this program a, the gse program is built on the sec's jurisdiction over the regulated broker-dealer of the investment bank holding company that bear stearns demonstrated this reliance on the internationally accepted waffles-- basel standards was a fundamental flaw. if the firms were even coming close to the 10% capital ratio of that the fed uses to determine a well-capitalized bank. yet at all times even during the weekend of the sale to jpmorgan chase dare stearns had a basel capital capital cushion well above that. that is why in march of 2008 i formally requested the basel committee to address the inadequacy of the standards in light of these experiences. since all of the world's major banking regulators rely on the basel standards this remained a matter of the utmost urgency. while the sec and the fed and the treasury were surprised by the speed affairs run on the bank the decisions that week that bear stearns was too big to fail was even more surprising. the sec throughout its history had seen investment banks failed or be required to save themselves. e.f. hutton, salomon brothers

it to the business line was fundamentally flawed and could you just tell what the falls were in the gsebusiness model and what you thought they were a disaster waiting to happen? >> i sure didn't prevent this is still happening the way it did so i will tell you that. that was a phrase but i used that turned out to be prophetic but i didn't see it quite as clearly as it can about. but in terms of the structure that first of all there were the ambiguities. there was the implicit government support, the congressional charter, and then the private capital and private profit and the shareholders and compensation model so there was a contradiction there and secondly, this was a situation where the congress presumed to be the regulator. they defined capital. legislatively defined capital. not only the level of capital but what could count as capital. and some things i consider the yes capital, intangibles defined as capital so the regulator was set up to be weakened and not say anything negative about the people that held the job, but they were not given the authority is a normal regulators gi

. >> on that list would be the gse? ? yes. >> in your book, you said you received a briefing about the gse's and that they were a "disaster waiting to happen." use of the business model was fundamentally flawed. go can you tell us exactly what the flaws were in the business model and why you thought they were a disaster waiting to happen? >> i did not predict this disaster happening this way. that was a phrase i used that turned out to be prophetic. i did not see it quite as clearly as it came about. in terms of the structure, first of all, there were the ambiguities. there was the implicit government support, the congressional charter, and then private capital and profit. the shareholders, the compensation models, that there was just a contradiction there. secondly, this was a situation where congress presumed to be the regulator. they defined capital. the legislatively defined this. not only the level of capital but what could count as capital. something's i considered intangibles were defined as capital. and was set up

i would like to start by thanking the ranking member for his concern over the liabilities of the gses and, of course, had to recognize all of those liabilities at the time that they were taken over by the previous administration, people would've realized our financial situation in here to buy the current administration was in fact far worse than what's recognized. but what i'd like to ask first, perhaps of mr. goelzer, is the state of play of countercyclic counrcyclical, countercyclical concerns in the definition of accounting practices. how services is that being incorporated in the next generations? >> i really think i would have to defer to my colleagues on that, since we have no jurisdiction over the accounting disclosure edibles or enforcement your >> you know, the accounting standards involves measurement and reporting the underlying economic situation, including thefinancial condition of the reporting companies. and, thereforethe goal is to report economicreality, not to adjust it through policy. now i bieve that good accounting can be countercyclical, in that it gives evidence

the gses operated under an inherently flawed model of private profit backed by public supporters.couraged risky revenue seeking and ultimately led to significant taxpayer losses. the united states has always encouraged homeownership, and rightfully so. homeownership builds well, stabilizes neighborhoods, creates jobs and promotes economic growth. but it must be pursued responsibly. the right person must be matched to the right house, and consequently the right home loan. and in the years before the crisis, we lost that discipline. the overstimulation of the housing market because by government policy was exacerbated by other problems of that market. subprime mortgages went from accounting for 5% of total mortgages in 1994 to 20% by 2006. consumer protection, including state regulation of mortgage origination, was spotty, inconsistent and in some cases nonexistent. speculation and rising home prices lead to increasingly risky loans, including far too many home loans made with no money down. securitization separate originated from the risk of the products they originated. mortgage f

