affiliate. i'm not criticizing my good friends in the state banking system. , you is a lot of authority will see improvements. at the time the loans are being the institutions had very little regulatory authority. why is it important to have preemption? standardsard national . they're more effective and less costly. there is an important factor involving safety and soundness. if the individual states in the name of consumer protection can take actions which are contrary

to a safe and sound operation -- in the early 90's when interest rates were 13 or 14% for home mortgage. you had states which prohibited the enforcement of clauses. 30 year mortgages, thinking they would have an average life of seven years. funded by short-term deposits. loansrohibited those under consumer protection, transformed those loans into 30

beingow yielding assets funded by high-cost deposits. this is one example i have. many examples where you have state laws designed to protect consumers in particular states without the strong ability to have natural -- national laws that are necessary to protect national banks.

it is critical to the national banking act. you. >> you have each listen to one another's remarks, what did you agree with and what did you disagree with? >> i would be glad to take a stab at that. -- i agreed with everything he said. banks are special and they serve a unique function. transferring long-term assets into short-term liabilities, which is critical to our system.

reference to the benefits the prompt corrective action. but ia worthwhile goal, do not think it is a realistic revision. ,riticizing something -- somewhere between 40% of its assets value is wiped out. if you are just see you -- receive institutions, the losses will be put on the fdic system. we have seen in a crisis institutions probably would not tax, buttwo percent

they were not close and they were able to be revived. tremendous savings for the american economy. with respect to sheila, i agree with most of what she said and i respect your views. i agree it was a bank, a run on the banks. andsagree with her solution i disagree with the philosophy that to make a banks a source of liquidity, we have to make them hold liquid assets. there was a brown the banking system. we did not have a federal reserve. we had jpmorgan, which got together the other banks and

said, we need to provide country. to banks this they provided that liquidity. at of that experience, to develop the federal reserve system. when assets are good, the is there torve provide liquidity. if you say that they ask have to hold $2 trillion in government funds in order to provide emergency,n case of you are taking that fun out of the economy. or $6verage could be five

trillion of lending. you are not helping safety and soundness. encouragingg to be -- holding long-term treasury bonds. if it is a liquidity crisis, those bonds will have to take a big haircut and you are encouraging banks to approve foreign debt. , spanish debt and , a much bigger return. i need to go long on treasury and i will mix it in with some foreign debt and therefore, you are creating the next crisis. >> sheila?

let me make a few comments. maybe you understood -- misunderstood what i was saying. i do not like the ability of foreign banks to hold a lot of liquid assets. protection against a run on any bank is to make sure [inaudible] transparency, so people can get a better sense of whether the institution is solvent. there has been very little focus on a greater conspiracy. the market has done that a bit. trend. a good i think it does create some very funny incentives.

>> on pca, it is a perfect no. the former chair of the entity that was responsible for the situations having some sort of process to reach the trigger point was extremely important to us. it is never a happy thing to close a bank. a lot of pressure from .oliticians, stakeholders they do not want to own up to the fact that bank is in trouble . the loss ratio were significant. by definition, you will not get very good pricing. something that could make dca work better is a better

methodology determining when you hit that two percent trigger point. there are ways to improve pca, -- the longer you loss is yourfirst best loss. you need to move ahead. i'm preemption, we will just disagree on that. the consumer protection printing states.dates -- their the not think -- i do think sec did have an ability to repay

supervisory standard, was not clear how that was applied to the adjustable-rate mortgages. i remember having discussions >> national banks funding these loans. i think the standards apply to mortgage origination. hole in theother who approach we are trying to take. there are market factors that

can temper the states ability to go too far. they try to calibrate it. i do not agree with that decision, i regret the sec did that. it hurt its reputation. many states --in we will have to disagree -- agree to disagree on out. >> what are your thoughts? dismissot willing to the suggestion that -- based on the experience from 1980-19 82,

it worked quite well. indeed, because it worked quite well, we were able to get through an extraordinarily .ifficult situation accident thatn you -- that we got through that without spending one nickel of taxpayer money. that is what it is all about. experiencerast that with the follow 2007. , centralleaders banking leaders, and other leaders are basically saying do not worry, the mortgage thing is manageable.

wrongas obviously quite to put it mildly. if we really are committed to the proposition that we can fix to big to fail to the resolution authority and other related definition,by seems to meuthority with aound together framework of much more corrective action. nuancestand some of the you were referring to and they are valid. to make it work is not going to be easy, but we have to get there. thing, i would like

to clarify a little bit, the liquidity concept. on a very i believe enhancements to a regulatory agenda post crisis that one of the most important been in a process has putting into place through the basel committee side-by-side adequacy of capital and liquidity adequacy.

, these are angs single discipline. opposite sides of the same coin. , we alsohink of that have to keep in mind the notnitions of liquidity being used in that context speak about honor convert -- unencumbered liquidity. it is unencumbered. if you look at the way the framework for this single is playing out, it is not unusual to find emerging situations for the amount of unencumbered liquidity.

into the often well up high teens as a percentage of total assets and liabilities. unusual ando longer it is unencumbered. about other concern aspects of liquidity remain very important. i do think we have made progress producing the absolute amount and the relative amount of other forms of liquidity, including repos and all those things.

that single discipline of liquidity adequacy, we look back 10 years from now or something, unless i am dead wrong, which is possible, i think we may conclude that this is one of the best things. at the end of the day, all of us , the straw that breaks the camels back is not capital. it is liquidity. it runs on banks and things like that, which are pushing a button on a computer. if we get that right and if we get corrective action close to right, those two things would have a beneficial effect.

