the president was undergoing 13 different two-hour meetings on nine, the notion that somehow that is the only thing he is doing -- again, i can hardly wait for the day that there is only one problem, one topic. that is not true of the day. the president will come from the situation room, then this could it was as he will eat lunch, it is not to say --it is just hard for me. >> we go to a special briefing by the special envoy to the millies, george mitchell, with an update on negotiation -- with an envoy to the middle east. >> direct negotiations among the u.s., israel, and the

palestinian authority in pursuit of a final agreement, sediment, and just peace of two states living side by side -- settlement. george mitchell will answer a few questions, but we still have meetings going on. he will have to return upstairs to rejoin the negotiations. >> good afternoon, ladies and gentlemen. the parties have just concluded the first round of trilateral talks. the meeting lasted about an hour and a half. it began with a plenary session involving the full u.s., israeli, and palestinian delegations on the eighth floor of the state department, and then broke to a smaller meeting in the secretary of state's personal office involving prime

minister netanyahu, president abbas, secretary clinton, and myself. prime minister netanyahu and president abbas then went into a separate meeting for a direct discussion. that meeting is still going on right now. in the trilateral meeting, there was a long and productive discussion on a range of issues. president abbas and prime minister netanyahu expressed their intent to approach these negotiations in good faith and with the seriousness of purpose. they also agreed for these negotiations to succeed, they must be kept private, and treated with the utmost sensitivity. so, what i eat and they are able

to disclose to you today and the future will be limited. i will not describe some of the key items addressed in the trilateral meeting. both netanyahu and abbas condemn all forms of violence that target innocent civilians, and pledged to work together to maintain security. they reiterated their common goal of two states for two peoples. and to a solution to the conflict there resolve's all issues and all claims, and establishes a viable state of palestine alongside a secure state of israel. president abbas and prime minister netanyahu agreed that these negotiations can be completed within one year.

and that the aim is to resolve all core issues. the parties agreed that a logical next step would be to begin working on achieving a framework agreement for permanent status. the purpose of the framework agreement would be to establish the fundamental compromises necessary to enable them to flesh out and complete a comprehensive treaty that will end the conflict and establish a lasting peace between israel and the palestinians. the parties agreed that in their actions and statements they will work to create an atmosphere of trust that will be conducive to reaching a final agreement. they agreed to meet on september

14th and 15th in the region, and roughly two weeks thereafter, every two weeks thereafter. of course, continued interactions at other levels between the parties, and also get others involving the u.s., will take place. a preparatory trilateral meeting to plan for that second meeting in the region has already begun at another location in this building, and will continue here, and in the region between now and september 14th, as is necessary. as both president obama and secretary of state clinton have said, the united states pledges its full support to the parties in these talks. we will be an active and sustained partner throughout.

we will put our full weight behind these negotiations, and will stand by the parties as they make difficult decisions necessary to secure a better future for their citizens. as we saw this week, there were those who will use violence to try to derail these talks. there are going to be difficult days, and many obstacles along the way. we recognize that this is not an easy task. but as the president told the leaders, we expect to continue until our job is complete and successful. and with that, i will be pleased to take some of your questions. >> what was their personal relationship? when you saw them next to each other it seemed like they were rather distant. did they seem to develop any type of bond?

>> the relationship was cordial. as you know, these men have known each other for a long time. this is not the first meeting between them. they're not strangers politically or personally. i felt it was a constructive and positive mood, both in terms of their personal interaction and in terms of the nature of the discussion that occurred. >> yesterday president obama talked about some progress. i appreciate that you do not want to -- too many details. today prime minister netanyahu talked about the jewishness of the state. can you bridge the gap considering there are so many

difficulties? do you think this could be an issue that could be explosive for the peace process? >> first, i believe strongly, deeply and personally, that this conflict can be resolved, and that these negotiations can produce a final agreement that enables the establishment of a palestinian state and peace and security for both peoples. secondly, it is of course self evident that the reason for a negotiation is that there are differences. there are many, and they are deep, serious. it will take serious good-faith negotiations, sincerity on both

sides. a willingness to make difficult concessions on both sides. if that agreement is to be reached. but i do not think that any human problem can be solved if one begins by reviewing the problems as insurmountable. as suggesting that the mountains are too high end of the rivers are too wide, so let's not undertake the journey. there has to be a sincerity and seriousness of purpose combined with a realistic appraisal and understanding of the difficulties, but a determination to overcome them. i believe that exist. i believe these two leaders, president abbas and prime minister netanyahu, are

committed to doing what it takes to achieve the right result. >> major from fox news -- you remember well from capitol hill the statement that nothing is agreed to, until everything is agreed to. is that the operative approach? if so, will you be reluctant to talk until everything is agreed upon? suddenly, you discuss the tremor. is the deadline one year, or something we are likely to see earlier? >> in terms of process, that and other questions will be resolved by the parties. you cannot separate process from substance in these discussions. there's an interaction that affects both.

we made it clear that these actions are to be determined by the parties. we have had extensive discussions that will continue. our goal is to resolve all the core issues within one year. the parties themselves have suggested and agreed that the logical way to proceed to tackle them is to try to reach a framework agreement first. as i said, and i think this ought to be made clear because there has been a good bit of misunderstanding, or not a full meeting of minds publicly regarding the framework agreement -- a framework agreement is not an interim agreement. it is more detailed than a

declaration of principles, but is less than a full-fledged treaty. its purpose is to establish the fundamental compromises necessary to enable the parties to then flush out and complete a comprehensive agreement that will end the conflict and establish a lasting peace. >> charlie with cbs. you mentioned a number of issues were talked about, but can you mention specifically that supplements was among them? the plan to be in the region for the talks fell take place on the 14th and 15th? can you mentioned specifically that settlements was among them? can you tell us where the talks will be? >> as i said, when i will be able to disclose to you, and

what the parties will disclose will be limited. you have given me the first opportunity to invoke the principle with respect to the first part of the question. secondly, both secretary clinton and i will be at the meeting in the region on september 14th and 15th. one of the subjects not discussed in the trilateral preparatory meeting on going in another room in this building to which i must go in a few moments is that subject. so, a determination is not yet made, but will be made in the near future. >> abc news. i understand and appreciate that you cannot get into specifics.

but i am curious whether you could speak about the scope of today's talks, whether they involved any substantive discussions on any of the core issues, or whether this is strictly to lay out the plan for the coming year? >> as and mentioned in my response to major's questions, i don't think that one can easily characterize process and substance as though they are two separate things. they do interact and relate. you cannot discuss a process issue in any meaningful way without some relations to the substance being discussed. so, i appreciate your taking another crack at charlie's question. it gives me the chance to say for the second time that i will not be able to get into the substance, but, yes, the workers

is that touched on substance. i do not want to suggest that the meeting was such that there was a detailed and extensive discussion or debate on a specific substantive issue. >> ron from jta. it appears from this morning that there were not any substantive concessions. . abbas talk about security. yesterday netanyahu at the dinner talk about recognizing the palestinian claim that they live there. is that something you have noticed and that americans have been encouraging? >> we have encouraged the parties to be positive in their outlook, it in their words, and

in their actions. any realistic appraisal of the situation including the recent history -- the last two decades, makes clear that they're very serious differences between the parties. there are many difficulties that lay ahead both in substance, impact on domestic politics, the needs and interests of their societies. we have not attempted to prescribe what they can or should say about any issue. these are independent and extremely able leaders

representing the interests of their societies. what we have sought to convey in the innumerable conversations i have had personally with both leaders over many months is that president obama's conviction that despite all the difficulties, near term, long term, political, substantive, personal, and otherwise -- the paramount goal of making the lives of their citizens more safe, secure, prosperous, full can best be achieved by a meaningful and lasting peace between the parties in the region's. that the alternative to that

poses difficulties and dangers for greater to the individuals, leaders, societies than those risks which they run in an effort to reach an agreement that brings about their lasting peace. that any realistic evaluation of the self-interests of the people of israel and the palestinian people must come it in our judgment, conclude that there for the trough -- must, in our judgment, conclude that they're far better off living in two states in peace and security dan a continuation of the current situation. >> french, mohammed.

netanyahu mentioned things this morning -- wouldn't be making it more difficult to close the gap between the two parties? >> in every aspect of human life, including your personal life and mine, the world is much different today than 10 years ago, and vastly different than 20 years ago. that is certainly true of the middle east. it is an area of rapid change, of many conflicting currents that historians and analysts have described are better than i could hear. but obviously, the actions and policies of the current government of iran have an effect in the region and in the wider world.

they influence what is occurring here. in my judgment, they add another argument to those which i have already made, and which others have made, as to what accomplish should be resolved. it is in the interests of the people involved. in this respect, comprehensive peace is directly relevant -- please recall that when president obama announced by appointment two days after taking office, he specifically identified comprehensive peace as the objective of u.s. policy in the region. israel and the palestinians, israel and syria, israel and of lebanon, israel at peace with all of its neighbors in normal relations.

obviously, one of the factors that makes that desirable in my judgment, necessary for all these policies is in part the actions that have been and are being taken by the government of iran. yes, it is a factor. even if they did not exist, it would be a compelling reason for peace between the two, but it is an additional factor. >> laurie, cnn. peace negotiations between the parties have taken place several times in the past. what is secretary clinton doing differently than her predecessors, including president clinton? >> although my comment on that is not constrained by the agreement which i earlier

described, there are other constrain factors which come into play. [laughter] since i was not a part of the proceeding a nasturtium, although i served at the request of president clinton then, and israel, and palestine in 2000 and 2001, following the conflict -- i will tell you my own belief. first, we cannot be deterred by the fact that previous efforts did not succeed. the cause of peace is so important, so just, indeed so noble, that it must continue,

notwithstanding prior efforts the ending in failure. an argument can be made to the reverse, that prior figures create an even more compelling is imperative to proceed now. with respect to past efforts, as i said previously, not today but add an earlier briefing, we think the best approach is to carefully review them, and to try to draw the best lessons from each. not be bound by any particular practice or process of our procedure, and always try to keep in mind dynamic changes in the region over a short period of time. our view is this is an effort that will try to learn from the lessons of the past, take the

best, and bring them forward, but not be bound by any legal or category. everything should be judged on the basis of what it will do to advance, help us, to achieve the ultimate goal. one obvious difference is that president obama is the only president in the recent times to have established this as a high priority immediately upon taking office. there have been many very well- written books on history of the past 20 years. it is very that in a couple of instances time ran out.

the authors of several books used exactly those words to describe the problem. this president will succeed. as he said yesterday, neither success nor failure is guaranteed, but it will not be because time ran out at the end. i have a high opinion of the men and women who served in these tasks in the past. i know most of them personally. i do not think you can't attribute inability to achieve a result to their individual efficacy. many regard the problems and issues to be intractable.

we believe there are dynamic changes that occur. there are the more obvious difficulties that lie ahead for both sides if they don't reach agreements that may be even more obvious than they were 12 years ago. you have to remember that these leaders must evaluate did things -- the difficulties in getting agreement, and the difficulties if they do not. we believe it is a powerful argument that if you subject these to careful, reasoned, rational analysis to conclude that the latter difficulties if they do not get an agreement will be much greater, and have a more profound impact on their societies.

thank you. it has been a pleasure reporting to you, and i look forward to reporting to you on a regular basis. >> the briefing on middle east peace talks happening here. george mitchell is the special envoy to the middle east. he has said that it has been a productive round. netanyahu and abbas have agreed to have a second round of talks

on september 14th and 15th. >> searched the term "mideast peace" online in the c-span library. interviews, panels, and forms all the way up to this week's white house middle east peace talks. >> join our conversation on the american revolution, making of the constitution, and importance of historical study on sunday with the pulitzer-prizewinning author. live for three hours at noon eastern on c-span2. >> this c-span the works provide coverage of politics, public affairs, non-fiction books, and

american history. find our content any time through the video library. we take c-span on the road in. . now available in more than 100 million homes, greeted by cable and provided as a public service. >> now a look at the u.s. troop withdrawal in iraq from today's "washington journal." it is about 45 minutes. studios there is republican mike coffman, a member of the aed services committee. also a veteran himself of the army and marine corps. we invited you here to get your perspective on the president's announment on the end of combat operations in iraq. what are your reactions to his announcement?

