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tv   C-SPAN Weekend  CSPAN  June 6, 2010 1:00pm-6:00pm EDT

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on 42,625 residential mortgage-bacd securities. moody's was a aaa factory. in 2006 alone moody gave 29,000 companies a aaa rating to put that in perspective, moody's currently bestows its aaa rating on just four american coorations, even berkshire hathaway with i more than $20 billion cash on hand, doesn't make that grade. we all know what happened to those aaa securities. in 2006, $869 billion of securities were aaa rated by moody's. 83% went on to be downgraded. investors relying on pension funds suffered heavy lses.
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now many of the witnesses we've heard from over the course of our investigation whether it's bankers or regulators or the chairman of the federal reserve has said there was no way they could have foreseen the steep nationwide decline in housing prices we've experienced. i spect we may hear more of that today, but, of course, there were warning signs. the attempts by many states to stem the tide of deceptive and predatory mortgage practices, the 2004 fbi warnings abt mortgage fraud, and most of all the fact that housing prices had shot up an unprecedented 89 president leading to the obvious possibility th what goes up mit come down. even within the moody's corporation there were warnings including a prescient 2006 report from moy's economy.com about the dangers of an overated housing market. and it didn't take a 30% decline in housing prices for these ratings to come unhinged. housing prices had only dropped
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4% from their peak when moody's began its massive downgrades in july 2007. imagine if you had a labatory that tested the safety of toasters. first, a few toasters caught fire. there would be an outcry about the toaster inspeors. and yet instead of halting the assembly line you sped up the production of these combustible toasters, after a while if you found out 90 president had caught fire -- 90% had caught fire, you'd think something was fundamenlly wrong. why did moody's get it so wrong? was it because of flawed businessodels? did a push for profits and market share skew their risk assessment? was it a failure of corporate governance and manageme? today we'll be asking questions of the front line personnel at moody's and its ceo, raymond mcdaniel. we'll also have warren buffett here to answer our questions. we hope to learn how and if
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credit ratings and the companies that bestowed them contributed to the financi crisis. in closing, i would like to note th the commission has a excellent background report on credit rating agencies on our web site at fcic.gov. with that, let me turn over t microphone to vice chairn thomas. >> thank you, mr. chairman. this does mark a difference in our, from our previous hearings. we're looking at a single type of product, credit ratings, and focusing on a single firm. admittedly, there aren't a lot to choose from. it's one of those areas where the expertise is narrow and deep, and it's tough -- especially with decisions that the government has made in recent years to get int the business as a direct competitor. we need to examine this area. i' interted in listening to the people who tried to tackle what we now know was a near
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impossible job partially with tools that they created, but with others looking over their shoulders. i do want to say i understand how easy it is after the fact to talk about the fact that you should have known what we now know. i always findt interesting to deal withvisionist historians who go back and look at various periods using their current conceptual frameworks to explain situations in history, and rather than adopt the conceptual framework of those who arat the moment in the history, they impose theirsnd wonder why. i don't think that produces a lot of usul answers except they didn't know what they didn't know. and after the fact dealing with some of the witnesses that we have today, m hopeful that we can get an accurate look. what struck me in reading one of
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the books that are now coming out looking at thatituation, michael lew', i think, very good, "the big short," is how few he could talk about that were on the other side. so if all of the folk that were basically host and earnest in the what they were doing, you would think there would have been more names and a slightly thicker book examining th who took the other side. there were very, very few who tookhe other side, and what we're trying to do is understand, one, why and how they got wherehey were, but probably more importantly wher a majority, a vast majority of the people were in assuming that certain things would continue to occur in rtain ways. one of the thingsi'm most fascinated by is in looking at moody's and their history. and the product that they rated for such a long time, and then the very short interim in which
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they had to shif significantly to what was a really different product. and my questions are going to focus on did they realize how different that product wa and did they believe they had shifted enough to cover it? and now in the retrospect what do you think? the other witnesses, i think, are going to be helpful in a broader sense. i think it's going to be interesting to examine the leadership, the executive direction of moo's at a time where bravery was not abundant and some of the drop in business was because they decided to change the way in which they evaluated the oduct they're paid for. and that is going to be a focus on whether or not they were part of the cause of the financial crisis or were one of the victims. and that, mr. chairman, is a point i'm interested in investigating. thank u very much and thank our witnesses foreing here.
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>> thank you, mr. vice chairn. with that, i are ask the -- will ask the witnesses for our first session to come forward. if you would, please, take your seats at the table. and actually before you take your seat t at the table why don't you stand because m going to administer the oath which is what we customarily do before everyone who does appear fore u if you would, please, stand which you are already doing and raise your right hand, and i will read the oath do you solemnly swear or affirm under the penalty of perjury that thetimony you are about to provide the testimony -- commission will be the truth, the whole truth and nothing but the truth to the best of your knowledge? thank you very much. we will begin now with session one of today's three-session hearing. session one is entitled the rangs process. it is our opportunity to hear
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from people at moody's who were involved in the ratings process both for resideial mortgage-backed securities and r collateralized debt obligations. and we have asked each of the witnesses who have delivered written statements if the would provide us with a five-minute opening statement or opening statement of no more than five minutes. there is a timer i see there, and i don't know if the there's another one here. yes, there is. there's a timer where the light will go to yellow when there's one minute to go, and it will g to red when your time is up, so i'd like to ask if you would each avail yourse of this opportunity to give us a more th fiveinute opening statement, and mr. cochin sky, we will start with you and go from my left to my right. thank you so much,. >> thank you very much. i want to thank chairman angelides, vice chairman thomas and the commissioners for
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inviting me to speak about the role of the rating agencies in the financial crisis. during the majority of 2007, i was the managing directer in charge of the business line which rated subprime-backed collateralized obligations at moody's. i began working cdos in 1998. inin addition to spending eight years at moody's, i' also worked at goldman saks lean brothers and nbia. what caused the rating agencies to assign such erroneous ratings? how could companies like moody's, s&p and fitch produce such core products? is more importantly, how can this be prevented from happening again? the answers lie primarilyn the structurof the financial market services. while the users may be private entities, they seek ratings to satisfy regulatory mandates,
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thus it's very similar to the auditing work done by accounting firms. it can be seen as an example of regulatory captur a term used to describe where a regular ray to have acts in the benefit of the regulated, not to the public. the regulated including banks and the public interest taxpayers provide for the financial system. this dynamic manifested itself in interplayf several factors. the mandated outsourcing of credit analysis without any associated mandated standards of highly-complex and flexible finance instruments to private companieshose managers were stronglysniff sized to maximized profits. in short, the rating agencies were given a blank check. consider the incentives created by these factors. the rating agencies could create billions in revenues. the lack of guidance insure that
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there's little concern anyone woulquestion the methods used to rate the products. the only negative factors to consider were some amorphous coep of reputational risk. in other rds, the rating agencies faced the age-old and pedestrian conflict between long-term product quality and short-term profits. they chose the latter. these estimates or incentives caused a shift of culture at moody's from one resembling a university academic department to one who values profit of all cost. it had been one of the best equity performers in the s&p 500. the products had grown from financial back water to profit leader. in the 2001 a total of 57 billion of cdos were rated. in the first half of 2007, our revenues reprented 27% of the total we wer by moody's -- earned by moody's. while there were ner any
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explicit directives to lower crit standards, every missed deal had to be explained and defended. management also went out of its way to placate bankers and issuers. for example, in testimony from moody's senior managing directer, banker requests to keep certain deals off their record were granted. the banker could easily take the business to aother. during my ten years i was able to say no to just one particularly questionable deal. that did not stop the transaction, the banker enlisted another rating agency and received the two aaa ratings he was lookingor. the poor performance structure finance ratings pmarily a result of seekingo maintain and increase market share only gained if one side has the ility to walk away. without this leverage, the power ceases to xist. instead, analysts and managers raalized their --
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[inaudible] the increased uses of nthetics also changed the nature of the cdo market. the ability to go srt a create a new class of investors whose goal was to maximi losses. the influence was never anticipated byur models and assumptions. additionally, the ability to replicate credits syhetically also -- [inaudible] the property of two identical bonds and two separate portfolios was no longer limited to the outstanding size of the sue. this corelationwas especially through of the respect to the bonds in the abx index. the methodology detailing this and limiting cdo exposure was -- [inaudible] however, it was t published e to market share concerns. synthetics also changed the dynamics of the ratgs process. while cash transactions would have taken months t acculate, synthetics could wrap up in the a week. pressure from bankers -- [iudible]
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>> don't pay attention to the light. >> okay. >> because, frankly, the delive in the last 30 seconds or s wasn't worth anything becausi was trying to follow you. [laughter] so i'll yield my time for a little wle so that you can finisht in a way in which we can understand the testimony. we haven't written -- >> okay. >> but there are people who are interested in what you have to say. >> thank you. i apologize. >> if you could do this, take just a minute or so to wrap up, please, because we'll hve lots of time for questions, and we do have your wrten testimony. >> very good. >> just do your major points in the last minute, that'd be good. >> yes. despite the ineasing number of deals and increasing complexity, our group did not received a adequate resources. by 2007 we were barely keeping up with theals in the market. many analysts under pressure from bankers and their high ideal loads began to do minimal work required. we did not have ti t do research in all credit issues.
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my attempts to stay on top of the increasingly troubl market were chided by my manager. as the market began to falt after t collapse of the bear stearnss hedge funds, i was asked to post senior management on the developmentin the markets. there appeared to be little concern in guarding credit quality. according to my manager, the co, ray mcdan yell, was asking for information -- [inaudible] what can be done to improve rating quality? one solution is to completely remove any references to ratings and regulations. while this proposal seems simple and just, it is also impractical. at this point there's no organization ready to take the rating agencies' role in the credit markets. furthermore, the perverse incentives wi apply to any private organizationharged with the same task. the only practical solution is to add accountability to the system by mandating minimum credit standards. this would put a floor on market
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share-motivated freefalls and methodologies and restrict competition to where it belongs, price and service. thank you very mh. >> thank you very much, mr. kohl chin sy. mr. segall. >> good morning, chairma vice chairman, and members of the commission. my name is jay segall. work for moody's investor service for2 years. from 2001 unti 2006, april, when i departed from the company, i was one of twoand then three managing directors of moody's responsibl for rating residential mortgage-backed securities. i welcomehe portunity to explain this process today. the role ofating agencies in the market is to provide a public opinion to they cans so -- that speaks to one aspect, specifically, the relative risk ofredit defau associated with the particular security. as with all securities that moody's rating, the methodology
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incorporates qualitative and quantitative factors that are weighed and assessed by moody's analysts quantitate i factors may include the degree of credit enhancement provided by the structure, the historical performance of similar assets cited by the -- created by the originator and metrics relating to borrowers' history. qualitative may include --he integrity of the lega structure and management and servicing quality. in the course of rating an rmbs transaction, analysts do not see individual loan files or information identifying borrowers or specific properties. rather, credit ratg agencies receive from theriginator or underwriter credit characteristics for each loan on anonymous basis. ..
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>> moody's and runs its rating process through zero committees system. individual analysts do not decide. it is designed to protect the quality and independence of the ratings. one common misperception is that moody's credit ratings are derived solely from the application of the mathematical model. this is not the case. models are tools, sometimes used in the process of assigning ratings. but the process involves a much more. most importantly, the exercise of independent judgment by members of the rating committee. ratings are subjects of opinions that reflect the majority view of the committee's members. rating committee members are selected based on diversity of opinion and relative expertise. each member is encouraged to express concern -- dissenting views and discuss differences
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openly. once a full discussion has taken plaae, the members and then vote with the most senior voters are voting last. each of vote carries equal weight, and the majority vote decides the outcome. once a credit rating is published, moody's monitors the rating on an ongoing basis and will modify as appropriate to respond to changes in its view of the relative credit worthiness of the issue were. subprime loans are expected to perform materially worse than prime loans and therefore harder look delinquencies and defaults are anticipated -- higher delinquencies and defaults are anticipated and reflected in the ratings. in 2003, moody's commented on the loosening ratings. it incorporated these trends into his analysis of rmbs.
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it increased its loss expectations on subprime loaas and the like it's of course -- levels of credit protection for a given rating. subprime mortgages issued in 2006 and rated by moody's had more credit protecti than bonds issued in earlier years. in practical in rms of, this meant that for the 2006 rated by moody's more than half the mortgages in a pool would have toefault and recover less than half of the appraised value on the property before moody's aaa rated bond would suffer its first dollar of loss. in the end, even this increased credit protection proved not sufficient to maintain rating stability due t unprecedented levels of mtgage delinquencies coupled with home price deeciation. in looking back on thateriod with the clarity afforded by hindsight, many commentators think that the credit rating agencies and others in the market did not fully appreciate the macroeconomicnvironment and anticipate the magnitude of the housing market downturn.
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moody's, like other market participants, certainly did not foresee as imminent the severity or speed of deterioration that occurred in the u.s. housing market after that period or the rapidity of credi tightening th likely exacerbated the situation. during mytenure, however, i i believed that moody's ratg depended on the credit worthiness based on the informatn available at that time. i understand that many changes have been made to improve the performance -- >> can you wrap up, please, mr. siegel. >> yes, chairman. and i believe at this and other forums can play a valuable role in assessing what additional changes may be propriate. ank you. i am happy to respond to any questions. >> thank you so much. >> good morning mr. chairman and mrvicehairman. i'm the chief crediofficer for moody's investor service. in 2007 i was managing director of u.s. rmb advance.
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today i could describe the rating monitoring processes that we would detail our monitoring activities in e environment of 2007. as we entered 2007 moody's believed residential mortgage-backed securities rmbs had sufficient to withstand the. a market downturn. unfortunately, moody's like others in the market did not anticipate the severity or speed of deterration that curred in the u.s. housing market. nor the speed of cret tightening that followednd exacerbatethe situation. the ratings and opion of the credit worthiness based on certain assumptions can be changed. we change it a appropriate to respond to changes in our assumptions or updates or views of the relatively credit worthiness of the issuer or the obligation. with respect to rmbs moody's generally monitorsts rating on
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all securities on a monthly basis. in general terms, the surveillance data from regular servicers or trustee reports seass the data and if necessary conducts a ratg analysis. finall where necessary, a rating committee convenes to rate or vote. throughout the 2007 time period, moody's aggressively monitored market contions as the crisis continueto unfold to assess the impactf how the various market participants might reond by extremely fast changing conditions. in january,007, we published a special repor highlighting the rising deflts on the006 vintage subprime mortgages. this is the first of a series of publications in 2007 in which moody's discussed the deteriorating conditions of the u.s. subprime and housing mket as well as the market and ecomic factors that we believed would be critical in determining the ultimate
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performance of these zones. moody's first rev for downgrad on securitiesn 2006 vintage subprime loans took place in november of 2006. further rating aions occurred in december, 2006 and january, 2007. our first comprehensive setf rang actions on second mortgage-backed ansactions took place in april, 2007. a second set of actions on mortgage-backed transactions followed in july of 2007. we took these rating actions as soon as therwas sufficient actual performance information to judge the persistence of the early trends. indeed, as moody's monited the actual performance of the 2006 subprime rmbs, it appeared that the earliest loan data was largely in line with the delinquency data observed during the recession of 2000/2001. this performance was csistent with the higher loss expectations. that waslready anticed for the vintage. not on performance data from the
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second quarter of '07 became available that the performance of 2006 vintage ws likely to worsen and that it might deteriorate beyon those observed in the 2000/2001 recession. in conclusion, the unprecedented evts of the last few years demonstrate how dramatically rkets can change. with the benef and clarity of hindsight, many comntators now think that we a other market obers should have better anticipated what course th market would take. given information available to our analystst any rate and the unpredictable behavior of the markets, moody's undertook efforts to obsve closely to comment publicly and to react decisively. we have implemented numerous changes to our metdologies th we believe will allow our ratings to perform better in the future. and we welcome constructive dialog that might improve the peormance of the credit markets. thank you and i'm happy to answer any questions.
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>> thank you, mr. weill. dr. witt? >> chairman angelides, vice chairman thomas, members of the commission, my name is gary witt. for the last two years, i have been teaching full time at temple university in philadelphia. and no longer have any affiliation with moody's. i am pleased to be able to participate in today's discussion the options i express are mine alone, the opinions express are mine alone. theinancial stabili act that recently passed both houses of congress expands the powers of e sec. the sec will determine over th coming months and years how best to use these new powers to foster more accurate credit ratings. i hope they find our deliberations useful. i waan analyst and then managing director in the u.s. derivatives group in moody's from septeer 2000 to september 2005 when i was reassigned within moody's away from cdos.
