i think that regulators are going to be ahead of baker's, especially -- bankers, and the notion of having a regulator before -- beside every banker is a fool's errand. the real question to me, i know that jpmorgan lost $2 billion over two years. .

but that that's a fought with

the reason it stelco hah

the statute talks about whether it is with an aggregate positions that a firm has taken. >> if you would, i assume that in order to have this, at the west is just happens. we can make regulations on hedging that makes this if we're going to keep them like they are. in this respect it is producing. what we do not want to have done is to not allow activities for privatproprietary trading. this is for what we were making a whole. >> at the last hearing, we have

a discussion of the distinction between proprietary trading and marketing. what we are facing is the dissension between them. when asked what the provision is, which is taken from the language. with respect to hedging, what it would do would be to put in place some guidelines for trying to distinguish between hedging of individuals and aggregated ones. as a portly, put in place a set of risk-management and documentation requirements. they would be required to

explain to themselves but the hedging strategy was. this is how would make sure that they did not give rise to new kinds of exposures. you ask the right question. that is the reason why there is an elaboration of some guidelines. >> hedging. >> it would depends on that particular institution day are facing. the issue really is there a

robust risk-management in place tax there are controls and limits that allow these to be addressed without introducing this. it is where they're trying to address. >> this is a risk management activity to the institution as opposed to activity we get into an unexpected nature. we're trying to generate income. the whole goal is to set it up. did you can monitor the activities so the important hedging activity goes for words. if we're getting into this, we want to identify that. that is important for the

institution to recognize it. >> i know my time is up. i note the agencies that particular involved. -- i know that particular agency is not involved. i know this is not cause regulators to do something different than what they think is good for our banking system. i do hope down the road we will look at some reforms that will not let this. >> thank you. >> i want to pick up a little bit. one of the things you have said is that you were still looking into these.

you were trying to determine their strategy. they said that one of the results that you envision. and make sure that your strategy would be laid out ahead of time to make a determination on whether it was in the boundaries of opprobrious hedging. do you think whether this transaction fell in or out of the volcker restrictions are not? with the nature and sharing of

strategy before hand have given your audience some guidance? >> the point i would like to make in regard to the discussion on the volcker role in jpmorgan chase, we do not know all the facts before you make any judgment as to whether not the rule would have been applicable. this was a risk management issue regardless of whether or not the volcker rule was in play. the issues are similar in the sense that were there a program once in place with the procedures and reports that enable management to assess the risks initially with the

execution of that particular strategy. it is still a risk management issue regardless of the volcker rule. >> the controller has been addressing the question on whether this is proprietary trades. he is saying he does not have information now that would allow to say him whether it of the proprietary trade. my point is regardless of what we conclude about the actual nature of this particular set of transactions, if this rule had been in place, if the exception were to be involved, it they would have had to be sure that the kind of risk management would have been in place. they would have been required to document it. i would assume there is an

absence. >> he would have this. clearly there is a of value in terms of your portfolio. they are hedging each individual trade. he would have had a little clearer guide. >> that is the intention of these additional provisions. then the on going challenge is to make sure that the information that is received is reviewed properly. >> let me move to a different subjects. one of the mutual so we have tried to put in place is these living wills. as we move down that path, i like both of your comments in terms of had you had the tools you need to evaluate the back and forth?

at what standard are you going to hold them? it will demonstrate how they would then wind themselves. are you looking at that in a blue skies environment and ? are you looking at the break above the euro? -- up of the euro? >> it establishes a standard. that standard is the bankruptcy code. the requirement is that you have to make an adjustment as to whether the plan could credibly result in an unwinding of the institutions. that is the operating premise. that is the development of the resolution plans. as i mentioned, the fdic and the fed issued a joint rule last

year establishing a criteria. we have been working with the institutions on their development. under the rule, the first round will be for the largest institutions with assets over to under $50 billion. it will be due in july. -- $250 billion. it will be due in july. we will get the initial submissions in july. there will be an expensive process of review of those plans. >> i would add that it is not possible to tailor a lot of different plans to a lot of different potential adverse scenarios. that is why our review of the plans that are submitted is going to need to include basic questions about the ongoing structure of the firm.

we're not just going to be able to say it's nothing bad happens on thursday it will they be able to resolve by monday morning? we will have to ask ourselves whether the review of the resolution plans shows us that there are structural elements of the organizations that could be an impediment. as a matter of current policy, we need to adjust. that kind of exercise should provide some more suppleness in response to whatever the risk is that could lead to the firm's problems. >> thank you. thank you. i want to indicate that i strongly agree with the tenor of the questions we have heard from.

i think we have covered the ball or roll their early. i did want to indicate -- the volcker rule early. i did not want to go into that. i encourage you to take their comments to heart. i am concerned about how we are moving forward in the regulatory plan with regard to the response with things like the jpmorgan issues. i want to shift the focus for a minute. i want to talk to mr. corker first. the housing market continues to be very tight. i am hearing concern about the dodd/frank rules that require a 200 down payment -- 20% down payment. and of the reopened this for the qualify proposal until july 9, is seeking comments about that

said that can be used to model their relationship between the borrower's ability to repay and the consumer ratio of debt to income. is it your intention to convene a small-business panel? >> thank you for the question about the qualified mortgage to repay rule. we have recently been able to obtain significant amount of data from fhfa. we are all quite concerned. i know all of you are as well about the trajectory of that market. this is an important rule in helping shape the future. we want to be clear that we crafted a rule on sound data and that does not restrict access to credit which is something we have been hearing consistently from small banks.

even after the comments had close, we continued to get immense amounts the comments from different groups. we thought that we would open up a comment again to make sure everyone had an even chance including data issues that we have identified in the proposal. because this was a racially proposed by the fed, this is not implicated. if we worked to try to convene, we would miss the deadline congress has set for us of january 2013 which we intend to comply with. that is our coach at the moment. we encourage any small provider the ones to take advantage.

we want them to have full access and boys in our role making to make sure we are reflecting the entire market. >> thank you. it would seem to me that because this is supposed to be more broadly defined, would it be correct to say that the regulators should wait for them to finish? >> i came there was not a logic in having that. there is a logic to that. >> that is a necessary component to the entire package of rule making.

>> if people want to way, we will wait, too. >> i encourage you to do that. recent events have violated modeling risk. my understanding is that the fed is utilizing the current exposure method and that there has been quite a bit of concern about whether it is an accurate method of risk modeling. are you considering other models? are you focused on simply staying with the current exposure method? >> in the stress test context? >> yes. with respect to stress testing. we're trying to make our best judgment as to what kind of bosses would be entailed.

>> let me interrupt. i was more focused on the single counter proposal. >> this was a calibration. this is one of the topics on the consideration of changes. there have been a number of alternatives suggested. i think the challenge, without trying to signal where we would go, we have not seen all the comments yet. the challenge will be wanting to have a methodology that tries

to attract actual risk exposure while not becoming dependent on modeling within firms. as we have seen, dependence on the firms can lead you astray. firms tend to be much better at modeling with the risk assessments. as opposed to the events we're trying to guard against. we will have to keep both these issues in mind. we are trying to go toward the risks associated with the positions. on the other hand, wanting to make sure that we are not totally dependent on the other model. >> if remodeled to aggressively, we will get it wrong. i encourage you to get it right

in focus on these concerns about the current exposure that that. >> thank you. >> thank you very much. i think the london whale who ran the investment unit woke up each day trying to mitigate the loans in bonds. >> that is a related area of inquiry. what you were inquiring. you and not argue that case? >> -- you would not argue that case? >> i didn't think anyone would appeared they woke up trying to make money for the bank.

it is a basic observation across america. i will ask you to keep your responses crisp. across america, small businesses are trying to get access to credit. they're highly frustrated. the ability to access credit is essential to the recovery of our economy. does it do damage to have banks diverting it into hedge fund investments rather than making loans? >> we are very supportive of small-business lending by the entire spectrum of national banks that we supervise. >> that was not a question. this is damaging to our economy? >> i would hope not. i hope all is not the case.