guest: very positive, obviously, relieved that we have been able to get to this point. i served in 2005, 2006. certainly, there were times that i did not think we would see this day. we are not going to put a banner up that says mission accomplished, we know better than that, but this is a milestone in our involvement. host: what kind of accomplishment is this if there are still 50,000 troops coming engaged in some kind? guest: we ended our direct combat role there. according to the status of

forces agreement, we will have those 50,000 out by the end of 2011. unless there is a change in that, both parties agree, we will not have forces in iraq past 2011. i would imagine, maybe an advisory, support role, in a limited way, but a much more smaller footprint. host: what challenges remain for the country? guest: from the united states pot of view, iraq now has 66,000 security forces in place, thanks in large part to the u.s.. that is a substantial force that is quite capable of defending themselves against the current threat. the fundamental issue with iraq

is a political one. their ability to form a government after the last elections. host: do you have confidence from what you have been seeing over there, reading, that they have the ability to get over their political problems to do that? guest: am concerned. iran is certainly having an influence in the process. i tend to think, perhaps i am optimistic, that they will form it. they had good elections. it is a parliamentary form of government. it is a matter of forming a rulingoalition in the parliamentary system that is necessary to form an executive. host: we want to invite viewers

to participate in the conversation. you may also e-mail us, journal@c-span.org. i want to hear a clip from one of the other speeches regarding policy. defense secretary robert gates was before the american legion and he talked about the continuing perspective on the ground, american obligations air. >> today, at the end of operation iraqi freedom, 4427 service members have died in iraq. 3502 of them killed in action. 44,268 have been wounded or injured. host: that was just a list of

the american contributions of blood and treasure in iraq. "the philadelphia inquirer" has a column related to that. she writes -- do you agree? guest: absolutely, we have a role, but it is not a military role, aiplomatic one. we need to be more engaged, from that point of view, in iraq. certainly, al qaeda is alive and well, ying to keep the country from coming together by inciting sectarian violence, but i think

our issue in iraq is a diplomatic one. help them form a government, help them develop a multi sectarn government. those are the challenges. this is not like vietnam where you have a substantial, conventional army ready to invade the country. host: first phone caller from connecticut. dan on the democratic line. caller: i have a question about military contractors. i was wondering if they are still in iraq? have you investigated the abuses that took place in iraq? for instance, schools that were

not built, sewer systems that were not built, all these unaccounted for billions of dollars? i also wt to know, can you speak of hamid karza banng military contractors in four months? host: let's begin with the number of contractors. guest: there are a lot o contractors but it i being phased down commensurate with our military drawdown. certainly, earlier on, there were extraordinary problems with corruption, working with contractors, both in and out of iraq. there were lessons certaly learn from that. as with hamid karzai, i think he is talking about contrac

security forces, wanting to ban those. there is a concern that that would cause the introduction of potentially more u.sground troops on the ground to make the difference. host: his other question was on corruption. guest: i think the corruption issue is significant in iraq. with u.s. tax dollars pouring in there to help them rebuild their infrastructure, there are ongoing investigations on that, certainly lessons learned, moving forward. host: how much time have you spenon the ground over there since being reelected to congress? guest: not too much time. we went over there last may, in june. i met with the general odierno

baghdad. one of the key point they make to me is the concern of the day. the current prime minister, will allow maliki -- al-maliki allow the democratic power process to take place? host: dean is on the democratic line. caller: after thousands o dollars, iraqi kids being killed in the streets, u.s. marines being killed, what lessons have we learned from iraq? guest: that is a great question.

frankly, -- my view is not shared by my military colleagues. my view is we should not do it again. this notion of using nation building as a tool to achieve our security objective is fundamentally flawed. to reality is, we could have accomplished our security objectives in iraq without invading the country, rebuilding it into a modern political state. the reality is, 80% have disaffected with the regime. we were flying combat air patrols over two-thirds of the country to protect the population. we had provided limited direct support to those elements and they would have opposed the regime. in my view, we could have had

something comes out of bed, certainly -- out of it, certainly, not designed as a western country with too, but would keep our security interests in tact. we need to revert back to the notion, i believe, of supporting factions that support our interests without this very idealistic foreign policy that has been so costly to the united states. host: after his speech, secretary gates went to iraq himself. "the washington times" has the headline --

next phone call. charlotte, north carolina. cathie on the republican line. caller: i do not feel like we have withdrawn with so many troops there. i do not remember how many we started with, but that is still a lot. what happened to the one that come home, do they go to afghanistan, will the majority go to unemployment? . coffman?o guest: will ultimately happen, what we call dowime, time between deployment -- we need to give them a break.

we have pretty much exhausted our ground elements on the ground and seaside as well. it has been multiple, difficult the plants. -- deployments. our numbers in iraq were around 150,000, now we are down to 50,000. now we are starting to increase in afghanistan. the last 30,000 contingent that the president promised last year are now almost fully in place. i think i will numbers are roughly around 100,000 in afghanistan right now. it must 30,000 at that time that we had 171,000 in iraq. so the aggregate numbers will be lower tn they had been.

host: this twitter viewer wants to know -- guest: the war in iraq is a high risk-high reward proposition. if we can establish a representative form of government in the heart of the arab mide east, as president bush had stated, will lead to peace and stability in the region. i am probably not one to defend th policies since i am not supportive of it. however, once we make the decision to go in, you cannot simply walk away. you have a responsibility to reasonably see it through, to bring into, what i would call, just conclusion.

host: terence on the independent line. caller: thank you for coming on, congressmanaufman -- coffman. thank you for taking my call. it is difficult to speak to a congressman in person. you do not seem like one of the gloom and doom republicans, u em pretty positive. that is very refreshing. i am a young guy, but i am an avid reader of history. after world war ii, we came up with the marshall plan. we beat the soviets in afghanistan in than 1980's -- in

the 1980's but we did not follow through with infrastructure. will we do the same in iraq? i hope we do not. i think we need to keep our diplomats there, a good corps of engineers there to build the country, showed them american technologies, maybe get some movie producers over there to help document their history -- things like that. we have to change the psyche of these people. thank you again for coming on c- span. please come again. thank you. guest: you are right, we need to stay engaged in iraq. certainly, at an econom level, perhaps in terms of advisory,

support, from a military point of view. i think you are right, we disengaged there after we helped the mujahideen drive the soviets out. when we were not paying attention, there was a vacuum bill from radical elements. let me justay on afghanistan, i think it will be more difficult than iraq. what president bush did at first was absolutely brilliant. we were attacked a on 9/11 by al qaeda. the taliban controlled much of the country, gave al qaeda a safe harbor. even after the attacks, we said, turn over your usama bin laden, and they refused to do so, but instead of putting our

conventional ground forces in there, we gave logistical support to the anti-taliban task forces in the northern alliance, and they drove the taliban out. now we need to have them reach out to other elements in the region to reflect the ethnic areas. we gave them the government that they wanted to have, and that is what we are defending today. once we made the commitment to go in, we have to mak it work. i spoke with the secretary of defense recently. i think he is starting to move in the right direction by looking at a more decentralized time of governance, our aid flows, working more with trouble

elements -- tribal elements as well as the central government. i think we are making changes there. we could have simply said, we will support you -- after the -- asrn alliance had one -won long as you keep the taliban, al qaeda out. host: congressman michael kaufman is joining us and the c- span cable center -- coffman is joining us at the c-span cable center in colorado. his district is in the denver suburb, including aurora.

he attended the university of colorado under the gi bill. served in the army, marine corps. two decades as a founder and senior shareholder of a property management firm, during which time he served in the colorado house of representatives and as the caller and a state senate and state treasurer. twice returned to active duty, once for the gulf war, and again in 2005 to support the independent electoral commission of iraq to help establish governments in t western euphrates valley. appear from hamilton, ohio. ronald, democrat's line. caller: good morning. i would like to ask the congressman, since he is saying that we should stay there and injected billions into their

infrastructure, in an oil-rich country, why is it that every thing that came through congress, republicans voted against, but we are supposed to trust their steel workers, contract workers, why not have them do the work? instead, we are putting our own money to support the companies and workers. we could jump-start good wages, they would open stores, etc., and they would know that they are working on their infrastructure, investing in their own companies, paying taxes to their own neighborhoods to support their roads and schools, etc. guest: you make a good point.

when i was running for congress, one of the issues i ran on was to cut off the infrastructure development in iraq at the expense of taxpayers. i strongly believe that. since i got in, just the timing had been phased down. i certainly agree with you, why are we developing their infrastructure -- i remember in 2008, when we were running a budget deficit, they had a budget surplus. their government was not set up administratively to do those

types of appropriations throug contractors. we were in gauging through the taxpayer. we were borrowing money to build their infraructure, which is crazy. i am certainly sympathetic to your view on that. we need to take a look at this nation building thing and ask, is that the proper role for the u.s., do we have the economic capability to do that? i do not know that we do. host: rob on the republican line. arlington, virginia. caller: i want to start with a brief note of fairness for this sitting president, president barack obama. he did say afghanistan was the good war, he did say that on the campaign trail. for him to receive criticism about going back on a promise is

wrong. he said he wanted to leave iraq and to work in afghanistan, which is what he is doing. as i see it, one of the few promis he kept. there were a lot of attacks since president obama became president in the green zone. there were eighin the month of june or something and the media has remained silent on that. if george bush were still president, they would be airing not constantly. it would be on all the front pages across the country. when you see an uptick of violence in the green zone, it may not be a good time to pull aout. it seems like amateur hour here. you could take all of the money

spent, look at all the projects that have been completed -- massive amount of projects -- add it all up and it is about $35 billion. this is straight from the department of defense. there are green circles on a placard representing different projects around the country. a lot of heavy lifting was done in iraq. george bush got it moving properly. foreign policy 101. history will bear that out. now we just have to hope that this current president does not botche it. guest: certainly, i share your concerns in afghanistan. let me just say, in iraq, i

think it is interesting -- i commend the president for breaking his campaign promise. what he effectively said, as a candidate, in 2008, he would expeditiously withdraw here regardless of the conditions on the ground. what he did was follow the exact timetable as laid down by president bush in iraq, without question. it turned out to be very successful. what he has done in afghanistan, putting a timeline on a withdrawal, is ill-defined. i understand why he did that. he did that to get the support, particularly of his own party in congress, but i think it has had a bad effect in afghanistan, in terms of their view the in our

level of support in afghanistan. i think it is better to put down time lines which are not sensitive to conditions on the ground. i do see hope in afghanistan to the extent that -- in vietnam, starting in 1969, the army, the military started to replace our forces on the ground as they build up. they were certainly not as capable as we were. the problem then, sometime after the 1972 election, congress cutff all funding, including ammunition and fuel.

iope americans do not get tired to the extent that we pull the rug out from under the afghan people. clearly, we need to phase down our forces in favor of theirs, but in a way that is tied to conditns on the ground. host: tony blair's new memoir has been put out. there are a number of stores in the newspapers. in "the new york times" --

mr. blair, by the way, announced that he was donating the $7 million advanced to the british legion, there principal charity for ex-service members. we are speaking to michael this morning. paul on the independent line. caller: i had a quick comment. i have an idea of what we can do in iraq. instead of pulling out, all of these billions of tax dollars, lives that have been spent, we should build a gigantic military base and make everything work

for americans. the infrastructure is down, our bridges are falling. why not just stay over there and make it worth our while? it will be like the roman empire. we can provide peace to the country. guest: iraq is a sovereign country. at the end of the day, we have a sovereign forces agreement. it would take both parties -- the u.s. and iraq -- to allow any kind of permanent basing facility. as to whether that would be advantageous to the united states, i cannot tell you that, but i tend not to think that the iraqi government will support that. host: maryland. willie on the democrat's line. caller: i am wondering why it is so hard for republicans to give

president obama any kind of the successful surge gave the necessary security to allow the

political process to move forward. they stayed on the schedule that was determined by the prior administration in terms of the benchmarks. i think he does deserve credit for following through on a strategy that has apparently been successful to this point. caller: i keep hearing congress talk about moving forward, but nobody is looking into what happened to all of the money

with this war. nobody is investigating what led up to this and all of the circumstances involved except you guys. how are we supposed to figure out what happened, who was responsible, n.y. all of this money has vanished -- and why all of this money has vanished from the people of the united states? >> i think there certainly have been investigations. there is an oversight investigation committee in the house of representatives that has been active in terms above pursuing the corruption that certainly occurred with contractors in iraq. there are lessons learned that

are being applied in afghanistan even as we speak. obviously, we cannot go back and make right what happened, but we can certainly learn from our mistakes and move forward, and i think -- i am only in my second year of congress, but from what i have seen, those investigations did take place, and we have moved forward from those lessons. valley, california, independent line. caller: have you read it the 9/11 commission report? you understand the motivation behind why we got attacked? weave got to attack because of ou support for israel and there are questions -- got attacked because of our support for israel and i wanted to get to the peace talks, too, because i

wanted to correct that guy who used to work for barak. aipac, the most dangerous jewish lobby, pushed us into the war with iraq. barak said in 2002 that he was glad we went in there. because it made israel more -- he practically blew the whole cover, because it is real more secure. i'm tired of this. they are driving the country into the ground. host: congressman, do you share those points of view? guest: no, if you look to the writings of osama bin laden, the statements he made prior to 9/11, he never made the nexus with israel. he was with radical islamists to try to bolster support from elements of the muslim world. but i don't think that

resolving the arab-israeli dispute will solve problems the united states has now with what i call radical political islam, which i don't see as a religion, i see as an ideology. host: we have just a few minutes left with you. i wanted to briefly, for our , your directake experience and what you took away from their ability to form a government. guest: i think with neral casey, he saw the exit strategy for the united states as creating a constitutionally elected government in iraq. obviously, those who ran the elections were always iraqi. what we provided was support for the electoral process, and the united nations, ngos

associated with them, certainly help in the process as well. it ran well, and the iraqi people -- unfortunately, when we look at the situation in afghanistan, the focus was not there like it was with ir in terms of making sure the elections were fair and executed well. i think we are paying a price for that today. host: raleigh, north carolina, democrats' line. are you there? caller: yes. host: you are on the air. caller: i have a question that is burning me. i do not undstand why this representative says he is such a bleeding heart for the iraqis, and yet we have hundreds of thousands of people in america who cannot even go to the doctor because they cannot afford it,

and yet he is opposed to that. he is opposed to any help, and yet he keeps spending about religion. my bible says that charity begins at home, and then spreads abroad. one more question -- if our troops are going to be there, why can't iraq finance it? they can afford it but why do we have to -- they can afford it. what we have to do everything for everybody? host: domestic versus international iorities. guest: i certainly believe in health care refm. i did not believe in the bill passed by congress. i certainly did not vote for that. i think that health care and that america -- health care in america does not provide the kind of access we ought to have to the system. but let's say that those -- my ideas -- let's save my ideas for

reforming the health-care system for another time. i agree with the caller that the notion of nation building we applied in iraq and afghanistan is unsustainable in terms of cost, and is diverting economic energy from the united states that is necessary for our own economy. i will be in a blocking position should this country ever go in that direction again. i do think we need to finish the job in iraq and afghanistan, but we need to do it as expeditiously as possible, and we need to do it in a way that it may be does not fulfill our idealistic dream is going in, but is more respectful of the cultures of those countries. host: 10 to the iraqi -- can the