not just special banks, but on other intermediaries as well. i agree with the premise that corrective action is a very useful supervisory tool. methodree that it is a of protecting the banking system in times of financial collapse. that was helpful in preventing or dealing with financial collapse. liquidity, you could take it from the perspective of, i really want a system that will be 100% safe and not have failures. you have a system that has 100%

liquid assets. it has very high capital ratios. it is a balance. safe andnt to have sound banking system, you will have a system that is not working to provide credits the economy. if you do not have enough safety in town, you'll have risky institutions. banks are supposed to be risky. i think the commercial loan can be very risky. risk.are designed to take the liquidity rules being excessive.ly are

why would the rules say you can invest 100% in u.s. treasuries or italian debt, but you cannot invest in have liquidity present for the market money -- for the money markets. rationale tosome achieve some member -- the emphasis on safety and sound will be the predominant regulatory goal. it will not work in the long run. , -- there should be more capital. this is on reducing the reliance

on short-term funding. why not just raise the reserve requirement. someday someone will explain to me. some of this stuff is counterintuitive. this emphasis on having a lot of sovereign debt. >> they have a chance to talk about fed policy for just a minute. sheet look at the balance of the fed today or yesterday or , something in the -- 2 of magnitude of

,rillion dollars sitting there .he return on excess reserves that, by the way, it is not wholly independent of my suggestion in the essay that a transitioned up mechanism for monetary policy. you and i talked about this on other occasions, but we will have to figure out what the hell we're going to do with those -- without $2 trillion. schedule?ks still -- still special westmark how has the role evolved over the last 30 minutes -- still

special? how was the role evolved over the last 30 minutes? anyone want to have a crack? >> i cannot resist. , includingdard , theng back at history last 30 years have been pretty tough in terms of the incidents shock.us, if you do as i have, some comparisons, and you look at the number of serious financial crises occur in the years -- we have hadhe

more in the last 30 years than they had in the 30 years leading .p it was the panic that created the reserves. it has been a rough go. the last thing that nags at me is the following -- do such a good job of managing all of these crises that we created a false sense of security for market participants that we would always be able to pull a rabbit out of . hat

i am not smart enough to know the answer to that question, but it is something that nags at me a lot. we will continue to work to the to thewith enhancements regular policies and practices, getting too big to fail. we have got to have a much more creative framework. people love to talk about contagion and risk or systemic risk. it is extremely difficult to anticipate in advance the specific events that produce and systemicsk

risk. it is very hard to do that. our track record of achieving that is pretty low. mathematicians, statisticians, .odels if we want to understand more about systemic risk and contagion, we ought to leave the models in the closet. engaging smart people in an aggressive brainstorming session, not haunted kate upton thinkingnot aggressive . how do these things happen question mark what are their

triggers? that,hen we get better at we will never be perfect and i do think those thoughts are extremely important in terms of our collective ability to come out of the mess. -- the last dirty years. to -- >> thisable industry loves models. >> i think most of them belong in the closet.

>> there was an overreliance on models prior to the crisis. there continues to be a lot of them -- a lot of them. they are based on historical data did nothing to do with what was being generated prior to the crisis. obviously, it technology has made markets quicker and that is reality. to reduce the risk of stress and

, i do think the increased concentration of the industry the emergence of large financial institutions was implied too big to fail status has created a big part of the crisis. i wanted bondholders to take .ome of the risk of loss .lackrock, they are just find no offense to them, but that was not right. could not even do that. ?hat kind of system

they would be a little more cautious before investing. >> i basically agree. i have slightly different aspect to it.

we do not understand what caused the crisis. the information is to starting to come out. my concern is that the regulatory pendulum has swung to that we do not know if it is the right answer, we do not know what it is going to do in terms of slowing the economy. we do not know what it is going to do in terms of being the cause of the next crisis. let me use an example. tremendous emphasis on a reward for financial institutions. securities.backed

>> the financial institutions tell them, create a mortgage-backed security. secondly, in the examiner who looks at a bank in 2004 and saw her concentration and , thisge-backed securities is a very well run organization. way to herall the .ou think it is safe and sound

stocks, is it going to be farmlands? we don't know. investments --wn we will wind up hurting the country in the process. sufficient liquidity, stress tests all make sense, but it has to be a balance. >> let's talk about a topic that even -- each of you touched on. the shadow system. a three-part question. -- howhat that gives the shadowthe st system?

anyone interested starting up a hedge fund, pay attention to that last question. all, some of you may know that i recently put together a piece on the shadow banking system. i presented that to a group couple of months ago. that is available on the website for anyone who wants to take a look at it. this was one of the most set out tohings i've put together by myself. i'm very old-fashioned. it is very, very complex.

all, one of the complexities arises from the fact that the term we all use about shadow banking is wrong. most of what is in the shadows is not banking. experience in doing my work in my research was as follows. that has a lot of isple -- a lot of support the problem with shadow painting or shadow financial system, it is a one-way street. it stops going from the traditional banking or financial system to the shadow banking based on my work, that does not appear to be to be right. a two-way street, not a one-way

street. it is complex and it is a big. just to give you one example. very hard to put this together, but you can get access to some youtube photos today. levels --s viability one oflook at the data the shocking things is that in

data, thed on the size of the shadow system is 20 trillion, give or take. -- 14.7 trillion. by the middle of last year, the size of the shadow hill -- that is amazing. systeme of the course was now 15.7 trillion. needless to say, talking about

trillions, as is not small change. about ways in which we can better get our arms around this thing i would want .o make it clear in the paper the work being thrown by the owei-- the national colleagues at 33 and liberty in new york, quite impressed with the progress. progress is being made. there are specific conditions of the risk management vintage.

one of the things i thought was a pretty good argument in this was the financial infrastructure stuff including settlements and all of that because right now, when you are a little bit way from the five or six or eight or nine best managed clearing systems. there are now dozens of them around the world. -- the discipline is -- i suggest that for all of those mechanisms, there

should be a minimal standard whereby stress test and related techniques, we should have a any one of those organizations, any race in the capacityuld have the that on a business day, they could survive the simultaneous fault of their two or three largest participants. we have a lot of ferc to do to get our arms thoroughly around the shadows.