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i wa one of three team managing directors in is cdo group fro march '04 to september '05. i was responsible for e following eas. cash flow, abs, market value cdos, collateralized fund obligations, catastrophe bonds and with another team, structured financial orating companie if this list and my responsibilities sounds intimidating, believe me it was a very big challenge. some of these assets categories are extremely complex. the investment bankers structuring them were hhly motivated to present them in the most favorable light. on our side, we had some very good people. but not enough of them considering the size and complexity of thbusiss that were running. the cdo market was growing and channg rapidly. our staffing levels always lag behind groh. the group struggled to rate new cdo issuance but we had many other responsibilities iluding
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monitoring existing transactio and keeping rating methods current. the biggest problem in my opinion during that time period was the absence of any research staff to develop, maintain and test new rating methods. after 18 months, in september, 2005, i was transferred out of the cdo group. in addition to the details about my time in moody's, i would like to add a little perspective to our discussion, if you don't mind. during the crisis, during this financial crisis, many people have been very quick to assign blame to the rating agencies. you know, this is definitely appropriate. but up to a point. we at moody's along with almost every major participant in the capital markets failed to grp theagnitude of the housing bubble of 2007. i know you're tired of hearing th from every market participant.
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we had the same lack of knowledge about wh the future the crystal ball just didn't get passed around. however, there is always a strong tendency to blame rating agencies far more than is justified by the previously mistaken opinions. i believe this tendency to blame rating agencies results from three reasons. the first reason is that people expect too much from ratings. as my wife once asked me, what good ia rating if it can't predict the future? well, the answer is, that ratings are tools to help investors manage risk. a bond rating is meant to boil down the received wisdom of the market to a single symbol. especially for managers of large portfolios, rings are an easy organization tool for a complex risk envirment. they are useful and publicly available to all investors at no charge but ivestment decisions should always be based on much more than just a rating. second, rating downgrades are bad news. it's bad news for the issuer.
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bad news for investors. by definition, it's a rating agency that is a bearer of bad news and theare the ssenger that are shot. rating agencies are a gat scapegoat is at their business model. they are pd by the issuers they rate. managing this conflict requires that moody's balance competing interests of two group the investors and moody's schairers and the investors and the debt that moody's rate. during my time at moody's management did focus on maet share and ofit margin. so a question that i often ask myself is this, did the competition among rating agencies in the securization markets lead moody's management to overemphasize the short-term interests of shareholders? i don't know. i can say that it isxtremely difficult to know where the line shou be drawn between these two competing interests.
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while short-term profits are easy to measure, bond holders interests are served by e zealous pursuit of an illusive but distant goal, the right rating. in my opinion, addressing the conflict between these two asymmetricgoals is e most important task the sec fes in its regulation of the credit rating industry. i've described my ideas on addressing this issue in a published article that i included in my testimony. thank you. >> tha you very much, dr. witt. we will now begin with questioning of the witnesses. i will begin the questioning today as is customed and followed by vice chairshomas and of the members of our commission who led this investigation. i would like to start with some questions that go to really what a couple of you havtalked about as a flawed business model. the very model under which the issuer pays while in sense supposed beneficiary, the rating
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should be the long-term bond holder. the duopoly in this indusy or certainly ligopy that limits competion and there's this tension between sho-term profits and the quality of ratinger time. i would just like to ask a couple of you to start. the following. i think . kolchinsky, you've spoken on this. and i'moing to ask a couple of the other folks. in august of 2007, the sec did a report on moody's. it was part of a larger report which they d on all rating agencies. and i'd like to actually enter that sec report on moody's into the record. it's, i beeve, tab 1. so if the staff would please note. but in thatreport, the sec noted a number of items. they said that the ratin had suered due to the increase in the number and complexity of
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deals, just the sheer volume. they said as a corollary to that that staffing had not kept up with the revenues d the number of deals. and in a sense there had be a conveyer belt moving faster and faster. as a no revenues and thiis not the sec but this is my notation, revenues at moody'sent from 600 million in 2000 in 2.2 billion in 2007. profit marns grew from 26% -- but they foundut the sec found staffing shortages. they said deals we pushed out the door. and that investment analysts were also involved in fee negotiations and that ratings had affected business interests. i'm going to ask you, mr. kohinsky, do you think those are fair characterizations of what you saw there? >> i think that's right. i thk the fee negotiations in many cases were limited. we had a standard contract that we sign off to bankers but in terms of lack of adequate resources, in terms of the
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factoring meality, yes. >> do you think th's a fair characterization of the sec report >> yeah. as my opening comments reflecd, you know, i definitely thought thawe were underresourced. you know, we were always playing catchup. we didn't have an independent research group. of coue, i'm talking of the period up to september 2005hen i left the cdo group. on the other hand, you know, at the time the reason that we would hear from management above us whye were underroused was because the growth was so fast and because eh year they would predict that the residential mortgage-backed market and the cdo market would level out. we never seemed to catch up. were definitely underresourced. >> didn't ou express some concern in your interview with our staff that there were some people you wanted to bring on and you couldn't get the approval for their salary levels and the talent you needed? >> yes. i mean, i thought -- you kn,
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my remarks reflected, you know, i'm kind of in the middle here. you know, i don't work at moody's anymore. i don't have any ax to grind but one of the things i did feel strongly about at the time and i still do now is that, you know, we just didn't -- the profit margins were so wide and especially in the cdo group. and yet, management really stinted on hiring staff. i couldn'tnderstand it then and i couldn't now. >> okay. let me go to business pracces here for a minute. mr. siegel, mr. weill. fit of all, to your knowledge, do either of you have any background in housing -- housing finance mortgages? housing business, ever been in the business itself? [inaible] >> mr. chairman, my experience in the industry was based on my 12 years at moody's. i helped developed models and d research that way. >> but not on the ground? you mr. weill? >> no. >> how many the business
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ratings, mortgage securities your shops had been in the business in any real way? in other words, touching, feeling the actual business, mortgages, lending, housing? >> i would estimate about 10% at any time but the staffing -- okay. now, my understanding is that you did do visits to originators. inhe rmbs group. but my understanding is you would look at originators. but beyond going to originators -- 'cause i understand there were some adjustments for different originators. did moody's ever do any actual due dilence on loans, borrowers, go to places like inland empire, bakersfield, cramento, las vegas and actually do on the ground assessments of the housing market, places where there was a national housing irease from 2000 to 2006 and in many of these mkets were from what many of us hail -- there was extraordinary price escalation? we there any teams snt onto
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the ground to assess the market to your knowledge? >> our analysis of housing market tnds was based on published and available research and discussions with issuers. and observations they weble to makfrom being on the ground. >> mr. chairman, i also have a load of data within moody's with various teams of economists. you mentioned moody's so the ongoing data allowss to be informed of market developments. >> any efrts, systemic efforts, after the fbi and others warned about mortgage fraud to detect mortgage fraud within the securities you were rating? >> mr. chairman, we're pribited by law looking at personally identifiable information so in terms of that sort of fraud, the social security number appears on three loans there must be something wrong. we would not be able to get that information. but part of the originator review would include an asssment of their checks for fraud. i don't recall specifically that fbreport.
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but i do recall substantial indust discussion about the increased sophisticated of fraud availability over the internet -- >>kay. let me ask this question and the vice chair has a question and what he nts to do as a follow-up. any models to account for changing risk prile in terms of fraud? >> if you're referring me broadly it our overall methodology -- >> with respect to to that specificly. >> yes our overall methodology, we looked to the warranties and strength of our analysis of examining the companies oviding the warranty which would include the loans that turned -- >>f you would get for us or provide exactly what moody's did in terms altering its methody to account for perhaps increased fraud, . vice chairman? >> very directly and specifically on your response to the chairman in terms of actually getting firsthand or
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primary knowlee, you indicated in the residential -- in the mortgage area that you relied on a published sources so sendary. did moody'sely on secondary sources in all of itsating activities or were you involved in somerimary pursuits in terms of examining particular areas? were you a catcher all the time in terms odata that was already out there or did you generate or pitch some of the time in terms of the way you came to your conclusion? >> if i understand the question, in some cases, moody's eventually was a good source of data for what we rved was moniring information. so i you count that as being primary, theervicer would secure how many are are in foreclosure. if you count that as primary we used that -- >> did you self-sample it or othe providing materials to you?
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>> we didn't open the check -- the envelope and see if the borrower was making the full payment but the servicer would saying 10 borrowers are delinquent. >> do you do sampling now based upon your experience? >> i left moody's -- >> you don't know. mr. weill, you're the one who's still there. >> yes, sir, mr. chairman. we have- >> i don't mean to finger you or point you out. it's just that the answer customarily is -- i wasn't there. so you're a live one. [laughter] >> i could ask you directly. what do you do? >> i appreciate the privilege. we have published recently a lot of improvements on askiwo fronts that are covering your question. one of them is the fact that there is of a need to enhance
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our representation of warranties are implemented and enforced through securitization and we can discuss it as part of the monitoring effor. the other parties -- moody's believes it's useful as we don't have access to loans to have third-party sample,he last proportion of the loans to indeed check there is representation in the warranties on araisals or on occupancyr income are indeed correct. >> when did that start? >> the process of our representation of warrants as stated earlier was started a long time. it was in 2008, i think, various reports suggesting there is enhancement to the rmbs markets. >> the sampling of specific factors involving loan delinquencies ando on.
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is that an additional sampling model? >> i'm referring 2008 publications where we have discussed sampling and -- >> recent then in 2008 to me don't connect given the fact that this is 2010. if that's the most recent, okay, thank you,r. chaman. >> thank you. let's see. pickinback up on this -- so let me ask you a question. was there anyiscussion ever in moody's as housing prices began escalate by an extraordinary rate. here's a graph of a case-shiller map. this is a historic and unprecedented rise in housing prices. 89from 2000 to 2007. was ere anyiscussn internally about fundamentally not ju incrementally but
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fundamentally chging the models? and/or sending assessment tes out into the field? s there any fundamental rethinking of the models? i know there are calibrations done. but was there ever a whoa moment for the team, mr. kolchinsky, you can remember? >> well, i didn't work for the rmbs group -- >> or cdos also. >> no, not for the cdos. >> was there a let's stop this for a minute. we're rating 9,000 securities a year. there's four aaa corporations. something is out of whack here? any kind of just a step back? >> there's discussions with moody's economists as to wt his views were on national rl estate prices. >> well, when moody's.com was there a report in october 2006 saying there was going to be a crash, that'she word they used, in 20 metropolitan areas? did the group say, oa, let's stop this? >> i'm sorry, mr. chairman, i left in october of 2006.
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>> was thereny october tax 2006 when mark zandi let's put this on hold. >> we had a lot of dialog wh moody's.com and others. our collection i for 2007 the prediction was more for soft landing at the end of 2007 maybe for a 10% at the time, worst case maybe 15. and the level of protection that the securities had would easily take into account -- >> well, let me query you on that. whys it when price dropped by 4% i july, 2007, you're alread down grading. your models haven't withstood a 10 or 15% decline? you're in downgrade mode byuly when prices have just come 4% off their peak? why is that haening? >> our rating addresses -- you
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have a 21 rating scale from aa all the way to c. and each of them reflects the probabily an obligaon to be repaid. a downgrade reflects a shift in this mobility and as we saw delinquencies ramping up in terms of home price decline, downgrades were reflectivef changing views on the probability of repayments. >> well, the expected loss, correct? >> that'correct. >> so by 4%, you're aeady recalibrating expected loss, not at 10%. that's a fact, right seven >> mr. chairman, the rating actions are not based on the macro view. the rating actions that we took in july, '07 and we always take are based on an analysis of security. what's driving the downgrade is lots more the performance of delinquencies, the servicer reports showing the severity of loss in fin --
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>> but mr. weill, let me just point outs again the downgrades begin at 4%. everyone is fond o saying we couldn't have predicted a 30% diminution of home prices. let me me now some market practice i referred in the sec report. but we heard in a lot of our intervwsstaff interviews that the was a lot of constant prsure from market share. me of you have spoken about that today. and it's our understanding that people leading theatings team wo regularly get market share rerts. in fact, i want to enter as examples, routine examples, tab 26, tab 36, tab 37. those are emas from michaels o'kelly, and others. a number of comments have been made jay isook who is onef
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the analysts who said ote if business was missed that is mr. clarkson, mr. witt you once said market share wasritically important and quote that is why brandon clarkson re was high that he could change t culture and have morfocus on market share. me who worked at moody's they looked the other way traded the firm's repution for short-term profits. i ess, dr. witt, wt would happen if you didn't rate a deal? >> well, you know, like you were talking, the reports, he was on brian'staff and we would get a report that said the deals that you didn't rate. and you would be typically asked to explain why you didn't rate them. you were supposed to look into itnd give explation. >> and -- but but every deal you didn't rate you would have tdo that. >> not necessarily every deal. but if the percentage were
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changing a lot -- they may have some interest in a particular deal but you have to report in detail each transaction. >> i did by the way just for the record those items i mentioned i'd like to enter into the record. it's my understanding that peormance valuations were based on five items. market coverage, revenue, marketout reach such as speeches, presentations ratings, quality and tools. ve of the same items seem to be on the profits metric not on the rang quality metric. of course, the rating quality wouldn't show up for quite some time. i did see an email from mr. clarkson to the managers, it's tab 15 essentially saying here's a market share report you ought to be using this in your personnel evaluations. to what extent were psonnel evaluations based on the quality of the ratin versus your ability to move the business, mr. kolchinsky? and then i'll ask mr. siegel.
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>> i actually never received a formal evaluation as a managing director. but it was very clear to me that my future at the firm and my compensation be based on the market share that was brought in. and that was reiorced inany ways especially with the emails that were sent out at least quarterly and occasionally monthly. i recalled one email that was sent out i believe in october of '07. this was right around the same time3,0 tranches were downgraded by the team that it was questioned our mart share dropped from 98% to 94% and please explain w. it was the mentality whether explicit or implicit that the performance and the future of a managing director in structured finance depended on keeping and maintaining market share. >> mr. siegel?
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>> mr. chairman, i never found that to be the case during my tenure at rmbs. first of all, the performance evaluation matrix you described sound like they e for managing directors and above the analysts were never evaluated. based on market coverage. thatas a component of the managing director's evaluation. it was always understood that market share was to be plained, not to be held as a hard and fast number. so losing a deal because -- that was perfectly acceptable. if we lost a deal bause an analyst waed to leave at 3:00 and e issuer had wanted feedback athe end of the day, that woulde an issue. >> okay. i just want to point out this me fm m clkson went to ed, pemilla, michael, andrew, what level would they have been? >> they would have been team
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managing directors. >> you should be using this in pes and give a heads up. he's tling his managers e this down the chain. >> but again, mr. chairman, that's not the number. that's the explanation. that's part of that file and people are losing deals because of customer service, they left at -- >> but that's not what it says. it says -- you should give them a heads up where they stand with their peers. all right. last question he befe i move on to the vice chair. we looked at a couple of ecific deals that struck me. just tsee how this worke we looked at a 2006 are, mbs sponsored by citigroup. $948 million. 75% weredjustable rate. 33% were 228 loans balloon payment. 13% of the mortgages properties had been foreclosed upon.
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by june, 2009, 31%. over50% of th lns are now 6 days plus delinquent and all the bonds have been downgraded to junk the other deal is the merrill lynch deal. it's the ratings memos of tab 22. i would like to enter both of those into the record. mr. kolchinsky ielieve you would have worked on this merrill lynch deal. 488 miion downgrade started in tober, '07. it's now been all downgraded to junk. and the value of the collateral originally488 million is now at 67 million. down 87% from its peak. you know, i loo at that and i think when you go into a sto you get -- you see grade a eggs you assume maybe one of those eggs will be cracked. turns out all 12 were cracked and it was originally rated aaa. i guess my question for you,
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because you were on this deal -- and be way, you sent an email about this deal which i'd likeo enter into the record to yvonne fu and talked about how this deal was -- you said it was important to have, quote, a, a quote, record of transactions which has egregiously pushed our time limits and analysts. tell me a little bit about this deal and why it went wrong. >> sure. this deal is of actually -- i wouldn't even consider this one of the worst performers but is a standard hidrilled abs o loans. it went wrong just like most otrs. the severe downgdes in the subprime area and there was coentrated healy in subpri drove the ratings down. eventually this deal suffered a default. and none of the ratings there actually -- the notes are at
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this point not ming any payments. as far as the structurer the concern, this deal was fairly ordinary. it was backed by bw2 andbwa collateral primarily subprime and midprime. what the trouble on this deal was -- and this is crucial about the maet share was that the banker -- the banker gave us hardly any notice and any documents and any time to analyze this deal. that was part of the pblem with not being able to say no. if i could say and the documents came outsidth window which we would have appreciate look, i'm sor, i can't give you an opinion. i need at least the or four weeks to analy this deal more fully. but because bankers kw we could not say no to a deal, could not walk away from a deal because of market share, they took advtage of that. and this deal parcularly the bankers send us various documents either a few days
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before closing or sometimes after closing. in this case i believe in this transaction we didn't even know the deal was priced. we found that out from th collateral manager when we vited the collateral manager and, oh, by the way wericed the deal. thatas something in the ordinary course of events we uld like to know. in the old days we had about a month and a half, two months to actually rate a deal. it took a lot of time. we got the documents. they were so back and forth. at this time the bankers took advantage of theact that we wouldn't walk away from a deal and started sending us documents enever they wanted to. >> am i reading this right, you say some of the documents you t the day before the closing. some about three or four days. >> i bieve that's correct, yes. >> all right. did you ever see -- have you ever sine love lucy. have y ever seent famous episodehe she's working in a chocolate factory and the conveyerelt going faster and faster. do you ever feel like lucy? >> all the time.