iraqis paper security themselves? guest: they are paying for this year to force, unlike afghanistan, where we are footing the bill -- they are paying for securityorces, unlike afghanistan, where we are footing the bill. but 50,000 troops are lefon the ground there. and for some asstance to the iraqi military, that obviously is going to phase out unless there is an amendment to that agreement by the end of next year. host: last question is from michigan, jennifer on the republican line. caller: yes, congressman. i'm a little bit confused. i have a son who his career military so i it supports the military. he was part of e mission to find saddam hussein and i'm very proud of him. i would not have him any other

way. i raised him to be a proud american. he did two tours in iraq, came home, did a tour in afghanistan, came home safe, with posttraumatic stress disorder. no doubt getting ready to go backo afghanistan. what in the world are we going to do here? they are putting us in there and failed, rushed us in there and failed. what can we hope to accomplish with all that -- host: thank you. we will pause there, because we understand the question. guest: first of all, thank you so much for the service of your son. i believe the military today is the most extraordinary this country has had its history in terms of the young men and women who served in the armed forces. i think in afghanistan that

achieving the level of stability that afghanistan is not used as a basis of terrorism and in a way that would destabilize pakistan. with that said, we superimpose a political process that gave them the government -- i don't think we need to dumb it down, but we need to simplify our role in afghanistan where, you know, they have never had a strong central government in the history of the country, and we need to reflect that. the historically fought -- they the historically fought on the lines of tribal militias and not on military, and we are supporting militias to fight the

taliban. i think it is going to be a very long fight, but i would like to see the bulk of the fighting not done by americans. at the end of the day, it is the afghans who have to win the war for afghanistan and not the united states. host: congressmanike coffman of colorado, a republican, a first tm member of congress, a veteran of the army and marine corps, and a member of the armed services committee in the housue of >> search the term, "mideast peace" on the c-span library, and you'll find more than 1700

interviews, panels and forums, all free, all online. it is washington and the world your way. >> join our conversation on the american revolution, the making of the constitution, and the importance of historical study sunday with a pulitzer prize winner gordon would. we will take your calls and e- mails at noon eastern on c-span t2. >> and now, a discussion on the state of the u.s. housing market. we hear from the chief economist for moody's and.com -- moodys.com this is about an hour. >> i think we are going to go ahead and get started.

good morning everyone. i am the director and community affairs office here -- officer here. we have a full day ahead, so we're going to jump been. we're going to start off with the director of communication affairs. >> thank you. i would just like to welcome everyone to this event. some of you have been here multiple times for other programs and some of you are here for the first time. we are very pleased to hold the summit today on the important issues of korea and stabilization -- reo and stabilization, issues that are impacting people all over the country. much of the work has been done in partnership with many of you in this room.

as this summit moves us forward, in order to do that, we have developed what i think is a very strong agenda of experts with creative ideas for addressing these important issues. the presence of many of our on federal reserve executive leaders demonstrates the importance of these issues to this organization. threer agenda, we have th reserve bank presidents. you also be hearing from the president of the boston fed and the president of the cleveland federal reserve bank. of course, we happen to have a governor who will speak in a few minutes. we always were to get top policy and practitioner participants at these events, we have made a special effort to reach for new voices that go beyond the usual suspects.

this effort has been aided by the use of technology. we are pro-life live web streaming this event to an actual audience -- we are live web streaming this event to an actual audience. many people who would like to have been here today do not have the time or the budget to travel to an event like this. we have also tried to take this event local bus video streaming to all of the nine federal reserve banks and branch locations. they're going to be providing local content. this is taking place in atlanta, miami, richmond, kansas city, denver, cleveland, cincinnati, boston and chicago. we welcome all of our video participants as well as those on streaming. one of the main purposes of this

event is to recognize that we are moving forward from crisis management to striving for sustainable neighborhoods. many in this audience have spent a good part of the last two years responding to the foreclosure crisis in real time. today is the summit is designed to help get beyond the more immediate crisis response and into systematic, long-term responses. we are also making an effort to enable practitioners to have the best emerging ideas unsustainable and scalable solutions. i am looking forward to hearing the program discussions over the next two days. now let me turn to the major task at hand. i have a great pleasure to introduce governor elisabeth duke, or bets the as she is known to us on the reserve board as she is known to

us on the reserve board. lucky for us, she has the responsibility for consumer protection and community development. in this capacity, she has worked very closely with my division for the past two years. she made it a priority to visit ofghborhoods in many areas the country that were hard hit by foreclosures. as a former community leader, she understands the importance of community development and the importance of public/private partnerships. she also understands the critical role that banks can play in the process of building sustainable neighborhoods. she has demonstrated an unwavering support for the community development work that the fed has undertaken, and we have gone on her expertise and

creative thinking -- called on her expertise in creative thinking many times as we have developed our programs. it is my great pleasure to introduce governor elisabeth's do. -- elisabeth duke. [applause] >> thank you and good morning. we are certain to have an affirmative and thoughtful discussion of these issues -- informative and thoughtful discussion of these issues, including from our keynote speaker, the secretary of housing and urban development. before i begin, i would like to recognize and thank the speakers

and panels that we will hear from during this conference. i would also like to appreciate those who have contributed papers in conjunction with this event. their articles give us a look at the issue from every angle, provide insight and promising solutions. i would also noted that the number of the participants and contributors are current or former members of the federal reserve consumer advisory council. this has been instrumental in furthering our understanding of community issues, including the topic that brings us together today. finally, i would like to think the federal reserve staff that worked tirelessly on this project. when it became apparent in 2007 that foreclosures were reaching epidemic levels in cities nationwide, the first priority of many organizations and their public and private partners was to identify ways to mitigate the impact of a foreclosure on individual homeowners and their families. to assist in these efforts, the

federal reserve deployed a number of resources. redeveloped tools for communities to use to identify areas with high default rate so that they could then target their counseling resources effectively. we helped organize many foreclosure assistance shares that brought lenders, counselors and other resources to individual borrowers. we created toolkit for communities. we launched a public information campaign to warn consumers about foreclosure rescue scams. despite these and other efforts to help mitigate foreclosures, we also recognized that many homeowners would not be able to remain in their houses, and that in time, the community development deal would need to turn its attention to the impact of vacant properties on communities. neighborhood stabilization focuses on the impact of foreclosures on others, the neighborhoods, communities and municipalities that shared the consequences of foreclosure.

we are pleased to be able to report early efforts to educate community development practitioners and public officials on issues related to community stabilization. under this partnership, we launched the website stablecommunities.org to provide community leaders informational the latest issues regarding neighborhood stabilization. we provided neighborhood training institutes. the federal reserve also hosted a series of forums in 2008 entitled, "recovery, renewal, rebuilding: a federal reserve system." this highlighted the best practices for addressing foreclosures in both strong and weak market cities. as part of a larger initiative to integrate federal reserve research and outrage resources and addressing the foreclosure

crisis. this improved our ability to identify problems and highlight potential solutions, an effort that continues today with this summit and its accompanying publication. most recently, we worked with the other federal financial regulatory agencies to implement regulations for the community investment -- community reinvestment act. we focus on areas eligible for funds under the neighborhood stabilization program. i would like to take a few minutes to introduce the types of issues faced by communities with high rates of foreclosure and discussed the gravity of the problem. i will also highlight some lessons we have learned in the last few years about affected neighborhood stabilization strategies, lessons that will be discussed in much greater detail throughout the course of these meetings. a 74-year-old resident of the

sell side of cleveland was recently interviewed for a national public radio story on that city's efforts to combat the effect of foreclosure on the neighborhood. her story was a familiar one. palms on the street are vacant and in disrepair. -- houses on the street are vacant and in disrepair. lawns need to be cut. her house, appraised at $74,000 in 2004 was recently valued at $50,000. the loss of equity due to neighboring foreclosures represents a real concern for homeowners, particularly older homeowners who might have expected that, agreeing -- that home equity would have served them in retirement. interestingly, the woman was more focused on her social life. she no longer invite people over to our house because she is embarrassed by the condition of her street. there is a large inventory of houses that have gone through

the foreclosure process and are now on by financial institutions. are oftenperties referred to as real estate loans. -- real-estate owned, or reo. there is an estimate that every blighted house in cleveland can negatively impact fiber six houses near it. homeowners in proximity to 546 foreclosures experience even greater -- in proximity to five or six foreclosures experience even greater despair. some 60,000 occupied houses are also impacted by foreclosures.

when houses are for clothes, a property taxes go down and with them, the ability to provide fire, police, and quality schools and a neighborhood. the challenges associated with this are not only in cities like cleveland or detroit. the federal reserve bank of san francisco has written an article that describes how formerly thriving subdivisions and outside of a metropolitan area are now suffering some of the highest rate of a foreclosure. these communities are often so new that they do not have the community development infrastructure to address the impact of large volumes of foreclosed properties. while these properties are more attractive to investors, the

nature of these communities may change dramatically without the opportunity for local government to address these changes. that inventory of foreclosed houses may be larger than the current numbers indicate. a growing number of properties are delinquent or in the foreclosure process, but have not yet entered the market. this shadow inventory will continue to have a further downward pressure on prices and further destabilize communities. the neighborhood impact of these properties can be mitigated if the subsequent owners have a long-term interest. the community impact of an reo property purchased by an individual homeowner is barely noticeable. it some plans to have at the house for the long term public and have a positive impact on in the neighborhood.

-- it can have a positive impact on the neighborhood. licensing and inspection are used to promote stability. communities with large inventories of vacant properties have challenges that will not be resolved overnight. the problem of poorly underwritten loans has been exacerbated by high unemployment. as foreclosures continue to grow, they will hinder the ability for communities to heal and thrive. it makes sense for us to focus our research, outrage and community expertise in better understanding the market dynamics of the communities impacted by foreclosures and identify solutions to help speed the recovery. this summit brings together people who have been on the front lines of addressing vacant and abandoned properties throughout this crisis. they will share their

experiences for the common good. the thanks to the work of the community affairs staff, we have been able to document many of these lessons in a publication. while i do not want to spoil the plot, i do want to use the remainder of my time to previous some of the more important lessons learned about community stabilization. first, we have learned that effective interventions emerge when there is a full understanding of mortgage market dynamics and incentives. several people have described the steep learning curve the policymakers have navigated in order to utilize the $6 billion in funds made available through the first two rounds of the recovery program. these funds were used to help stabilize neighborhoods through demolition and land banking of blighted properties. time limits, such as the

requirement the grantee's operate funds within 80 months, often underestimated the time needed -- within 18 months, often underestimated the time needed. the complexities of the secondary mortgage market might have made it difficult for governments in community organizations to ascertain who owns the property, less -- much less arrange for purchase in a timely way. it is difficult for municipalities to acquire one or two properties among many. we discuss the challenge of using these funds, particularly in a competitive environment where investors have the resources to purchase properties in bulk without the constraints related to a neighborhood stabilization plans. one article described the efforts of the national community stabilization trust, which was established to create local capacities of the

communities could effectively acquired, manage, rehabilitate and sell foreclosed properties. despite a slow start, they now have transactional expertise, development infrastructure, asset management skills, land banking approaches, and the comprehensive planning necessary to effectively utilize these funds for reo acquisitions. i also commend another article which serves as a primer on servicing arrangements, the fiduciary relationship between servicers and investors, and the decisions -- the factors that drive decision making. these are key to understanding the intricacies of reo acquisitions. the second lesson learned involves targeting scarce resources. while the funds are substantial,

they're not nearly sufficient. strategic use of these funds can help stabilize individual neighborhoods. in this article, the difference between stabilizing neighborhoods and impacting individual properties is emphasized. database tools were developed by the reinvestment fund to characterize the underlying dynamics of local real-estate markets. market value analysis is focused on a set of indicators in local and administrative records and third-party data sources. indicators include such things as median sale price, number of sales, a percentage of housing units, for pushing -- for closure filing, commercial properties, a newly constructed properties, honor occupied properties -- owner-occupied properties and other rates.

these are used for mapping and statistical analysis. communities can then more effectively decide where funds will have the greatest impact. for example, using philadelphia data, and neighborhoods are identified you are eligible for the funds. they then calculate the percentage of foreclosures in each neighborhood that could be addressed using these funds. from the standpoint of neighborhood stabilization, the best use of funds in is in the neighborhoods where there is the intersection of the demonstrated need combined with the ability to impact a significant fraction of foreclosure, the ability to overcome barriers, and additional strengthening factors such as the strength of the surrounding neighborhoods. identifying need and probable success can help communities strategically invest scarce dollars, build community strength, and remove barriers to

success. it will also help communities a leveraged other funding in a larger community stabilization plan. database decision making is not as easy as it sounds. in fact, the third lesson we have learned is that we need to use technology to create better tools for serving communities. case western university did work to support community organization by providing critical data and information to help determine which properties and priorities for acquisition and rehabilitation, keep a record of current property conditions and monitor issues as they arise. this means keeping up-to-date records of foreclosures, shares cells, and the status of properties, as well as gathering information on delinquencies that can serve as a proxy for identifying property that may be falling into delinquency. these researchers are also using technology to develop tools to help communities strategically

invest in areas with significant need a great potential. we recognize the need for tools to help community organizations monitor conditions in their neighborhood so that they can anticipate an plan from bumps along the road to recovery. we'll learn the fourth lesson in this crisis, the need to collaborate in new ways to come up with a comprehensive approach to neighborhood stabilization efforts. researchers from case western are part of a neighborhood stabilization team that meets monthly to exchange intimation on the status of particular properties and discuss intervention strategies. our publication is replete with examples of local collaboration's that have successfully addressed neighborhood issues through partnerships between federal, state and local governments, community organizations, universities, foundations and others. however, a promising initiative that you will be hearing about takes upon comprehensive review

of community development. we cannot do things the way we have always done them. homew ownership cannot and should not be the only alternatives before -- only alternative for reo properties. alternatives include rentals, leasing, and even turning, honors in to renters. -- homeowners into renters. there are several promising models of non redevelopment to stabilize committees, such as simple code enforcement, land banking and demolition. communities must consider a variety of strategies to reach

purpose these properties within the context of a comprehensive plan that addresses a variety of community needs. only in this way will our neighborhoods be restored to health and vitality. this brings me back to the street in cleveland. that woman's plight illustrates that while it is important to stop foreclosures whenever possible, it is equally important to pay attention to the properties that, despite everyone's best efforts, will end up in foreclosure, or worse, will end up a vacant and abandoned with no one willing to take responsibility pre- foreclosure. we must also work to repair the financial and social damage and restore services to the remaining homeowners in communities with high rates of a vacancy or for closure. the problem will not be solved until the properties are restored to a responsible ownership and occupied by the families that call them home.

