will and a

more -- the volcker rule and is more through political pressures. also monday, the decision maker for all of these decisions, the person invested with the most -- ultimately, the decision maker for all of these decisions, the person invested with the most power is the chairman of the treasury. and that person is going to be moving along with the administration in the next election. when shaheen as the question earlier how to president hoenig how about whether we should be concerned about the financial system because it is not as bad as europe, i mean, he was quoting secretary geithner.

i agree that is an awful analogy. that is a terrible cold. why should that be the standard for the u.s.? but that is the person who will ultimately be responsible for making the tough decisions. >> coming your way. >> [inaudible] come back to the original decision to switch to the mechanism which was the original trial of -- the triabetrayal

[unintelligible] with the first approach have been feasible and with the blessing of hindsight, would it have been better to do that? because the fallout of not doing it was enormous. >> look, in certain aspects of it is my job to second-guess and use that 20/20 hindsight. i have never been critical of the move to shift to capital assets. buying toxic assets at that point, it could not have worked. it was not time for it to work. it would have had the unintended consequences of write-downs for the financial institutions. that was not a viable alternative at that point.

the capital purchase program was instrumental in avoiding a collapse. i do think where there was a vitriol was the promise that tarp would be used not just to rescue the wall street banks. with absolutely benefit from a street by the stabilizing the financial system. but the legislative process that got us to pass tarp was meaningfully addressing the mortgage problem. that target was shelved. and in february 2009 there was an execution of a policy that has been, in my view, a failure. >> [inaudible] >> could have done a better mortgage modification program? i think they could have from the beginning and they could still today.

do not take my word for it. take secretary geithner's word for it. the home modification program was announced in february of 2009 with the hope of helping millions of families to stay in their homes with the permanent modification of the fannie mae and freddie mac fund. secretary geithner testified and relief echoed -- relief echoed what had been set for about a year. lyttleton nothing has been done to address those problems. -- unfortunately, little to none has been done to address those problems. >> [inaudible]

of a few key individuals. the foreign exchange, it is likely to be exempted from the clearinghouse, and so on. and i think it was a decision that was meleft in the powers of the treasury. i was hoping there would be a report for a steady on the basis of the financials provided. i -- or a study on the basis of the financials provided. today, it is possible to do some significant mortgage modification activity. do you think is on the table? do you think it might happen at all? the housing cycle has not release started. >> -- really started. >> i think we took the worst out possible. one suggestion is that we should

have done nothing and let us find a bottom on housing as quickly as possible and then hope that we would not drag along they're too often and recover. for really commit the resources to try to have an impact. -- or really commit the resources to try to have an impact. notwhen i say impact from ou, kicking the can down the road and stretching it out. that is where we are, we are effectively kicking the can down the road. we took 800,000 people and give them false hope and then flush them out, vs 600,000 who have had some benefit through a program modification. but that is the proverbial drop in the ocean. we are essentially playing this out in this process and not recognizing the losses for these mortgages that are in default or heading toward default. for encouraging industry

practices that extend that. -- or encouraging industry practices that extend that. there was one moment of real honesty and clarity that may have been reported in the huffington post. there was a meeting of bloggers on the internet and there was look, it was anw-co idea that was extended and then the bloggers never looked at it again. >> dennis. >> i first want to say thank you because i do not think anyone will ever know of the enormous pressure you were put under. there are very few government -- individuals in government that were put under the pressure that you were put

under. very few individuals in our history that would not crack under that kind of pressure. it is quite an amazing feat. the way to really understand the accomplishment is to be reminded that -- i remember the day when the three-page bill was sent up from treasury. it was the first drafting of the bill. it had a complete blank community for anybody for anything that they did in connection with the program that became tarp. it also prohibited legal accountability and oversight. of what happened is that -- one of the good things that happened is that in exchange for allowing tarp is that you, and, and some other oversight -- we did not know it was going to be

you for oversight. but it changed to at least to some accountability. the context of the -- the whole program should be understood in that context. there are many members of congress that did not believe that it would ever work fast enough. we forced it on the administration to allow capital injections. the hearing on this bill, the administration said, no, the world will end, everything else. the cause was forced the provision in there and forced the ability to make capital injections. and i would only have a slight modification to your comment of white people felt it was vague and switch. it was not just foreclosure. -- of why people felt it was a bait and switch. it was not just foreclosure. the only time they got religion on putting any terms on the money is when they could-the

auto companies were the unions. but they did not apply -- when they could bash the auto companies and unions. but they did not apply any of the stringent requirements on the automakers, not one. it was money for nothing for the bankers. >> when you look at the dichotomy, i think it is saying two things. one is, they were afraid that banks were not going to participate. looking back on it, that almost seems laughable. at the time i kind of thought it was laughable, but that does not make their sincerity any less. they really did believe that stronger conditions would drive banks out. notwithstanding the remarkable response they got. they were prepared to repel.