>> dodd-frank tried to do with issues. under title i, it gave --ulators the ability to .o-called tiger one designation this is one area where it has identified as a problem and asked the fcc to address it. my view is more activities an institution oriented. if an institution is reviewed as unable to fill a traditional bankruptcy without disruptions, the best answer is to make them

downsize until they can be. a bankruptcy process. accept more and more to their business and put them under fed supervision is not the right solution. issues. the there was a big overreaction to that report, but i do think the issues they identified should be through activity regulation and mostly by the fcc. it requires the agency to move forward and get ahead of these types of problems. there are mechanisms to deal with the shadow on. they can work if they are used

properly -- appropriately. the shadow sector works great in good times. in bad times, it kind of goes away. welled that rail -- regulated. worry peer-to-peer lending is a small example of where you're having trouble, a separate mechanism. quite lightlys regulated compared to a bank or a community bank. the competition is nice. there has been a problem with credit availability. how much of that is because they have developed a better mouse cat -- mousetrap. they do not have the same .egulatory expressions

they will not want to go to the platform and put their money and to make ones anymore and helpfully, you will have a robust banking sector. think, it has to be in the focus of regulators when they see these new types of regulators. this is one area with the consumer bureau. better disclosures could be helpful. we want to make sure -- everything works in the good times.

>> if it means everything that is not regulated by a federal banking agency, i think it would try and bringto tryof the institutions -- identify those institutions that failure would cause a systemic problem. shadow to regulate the boxing system and i do not think it is necessary. i also agree with sheila that it could be regulatory arbitrage. iso not think the solution to impose the same regulatory

regime on nonregulated institutions. banks and net gives other entities the competitive advantage. let's shift gears. asset bubbles, over the last 50 years every concert has been associated with asset price bubbles. actually distinguish the train those who pose a systemic risk and those who do not? say, nobodymon to knows when there is an asset. i think it is hard to know when it will pop up. there are some things regulators

can't and shouldn't do. is, more robust -- they haven't come where you can pay back the loan. you are not basing it on the fact that the asset is going to appreciate. this is being done by nonbanks. inflatee, that will these houses. this building is exactly what we had. leverage is another way.

i applaud the occ for its leadership. the absolute type of thing the regular baiters -- regulators need to do. i think monetary policy does contribute to asset bubbles. i do not think it is hard to call it, it is important to know who is going to learn. knowing when it is going to turn is very difficult and telling people to stop the madness. when the music is still playing, you have to keep dancing. that kind of dynamic is something regulators have to defend against. some of the things we are seeing now will help constrain some the silliness.

>> the practical matter is that when you're in the middle of an asset bubble it is almost impossible not to stop it and .et me in 2006, the regulators issued downt guidance to stamp music's criminal court. they were pulled before congress -- there werehere attempts to rein in fannie mae and freddie mac. they were undercapitalized in 2004.

one chance in 500,000. he became the regulator from hell. that is what he was called. he tried to tempt down -- camped on spending. it happens over and over again. would you are in the middle of a cap it downou try down, you'll be accused of being a regulator from hell or hurting the economy preventing disadvantaged

people from getting a house. right before the house passed legislation, what would've happened in 2005 at the easton going -- it wasn't buying the loans that the banks also money. if the regulators had said, banks, red. reaction would have been hard on the agencies. is too muchgument political pressure, i do not buy that. that is why we have three good strong people. that is their job and they need

to do their job. we will let the craziness go on again because congress will whack us if we don't. a lot of pushback on the .everage loan guidance we have much tougher leverage ratios. area.of support for that i hope to see that finalized soon. the regulators will have the courage to move ahead. that we needth you to do something.

it is not just -- i am talking about 2008 when just about everybody knew we had a problem, congress passed legislation, directing the sergeant to ensure that fannie and freddie are .roviding home mortgages created standards they would .ave to meet with guidelines to encourage the use of innovative mortgage products. the 1980's, regulatory forbearance put into law.

other examples. writer torry capital for commercial -- regulatory capital for commercial loans were instructed to be given 50% wait listing. au cannot simply say, put up red face. if they are wrong and there was not the levels, we can be -- i amble for causing sorry. i know people disagree. get out there and explain what you are doing and why you're doing it. if you are quite about it, the people who don't like it have a lot of political influence.

you have to get out there in the public domain. if you could not explain what you are doing, maybe you should rethink it. there are tools that need to be -- i wish congress would just stand down. .ositive influence role through structured overnight settings. i do not think they are the people with the technical expertise. they go to the comment letters and have -- that is why they have these jobs, to make these kinds of decisions. i think it is regrettable and i --r what you are saying,