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we definely had a conveyer belt and we felt that wa i will reserve the balance of my time. thank you veryuc >> mr. vice chairman. >> thank you, mr. chairman. want to pursue a similar line but in slightly different way. you're interestingnd useful to me bause at least in my mind -- and anytime i make a statement that you don't feel is, you know, accurate depicting the generalcene as you looked at it, let me know, because i see you as a oke pointnot in a negative sense. but it's a very limited number of people doing what you do. and i guess given the volume and the history, you're probay as good as any of them doing it. so someone would want to get your lab. and that's one of the reasons they came to you.
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so as a choke point, especially since you were there in this transition of ratin what for want of a better term, it's been called plain vanilla,he old corporatebonds, in a time frame that seemed luxurious looking back at it, a then the transition to mh more complex structured product in a farore voluminous way in a time frame that gets shortened from wks or months to literally days, and when it's the oput that's focused on and not necessarily the quality of the output, it clearly creates a dynamic. and so i want to talk a little bit about how you felt or what
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was the mental set? because in looking at what you do, i'm very much struck by the comparisons that you might make. anybodyooking at wall street or looking at investment banks, it just always has to me a kind of auction atmosphere. it's very hectic. there's pressure. timeline biddingnd so on. in looking and especially in reading about what you folks do, it just seemed to be much more an academic atmosphere at least earlier about -- even coming together as committees it off discuss how we do and wt does it look like a suggesting changes that might be made. i'll come back to that in a minute. so when you say that you're
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compensated, what did that mean? was any of i truly in your mind as the chairman referenced rated to the volume of what you were doing, quality versus quantity? how did you think you were judged in terms of competition? first of l, and this is opened to everybody depending on when you were there 'cause don't want an answer of, i'm sorry, but i wasn't there we've aost always gotten from the people higher in the structure. that's o of the reasons i like this panel because you were actually doing it and we've got people who are there today and back to that particular peri. so how did you think you got paid? anybody? what did you get paid on? >> well, one thing want to point out -- >> one micn at a time. dr. wittyou go ahead. he can referee, ahead.
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>> we got a salary and a bonus, which sounds like, you know, just like the rest owall street. but the bonus that we got was a fraction of our salary, not multiples of it like it waon wall street. so the variable compensation component was not nelys large as it was for investment bankers. but it did vary. >> it was an incentive. >> it was an incentive. >> a reastic ientive? >> yeah. i definitely thought that making sure that we kept market share as high as we could, you know, subject to getting the ratings ght, i thoht that was definitely something that was important. and that my manager looked at and he thoughtbout a lot and talked about. yeah. >> let me not get ahead of myself because one of the things we found is that there's never enough time and wcan't ask all the questions and frankly as we go forward we know more thane did when we asked you the questions in the first place. so would all of you be willing -- and i would like response to the queson.
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be willing to answer questions of you submitted in writing as we go forward? would thate somethineach of you would be willing to do? >> yes, certainly. >> yeah. he has a hard time recording nodding of heads. >> sure. >> okay. good. >> yes as to my tenure there. >> good. now back to this catchers and pitchers thing. did you basically feel that you were there. and you wer't active unless someone came to you or did you out and actively seek folks making pitches to them to use you for the purpose of rating? what extent were you catchers, pitchers or you did both? in the company. does that make sense to you. your rating company. people want you to rate their product? did you wait for them come to you?
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re you a purely of catcher of people who came you with product? >> moody's does not strture deals so we would not go to someone who originated a subprime loans and we could be your rating agency. someone who owned the coateral would be driving the structure. >> and it never, ever was a discussion about going outnd making pitches because you're seeing things crossing your choke point that others might not. >> we did want the market to appreciate the quality of the moody's rating so we would speak to investors. we would publish otrends in the market. we would publish on rating methodologies. we would publish on risk. we would also meet with issuers, theish was on 100 dea and we would be on 90. we would inquire why we weren't on others. customer service, we would pursue you want thatvailable on saturdays. let me try to arrange that. >> yes, r. just on convenience.
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i was also struck by the vel of dollar amounts. by that i mean, they were real. in discussing investment banks and what people were paid, and the amount of millions they would receive and their answer was that was above my pay grade, it's been very difficult to deal with that. so i was especially struck, dr. witt's testimony, about the failure to retain someone for $20,000 a year. there aren't enough zeros there to impress folks iother areas. so i'm sure that u had people o had been on the team for a long time. and that having someone who had been in the service of moo's or another rating agency would probably be a fairly attractive hire for the people who are going to be comg to you in e future to ask for ratings, i.e., i now have someone at an investment bank under my employment who knows the setup and keep people in the rest.
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did you see a frequency of people moving fromoody's and hers that you're aware have to wall street? >>he pleuralitfor people moving at moody's for other jobs would end up on wall street. >> and did they remember you? did they call you? did they talk to you? >> most of them knew that was not an appropriate behavior at they could bring the expertise on the product type but that i would not look favorably on someon callingnd saying, can you somethi different or special for ? that would not have gone over well at all. >> okay. we're going to accept that as the statement. does anyone want to say that that sounds good but it wasn't always that way? >> i would just add on the -- on my side, on theurveillance side, just becauseone of these left to an investment rm or another firm would not create
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any kind of a specific relationip to being on any ratinggency. >> it wouldn't be a specific rating relationship but you knew each other. all right. back to this business of going from plain vanilla ratin corporate bonds. and would it be fair toescribe aelatively rapid change of what you did as a business in terms the pducts you were rating? moving to structured, complex structured financial documents? >>. did it hit you as a company in terms of what you weffering over the years versus wh you were now asked to offer? >> this goes back -- i started moody's around 1994. and even befor that, moody's had developed a methodology. theyulled some of the more quantative alysts and developed entirely separate teams to rate structured finance. separate people from the people
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who are rating what you describe as a plain vanilla corporate bonds. >> okay. but then it also sped up even faster than you thought. was going to do, based upon your statements you thought it was going to level off. i think mr. weill, you made that statement -- or mr. witt did. what i'm looking at are these teams, the committees in making decisions. as the process sped up, and obviously peoe understood that if you're simply going for the letters, if they shorten the time in which youad to consider what it was and notwithstanding that they made significant changes in the produc if they indicated t you or structured in way that it looked like similar products, you would have a tendency to give it the same rating not despite the fact that the internal structu was not the same. did you have the feeling as you were looking at products over this timeline?
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>> i think that's exactly what occurred with the products. you d a sort -- an exterior that looked sort of -- and this is -- i'm -- i wasn't -- i never worked icorporate. even on the pure structured products. the exterior looked like it would match our models. but all the underlying mechanisms were changing and the crit was deteriorating knead that. -- underneath that. the problems with the ratings process was wrong, or you had a feeling that it was wrong, you couldn't do anything bec you couldn't say no to a deal and they just got passed tough because quantitate actively numbers cause the headline numbers were great. underneath -- and this goes to explain some of the factors in rmbs, the quantative numbs, the perfornce numbers looked great. underneath that, what the originators, the bankers did they underned credit quality
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by changing things. crng different structures, new products that looked like the old products but were, in fact, different. the problems with e rating agencies and what they did and didn't do are omissions. and sort of takingt face value some of the things that came to us becau they looked good in th old perspective while the bankers were changing things around. >> going back to the old i love lucy chocolate conveyer belt. you could have carams that would be easy because they melting and the creams they start mashing them. do you have a gut feeling they look the same but weren't? >> there were definitely gut feelings but you had solid chocolate rsus something that was empty on the inside. so they kind of looked the se going down the cveyer belt. and with time and time they became more and more empty inside and hadess cocoa content.
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>> so part ofhe problem was you were analyzing this. you were coming up with new mode. probably mr.eill, probably than anyone else. did you ever have a session with the committee where you looked at each other and said this thing is changing rapidly. it's different than what we thought it was. let's go get and research and reconvene as a committee a little bit later t examine what, in fact, we have this gut feeling that it'slightly fferent than what it was? >> that's exactly what we did in the first couple of months of 2007. what we published in the beginning of 2007 a speci report on early payment default, we saw that there was a changing borrowers behavior and homeowners behavior is defaults. we paused and we convened a grp of people to think about what was hapning there, whether there was a change, a departure from aexisting trend to a new trend.
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whethehe- whether this was a macrotrend or a refinancing trend o whethert was a homener behaviors end, an origor trendcertain behavior on warranties on appraisals, on servicing and loan modifications, we put aot of effortnd people together to try to think through those issues. that's exactly i think what you're describing here. >> and this is an attitude that i'm asng you in your opini. as these products -- iterms of number clearly just theer volume you were facing, they were also changing in terms of structure. were there any discussion or belief on your part that these products were changing in structure, clearly done so by thos who were strucring them for the purpose of gting a
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rating notwithstanding the fact at it was harr to produce those same solid chocolates that they did before? >> mr. vice chairman, on myeam of the sffing levels did grow substantially during this time period to keep up with the increase in complexity in e market. we did walk away from deals where we had a more conservative approach. there were -- there were many cases where the analysts looked at the deal and they would be able to present an analysis to committe as the strtures were chaing, in some cases, w feel it was in response to a risk thawe may have identified. so if we identied aisk of increasing interest rates, we might see a deal come back with a swap. so the investment bank would say, put a swap and we'll put out the risk. what did you think of the deal. >> didou evehink that based upon thatind of discsion, the next time a product came down the conveyor belt, that they got a little more clever in
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terms the w they did it to confus confound or, in fact, cover up what it was that ey were doing? was it a learning curve on their part to outsmart you? did you ever have that feeling as you were lookinat the product? >> think it's important from our methodogy from ourodels we always -- when we would make available a model, we would indicate that the ratings still have to go through committee. there were times when a model would come out like the interest rate example, we say our stress case might be a se of 5%. and the swap might be so highly engineered that it only protected against that 5% case, not a case right up to or right pastt. sohen it would changed the w we analyzed the deal during the committee process. >> mr. chairman? >> no. i'fine right now. >> one example of that occurred about second quarter of '07. in the cdo group had a
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methodology that prevented deals from getng full credit for bonds that were being priced at a discount the discount pricing world. it worked very well with cash instruments because synthetics were so flible you could change the price and spread. it was hard to nail down what the actual discount was. and as the market started -- the prices in the market started deteriorating as evidenced by the subprime index, we always enforced this rule. but the bankers started getting more and more clever with the ways that they would try to counter that role. and it became almost like a chess game. we would make a move, they would make t moves. and it became very difficult. and this is wre my view about sang no. at that point we should have been able to say no, you kw ? we see what u're doing. and i saw some portfolios that were clearly meant to game that rule. we should have said, no. you're not trustworthy. we don't want to do this with you. but weouldn'do that.
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so we had t play the chess game, which we kept losing. so -- but that certainly occurred. >> mr. chairman, i'm going to reserve my time but i'm going to ask you a series of written questions around a concern that i have and i know a number of others have. you ashe people who created the ratings hav in your mind what you believe what aaa means. the customersho asked fo those ratings had in mind what they thought a aaa rating was and especially those people who were out there purchasg th products had in their mind what a aaa rating meant. and i know only one of you is an attoey, mr. kolchinsky, so when i ask the question, i would prefer not to have an attorney's answer. but this is a source of confusion among a number of peopleecause aaa meant something to you who delivered it and it meant something different to theeople who were seeking it obviously with the
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game-plang and it meant something to those who purchased it and it turns out in the end, the people who purchased it didn't have any conception often what it was and what it meant. >> very quickly as a follow-up, it seems to me two big issues. one was why the heck were the ratings so wrong. i just want to put in rspective. they weren't off by small measure. 83% of the aaa in 2006 was downgraded. in 2007, 89% of the investment grade products were reduce to junk. this is way off. withou using the legal term without casting asions, this comes as close as you can to the very product being fraudulent or of no use to the marketplace. in reality. so one is th quality of ratings but i'm equally struck by, i think, what you refeed to, dr. witt, just the structural
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problehere. the very system that dn't allow you really to say no to 30 to 40% of the deals. you might miss a deal or two but you really couldn't say no to a whole market slice because you're paid by issuers and you're profiting and that was -- it seemed to me, always predomant versus quality of rating. so in2007, you know, you talked about how things were calibrated. but i want to point out in 2007 when the housing prices are ading south fast, moody's rated more than $500 llion, $500 billion in residential mortgage-backed securies. afr jy when you really start your massive downgrades, $119 billioget rated. as the markets are in free-fall and these goerbad very quickly. i want to k you, dr. witt, was the model so flawed, issuer paid, profit, tension -- you are an operating business, that it
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was very hard to make the fundamental shift to say we're not going to rate these flawed products anymore? >> you know, rtunately, i wasn't in the cdo group in 2007 so i didn't have to make that difficult judgment. you know, eric was. but i would think if i had been the manar in that group,yeah, it wouldave been haroake a decision yeah, we're just going to stop rating this stuff. however many of tens of million dollars of revenue the other agency is going to pick up, we're going to leave it on the table. i think that would have been difficult. >> okay. because i'm asking. i mean, could you haveade th decision? mr. ill, could you have gone to your superiors and say, look, if you think united labs for a minute they're not going to keep rating defective electronic equient if currently reports has a different model.
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no payments by products being rated. you just couldn't do that. could you go to your bosses and could you say 20 to 30% of the stuff we ain't going to rate? cod you do it? mr. chrman, i would give you -- i would offer you a surveillance perspective t is. when we were surveying 2007 transactions and we were seeing an increase in the delinquencies or potential for default on the mortgages, we were constantly closing a feedback loop with the various teams. and i think ts was part of a great interest from senio manament you know how the pools were performing in order to know what to do with new ratings potentially. ...
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>> it did. it was a particularly difficult deal that i said no to. i had to go through my managers and a lot of things to convince people that this would not be rated. it was much harder to say no than to say yes. >> along those same lines -- concerning june 2007 in regard to the application of the sec under the heading, interacting with the management of the issue were. moody's said to the agency most insurers rely ioperate in good h and relied on agencies -- nevertheless, our analysts seek
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to exercise skepticism with respect to an issue worse claims. if we believe we have inadequate information to provide informed rating to the market we will exercise our editorial discretion, and either refrain from publishing, or rating. what i'm going to be asking for ituations, what skepticism from did you exercise? gi specific examles of exercing skepticism based upon it, and when you were in the situation of having to produce volume versus exrcising the professional skepticisskepticism th you told the sec you are going to exercise. i just want to see some examples of th skepticism being exercised. so i will get it to you in writing, a you can give me some examples.