they did not have to because the reaction was, we are in the middle of a crisis. of course we are going to take it. naivete aboutst an i-a the banks. i came at this from the opposite position. i have a history of seeing the banks as the perpetrator of the crime. i view my role as traditionally been an antifraud guide. i cannot tell you how many times we would be having discussions about this program or that program or that program and i would get the response, oh, you do not understand. these are banks. they would never risk their reputations by doing something like this. this was a constant argument.

maybe six or seven months in i finally said at a meeting, please do not ever say that again to me because it is not going to work. you are talking about changing the shameless in some respects. -- shaming the shameless in some respects. all of this anchor that comes out, it is almost at the -- all of this anger that comes out, is almost in that the administration and the banking industry because there's a sense of betrayal. >> i have a question about your activities. presumably, you went and looked at how the banks were using this money. a lot of the story of this particular crisis traces back to underwriting standards, which in

many ways were outsourced to non-banking entities, mortgage brokers, etc.. i assume there is fraud on multiple levels and there are stories that bubble up around that. did you ever get an opportunity to go beyond those institutions into the relationship, that long web? in some instances we did not have the fed doing what they should have been done in terms of oversight in that arena. did you have that mandate? did you follow-up on those threats and learn anything interesting? >> unfortunately, this is just a trail for me. under the toxic assets -- toxic assets program, that would have given us authority to investigate all the way down to the roots. we would be basically buying these mortgage-backed securities and we would be looking at the

underlying fraud. but we did not do that. one of the reasons i was hired was not because of mine at our team's skills. it was because i did eight years of mortgage fraud and securities fraud prosecution. that would have been an opportunity for us. it is the reason that some of us were calling for the department of justice has a specialized law enforcement agency that looked at crisis-related crimes. for us, we also fell outside our jurisdiction because unless there was an intent to capitalize fraudulently on the chart program -- tarp program, it was outside our jurisdiction. other than that, we did not have an option. a lot of our fraud investigations were based on misrepresentations made to the treasury in order to get tarp funds.

those first nine banks, i did not matter if they were cooking the books on the balance sheets. treasury was giving them the money and how. in fact my if there were larger holes on their balance sheets because of fraud, that would have been more reason for the treasury to give them money because it was a schear bailout. -- shear bailout. >> getting back to the fact that tarp did not really deliver for main street as intended, basically, i guess it was last summer, secretary paulson as for his and the -- ask for a bazooka. shortly after that, the american public wanted extenuating support with the fdic, preferred investment, and more tarp and

reece sentencing of assets for your stove. -- a year or so. whenever secretary paulson -- what ever secretary paulson said a week ago or a year ago, it was hard to keep track of. >> first, the whole idea of using tarp for foreclosure relief and modify loans, that is not an idea that it originated from the treasury department. this is something that congress wrote a section into the statute that actually dealt with how to modify mortgages once we own them. and i think that the fact that the trade changed, while it is certainly an investment -- an indication, it is not a

justification. it is not as if they did not have enough headroom because it is not as if they did not have enough funding from the tarp assets. there certainly was the room for it. i know that during the timeframe of transition the bush administration and the paulson treasury department were working on foreclosure ideas. they knew very well that this was still part of the product. and ultimately, after the election they were asked essentially to stand down by the obama administration saying, we do not want to inherit your program. we do -- we want to launch our own program. and then they did. they committed a nice chunk of funds. this was to get the second half

of to our funds -- of tarp funds. this was barney from santa saying, barney frank usain you need to release more funds. it was a very poorly designed and poorly executed program. >> i am from the university of texas law school. if we had done foreclosure, at least for bankruptcy, do you think that would have worked better than trying the program? >> cramdown was outside our jurisdiction. to be honest with you, is not something that we really studied or worked on because it was

outside the scope. i think the concept of silver reduction, i am not as afraid of it as many are. a good principal reduction program could help affectively goal ofthe tarp sustainable mortgage modification. i think it was sustainable and the moral hazard for the homeowners would not be where they are. >> if you had your druthers, and you think you could do it by just addressing the banks, or do more of the others have to get it right to have a stable system in the future? >>, two things we are doing with dodd-frank. i think that the local is probably a lost cause.