>> is hard to go to the public we will take away your credit because we do not think buying a home is a good idea. >> what are your thoughts on asset bubbles? housesspeculating and and thought they were doing the right thing and it makes sense if you believed in the bubble. i do not think you go to the -- s and say >> there are other countries that ratchet up down payment requirements. >> absolutely. those are two countries, but there are half a dozen i know of

that did exactly that and it worked. >> they aborted it, and we did not. >> the final closing question? based on what we have discussed this morning, what is the one recommendation you would give to to the following participants. the governor -- the government, consumers, and financial assistance provided. simple. balance the budget. one of the reasons why balancing the budget is so important is because that will give us more ram to finance private investment. if you want to get the economy back on track, one of the things

that is going to -- have to happen is more private investment. providers -- ice tend to put regulators in that same category. that for financial service providers. of all the things that are being , expenses, building over, regulatory framers, lots of stuff going on and all of that is very good. what i would like to see on top of all of that good stuff is more attention within financial institutions of all kinds. more attention laced on the fact

ultimately, those are the things that are going to provide the glue that really makes banks fact makes other forms of financial institutions also special. one of the things i would love payday lenders to disappear off the face of the earth. [laughter] framework, tot provide much more stimulus and emphasis within the regulatory community and banking community thatutreach programs really make progress in reaching lowwith banking services to

income and other members of our society who could use some help and could use some education to begin to put that nightmare behind us. finally, which gets back to the bubbles question, greater transparency in terms of things that really matter. one of the things that is all the the place, including mortgage space, but not limited to that, if a lack of transparency. -- it is muchngs too widespread -- what i like to call embedded leverage. embedded leverage is one of the things that grows out of derivatives and other highly

structured complex financial products. we have got to do a better job within the industry and the regulatory community of trying to get much more effective disclosure, particularly as it surrounds that concept of embedded leverage. that was probably too long. >> don't worry. we still have time. sheila. >> i think getting our fiscal house in order, taking the burden off the fed, monetary policy can only accomplish so much. we need more infrastructure spending. i think you can do that in a way that is fiscally responsible. those are the kinds of discussions we need to be having. we need -- the fed can't do it. with all thess, problems it has on unemployment, why there is not more focus on

growing jobs, i don't know. that benefits everybody including the banking sector. to get this economy going again. for financial service providers, i think, think for the long-term. think in terms of long-term customer relationships. think of making money by providing real value, not through hidden fees or constructing complicated derivatives that people don't really understand. give back to customer service. whether it is a business or a household, provide them good value. that is going to make your institution more sustainable and more profitable. for consumers, i think they need to -- a couple things. they need to get financial oform to combat those issues pushback that regulators get

when they try to institute reforms. i think we need more of a counterweight from the main street folks. they need to get more involved and put some political pressure. as consumers of financial , i think the consumer bureau is helpful in terms of getting better disclosure and --urring the industry encouraging the industry to develop a more simple products. if they do provide things where the fees are hidden, consumers need to be prepared to protect themselves. if you are unhappy, go someplace else. there is a lot of thinking with customer relationships in financial institutions -- we probably make it too hard to change account relationships. i am talking about brokerages as well. another thing the consumer bureau might think about, making

it easier to move those transactions when you feel like you are not being treated well by your financial institution. that would be helpful in improving the sector. agree with the comments i have heard. thoughts. my i think the government should start to think about long-term policy and not short-term political gain. of trying to get the next headline in tomorrow's paper. what is best for the united states country? financial institutions, really screwed up. i hope they have learned their lesson in terms of what happened in the reaction.

i think some financial institutions should reconsider whether they want to be in the consumer business at all. banks, especially many commercial lenders, i am not sure that they are the best institutions in the consumer business going forward. if they are, they have to have a kind of ethics that we have discussed right here. consumers, my advice would be, just because you can get a loan doesn't mean you should take it. [laughter] >> there you go. any questions from the audience? over here. >> good morning. [indiscernible]

>> first of all, i am not representative of the banking industry. i can't speak for the banking industry. i am sure things i have said today, the banking industry -- let me give an example of what i am talking about. i recently read a paper which talks about mortgages. thathought had been decimal rate mortgages were a big problem because when the rates went up, people were getting loans for low interest rates and they had great shock a

few years later and they weren't able to repay. paper now says that is not what happened. for many, there was no rate because interest rates went down. there was no increase in monthly payments. if you look back over the past 15 years at the performance of decimal rate mortgages, there is -- verylation between little correlation between adjustable rate mortgages and mortgage is that the faulted. they defaulted without an increase in their interest rates. there is a lot of regulatory effort -- it ultimately didn't happen, but for providing penalties for adjustable-rate mortgages. it turns out that would have been an inappropriate reaction.

i think it can be a very good product for people who are moving or starting families. it would have been a benefit to the population that could have easily been taken away. that is just one example. certainly i think credential ,tandards, better liquidity better and more reasonable capital requirements, stress tests, these are all things that make sense. make sure that the actions we take are based on facts and not conventional wisdom. think the industry -- there has been some industry-sponsored

research and other kind of reinventing history, creating fuzziness about what causes prices and whether that serves people interest. we don't know what the solutions should be. adjustable rate is adjustable-rate. they defaulted at much higher rates than prime mortgages. it is silly to suggest otherwise. if you want research that does not reflect the industry view, go on the website for the center of responsible lending. there was a significant size of the troubled mortgage market that were flippers. they were professional investors. that was out there. there were also a lot of people living in lower income neighborhoods who once had nice, safe, 30 year mortgages who got refinanced and the default rates

were very high, much higher than fixed rate sub primes. there are definitely different perspectives on that. >> i feel-- did the industry have any responsibility? is this all just the government forcing them to give poor people mortgages or were borrowers ripping these investors off? was it all the borrowers' fault? i heard that in 2006, 2 thousand 7, 2008. i am still hearing it. take some responsibility for this. [applause] >> we have time for a couple more. then we gobuttal and to the gentleman in the back. >> i respect you, sheila. [laughter] heroine. but what i am a little trouble