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thank you very much, mr. chair. >> will now move to mr. georgiou. >> i suddenly became more senior on the committee, which is a great honor. i wanted to inquire, really, of all of you. i think i'm finally getting to the point where i am understanding how the money is made in this business. and one of the things we've learned in prior hearings is that a significant element of fraud occurred when we double incentivized mortgage brokers in the origination of mortgages by paying them a higher perctage of the mortgage him if they a person into a motgage that paid a high rate of iterest and was more valuablto the lender. and in many instces wefound
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that the rates that they were paid where for example,% on putting people into a standard, 80/20 mortgage, and that paid a lower rate of interest. and 2% of the rigination, origination fees if they put them into a more expensive mortgage. which we believe in cerin instances lead mortgage brokers, because they would make twice as much money, lead mortage brers to leding borrwers to loans that were moe expensive to them, when they might hav qualified for a reasonable loan. now, i learned from our staffs investigaon repor and i want to clarify this, i want to make sure it's true, that for many years moody's, and charging issuers on rmbs analysis, you chard a cetain rate come in this insnce for .75 basis
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points, for the dollars that were in e senior tranche is. and 3.75 basis points for the dollars thatere put in supportive tanches. which strikes me as an nentive creating a financial incentive for moody's p a greate percentage of the dollar in the senior superior tranches. as opposed to supportive tranches, which may help to explain why it is that in these rmbs structures, often some as muchas90% of the issue come of the tranches, are rated at that very, very hghin. can anybody speak to is? is anybody aware of that, or understand the financial incentives? >> commissioner, i don't recall big stack fee schedule the iitial analysis of the deal would have almost a fixed compont, analyzing the
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collateral. and in the tranches where you would get the senior classes and subordinate classewould come late but in no case were there any distinction in my mind as a manage who kw about the fee that they should be a shift based on the potential fee income impact of moody's that an analyst who constitute the majority of committee would not even have known about that differential. >> but then why wasn't structed in that way? in o words, if you hav a 0 million-dollar rmbs that you are analyzing, why would you ask the issuers to pay you a higher fee per dollar on the senior tranches than you would on the subordinate tranches? dr. witt, do you have any views on that? >>ell, that's -- there was no practice to that on seo's that i know. it was a straight fee, rated dollar and hen caps. >> that's correct. cdos of coure you got paid nine basis points per dollar
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rate >> depending on the tide, but yeah, there were so she did, yes. >> which was more than double the highesrate that you t for rating a rmbs which may speak to why people were incentivized, to rate cdos significantly. >> we were paid both times. paid for the rmbs and then they put it in the cdos. correct. and paid at twice the rate. mr. kochinsky, did you ever note this disparity, or did anybody that you are aware of noticed it was no. like dr. witt, in cdo we had a flat, flat fee with a cap. specs of who w in rmbs? mr. weill? >> commissioner, i wn't awe of the fees. i wasn't a manager on the rating scheme that was rating. the thing would emphasize which is important to provide, is you may have three, five, 10 peoplen the committee, and none o us in surveillance or in
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rating autos our aircraft or other deals was aware of the rating fees. in other words, you have a debate and everyone has one vote. the most senior person, the managing director our most senior person votes ast. >> do you know who developed that fee carging structure? does anybody know? >> i don't. >> maybe that's a question that i will have to ask mr. mcdaniel here in the next panel. but mr. sieg, are you aware? >> no. spec ofwho constructed the charts do? i don't actually specifically being that distinction between the senior and subordinates. but if you have data, that is the case, at some point te managers would hae been involved in a fee discussion and come up wth the schedule. and there are different rbs schedules depend on whether its
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prime, subprime, second lin, et cetera. but again there might've been something that we have this fid component so that senior bond determines if you are on the deal or not. that you would want to charge t cover your collateral analysis. and then iyou happen to tranches out, it isn't as expeive to figure out the ratings on the junior tranches within the deal. >> i'd like, trantwo's with her permission i'd le to have the stafdirect a written question to mr. vail, or mr. mcdaniel to ascertain iwe can find out how it developed, with the ideology of this is. >> so done. >> also, it says in here in our investigative report, that all these re due and payable at the time the rating was issued. do you -- but you were never paid until the actual issue was sold, were you >> we wee generally on the cdos side paid out of the
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closing, meaning at's whenthe securities were sold, we were paid along with her supporting, the auditors, the attorneys, the bankers themselves. there's also an annual monitoring fee, but that was usually a fracon of the up front fees. >> correct. but the up front fee, like if you rated an issue and they dn't sell it for two mths, you didn't get your pay -- the company wasn't paid when the rating was issued, right? the company was paid when the issue was actually sold from the proceeds? >> that is correct that there was in our contracts in cdo, there was a break at the but that was almost ver enforced and very difficult, it was a fraction of the number. it was very difficult to actual get that fee. in my express i don't believe we have ever chrged that the. >> sodesn't that create yet anher perverse incentive to be sure that th ratings wil support the sale o the secrity at your ctually not paid into
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the security itself is sod? >> i think more so, in my mind, ita the fact you couldn't say no inany case. th created the worst incentives to the deal. and after that, you know, it kind of went down fro there. >> right. dr. witt, do you ha thought on that? >> well, i don't know that that had a big component to, you know, peoples, i don't know, incentives. but i just notice there was an article in the times, i think yesterday or today, nd they were talking about the timing of when the ratin is itchy. the rating was normally issued, if you look at the prospectus it was a it's a ndition of issuance that the ratings the certain levels. so the rating came out like coincident with the eal. and that fact meant that there had to be this interchange
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between the rating agencies and the structuring, the investment bank. and what this article said was that they suggested that maybe there should be some waiting period that ratings should be issued after the deal. and i peonally think that's a real good thing that should be considered. >> now that was and to ross, one of his suggested qestions, was that william adnan, a hedge fund manar suggested that the ratings agency adopt a wait to rate policy for 60 days after the preliminary purchasers had already purchased the bonds. so the woul be obligated to do their own diligence and the ratings wouldn't be their primary factor. do you think that would be advisable? >> i think it would. investors woun't like it because it introduces more sk tohem. but somebody has to buy those
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bonds without a rating. so that sort of additional ratings risk. but it frces investors to take that risk to look at the deal more. not relyonrating so much as a crutch andot just by the rating, but by the issue. and then the ratings themselves cod be more of h a you know, and objective analysis. and you wouldn't have the close, you wouldn't hav the nexus, the need for the close interaction between the rating analyst and investment banker. you woulhave more of a distance hand off relationship. >> mr. kolchinsky, in one of your prior testimony, or perhaps itwas your today, you suggest that in many ways the incentives for rating agencies have become worse since the credit crisis but here are ow more rating agencies and they're all chasing significantlfewer transaction dollars. and the new controls put in place by regulars are too weak to significantly ar this dynamic. could you elaborate on that,
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please? >> the chang in incentives were,before you that i think three major, for major rating agencies at this point. 10 or 11are regulated as an sros. there are much fewer transaction that are going around just because, frankly, the market has died out. the ating agencies, any large rating agencies that wants to run a strucred finance buness, has a lot of fixed costs,very high fixed costs. plus some point as a private business you have to justify those fixed costs. and you have 10 people're competing with. so the incentives to play around with your methodology are much greater. if you want to maintain your business you want to maintain your time and want to maintain your positio. you have to compete a lot more. have a lot less business you're competing for. nd, frankly, the structural up to that point, and prbably true
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going forward so farhave been fairlyweak n termsof maintaing and improving ratings qality. a lot more rating ssues and a smalle pie. >> thank you. i want to read into the record one portion of a letter that we just recved yesterday from the executive director of the ntana board of investment, which was a major pucher of bonds in relice to some signicant exte on ratings. and it said here, as more complex exotic investments have been created and sold to investors, the ring agencies quote got it wrong either because they are betting with superficial or they were unduly influenced bythe greatest of the investment andeeded to ge the deal done. when the rating agencies chose to write complex and markets it as an instrument such as structured investment vehicles as risk-free as u.s. goernment
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bonds, they failed to investors who were depnding upon their independent thoroh analys. this board and other public investors are still living with the impas of that failure. if i could ak, mr. eill, just one question real quick as j as a final, how mh, how present in your mind as you did your analysis was the fact that many, many public and private pension funds and other investors responsible or funding the retirement benefits of bneficiaries, how prest s that consideration in your mind as you did your rati? >> i would say that every rating committee feels significant responsibility. when they a sign iran, when they downgrade or upgrade a rating, and they have in mind all the users of the ratings in a very significant way. >> thank you, mr. chairman >> thank you, mr. georgiou. mr. wallison?
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>> thank you, mr. cairman. i wanted to be sure we all are talking about the same thing and we're talking here about bprime and alt-a loans, securitizations. were not talking about prime securizations. does any of you, does any of you know what the record of moody's was for prime securitizations? at is to say, did you hav many downgrades of prime securitizations? >> commissioner, a you referring to the recent third are you referring to -- >> we'll talk about the same period that we've beentalking about here, from 2005 to 2007. e have indeed had significant ratin positions but, downgrades n the pme mortgage-backed securities. the other team that publishes on a frequent basis twice a year in a very transparent way, the performance of r-rated bonds, i
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don't have exact numbers with me. that's something we can prvide the commission with. >> we would like that information. >> absoluty. >> let me just say tis, that i listen to all of you and i thin you are all well intentioned ople. we have hadwhat anyone would rd aa terrible failure here. and so my inclinatn alwaysis to wonder whether there was not an information problem more than anything else. so my questions are oing to be about the information that was available to you and the extent to which this information was or was not sufficient for you to ma the kindsf judgments that you were making. so the first question i wod like to ask your is, and i think this is obvious, the ratngs dependdo they not, n assumptions about usin prices? mrsiegel? >> ratings depend, the
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performance of mortgagesand very much on homeprice movements, and that different rating levels you'll b looking at different stresses to possible future home price movement. >> does anyone disagree with that? mr. weill? >> home price movements, you ha other inputs on interest-rate. >> but that is one of the significant issues of what you expect home prices to be, that's correct? >> that's corrt. if we're to expect like expected bestuess, and what you might expect as a range of stress off of that best guess. >> mr.itt? >> i was in the cdo group. wesed the ratings, from the rmbs group a an input. what we did is establish correlations and, you know, if we had, you become if we had a crystal ball and we're forcing a really large decline in house prices, we would have raised correlations as a result.
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>> okay. and i'll get to the correlations questioni hope if i have one. okay. so ousing prices depe on an assumed number of delinquencies. you are believing that there lle an assumed number of the languages, and it turned out, i understand what you set up to now, it turned out that you're as good of the number of delinquenciewas wrong. never actually many, many more than you expected. that true, mr. siegel? >> yes. nicholas would have more of the performance information after waclosed but the elinquency r far above the most likely pass that liberties. mr. weill? >> the way i would phrase the question, there are two components. one of them is how the macro trenof home price, whether they increase or decrease, a then you have the behavior. and the delinquencies definity
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more boorish behavior that a macro tribute at some point they to connect an i think you ne a thirdomponent to really connect them together which is as home price decline, and refinancing opportunity dry up. than itdoes magnify the delinquency issue. in other words, boars are feeling they are underwater on the mortgage as they seem home price decline. the first action -- reaction wod be to try to get out of the financial obligation in a way that would be ideal, i.e., selling their property and avoidi foreclosure and default. as refinancing opportunities dry up, and home prices suddenly decline, it does magnify. >> and this would be especialy true, i would presume, for subprime and al-a loans? >> they are most sensitive, they
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are most sensitive to the very's economic. >> mr. siegel, the sme? >> yes, i agree that subprime bars statistically speaking. >> now, whenou are constructing your evaluation of a particular scuritization, pool, do you take into account the number of subprime and alt-a loans that are actually outstanding in the market as a whole? not just in this portfolioor pool, or securitization, but rather the market as a wle throughout the country? mrsiegel? >> i'm not sure i understand the -- >> if you are assigning a ratin to a pool, the pool is in front of you, it has a certain number of subprime and alt-a loans in a. in fact, that's what we're
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talking about here. is it important to y to know, not ju about the loans the pool, but rathe the loans that are subprime and alt-a throughout the country, so that you are placing thisn effect in a context of all mortgages that are subprime or alt-a throughout the country? >> well, when we analyhe collatal epectations, on a particular ol, we would compare to other pools that we had committed and historical data it anthen indirectly, there might be an affect saying, well, here is a general market shift, will this have an impact on fure performance >> indirectly did you have information about where the mark wasn terms of the number of subprime or alt-a ans that were outstanding? >> moody's published on the
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number of alt-a and subprime loans that had been securitized. so we knew that number and we saw an increase, substantial increasing number of subprime mortgages that were included in securitizations leadg up to 2006. >> only the once had been securitized by moody's, or those thatave been securitized by al not by moody's, but rated by moody's, all -- >> we published based on rated by moody's. that was information, that was information that we had ctual and to the dollar, but there's also a sense of securitizatis that we di not rate. we had a feel for that number, too. but in terms of spending a long time looking at whether fha and ginnie mae also included subprime, that was not -- >> what about fannie mae and freddie mac, did you include those? >> no. fannie mae and freddie mac do not originate loan they buy loans. >> that's right. but they do securitize.
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tuallyabout $4 trillion in subprime and alt-a loans wer securitized by fannie mae and freddie mac, at the time you're looking at these things in 2007. so did you ake into accot the fact tha they were this number, it turns out to beabout milliony fannie mae and freddie mac, were, in fact, ounding at that time? >> i don't recall tat bein a ctor. that came up in any particular dealcommittee asthma to. >> mr. weill? >> commissioner, on the monitoring side, we would use the infoation. >> i'm sorry stickers on the monitoring side, on the surveillance i'd on the securities, i don't recall that we would use the information. >> and what about the ratings site? i dig at the monitoring ide occurs afterward, but what about thratings site did you have this information at the time that you made the ratings? know is the anser? you didn't? >> commissioner, i answered as
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to the ratings site. >> i understand. now this basically is my question. hocan you make a rating on te subprimer alt-a pool, when you actually dont know the effect that the total nmber of outstanding subprime and alt-a loans miht have on that particular pool? actually, let me giveyou som background, becae it may be, i have left out perhaps a logical ep. d the logical step is the correlations among motgages. the correlation is exceedingly important in the rating process, as i understand. if a mortgage fails in an area, if the house has to be foreclosed, it drives down the price is in that area, at least in that neighborho and in that area you true?
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>> yes. it depends on the nber. i would say one out of a thousand, but yes. >> exactly. and so when you have a large number of subprime or alt-a loans, they re likely, especially as youointed out, when a bubble begins to top out and people can't refinance, then you're going to many, many more failures of subprime and alt-a loans, will you not? >> it would follow, yes. >>nd if you have many such failures of subprime and all a load, they ould affect the loans that are in the pool that you are rating, troop? >> yes, that would follow as well. >> so this is the question. since here s tremendous correlation among mortgages in the sense that a mortgage fails, it has an effect on housing prices in the area, many mortgage failures produce sharp declines in housing prices in
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the area,and as those failures multiply, housing prices died under and died. and we've seen that. so my question is how culd you possibly have rated a pool without knowing a numbe of subprime and alt-a mortgages that were outstanding in the market at large, not just in that pool? >> commissioner, we had commented on the fact that some of the riskier loan types were having, could've been having an impact on home prices. t that magnitude and the severity of decline in the rel estate market after 2006 was not anticipated. >> so you didn't have the dta, if i understand correct, about the total number of subprime and alt-a mortgages in the market at
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the time you were doing these ratings. yeit is true that there is correlation in the sense that large numberf mortgage failures do, in fact, produce declines in housing prices. and so i am not ure that i fully understand how you were, how you're actually dong these ratings. howdid you make this, how did you make these judgments without the information from, say, fannie mae and freddie mac or fha through ginnie me? how could you possibly do that than? >> that was,it was not viewed by us as imminently going to drive and never before seen housg price declin >> okay. then we afford all te sampling point or another, as we have heard in every one of these hearings, we couldn't posbly have foreseen what happened. this was completely
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unprecedented, is the way many people have expressed it. and we accept that. it was unprecedented. we've never seen housing declines like this, but what is also unprecedented i think is the number of subprim and alt-a loans that were outstanding at the time, of which, as i understand it, you were unaware. and the number, at least the commission has received information, that the number is approximately one half of all mortgages outstanding in 2007 in 2000 they were subprime and alt-a. wouldn't it then sugsts that the enormous number ofailure that wld come out of this nationwide context would affect substantially the way your partular pool has performed? >> i yield the commission an ditionalwo minutes.
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>> commissioner, i believe that the specific data we had on the securitized subprime market was a good proxy for trends in the overall et. it refects the prcentage increase of subprime so we didn't have the exact nmber, but we certainly saw tat the portn, compared to moody's securitized primproduct and securitized subprime product had,e had that infmation available. and that sounds like a proxy. >> half? you had a proxy fohalf of all mortgages oustanding in the country at that time? >> i would have check the figures, but subprime group, subprime andalta group to exceed th subprime securitize market. so halfounds about right. i really would like to see the ta that u had available at the time, and how you analyze it from that point of view. thanks very much.