you hear every day that as much as it has weekend before cannot -- it has weakened before, you know, i think it is not a perfect solution. but hopefully it will be done effectively and there is a significant enough capital surcharge. it will lead least hopefully provide more of the necessary cushion. i do not have a problem with it if it is penal. i think incentivizes them to become smaller. but if there's any chance to address the sale and the implicit energy, i have to be done through the will. -- it has to be done through the will. that is something that dodd- frank has put a tremendous amount of power and authority in.

the treasury has a wide landscape of different things they can do to make sure that these things are resolvable. for me, that is the only way you can deal with the implicit guarantee, by convincing the markets of the government guarantee. not just to allow the largest institutions to fail, but more important, to demonstrate that it could fail without bringing the entire economy down with it. there are lots of good ideas that can be adopted, but -- and here is the big "but." the political will has just not been there. she lived there has been a strong advocate, and has just

ila bair has she love thei been a strong advocate. i have never heard anyone in her position so strongly take those concerns, and as we all know, she is gone in a couple of weeks. >> thank you. [applause] >> we have a 15-minute break. please be back promptly for our final panel. thank you.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> a short break in this look at the financial crisis. a look at financial regulation that should be about 15 minutes. remarks earlier from michael

barnes. >> thank you very much. charles, for having me here. and for all of you coming this morning. i will have formal remarks and the panel will savagely dispute everything i say. this should provide a lot of entertainment. the united states and global economy faced the worst crisis since the great depression. this was rooted in years of unrestrained access and complacency. it made clear what we should have always known, the finance cannot regulate itself and that consumer markets that profit based on tricks, this inequality will put all of us at risk. that financial markets function

best when there are clear rules about accountability. for many years, a core strength of the u.s. financial system had been a regulatory structure with a careful balance between incentives for innovation and competition, and protection from the excess of risk taking on the other. over time, the great strengths were undermined. there was the development of new products and markets for which the protections had not been designed. they were outgrown and outmaneuvered by the same market said they were designed to regulate. the growth of the shadow banking system allowed transformation with too little transparency and capital oversight. there was the growth of the inter-connected financial firms

with a huge amount of risk going outside the more regulated parts of the banking system with increased leverage. legal loopholes and regulatory gaps allowed the financial industry to operate without financial oversight. and the banks escape meaningful regulation with the reform. this was outside the reach of more stringent regulation. there was insufficient capital to back the trades. collateral shifted with the treasuries, for the asset backed securities. this was hiding the incentives facing different players in the system and they failed to have sufficient responsibility to package these into complex instruments. this merely multiplies the risks

in this system. the financial sector under the guise of innovation had ill considered rest upon a hill considered risk. and as the chateau banking system group, the system failed to get sufficient capital for meaningful oversight. we often have the misaligned incentives, outpacing the regulators and the markets to understand these risks and adjust. and we have the inadequate capital buffers, as well as some market participants that failed to account for the new risks appropriately. the rapidly growing markets blinded the capital markets and the parts of the system that are supposed to be at risk. consumer investor protections

-- households could afford these risks. asset prices have helped with the high declining underwriting standards and the other problems in the origination, with a mortgage loans. when the home crisis came into decline, the fall was revealed. this is a contagion from the weaker firms to the stronger firms. failures in the shadow banking system lead to failures in the banking system and in the credit market rose. the reliance on short-term funding and excessive risk- taking, that had been the source of significant profit on wall street, and globally, this nearly collapsed a global financial system. comprehensive reform was essential. one year ago, barack obama

signed this into law. this calls for the supervision of major firms based on what they do. chateau banking came into daylight. they were required to build up their capital, to place restrictions on the risky financial activity. this regulates revenue markets with new rules, transparency and market requirements. no corner of the financial market can go unnoticed. there are essential mechanisms for the financial firms without leaving taxpayers at risk. and there are important consumer and financial protections. the act may provide a strong foundation in which the nine states must build a more stable