with is your reference to industry-sponsored research. i don't think that is industry-sponsored research. it may be. if you look at the data i have looked at, i think you might want to -- >> just look at the default rates. >> why don't you take the discussion off-line after the fact. gentleman in the back, question. >> yes, since we are at a symposium honoring the 150th anniversary of the lcc, i must ask this. in your book, one of your proposed reforms included abolishing the lcc. future, do you

still espouse this? if not, how has the occ altered its behavior to cause you to change your mind? are there any particular rules, guidelines or other regulatory actions that you would point to as evidence of this improved behavior? >> i think my experience with thatcc was during the time predated tom curry's tenure here. the fdic board. it was one of great frustration. there were a lot of disagreements. i felt as opposed to being a partner, he was an impediment. i think having so many regulators can complicate supervisory response. having a framework where you had the fed and the regulator over

the insured banks, that would be a merged fdic-occ. it seemed to make some sense. i think tom shared tremendous leadership here. the examiners are some of the best in the country. they have been top-notch. i don't think congress will abolish it anytime soon. something else is dealing with their funding base. they have to rely on examination of these which is difficult, especially as the industry has become more concentrated. they have the advantage of having separate funding sources. trying to figure out a new structure, there is some combination of shared funding that would make it a more strong and independent agency. that is something i hope would be doable.

if you want me to complement tom, i think he has done tremendous work here. i do think the examiners are some of the best and most sophisticated among the regulatory community. that said, unfortunately they impediment, not a partner in trying to get these problem's fixed. >> last question. >> thank you for a great panel. my question is about the bank funding model. banks are supposed to be a liquid. they are a liquid by design because they borrow short and lend long. if you look at the regulatory proposals, the liquidity coverage ratio which requires more liquid assets, the stable funding ratio whose status was unclear, but the governor makes noises about getting u.s. banks to issue longer-term debt, it regulators-- are

suggesting that the borrow short, lend long model is no longer tenable? or that banks can no longer do that in the same way? >> that is what they are doing. isi think the issue non-deposit funding and debt financing and whether that is short or long-term. onre was too much reliance the commercial paper market. that was an increasing portion of the liability structure. it was quite unstable. i think in terms of the non-deposit component of the the issue on long-term debt is good. that will have the indirect affect of making the uninsured deposits more stable because you will have a thicker level of long-term uninsured debt. if the institution fails, it will protect other shared deposits, which will make funding more stable. i think that is the right direction to go. distinguishneed to

between deposit and non-deposit funding. >> changing the nature of banking, which is what is happening, we are changing how banks are regulated, how banks will resultthat in a different impact on the economy. i am not saying it is not appropriate, but there is no free lunch. there is going to be higher cost of borrowing, higher cost of credit. maybe that is good but it is going to be an impact. we can have that model, but it is not free. >> excellent. i would like to thank each of the panelists. thank you so much. [applause] [captions copyright national cable satellite corp. 2014] [captioning performed by national captioning institute] >> next, a look at the conflict in syria. then, afl-cio resident richard

trumka and a forum on immigrant workers. after that, q&a with wayne frederick. content, i think we all agree, should remain free from regulation. said, thatawford has is confusing the conversation for the sidewalk. of course we want the conversation to be free and unregulated. the fcc has no place regulating content online. they have always made sure the communications pathways stay open. today we have a regulated phone system. doesn't regulate what i say but they make sure the pathway is open, affordable, available, nondiscriminatory and fair for everybody to use. >> it is crucial to think about whether those platforms are made opened a way they have historically. the internet has grown up as a network where anyone can communicate. anyone can get online.

a tiny company can get access to the network and become a huge business. changeital that that not as the internet evolves. >> more opinions on the fcc open internet policy and the flow and speed of web traffic tonight at 8:00 eastern on the communicators on c-span 2. on tuesday, the international institute for strategic studies hosted a discussion on the syrian conflict and the influence of the militant group isis. this is about an hour. >> i think we will go ahead and get started. thank you all for joining us this morning at the international institute for strategic studies u.s., the washington home of the iiss. i am the managing director of the iiss u.s.

for those of you who do not yet know us, the iiss is a global think tank headquartered in london with research teams and offices in bahrain, singapore and washington. the bahrain and singapore offices grew out of regional security dialogs pioneered over the last decade or more. the institute also publishes "survival," and international , as well as a book series, some of which are on display in the back of the room. ss u.s. ise, the ii a critical part of the network. we seek to bring a global perspective to washington and to convey washington's

perspective to a sometimes skeptical international audience. today's discussion will be very much the former. we are very pleased to have emile hokayem here from the middle east office to share his insight on the tragedy continuing to unfold in syria. before i introduce him properly, i should mention that the iiss is a membership organization and those of you in the audience today who are interested can learn more. there are some flyers in the back table or you can speak with me after the event. those of you following online or on tv can visit our website, iiss.org, to learn more. the structure for today's event will be the following. providing some remarks for 15 to 20 minutes and i will be turning to you to moderate some question and answer session. prior to joining the institute,

emile was a political editor and international affairs communist from 2004 2 2008. he served as a resident fellow at the stimson center here in washington. he was researching strategic security and political issues, things he still does for us. in regionalen security in the gulf. he has testified in front of the u.s. foreign relations committee on syria and lebanon and spoken on gulf affairs in front of various audiences. e is embarrassed. he wants to cut to the chase and begin these talks. leave this introduction there and let him take the floor. >> thank you. thank you and good morning to all. it is a pleasure to be back in