>> it would be if it was diverted into hedge fund investing rather than making loans to small business. >> you are hoping it was not the case but you're saying it would be? >> we expect national things to meet the community's including small business lending. we do not direct exactly how would they do that. we assess it from the cra. >> thank you. does it increase systemic risk? >> i believe that is the intent of the volcker provisions of the dodd/frank act. >> it is. but in your opinion, does it increase the systemic risk? >> unrestrained financial risk

taking outside of legerdemain risk a framework is something we would be very concerned about. >> from a citizens' point of view, when you look at long-term capital movements and a host of other institutions that survive because we bailed them out, it is clear that if you are in the hedge fund business you would increase the systemic risk. am i off base? >> we will look to the banks' engaging lending within the context of lending with the undue address taking. >> let me explore from this angle. do the hedge fund union had an

advantage? the others have access to the discount window and be insured deposits. do they have an advantage? >> i would have to look at the available research to come to a conclusion. >> they have deposits. it is an observation that his way of? -- that is way off? >> no. would like to be able to research that. >> in terms of proprietary trading being disguised as risk mitigation, there are basic things that create red flags. if a company says it is mitigating risks in a long-term position by selling insurance, is that a red flag that this is not the best mitigation after all? >> that is something we would

raise. >> how about if the operation is investing in hedge funds? would that be a red flag? >> that would be another area under general risk management that we would be looking at. >> a potential red flag. it would draw attention. if an operation is making massive trees that are not identified with specific risks -- trades that are not identified with specific risks, what would it look like? >> we will look at it closely. >> they're not tightly correlated. >> are you going to support closing the loophole that the wall street banks have been arguing for so they can continue the hedge fund style operations of? will you support it? >> that is one of the issues that all the agencies are

looking at. i think our experience here with jpmorgan chase would help inform our views. >> thank you very much. >> senator toomey. >> thank you. i would like to start by also acknowledging his comments about the importance of capital. i know you have given a great deal of thought of this. i have considered this in a sophisticated way. i think the emphasis on capital as a general matter is exactly the right direction that we ought to be heading in. i fear that dodd/frank is a

profoundly misguided effort to do many other things. i have to disagree with our chairman who i think tend to disagree with the characterization of dodd/frank as i have characterized it, a very explicit attempt to require that regulators micromanage banks. i do believe that it is exactly that. it is guaranteed to fail. i want to touch on another topic. i observed in a recent speech that you stated that the typical path toward the failure of an insured bank starts with bad loans. my understanding is that according to the fdic's website over the course of 2009 and 2010

there were almost 300 banks that failed. 297. that is a high rate of failure. the highest since the early 1990's. 95% were banks with assets of less than $1 billion. to your knowledge, how many of them failed because of their trading activities? . .

>> concentration requirements, supervision of the activities. yet despite that, 100% of the failures of banks in america in the last few years are attributed to bad loans. i am not criticizing the regulatory process. if we have a banking activity, the very nature of which is to take risk in extending credit, some of those are going to fail. it is unfortunate, but unacceptable and unavoidable. the real goal, it seems to me, ought to be to ensure that we don't have systemic risk, you don't have the failure of one more institutions -- you have

less leverage if you have more capital, and less rigid greater ability to absorb when it no longer occurs. instead, we are going down the direction, and you are fortunate to implement the law that has been passed. my understanding is there are 398 rulemaking requirements. 110 of them have been met with finalized rules, and yet another 140 four have yet to be proposed. we are talking about rules. we are talking about many, many pages of very dense and complex matters. the volcker rule along is staggering in its length and complexity. take one little aspect of the

volcker rule, the exception that applies to market-making activities, just in formulating that inception. we have all kinds of metrics we are going to impose. versus the subsequent market rule, how much business a market maker must do with end-users versus interbank dealers. what kind of asset classes are permitted. we have to decide whether these limits apply to an individual trader or whether we aggregate trade. it is staggering. it is going to have a huge cost. we are doing this while the banks have to -- fl because of proprietary trading. do all the risk taking you like,

as long as it is in treasurys. you can lose your shirt raising treasury's big trading treasury's as much as with trading corporates. i guess i don't have a specific question about this. i am just very, very concerned that we have created a monster. my last count is between the comptroller of the currency and the fed, we have over 100 examiner's. i guess pretty much full time, and j.p. morgan alone. that is before we implement all of these rules. mr. chairman, i have to say we have pretty much taken the wrong direction here. i hope we'll reconsider when we are in a political environment and will consider capital as the essential tool to reduce systemic risk. >> senator menendez. >> thank you, mr. chairman. i want to ask you about j.p.

morgan losing $2 billion and possibly more. the occ has a well-deserved reputation with the banks it regulates. you have an opportunity to decide what the occ does in the future. i find it interesting. what i don't want to see is a repeat of 2008. i know that a free market is essential to a very economic vitality, but there is a difference between a free market and a free-for-all market. in 2008, what we obviously came to the conclusion of this is the consequences of a free-for-all market. the decisions of large financial institutions became the collective risk of an entire

country, even though they were not part of making those investments and other decisions. then all of us had to pay. i wish we had insisted on capitalization then. i wish we had insisted on a whole host of things that would have avoided 2008, because i will never forget that meeting with chairman bernanke and secretary paulson where they described largely a series of financial institutions on the verge of collapse and suggested that if it collapsed, not only would it create systemic risk for the entire country -- i want to revisit that. i don't know whether people can forget the history, because it is recent history, but i do not. and now you just got this position and i am certainly not blaming you personally for this. is the occ -- did they screw up and allowing the j.p. morgan trades to happen?

>> senator, we are going to critically look at that question in reviewing what happened. not just to see what the bank itself did or did wrong, but also how we can improve our supervisory processes at the oshi sea. -- at the occ. >> how long is that self review going to take you to come to a conclusion? >> we hope to have done as quickly as possible. >> what does that mean? >> i would hope within the next several weeks, and no more than a few months. i want to reiterate that my goal was to have a strong effect at the comptroller's office. it is imperative and the lessons learned from the 2008 crisis are clear to me and my colleagues at the occ. we do need stronger capital,

which we are getting through basel 3 and other rulemaking spirit we need heightened expectations in terms of the bank management, raising expectations of what we require for minimum reserves, liquidity and risk management. also corporate governance, which is critical. >> and know your going to say you will review it, but shouldn't the sheer size of these traits have been a huge red flag for the occ? >> that is an issue, the concentrated nature of the trading and the liquidity of it are red flags and clearly apparent now. i just think that for those of us who supported wall street reform and do not want to relive 2008, that i think every regulator here responsible for implementing a law should know

that if huge trading losses like this happen after we establish the ballgirl -- paul volcker rolle and capitals have been implemented, i think it would be out of your hands if it goes belly up next time. in this case, -- what if you have read these traits, what is to stop them from losing multiples of that, billions more the next time? or even more significantly, a less well-capitalized bank from losses that could bring it down? i just don't see where the circuit breakers are here. i don't see where the ability to ensure that in fact, that type of decision making does not become the collective risk of all of us again in this country. i don't think the american

people, and certainly this senator, are willing to go down that road. i don't know what it takes to get everybody to understand that we are serious in purpose here to ensure that the law is fully implemented. i know there are those who disagree with the law, but americans are free to disagree with the law, but not free to disobey it. they are not free to disobey it. this senator, for one, will continuously pursued to make sure that we do not relive 2008. i hope that all the regulators understand that. >> senator ran. >> mr. chairman, thank you very much. this is one of many hearings that i participated in that this committee has held with regard to oversight of the implementation of dodd-frank. when i asked for committee assignments a year-and-a-half ago, i asked the banking