regulatory system. if an entity were a bank, with more robust supervision -- if they were an investment bank engaged in the same activities, they have to abide with different rules. when the u.s. investment banks needed to find a consolidated holding company in order to meet the standards of the european union, they set up a voluntary program with little oversight. but this was not established as a regulator, with no regulatory oversight for holding companies and little experience with the trained examiners. the leverage requirements were not applied to these banks. the large financial institutions would choose the regulator for

the supervision. the fed did not have the ability to enforce capital requirement, to operate outside of the bank holding companies. this meant that they had no supervision over the investment banks, with a nonbanking financial companies competing with banks in the consumer credit markets. the office of supervision survey the rest cannot the holding companies. they engaged in mortgage lending, setting up with the subprime market only when this was too late. there is consolidated supervision by the federal reserve of any financial firm regardless of legal form, who pose a threat to financial stability. we will have a single place of accountability and supervision of the largest and most

interconnected financial firms. the bank holding companies will be supervised by the fed, and the largest ones will be subject to new standards. savings and loan holding companies will be supervised by the fed. the non-bank financial institutions will also be supervised by the fed, and the voluntary investment bank holding company regime has ended. and there will also be more stringent financial standards for these firms. putting in place strong needs for capital, with the stress test to be conducted and rules on lending limits, and counterparty credit exposure. the fed requires supervision that will take into account not only the risk of any institution but the risk of the financial system as a whole. and this will be subject to a concentration limits that will

prohibit the companies from engaging in mergers and acquisitions that would result in their liability, including the off-balance sheet exposures, with 8% of the liability as a whole. there will be the measures from the major financial firms that will reduce problems with the financial system and the too big to fail banks. before this, no regulator have these responsibilities to take action where there is a threat. today, as a regulatory infrastructure is far from ideal, with too many divided responsibilities, this is accountable to identify these threats with financial stability and to address them. the information across the financial services marketplace and the financial research is empowered to collect data from any financial firm for the

enforced standardization of these enforced data collections. the derivatives market grew up in the shadows, and credit derivatives that were supposed to and use the rest -- this magnified failures in the securities market, and a major financial firms used these derivatives to reduce credit exposure to each other. we should never again face a situation where the potential failure of an unregulated capital deficiency -- >> on the overnight programs, you can see all of this on c- span. the conference on viet regulation law continues right now. this is a panel on international economics. >> nicholas.

>> thank you very much. and thank you for being here. i am at the peterson institute, so i need to be the moderator. this is a pleasure for me, to appear to my colleagues, at the peterson institute. and morris has held meetings with the imf and the deputy director at the service department. and he is a visiting fellow at the peterson institute, with rugel. he pronounces it -- and this is the brussels based think tank.

both of these gentlemen have done a lot of good on the international fact of the regulation today. i will call on nicholas to give us the state of play on the cooperation on presenting banks that are too big to fail, with the international banking system so that all the major institutions in the country can make certain that they will minimize the problems with the system. he will bring us up-to-date on this process, and then, morris is going to talk about whether or not these steps have been adequate, with a task that lies ahead, and we will have a

conversation. it is a pleasure to reintroduce you to nicholas. >> thank you very much. and thank you to the center for inviting me in for a discussion on the equipment with the americans -- invited to this discussion about the financial reform in the united states. i would say that the news of the last few days has helped me to make the point of why the last panel is actually irrelevant to this discussion. in 2008, there was the feeling that europe was the victim of something happening in the united states. and europe was hit by a contagion. and this would lead some europeans to take action, in

these discussions to have a higher level of financial oversight, generally. but now the reverse is happening. we mentioned what is happening in the money markets at of concern for the contagion in the european banking sector with what is happening in greece. basically the interdependence goes both ways, with the united states and europe, and the rest of the world. let me be very brief in getting an update, about what is happening in the other jurisdictions outside of the united states at a global level. in europe, the big difference is we have the financial crisis and the banking crisis to the extent that the united states has not had to force this year.