the seat because it gives me -- in d.c. because it gives me an excuse to run away from the horrid warmth of the gulf. no one wants to be there at this time. it is also ramadan. i can tell you that there is a new game in town when it comes to syria. it is the search for the new and perhaps more derogatory acronym for isis. if you are on twitter or read what isthat is perhaps happening in the arab world these days. youe from that, i encourage , in arabic, isis, there are many ways one can play with those letters to find something that will make others fume a bit

more. they are already pretty extreme. what i am going to do in this presentation, because i expect there will be many questions , or the regional fallout and spillover and u.s. policy, i am going to focus on syria. when i look at the current debate, syria has fallen off the radar. in thes taken prominence public and policy debate. what is happening inside syria analyzed.ot well there is not much great interest. look at the number of journalists who flew to baghdad for the covered -- compared to the coverage of syria. syria is a lot more dangerous, but still. what is happening inside syria

is not getting nearly enough coverage and the policy attention it deserves. i am going to spend most of my time doing that. i think it is fundamental to understand what is happening there. arereasons for the conflict going to last many more years. iraq that the spillover cannot be contained. containment is not a strategy. it is an avoidance strategy. let me start by making a few points of warning. the first one is that there is tendency to embrace broad narratives on it comes to syria too easily. in late 2012, early 2013, the narrative was that the rebels were winning and the regime was collapsing. in recent months, it is the opposite. understandably tempting narratives. they are also simplistic.

secondary level of development that has a direct impact on the big picture. , whene 2012, early 2013 the regime was weakening, it was also reorganizing to push back. it did so pretty well. two months ago, the regime regioned most of the alongside the border with lebanon and everyone focused on that victory, which is a very important victory. it secured the highway between rebelus and -- it cut supply lines, etc. at the same time, people ignored real rebel advances. -- when it doesn't fit the broad never thosewe tend to ignore

facts. there is another point of warning. resist the temptation of being intellectually lazy. my comments refer to the tendency to describe the syrian conflict as a proxy war. i say this for two reasons. direct iranian intervention. terminology matters. it is not proxy. there is direct intervention with uniformed percentile fighting on the ground. there is no denying that there is a strong regional aspect to the struggle in syria that exacerbates the violence. but to only limit one's analysis to that is in a way satisfying and convenient because it allows us to do what we like to do, which is engage in geopolitical

analysis. if only russians and americans could get along. if only saudi's and iranians could get along. local and, the transnational dynamics of the syrian conflict shape events on the ground a lot more than the regional competition. , once you accept this, you accept the limits of our understanding of a lot of those dynamics. it is much more difficult to understand. it also makes a lot of of the tools we have at our disposal much less useful. arming,y, arming or not sanctions or no sanctions. this is a problem. driven by analysis is the tools we have at our disposal other than the other way around. in three years, the emergence of local and transnational actors

that have their own legitimacy, their own way of mobilizing fighters and support, noting .egitimacy, acquiring resources the conflict today has self-sustaining dynamics and all the ingredients are there for a long-lasting war. one can identify disruptive events and we can go through that later. in a way, if one looks at the linear trajectory from today, the syrian war has about five to 10 more years. the war economy has created ample local resources for the various fighting groups, whether they are on the regime side or the rebel side or the jihad a side, to sustain their own fight. local mobilization happens along communal lines. there is also transnational mobilization which i will get to in a second.

small and light weaponry is available in sufficient quantities. today it is not about whether this weaponry exists. it is all there. there is perhaps changing actors. in the hands of at that level, all the ingredients are present. finally, a few points here. we also have to resist the temptation of drawing direct links between rebel groups and regional funders. i am going to give you a very specific example. when the islamic front came, if you look at the commentary, everyone says this is a saudi

creation. why is that? islam and one of the main leaders of islamic front had a father who was a syrian cleric. therefore, it was natural that somehow it was a saudi creation. except that the father is actually close to -- in saudi arabia, the quasi-muslim brotherhood saudi affiliate. it was at odds with the saudi government for a long time. getas very difficult to saudi officials and supporters to come together. the agreed. there was an arrangement over time. but there was no direct relationship of control, command , between those two groups. it makes our analysis easier if

you assume that. the reality on the ground is a pretty different story. has to do with saudi arabia. there is a pretty formidable force. sal;afi that it is doesn't mean they report to saudi arabia. those who are familiar with sala fi ideology knows that they e because oful circumstances. there are many others who resist that. there is still an ideology influx. they haven't really decided where they are purely get -- where they are. there is a perceived or assumed fonder and the rebel

-- it obscures more than it helps. so today, and this is going to be the crux of my presentation, what we are witnessing is the de facto self partition of syria and iraq. i am no iraq specialist. extremelyocess bloody, but over time it is likely that levels of violence will drop. those who know the -- enough people will have been killed. there will be forced or voluntary cleansing, which is already happening. are talking about 3 million refugees plus. this will make a political sentiment much less likely. we will probably see quid pro quo arrangements on the side, but the settlement is much less

likely today than ever before. let me turn to the regime a little bit. present, my assessment is that the regime of assad is in a better situation since at any point since early 2012. let's be honest about this. if survival is no longer threatened in the medium term. pressure on damascus is at its lowest in two years. hamas has been largely reconquered. was a falsection political horizon all along. he saw the election as not only a show of defiance and cohesion and legitimacy, but also as a way to force the hand of senators. there weren't many people inside think it islike to

a totally polarized environment but you had many actors in segments of syrian society that were in a state of denial, they didn't really want to be forced to take a stand. in fact, the election was useful for assad in a way that it put pressure on these constituents. with the build up to the elections, the banners, the color, people demonstrating, there was something to get excited about. way, it has worked in the short to medium term. it allowed us odd to begin -- assad to begin the process of rebuilding the pretense that he leads the state. the reality is that the assad regime has also retained a military edge over the country.