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>> i yield back whatever time i have left. >> if i could, i think it speaks with larger problem. i talked about the absence of independent research staff. that's jt like o of those really big issues, and i on't want to put words in jay's mouth, but i believe he was coming in a managing irector in charge of rating new deals. at the same time, was sort of the lead guide, you know, methodology and try tohink out those bigger issues. like you said. it's very difficult to wear both those hats in a market where yore jt so busy, you are rating so many deals. you need a independent research function that is, you know, thinking about those k of issues. >> understand your point, perfectly reasonable point. if someone had thought that the issue was significant, you can have as many people on the staff doing research on the market. you have to hav the people who are doing the ratings be leaving that that information is important. i don't think it's the fat that you didn't have enough people
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looking for that information. th information could have been obtained by oneperson who thought it was impotant and i gather that it was just not out to be important. >> you know, i agree with that. but when that somebody's whose job is to be think about bigger issues all the time, be reading about them in thinking abou them, i think you are a lot more likelyo come to the conusion that it's an mportant issue. >> thank you. senator graham? >> thank you, mr. chairman d thanks to each of you for your very illuminating testimony. i amgoing t start by going back to a comment that was made by president jer and his generous introductory comments, which he said that america could not turn away fr risk and continue to be a great nation. i agree with that, but wth a couple of caveats. one, is risk to whom? what seemsto have been happening is that those who were
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creating the increasingisk were also finding ways to hand that risk of to other entities, those other entities might be the montana pension board. they might be the united states government, and they have turned out to be the people of america in terms of lost homes, lost jobs, and lost all. the second caveat is that risk is a different concept of recklessness. one of the things, and i'm going to probe, is the recurring adam in american society where we see a bright warning lights going off, which are ignored ntil they mature into a catastrophe. we have one of those happening today in the gulf of mexico where there were warning signals that that type of extraction
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had, dangers that were not being adequately mitigad orprepared for. and we see in the subject that we're dealing with today. i thinkthat there were significant warning signals that appear to have been ignored. would start with the fact that beginning as far back as e early 1990s, there was a significant change in what constituted a mortge. an increase in loan-to-value ratios, an increase in ortga to borrowers with poor credit history. an increase in mortgages for purchases of iestor rather than residentwned properties. an incase in the number of cash out refinancing loans that lowered the borrowers home equities. all of those chans were
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significantly offering what the word mortgage demand in america. then beginning in 2000 the chairman has already shown the chart of the incree in housing prices that began the year 2000, running up to the year 005. could we ve our chart? i can't -- is there a chart? as it in place -- >> a big chart. >> here comes the chart. i'm not going to be able to see the big crt, but i'm going t be referring to a smaller version. can you put -- right there. >> i have a smaller ersion. >> while the chart is being mounted, the chart shows
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basically three things. first, is the dollars expressed in billions of dollars issued -- >> all right, can we do this? ms. born object that can we move this over just a little s that we an -- let's stop the cluster for him minute. ve it over. >> my position is that the commissioner should be able to see the witns as they are testifying. thank you. >> and we would jus mov those chairs out of the way. >> it's a big cha. >> all right, terrific. >> i want people to knowthat this is a totally spntaneous and unrehearsed program. [laughter]
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>> tha demonstrates three -- >> excuse me. angle itlightly so the camera. there's no sse in having that big of a chart if the folks at me can't see it. >> and pull it over a little. >> good. we're all happy. let's get back to substance. you may start the clock again. >> first, the blue mountain reflects in biions of dollars of issuance of rmb the red mountain, billionsof dollars of cdos. andthen the yellow boxes, historic events. starting with an event in october of 2006 when th moody's
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research unit issued a study called housing at the tipping point, the introductory paragraph and executive summary reading, the u. housing market downturn is in full swing. w and eisting home sas and single-family housing are sliding. inventories of unsold hos are surging to new record highs. house prices are falling in increasing number of areas. that was in october of 2006, nd you wil note that immediately thereafter, the red line goes into a sand with the number of cdos jumping in a erioof less than 0 days from $20 billion, two over $40 billion. then in january of 2007, mooy's issued a special report detailing abnormality rates of
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early default in mortgage seritization issued i late 2005 and early 2006. almost immediately after that, another sharp incline in both the rmbs is inthe cdos, the case of the cdos going from less than 10 billion to approximately 55 billion in 60 days then in march of 2007, moody's issued a special commen, notingt cdos containg large concentrations of rmbs as collateral like to expand steep downgrades in the event that the subpme collateral defaults. after a short downturn, both the rmbs andhe cdo line again goes upward. then in april of 2007, moody's releases a report projecting cuba to the losses of six to 8%
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for loans back in 2006, subprime rmbss, and again both the blue and the red line go up. finally, come in july 2007, moody's and s&p downgrade hundreds of rmbss, totaling 5.3 billion insideand plced cdos back by rmbss on watch for possible downgrade. my question is, and mr. witt, you say you needed research, re research to better understand the environment in which the ratings were being offered. it seemso me as if your own organization was issuing sharp warning sinals. why was this research and adequate? and whs it not apparently taken into account >> i was wanted the same thing. i left in september '05, a year
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before this graph starts. >> so that explains your -- what about those who re ere? what did those of you, mr. weill,r. siegel, what did you do with this information? >> should i take the question? over the course of 2007, we had a lot of dialogue with a lot of economies, including moodyseconomy.com. the discussn of the te was t on a crash, but was more primary on the ending. the actual predictions of -- >> and i just -- did you red your own report? this was issued in october of 2006. the u.s. housing markt downturn is in full swing your new and existing home sales, single, housing construction are sliding. inventories of on sold homes are
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surging to a new record hghs and house prices are falling increasing mbers of areas. did that information not get to those responsible for raising? >> can i add onmy time one item? said she used the word crashed on his was sad, they will express a crash in housing crisis. so i just, since you mtioned crash i thought her put that on the record. >> i mean, my team and myself, the research we get including the esearch the mody's economy.com, we get more detailed reports, with actual numbers o the home price declines. we need to get the actual numbers. when we look at the numbs that were produced in 2007, most economic forecasters were predicting a national decline of about 5%. soft landing in 5%, maybe 10.
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there were some nsa, some pockets within the country where maybe more significant price declines were envisioned. but again, over the course of 2007, if you look back at the research that was produce most economies we are talking about a soft landing and maybe five or 10%. >> that's not wha your own economists were calling for. >> i mean, i -- i think you were multiple reports and i think you're in of reprts by our own moody's economy.com focus on this as well. >> how do you explain what seems to be counterintuitive that you t very bad business in he numberof cdo, jumped by a factor of 60 or 70% and 90 days? >> iean, just asking two different items. what i'm looking at without -- >> one is the warning and the other one is the action. taken on the warning. they seem to be running in
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contrary directions. >> i tnk what is unning in the other dirtion, commissioner, if well-worn th market. if some economy is starting to spkabout home pries decline, it is very much lind t what we're saying that we're seing early payment defaults. so i think where we signal to the market in early 2007, at we are seeing erly default. i think it does match quite well with the annncement that it uld be pressure on home price. if you put into perspective, just t put a number here, when we discussed arly payment defaults in early '07 for the entire subpme mortgage instry, six months or so after, it was about 2% he liberties, 2.5 if my memory serves me well. so if you put things in perspective, as long as, it does sort of correlated quitewell
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that there is a view out there in the market, more of you that they are eclining and defaults are increasing. >> mr. kolchinsky, how would you expln the fact that you get such a hair-raising report n october, and he meekly thereafter the number of cdos issued by moody's rockets of? >> its action and interesting what you mentioned, actually an interesting dynamic. by this time, and this is sort of 20/20 hindsight, there were very few what you would cal real money investors in cdos. the bankers themselves were taking down the per senior structures fro these deals. and mezzanine pieces were going into the warehouses of the same banks and two f the cdos. so the bulk of it was being sold to other structured vehicles, e economic risk of which was taken by the banks. from the bankers perspective, and this is where you get the bad incentives, there were some
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trace declines in the abx index this point. no raise declines, but price declines. fr theankers perspective as opposed to the bank, as opposed to the taxpayer who -- they made economics better. so that's somethg we saw in the first quarter of '7. second quarter of '07. people stepped on the gas. and they issued as many deals s they could. from our perspective in the cdo group's, we use ratings, just pln old ratings as deteines of the default probality of the underlying securities. we did have this discount purchase a rule i'm sort f look atscenarios where prices were really shows something very different than ratings, but a i said before, the bankers had a lot of weight to get around that will come and ey did. theincentives were very perverted in this case that the bankers were ting to do mo als indeed stack were you unaware of his perverse
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inntive and actions by the bankers? >> i - i mean, we -- i understood but did know the extent to the fact how many, the collatal was being put on the banks balance sheet, how much was going to of th warehouses. that's one area that the bankers uld not tell us as where it was so into the. >> are you not able -- you're not ab to comand a can of information? >> absolutely not. >>hy not? >> they viewed as proprietary information, where they sold, where they sold thesebonds. >> does is go back is go backto back you could not walk away from a deal becse you are o concerned with market share is? >> summit does. i think, in some ways that is a legitima position for bankers to tke. >> but you areutting their reputation on the line. >>hat is correct. >> that the securities are going to perform against the rang that you're going to give them. isn't tha an important factor?
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>> in neral, i would ay. but in some cases i have had cases where bankers, what i believe have lied tome aout wherthese are being placed that there's nothing i could do about it. there's no penalty for lying to a rating agency. since i couldn't say no, i kind of had to take my lumps. but absolutely. >> jt one minute. the chairman asked in his opening comments, questions relevant to did you have anybody on your committees tat were making the judgment who have actually had experience in housin d the answer was no. did you have anybody on your committee who actuallyas an expense working in one of these bankor investment houses tat were putting these deals together so that you would be alert to efforts that might be designedo d.c. to? >> i actually, i myself worked up banks but i was one of the
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people who hd worked in an investment bank. to be honest wi you, nature of the market from the time i worked at a bank had changed by '06, '07. in the beinning of the market there were plaments to investors to actual real money investors, but the nature of this market changed as more and mo structured vehicles, you know, the rmbs collateral, a lot of iwent into the cdos, the cdos themselves were repackaged and sold into other cdos or into since. and sursedes were held on the balance sheet. so that fact instructor would change the nature of the government in the time that i was there. and you're saying that you would not have, even though you had some background, you would not have picked up on that dyou were an exception, that you have some experience in industry? >> that is crrect. and i could t have imagined th actually the risk management was so poor at banks that this was allowed to go on.
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so i was up are, t least early part where the bankers actually, you actual had to sell the deal, real-life investors, real money to buy the deal otherwise the deal didn't work. that change by '06, '0 '07 where this just went into perpetual factory and packaged io other, other securities. >> thank you very much. ms. born? >> thank you very much, and thank you all for appearing. let me just follow up, mr. kolchinsky, with something you just sad. you said that there was no penalty if an issuer or an investment bank was working with you, lied about aspects of the deal. is that corrct? >>hat is correct. for practical purposes, we would
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not walk aay frm a deal. so we couldn't say no. so that wod be the most obvious,e wod do it in any normal business would be fine. your trading partne is not being truthful to you, you would say i'm not going to do any business with you. so once that app is closed off because you want to increase market share, then there is no penalty. you know, we were in a osition of being a quasi-regular which means we have no power to compel peopleo give us information. we had no power to check the veracity of the statements. so without the ability to say no on adeal, without the ability to compel, you just were left th sort f limbo where you tried very hard. and many people ried very hard toforce the infortion ut, but at the end of the day, push come to save, pple could lie to you without a penalty. >> and there will be no repercussions undr the securities laws, for example? i mean, that means an issuer can go to every agency provide false
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information resulting in a false aaa rating, for example? and you would not, if you found out that that information was false, would you consider going to he sec with information about, you know, these misrepresentions that misled vests? >> i had never considered that, but it would take a chain of events, a very low probability would have to find a, which would be difficult. it wld have be material, and to be perfectly honest with you, you would have to get the maps to agree to take action against large fee providers, which probably mos difficult. so that probably would not occur. even if we did have evidence, direct evidence, it probably would be handled on some higher
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level betwn the two parties instead of taking it to a regulator. >> mr. sgel, do you disagre >> i have been operatinwhen i was at moody's and not haing to legal research in particular, i was operate under the impression that it was a violation of curities law to lie to the rating agency that had been published in the general media, when moody's got information from colleges and it turned out to be who needed a rating, turned out to be moretruthful than information they provide to newsweek winner how to have stronger schools were. and they were commentary at you couldn't lie to the rating agency. so we operated under that assumpon. if i had found someone intentionally misleading, my believe is i would have taken action. i rarely would say a senior peon at an institutional level, at our bank it is policy lie to rating agencies, do anything we can. but if were an indvidual banker who se information that was
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wrong, a couple times will go a more senior person andtell them we want the inormation to come some other way, or to make sure you have the right person checking this dataefore we get it, on the rmbs teen spirit thank you. mr. kolchinsky, i take it from your testimo, from your written testimony that you feel that moody's quest for market share, market coverage, and revenues tended to undermine the quality of the credit ratings, at least in the structured finance area, is that craig? >> that i correct. >> so a profit motive, corrupted -- >> short-term profit versus long-term quality. very pedestrian, nothing nusual about this conflict occurs, probably in every industry. very standard. >> certainlye are finding it ocrring in the financial services industry.
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mr. witt, in your view where the credit, was the credit, the quality of the credt ratings undermined in any respect by the search for market coverage in market shae? >> i don't know of any cases where there is really a bright line that anybody crossed it that i knew of where it was reallyobvious, that summary was, you know, changing standards or invnting standards, you know, to get a deal or toet market share. >> was there a gradual erosion? >> i wouldn't -- if somebody said tt, i wuldn't doubt their veracity. i wouldn't say that myself. mr. kolchinsky let me ask you, you testified in your written testimony, but not in your oral testimony.
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you talk about your ratings of cdos, collateralized debt obligations, when they began to contain credit efault swaps as at least a portion of th underlying asset. >> yes. >> and as i underand ,-comit, the credit default swaps ai to replace some of the residential mortgage-backed securities. >> that is correct by '7 most of the deals, instead of having cash assets had credit default swaps that reference the subprime and alt-a collateral, yes. >> and did you experience paicular issues or difficulties in reading these synthetic or hyrid cdos? >> there were much more diffcult. they introduced a number of new
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factors. a number of new risks including counterparty risks, collaborate, because they all had to be funded. the number of waterfalls, the mechanics in the eal,ere essentially doubled. on top of that, each credit default swap could be customiz, an by that i mean like the things that i mentioned with discount purchase option. the on thing that made it possible to do that for a banker is the fact that the credit efault was so fexible, that you could adjust certain things in it, that the derees of freedom and a credit deult sw were much higher than the degree of freedom of a normal cache we only had price. so yo could hide certain risks. you could create a dferent credit defaults while. so that in and of itself change. i think, i mentioned that th ability to sot created a new type of investor who anted to see the market deteriorate. >> he wanted to see thesebonds failed state? fail.
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and the point from the ating, we d not anticipate that sort of investor in our deals, and ou mdeling, and our approaches so that was something new. and, finally, it really changed the dynamic of the rating timeline. . . in a different form and keep a pressure from the time the increases. those all changed because the deals are more synthetic.
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>> you can ask one questio >> if i am limited to one question, how did the ratings on the synthetic cdo's perform? ou agree with mark who has testifiednd written testimony that they were the worst rating in all of moody's once distinguished? >> iithout a doubt oubt -- i would say -- my guess is yes. they performed poorly but because many of the synthetic deals were as we know now were done and selected by parties who waned to match the loes. they would have probably performed worse. i don't havany data. but i wouldn't tend to disagree. >>since they we
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$230.5 billion has been paid out for that project. c-span.org/stimulus contains news conferences, hearings, and congressional debates on the stimulus, as well as links to government and watchdog groups tracking the spending. that is that c-span.org /stimulus. c-span recently spent an afternoon with senator mary landrieu as she assessed response to the gulf coast oil
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spill. over the next half-hour we will take you through the area of jefferson parish, louisiana, where she observed the operations taking place to deal with the ongoing oil leak. >> what are they paying? [inaudible] different for different amounts. but is it adequate for you? are you getting any negative
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effects from the fumes? are you putting down booms or transporting things? it is a big job ahead of us. [inaudible] we told bp today that they're going to pay people one year in advance. so, they have to show last year that they had operation growth. bp is going to have to do it on their own reputation because of they do not do as well they will not work anywhere else in the world. no other country will have them.
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>> these people cannot wait for litigation. >> exactly. we need to streamline the claims process. they are going to do an automatic send out of separate checks. $3,100 is the average. ranging from $1,000 to $10,000. they are overpaying some people and under-paying others. they also have to vote with on the big claims. the big hotels. these are companies that make hundreds f thousands of millions of dollars and are waiting to get reimbursed for
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big claims. cuff then you have got the closure issue. 7,000 miles of tidal land. today the federal government approved hhw many miles? >> 30. >> so, this is the scale of this. we do not need to barricade all 7000, but if we are talking about sand protection in certain places, it will be more than 30 miles. maybe we can do it for cheaper. deciding that we want to have certain amounts that need to be protected. a critical thousand.
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it is not just grandchild. it is lots of places. >> it will take a one hour to get the grandchild. there's more marshland there than anything else. big clumps of oil coming past right now. >> we do have a sense of urgency about it. there are forms of oil coming in. looking at the big picture, it is really urgent. but this is the entire coast. it is affecting us right now but i was sitting next to it not just to tell you this, but the president was pitching a complete set and another man was having a fit, send -- upset that
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all of the boom went to louisiana. saying that the oil changes course and it will start moving into mobile. he told the president that they were defenseless. >> there are miles and miles of navy boom. >> they are trying to organize it. i am not defending them, but i am telling you it is a big coast. >> marshland in the vienna cannot be cleaned. talking about the beach it is a different story. we can clean the beach. the areas that we have, you cannot just go in. >> do we know how many miles it will take to block all of the
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marshes? >> in jefferson it is 21. >> but it is stopped at the coastline. >> than that is what we should do. we should focus on that and get it done. >> they have told some of the fishermen that they have used their resources recently to put out the boom. that is a part of why we do not see things here. when they talk about clean up the talk about training but they're not coming in to do that training, laying off the guys that have been putting the boom out to bring in people from outside. >> i heard that they would hire 25. >> with no one driving their boats.
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>> [inaudible] >> obviously we need more resources. finally the federal government approved a plan for the barrier island but we need more of everything. expedited claims processes are what i am focusing on. buildings are businesses, this was nothing of their fault. not only is bp responsible, but pe have to make sure that the czechs get in the hhnds of citizens. camp owners, restaurants, seafood operators, etc. that is what i was focusing on today to make some progress.