in conclusion, i went to thank you for being here, and especially for your work to promote neighborhood stabilization. today is not the end of this project. following this summit, we will be working to provide technical workshops or communities as they implement some of the strategies identified year. we have scheduled workshops in rhode island and ohio for the fall, and plans are underway to schedule similar workshops on the west coast. we look forward to your participation and be back today, and your partnership going forward as we continue to find ways -- to your participation here today, and your partnership going forward as we continue to find ways to strategically developed neighborhoods and combat the problems of foreclosure. [applause]

>> thank you. thank you all for coming. i know that many of my community affairs officer peers are here, and i welcome them. i also wanted knowledge three people the diddle lot of heavy lifting on this event. -- i also want to acknowledge three people that did a lot of heavy lifting on this event. one person got the 7:00 a.m. to make sure that the publications got here after a ups shipping error. [applause] more todayearing about the system wide effort to address the foreclosure problem.

it really requires a system-wide effort. it is my job to introduce our next speaker the will be providing a national overview of the crisis. much of this summit focuses on regional problems and solutions because of the different ways this plays out in local markets. our next speaker is going to help give us a national frame for this problem in terms of the data we are seeing. in the interest of time, i will not go into long details of his biography, but i will say that he has been a trusted adviser to policy makers and influential source of economic advice. he has written frequently on financial stimulus, regulatory reform and other topics. he has taken a unique position to provide a national -- he is

in a unique position to provide a national overview of today's topic. please join me in welcoming him. [applause] >> thank you for the kind introduction and the opportunity to be here today. in our standing have two hours to speak. -- i understand i have two hours to speak. [laughter] i am going to make three broad point in my remarks. the first is, the foreclosure crisis continues on. the pipeline of foreclosed properties is bull. you can see that here. this is -- the pipeline of foreclosed properties is full. you can see that here. this is the number of houses that are more than 90 days delinquent.

the number among those that go into foreclosures is high. the last data point in the is the last week of july. four 0.1 million homes are in this predicament. there are approximately 49 million of first mortgage loans outstanding, so that gives you a sense of the magnitude of the problem. there have been four waves of a foreclosure. the first was in 2006. those were the flippers. when the market began to turn and it became clear they could not make a quick buck, they went straight into default. the second wave was in 2007, the subprime reset problem. this was before the federal

reserve began lowering interest rates. most of the subprime of loans that were originated in 2005 their first rate hike in 2007 and most of the borrowers defaulted. the third wave began in 2008 and continues on today. this is because of unemployment and underemployment. there are just over 14 million homeowners better in--- negativers that are in an equity positions. 9 million of those are under water by more than 20%. with 50 million unemployed and another 10 million un

der-employed, that is a pretty -- with 15 million unemployed and another 10 million under- employed, that is a pretty lethal mix. there are many economic their mortgage -- there are many who cannot make their mortgage payments and find it unpalatable to do so. about 20% of defaults now are strategic, and that number is rising. the foreclosure problem is still in full swing. it is translating and will continue to translate into more reo. from the first quarter of 2008

to the second quarter of 2010, you can see that the peak was back in late 2008. it did come down through late last year, but it is now picking up again. the number of foreclosed properties is beginning to rise. one interesting development is that loans that are in securitized pools are declining. if you go back to 2008, you can see that over 400,000 reo properties were in securitized pools. that number is now 200,000. it is falling relatively rapidly.

unfortunately,reo from fanny, freddie, and bank balance sheets is now rising. i suspect that we will see reo inventory continue to rise as we make our way through the remaining of this year into 2011. the crisis continues on. there is no sign that it has peaked yet. that is point number one. i said that there were 23 points that i would like to make? [laughter] there are three. point number two, we are not done in terms of price weakness. the key statistic for house prices is the share of home

sales that are distressed, coming out of reo or short sales. this may be a chart that only an economist can love, but it is informative. the green line on the right-hand side represents the quarter change annualized on a percentage basis. the 2010 value is my estimate. we discuss the actual value yesterday. this is based on case-shiller data. the increase was actually a bit stronger than i was estimating. the orange line on the left-hand skelp represents the change -- left-hand side represents the change in the shares of home

sales. he conceded very strong, clear in verse relationship between -- you can see the very strong, clear in verse relationship between the two. you will note that we have had some price stability over the past year. if you go back into the spring- summer of 2008, house prices had been relatively stable. that goes to the fact that the shares of home sales that were distressed actually declined during that time. non-distressed sales were actually relatively strong, in part because of policy efforts.

there were three rounds of housing tax credits. the share of sales the or distress has actually come down in the past year. going forward, things are now living in the wrong direction. reo is rising and more reo sales are coming. meanwhile, the number of non- distressed sales have fallen sharply after the tax credit ended. it is as low as it has been since early 1995. some of that is due to the fact that sales were pushed forward because of the tax credit. many people are waiting for the next tax credit. they have given us three so far, maybe they will come up with a fourth. people are trying to hang tough for a month or two or three to see if they can get a credit. regardless, non-distressed sales have come down.

i think this strongly argues for more price decline. you can see my forecast here. this shows case-shiller national house price index. at the beginning of the previous decade, you can see the boom, bubble, and then of course the last decade, the crash. house prices from peak to trough have fallen about 30%. you can see my forecast. i do expect another 5% decline in house prices from the previous trough. peak to trough price declines will come in around 35%. now, this selig is predicated on

a number of a sum -- this outlet is predicated on a number of assumptions -- this outlook is predicated on a number of assumptions, one of which is that interest rates will remain below. -- remain low. the other is that the job market hangs together reasonably well, that we do not see a consistent decline in the jobs. that assumption is the best, most likely scenario, but it is a pretty shaky forecast at this point. it looks like the job market is beginning to weaken again. the unemployment rate is 9.5%. we do expect that to trend higher over the course of the next six-nine months back into double digits.

it will be back down to 9.5% by the end of 2011. the third assumption is that policy efforts to mitigate foreclosures are reasonably successful, that they will ultimately result in approximately 1 million permanent modifications of loans. the price outlook does vary considerably across the country. you can see that on the map. this shows the nation's 300 + metropolitan areas. the parts not shaded our rural areas not metro areas. where there is not data available i have used fha of a data.

the shaded areas show where price declines will be greater then 5% in red. these other the areas of the country that have been hardest hit, florida, california, nevada, much of the west. parts of new jersey, new york, and of course, distressed parts of michigan. this goes back to the point that the key statistic for homeowners is areas that are distressed. one other point about house prices, this is a very fragile forecast. it can devolve pretty quickly if house prices fall more than i am anticipating and more homeowners and an equity positions than expected, that

could result in more defaults, more declines, and then we are right back and that vicious, self-reinforcing cycle that we ran a couple, three years ago. we are right on a razor's edge. if anything goes wrong in the script, we will be right back. that is number two, and you should be thoroughly depressed, right? point number three is an effort to cheer you up a little bit. there are some bad things happening. i will go through them. i will mention -- there are some good things happening. i will go through them. i will mention three very positive things that should give us hope that while there is more work to do, it is not over. it is clear that we are getting closer to the end of this process than the beginning. let me go through them for you. first, i think the housing

inventory has peaked. the number of vacant houses for sale is extraordinarily high. the green line is the actual number of vacant houses. the last datapoint is from quarter one of 2010, and just the 10 million homes were vacant. that is a cut approximation of -- the other line is a good approximation of how many vacant houses we should have been a good market. we have about 1.5 million vacant properties in excess.

the calculation in the chart shows you how we might work off that inventory. housing supply is incredibly depressed. it is currently running at about 600,000 unit pace in -- pacing. that is as low as it has been since world war ii. housing demand has also been very depressed given the tough economy. the difference between demand and supply is about 750,000

units. if demand and supply do not change going forward, how long will it take to work off 1.5 million vacant units? two years. two years. so, you have to wait until mid- 2012 before you can conclude that things are reasonably back to normal. my sense is that we will get there sooner than that. i doubt that demand will pick up more quickly than supply. builders are under significant pressure and there is no appetite to increase supply quickly. but as we see households form more quickly, there could be pent up household formation developing. people are doubling up, tripling

up, and as soon as there is an opportunity for those households to break apart, they will do it, because it is pretty difficult for people to live together in those households for an extended period of time. [laughter] you can see that in recent data. there has been improvement in the job market this year. there was a significant pickup in the rental market as a result of that. there could be a point in time, when the job market is picking into gear, say 2012, that we get a lot more household formations then we were anticipating. the inventory problem is very regionally concentrated. florida is rife with a surplus of inventory. and around atlanta, south carolina, las vegas, ariz.,

central valley california, but if you go to other parts of the country, the inventory problem is significantly less. we will work through that much more quickly, and that will lay the foundation for a much healthier housing market. another reason for optimism is that housing is, in my view, fairly valued. if you look at a household prices versus household incomes -- let me give you a sense of that. this gives you the overvaluation and family housing nationwide based on those two metrics. they created a measure of valuation that is a weighted average of price to income and price to rent using the case- shiller national index. you can see by my calculations that house prices are roughly

where they should be relative to household income. that does not mean we will not overshoot and see markets going to a position of undervaluation as they were back in the 1990's when the california market was particularlyparticularly depres. one other point -- take a look at the degree of valuation at the height of the bubble. it is about 50%. that is nationwide. that means some markets were measurably over-valued. just to go on a quick tangent, i was doing the same kind of thing back in the middle of the housing bubble. i was looking at these charts and saying, the implications are that these prices will fall 60%,

70% in miami. unfortunately, i did not stick to the models, and i said, we cannot say housing prices will fall 70%, and if i say that, i will lose credibility. i said 40%. i wish i had stuck to my guns. it is a lesson. now i am sticking to my models. that is the reason for optimism. finally, the third reason for optimism is policy. i think policy is now engaging. i think it has been frustrating, difficult to get the policy machinery working. this is an incredibly complex problem. just getting our minds of round the problem and measuring the magnitude of the problem is incredibly difficult. incredibly difficult. but you know what? i think we are there. i think we are on the cost of making a meaningful difference.

we have been reasonably successful. not as successful as the president hoped when he introduced the plan back in early 2009. we have only gotten 430,000 in permanent modifications, but that is meaningful and will make a difference. also as important, the plan is going through its own modification in the next three months. we will see expanded incentives from obligations that will include expansions of principle write-downs, and i think that is a very encouraging development. you see my outlook on foreclosures and short sales going forward, in the context of the 2.0 version of the plan. just because this is a very

disconcerting topic, and i know it must be very disturbing for you, being in the trenches -- it is going to be difficult. the coast is not clear. the next six to 12 months are going to be tricky. we will need unique policy from the federal reserve and administration. i think we have made a lot of progress. i am sticking to my forecast. that is the end of my final remarks. those are the three points. i think we have five or so minutes, if anyone would like to make a comment or pose a question. yes, ma'am? >> [unintelligible] >> microphone, please. >> in several slides previous to

this one, you were comparing -- there. the housing supply. my question is, it appears that in the housing supply numbers, you are not considering foreclosure? and my question is, why not? and if you did include foreclosure inventory, what kind of impact would that have on the supply/demand ratio? >> effect to the foreclosure inventory, someone loses their home, they have to live somewhere. it does not add to the vacant stop. they can go rent or rent an apartment, manufactured housing. it is not like that household disappears. it is there. it does not add to the vacant stock. this is just another measure of the amount of excess that exists

in the housing market, that is independent of the foreclosure problem. from my perspective, the foreclosure issue is very important in respect to the house prices coming and going back to my point about the share sales being distressed -- this is another aspect of the vacancy problem that occurred during the bubble and the bone. -- boom. >> [unintelligible] >> it would. to continue the question -- she was asking who would win the world series? [laughter] the answer is, i guess. -- yes. [laughter] she is asking a fair number of the people who lose their homes double up, triple up, would that

affect results? the answer is, i guess. it is already depressed, and it is reflective of that occurring already. i ended up accounting for that in the estimates for -- or guesstimate. we could see more doubling up or tripling up then we have seen today, and that -- and then this estimate would be high, but it does not account for that already. >> understanding the family is a subset -- multifamily is a subset of this data, is there anything significant in that sector? >> yes, i mentioned earlier that to my surprise most of the multifamily sector had been strong, relatively strong. certainly in the single-family market. since we saw the job market go from losses to gains, we have

seen some pickup in formation and some breaking apart of those double and tripled-up homes and gone to rental property. vacancy rates have fallen in most markets. in fact, rents are rising. they have risen considerably since the beginning of the year. so, the rental market is in pretty good shape, surprisingly good shape compared to my expectations and those of most of the people in industry at this point. a lot depends on the job market. if the job market goes into negative territory, then we have got a problem. there will be weaker absorption in the apartment market. barring that, based on continued modest job growth, the apartment market is measurably a healthier.

rent, that counts for concession, so much of the improvements sector rent has been winding down in concessions. landlords providing these two people with a rental property. and the level of rent was measurably lower than it was prior to the recession. the net income being generator -- being generated is measurably lower. that is the net outcome. i think we have time for one more question. is anything bothering you? no? thank you very much. it was a pleasure. [applause] [captioning performed by national captioning institute] >> thank you but very much, mark. i am going to ask the panelists to come up. i have a few logistic announcements. >> the washington journal summer this to series continues this

week. tomorrow, a discussion on political fund-raising and friday, a look at the science of polling. see it all on the washington journal at 7:00 a.m., eastern. >> searched the term "mideast peace" in the c-span video library, and you will see more than 1700 videos. interviews, panels, and forums all the way up to this week. all free, on-line. washington and the world, your way. book tv primetime tonight -- a look at climate change. mark alboin on nasa's james hansen. lawrence solomon on the scientists who have different views of climate change. and more on how to cool the planet. that is tonight on c-span2.