committee and was told by someone that its work is done. they have already passed dodd- frank. its heyday has come and gone. in my view, overside implementation, modification, alteration of dodd-frank has been a very important task for this congress, and one that i wanted to fully engage in. more importantly, to the customers and bar wars and depositors that we care a lot about. it is concerning to me that while we continue to have these hearings, my concern is that there is no legislation that follows the series of ideas that are presented, and certainly i would guess almost every member of this committee has expressed

either here in a committee hearing or in a letter to the regulators the desire for a different outcome than what has occurred with dodd-frank. so i think there is a general belief among most everyone on the committee that there needs to be some alterations in dodd- frank, and my hope, mr. chairman, is that we will take the opportunity to modify through the legislative process provisions of dodd-frank that we think or objectionable or improperly worded, or need an alteration. based on the hearing over a long time that we have had on this topic, i have always been concerned that any time legislation is proposed that alters the provisions of dodd- frank, the allegation is that the senator or legislator who wants to make changes is defending big banks, does not care about the consumer. but i cannot imagine a circumstance in which there is not legitimate need to be

addressed that our concerns for everyone on this committee. in different areas, different issues, but i think we need to make certain that the oversight hearings become something more than an oversight hearing, that there is a legislative response in which we treat each other with great respect and not with political allegations that were carrying water for some particular financial institution or segment of the financial industry. i would encourage us to mark up the menendez legislation. let's go to work and pursue some of the things we think need to be done in regard to improving the financial regulation, even though we passed dodd-frank and the glory days of the banking committee are not over, they are ahead of us. we have lots of work to do. i want to ask a series -- a series of you have indicated

that as a result of the loss announced that j.p. morgan that your position in regard to the volcker rule has been informed. i am interested in knowing how the losses reported and how it has informed your view in regard to the volcker rule and in particular, what you think needs to occur in regard to dodd-frank now that you have become informed. >> i think i informed i mean that our experience with the level of risk management that is present at the cio office that was engaged in activities that are deeply they fall under dodd- frank ballgirl provision in proprietary trading comeback and

risk mitigation hedging exception. i think this illustrates in terms of the types and kind of oversight structures and mechanisms that would be needed under that particular provision. >> anyone else become informed? >> it seems to me -- we need people to run for this and say we have a situation in which they said they did not think this was a well managed risk. it was supposed to be a hedge. somebody should align the rule with the practice and say if the rule had been in effect, would have precipitated the kinds of risk management identification of strategy and documentation that would have been adequate to bring the attention of both the firm and the supervisors to a

potentially risky strategy. as i sit here today, i think that is the case, but i would want someone to go through it more carefully. >> mr. chairman, thank you. i would like to compliment my colleague from mr. -- from pennsylvania with his logical presentation. >> senator bennett. >> thank you for holding this hearing. i appreciate center ran's comments. i think all of us believe the profitable -- capital market is probable and secure in this country. i just want to be clear. i sat here three years ago and heard testimony on the credit defaults walks that brought down these large financial institutions and put my family

and your family's three enormous economic turmoil. it was clear to me that the testimony we were hearing is that no one was watching that, no one had a view of the systemic risk that was produced by those transactions. you think of those is merely bad loans rather than secured -- securitized instruments that nobody was watching. that is not an accurate reflection of the history of what we heard. i am not for any more regulation and i share the skepticism on the other side about the ability of the regulators to keep up with what is going on in the capital market, which raises the importance of capital as you described earlier. i do want people to remember why we were here to begin with and the gaps that we saw in the regulation that had a profound effect on this economy and the

people that i represent. having said that for the record, i want to go back to the ranking members first question. what was the nature of this transaction, was a proprietary or was it a head? we do not have the answers today. explain to us what that examination is going to look like. what will you consider as you think about defining that? we can learn something from that. those of us that are cautious about these definitions would like to know what you are actually going to be looking at. >> at the occ, we have a two- pronged approach to that particular issue. number one, we want to fully

understand the nature of the head or trading activity at issue. we also want to get an assessment full understanding of how the bank intends to reduce its exposure from that position. part of that process and part of our secondary braun which is to -- in my >> i am sorry to interrupt, but the for step is to determine the nature and the second step is to determine the risks, is that second determination dependent on the nature of the transaction? >> no, sir. the first prong is the ability to assess the financial risk to the institution. that is really a priority after the issue surfaces. we are looking at from a post mortem standpoint.

what has happened, where were the deficiencies, what needs to be corrected, is there additional risk management gaps elsewhere in the organization, and is there an opportunity to learn from this experience in terms of the risk-management practices at the other large institutions that would supervise? that is the typical scope of our review. >> you made an observation earlier. i thought i heard you say that the low likelihood of the experience -- i want to know why you think that is a low likelihood. >> i was referring to the fact that in my observation, modeling that financial firms do,

associated tons of modeling to try to understand what their losses are, it tends to not be as oriented towards tale risk, meaning events that, while appearing at that moment to be low probability, would have enormous consequences. >> if you would like to talk about this, how do you view that risk? as you are sitting here. i understand that the balance sheets are in better shape, but the risk of collapse. >> a couple of things. european leaders appear to be moving with a heightened sense of urgency. the runoff to the 220 meetings will be an important opportunity for them to make further progress with respect to the

banks, capitalization of the banks, restructuring of the banks. as you have seen, they are considering those things on a european wide basis. the europeans have the will and capacity to keep this thing together. president, secretary of the treasury, others are very much engaged. i think we will see as developments before, it is not useful for me to hazard a guess, but i think they have the will and the capacity and i think they understand the urgency to start taking actions that are consistent with avoiding some of the most unpleasant outcomes. >> thank you, mr. chairman. >> senator brown. >> thank you all for joining us. i am glad to hear my colleagues

on both sides of the i'll talk about the importance of capital requirements. they seem less convinced in during the drawing up of dodd- frank, that might be somewhere we want to look. a discussion for mr. moran and mr. to me about capital requirements. my questions will be with you, if i could. i sent you a number of written questions and i look forward to your response. i appreciate those answers prior to mr. diamond appearing before this committee next week. i hope you are able to do that. about a year ago my subcommittee held a hearing and they examination and supervision at which the occ testified. you were not here, of course. with the reputation of your agency. i want to share some of that testimony.

i insist on brief answers because i have several questions and limited time. i appreciate a yes or no response. the head of credit and risk testified, given the importance of the role that these large institutions play and the overall financial stability of the nine sets, we have instructed our examiners that these organizations should not operate with anything less than a strong risk management and audit functions. anything less will no longer be sufficient. did occ meet the standard prior to you being it -- being there, that it set for itself in this case? >> i want to knowledge that we are working on your responses to your written letter and we will get it to you prior to mr.