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>> [inaudible] >> this is held down with anchors? >> the pipe is along the same.
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the boom is outside of it. it needs to be picked up. >> that is the white? the yellow is the hard boom? >> right.
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is this what it looks like bel?
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>> we really appreciate everything you are doing. you have a real job on your hands. >> [inaudible] >> where do you live? you cannot have a better mayor than 1tim. >> [inaudible] >> are you the captain? how many boats? you have not been able to fish? >> we are restricted. commercial fishing for 22 years. [unintelligible] >> we talked about how many.
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they would be out of business for least this year. but you have got to keep your fingers crossed. we want to make sure you are not out any money. we will try to get you back to fishing. you are a fisherman or a charter boater? we will try to get you out as soon as we can. ryan, you are a charter boat fishermen? >> nice to meet you. i want to say that i am so proud of those guys. it has been a model for the state of louisiana.
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i knew the wall would do such a good job. we probably have a 50/50 chance of the boom rolling in a strong storm, we are trying to get the judge to help you win the fight. when i see that boone working hard, thank you all for everything. >> [unintelligible] >> every day we are in meetings reiterating it to everyone that needs to know, making sure that
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we are using local access. it is worse past grand isle and it is headed this way. " we thought was bad last week is about to get worse. do not hesitate to call on us. we have a team out here. i know that we are in short supply of hard boom. as the mayor said, when we go traveling with the key we cannot just wish they had similar plans. we cannot throw down. we have to continue to push and do not hesitate to let us know if there is something you need. >> every one of these fishermen, we have got to stop it on the north side of the bay. we do not want to get -- we do
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not want it to get to our families. >> that is why it is so important that you locals are here. you all are here in the heart and mind and it makes the difference. >> i just want to support what you have said. you could not have better champions than this mayor and this city councilman. you are getting high marks when people look down to the gulf coast and see who is organizing and what is happening. the spot light comes on here. they having gauge of the local people. i agree with you. this is about our future and our kids, our way of life. no one can work harder in hotter weather then these people trying
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to protect our home. we are doing all of the above. trying to protect the passengers in terms of their homes, getting more 18 inch hard booms. most importantly i will keep telling them that we want to hire louisiana boat captains. every day that i can tell them as someone they $50,000 last year you will write them $50,000 this year if they cannot work. i do not want to see one person lose their boats, other business, or their home over something that is absolutely not our fault. when the federal government finally comes to louisiana with revenue sharing, the billions of dollars that come out of the gulf court -- the gulf coast
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paid for by the oil and gas companies, the federal government makes millions of dollars every year. you deserve a portion of that money. so we can restore these wetlands. so that we do not have another oil spill like this. our marshes will be stronger and we will have better plans in place. i know that there is more to do, but there is a lot of oil out there and you never know where it is coming from. we know you need more boom right now and the bill do everything we can to get it. >> one quick thing. one week ago they called us into a meeting to say they wanted to rotate people in and out. they were worried that people would get worn out. the mayor said that we had to be
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kidding. these guys go out for three of four weeks at a time. we are not taking them off the ships or back to the port. every minute that we haveeto advocate on your behalf this man is doing it. if there is one good thing for this parish, grand isle will lead us see it and we will give you as much of it like a hurricane but with more time. >> it is so nice to see everyone here working so hard but ss many people are still out of work. we are trying to do whatever we can to help those people.
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we want to mmke sure that when the cleanup process is done you have the proper gear and you will be safe. i know that everyone has family and friends at home that wanted to come, we will make sure they get something. thank you. >> thank you very much. [applause] cuff better get used to it. hang in there. i know that this is hard. and boring in many ways. we really appreciate it. thank you, we will try to do everything that we can. thank you all very much.
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>> [inaudible] >> [inaudible] >> hi -- hang in there. >> this is why i am here. my granddaughter. >> how old is she? >> 2 1/2. >> my goodness.
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>> [unintelligible] >> they come in from out of town. they are hard workers and they know this land. that is what happens. people have no direction.
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>> they are good people. [no audio]
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>> of course, they have tried to skim some of it up. [no audio] >> people are criticizing and saying it is for hurricane protection, but it is for keeping the oil out. >> the marshlands in that point, they'll like beachgoers. much easier to clean it off. >> let me say this. this is the beach. this is the beach. this is out of beaches look from here to florida.
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this is what we are trying to protect. this is where the marine life is. if you clean this, you will kill the grass and foam in the water. >> thank you. >> [unintelligible] >> it is heartbreaking. i have represented this state for 30 years. work for governor, traveled almost every inch of louisiana as a senator. i know the people well and they are the hardest working, most open hearted, generous people in the world. you can see them out there on this work boat. their heart, family, and future
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are on the line. a slow response from the federal government and other places as well in terms of getting things approved that would help, they look at the wealth created in the world and wonder when louisiana will get any portion of the revenues taken by the federal government to protect ourselves and save the marshes. it is heartbreaking. >> [inaudible] >> i say that we will get through this the way we got through katrina. this region has a potentially suffered more than any other place.
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we have a balancing act down here. we have to fight to get help but we cannot allow the federal government to go overboard regulating the oil industry because it will put more people of work. we want it to be safe. it should be safe. but we have to make sure that we strike the right balance. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> the head of the campaign for america future and various blotters live tomorrow at the
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2010 midterm elections conference. starting live tomorrow at 11:00 a.m. eastern on c-span. >> as long as you know the agenda you can write about the story. >> for the last pierre brody mullins has made a series on lawmakers overseas trips paid for by taxpayers. >> david cameron fields questions from members of parliament in "the prime minister's questions" tonight at 9:00 on c-span. >> attorney general eric holder spoke friday at the american arab anti-discrimination meeting in washington, d.c.. he reiterates the commitment to prosecuting hate crimes. this is about 20 minutes.
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[applause] >> is my pleasure to introduce you to someone who has dedicated a decade to this field, mr. eric holder. >> thank you for coming from across the land. our delegates from coast to coast are here to celebrate our 30th convention. we have to do something special for it. is a person who is very special to our hearts and to our country. i do
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i do not want to introduce him by reading his bio. everyone knows who he is. of course, i have known him for so many yea, i have been honored to knowim for so many years. mr. holder has proven to be a intelligence, integrity, commitment, and an eternal friend of the truth. ladies and gentlemen, let me present to you at eric holder, attorney general of the united states of america. [applae] >> thank you. i was just telling him, i have
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known him for a good number of yearr. in fact, i think i knew him before i was married. i was wonderi where he was gog to go with that. i am happily married now. but thank you for those very kind words, a doctor, and for this tremendous nor. i am grateful to you and for the board and staff members for this wonderful opportunity to speak with you, and i appreciate the opportunity, at the start of this milesown conntion, to share some thoughts with you about the justice department post a cmitment to promoting safety, peace and opportunity. i especially wt to thank your extraordinary president for her leadership. we also thank and congratulate the other awardees here this afternoon for their
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achievements in the cause of justice. above all, and want to congratulate you for your 30th anniversary. i ink that desves a round of applause. [applause] i do not know exactly what you get for its 30th anniversary. i just passed my 20th. you deserve what ever the wonderful prize is. the reality is that for decades you have advanced the promise of civil ghts forll americans. you have educated citizens of all nationalities, backgrnds and faiths, and you have promoted the basic principles of dignity that defined this untry and bring out the bes in all of our communities. it is a special honor to be a
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part of this anniversary, and to continue one of our nation pose a mo important conveations, mostcrucial, -- nati's important conversations, the crucial dialogue with arab- american communities. this is a top priority for my partment of justice and for the obama administration as well. i would be happy to speak to you any day of the year, but i am especially pleased to be scheduled today, june 4th. exactly one year ago in cairo egypt, president barack obama addressed the arab and muslim world in a landmark speech that in heartfelt terms captured the importancefur discussion today. he said scott -- he said, "america holds within her the truth that regardless of race, religion, or station in life,
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all of us share a common aspition to live in peace and security, to get an education and work with dignity, to love our families, our communities, and our god. so long as our relationship is defined b our differences, we will empower those who sow hatr rather than peace, and in gender conflict rather than cooperation. this is a cycle of suspicion and discord must end." prident barack obama may have been addressing another region of the world, but his words are as much as a guide for american 's diverse communities toda as they were for communities around the globe last year. the special relationships between arabs and americansnd non-arab americans should not be defined by differences.
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as everyone here knows, we cannot and we will not allow that to happen. [applause] since becoming attorney general last februar i have heard from arab americans to say that they feel uneasybout their relationship with the united states government. i have spon with arab- americans who fe they have not been afforded th fault rights or responsibilities of their -- the full rights o responsibities of thei citizenship. they feel that it is us versus them. i have had a very frank conversations. that is interable, and it is inconsistent withhat america is about. in this nation, our many faiths, origins and appearances must bind us together, not break us apart. in this nation, at the document
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that sets for a lot of our land, the constitution, is meant to empower,ot to exclude. in this nation, security and liberty are partners, not enemies, i ensuring safety and oppounity for all. [applause] the communities that we serve it must -- the communities that we serve must see that the federal government is committed to the impartial implementation of our government's clause. they must know that we will do all we can to enfce our civil rights laws with the same vigor that we used to enforce public safety. these are not mutually exclusive goals. the justice department will do both. under our leadership, that is the commitmenn of the justice department and of every united states attorney throughout thi
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nation. that is also my personal pledge to each and every one of you. wh exactly have we done to ensure the equal enforcement of our nation's laws? first, we have restored the civil rights division to its rightful place as our country's preeminent civil rights agency. [applause] i understand that tom press is here with u and sunday -- here with us -- either understand that tom perez is here today? he hasade it a priority to tackle the civil rights challenges of the 21st century. desires to make substantial and meaningful progress towaad
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providinggequal opportunity to all americans. it is not enough to say that the division will simply mean more active. the real question is, to what end will it dedicate its resources and its energy? as long a in attorney general, that answer is pretty simpl we will dedicate our resources andnergy to enforcing the law neutrally, fairly, into working to provide a americans with an equal opportunity to pursue their dreams. that is was civil rights are all about. one of the division's many calls it -- many goals is ensuring that housing, educational opportuni, and other rights are dealt with. one issue that inow is particularly of interest to you is combating hate crimes. the prosecution of hate crimes is a top priority.
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we are employing new tools that have been afforded to us by the ttw shepard hate crimes prevention act of 2008 to address and eliminate hate- filled crimes around the nation. we are working with attorneys and law enforcement officers in itsggressive enforcement.. i want you all to kw that we are currently working with loc law enforcement to investigate the recent attacks on a florida moscow this case -- on a florida mosque. this case is a top concern to the fbi. [applause] that is not all we are doing. we are committed to religious freedom, a foundation of our democracy. state of oregon to repeal a longstanding law, passed 100 years ago, that bars catholic
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nuns from teaching at public schools. the law effectively forced these women to choose betweenheir careers and their faith. they could not wear religious part in the classroom. following a letter from our civil rights division, the governor acted to repeal the law in april. [applause] the bottom line is depth -- the bottom line is that the justice departme post a commitment to civil rights has never been stronger. - justice department's commitment to civil rights has never been stronge we are worng to bring together community leaders with various deral agencies. the department has engaged in a critical effort to end racial
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profiling in the united states once and for all. [applause] as many of you know, the guidancet's cuent abouthe use of a race by federal law-enforcement agencies was issued in 2003. it has been the subject of some criticism. i am committed to ensuring this. department policy allows us to perform our responsibilities with legitimacy, accountability and transparency. i initiated an internal review to evaluate tt 2003 guidance coming into commend any changes that may bearranted. today i want toe clear abo something. i want to be very clear about somein racial profiling is wrong. [applause] it can leave a lasting scar on
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communities and individuals, and it is, quite simply, bad policing, whater city, whatever state. years ago as a college student, i was driving from new york city to washington, d.c. an officer stopped me on the highway. he saihe wanted to search my car for weapons. opened the tru ofhat car. i had done nothing wrong. i had not done anything that might have aroused suspicion. in the years since that dayi can still remember how humiliated and how angry i felt as i opened the trunk of my car. my story is not unique. nor does it represent a worst- case scenario. we have all seen heart wrenching stories of misguided racial profiling in the past few months alone. but we must always remember that virtually all of our nation's law enfoen officers serve their communities honorably, and
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risk their personal safety every day. their work iludes all of o lives, and the justice department will not snd idly by as the discrimination by a few and fairly tarnishes the outstanding work being done by so many. nor will we stand idly by as isolated law-enforcement departments engaged in discriminatory policing of any kind. our nation is better than that. [applause] third, and finally, in addition to prosecution, we have made a commitment expe keeping lines of communication open and by gaging the comnity that we serve. in addition to the civil rights efforts, many other justice department components have launched promising initiatives. the fbiften hold conference calls wit local community
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leaders and each district office employs a community outreach specialist to engage through town hall meeting public speaking, youth initiatives a psittacine academies. kewise, th fbi specializes in community outreac and is working to sengthen engagement between the fbi field offices and communities of every ethnic background. j der components o do now reaches to the arab-american communit the respons to tension and conflict related to allegatns of discriminatory treatment based by arab, muslim and sikh communities across the country. there have been events snsored that emphasizeommunity engagement u.s. attorneys across the nation are actively engaging arab and muim communities to confront
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the challenges of the 21st century together. this is only a snapshot of our efforts and we are working constantly to improvehem and to build stronger relationsps th the community that we serv our efforts are currently being reviewed and coordinated by the arab-muslim group which i established last year. i launched that advisory group with the goal of protecting our common security while eserving the values that we all share. the same values and patriotism that died adc's work als-- adc's work. let us not forget that it was a muslim man who first alerted police to a smoking car in times uare. the visuals of -- the heros of batman doubtless saved many lives. he did his part to avert tragedy
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just as millions of the other party millions of other arab americans are doing and bradley for filling their responsibilities of citizenship. the conibutions of arab americans have helped us build this nation intwhat it is today. the have served as police officers, teachers, and civic leaders, sengthening the local community and country. we must remember this, we must also remember the wisdo of the enaving on statute that sits next to the department of justice and in front of the national archives. it reads what is past i prologue. our past reminds us that we a a nation of immigrants. our past reminds us that when we band together across the traditional tree -- divisis of identity and bkgund, we n promote ser communies. our past reminds us that if we as togeeher, then we must start working together. we have no otherhoice.
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the era of us versus them that some of you have experienced must and. at long last, i believe that it is ending. together, we can make sure that it is replaced by a new era, and everett that recognizes the truth reflected in this organization' ne, that regardless of our faith, gardless of our background, we are a americans. i amrateful for this -- to this committee and to all of you for your three decades of work, your advocacy and above all, your partnership in helping brings to this point in our history. i am looking forward to our continued collaboration an support of a more perfect union and a more peaceful existence for all americans. [applause] very much
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[applause] [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> if everybody from the table will come up. we appciate the attorney general. throughout -- on behalf of the arab committees that the united states, it is my deep privilege to present the attorney general withhe special award from us for his outstanding leadership, for his dedication a coment to civil human rights and justice and t rule of law.
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we are very proud of you and we thank u souch for being with us. [laughter] [applause] >> tomorrow on "washington journal," this week in congress. donna hopkins, from the state
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department bureau of political military affairs, examines the threat posed to maritime security and what v administration is doing to prevent it.3 book, "the grand jihadis." "washington journal" live at 7:00 eastern on c-span. national security agency director general keith alexander is in charge of the u.s. cyber security command, he talks about cyber threats and the work of his new command at the center for strategic and international studies in washington. this is one hour.
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>> good morning, and welcome. i am john hamre. this is a session that i have been bugging general alexander to come here for about seven months, when it first became clear he was going to be the head of the new cyber command. it was not clear to members of congress, and this took a hell of a lot longer than it should have. it was obvious that he was the right man at the right time, a time when we very much need this. now, this is going to be far more dramatic, i think, for nsa than than for the nation.