it has rebuilt its helicopter force. it has adapted militarily. there are downsides to it. today, it remains the dominant military actor inside syria. conquerme goals were to areas where it matters. the central corridor. to conquer territory, not people. this is the fundamental point. it explains the military strategy. to conquert important territories and push out people of important areas. he didn't want to commit the economic resources to regain the loyalty of people. it may have been impossible to start with. why spend precious resources at a moment where you are fighting backour survival to win

the loyalty of people who have suffered so much? this is a key point. this, he shifted the burden on rebels, international agencies, neighboring countries, the friends of syria, etc., to take care of massive numbers of people and create paralysis on that front. my point here is that the humanitarian tragedy, rather than being the unfortunate outcome of the fighting, is actually the result of deliberate regime strategy. this is a key point that is not well understood. events to see wars as where everyone is bad and, let's not take a stand. the reality is that the regime has pursued this as a way to debilitate. that being said, there are challenges ahead for assad.

the first set of challenges is the following -- a necessary condition for the survival of the assad regime was its transformation from state into a collection of militias. assad could not have militarily countered the rebels by just operating as a conventional military, deploying, fighting conventionally against all these rebel forces. loyal,to build a more but also less costly unit to support the fight. he encouraged the development of that areased militias loyal to the regime. but have their own behavior, their own set of interest. they start differentiating

themselves from the regime over time. some of them are more radical. some of them are less radical. there is a clash of interest with regime forces. organizationash of between those various elements. over time, i suspect this will erode the coherence and sense of purpose of the groups aligned with assad. but this is not the short-term problem for us odd. that is manageable in the long-term. i am going to give you a couple of examples. was the u.n.there to getent with hamas civilians and fighters to agree to relinquish their weapons. from those in

hamas who felt the deal was uncalled for, the local commander of the national defense force, opposed the initiative. was very difficult to implement. assad had to send one of his top security officials from damascus to make it happen. it was a pretty traumatic process in showing that assad controlled the ground. nds and another group have operated largely independently from the syrian military, which led to a lot of confusion and military setbacks, including the armenian village. that the rebels and some of the radicals did

well militarily, it is just that the forces supporting assad didn't communicate well, didn't have a sense of the battlefield, and that was problematic. in the south, the national defense force see themselves as a local protection force. they don't want to be involved in the fighting. resisted they have orders to go and fight sometimes. my point is that in the short term, this is manageable. however, this poses a problem tries to rebuild a functioning state inside syria. this is a challenge in the new period. engage some degree of stabilization and reconstruction to show to all the fence sitters and urbanites

who look at him as a battle -- a better alternative, that he can deliver. that necessitates a vision. it necessitates a will. it necessitates a strategy and it necessitates resources. if you feel that the cost of fighting was already massive, wait until you see the cost of restructuring. be moreuction can costly than the fighting itself. lebanon being a great example. who is going to provide that? how do you actually convince the local actors who have risen to support us odd in his moment of aed to actually accept centralization strategy here? these are groups that expect revenge, rewards, respect from central authorities.

isther problem is that there dependence on foreign supporters . it erodes his claim to actually embody a sovereign legitimate state. i was looking at some youtube videos from these shia radical groups. one of them shows fighters dancing with their kalashnikov, saying we are not here for but shot. -- four assad. broadcastps need to their success to build a narrative that they are fighting for the greater good of the shia community. that a roads assad's pretense of being a nationalistic settler. on twoquickly touch

points. the phenomenon and how it plays inside syria. example of best local and transnational dynamics at play. isis is not a creation of saudi arabia, despite the conspiracy theories. it is a product of the failing governance and polarization in iraq and syria. wererowth and its reach not necessarily surprising. today, what we are seeing is the effective merger of western iraq and eastern syria and a constant movement of money, resources, fighters, across this border. he real surprise is that isis which at first pretended to be a vanguard organization, today has announced perhaps too

soon that it attempts to the estate. tate. be a s this may be the downfall of isis. vulnerable.uch more you create expectations. this is actually one of the very contentious points of the syrian rebellion. isis'assad benefit from growth? i was talking to a few regime associates recently. they have mixed views on this. some of them say it benefits assad. first, it validates the narrative. if only you had listened to us, then we could have avoided that. welcomes the focus on

counterterrorism. this is the language he masters. he has done so during the iraq war. an expectation that there will be cooperation with some rebel groups that are under pressure from isis. you start by technical cooperation and go to those famous truces and peace fires that we have seen left and right. the debate in the west over what to do about isis is a source of delight. just today, there was yet another op-ed in the new york times arguing for western cooperation with assad against isis. this is good for regime a row in a way. others argue that it is not good news for us odd, that assad has failed to get westerners to embrace his view. i think here, we should give

.redit to john kerry i have a lot of things to say about u.s. policy but on this specific point, i think there is a centralizing of the problem. when john kerry says us odd cannot be ace -- saiys assad cannot be a solution, this captures the dynamics at play. there is a lot of frustration among regime associates that this narrative hasn't really taken hold. there is also strain on allied militias that have to fight on several fronts. iran has inherited two failing regimes in iraq and syria, a massive investment. can they do it? iraqi militias, they have to decide. do they go back to -- ?