divens testimony. i think the answer is no, not in the particular case of the cio office. >> thank you for that answer. >> mr. wilson also said that hearing that every report is reviewed and approved by the responsible deputy comptroller before it is finalized. both units have formal quality assurance processes that assess the effectiveness of our supervision in compliance with occ policies. i know you were not there, but the deputy controller and assistant deputy comptroller, did they simply not know about this? >> this is part of the inquiry we are conducting to determine how we improve our processes. >> thank you for that. your written testimony suggests that examiners and supervisors were unaware of the activities

occurring at the j.p. morgan investment office until april of this year. what is intriguing about that is that this office was making $360 billion in trade. this is larger than the assets of 7299 banks in the united states. if this was a stand-alone bank, it would be the eighth largest bank in the united states. it was making the biggest, most complex trading in the entire banking system. the question is this. should the eighth largest bank in the nation be allowed to make the most complex trade in the entire banking system without the occ's knowledge? >> we would expect to be aware of significant risks, to have the bank identify them and to have adequate reporting about those risk. i just want to clarify that the cio office had a pool of approximately $360 billion but

this particular area was a portion of it. that may be part of the reason why it was not identified as quickly as we would like. >> that is an issue of the structure of occ, under different management and when you there. this is not about -- this will be discussion for next week but i hear about $4 million loss as chief investment officer. j.p. morgan took a $25 billion hit to their stock could that it's 401k, pension funds, a loss of wealth to a large number of people. we went through that with multiples higher than that to three years ago. there are signals that the market believes this again demonstrates bigger problems in the management and oversight at j.p. morgan. with respect to the issue that these trillion dollar banks are not just too big to fail, there

are too big to manage and too big to regulate. but occ position has been that they do not subscribe to the view that big, in an of itself, is bad. as long as occ continues to insist that big, complex banks are actually essential to our economy, they are responsible for their inability to properly examine and supervise these mega banks. i appreciate you working to improve your oversight, but i heard the same promise of last year under different management. for the occ to determine what, in retrospect, they could have done differently -- i know you want to look forward, that is your job. you need to identify what mistakes were made, by whom they were made, and if j.p. morgan can hold its senior executives accountable, which they appear in part to be doing, we should expect nothing best we did nothing less from you and the people who work for you, whether

the people who are there now are who'd you replace them with. >> center schumer. >> one of the obvious issues raised by j.p. morgan in the role of risk management of banks, especially large banks, as some of you know i thought to have included in dodd-frank the provision requiring all banks with over $10 billion in assets and all non-bank financial firms supervised by the fed to have a separate risk committee that includes at least one risk management expert having experience in identifying, assessing, and managing risks of large complex firms. in your testimony, you say i will require banks to adhere to the highest risk manageable standards. in your assessment, did the risk policy committee at j.p. morgan have sufficient

expertise in risk-management to carry out its duties? it has been reported a keyboard is changing the composition of its risk policy committee. can you provide the committee with an update on those changes and discuss whether you think the new members of the committee have sufficient expertise? . .

we hope this will be experts. >> have you reviewed this with the over $10 billion ta? >> >> as one of the standards, it would now precipitate what we call horizontal comparison. for those institutions, we will look at each.

it'll give the individual ones more guidance and insight x. >> there are other banks. >> they are doing all these fancy unfashionable -- unfathomable things. are you revealing other banks as well? >> that is a critical components of the overall risk management. >> this is for you. jpmorgan's derivative trades were made by a group that is part of the u.s. a bank but booked in london. you have full access to the information you need about trading activity. and what more needs to be done to improve coordination with regulators to prevent these

kinds of losses. >> these are conducted through a branch of the united states national banks. we have clear jurisdiction for that brandt's. in the case of jpmorgan chase, at those are managed on a global basis to the new york office where we have the majority there. >> all right. this is about early warning systems. traders have been able to spot the jpmorgan trade through the impact on the market for credit derivatives. why did the regulators no? they cannot micromanage every trading position. that would be impossible for you to do. is it possible to build an early warning system that could warn us if a single company

accumulate large positions as it appears with the jpmorgan chase? i asked the chairman if it would be possible. they said with the new information to be reported that we will be able to set up systems that could identify risky positions before they blow up. my question goes to you and any others who care to add their opinions. what should regulators do to improve their ability to identify potentially risky trading activity? i realize foresight is a gift. at least you're getting about a certain level of money. i would not ask you to get involved in every single thing the banks are doing. >> it is the risk management of

the firm. it generally does not include things like position limits. we do already but in our process look at market indicators to try to identify trends that might be relevant. that depends on the specificity of the information. i believe there for projects which could be a big part of the market but the overall financial markets were still relatively small. unless there is reporting on more specific projects, our look at market information would not have revealed it internally. >> what about after dodd/frank

is fully implemented? >> i think what is most important is when a firm is taking a hedging position is still be required to specify what its risk management is. the supervisors will have before hand access rather than have to rely on is going and afterward. >> you think it will improve? >> i think it well. this was a highly complex investments. it would have been very helpful if there was other data available that would highlight this concentration to us. the extent that it does provide that there is other market information that we could utilize.

>> they have to report in justify it appeared does that tend to be prophylactic? -- justify it. does that tend to be prophylactic decks but it to be helpful. that is one of the issues, whether there was accuracy in reporting. >> is anyone else care to comment? >> bossy but. -- interestingly put. he said its search remind us that the presence of substantial amounts of high- quality capital is the best way to ensure that significant losses are borne by their

shareholders and not depositors. what percentage will likely hold? will this be sufficient? i think it is given that there is no substitute for capital. beacon regulate everything in the world. if you have an adequate capital, a you know what is going to happen. >> i do believe in the centrality of capital. it is a central way. >> id is #1? >> in my judgment, yes. >> the basel requirements are for 7% ratio.

>> traditionally, measures of capital includes common equity which people generally think of as shareholding also included some other hybrid instruments. this is not as strong as for common equity. pre-crisis, if he went down to the requirements, it was only 82% common equity requirement. you have to have common equity which was to% of your assets. basel 3 takes it up. with respect to the very large institutions, there will be

additional 3authority. is that enough? my preference would have been to have both somewhat higher. we did set them with an id to those other regulatory tools. there is some market discipline. it is always going to be a balance as to how much capital is enough given the tools. >> g believe our banks are much better shape than they were three years ago? >> yes. >> absolutely. >> do you believe that a lot of

it is because of required capital? do you believe that his central? >> i think there has been a good bit of d risking. >> is there summers to the economy if people try to take most risks out of the banking systems? you cannot take real risks out of the financial system. >> you cannot. it is always a question of one manage our risk and the capital buffer when things happen that you do not anticipate.

>> i would agree with the governor. >> thank you. >> thank you for your testimony and for being here with us today. risks must be appropriately managed. we must remain vigilant and complete the implementation to enhance policy introduced systemic risk. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> up next, at a hearing on correction in afghanistan. we will talk with michael joseph grosz about the future of the internet. another chance to hear the hearing on the dodd/frank financial laws. >> tomorrow morning ben bernanke will be on capitol hill to talk about the u.s. economy. we'll have live coverage beginning at 10:00 a.m. eastern on c-span 3 and c-span.org. >> it was the conscience of the congress. i cannot think of a better name. it is the heartbeat of the

people. >> the role of today's caucus. >> they are dying to ensure that members of congress can come together on issues that are plaguing the community at large and they can find commonality in come together to discuss legislative proposals to advance the causes of people that do not have a voice. >> sunday at 8:00 eastern and specific here on c-span. crack>> they have estimated thae u.s. has sent afghanistan $90 billion in aid. this looks at how the money has been spent and how much has been lost to waste, fraud, and abuse. officials testified with representatives of the international development.