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"no such agency," it used to stand for, and this is an agency that does so many crucial things for the country, but it has to -- in terms of public acknowledgement, and now, all of a sudden, to the thrust into the limelight -- to be thrust into the limelight is going to be a very wrenching thing for an agency. no small measure, because we do not have the kind of consensus, the national consensus, that we need at this crucial hour. for the last several years, we have had a great debate in this country that has not resolved itself in the right way. we have two contending we wanted the government to protect us, and americans want to be protected from their government. these are two things that have been with us for 250 years, and
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we have worked that out. we had a working formula, but that consensus broke down badly in the last decade, and so, we have general alexander, walking into probably the most crucial jobs at a time when we do not have consensus on how to manage this. this is going to be the great challenge, so, fortunately, we have a man of his talent and his experience that is going to help us. he not only has to build a new organization, but he also has to help build the confidence and a consensus in the united states that we need this role, so i am very grateful, and general alexander, for you to join us. -- very grateful, and general alexander -- very grateful,
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gemeraneral alexander, for you o join us. thank you for coming. >> he must have been standing on something, because this is way up there korea and thank you for that introduction, and thank you -- this is way up there. thank you for that introduction. there was a key threat across two administrations, and it was part of drafting the policy for security. thank you, as well, for the
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opportunity to speak here today, as this is my first public engagement since i have been promoted in assuming the command of u.s. cyber command. i am pleased to be here with all of you today and can think of no better place to talk about cyberspace than here. but before i talked about this and focus on the defense department, -- before i talk about this, let me state that this is a team sport. i see a lot of the team out here in the audience. we cannot do this alone. within the government, howard schmidt has the lead in coordinating agencies and our approach to cybersecurity. he has done a secured -- a superb job and has been great to work with. for the team at dhs, they have been great partners on a set of very complex issues. all of us in government
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recognized the government cannot do this without the help of industry, academia, and our allies. securing cyberspace is a team sport, and we are proud to be a member of that team. we look forward to growing that partnership as we collectively address how we should secure our networks. let me talk about our portion of the team and our role and responsibilities. -- are part of the team. -- our part. as dr. hamre said, long overdue. i think that was a brief confirmation process we went through the end that was a joke. no more jokes. -- process we went through. that was a joke. no more jokes. the commander of the defense
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information systems agency was still ahead did. -- was dual headed. as a result of serious intrusions into their networks, things are placed under my control -- were placed under my control, recognizing the imperative for synchronizing our offensive and defensive cyber capabilities as well as the need to leverage nsa's intelligence capabilities to support our understanding of the threat and the ability to respond to it. last june, the secretary of defense directed to further strengthen this model and streamline the command and control of our military's cyber
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capabilities. since that time, we of building a system that is more integrated, synchronized, -- we have been building a system. on may 21, that came together. we at cyber command are responsible day-to-day for directing the operations and defense of the department of defense information networks and for the systemic and adaptive planning, integration, and synchronization of cyber activities, and, when directed under the authority of the president, the secretary of defense, and the director, we are conducting cyberspace operations to ensure that the u.s. and the allies -- this is quite a mouthful. i have difficulty saying it. i am a army officer. reading is difficult.
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partly, it means that u.s. cyber command will centralized command of military cyberspace operations, strengthen dod cyberspace capabilities, and work on the cyber expertise. the deputy secretary of defense explained our mission last week. we will leave the day-to-day defense of all military networks, support military -- we will lead the day-to-day defense. and we will assist other government and civil authorities and industry partners. as the secretary put it, the key part of cyber koran is the linking of intelligence, offense, and defense -- the key part of cyber command is delinking. the linking. -- the key part of cyber command is the linking.
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we have an enormous challengee ahead of us as a nation, as a department, and as a command. if i may, i would like to sketch interrelated set of issues that we call a cyberspace and how we hope to sort those issues, i hope resolving some. cyberspace consists of complex systems that store and eventually vast amounts of data. by 2015, the number of network hosts is expected to exceed the human population. i am doing my part to compete against that with 12 grandchildren. but it will not work. social networking an instant messaging accounts are exploding. by the end of 2010, it is projected there will be 2.2 billion social network accounts worldwide, and currently, 2.4
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billion instant messaging accounts. by 2014, the project there will be over 3.7 billion social networking accounts and over 3.5 billion instant messaging accounts. in 1996, there were 60 million internet users worldwide. today, -- 16 million internet users worldwide. in 2009, there were a total of 90 trillion emails sent, and in 2010, around 247 billion emails sent every day. of those 204 g-7 billion emails, 200 billion were spam -- of those 247 billion emails, to wonder billion more spam. -- 200 billion more spam -- were
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spam. 47% are in asia. 23% in europe, and only 14% are from north america, 16% from other locations around the globe. in a sense, we humans are tying together all of the libraries on our planet and making them accessible from everywhere instantly. that data in a common library of humanitariay contribute to our , tremendous opportunities for our future and tremendous vulnerabilities. our data must be protected. no one here or anywhere else would consent to having all of their personal and family information's stored in a place where any random stranger could iii them -- and family information stored in a place
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where any random stranger could access them. this is happening more and more through subterfuge and poor design. this relies on our agencies, forms, suppliers, friends, neighbors, and, well, all of us -- agencies, firms. cyberspace has become a critical in a blur -- enabler. our digital infrastructure, therefore, is a strategic national asset, and protecting it, while sit according privacy
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and civil liberties, is a national security priority -- is a strategic national assets, and protecting it, while protecting privacy and civil liberties, is a national security priority. today, our nation's interests are in jeopardy. the technological convergence of data processing and telecommunications has boosted opportunity and productivity, but it has also introduced tremendous vulnerabilities and created new challenges. it is not artist to say that the weakest link in our security -- it is not alarmist to say that. america's very wealth and strength make it a target in cyberspace, and one of the pillars of that strength, our military, is at risk, perhaps to an even greater degree. our military depends on its network for command and control,
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communications, intelligence, operations, and logistics. we in the department of defense have more than 7 million machines to protect, linked on thousands of networks with 21 satellite gateways and 20,000 commercial circuits composed of countless devices and components. national and military infrastructures, moreover, are increasingly intertwined. they include the internet, telecommunications networks, computer systems, and embedded processors and controllers in critical industries. that infrastructure is sophisticated and robust, but it also has its weak points. dod systems are probed by unauthorized users hundreds of times an hour, over 6 million times a day, and while our
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fourth line defenses are up to this challenge, which still have to devote much of our time -- and while our first line defenses are up to that challenge, we still have to devote much of our time to this. you are all familiar with the general outlines of the threats to network security from a growing rate of four actors, terrorists, criminal or, an individual hackers -- from a growing group of foreign actors, criminals, terrorists, and individual hackers. they found that criminal organizations often using custom-built malware are able to breach of virtually every single organization they choose.
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a relative handful of such a tax accountant for the vast preponderance of records that the verizon investigators determined to be compromised. time and resources. they simply did not have the time and the wherewithal to reach all of the hide of the targets they could have, and, thus, the apparent concentrated on what they deemed were the most profitable ones -- they apparently concentrated on what they deemed were the most profitable ones. in short, we face a dangerous combination, known and unknown vulnerability iies, and weak situational awareness. the trend seems to be evolving
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in other ways that should give us concern. one decade ago, network penetrations seen targeted mostly at exploiting data. in the last few years, we have seen the bar of conduct lowered for computer network attacks. in estonia in 2007 and in georgia in 2008, government functions were impeded, and as i told dr. hamre, i think they also delayed me getting here. sabotage. let me explain. estonia and georgia were certain attacks. informations systems were able to continue on with their jobs, but the potential for sabotage and destruction is now possible and something we must treat very seriously. and these threats are serious. to deal with them will require a common vision, unity of effort,
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and a commitment of dedicated resources. our department of defense must be able to operate freely and defend its resources in cyberspace. we will do this as we do it in the traditional military domains of land, sea, air, and space, but cyberspace is unique. it is a demand made domain. it is also an increasingly contested domain -- iit is a manmade domain. usid command in naples the defense department to better operate and protect -- u.s. cyber command better enables the defense department to operate and protect things. its contribution represents a substantial share of what the department offers as part of the
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whole government approach to deter, detect, and defend against emerging threats to our nation in cyberspace. how will we do our job? as i mentioned earlier, we consolidated two already existing staffs. u s sadr command is located with the national security agency, -- u. s. cyber command -- u.s. cyber command is co-located with the national security agency. this is critical to the entire
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effort in cyberspace. u.s. cyber demand falls under title 10, and co-locating the command with nsa was not only wise but also an imperative. it concerns are valid, which is what the professionals at the national security agency have robust and rigorous procedures to minimize the effects of intelligence activities upon u.s. persons. nsa also has oversight internally and from the department of justice and from congress. this explains why co-location with those is perhaps the best way to do this. there is the protection of
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privacy and civil liberties. as of may 21, u.s. cyber command also has boots on the ground. this includes the 24th air force and the navy's 10th fleet. while technology is part of the solution, of course, but the key is people, and we have superb people, both at n.s.a. and at u.s. cyber command. we will be recruiting and training our cyber cadre to make sure that we can operate effectively for the long term. this was in the squadron real --
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quadrennial defense review. one, we must develop a comprehensive approach. two, we must centralized command of cyber operations, and, three, finally, we must enhance partnerships with other agencies and the government. this last point meritt particular elaboration. our mission at cyber command includes not only the defense of our military networks but also our role in guarding our nation's defense industrial base. a large percentage of our military energy is generated and distributed by the military sector, and more than 80% of our logistics are transported by private companies. mission-critical systems are
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often built and maintained by defense contractors. the military networks -- we rely on private-sector networks and capabilities. hence, ensuring that those partners and allies are secure is a key concern, because the flow of information crossing these networks is significant and sensitive. our adversaries will find our weakest link and exploit it, whether it is public or privately owned and operated. that being said, any efforts to secure dod networks will be designed to avoid giving preferential treatment to any particular private-sector company. we need to do this in partnership with dhs. at the u.s. cyber koran, we will approach these tasks by ensuring the right -- at the usid command -- at the u.s. cyber
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command, we approach these tasks by ensuring things. we will leverage technical capabilities to provide a coherent commanders -- to provide a coherent commanders -- to provide coherent demanders. -- commanders. in closing, i would like to leave you with some thoughts on how i think we can translate these imperatives to operate effectively in cyberspace and how we can achieve these defects -- effects. we must build situational awareness through a common, shareable operating mission. we must share threat the data --
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threat data and synchronize control of capabilities, also at nets be. we must leverage all tools of national origin also admit -- also at net speed. we must leverage all tools in the nation. considerable conomic policy tools with the involvement of law-enforcement and others. to achieve these efforts, we must recruit, educate, train, and retain a country of cyber experts, who will be conducting
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seamless -- to retain -- train, it retained -- train, and ret ain a cadre of cyber experts. military, intelligence, and insurance. we will perform this mission with your trust and confidence, but we will only succeed by working as part of a coherent team. we will partner with all of the partners and agencies. we will actively engage all branches of government. and we will exercise our powers and responsibilities under laws and ways to ensure that we are truly protecting, not infringing, the privacy and civil liberties of our fellow citizens. i appreciate the opportunity to share my thoughts with you
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today. cybersecurity is among the most important current and future challenges dod and our nation faces. securing our networks is not just a dod issue. it is a national security issue with implications for all instruments of national power. the department of defense, u.s. cyber command, will do its best to protect us from all elements wishing to do was harmed in cyberspace. as i said in the beginning -- to do us harm in cyberspace. now, it is time to listen to your questions and concerns. i look forward to the interchange, and i thank you very much again for your attention. [applause] >> great, well, thank you,
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general alexander, and congratulations. if i could ask, could you do two favors? could you keep your questions brief so we could respect the generals a schedule? he does have a few other things to do -- so we could respect the general's schedule? you get a free microphone out of this. >> one of the questions i keep getting asked is how to use streamline -- how do you streamline obtaining permission in time for it to be tactically relevance -- relevant? >> that is a difficult issue. the question, i think everybody heard, is how do you streamline your counterattacks?
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i think i would enlarge it to say how do you do that? and i think we have to establish that say what we can stop. now, there are things the weekend stop at the bouudary, like an intrusion prevention system. that is one part of the strategy, but in the future, that may not be specific, so what we're looking and includes what are the standing rules we have -- what we are looking at includes that. what we're doing in peacetime and what we need to do in wartime and how do we ensure that the combat commanders have the control that they need? but digital internet is now the command and control system, -- the digital internet is now the
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command and control system, which used to be the push to talk radio system. we have yet to do that. that is something we have to take on. i had an opportunity, aad i say this with some level of humor, i was asked a specific question by senator levin, and we came up with three different venues. how would cyber command act when we were at war when both combatants are in the same country? you could attribute the attack your aggressor, your adversary, and you would say, now, i am
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under one set of rules of engagement. now, what happens when -- that was case one. case two, what happens when an average year uses a neutral country to announce their attack, -- what happens when the enemy uses a neutral country to bounce their attack? we now have to look at that in light of cyberspace. and the third to look at is what do we do when the united states is under attack. what do we do to mitigate or defeat the threat? so those were the three conditions, and as you think about those, each one of those are going to wrap different rules of engagement. -- going to have different rules of engagement. we are working through those up
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through the committees. >> i think we had harry and then the gentleman in brown. >> morning, sir. harry, from deloitte. many of us in the room have worked on situational awareness and such, and during your comments, you mentioned that situational awareness is an area that definitely needs to be improved. i wonder if you could just briefly describe perhaps where we are now with situational awareness and the areas that you would like to see improved in the future? >> well, i think, in a nutshell, the hard part is -- and i can give you an analogy here, so i will use the national training center. in the national training center, one of the things they teach is how to see the battlefield and
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how to react to different situations, and getting the picture for the battalion and brigade commanders, as you know, is a very necessary part on how they're going to conduct their campaign. fights mcconnell's four to six hours, so understanding where your adversaries are trying to go -- fights may last only four tt six hours. now, let's put it in cyberspace. we have no situational awareness. it is very limited. oftentimes, our situation awareness is, indeed, forensics, which means that something has happened. we are now responding to that, and we are saying, "ok, something got throat." how do you see your network? -- something got thhough."
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you did not have real-time situational awareness. and the consequence of that is it was almost -- after the fact as opposed to mitigating it. we need real time situational awareness of our networks to see where something bad has happened and to take action at that time in. that is both a coordination issue among the services -- to take action at that time. this is both the court may issue -- a coordinating issue among the services -- we are working towards that, but we do not have that. now, if you take that to iraq and afghanistan, you would find the same things. we need to fix those. i would fix the war fighting
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once first and in the global one second. -- the warfighting one first and the global one second. >> the question i have is regarding russia's proposal with significant support in the u.n. general assembly for a cyber warfare arms treaty, and the question is whether you think something like that is possible. the other part of their proposal is to create basically sovereignty on the net, and how would that -- do you think that work? how would that impact your functions? >> let me take thht into two parts. yes, no. -- let me take that into two
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parts -- in two parts. yes, no. no. [laughter] i think when they put that on the table, i think the secretary of defense, the secretary of state, the administration will carefully consider those and say, "what are the counterproposals from the united states, from europe, from the middle east?" how do we put that on the table? with respect to sovereignty, that is much more complicated, and the reason is looking at our businesses as an example, they are multinational in nature, and as a consequence, we have opened up a set of actors that do not easily drop to geographic nation-state boundaries, so i think the first may be in
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helping the second, the first part of your question, and i think it is something that we should and probably will carefully consider. i think those are the kinds of things that need to be put on the table, talked through, and start out as, college version 1.0. -- call it version 1.0. randy, thanks for the call. >> randy, raytheon. congratulations. i was wondering, since deterrents was one of the issues specified under the comprehensive cybersecurity initiative articulated in the previous administration, and that issue has continued to receive consideration, what about the level on the web?
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>> yes, i used "discourage" because i could not pronounced of a word. -- "discouraged" because i could not pronounce the other word. in this case, it would be the joint task force, the fbis thing. -- fbi's thing. as you know, they have a great ability, but it is not good enough for what we need, and i think there were some statistics that came out last year that said the amount of money being made in cyberspace is equivalent to the drug trade, and when you think about that, you could say, "good news. the drug trade is down." i do not think that is true. [laughter]
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i think it is the opposite. putting it from a nations perspective, -- natin's perspective -- nation' s perspective, it is what will make up the future welfare of this nation, and we have got to protect it, so i think establishing those rules of the road in cyberspace is going to be key. i do not think that is the responsibility of cyber com of defense alone. -- or defense alone. you can come from any place in the world, bounce any place in the world, and attacked with impunity, and it is a huge
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issue. >> thank you, and good morning, general. congratulations. some have been working on attacks. do you see some issues with converting? are looking at a hybrid system? -- are you looking at a hybrid system? >> i think there is a lot of folks looking at the transition from four to 6. i think it is something that we will have to do at some point. you know, it is kind of interesting when you asked that. i know there are some people that are wondering why we were
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at vfour, and they are talking about going to at 5 -- to five. i do think it is something that we're going to wait hour -- work our way through. the number of addresses arky, and we have got to come up with something. -- the number of addresses are key. dubee take a step beyond that? and what will that be -- do we take a step beyond that? i admitted that i have an ipad. when you think about all of these tools, the iphones and all of these, it is huge.