the u.s. banking system has been contested with a stress test in 2009, and they have been recapitalized to a certain extent. there is no longer feeling of a banking crisis. though the united states may have other issues. in the european union, the banking crisis has splintering -- has been lingering since 2007 and has never been resolved. there have been other stress tests, not entirely successful, and right now the results will be announced sometime in july, probably. but we are in the midst of a crisis that has not been resolved. the situation is slightly different, perhaps, in the united kingdom. and in europe.

and at the core of the continent, the crisis is there. and this colors everything that has been discussed with the financial reform. they have made significant progress in one area, try not to touch too much in this round of performance with the institution. dodd-frank has not touched too much with the privatization of the federal regulations in the united states. the supervision has been wound up, basically. in europe there has been a buildup of supervisory authority, and the european union have the legislative framework for the financial regulations, so these have now

been created, with the united states and the european banking authority, and the markets authority with the european interests, and now they have a very full mandate, i think, compared to what is possible a few years ago. in terms of the rest of the logistic agenda, europe is far behind the united states, but there have been some pieces in the right -- the legislative process that are more pragmatic than in the united states. we have several little pieces of legislation on each chapter, so the legislation has been passed, and the retention of the securitization, as presented in the u.s. case, but the really

big pieces, the derivatives, and the resolution and the capital requirements, were also a work in progress at best. some of these do not have draft legislation by the european commission. basically this is far behind the curve. in asia and the rest of the world, i will not talk about the huge complexity of this geographical area. but let me say that asia has a couple of main features and the feeling that they have not been -- there has been a trade crisis, and there is also the financial crisis -- they say that this is more accurate, as a matter of fact. but also they have a tremendous

competition in going for the title, with asia and none of this -- this has the same level of financial integration in the united states and europe. but also there is the sense that too much innovation or financial developments in the capital markets, this may not be such a good thing. conservatism, if i may call that this in terms of the regulation, and keeping the mortgage banks in this system, this is a temptation which, this is somewhat contradictory, with a financial centers. but that is very much there at this time. the title of this section refers to this and i do not think that

the problem is that there are many bodies -- rather than the weakness of these bodies. this is a government basis and it makes it very difficult for them in these positions. and warren will expand on us. let me just mention, the financial rules, this is a very ambitious rhetoric, in the first few meetings of the summit, back in washington and london and pittsburgh. the truth is that financial rules are more difficult than the financial crisis that was included before and the reason for that is because it is easier to harmonize the rules when you are liberalizing and deregulating, and regulating the financial system, because there

will be the local factors, and they will converge on the common law designator. there is increased importance in these countries like china and india and others, these tend to have a more focused view of the sovereignty, and less of an instinctive adherence to international rules, with europe and the united states. this is the standard making at the international levels, to reach the effect of harmonization in the context where they have a much bigger profile as a consequence of the crisis, where they have lost a lot of the moral authority that they had in the space before. there has been progress at the committee, most recently this weekend, and also in terms of

the international -- this is what people were hoping for before the crisis, but they are still making progress in terms of global endorsements. there are also concerns about this -- and one of them is a central clearing house and there derivatives, especially, -- they made mention of this because each jurisdiction must have its own clearing house, and the results may be the privatization of those markets, which are largely integrated, globally, and the same is true for the credit ratings agencies. they basically regulate in all of the important jurisdictions, and this -- may not affect the

ratings so we may have the privatization of the ratings technologies, who have not covered themselves with the privatisation issues that existed before because there was not as much difference. let me finish with this case, this is one of the biggest unresolved issues, this was a couple of weeks ago in a high- profile speech. they have acknowledged that there is no solution at hand with how to deal with the systemic and important financial institutions, and we don't have a formula for the cross border resolution. the option is to increase the capital requirements, because even the increase of several

percentage points of capital requirement will not preclude this -- in the future. i guess that we will come back to the questions, thank you. >> a good afternoon. it is a great pleasure to be here. i want to thank pew and stern for inviting me. this deals with international constraints on the effectiveness of dodd-frank. the problem is not that we have many multilateral institutions dealing with financial regulatory reform and these institutions are issuing rules or guidelines that conflict with one another, or conflict with dodd-frank.