>> i wanted them to look specifically into business deals involving karzai and his family and their inner circle that have used u.s. funds. i was told they could not provide answers because the lack of complete data on u.s. contracts with performance in afghanistan, the difficulty in obtaining publicly release a full information on afghan firms and the improbability of ownership interest could be identified. the data base system provide information on such contract awards. this is one of those agencies that is not keeping adequate records on him and is benefiting

from american aid. i want to know why. i want to know why that is the situation. if a reporter can find out about karzai's family, why can you? i approached the general. i was told that they could not do it because they only had 120 people working for them. as has been widely reported, president karzai denied me entry into afghanistan as part of a congressional delegation in april. i have serious concerns about this strategy we have been pursuing in afghanistan. what has made this debate personal is this investigation

into the corruption of his administration and a decentralization strategy that i support. perhaps that is making him upset. what reforms i am calling for could mean a great deal to the family fortune. many people in washington do not want me or anyone else to look into the basket to see if all the eggs are still there. that includes the state department which has gone all in for karzai. my request to hold hearings and explore alternative strategies for afghanistan have been denied time and again. i wonder if someone will cut off the broadcast of this session

before a concludes which is what happened last time. to many careers have been tied to karzai. the campaign is not out to save him. i was told not to mention karzai in the title of this hearing. afghanistan is pledged by corruption and is tied for third as the most corrupt country in the world. corruption threatens the u.s. military and reconstruction missions as well as the the dishonestlegitimacy among its o.

this has made it virtually impossible for the gao to do its job. they're trying to safeguard the interests of the american taxpayer. there has been a scandal so big that it cannot be hidden by the bureaucracy. that was the kabul bank case. it was looted three series of insider loans that were never meant to be paid back. the bank collapsed and was bailed out to the tune of $825 million according to the imf. one of the central figures was

karzai's brother who was given interest-free loans which she'd been used in part to buy a stake in the bank itself. it has been reported that much of the money was used to speculate on real-estate in dubai. there was not even a pretext that they were being used to provide money for the afghan of economy. they were involved in advising that the afghan central bank on supervising the operation of the banking system at the time the kabul bank scandal was taking place.

i am hoping the witnesses today can elaborate on why it could not do so. the u.s. used the bank of kabul for many transactions. we had many relations with the people running the bank. for fiscal year 2015, the requests is $5.2 billion. u.s. aid has awarded $15.2 billion in afghanistan reconstruction projects. a majority of staff report found "80% of the resources are being spent in afghanistan's south and

east." only 20's term is going to the rest of the country. would in not be better as a long-term strategy to build up the capabilities and areas that were more loyal to you and to our country? there is an old added that goes i do not need to pay my enemies to hate me. they will do it for free. it is our friends we want to reward. there should be a distribution of aid. there should have been all along. is much more balanced than this focused aid that we now know about in afghanistan.

the reports have raised questions about how well it has protected u.s. dollars. i was shocked to learn that it was only in january 2011 that they created a process to bet non-u.s. contractors regarding whether they were a terrorist or organized crime. how many years of counter terrorist campaign does it take to start to worry about american firms are going into the pockets of terrorists? so many contracts get passed down through multilayers of subcontractors. somebody gets the money. then comes the subcontractor. at each step the money is taken out. the work is passed on to someone

else. there is a labyrinth of shady connections that no one seems to be able to keep track of. everyone knows about the ties that it has or whoever they are dealing with to the government. they can get rich from a power plant thing kabul that is too expensive to run or one in canada car that has no -- cantar -- khandar. we have $4 million went to an afghan firm whose owners fled to

the netherlands with the money after paying less than a mile -- paving lesson a mile of a 70 mile project. i hope they can suggest a better way to control american money going forward from 2014 and beyond. i hope we can find an alternate strategy. whenever we decide to do, we need to make sure the money we spend actually goes to support our objectives and not people who hate the goals we have laid down. i was briefed on a new software system that can be seamlessly acerbated into all the

expenditures of aid funds for afghanistan or any other recipient. if we have insisted be paid by a check, then this software will track every transaction as our money moves through the local a economy including the initial transaction involving our money that is made to a recipient outside of afghanistan. i think the technology exists that we can get the job done if the will exists to get control. corruption must be stamped out. it would be ironic and tragic if one of the results of assistance was to provide the afghan oligarchy in which the u.s. has invested so much the means to implement personal exit strategy

is if things get rough. most of the karzai family left the country the last 90 taliban invaded and only came back when they were protected by united states troops. the northern alliance fought them every step of the way, it never quit, and more on the vanguard when they fought in 9/11. we do not want cowardly allies who will take their ill-gotten gains and cut and run rather than stand and defend their country. we need allies who are rooted in the country and not standing on a huge bank accounts. i will now yield for the opening statements of any link they you would like.

>> thank you. to our witnesses, thank you. this is an important hearing and an important part of continuing the bipartisan committee. see years ago we conducted a set of hearings on our reconstruction efforts. look what lessons they should learn in order to reduce the corruption and abuse. we heard from the special inspector general. he described blurred chains of command between the state and them. he emphasized a lack of institutional structure to

perform stabilization and reconstruction obligations. i have been working on developing legislation to increase transparency in our overseas operations. we will hear reforms have been implemented and improvements have been made and a continuing to make real progress in these areas. it is essential. specially as our troop levels decrease. the environment in which we operate is difficult and complex. the work they do is critically important to the u.s. and vital to our national security interests. it reflects the moral values of who we are. that is why detailed oversight is required.

our programs help build capacity to increase the political participation of women. they help transition the afghan economy away from an over alliance. i like to commend the work of our diplomats for what being works circumstances. i commend the chairman for calling this hearing. >> thank you. our first panel will beat the government accountability office. he will be testifying as a director at the u.s. accountability office working for the sources management team. it provides a check support to

members on a range of issues. i remember that you had a full head of hair when he first started there. they have worked on a wide range of issues. he led in the reviews related to such ones as iraq and afghanistan. you have had all the easy jobs. he'll hold two master's degrees.

he will be presenting the gao testimony. to help answer questions is charles michael johnston jr., the senior executive with the accountability of office. he is the director responsible for the gao portfolio offering security related issues. he was assistant director in the homeland's security team. he spent a year detail to the house of representatives committee between 2005 and 2006. he worked on border security and immigration issues. he graduated with a degree in

business administration. he may proceed. then we will go on to a second panel in which the senior deputy assistant will be testifying. we may proceed with what time he may choose to consume a rump five or 10 minutes. >> thank you. thank you for inviting us to discuss the oversight of u.s. funds to assist afghanistan. gao has issued over 100 reports including those managed by the state in support of congressional oversight of the 90 billion appropriated since 2002 to help secure and rebuild afghanistan. our work complements that

drawing on past work, are statements focus on our findings in three key areas. our reports have shown that u.s. a id faced challenges that injured assistance instruments used to carry out development programs in support of the missions in afghanistan. these challenges include planning for the use of contractors and having visibility. well reliable data are a starting point we have reported on the leaded visibility into the afghanistan contracts and grants as well as the personnel. wall they agreed in 2008 to use

a common data base to track status torula information, we found that the database cells is the rely on such information. other sources have their own limitations. they have taken some actions to mitigate risk under the accountable initiative. they began testing perspective non u.s. contractors in 2011. this is intended to counter the rest of funds being used for a surge in activity. at the time of our report, we recognize that the venting process was in its early stages and recommended that a formalize a risk based approach. we made a recommendation to

promote interagency cooperation to ensure that non-u.s. vendors are vested. we have identified weaknesses in the oversight of program performance. we appreciate that the mission has overseen programs and has experienced high staff turnover. they have not followed its own performance evaluation procedures. it makes the programs more vulnerable to waste, fraud, and abuse. they did not always approve the performance indicators. they concurred but our recommendation to ensure that programs have such indicators and to consistently use these to

shape the current and future programs. i will now turn to the accountability systems. in 2011 we found that they did not create risk assessment such as determine namterming capabilr bilateral assistance. usaid had not complied with the risk assessment practices. they did not conduct the assessment before boarding to the world bank's reconstructive trust fund. such assessments are a key to providing reasonable assurances that assets are safeguarded against fraud.

usaid updated the policies to provide this for all assistance and revise their guidance on prix award assessment for the world bank and other organizations. we have made numerous recommendations aimed at improving the management and oversight of funds. usaid has taken steps to address them. robust management and oversight is paramount in challenging environments like afghanistan where capacity is weak. we would be happy to respond to any questions you may have. >> you are just here to jump in. do you have something he would like to add to that tax hikes

the youth administrator committed that it cannot afford any direct assistance until risk assessments were done. we did find some cases after it was made that there were some done. we have discovered that there is a new policy to help insure that that does not take place in the future. the u.s. has relied on these institutions for safeguarding controls. the u.s. has been working to try to enhance the u.s. access to certain information. that is a process for which they have ongoing ones. >> ok. it is very frustrating to think

we're talking about people who make these commitments back in 2010. 2010 was years after we had been involved in afghanistan. how much aid has the united states given to afghanistan since the liberation? >> our estimate is that it is close to $90 billion. >> $90 billion in actual foreign aid not american military aid by economics. >> it was focused on development related projects. it to be a significant amount paying for the afghan security forces.