>> join our conversation on the american revolution, the making of the constitution, and the importance of historical study. it live for three hours with your calls, e-mail, and tweets. >> the financial crisis inquiry commission continued its investigation into the 2008 financial crisis. this hearing looked at how regulators determined financial firms that were considered too big to fail. among the witnesses, the ceo of wachovia, a financial firm deemed too big to fail. >> this is a meeting of the financial crisis inquiry commission. we're looking at the impact of extraordinary government intervention in the financial

crisis. good morning. i am honored to welcome you as we open the last in a yearlong series of hearings in washington and new york, examining the financial and economic crisis that has gripped our nation. sadly, while the facts of the crisis may be clear in our rearview mirror, the trauma is no -- by no means behind us. too many people are searching for jobs, trying to hold on to their homes, and praying they can salvage the licenses -- businesses. as reassemble our findings, this commission is determined to find the truth behind these people's statistics and understand how this calamity came to pay. beginning next week, we will hear from some of the people who've been most devastated by the crisis are brown united states. we will hold a series of hearings in the home towns of some of the commissioners to

learn more about the seeds of this crisis on the ground. we will be in california september 7, las vegas september 8, sacramento's september 23. we will be looking at our range of issues from mortgage fraud and bad lending practices. since our first public hearing, we have been on a journey together, following the evidence wherever it has taken us. we puzzled over the same questions many americans have asked, trying to figure out how wall street came to strangle main street. we will investigate how many financial institutions became too big to fail, and why the government decided to save some of those institutions with trillions of dollars. we know taxpayers feel at risk

when major financial firms of here towards collapse. in the decades before the depression, government intervention was rare. since the 1970's, it has become more common. this grew into a longer list of bank rescues in the 1980's and 1990's. illinois, first city, first republicbank, in court -- mcorp, and the bank of new england. it all seems quaint that these institutions were once considered too big or too important to fail. today we have megabanks of a scale unimagined a generation ago. the combined assets of the five largest base in the country tripled in size between 1998 and 2007, leaping from $2.2 trillion to $6.8 trillion.

the 10 largest banks expanded their shares of assets in the banking industry from 25% to 55% between 1990 and 2005. prior to their collapse, fannie mae and freddie mac held or guaranteed assets of a pop -- approximately $5 trillion. time and again we have watched as financial institutions of taken on more risk, used more leverage, and chased bigger profits. when things have unraveled, taxpayers have been handed the bill and warned that they must save the nation's financial system from perils created by the offending banks. to my mind, we have been living in a kind of financial groundhog day. if we've got a wake up and change course, and then we repeat what we have done before. many people as this commission whether the government during the most recent panic did the right thing to toss flotation devices to major financial firms while most of america took on water. the real question before us is this -- how did we end up with only two choices? either bail out the banks or

watch our world sink? many americans believe their reckless and institutions and greedy executives made appalling bets and came away not just unpunished but with a windfall of cheap capital. if they remain justifiably infuriated that top executives pocketed big bonuses with taxpayer money. if they rightly worry that the largest surviving financial firms are not just too big, but now are too big and too few to fail. if we will hear from witnesses about how these financial institutions were allowed to grow and take on so much risk. we're going to explore how the financial system became increasingly interdependent and interconnected. we will learn more about why the government grappled with the crisis in determined why certain banks and not others were deemed too big to fail. we will explore whether the expectation of bailouts at taxpayer expense served to encourage greater risk-taking by the financial sector. the commission staff has produced another in a series of excellent background reports

blood located at the website. the report dissects the governmental rescues of financial institutions during the decades leading up to the crisis that we are probing today. before i turn the microphone over to vice chairman bill thomas, let me thank him for all his hard work and cooperation on what has been a very long and hard journey in service to this country. let me also commend commissioners holtz-eakin and georgiou for taking the lead on this hearing. mr. vice chairman, the vice -- the microphone is yours. one of the things this commission is not required to do is make policy positions for the future.

frankly, on one hand, that is an easy job to do, and on another, it is almost an impossible job to do. when you bring a commission together, that is almost always the seam at which it rips apart. congress asked us to try to understand and explain the circumstances surrounding the crisis. what caused this particular financial crisis. when i was younger, and i guess i have to say in the early days of television, there was a program hosted on cbs hosted by walter cronkite called "you are their." and it went back to times in history, and while that particular event was evolving, that there would be a reporter's approach to discussing that particular period in history.

to an extent, that is what we are asking you folks and the other panelists, including the chairman of the federal reserve, ben bernanke and the chair of the fdic, assisting us in understanding what happened. one of the real difficulties is to deal with something like two big to fail and assume it is something you can define -- too big to fail and assume it is something you can define in the abstract. what would not be of concern in a normal situation becomes one in a situation where a series of events have occurred. it is almost an expectation. it is an action taken in anticipation of what might occur, and so, you hope that there are a series of non- events that you hope prove the

decision you made at the time was the right one, and it invites everyone to play the 20/20 hindsight quarterbacking game. this is the policy makers worst nightmare. i have often referred to the situation that justice potter stewart found himself in on the court when they were forced with defining of scene. how do you sit down and define of seen in a serieso -- bscene -- obscene in a series of words or phrases? and he gave the best answer i have ever heard, which was "i know it when i 7 on your side.." , with some detail available to us, but not nearly enough to explain to the

american people what happened. so we're asking you folks to do the best you can to provide us with a degree of understanding that our investigations have led us to believe that there were series of events that occurred that the american people will like to have a bit more knowledge about. this is the first time we have investigated this idea of too big or too important or to interconnected to fail in terms of institutions. and it is not going to be the last investigation that we have. but we do have the ability to focus on two case studies, wachovia and lehman brothers, as an example of decisions that were made that resulted in different outcomes. our chairman comments about hearings in various regions of the country, we're not going to

turn to what i think is one of the important incitements under the a statute, to hold field hearings, or informational or listening hearings, so that we can began talking to those folks who really represent the last domino. we've talked about a series of domino's falling on the other dominoes, and we're going to be looking at the last domino. many of them community banks, many of them people who were involved -- a longtime involvement in business activities, housing, various financial services -- who did not have another domino to fall against. this simply found downey. that is the and result. -- they simply fell down. that is the end result.

and it had six significant impact on the american people. i look forward to the questions as we continue to try to understand what people in particular context's came to determine was the criteria for too big to fail. >> thank you, mr. vice chairman. gentlemen, we will start our first panel of the vice-chairman indicated. we have two case studies will be examining wachovia as well as layman. tomorrow we will hear from chairman for 90 and chairman rnankechairman and chairman bair. the solace where that you're going to be providing the truth

to the rest of your knowledge? thank you very much. i think each of you for your recent testimony. we have asked each of you to give a five-minute oral presentation to the commission this morning. i am going to go to my left -- my right to start off today. alphabetically also, a logical order. we'll start with you, mr. alvarez. i am sure that you have been here before or in some room like this around the capital. i will indicate that one minute, there is a light and from the media goes from green to yellow. and then it will go to read when your time is up at 5 minutes. with that, mr. alvarez, if you begin your testimony. judy members of the commission, i am pleased to testify about the acquisition of wachovia corp. by wells fargo in the fall of 2008.

as an initial matter, the federal reserve was not requested to nor did in fact provide any assistance using its emergency lending authority under section 13-3 of the federal reserve act in connection with the acquisition of wachovia. nor did the fbi say provide any. the agencies were prepared to invoke the systemic risk exception to allow the fdic to provide extraordinary assistance if needed to reduce the provincial efforts of a face for wachovia failure on the economy. that party was not and faq's, and mccaw violist is all planned acquisition by wells fargo without extraordinary government assistance. to understand is, it is a born to understand the context. at the end of the second quarter 2008, wachovia was the fourth largest banking organization in the united states with assets of approximately $812 billion. wachovia had experience significant losses during a period of extreme financial

turbulence in distress. the nation's economy was in recession with housing prices declining and economic growth stalled. the financial system was also deteriorating quickly. within the four weeks leading up to the sale of wachovia, fannie mae and freddie mac were placed it to receive it -- to conservatorship, lehman brothers filed for bankruptcy, at efforts by private investors to provide liquidity to the aig failed, and the federal reserve provided it would temporarily if we using emergency lending authority. there was extensive withdrawal from a number of money-market funds. on september 25, 2008, the fdic seized and sold washington mutual bank, the largest thrift in the united states. the day after the failure of wamu, wachovia bank experience significant withdrawal of funds by depositors. it appeared likely that wachovia would soon become unable to

support its operations. on september 27 and 28, but citigroup and wells fargo began to do duke -- to do if diligence reviews and indicated to regulators that government assistance would be needed in each of their bids. the federal deposit insurance act includes concessions that allows the fdic to provide extraordinary assistance if the treasury secretary in consultation with the president and with the recommendation of the fdic and the federal reserve board determines that the assistance would avoid or mitigate adverse effects on economic conditions or economic stability. the federal reserve was concerned about the systemic complications for the failure of the fourth largest bank in the united states during this fragile economic period. markets were already under considerable strain after the events involving the gsf -- fannie mae and freddie mac.

it could lead investors to doubt the financial strength of other organizations that were seen a similarly situated. losses on debt issued by wachovia could lead creditors to stop funding other banking firms and cause more money and market firms to break the accelerating runs on these and other money funds. this could lead to extreme pressure in the fall of 2008 to virtually shut down. businesses and household confidence would be undermined by the worst bank financial market turmoil, and banking organizations would be less willing to lend. this would country to material weaker. for these reasons on september 28, the board unanimously recommended that the fdic be permitted to invoke the systemic risk inception in march to assist the resolution of wachovia that would avert serious adverse effects on economic conditions and financial stability. for citigroup and then wells

fargo bid for wachovia. and after a series of actions, wells fargo and ultimately acquire wachovia in a transaction did did not require use of the systemic risk exception. to better present -- prevented prepare for a situation like this, federal popples -- the federal reserve has already adopted things so that the federal reserve can understand linkages that could undermine the stability of the financial system. we're augmenting our traditional supervisory affect that focus on firm by firm examinations with greater methods to better identify common sources of risks and best practices for managing those risks. and with develop and enhance quantitative surveillance per graham's for large banking holding companies that use bank data analysis and formal modeling to help identified vulnerabilities.

we're also working actively to implement the provisions of the dodd-frank act. we're developing enhanced capital risk management, liquidity, and other requirements that would be applicable to large systemically important financial organizations as well as developing resolution plans and other plants and the debt. >> can you wrapup place? >> i appreciate the opportunity to describe these events and i welcome your question. >> thank you very much, mr. alvarez. mr. corston. >> and i thank you very much and i appreciate the chance to be here. chairman angelides, vice chairman thomas, and commissioners, i appreciate the operative its test fight on the challenges faced by regulators in resolving its large financial institution. the measures taken to improve the fdic supervision and

processes. before i began, allow me to briefly introduce myself. i am john corston, acting deputy director of the complex financial institutions branch. part of my duties are to oversee large institution programs. the fbi statuette started to resolve depository a institution is governed by the improvement act of 1991. it requires the fdic is the least costly resolution method and to minimize expenditures from the depository insurance fund. the lease cost test ends all are examples that cost analysis based on the best available information at the time. it includes an exemption to the least cost requirement for certain extraordinary

circumstances under the systemic risk exception that was described by mr. alvarez. in the case of wachovia, a severe time constraints and limited available information significantly limited the ability of the fdic to develop resolution options. the ftse fell that a rapid failure of wachovia could have loss -- could have had losses for others and created significant adverse effects on economic conditions and the financial markets globally that was already experiencing severe market instability due to a succession of crises is a large institution. these factors led to unprecedented decisions to use systemic risk exception. following the lehman bankruptcy, wachovia experienced significant deposit outflows. liquidity pressures on wachovia increased over the evening of september 12 when regular counterparties declined to lend to the firm. on the morning of friday,

september 26, wachovia indicated to the fbi say that the institutions liquidity position remained manageable. but by the end of the day, the situation worsened and it faced a near-term liquidity crisis. there was a highly accelerated effort to find an institution that would provide protection of depositors and minimize damage to the wider financial system. as noted earlier, limited available information and the complexity led to the government approval of a systemic risk exception and the acquisition of wachovia by citigroup with government assistance. in the end, the citigroup transaction was superseded by a bid by wells fargo to acquire wachovia without government assistance. if also tried to draw a parallel between wachovia and washington mutual, the situation for very difficult. having the ability to analyze

the financial condition of stressed institutions critical in developing strategy in the case of wachovia -- washington mutual, the ftse had adequate time to develop strategies and understand the risks associated with a strategies. with wachovia, the fdic was not informed until the weekend before its collapse and had very limited information that could be used to understand the market implications, especially in a market extremely unstable. in response to the challenges during the financial crisis and aided by a new regulatory tools, we've taken a number steps to improve our supervisory and potential resolution responses for systemically important institutions. to address on the restrictions under the 2002 agreement, that govern our examination of authority, the fdic and the board of directors approved a memorandum of understanding which provides the fdic a

authority to conduct special examinations and is not limited and knowledge is the authority to direct them should circumstances warrant. furthermore, the dodd-frank act provides the fdic with broad new authority not available during the crisis to close and liquidate systemically imports and firms in an orderly manner. this includes the requirement to develop resolution plans knows as living wills. and a broader resolution of authority of systemically important institutions. in closing, the fdic has several trolls and on-site presence to better assess the information, broader resolution powers to successfully manage this. i would be please to answer any questions from the commission. >> thank you mr. corston. mr. steele. >> i think your microphone.