the problem is that some key aspects of financial regulatory reform are set by the international standard saving bodies and in order to get an agreement within those bodies, you have to settle for an adequate standards. in other words, you have to settle for half a loaf of bread, because many will not go along with us. i am going to illustrate my argument by dressing to elements of reform, one dealing with financial regulatory reform, on the minimum capital standards, and the surcharge that was announced this weekend. the second one deals with the reform of the international monetary system, and namely what has been done about the global payments and balances in these exchanges. dodd-frank has a number of

capital requirements on the companies, it was always recognized since the late 1980's that minimum capital requirements for the banks would have to be determined by international agreements. in september 2010, the committee on banking supervision announced its findings on capital conservation. this has been alluded to earlier, that the common equity requirement was increased with the risks related assets, and in addition, the capital confirmation -- confirmation budget -- this was 7%. there are a couple of standards for judging the outcome. one of them is to compare this to bossell two, and the other is compared to what was needed in the crisis.

if you take the first standard, it is clearly better. and if you compare this to the second standard, the most important one, this is very inadequate. why would you say this? some reasons have been mentioned earlier. we mentioned some of the studies that went in different directions. there was a study in 2010 that noted in 2010, the fourth largest u.s. banks at the lower end of the cycle were holding a capital ratio of about 8%. this is four times the regulatory minimum. why were they holding more than that? the market was pressuring them to do this. from that, they concluded that 8% is the new minimum of the bottom of the cycle.

according to the imf, u.s. banks lost 7% of their assets during the last crisis. and if the large banks -- to meet the minimum at the bottom after losing 7% of this you would need about 15% at the top of the cycle to do this. and if you are not using the 8% of the capital, at the same time for a large percentage of u.s. banks, then you would get -- and answer closer to 7%. and if you wanted to use the loss -- the average weighted credit loss for the u.s. banks, this would be about 4%. you would be somewhere between 12 and 17%, using that methodology.

this is what you would come up with. this is different than 7%. if you lost 5%, he would be down to 2%. you don't have a lot and you will not give a lot of lending. in 2011, the bank of england came to a very similar conclusion, that the capital requirements should be much higher, than bossell three. a 2011 study at stanford business chool shows -- sc hool shows equity capital would not reduce lending, or funding for the banks. that the bank debt did not provide market discipline during the crisis, and the increase equity requirements did not force the banks to hold the

reserve funding that could be used for lending. if we had much higher capital requirements than what was required, we would have deep pockets and very minimal social costs. you could have done that with this once-in-a-lifetime opportunity, but you did not do this. what you got was half a loaf of bread. in addition, when this was announced, it was believed that the buffer was not going to be mandatory, but this was put in with national circumstances. you could do this if you want to do this. you see that there is all this talk about the micro credentials. some of the original work on this, a key element and one of the tools was going to become a cyclical capital requirement.

but this is not part of the package anymore. and if you say, a number of members of the g-20, including most of the european union -- they were not willing to go along with the higher minimal capital requirements. you probably will not have this, either. and then what will you have to do this provincial? the value ratio? some other things. but she want one of the elements. and so, if this was a disappointment, you may ask why we couldn't get something that was more ambitious. for most of the public reports, it looks like the u.s., the united kingdom and switzerland would have been comfortable with something closer to what i was talking about at the optimum.

but the european members of the g-20, perhaps thinking about the prospective credit losses associated with the sovereign debt crisis, they were opposed. and there were other members in the crisis who did not have the same motivations task for the wholesale reform. these large emerging markets were not hit as hard, and there was enormous pressure for the private sector and the financial institutions, exerted in different ways including early studies showing the effect of the real economy and how this would be disastrous. some people say that you are too pessimistic. it was not as bad. first, most of the credit losses were borne by the largest institutions, with $100

billion, and the surcharge will make up for this. and you could say that if you want higher capital requirements, to discourage too big to fail, and you do not get these, you could still get them anyway. some of you may have seen the speech that nicholas just mentioned. he was talking about a charge that would be 1% below this at one end and 7% at the high end. as announced over the weekend, it looks like we will have 2.5%. we did not get anywhere near this. and what about the other tools for discouraging us? there are a number of them. we have a liquidation regime at the national level,li like in

dodd-frank. we have not gone very far in the cross border resolution. there is a large amount of majority-owned subsidiaries. you are not there. now you could think of some charter to deal with this problem, as i mentioned earlier, and there may be a prototype that may do this. but nobody thinks that this is going to happen soon. a lot of people mentioned the wind down plan, and this may be helpful, but the question is whether the supervisors will simplify these institutions, and what is really going to happen? i think that this is a long