>> how much do we give them that is non-military awarded? >> how much have we given and development assistance and what we would consider to be civilian aide? >> the best estimate i can come up with as look at the afghan security force funds. i would estimate close to 46 of $47 billion in terms of aid that has gone there. we did one look at their reliance of donors for money. they cannot afford to sustain itself. the u.s. has been the largest

insurer feature. >> how much in civilian aid have we given afghanistan since the federation of? >> it would be roughly in the ballpark of 12 or $15 billion. >> there's money in the pipeline. as far as disbursements. >> >> the numbers go from 2006 to 2010. that is where it has taken place. we can go back and give you the numbers going back to 2002. since 2006, at the numbers show roughly about $12 billion.

>> how many years have we been in afghanistan before 2006? >> since 2002. a lot less security and related money. we pay roughly about 36 are 37%. the donor community has and should be 10 more than the u.s.. there has been a shift. >> and my off days by saying that one may take a look at what we have spent in the civilian sector in terms of not harming people since they were kicked out of the country does long

before 2006. $20 billion tax it depends on if you're taking funds allocated. the number would go up close to $45 billion. it has been money that has been awarded or alloted. >> this is allocation of funds for reconstruction. the numbers are roughly about $22 billion. >> that is an allotments. >> i'm getting a lot of figures here. >> we will go back and give the precise figures.

>> how much have we pumped into the non-military effort in afghanistan? >> when i asked about the gao to give me any dad said that they had on how much of those billions of dollars that we spent ended up in the pockets of the karzai family we were told that was an impossible thing to do. it is impossible to know how much they profited from the sense of billions of dollars that we used to help build up their economy. we do not know where the money has gone?

the outline some of the challenges that we saw. there are additional challenge in how you determine how much money and where. the you hit some of the key ones about difficulties. how does the money flowed down? one of the bigger challenges was trying to identify who is benefiting from a firm. that was difficult. even in the united states, it is difficult to determine who has benefited. not all companies have their information public. it is important to note that they had done some work that shows that all firms have to be licensed by the afghan government.

they determined whether that data is reliable. they also identified issues that ownerships may change over time. this is very challenging. >> in a young girl's life, i was a totally different person when i was 19. i found myself in the central highlands of vietnam's. i was not in the military. we reducing special projects. then i was supposed to go down to a town on the coast and meet up with some doctors to tell me about corruption. i'll never forget that.

they have these doctors to work crying that we're going to lose this war because of the corruption level. they took me out to show me the hospitals that had been set up to win the hearts and minds of the viennesvietnamese people. they had been looted. i will never forget that. the men were coming right out of the combat zone. they were understanding the horrible price being paid by americans. they did not see how the vietnamese people could respect

us. why couldn't our government see id? i think that was one of the factors that put this in a situation that we left in disgrace. i would hope that is not what we would do in afghanistan. it appears we have had the same type of attitude. what i am hearing right now is that we really have not had an accounting system to make sure what we are putting into this country to help improve the lives of the people whether that money has been given to a great degree are not. in my mistake index some like there has not been an attempt at serious accounting. >> when you think about what

normally is expected to be put in place, you have things that the federal acquisition. that is a pretty sound framework. part of that was to elevate the civilian presence of others as part of the teams that were going out. prior to that we did not have the right type of resources to deal with that sector. our report does talk about that. the u.s. has made some progress. we looked at the civilian presence in afghanistan. they also talked about the civilian part will be parallel

to make certain that things like agriculture are going to be a priority. thank you. the other area was afghan police training. there is wide agreement that fundamental parts of the stability your report addresses the critical nature of that. we have and had increased funding for those efforts. the department of defense have nohas not assessed this. can you talk about that lack of

a valuation? can you get beyond just the quantity of the police that we are training to the quality? >> when the issues that i can tackle -- one of the issues is that it is unclassified. dod has contracted out in that area. they have focused more attention as opposed to the military training. i think they're shifting some of the focus toward a more civil order policing. you are correct.

dod has noted those and agree to take steps to correct it. >> was that entirely being done by contractors? >> it is a combination. right now there's a lot of efforts involving those that may be involved with the police. cut has there been an adequate assessment now? has that yet to be done? >> we hope it will be forthcoming in the next report. there is an annual report that they do. i think it is called section 1230. we are anticipating that it should include that information. that is basically their response back.

>> what is the date? it was issued about a month ago. i'm not mistaken, it was sometime in march.

third, you act out our obligations affect human to banks, as you know the consumer does not typically examine any banks with less than $10 billion

in assets and is not enforce the law against any said things. we do of the ability to adopt rules the can adopt community banks and larger banks. we will help community banks around the country with our new oversight of non-banking firms. i heard from committee bankers that refuse to make any ill considered one, only to see consumers. and the street and get a loan from some else with not the same standards. -- engaged in no recognizable form of underwriting, but still managed to sell bad loans. once bundled into securities, bonethose loans crashed. consumer financial laws will promote safety of the financial system. of the next year, they are required to adopt new rules to protect consumers. many of these rules are intended to provide some customer service, practices that are traditional at our good community banks. as we develop these initiatives,

when a that one size does not fit all. when it makes sense to treat smaller institutions differently from larger ones, we pledge to do so. where employment small business review panels on several of our mortgage rules. when i became director of the consumer bureau at the beginning of the year, i barely knew my colleagues on the panel, months later from our work together and have come to know and respect them all during our team is cut to be working with their teams and with the members of this committee to strengthen the support of a vibrant financial system. i am but to answer any questions. >> thank you. i would like to thank all of our witnesses for their testimony. as we begin questions, i will ask the clerk to put five minutes on the clock for each member. it is clear from your testimony

that jpmorgan lacked the proper controls to mitigate such a large loss. was this a failure and risk management? if so, what should the bank have done differently? >> we believe that the issue at jpmorgan chase is one of an adequate risk management within the office of the chief investment officer. we have been focusing on potential gaps or deviations from excepted risk-management within that particular office in looking to see whether similar gaps exist in any other area of jpmorgan risk management architecture. >> there are dozens and dozens

of examiners of jpmorgan. first, your region. your agency check the risk- management and internal controls of all aspects of the bank, including the chief investment office before this event? or did you miss this? and second, -- are not in a position to review every single trade. what assurances can you give us that the bank. villagers will be able to monitor situations where large trades -- regulators will be able to monitor situations. or have a systemic impact on me economy? >> one of the major focuses of our examination activities is a risk management. we look at risk management in the entire organization and in key areas where there is substantial risk facing the

institution. that process is intended to go across the entire organization in those key areas. in this particular case, we are looking at whether there were gaps within our assessment of the risks and the risk controls in place at the office. we are and the process of evaluating that and our ongoing examination. the point would make in terms of our focus on risk management is that it is one part of the overall approach to identifying risks within the organization. as governor mentioned, a key component of how we assess and mitigate risk any institution is the institution's capital levels, their level of reserves, and their liquidity. in the case of jpmorgan, at their capital lovell's and

liquidity are substantially higher than they were at the beginning of the financial crisis. as i mentioned in both my oral and written comments, they are more than sufficient to withstand the reported losses in this particular area. we are continuing to review, as one of the two prongs of our ongoing review, what exactly transpired with the trading operation in the office. we are looking to make sure that there were a per britt limits and controls on those activities in that area. and how they compared to other similar areas within the organization. >> it is important that implementation is completed to enhance financial stability and reduce systemic risk. secretary, just to be clear, it

does not seem to be that the jpmorgan trading loss was systemic. do you agree? and what do you believe are the implications of the recent losses at jpmorgan on the wall street -- that have to be completed? >> yes. it is not about the solvency of the firm, or for that matter the stability of the broader financial system. what is clear is that the lessons we all learn from what happened at jpmorgan will serve as important lessons and insights into the range of the franc -- dodd frank.