>> members of the commission, thank you for the opportunity to appear here " to proceed today before the inquiry commission. my name is robert steel and i served as ceo of wachovia from july 11, a 2008 until december 31, 2008. the commission has requested that i address a number of issues including deterioration of wachovia's credit portfolio in 2008 and the company's discussion for potential merger partners off in late september and early october of 2008. as the commissioner is aware, the housing market deteriorated throughout 2007 and 2008. in light of the worsening outlook for housing prices, changing borrow or behavior, and mark to market by u.s. and losses on the residential mortgage-backed securities and collateralized debt obligations and leverage lending portfolios, wachovia reported a loss in the first quarter of 2008 of $707 million. if second quarter losses, like the first quarter, had been

calculated prior to my arrival on july 11 and amounted to $9.1 billion, including all want -- all $1.6 billion loan provision. this reflected the worsening economic conditions, and anticipated future losses in the loan portfolio, prime morally but golden west portfolio. a series of unprecedented events occurred in the financial- services industry that increase the uncertainty and stress and the financial markets. these events include conservatorship of fannie mae and freddie mac on sunday, september 7, 2008. the bankruptcy of lehman brothers, and the acquisition of merrill lynch announced on monday september 16. and growing concerns about the viability of aig, which letter culminated in a transaction in which the federal reserve acquired most of aig's equity. on thursday, september 25, in an unusual item, the seizure of the largest savings bank in the

united states was announced, washington mutual bank. the subsequent place of washington mutual under fdic s receivership for possibly $1.9 billion. on september 25, a tentative agreement in the u.s. congress regarding the economic establishes a proposal collapse. the combination of these events from earlier in september, the seizure of washington mutual on thursday, the 25th, and the collapse of the congressional agreement precipitated a sharp downward turn in the financial markets. the cost to ensure wachovia is dead as evident by credit default swap for s -- credit default spreads. on friday the 26 there was significant downward pressure on the common stock and deposit base, and as the day progressed, pressures intensified as financial institutions began declining normal transactions. in light of these deteriorating

market conditions during the week of september 22, it appears as though f. wachovia was blogger in a position to engage in the public offering a pipe replacement transaction necessary to risk capital, if which was considered to be the best method short of selling the company for sustaining wachovia in this tumultuous environment. management advised the board of directors that in light of the bank's inability to access the capital markets, wachovia had begun discussions with but citicorp and wells fargo regarding a possible merger and that management intended to pursue both options during the weekend. the better of these negotiations could of resulted in wachovia filing for bankruptcy and a national bank being placed in a fdic receivership. it would of been a major impact on the creditors, counterparties, and the u.s. economy. on september 26, wachovia entered into, fidelity agreement with citigroup and wells fargo, and initiated negotiations.

wells fargo and city corp. conducted extensive due diligence on december 27 and december -- september 28. the chairman of wells fargo asked for a draft agreement and merger for the whole company representatives of citicorp indicated to me their interest were to acquire only banking subsidiaries, with an fdic guarantee an assistant. the transaction would create a residual entity with non-bank assets and other liabilities. the chairman of the f.d.i.c. contacted me by telephone and advised that no transaction with citicorp or wells fargo could be effective without government assistance. in the fdic's view, wachovia pose a systemic risk to the banking system. she directed wachovia to commence negotiations with citicorp. we negotiated an agreement in

principle with a sign. these negotiations began immediately and were conducted in earnest and in good faith by a team of wachovia advisers. these negotiations proved extremely difficult. on thursday, leaving and to negotiate the transaction in good faith. but then decided to pursue the transaction with wells fargo. wachovia board of directors approve the transaction later that evening. after receiving fairness opinions, the next day, wachovia and wells fargo and as the merger. naked, sir. >> thank you for your statement for your written testimony. we will proceed to commissioner question. i will begin fallen by vice- chairman thomas and in the league commissioners on this.

call like to talk a little bit of bell the matters about which i spoke in my opening statement, the key question in my mind or one of the key questions, how do we get to the point for the boys we chased across the system was either to let the financial system collapse or to move in and saved i have been reading the work of our staff. there was a pattern amongthemset assistance or being in the category of "too big to fail." the one thing i want to focus on in my questions, with respect to the regulators, why were there

not efforts taken to contain risk, to evaluate systemic rest until the very end. when i look at the documentation all the way through with respect to wachovia, i do not see either regulatory body -- i do not see evaluations of systemic risk. i do not see this until the weekend of september 27, 28, and 29. the ryan had begun in the wake by the fdic.zure that is what i would like to focus on. i would like to enter some documents into the record. they are the april 2007 report of examination to the federal reserve, the july 27 at, 2008, examination to be a federal reserve, the august 4, 2008, examination of the office of

comptroller of the currency, and with respect to the action taken by the fed, there are two memos from september 27 and another memo on september 27 -- documents concerning what wachovia's liability structure was as well as the recommendation of the year richmond said. that was september 29. i would also like to enter into the record the fdic resolution -- fdic resolution of september 29, the memo of recommendation on the same day and that the minutes said the fdic board. now i will go to my questioning. , ai look at wachovia's gross dose from -- it goes to $782

billion in 2007. that is a great rate of 17.4%. by 2007, the tangible equity leverage ratio was 23.321. uninsured deposits climbed over $160 billion. mr. steele, you mentioned the acquisition of golden west lead to losses of more than $10 billion. as i look at what the regulatory bodies have done, as late as april 2007, the federal reserve in its report of examination is awaiting wachovia and at a two, which is safe and sound. it is not until july 22, 2008,

that the federal reserve downgrades wachovia 283. even at that point, -- to a 3. even at that point, there was only a remote threat to its continued viability. there were decentralized risk- management issues. he cited concerns about subprime concentration. the occ downgrades to a three on august 4. what strikes me is that all during this time as you look at the reports of examination, there is no report of systemic impact. mr. kohl, from the federal reserve, does note that there

were many constraints while the fed discussed internally the issues of significant growth, securing long-term funding, and acquiring more capital -- the fact is, when there are discussions about trying to get institutions to build some bulwark against those concerns, mr. kohl noticed a 2007 study that there was concern in the united states about losing out to london and other financial centers. there was the concern that there was too much regulatory oversight. we lose our competitive bid vintage. mr. kohl also said there was a risk that risk management practices had improved and that the industry had matured.

mr. kohl also said that at the federal reserve bank -- the focus was on a holding company and packs on suppositories. there was not a look at systemic risk. i would like to ask you to comment. was this a big hole? was there a hole in the system or the federal reserve did not look at the systemic and pac's? i did not see anyone -- systemic impacts? >> his points are correct. we operate under a statutory frankfurt -- statutory framework. the degree of our investigation is governed by statute. one of the gaps in the statute is one that is fixed by the "dodd-frank act" is on the

individual safety and soundness of particular institutions, not on the system as a whole. there is no regulator in the banking area that is granted that kind of authority and oversight. that is one of the things that emerged in this crisis as a gap in the system. it is one of the things in that the "dodd-frank act addresses in a variety of ways. it encourages regulators to look at the systemic effect and the safety and soundness effect of particular institutions. it also establishes a council that brings together regulators of different markets ended institutions, so that gaps in systemic problems can be monitored. where there are gaps, recommendations can be made to

congress. park said it was the statutory framework we were operating under. we also, as mr. kohl mentioned, were limited to the institutions we could look at. we work required by law to defer to the primary regulator, institutions that are otherwise regulated, including the bank, the broker-dealer, and other regulated institutions. while we have a good relationship with those institutions, it is clear that the primary role belongs to somebody else. >> let me probe this a little more. we are in the high inside business. if you see an institution growing by 17% compounded annual growth rate, you see a tremendous wave of acquisitions and a fair amount of risk being taken. this has been a pattern over time. the fed had the ability in the "good times" to make sure the

boy works were there. -- make sure the bulwarks were there. having come from state government, i know that a lot of states have suffered. looking back on it, should the federal reserve or the jugular -- or the a regular -- or the other regulators have seen the growth rate? >> we did encourage a bulwark. that is what capital is for. the capital at wachovia, even at the time it failed, was sizable. it was well-capitalized by all definitions. when you are in a liquidity crisis, the capital may not be your saving grace. indeed to be able to sell assets or be able to raise funding in some other way. that is what was happening in the fall of 2008.

liquidity was drying up, so capital became less valuable as a bulwark. growth and size by themselves are not bad. growth of the banking system tends to mirror growth in the industrial and commercial entities in the united states. large, multi-national corporations, of which there are many of in the united states, find it helpful and very good for their business to have a large, american companies that can finance the growth of these commercial and industrial entities. >> i agree that growth is not in and of itself bad. when you see growth, you see a wave of acquisitions. there's been a pattern. one thing that has struck me as you see the staff reports, over

time there is a pattern of these institutions that do fall into trouble which is aggressive growth, high leverage, and increasing concentration in risky assets. i am probing, at any time did you say you had to look at the systemic risk implications and or that we should be concerned about the growth of these institutions and the risk profile they are taking? >> our ability to look at the systemic effects was limited. what we did was look at the institution's ability to look at the risk it was taking on. from the exam reports that you just released, the federal reserve was cognizant of the risks that wachovia was taking. they were urging wachovia to address those rest and improve its risk-management systems as well as allies in its capital

needs. we have a variety of efforts underway at wachovia at at other institutions to help them improve themselves said they will be in a better position individually to deal with their difficulties. unfortunately during the period of 2000 and eight -- 2008, institutions cannot address problems at their institutions. there was less funding available. there was less capital available. liquidity was scarce. we're stressing that companies deal with problems as those problems were becoming apparent. we were in a disadvantaged economic situation to adjust them. >> i want to ask you a couple of questions, mr. corston. it is my understanding that you had one examiner on site. were you ever blocked from access to wachovia? i know in respect to washington

mutual, it was blocked. are you familiar with that? >> i am familiar with that. >> but not in the essence of wachovia? >> correct. >> the one thing i want to ask you, in your role as the backup regulator with a significant amount of at-risk, did you ever look at the trail of the systemic risk implications for the system prior to the september 29 nemesis? is that an accurate characterization? >> the fdic was looking at our risk at the various institutions. we established what we refer to as date a"-- referred to as a " national risk committee." it included directors of our

insurance divisions and resolution divisions. it also has the chairman and vice-chairman of the fdic in attendance. what of the issues we became concerned about was the amount of liquidity in the markets and the amount of structured products and the complexity in the structure products and what we felt maybe insensitivity to credit risk in those products. we discussed that with our national risk committee and, in essentially, were involved in trying to get more information. wachovia was very involved in that area. we had our dedicated examiner spent quite a bit of time working with the regulator and the federal reserve on getting

information, background, and reporting for that committee. you mentioned the issue of growth and concern that we may have over growth. as mr. alvarez points out, growth is not always bad, but for the fdic, if growth results in a higher risk or more complexity, it becomes more of a challenge for the fdic. for example, when wachovia purchased golden west, golden west was what we would consider an institution having a single product, a mortgage portfolio that was largely collateral based. for the fdic to have that level of embedded risk in a single institution is problematic. you can see that with the results of fannie mae, a freddie

mac, and countrywide. this allowed a monoline institution go into a far larger institution that had diversified risk. the issue with wachovia is that it had a lot of other risks that exposed it to sensitivities in the market and liquidity in that market. one of the questions you had about whether we missed anything, the toughest thing as a supervisor and having to go to my board of directors, it is tough to not have a viable options for them. one of the things i do not think that we fully appreciated was the sensitivity to the capital markets and the funding markets to the credit risks in some of these markets and how quickly

that pull-back could be. with wachovia, you can see the rating was 3. we actually had in our lidi system, had wachovia-in march of 2008. that institution would be subject to a downgrade within the next 12 months. we had a discussion with the occ and they subsequently downgraded that institution. we did have concerns about it. the sensitivity to funding markets was something we did not have a pull the appreciation of. when the market became so displaced, this institution stood out as one that could not weather that storm. >> it does seem to me that there is in assets -- in a

since -- that it is like groundhog day. on the upside, we do not take the provincial steps that we take. do you believe in retrospect that that was a failure or a big gaping hole in the system? i do not see the systemic risk and liquidity prior to the weekend and this was done. >> i would agree it is a statutory gap because it was very critical for us -- we were getting feedback that the risk was adequately managed. but it was difficult to say the growth itself was the problem. >> i reiterate what i said before.

the -- that is a gap the dodd- frank bill is attempting to close. e>> this is for you, john corston. i will ask sheila bair tomorrow. she expressed reservations. in the transcript, she talked about how she is "acquiescing to the decision." she said she was not completely comfortable with it. . . she would be able to answer that question. the information that we presented to her prior to the board meeting and at the board meeting was an institution that was suffering extreme illiquidity stress and that something had to be done. i am sure that board, including her, would have liked for more information and far more time to

make a decision. i know that that was a concern. >> mr. alvarez, one last question for you. we are trying to examine it white some institutions where deemed "too big to fail" and others were not. we looked at the memos from the fed and from the fdic. i asked myself, "why did lehman not fit that criteria ?" they both seem to be in a position where they had systemic risk. one was in m1 was out. >> first of all, we do not have a list. i think as you will find in the discussion this afternoon, the difficulty with lehman was not that it would have had a systemic effect. it has been shown they did have a systemic effect, but we did not have the tools to do anything other than what we did.

lehman needed for more liquidity than the federal reserve could provide on a secured basis. without that security, we are not authorized to provide landing. we did not have the authority to provide capital. >> and me press you on that, mr. alvarez. he wrote a opinion on march 9 which i would like to enter into the record. you said at that time that the statutory "acts least the collateral within the reserve bank." you said that for the loss to be fully secured -- i am sorry. this is march 2009. he went on to say that requiring most to be fully secured would "undermine the very purpose of the section."