shot. there was my colleague who has been a fan and he knows -- but they were voted down in the amendment, and if you think of those, as we showed in a recent paper, they have to be vastly different for europe and the united states. if you take the combined assets of the three largest banks in the united states, this is about 40%. and if you take the same for the european countries, this is about 140%. you could not have that. the only bright spot is that this is the minimum capital standards. you could impose much more than

the minimum on a national basis. and some people say that this is not possible, but i will say, look to switzerland. the hatteras of report, with motivations. they had 12% of the assets in the crisis. they had, equity with the other 9%. i would like to see the united states follow the example of switzerland and do this. i do not think that this will happen but i would like this. let me look into another area. another effect on crisis prevention has to do with local payments and balances, particularly in the emerging environments.

china is the classic case. the study found that financial imbalances in the run-up to the crisis as measured with the ratio of bank credits, this also experienced a large capital influx. you get more credit when you have these large capital innovations. we have large increases in the housing crisis. what is the best indicator of the banking crisis? this is the best, including project in the u.s. and the banking crisis.

[inaudible] >> with the emerging economies. this is 10% of gdp in 2007. a major factor in this is what happens with the real exchange rate. during the 2002-2007 timeline, china had the expenditures of gdp, with the money supply so you do not get a rise in the inflation rate, or appreciation with the real exchange rate from that. this is undervalued by 20% on average. at the peak this was about 40%.

isn't this what china was doing with currency manipulation? don't they have rules against this and shouldn't they pose a penalty? the answer that question would be yes and yes. but the reality is different as they were slow to recognize the size of the valuation, and china was blocking the publication of these reports. meanwhile, the g-20 has been engaged in these exercises to reduce payments and balances over the last five years. this has no effect. in the sense that there was no change with the major players. there have been no codes of conduct, outlawing those policies. what we need is an agreement by a list of countries engaged in the large-scale currency manipulation.

this would be subject to the world trade organization and their approved trade policy. you cannot get anyone to agree on this, or at least not enough would make this go. this has been recommended by the academics, with a bunch of other wiseman, and so, to sum up, on these problems relevance to the financial stability, mainly the global payments and balances, we are a long way away from where we need to be. the problem is not an alphabet soup of financial regulation, is that the international suit that we have is too little to make a meal of the regulatory reform. >> before we go to the floor, we

have the financial institutions and the governments, with a capital requirements that are considered official, and this is part of an international basis. does this abide further with the united states going along, with the strength of their own financial regulation. and other regulators more likely to heed the merits of the financial institutions over those concerns that they have addressed. and competitively, the cannot adopt the more stringent requirements.

>> the answer has to be yes. the minimum capital requirements in europe and the united states, with a member of the european banks to have activities in the u.s.. you have a competitive distortion. the question is, how serious is this, and how much of a concern that this should be for the u.s. authorities, and we have a different shade of response, if you consider the different segments of the financial activities. this is not very material in terms of the u.s. market. these activities need to be treatable. you cannot look at the u.s. in

isolation. this is not the only way to look at this issue. this has the tentative capital requirements, and there is too much at stake for their own stability. this shows the race to the bottom in terms of the capital requirements, and i cannot understand why u.s. authorities would like for them to be more ambitious in terms of the discussion. as i mentioned, we have not solve the banking crisis, and this is clearly a concern of the european leaders with the financial crisis.

[unintelligible] this may prevent the next crisis, but these actions are financially difficult. >> with the u.s. industry, they hammer on the argument that we have the requirements that the competitors have. there are a lot of arguments that this would be safer and that this would not be a disadvantage. lobbyists go to the congressman, and they say that you are giving away these american jobs and making the institution smaller and more competitive. this is what you hear from the children when they come home from summer camp.

the food was awful and they give you such a small portions. they want the business and this is what it is. if they are not doing this, we should do this anyway. we will not be as much at a disadvantage. we will recognize that the institutions are better capitalized. i not see any evidence about this argument. what happens is that whoever is a sizable will cause them to say, yes, we have heard the arguments about this at 15%, and we will only go to seven. the treasury, which show that

this was the most important thing, with capital, they decided to go for the agreement. they decided to go for the lesser agreement. we will hold up the agreement, and we will hold on for a stronger agreement. let's take half the loaf, and this is better than no loaf of bread. >> this is deliberately not leave and a cynical question, at the same time. you mentioned this at the outset of the crisis in 2007 and 2008.