and i think this incident underscores the need for us to pay attention to examples like this in order to learned those lessons, both with respect to dodd frank. as a respected earlier -- that those operations are ongoing. secretary, our regulators coordinated and prepared after wall street reform to do with external threats to our financial stability? what steps are you taking in response to this crisis? >> there is no question, mr. chairman, that the existence of the council has given treasury and market regulators of the united states government an opportunity to constantly monitor financial markets and the exposures of our banks and our financial system to what is going on in europe.

they have spent a lot of time on europe and thinking through what its implications are and might be to our financial system. that work is ongoing. but i think, for the first time, this council really gives the range of religion -- shared perspectives to work together and engaging counterparts in europe to make sure that we are as well prepared and have thought through the various contingencies that might be necessary. >> governor, do you have anything to add? >> pissed chairman, with respect to european preparation, i would -- mr. chairman and, with respect to european preparation -- united states financial institution exposures and

activities in europe. so, right after the three are rows into the content, we began looking at these -- over time what we have been able to do is put in place a system that allows us to check the positions and exposures of individual firms against aggregated data from market sources just to make sure that both we and the firms have a handle on what is going on. other than that, i concur with what the secretary said. >> center, thank you. >> senator. more than adequate capital. i have been told that there would have to sustain losses 40 times, in other words $70 billion or $80 billion to still

be standing. is that about right? >> senator, and the stress test, what we did with this was to assume an instantaneous shocked based on our very adverse scenario which intel's trading losses $28 billion. we also assume of the period of the stress test, credit losses of $56 billion, some of those approximately you indicated. >> comptroller, tell us, walk us through -- from what you know what was going on at j.p. morgan. were they managing risk? were they making money? were they doing a combination? everybody has a major risk. in other words, what was really going on? you had people on site?

>> that is correct. >> they took a position -- a position managing something you already have done? could you explain it. >> that is the key question we are trying to address, senator. what actually happened with this particular investment strategy. and it is a very complicated investment strategy, in terms of its size, as well as complexity. we are looking to determine what the actual strategy behind that investment scheme was. and also if there were any other factors that were driving that strategy other than attempting to mitigate known risks and the bank's portfolio. >> whether it is the banking

arena, or some other our arena, especially in the area of derivatives, you take a position and someone else has another position. >> yes. >> if you win it, you are looking great. you are looking smart. if you lose, you are making a -- maybe not having a bad day. you are not trying to take risk of the market? >> not necessarily. >> whether you really trying to do -- what are you really trying to do? from my perspective, i think banks should be able to take risks, be able to manage that risk. regulators should make sure they know what is going on, from your perspective and the feds perspective. for any risk they take, they might endanger the tax payer. a lot of us, maybe not everybody, but a lot of us are worried about the taxpayer and bailout, and future bailouts.

jpmorgan, as strong as they are, seems from your testimony and others come and what we know, was never in any danger. they lost 2 billion or 4 billion. that is a lot of money to me. i guess it is a lot of money to them. but what did the comptroller's know?e n how many people did you have ed jpmorgan supervising and watching? >> let me address the issue of supervisory strategy with risk- management. number one, we are looking for the institution it to identify and address the potential for serious risk. we are not really looking to eliminate all risk. if we did, you would not have a bank. the nature of a bank is to manage risk and be profitable.

the role of capital is to absorb those areas where risk is either of unavoidable or occurs because of the nature of the business. in the case of jpmorgan's national bank, which we supervise, there is ample capital. there is over $101 billion backing just the national bank, not just the holding company. with respect to the actual supervision of jpmorgan chase, we have 65 individuals who are a core team of examiners who are resident at the institution. on top of that, we are able to draw on a considerable reservoir of skilled individuals with expertise in a variety capital markets and other areas that are brought and as a targeted -- on a targeted basis.

we also work in cooperation with the federal reserve system. which also supervises the holding company. in terms of this particular investment, the situation at the fifth cio's office -- de cio's office, we began to examine this in april. interest to concern intensified during the month as losses and increased within the portfolio, up to the point that the institution itself announced the significance of the losses that were incurred. since the point in time, our focus has been on managing and monitoring the bank's efforts to mitigate or the risk that

particular portfolio with the objective of insuring that there is a soft landing of that particular position. to minimize risk to the institution and ultimately to the insurance fund. >> when it the you think you will finish your analysis of what really happened with all of this? >> we hope to do that as quickly as possible. we also hope to use our findings to inform us as to what potential implications there are 40 other institutions that we supervise. >> thank you. >> senator. >> thank you very much.

there are 65 personnel devoted to supervision. how many are in london? what we have five individuals who reside or house in our london office. >> they are responsible for how many institutions? >> they are responsible for any national bank that has a global operation, and especially with the presence in london, like the london branch office. >> cumming would that be, roughly? >> it would be roughly half a dozen. >> how common is it to have the risk office of national bank located outside of the united states? >> this particular case, the risk office is actually housed and n.y. or the global operations of the cio office are housed. from supervisory standpoint, our focus in supervising that and other global issues is really

directed from our resident team in new york. >> one of the impressions you get is that the office and lunden actually was -- had significant responsibility with the overall risk of the bank. the justification that has publicly been made is that they were making -- taking these hedge positions, taking these positions to protect the bank from the overall risk operation. can you explain? >> the individuals that are responsible for managing the risk and establishing the parameters for the activities that occurred and the london office are housed in new york. that is where the physical focus of our activity has been a. >> and they reported directly to the chief management? >> the chief executive officer, yes. >> you think they have complete

authority to contradict or direct the operations and lunden? >> that is one of the focuses of our review, to determine the accountability of the involvement of management and supervising -- risk-management controls and other monitoring of it. >> when the model for risk was changed, were you aware of that change? did you evaluate the new model? it took place prior to your assuming these duties? you came on board around april 9, and april 6 was the first indication. but was cut -- i think the var is the term. was it evaluated by the occ? >> there are hundreds of thousands of models employed by large financial institutions to

measure and monitor a variety of risks or other functions and the institution. under the authority of the applicable regulations -- we are required to approve their capital related models. there are other models at issue here. management related models for other models that would have been involved in this. gellar situation. we would not have had an express -- we would have been aware of them. we are of looking at our procedures for evaluating other types of models that are used by institution such as j.p. morgan chase. i would point out that one year ago, last april, the occ. published written formal guidance on the use of models by occ supervised institutions.