the other thing -- i would get into it more this afternoon -- was there ever an opinion rendered during the course of deliberations on women that credit could not be extended it legally -- lehman that credit could not be extended legally? the issue of a legal stopper never comes up as far as i can see. >> there was no time to write a legal opinion on lehman. everything happened incredibly quickly. we were dealing with the collapse of lehman. there was not time for that. on the other hand, if i could explain my legal opinion, the statute says that the federal reserve can land so long as the reserve bank is secured to its satisfaction. the credit is either guaranteed by somebody else or secured to

the satisfaction of the federal reserve bank. collateral is one way that eight reserve bank may find it secure. it may be the value of the collateral makes it feel it will be repaid. it has to be able to feel comfortable that it be repaid. going into that monday, there was not be believed that the federal reserve would be repaid because the collateral was inadequate. payment was a company that was failing. it did not have other sources of income to assure that they would repay the debt. there was no third party or the other source with funds to repay f. lehman did not. the federal reserve believed it would not recover the funds, debt for the credit was not extended. >> i know that the private consortium went in and was trying to value the assets of

lehman. i know that there was a valuation, but, of course, you can argue there was a motivation and a timeframe. did the fed ever do collateral analysis? did anyone in the federal government? >> a written report? no. >> there was time for extensive memos on wachovia. >> for lehman brothers, we were not the supervisors, and light wachovia. we did not have the access to information or the understanding of the company in the same way we do of wachovia. it is a different situation. >> thank you, mr. alvarez. >> thank you. >> vice-chairman? >> thank you, mr. chairman. i think i have an extraordinary opportunity given the fact that mr. alvarez, you have been at

the federal reserve, i believe, from 2004 until the present day. >> i was actually born at the federal reserve. [laughter] >> excuse me, the federal reserve notes. mr. corston, i understand that you were born at the fdic in 1987 and had been there ever since. >> that is correct. >> mr. steele, you were at the treasury for domestic affairs from 2006 to 2008, but moved from 2000 08 -- but moved in 2008 to wachovia. you would be part of this string of decisions and results. so i will play walter cronkite,

"and you are there." i am asking these questions as the chairman of the federal means and ways committee. all three of you gentlemen, when you were in government, are in article 2, the executive branch on the execution of the loss of the united states. when we talk about that -- and you were there, mr. corston, i understand on that meeting of the board of directors on september 29 -- when you were looking at a potential decision

to deal with wachovia, mr. alvarez, on page 10 of your testimony -- excuse me, on page 6 of your testimony, you emphasized in the observance of the behavior of the fdic meeting -- on september 28, the board by unanimous vote determine the compliance by the fdic met all of those requirements. it was a unanimous decision. >> yes. that was might board. i was not speaking about the fdic board. >> i apologize. what was the boat -- what was the vote? >> if it was unanimous.

>> it was a unanimous vote of the fdic. what it -- was it an easy unanimous vote? you know what i mean. just talk. >> i was a presenter. i did not get many questions. i think, though, it was not an easy decision. >> what was part of the concern about making that decision on the part of the board directors? >> that is easy to answer. it is the same problem i had. we had virtual time frames with a lot of gaps in information. while we had information regarding wachovia, we had very little information regarding the outside collateral impact which we knew could be substantial. it was hard to calibrate a measure. when we presented our case, we

knew this could be a very significant factor. decisions were going to be made upon, yet it was difficult to provide hard facts. i deal with institutions where i generally go up there for my --rd and present part that's present hard packs. i think this was the challenge we had that evening. >> as you indicated to the chairman, he liked to go into meetings with viable options. viable options are those based upon facts, that you had some certainty of presenting a course of action if that course of action was accepted. was their concern in the fdic about the potential of the fdic holding the bag? that there would be some concern about costs to the fdic

>> with regard to the case i presented and our analysis, the bid that was presented and the analysis we have from our field staff working with the federal reserve, it really showed that we had no loss exposure. now, we were given affect set that is not entirely 100% probability, but we were very comfortable that the actual dollar exposure was zero for the fdic. >> i your testimony, he said as a result, there is no expected loss of the fdic associated with the transaction. so you were home free. mr. alvarez, in your testimony, on page 10, in terms of

examining the arrangement, you say, "the federal reserve did not provide any emergency financial assistance in connection with the wells fargo- wachovia merger." in terms of taking care of your birth place, there was no risk, a financial obligation, or other financial world of the federal reserve -- financial role the federal reserve reply. >> that's right. so the federal reserve was home free? >> yes. i have to add a small footnote. >> small in size or importance? >> i think in both. while it was true we were not asked for emergency assistance,

wachovia was barring the bank itself -- borrowing the bank itself. >> once you make that decision, that is part of your commitment, but it was not outside of that. the federal reserve was. have any kind of exposure. the reserve is home free. the fdic is home free. in your testimony, mr. steele, i found on page five that your information was kind of second- hand, for example, in the middle of the page, "chairman bair shortly thereafter provided details on the proposed transaction, including that it would not require any government assistance." >> yes, sir. >> lower on the page, you

were in flight, things were happening what you were moving. things -- this was at the time you're at what cobwachovia consistent with what she told them, chairman bair described it as providing no government support with no risk to the fdic fund. >> yes, sir. >> but the solution, notwithstanding the fact that the fdic took the unusual measures in its minutes to move to a citi-wachovia a structure was not talking about the arrangement, was she? >> no, certificsir. she was speaking about the proposed transaction by wells fargo. >> and the proposed transaction

came after the fdic had met and decided by unanimous vote that it was appropriate to go forward with the safeguards and the small risk of possibly having fdic funds expos. on the 29th? -- having fdic funds exposed. what happened on september 30? beckett year-old stomping ground, mr. steele, the department of treasury. there was at that time an irs notice, number 83, which changed a more than two-decade old regulation dealing with the acquisition of companies. in terms of whether or not the

acquisition focused on the acquisition for purposes of tax benefit rather than any of the other reasons that firms might want to merge. in fact, irs issued an opinion which turned the law on its head. it didn't provide -- we are familiar with it. the ways and means committee used to -- committee used to deal with that because it was a way to transfer previous losses to current situations and previous profits to current situations where you wanted to shift time to provide assistance. it was always on a fixed time that it was available, and it was always across the board available. that if you met the dollar amounts, you were able to utilize them. you did not come at you did not. but in notice 83, the irs said

it was available to banks only to shift. losses that would acrue to the acquiring company. so you were asked wachovia at the time, and subsequently with the acquisition of wells fargo, you moved them to a position on the board of wells fargo. >> after the closing of the merger, several former wachovia directors were invited to the wells fargo board. in january, 2009, i joined the board. >> i am trying to understand, as i am there and you folks are in the positions you are, let me in on when treasury began looking at what you call, mr. corston,

viable options, including a reversal of a regulation that significantly covered what you could or could not do in trying to salvage financial institutions that you might define as too big to fail. because suddenly laying on the table and ability to acquire a bank or financial institution in which the concern is failure, therefore, a significant losses, could actually be incorporated by the acquiring corporation and use to offset taxes. and that was the choice that was made, notwithstanding the fdic made the other choices. what was your reaction, mr. corston, to the september 30 announcement by the irs that they were changing the fundamental rules of the game which would clearly change the potential relationship between

these financial institutions that you folks were so concerned about the day before in your minutes? >> my reaction was more towards the wells fargo -- it was a viable bid as a result. that was far more palatable of an option. >> so the means justified the end. you were pleased the irs made the change in regulations, unilaterally, without consultation, with the legislative branch of that has the constitutional responsibility to change the law. in essence, they changed the law. but it was convenient, a brit, a better deal. on the previous deal, fdic was ok, the federal reserve was ok. why didn' t you look at continuing the process and not leap at the opportunity to take

this extreme, a fundamental change in the tax code brought about by an irs notice? >> the issue on a weekend rally was a liquidity issue. we did not know -- really was a liquidity issue. we did not know if they had enough liquidity to operate monday. and that was a concern, and a concern we presented to our board. the problem was we just did not know, but we did know that the implications of them not being able to operate and the resulting impact on counterparties and other institutions could be fairly significant. so are our decisions were made, as i said earlier, unfortunately very, very compressed time frames with really not a tremendous amount of information. >> mr. steele, you were at treasury in an undersecretary position from 2004 -- 2006 to

2008. was there any discussion in terms of mr. corston's viable options of looking at this shift in the definition of what he could do under the irs? >> not that i'm aware of. >> was it brought up in any discussions when you were desperately looking for a solution? because i know treasury talks to fdic and the federal reserve, and you sit around and try to resolve problems collectively, making sure no one wind up holding the bag, certainly not the federal reserve or the fdic. would you characterize there would be no government exposure or cost? >> no, sir, no discussions of this technique or issue. >> mr. corston? >> none at my level. >> none that i'm aware of. >> so this immaculate birth of

an irs notice which fundamentally changed the way in which corporations could deal with the tax code on an acquired corporation's losses was so significant that it shifted your decisions to allow the wells fargo to go forward. citibank was little upset. didn't they take legal action? >> that's correct. >> you were probably supportive because it could have left a bit of exposure, notwithstanding the size of it, but exposure to the fdic. you were supportive of this utilization of the regulation change. was there discussion in the fdic about this is a better way to go? >> the discussions i was

involved with was analyzing the two transactions and the wells fargo transaction not requiring any assistance with the fdic was a far better proposal. >> right. you are home free. we knew the federal reserve was home free. mr. steele, how can you characterize, even a utilizating other people's characterization's because you include them in your testimony, that there would not be any government cost to the irs notice 83 solution? what it was was a significant loss of revenue to the treasury, unprecedented. so, how can you say there was no cost to the government? unless you saw the government as the executive branch. >> no, sir. i believe the way i would for in this distinction is that drawing a distinction between specific government support for an

instant transaction in one case versus a change in the irs tax code, which was available to all others who might be in addition to take advantage of it. >> all other corporations? >> all other institutions to fit the qualifications. >> which were financial banking institutions. >> yes. >> in the vernacular, we used to talk about it in terms of making these kinds of decisions -- it was a rifle shot. they changed the law for a specific group of institutions. did anybody think that was lawful? i understand it was convenient. it certainly was a solution that was not available on the 29th when the fdic made its decision. became available on september

30, and while sharpening its pencil, a home by october 2 decided it was a good deal and they could do it without any government assistance. how can you not call changing the tax code to provide you with significant tax benefits doing it without government assistance? isn't taking money away from the taxpayers in the general fund through a change in the tax code government assistance? >> i understand your perspective. what i tried to describe was a distinction between support for a specific transaction and support for what you just described as a group of people, meaning financial institutions, and that being a distinction in my mind with a different. >> this is not my characterization.

a fellow it teaches at the university of virginia that i got to know very well, because we selected him as chief of staff of the joint committee on taxation said, "did the treasury department have the authority to do this? i think almost every tax expert would agree that the answer is no. they basically repealed a 22- year-old law that congress passed as a backdoor way of providing aid to banks." what happened once congress discovered what had been done by the irs? they immediately slammed the door on this provision, although i believe two other banking institutions got through before the door was closed. i guess what just amazes me is looking at this tieme period, late september, early october,

there was a focus on the fdic making sure they were hauled freight and the federal reserve making sure they were home free -- the ends justifying the means was quite all right for wells fargo and for the assumption by wells fargo of wachovia, because it made it government-assistance free. but it wasn't. it cost the taxpayers to utilize this. i guess what is so amazing to me when you begin to examine the options open to you that i think a lot of us have a concern about the kinds of discussions that went on behind closed doors, what the options were that were defined as a viable, including, up to it changing the law of the internal revenue code to make it expedient to take a course of

action that did not cost the fdic anything or the federal reserve anything. but to characterize it as no government assistance, no government cost is to tell me a whole lot more about those key decision makers' view of the world at that time they had to make decisions for the american taxpayers and for the american government. i nkoknow who you are looking ot for. i reserve my time. >> thank you. >> i would like to follow up with mr. steele. do you still serve on the wells fargo board? >> no, i do not.