the news is not necessarily good for us odd. -- for assad. in the short term, the regime is on solid ground. i have spoken for much longer than i should have. sorry. thanks very much. >> thank you. that was fantastic. i am sure there are a number of questions in the audience. please wait for the microphone and please beay sure to identify yourself and your organization. we will start here in the middle. >> i am a member of new york presbyterian church. my question, i want to get specifics on syria and the

the peopleovement of . in terms of the total population, how many are out? just to get a sense of the specifics of it. that is my question. >> sure. the numbers are quite frightening. 3.5re talking about around and 7 milliones internally displaced people. many of those are located in refugee camps in the north of syria and they are difficult to access. there are also another set of dilemmas when it comes to u.n.-provided help. whether to provide help directly across the borders with the risk

of alienating the assad regime, there are legal considerations, perhaps considerations that according torcome international humanitarian law experts. the help is not making it this way. the numbers are just beyond frightening. the magnitude of the crisis is stunning. it is much bigger than what we saw in iraq. another related problem, which is the housing infrastructure has been very badly damaged. again, it doesn't compare to iraq because of the nature of the fighting. entire neighborhoods have been leveled. the numbers i have are around 50% of housing infrastructure in hamas, aleppo, etc., is totally damaged.ery heavily even if the fighting were to stop tomorrow, we are talking

about a five to 10 year process to rebuild the units that are needed. that is assuming the money will flow. where will it flow from? syria is a conflict that has erupted at the worst possible time. peoplek to ngos, other active in providing relief, and they basically say they are meeting only 25% of the needs. heartbreaking. my fundamental point here is the humanitarian tragedy is a deliberate regime strategy. it is not the unfortunate outcome of the fighting. until we totally accept this, we are not going to make much headway. the u.n. resolution was adopted several months ago, practically

nothing has been implemented. u.n. officials are despairing about this. there has been no progress in terms of direct delivery of aid to rebels. you have millions of displaced people. >> [inaudible] >> 22 million. >> what is going to be left? >> johns hopkins university. what are the two sides fighting for? do the shia expect to retake sunni territory that has been lost? what is the near-term goal? what should the u.s. hope for as a solution? >> i think the various groups

have adjusted their expectations. i think that assad and his allies don't hope that they can retake all the territory that has been lost. why waste those resources conquering land that is barr en, where you have refugees that you would have to take care of? the point is to secure this area, make it economically viable. it is not necessarily economically viable. those who know the geography of syria know that the fields are somewhere else. people talk about the sunni state in syria. without a large city, it is probably not very viable. -- thisfficult to say is why i say that what we are witnessing is the self partition of syria.

none of these units are viable on their own. there will always be a degree of trading between all of them. i think that assad has a pretty realistic vision of what he wants to achieve in the short-term and midterm. his problem is maintaining coherence among the various groups that support him. you cannot take this for a given. we have spent time describing, analyzing, and disparaging the factionalism and fragmentation of the rebellion. we should spend an equal amount of time looking at the factionalism inside the regime. i give you examples. we should not overstate that. this is a medium-term challenge. the second issue is, -- look,

there is a lot of ebb and flow among rebel groups. i gave a presentation that the big groups that i was in touch with. they have taken very heavy losses from the fighting against isis. i was talking to -- a few months ago -- to an official who told me that, in two months of fighting against isis, they took 500 casualties. dead fighters. just how many -- guess how many they lost against assad forces? 2100-2200 fighters. in two months, you lose 500 and in 2.5 years, you lose -- so, the fortunes of these groups vary considerably based on support and they do not have a

clear angle about what they want. they are fighting for their survival and they need to secure territory and resources inside the territory to sustain the fight. they become very self-involved. it is all about their own survival. this is the opportunity that was lost early on. there was a more positive spirit to the rebellion. you know, a forward-looking east -- ethos. that has been lost and this is problematic. it is hard to imagine a coherent rebel entity in syria. >> great. the gentleman right there. >> thank you. my name is edward joseph. this is an excellent presentation. you made the point that was

excellent about the need to be precise. i would like to ask you for a bit more precision when you talk about the "local character" of the conflict. the reason i ask is twofold. first, the implications. if it is so fragmented, it seems hopelessly complex. why do we even dare do anything about it? it is fragmented so much. so, that is the first. the second is, it doesn't it imply that assad is more attractive? all these other things fragmenting around and then you have assad. i would ask you to be precise about that. whatever difficulties these local units present to assad,

they do not switch sides. this is not like somalia. there is one clan here and there. who is the enemy? they are not jumping sides in a fragmented way. there is a coherence, to the extent that it is sectarian. i would ask you to respond to that. >> let me start with the policy >> let me start with the policy implications of your question. as someone who is advocating arming since 2012 of the rebels, today, arming comes at a higher cost and higher risk. it comes with lower returns than it would have had two years ago. i understand the elements that policy makers are facing. at the same time, these are the

policymakers who turned down the opportunity because of faulty assessment or because of a total reluctance to take the fight seriously. i have many bad things to say about u.s. policy in the last couple of years. here is the one word, bankrupt. i understand the current dilemma. it is not -- the current dilemma should not excuse the policy paralysis and the wishful thinking that happened. yes, it is unbelievably difficult to maneuver and navigate those dynamics. but, guess what? if you want to address the isis challenge. we all realize how big a challenge that is. the best strategy is and the only effective strategy is to work with the local actors. because of the size of the threat. because they have the

legitimacy. because they have the human intelligence to do something about it. these groups have an opportunistic way of doing things. two or three years ago, we could have appealed to their ideals and values. you know, some meetings with the hearts and these are revolutionaries and -- today, you know, they look at, at, foreign actors and say, where were you in our moment of eed? make a case for why we should actually help you. it has become a transactional relationship and we have to be honest about it. at the same time, describing the complexity should not lead one to overstate what assad can offer. i do not understand what, operationally, he can offer.