that guidance does outline the pitfalls and areas in which banks and bank management must assess the use of models and measuring risk to run the organization. >> right now, we face a serious challenge in europe with european banks. who seem to be in a much more adverse condition than the united states banking industry, based on capital and many other measures. to what extent had dodd frank helped our banking position? and put this in a better position? what i think both doff frank and the ability of the council to come together and discuss these things, but the work of the fed and other regulators sitting at this table to undergo the stress

tests and be at the core of making sure that our banking system as well capitalized and well cushioned from the kind of exposures that might have otherwise have been important aspects of our being in a much better position than we were before. and in a much better position than our counterparts in europe. >> yes. i think that beginning and 2008 and for the hearings to by this committee in 2009 on reform, there was a change in attitudes and orientation with respect to existing authorities and with it, the use of the new authorities. and as indicated, particularly with respect to stress testing, capital requirements, which of course are embedded in dodd frank, i think we all have a

much better handle on the positions that our banks will be in in the case of a tale event, the very bad, if low probability outcome. >> thank you. >> senator. >> thank you. thank you for the hearing. i hope it is successful. i know that in any big piece of legislation, 2400 pages, there is going to be some good attributes. i know, from my perspective, as we get further and further in the rear view mirror, it is getting more evident to me that the dodd frank was a political response to -- instead of a real reform and so many ways. i do hope that when this season is over, i hope everyone talking about it saying it is the best thing since sliced bread -- will

move on to real reforms down the road. i do thank you for the capital, i think that is our best buffer financial institutions have. i think that has been a contribution. i appreciate you coming in and talking the other day about liquidation. i do think mr. chairman -- i know how many people want to the rules on the resolution, but the -- i know senator, it is anything but liquidation. it is only dealing with the holding company. the institutions will continue. i just think it would be great for us to understand and maybe think about whether there should be a chapter two. let me move on to the issue at hand. think it is foolish to think that regulators are going to be ahead of bankers, it is -- they

are highly complex organizations. i really think we have charged you with a lot of things we should not have charged you with. the real question come to me, i know that jpmorgan lost $2 billion over a two year. they could lose a billion and we would be ok. but we still haven't dealt with what was really lost. i know people may be looking at this hearing and thinking, where we having it? the reason i think it is important is because this is a real wide example of a what volker may or may not be. i know the terminations are being made about it. since we have the regulators here, i will ask each of you, what does this mean? risk mitigating hedging activities in connection with

and related to individual or aggravated possessions or contracts. you know the rest of it says. but what does that mean? -- institution --tuitio wants aones it is in place, what does it mean? if an institution has tremendous exposure in europe through all loans, a normal loan making activity, does it or does it not have the opportunity once it is put in place to hedge against a downturn in economic activity, or just activities there that may be adverse and the bank. i would like to it you go across and tell me what this means. is this hedging something that you envisioned to be something that can happen or cannot happen after it is fully implemented? >> i think as you quoted, the

right question to ask -- is it related to are greeted positions. you are hedging something that is related to that, then it is permitted. if it is something other to that, it is not. portfolio hedging depends a lot on -- if your hedging some macro-risk that is not related as the statute requires it to be coming to individual or ivory did positions and the risk that come from those, then it is not admissible under the statute. but of course come in the end, the regulators will have to look through exactly the technical issues of what that means. they put out a proposed roll. 18,000 or so comments came through. they are working through that now. it is not whether it is portfolio hedging or not, the statute does not talk about the outcome of talks about whether it is associated with individual

or a grid positions that the firm has taken and put on the books. >> if you would, as you go through, i assume that there is an order to have a political response to what just happened during this political season. we could end up making regulations on hedging that make some of the highly complex organizations -- if we are going to keep them like they are, even more risky. is that correct? >> i think the whole goal here is to allow hedging that relates to risks associated with the positions of the firm. in that respect, it is risk reducing. what we do not want to have risk, and what is -- it is about at its core -- that the rest of us are potentially on the hook. >> senator, at the last hearing, we had a discussion of the

distinction between proprietary trading and i think what we are facing now is the distinction this and hedging trade. this is taken from the statutorlanguage. what would the proposed rule duke -- to put in place some substantive guidelines for trying to distinguish between hedging of individual or a grid positions on one hand and proprietary trading on the other. as importantly, putting in place a set of risk-management reporting and documentation requirements. so, in essence, if a firm said, we are doing this because it is a hedge, they would be required to explain, to themselves as well as to the primary

supervisor, when the hedging strategy was, how it was reasonably correlated with the positions that they were hedging, and have it would make sure that they did not give a rise to new kinds of exposures. i think you ask the right question. what does that mean? that is the reason why come in at the proposed rank, there is an elaboration of both some substantive guidelines and also some risk management and documentation requirements. >> i would simply state come from a supervisory standpoint, i think we expect all the banks, large or small to have robust and comprehensive liability management policies, practices and a place. >> that includes portfolio? >> they could include that. the question is really -- is

there a robust risk-management and place? with controls and limits that allows these risks to be mitigated without introducing additional risk? i think that is the concern or the issues that they are trying to address. >> senator, i think the central issue here is that hedging is a risk management activity to reduce risk to the institution. as opposed to a committee that would get into a spirited nature were your really trying to generate -- i think the whole goal is, i think this has been a point that has been made, setting up a greater set of controls so you can monitor the activities so that the important hedging activity goes forward. if you are getting into riskier spikelet it out to become you want to be able to identify the. i think this is important for the institution to be able to recognize. an important for the regulators

to recognize. >> i know my time is up. and the agency is not the clearly involved in that aspect, but i think you all. i hope that the pressures of what has happened do not cause regulators to end of doing something different than what they think is good for our banking system. i do hope come down the road, we see some real reforms that many work for us a little bit better and not put all of this on putting a regulator on every bank. >> thank you. >> thank you. vella to pick up where he left off. you said you were still here once after looking into some of these jpmorgan accusations. trying to determine their strategy. i believe it was said that one

of the results of a bigger role being a implemented is determining whether whether you are hedging strategy would have to be laid out ahead of time to make a determination of whether it was fit within the boundaries of appropriate hedging, or proprietary trading. you think that these morgan transactions fell and tore out of the volker restrictions or not? would the very nature of having this -- given your office more

guidance? if you want to comment on that. >> i think the point i would like to make in regard to the discussion on the volker rule and jpmorgan -- we do not know all of the fax 50 -- if it would have been applicable in this instance. but the point i want to emphasize is that this is a risk management issue regardless of whether the volker rule was applied. the issues are similar and the sense that, we are there of corporate management procedures in place? for the procedures and reports that enabled management to assess the risks initially? and as they may have developed in the course of the execution of that particular strategy? so, i believe that that is still

a risk management issue. >> i think the comptroller has been addressing the question as whether this is a proprietary trade. i think he is saying if he does not have information right now that would allow him to say whether it would have been a proprietary trade. my point, though, is region regardless of what we conclude about the actual nature of this particular set of transactions, if this proposed rule had been in place, if the hedging exception were to be invoked by a firm, they would have had to ensure that the kinds of risk- management that thomas speaks of what had been in place and they would have been required to document them. i suspect we will find in this case that there was an absence of documentation, both within the firm -- >> would have more guidance on

hedging. clearly, there is a value in the hedging. instead of hedging each individual trade. but you would have at least a little clearer guidance. >> i think that is the intention of these additional provisions and the regulation. and then of course, the ongoing supervisory challenge is to make sure that the information that is received is scanned and reviewed properly. >> let me move to another subject. my time is running out. one of the new tools we have tried to put in place that we worked on is these living wills. as we move down that path, both of your comments in terms of, have you had the tools you need to kind of evaluate these back and forth wills -- and what

standards are you going to hold the institution? a living will will demonstrate -- looking of that and a blue skies environment? we looking at it in a real environment you may have with a breakup of the road? but we get comments on that. >> the statute of soft establishes a standard for evaluating plans. the standard is the bankers code. the requirement is that you need to make a suggestion as to whether the plan could credibly result in an unwinding of the institutions under the standards of the bankruptcy code. that is the operating premise for the development of the resolution plans. as i indicated previously, the fed and the fdic issued a joint role last year establishing the criteria for the plans. if we have been working with the

institutions on their development. under the rule, the first round of plans will be -- for the largest institutions come assets over to wonder $50 billion, that will be due and july. we have engaged in a process with those companies and are in the initial development of those plans. we will have the initial submissions in july. there will be an extensive process of review of those plans following the submissions. >> the only thing i would add is that, obviously, it is not possible to tailor a lot of different resolution plans to a lot of different potential adverse scenarios. i think that is why our review of the plans that are submitted is going to need to include