>> do you know how much that tax code change benefited wells or whether it is still a continuing law? >> no, sir, i do not. >> does anybody hear know? anybody on our staff know? >> in an analysis provided, wells contended it -- contended they have not read any benefit to date, but i believe that is their statement, that they have not yet utilize or reap any benefits to date but there are projections ofor future use and availability of the credit. >> and that is because they have not made enough money in the interim.

but there was an estimate provided when the measure was repealed saying costs would be about $7 billion. that is my recollection. >> there is printed information that indicates that the difference between it september 29 and october 2 was a tenfold benefit to wells fargo and terms of the tax provisions. >> obviously, a tax loss carryforwards are valuable and that they shield a future income from taxation. at the end of the day, although the fdic did not have to impact the insurance fund, the fed did not have to provide direct assistance, ultimately the taxpayers will be impacted by the diminution and -- in revenue that would otherwise have been

collected from wells when and if they utilize these tax loss carry forwards. the point at the end of the day is not that that method was utilize but the characterization of it as not government assistance. it was a different form of government assistance, that's all. it was a delayed form of government assistance, but at the end of the day, the taxpayers will have less revenue, which is the same as expending the same amount of money effectively over time. i guess i was interested by some of the things mr. steele that you said to our staff in the interview they conducted with you. one of the things he said was the resolution process, you believe, should be mean-spirited with all parties playing a price

as a pedagogy or methodology for resolution. i think people should not be too big to fail, but given the concentration issue, how should people fail in a way that does not have a ripple effects? could you elaborate on that? >> surely. i think i would start with what i believe are the right principles and then i would talk about preventative perspectives and then the right approach once events develop. as you recounted from my interview, my personal belief is that no institution should be too big to fail, but we do have a reality and that is that the nature of that government involvement, in particular with depository institutions, set up a situation that is complex with

regard to moral hazard and the relationship between these institutions. where we have a complicated crystal that wer are not clear on. so that is the reality, but my belief is that no institution should be 20 big to fail. so what to do about that? i believe that there are certain things we do in advance and some of them mr. alvarez described, whether it is a living wills, more effective regulation and supervision, and efforts to understand systemic risk as the chairman discussed in great detail. those are examples of things we can do in advance. then i think you get to the complex issue of when institutions run into trouble, what is the method by which, if you adopt my perspective that no institution it should be too big to fail, why do you think should be the methods by which

institutions are wound down o r have the as to least effect on other parties? they're my view is that we have processes for bankruptcy and that we should use as much of the processes available by bankruptcy as we possibly can before we get to the issue of thinking about government support. that is the philosophical perspective i would bring to the second part of the discussion. >> a lot of us on this commission share that view. but one thing that is in our charge is to attempt to evaluate and elucidate for the american people how it is that we got to the point where so many institutions were provided with extraordinary governmental assistance. and, of course, they -- the policymakers only faced the choice of whether to save an

institution when they are on the verge of failure, which, of course, customarily occurs not in an isolated manner, when one particular institution fails and a time when it is generally of rosy economic circumstance. if that occurs, quite often we allow them to fail because it is not going to impact anyone else. the problem is when circumstances present themselves, as they did in 2007 and 2008, when liquidity was being withdrawn from the marketplace. as we look at those issues, we are doing so with the hope that we will learn something about it that might enable us to address these matters differently. one concern i have is that it appears that just the top six largest banking organizations in

america, that would be bank of america, j.p. morgan chase, citigroup, wells fargo, goldman sachs, and morgan stanley, their assets were -- grew from 17% in 1995 to 58% of gdp in 2007 as we approached the high point of the financial crisis, but they are 63% as of the end of 2009. they are not any smaller. those six banks are 5% or to have a 5% greater size relative to gdp now than they did during the crisis. so my question to you, and i guess i will start with you, mr. steele, because you have a lot of experience in the private as well as public sectors, then i will turn to the other two of you -- are we really any less likely to be compelled to save one of these six very large and

very interconnected financial institutions in the event that we have a liquidity crisis anywhere near as severe as we had before? and i raise this because it seems to me that there are conceivable circumstances in the future that could lead there. we, obviously, commercial real- estate loans are not as large in number as residential real- estate loans, but if we all can see that the loss of value in the residential real-estate market place was a significant factor as a trigger of the crisis, you know, could we face a similar one as the commercial real a state losses have to be absorbed in these institutions over the next few years? and are we better position today than we were two years ago to avoid the need to provide extraordinary government assistance to these institutions? >> i will revert back to the

methodology of was describing. i think first is are we building or in the process of building better capabilities for thinking ahead, thinking systemically as the chairman suggested, having a more robust perspective from supervisors and regulators, and are we building tools so we are more aware and have a better line of sight on these institutions? i think that is in the process of happening. then you get to the second part of the question. and here, i think we have to be a very disciplined about setting into process now methods by which we do with this before we get into this situation. as you said quite correctly, when you have a situation like we had in 2008, where several institutions are being stressed at the same time, then you need to know in advance what you are going to do. that is why i have liked,

preferred some of the perspectives of recognizing we have to say in advance we will move in this direction and be more tough-minded with regard to potential bankruptcy. >> how do you do that? you have to do it well in advance of the crisis? the think we are doing that now? >> i think this is all yet to be determined. they are going to be writing 50 rules in the next 18 months. it will be in the work of implementing this legislation that we will see how people do. >> mr. corston? >> i think we certainly have an opportunity to address these issues that we face in the past. ints youhe pooint raise, under our current process

for resolutions, you will notice that to resolve all large institution it generally is absorbed by another institution. so, given the example of washington mutual bank gets absorbed by j.p. morgan chase, and now we have j.p. morgan chase. the solution for wachovia is absorption by wells fargo. those statistics you mentioned, i think if you look at each crisis, the concentration of assets afterwards, we see more and more concentration in banking assets in larger institutions. frankly, under the dodd-frank that was our only way of for a large institution, to have absorbed by another institution. one of the things, the fdic looking to resolve an institution, you need time,

information, and you need to understand structures. the bill will provide that information. one of the keey pieces is that when institutions make decisions right now, they make them with the sole focus on the bottom line. so if you are sitting at citigroup, j.p. morgan chase, you are not concerned with your structure unnecessarily if it had to be wound down in an orderly manner. that does not cross your mind set. that is not a business decision. with dodd-frank that becomes a business decision. for the fdic that is crucial. in many of these structures, whether legal or informations systems, the structure of some of their products, if you make simple decisions at the beginning, at the outset, we understand some of the decisions they are making at the outset, not under a compressed time frame, in a weekend, but going

back when institutions are making decisions, we will buy wachovia. we look at the structure and we are able to work with the institution to make it more palatable. >> let me focus on that for a second. obviously, wachovia bought golden-west. they had these pick your payment mortgages that we know people picked -- when given the option to pick a payment, they generally pick a lower one and a lot of people would like. sometimes they even picked ones that resulted in negative amortization that did not even meet the interest, let alone of the reduction in principle, so their loans kept ballooning. these are the kinds of loans that cause problems not just at wachovia but at many

institutions. does anybody have the authority now to address a similar type acquisition that will create within one of these larger financial conglomerates that kind of focused risk that helped to bring down wachovia dodd-ee of the keys in frank is when institutions have mergers, we can look at those structures, see it through a living will process, is it something with which our corporation can deal? ultimately, if we cannot, we have the ability to force the best your. there are steps along the way, but at least it provides the ability to influence some of these structures to get the complexity iand size to a

manageable size for our corporation to deal. and ultimately, under the bankruptcy code, is the goal. >> two minutes. thank you. i want to highlight one point and that is that some of the most astonishing testimony we have heard over the last many months was testimony from the leadership, the ceo, the chief risk officer and chief financial officer of citigroup testified that they did not know that within their sold investment banking subsidiaries had a liquidity provision that required them to buy them back, which they ultimately exercised. there was $25 billion, which was 1/3 of the $75 billion of capital that city book had on its books. aig's leadership testified that

they did not know that there were collateral calls associated with the credit defaults what they sold. their required when those tranche as were downgraded, required collateral to be put up. this led to the demise or would have been the demise of one of the oldest and best capitalized insurance companies in the history of the world. are we presenting a problem now that it will be exceedingly difficult in the future to resolve with the bailing out institutions by creating institutions that have so many diverse product lines and so forth within them that they are exceedingly difficult to manage it? or are those just al outliers? citibank and aig were central to

our financial system for a long time. is part of the problem, when these large institutions are created, they are difficult to manage and to supervise as well from the regulatory perspective, and is that just setting this up for a difficulty that is going to be a problem in the future? if youhairman angelides ifmr. , could respond to that. >> that is an incredibly difficult question and problem. but one way to think about it is dodd-frank puts more responsibility on agencies to ensure that large organizations have been has requirements to deal with risk management. there have been accounting changes that will help with a citibank problem. aig fell in a gap in regulation. there was no one is supervising the top of the organization, which does not relieve management from its responsibility, but may explain why there was not more

government pressure for the management to know what was going on. those things have been attempted to be addressed in dodd-frank. going forward, the tools we have to deal with the crisis are different than what they're were up to 2009. the federal reserve will no longer have the ability to make loans to individual institutions like aig. in its place is put a requirement that we resolve these institutions by wiping out the management and the shareholders and assessing losses across the creditors and closing down the institution. so the approach of going forward will have to be different -- more regulation on the front side to prevent the problem and more drastic solutions in the event someone gets into trouble. >> we wish you godspeed in your work, because this is important work for the american people. i would urge you in your

analysis to try to bring in your analysis all the off-balance sheet exposures that all these institutions have that render them incapable and their capital and adequate when crunch time came. so really you have to look at them holistic way with in the institution. and to the extent to have been given that authority by the new legislation, i urge you to use it. >> mr. vice chair? >> 30 seconds to mr. corston in terms of your answer, about corporations looking to their bottom line, did the fdic do exactly that, when on the 29th, you unanimously accepted a shared relationship with citibank in the acquisition of wachovia, and two days later, when you were let off the hook

by virtue of an unprecedented executive branch usurpation of tax law, provided and all that really was a solution the better protected your bottom line? >> when i % my analysis to our board of directors, i present analysis -- when i present my analysis to the board of directors, i present analysis that when we gotd the wells offer that the exposure to deposit insurance fund was less than that of citigroup so it would be better for us, less risky. >> so if i line up your loyalty responsibility, it is to the fdic first and to the american tax payer second. that is just what he said. thank you, mr. chairman. >> thank you, mr. chairman, and thank you, a gentleman, to help us today think about this issue. i think it goes almost without

saying that the nature of government intervention to financial institutions to -- and markets is the signature of this particular era and one of the most controversial aspects of public policies you can imagine. it does raise questions we have to somehow answer. in particular, did the intervention or the expectation of intervention cause or exacerbate the crisis that we have lived through it? for institutions that received a, what were the criteria that were applied? who gets the help, how much do they get, what form does it take? in terms of thinking about the notion of identifying those that intervention, what are the dimensions policy makers are looking at? is it scale, large institutions get attention?

is it interconnectedness? the fact that many counterparties may be deeply affected due to the failure of an institution? is it the business of being a similarly situated, allowing one institution to fail sends signals about others that are similarly situated? or is it just the nature of market conditions that dictates the need to intervene? these are all dimensions of the problem that have been bandied about in our discussions in preparation for this hearing. i think i was asked to lead this preparation in part because i approve and i do not understand how to think about this problem. i want to start with you, mr. steele, and ask you, during your tenure at treasury, as we saw financial market conditions evolved in the fall, 2007 and into 2008, what institutions was the treasury surveiling? what criteria were you looking

at? were you looking at the largest, counterparty exposures and measuring them? how was the the treasury thinking about this problem and the fallout from individual institution failure? >> well, when i reflect back at treasury, and i was there from 2006 to 2008, it really was in the summer, 2007, when you saw the first cracks start to appear. and basically, what began with housing-related issues spread into securities markets and then began to have the reverberations into specific institutions, is how i think about the process developing.

and everyone has their own image of this, but that is mine. i believe there is no question that it was tough to keep up with this situation as it was developing, challenging. and that i think that our focus rolled along with the phenomenon that i just described, where there was our original focus on the challenges of housing and foreclosures and what could we do to understand and tried to be constructive toward housing and focus on foreclosures. roman number ii, was as the spreads into securities markets, it was a matter of things like the commercial paper market, and asset backed commercial paper markets. then you saw, overarching this period, was concer n about

gse's. i think that was leading up to the institutions. first with security firms and then into commercial banks. that was a transition of how we monitor it and try to follow the different things, just from a time frame of the lends and how things lined up, sir. >> is it fair to say that you were then looking at firms that were similarly situated as specific markets became more impaired? >> i think we did our best to think about the interconnectedness, too, because when you look at the effects on the model line industry as it spreads out to other areas and what it means for securities on the balance sheets of lots of other institutions, all kinds, insurance companies, commercial banks, securities firms -- so i think it was trying to understand the

interconnectedness' and the institutions affected by the situation we are examining as we worked for those challenges. >> but scale, per se, did not appear to be important. when i hear you say, it is not the size that matters. his other characteristics. >> all kinds of things. this began at the grass-roots level of trying to understand the effect on foreclosures and homeowners. that was really the first. from there, you have the ripples. where does adcp lie? if general electric has a problem, that affects credit cards, it affects student loans, and it affects all types of securitized credit. so this was a phenomenon that when in lots of directions. >> so my understanding of the dodd-frank legislation is that the nature of the interventions changes. the fed will not be permitted to

provide liquidity to individual firms, but it will and should stand up like it did in this crisis -- there would be brought eligibility for liquidity systems. if that kind of facility is in place, commercial paper assets, does that change the way we will have to worry about the supervision of institutions and their systemic implications or have we taken care of that by providing broadbased liquidity to those markets? >> i am not sure i have a perspective on that, to be honest. >> not even a guess? i guess all the time. to return to you, mr. corston. you have been at the fdic for a long time, long enough to have lived through -- the law that was supposed to rain in the fdic's ability to assist large

banks when they are in trouble. in your career, was there a sense that the 1991 law put handcuffs on you and raised the borrower in terms of your ability to provide fdic assistance to troubled institutions. >> it narrowed the options. i think with prompt, corrective action is davis the structure to work in. -- it gave us the structure to work in. as an examiner, it made things easier to implement. but with that structure, there were some constraints, also. >> so, the decision to provide the systemic risk exemption in the wachovia case was a very important decision? >> absolutely. it was a very unique situation. obviously a difficult one for our board to make progress can you tell me a little bit about

the process for making that decision and what you looked at to identified as systemically important? >> at my level, i deal with the examiners at the ground level and those -- am responsible for producing information and analysis. so, executives or directors can make decisions. with regard to wachovia, we knew it had credit exposure, certainly with the golden-west portfolio, provided unique risk, because it is difficult to calculate the embedded risk in a typical portfolio when you cannot tell what is really a non-performing loan. >> were there any wachovia- specific risks desk what were the systemic dimensions? via,s we worked with wachoiva and we got to the weekend of the 25th, we had a situation in a

market that was very unstable. we had an institution that had of funding structure that was a very sensitive to the types of displacements that were taking place in the market. and we knew that it had this exposure. what we were not clear on was to the degree it could impact the outside markets and other institutions. we were certain -- >> but that is the nature of systemic. >> our analysis showed that there definitely would be an impact. and the impact would be significant. >> and what would those impacts be and how large would they be and how would you measure them? >> as mentioned before, these were difficult to measure, and we were dealing in compressed time frames. we were dealing with limited information, but we did know we had very large institutions also funded in a similar manner to funded in a similar manner to