this is a lot of finger waving in the united states. you do this with the europeans were you get the house in order. >> this is a great situation -- with a short answer. the other answer is that the united states, with due respect, the united states is looking more at the u.s., and europe is very inward looking with the united states as well. we will go into this. i do not think the u.s. has a natural dependency when it

comes to financial regulations. this may be justified by the fact that the united states has put these capital markets and to work. >> we have one final question before we go to the floor. the european concern is that the system is so weak right now, how seriously must we take this argument? we study the stress test, and the sovereign debt crisis and how weak are these institutions right now. should we be involved with looking into this too hard? >> the treasury has been constantly hammering this message with the european counterpart.

>> if the hammering is going on, -- >> the leverage is limited. and perhaps this is a good thing depending on your point of view. this is a major decision with a system in europe. the european economy is not very different in the european countries. this is not very constructive, with the capture of the financial sector. >> this would not be constructive this would be interesting. >> the official line in europe

is that we cannot have these defaults. we are trying to persuade the banks into rollover of this, and so this will not need to be reflected. we have this rather than continue to put this into greece and others. that is where they are until that doesn't work anymore. then they will have to move somewhere else. they will have to push the case that hard. we have what we were hearing earlier on. we had some of those instruments, and it is unlikely

that you'll be able to work this out. this will be a recapitalization of the banking system. i would rather see this done sooner rather than later. -- that is what is happening in europe. and given that the past crisis is still reasonably fresh memory, -- >> we were wanting to ask this

question. >> he had a lot of good viewpoints. i heard this at brookings a couple of weeks ago, with the issue of the european zone with the u.s. financial regulations. some of them are harmonizing with the rest of europe, and some of them, unilaterally, did not play well in the financial sandbox. there is such a size -- there is such a thing as the one size fits all capital requirement. and this is the kind of

approach that has to be taken. we still ended up commenting on these concepts. >> if you look at the european union, especially at the level of the european commission, creating an internal market place with several countries, harmonization is, in and of itself, for good reason, is a problem that we no longer have in the united states. but there was a time long ago when fragmenting was an issue it in parts of the world. i would not criticize the european commission for being involved with this.

this tends to be projected with the rest of the world in ways that can be surprising or exotic. this is something that would be easy to describe. and i agree with the premise, and this is a more pragmatic compromise. this is part of the harmonization. >> we did not go very fast on bossell 2. it is hard to say that this was a bad thing. they clearly got it wrong in several fundamental respects. but now you would like something that's much more ambitious.

you will be a little bit slow, or we will not go where you want to go. i think that these things matter. we are trying to have a stronger one rather than a weaker one. i say that this is the most important element of the financial regulatory situation. if you really did this right. after all the huffing and puffing, we got one that was rather modest. i would think that it would be nicer to have a stronger one. if we felt strongly enough, we could do something with this. i saw the comments as he was trying to control the currency with a capital requirements.

this is within the u.s. team. would this be too much? we will take what we can get. >> would this be more effective at dealing with the financial arguments in terms of the financial institutions? >> i think that this would be helpful if we could get the u.k. to line up. we would still leave out some major players. bossell 1 came about because the u.s. and u.k. were at the

lead. the united states and the united kingdom and switzerland with at least be a start. they say that they will go for more, to get somebody that they want. with a push 10% of the common equity for the retail operation, they would lead the wholesale operations to be determined by this process. this is clearly not willing to go with unilateral on the wholesale acquisitions. paul lee because of their own banks and being subjective to tougher requirements than those elsewhere. we can get the u.k. and switzerland with us and it would be better than going alone, but i do not know if it will be

different. >> it is only about two banks. one of them was not billed out because the swiss government had made a profit during the crisis. the conclusions that they had drawn from this is basically, we don't want these huge banks. this is not the conclusion that the u.k. had made, or the united states. one way to look at this unconfirmed decision -- and there is a debate in parliament. this is something that looks like the proposal. this is a way to say, we will go back to the banking system, and i do not think that this is a choice that the united states or the u.k. is ready to make. the u.k. is ready to make.