what about the gse's? what about the hundreds of finance companies that else up not as banks that's doing banking. so that basic concerned about the vulnerability of the financial system to systemic risk in those institutions was central to the efforts that i described that we initiated. now you are right to say that those were outside of our-- outside of our formal legal authority and outside of our mandate in some sense but we knew the horror of the system we were responsible was made more risky and we knew we were in the classic position where in effect, we were the only station in town you could turn to when things fell apart for liquidity but we had no capacity to constrain risk outside of that regulated core. but when none of us anticipated i think was, and i certainly did not understand fully was what produced that finance and how vulnerable it was to run, how you could have had a system where these people again they were operating in public markets issuing public debt under the disclosures of the l

i would like to start by thanking the ranking member for his concern over the liabilities of the gsesnd, of course, had to recognize all of those liabilities at the time that they were taken over by the previous administration, people would've realized our financial situation in here to buy the current administration was in fact far worse than what's recognized. but what i'd like to ask first, perhaps of mr. goelzer, is the state of play of countercyclic countercyclical, countercyclical concerns in the definition of accounting practices. how services is that being incorporated in the next generations? >> i really think i would have to defer to my colleagues on that, since we have no jurisdiction over the accounting disclosure edibles or enforcement your. >> you know, the accounting standards involves measurement and reporting the underlying economic situation, including the financial condition of the reporting companies. and, therefore, the goal is to report economic reality, not to adjust it through policy. now i believe that good accounting can be countercyclical, in that it gives e

it didn't happen in the gses.h the subsecuritization of subprime loans and nonconforming loans that didn't fit the fannie and freddie standards. they really were the engine. goldman was not necessarily the leader of that. so, in some ways, it's unfair to pick on them. but as john mac has said, the entire industry let down its standards and with along with the rating agencies. >> they're telling me we have to go, but i have to ask you about the deficit, which is so huge. how you were the last guy running and we were in surplus at that time. give me the three things that you think we need to do to get the budget back in balance, apart from grow the economy, which is probably the single best way to do it. but can you do that and raise taxes at the same time? >> when we balanced the budget it was 19% gdp. today revenue is only 15% and spending is 25%. so, we've got this huge deficit. so, to me, it's pretty simple. you have to cut spending back to more historic levels that we have been able to support in this country.

what about the gse's? what about the hundreds of finance companies that else up not as banks that's doing banking. so that basic concerned about the vulnerability of the financial system to systemic risk in those institutions was central to the efforts that i described that we initiated. now you are right to say that those were outside of our-- outside of our formal legal authority and outside of our mandate in some sense but we knew the horror of the system we were responsible was made more risky and we knew we were in the classic position where in effect, we were the only station in town you could turn to when things fell apart for liquidity but we had no capacity to constrain risk outside of that regulated core. but when none of us anticipated i think was, and i certainly did not understand fully was what produced that finance and how vulnerable it was to run, how you could have had a system where these people again they were operating in public markets issuing public debt under the disclosures of the l

the largest issuer of these kinds of securities was the tse's -- gse's. there was a lot of requirement to come under the disclosure regime, to the extent that securities are sold in public markets. in terms of their own reporting, fannie mae and freddie mac did not volunteer to be covered by the act. i actually asked congress to do that. even now, it has not been done. they did do the 34 act in the fall of 2008. >> in retrospect, on the part of either of view, should the sec have required some examination of the market innovation? >> certainly, they were all over this in many ways. but during -- we are focused on securitization is and the use of the public markets for the sort of thing. the second thing i would say is that one of the big sources of private placement activity or on registered activity is hedge funds. the sec enacted rules. i supported those rules. i put into effect. -- i put them into effect. we now have to put them into effect by statute. >> the commissioner has talked about the degree to which you have adequate staffing and the degree to

and does remind you at all about how congress, on how congress set up gses or fannie mae and freddiemac what do you think they're in a to that structured? >> well, actually both of those concerning. i think both organizational structure of the bank itself concerns me in looking at it, but also there are surely some corrections that need to be asked in terms of how the financing of the bank would move forward, because also, going back, focus on the second first, keeping in mind that if we're going to capitalize this bank with $5 billion a year up to $12 billion, that will leverage a century loans and liabilities of several hundred billion dollars, that's not free money. i mean, that has to come from somewhere. i think to the extent we're taking the existing transportation revenues and repackaging them in a bank type of format have allowed us to do so with his creative work. that's on the federal level, that can make some sense. but if we're just going to try and come up with extra billions of dollars someplace, somebody's going to have to come up with that money, either borrowing it s