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we are going to have to account for that. that will drive us down a road. i do not know where it is going to end up. -- that will drive us down the road. >> i have a question, and i think it is pretty inherent. it has been touched on a little bit. there is a vulnerability in cyber which comes with all of the cyber engineering, allies, not allies, all of the countries in the world. academia, industry, and government. there is little or no repercussion. in fact, it is considered a boom if they can show ways that they can get into, how they can compromise, how they can gain access into the networks, whether their government or industry. my concern is, is cyber command
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along with other agencies along with industry in the united states actually going to address this? because i think as we look in the future, that is where the real threat lies. this is people brought up in learning how to do what we are trying to do. >> i think the way to redress that is by establishing the rules of the road. -- i think the way to address that. when all can agree, this is going to be the way we are going to operate, and we all agree on it, that will go a long way towards getting there, and that he will be how we ensure that we all i ensure it equally? that is not a u.s. cyber com lead. i say it is an international issue that has to be addressed
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and put on the table. >> i am with "the wall street journal." thank you for joining us, sir. what is your role in developing better situational awareness inside the u.s., sort of nationally, and in addition to that, what is the government's's role -- what is the government's role? >> ok, a couple of parts. let me handle first my role with respond -- with respect to the military networks and how we get situational awareness there. in a war zone, we gave three cases. in a war zone, he has to have confidence in his command and control system. increasingly, our weapons
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platforms and others are being brought together in cyberspace. we have to be confident that that is secure, and whoever is running back for that commander in that area has to know that that is secure. you cannot afford to lose that. tremendous, abilities. so my responsibility in that regard -- tremendous responsibilities. when you think about the networks globally, that is my role. when you look at the rest of the government, they will say, how do i know that the other governments and agencies can defend those, just as the military will defend it? we will provide assistance when asked. i think from a national perspective, if we come up with a situational awareness tool, that we should have each other
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department paid to have been developed for them, too. -- pay to have it developed for them, too. like microsoft office. now, the third part of your question, civil liberties and privacy. i think the key is oversight. this is a tough issue hen you think of civil liberties and privacy. when you're talking about classified information and areas. and so, the way we have set up oversight on that is by having a set of mechanisms all branches of government, the government, the court system, and congress all needing to play a part in that, and knowing that the actions we are taking ccmport with law and protect the civil liberties and privacy of our people. now, there is issues that you get into that. the domestic side, what does the fbi do when it gets a warrant, and what do we do with the
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foreign intelligence surveillance act? those get into classified areas. i think we do that very well. the hard part is we cannot go out and tell everybody exactly what we did, or we give up capability that may be extremely useful in protecting our country and our allies, said that is what i see are the two things that we balance -- so that is what i see are the two things that we balance. explaining exactly what we're doing, where we have issues, where there needs to be change, what we can and cannot do, and we put that up to the court, and we get things back from the court. i think it is growing and getting better. we spent a lot of time on that, the hard part. we cannot tell everybody what we are doing. it would be analogous to you explaining how you defended your
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system, your computer system. you say, "i am defending my computer ystem using the following steps, one, two, three, four," and the adversary says, "thank you. one, two, three, four." that is going to be hard part. you play a key role on that -- in that korea had to explain it without giving up things -- you play a key role in that. how to explain it without giving up things? i have several daughters and 12 grandchildren, and my daughters are huge users of this area in space, and they like their civil liberties and privacy, too, and we want to ensure that they have
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that. that is one of the key nations -- notions that this nation was founded on, and we take that very seriously. >> i am cognizant of the general's time. maybe two more questions? an in-house question? >> general, about 15 years ago, there was a lot written about cyber terrorism. .
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>> it is not like this was a step-function in getting to u.s. cyber command. if you go back to 2002 when you saw that department wrestling with how we were going to deal with this, first we decided who would have the responsibility. we needed technical expertise. were you there at that time? he was there. they gave him a global network operation mission. they asked who could help him. they looked at nsa.
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it takes time to evolve it. it is not something that we just jump into. one step well thought out, ande further along, and i think it is going to be good. >> hello, i am from the center for national security studies. i want to thank you for your commitment to protecting civil liberties and your recognition of the importance of them, and the knowledge that the problem of protecting national security classified information is very difficult. in the last administration, several members of congress as well as the civil liberties community concluded that
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intelligence capabilities or illegally trained on u.s. citizens. how do we prevent that from happening again? do you plan to undertake an initiative to look at the possibility of greater public transparency, given the necessity for national security secrecy in this field in order to help build the public confidence that you have created? >> that is an easy question and i am going to turn it over -- know. -- no. [laughter] first, you made some statements that i am going to disagree with. you used the word "illegal." i am not a lawyer.
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what are the rules of the three branches of government, and how do we deal with them? what are the roles of the president, the congress and the courts, as articulated in our constitution? what we have is a constitutional issue. if you take 9/11, a tragic event for our country, the question is, how do we ensure that we do not have another terrorist attack, and we do not give up our civil liberties and privacy? both of those our national objectives that we want to achieve. when you look at that -- and are ones that we are trying to achieve. so, what i can do is jump forward. it is hard for me to jump backwards, because i came in in the middle of the last administration. what i believe is that transparency at the top level
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between congress, the court and the aaministration should be agreed upon. that is the first and most important step, and i think that is what we are doing. we have spent a lot of time with congress, the administration and the oversight committee to ensure the people know what we are doing and why we are doing it. then we will go forward with the court and say what we are trying to do. i think the american people would be very pleased to note the way we are doing it. some would say, why is it taking too long? the answer, these are tough issues. we have a lot of lawyers in nsa, and in the nation -- all good people, i am sure. [laughter] we could debate this issue until we all fall asleep. the issue i think that we have, the one that we really face, the one that you're driving and, is
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where our country wants to be. some say that the constitution is not a suicide pact, and i agree. but we are not just going to throw out our civil liberties. we were built on that. we want to ensure that we do our part. mike responsibility as the director of nsa is to -- my responsibility as the director of nsa is to ensure that we are in compliance with that. every action we take, we have reviews of it all the way up and down. there are a lot of legal reviews that go into this, many of which are classified for good reason. the bottom line, i think we are doing this right. it does not mean that we will not make a mistake, but from my perspective, i can tell you that we spent an awful lot of time ensuring that we are doing both
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everything we can to protect the country and everything we can to protect civil liberties. i sleep at night because of that. >> we started this series -- at&t has helped us to underwrite debt and help us to support it. we started this series in 2009 with deputy secretary lynn who was supposed to announce the creation of cyber counter- terrorism. i am grateful that we finally got to deal with that. that was a tremendous speech. and thank you for taking all of these questions which were all wonderful and good. join me in giving a round of applause. [applause]
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>> a look at the latest in the middle east. the recent flotilla incident, and a visit by president of loss posted by the carnegie endowment for peace live tomorrow on c- span 2. >> everyone has an agenda. as long as you know what their agenda is, it will not impact what you write about. >> over the past year, this investigative reporter has written a series on lawmakers overseas trips funded by taxpayers. he is our guest on c-span tonight.
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>> the new british prime minister and conservative party leader, david cameron, a field questions from parliament tonight it 9:00 on c-span. >> now, agriculture secretary vilsack speaks at this year's rural summit. he has spent a year visiting farmers, ranchers, and residents of rural america to get their ideas on building the economy. this is 50 minutes pipit -- this is 50 minutes. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> good morning. it is great to be here with you as part of this national summit for rural america. welcome to my home state of missouri, to jefferson county and to jefferson college, whose
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namesake, thomas jefferson, was famous for many things, but especially for agricultural innovation. as we emerge from the worst economic crisis since the great depression, we must make it smart and strategic investments that not only grow jobs in the short term, but develop economic strength for the long term. i believe america is at its best, especially rural america is at its best when we face a challenge and we work together to get the job done. that is part of the core values of our country. here in the heartland of america, we must consider conservation and development of our rural communities central to our strategies, and exports to global market as a vital to our success. this is very close to my heart. i grew up in the small town of raleigh, missouri.
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we still have a family farm there today. a few years ago, that town was dedicated the population center of the united states. it is pretty appropriate that so much of american life is centered in small towns in world misery. in a rural missouri. president truman regarded farming as good training for future managers of affairs. he said, "i thought that by passing mules and -- cussing mules and planting corn, i could overcome by shyness and amount to something." the world of agriculture is evolving. we must evolve with it in order for our rural communities to
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pight -- to drive. -- to thrive. unlike the young people here to stand so that we can recognize it -- i would like the young people here to stand so that we can recognize them. they are the future generations of farmers in our country. let us recognize them. [applause] we must expand international trade opportunities for our farmers. here in missouri, we have lost 37,000 jobs both upon the farm and off, -- we have 37,000 jobs but on a farm and off. world demand for our products is increasing, but so is competition among suppliers.
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we must be able to compete successfully for the export opportunities of the 21st century. there must be better trade and more open access to global markets. we must invest in research and development. our farming facilities and corn are primary opportunities for biofuels. we can bring in extra farm income and help revitalize rural communities and reduce our reliance on foreign oil. we must support local market for local farmers. here in the greater region, we are seeing dramatic growth in the number of small farming enterprises that cater for a growing demand for locally grown and produced food. more and more, consumers are looking to farmers' market as a way to buy fresh, local produce.
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we are tapping into this trend with our food-to-classroom program. we are bringing locally grown products to our school cafeterias. this makes nutritional products available to children, creates and in corm -- creates an income source for growers, and create a connection between the community and the children. we must expand broadband access, the modern day equivalent of an fdr program. we must capitalize on outdoor recreation. there is a booming wine industry centered write down the road. rural communities need a diverse economic options to retain residents.
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i think about my experience growing up in rural missouri. one of my first jobs was on a hay hauling crew. i thought i was making big money. 3ยข a bale for these small square bales. one of my first lessons was how to stack the hay bales of and the wagon. the first stack i did, we did not have the foundation laid correctly, and i got up on top of that stack of hay and fell off. you only have to do that once before you learn to stack it right. i think it is important that we lay the base, continue to build on a strong foundation in this country. thank you for being here in missouri for this important national conversation, and i especially want to appreciate our secretary of agriculture,
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thomas vilsack for being here. as you can tell, folks in rural missouri have a lot to say. there have been some big challenges that have faced rural america. secretary vilsack is not only a good listener, he is learning from what he is hearing across this country, and he is not just putting it down on paper and putting it on the shelf, he is putting it into action. he knows firsthand from his term as governor in our native state -- our neighboring state of iowa. the secretary of agriculture has crisscrossed this country. he has shown his commitment.
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us being from bordering states in missouri and iowa, i think will see his commitment to what we are all about here, improving the health of children, at strengthening rural america, and increasing exports. these are a few of the basic strategy is that we know are viable. appreciate his team and all of the work they have done to have this important and timely national conversation about how to move rural america forward. thank you very much. please give a great, that show- me state welcome to secretary vilsack. [applause] >> thank you. thank you very much. it is great to be back in the
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state that my wife refers to as missouri. her mother held from the dover. her uncle jim grant -- her uncle jim ran a funeral home here. we have a great connection to the state. i would like to appreciate the opening remarks. for the're governor first time, there is a program that puts you in touch with a governor with more experience. i was very fortunate to have him as my mentoring governor. he was a great man, as you all know. he was a caring man who had a
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deep passion for this state and the rural community. he imparted in me some very good wisdom about focusing on a number of priorities as a governor. i remember being here for his funeral. it was a memorial that took place at the state capital. he was a great man. i miss him, but i am so proud of his family. his wife, his daughter, and the congressmen following in his footsteps in public service. thank you for your leadership in farming and small business opportunities in this great state. i want to thank the jefferson community college community for allowing us to have this wonderful event. their ground crews and maintenance folks deserve our
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gratitude, because they are having graduation right after this. we picked the perfect time to have this, as far as they are concerned. i understand that this is a place with a particularly good basketball team, especially the women. this is also the home of bill bradley, another famous basketball player. i have asked for a bottle of the water here so that i too may be able to jump sunday. i would like to express my appreciation to my own staff for their hard work. many in that missouri usda family are here today and have done a lot of hard work in putting this together. we have a number of undersecretaries participating in the mission here.
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i appreciate them taking their time to make themselves available to come here today. obviously, we have a number of panelists and facilitators for our breakout sessions, and i want to express my appreciation to them. i am particularly interested in our luncheon speakers. in some circles like this, you might ask somebody who is well known or famous to be your luncheon speaker, but we felt it was appropriate to really focus the attention on the young people. we have two young folks who are going to come and talk about their hopes and dreams for their lives and being able to pursue the american dream in rural america. i am looking forward to that. i want to bank max armstrong for his willingness to assist us. i want to thank the deputy secretary for her leadership and partnership with me on this
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summit. between her and myself we have been to 45 of the 50 states. we're going to continue to work hard to get to all 50. i went to alaska. she went to hawaii. i am not quite sure who went to -- who got the better end of that deal. but most of all, i want to thank you, the attendees, for taking the time to be here today. we need to talk about a very, very important subject. some may ask why we should have a rural summit. what is the purpose of it? i think there are a number of purposes. first and foremost, it is an opportunity for us to educate the rest of america about the important role that farmers and ranchers and those who live and work and raise families in rural communities play not just in the lives of those who live in these communities, but in the lives of
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all of us. i think it is important for the rest of the country to know the contribution the rural america makes to every family in this country. it is obvious that we are the providers of high quality and abundant food. we are certainly blessed in this country with the most ppoductive and efficient farmers in the world. when i was born, in 1950, a farmer was responsible for feeding about 12 people. today that number has grown to 155 people. when you multiply that by the 2.2 million farmers and ranchers in this country, what you find is that this country is self- sufficient in terms of its capacity to produce food for itself. what happens when that happens is it creates an economic advantage. because of the hard work of ranch families and farm laborers, we enjoy a tremendous economic advantage, which is that our paycheck gets stretched much further in this country than anywhere else in the world.
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because we have such productive farm families and ranch families, we'd spend somewhere between 10% and 15% less of our paychecks for food. that means that the rest of america enjoys the opportunity and freedom to do quite a bit more with their lives because of that. they have the capacity to maybe drive a nicer car or live in a bigger home. maybe they take a vacation or put money aside for their children. maybe they read -- maybe they increased their retirement nest egg. they have that choice. people in the rest of the country need to understand and appreciate that it is not just their hard work that stretches their paycheck, it is also the hard work of farm families and ranchers and this community. agriculture is a job creator. very rarely do we stress this, but one out of every 12 jobs in america today is connected in some way to what happens and what takes places in farms and
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ranches in terms of producing opportunity. speaking of opportunity, when we talk about the capacity of our farmers to satisfy our own needs, we are also in a position to trade our surplus to the rest of the world, to create wealth of opportunities in this country. so often in trade discussions, we hear of the trade deficit. you know what i am talking about. but in one part of the economy, that is not the case. in agriculture, we have a trade surplus. no, this year, the first six months we enjoyed a record amount of exports. in fact, we are anticipating and expecting that overall, we will have about $100 billion of agricultural export during the fiscal year that will end september 30th. that will be the highest year of exports in history since we have been keeping track of exports. we will have a $20 billion surplus if we reach that $108 billion mark.
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a $20 billion surplus means that we sell $20 billion more than we take in. we have a surplus the create wealth in communities, but it also creates jobs. for every billion dollars in trade activity, we produced somewhere between 8009 thousand jobs in this country. at a time that we are emerging from -- as the congressman alluded -- difficult economic times, we are in an industry that creates economic opportunities as well. it is not as the jobs, is not just the extension of the paycheck that is important as far as what farmers and ranchers do for the rest of the country. it is also about water. very rarely do people think of it as such. the reality is that 80% of the drinkable water in this country is impacted by what happens on our farms and in our forests.
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people in rural communities are responsible in a large part for hundreds of millions of americans to be able to enjoy equality glass of water. but it is even more than that. is that we are emerging into a circumstance where farming and ranching will also help us produce more fuel and energy for this country, with renewable sources and biofuels. the consequences of having to import foreign oil and what that does to our economy, and how difficult it is for us to pay dollars to countries that do not agree with us, at the same time we are witnessing what is taking place in the gulf of mexico, it seems to me that people ought to recognize that farmers and ranchers are ready to step up and help alleviate some of the pressure, to help us transfer from our dependence on fossil fuels and particularly foreign oil, to be able to create opportunities in rural america. those opportunities are unlimited, and we will talk about that in a few minutess but
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we are now a source of fuel and energy. but it is even more than that. it is even more. that is that the value system of this country, if you think about how it got started -- there were references made to ben franklin earlier. 90% of the people who founded this country came from rural upbringings. there are rural people. they understand that if you expected something to grow and prosper, you had to put something back into the ground. you have to contribute to mother nature so that she would contribute to you. that value is reflected in the fact that while rural america writ flex -- rural america reflects about 6% of this country, it is 45% of the people who serve us in a uniform. some would say that that is because the military offers a
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way out. i do not think that is the case. i think it is the value system that we raise our children with. it is not just about taking. it is about giving. it is about supporting your country. it is about giving something back to your country because your country gave so much to you. when we talk about what rural america does for the rest of the country, you can see that it is extraordinary. the rest of the country needs to know about this and need to appreciate it, and needs to understand the when we talk about various farm programs or bills or things for rural america, it is about supporting affordable food, quality water, new fuels, new energy sources, a trade surpluses, jobs, and the values system of this country. one reason we are having this meeting today is for the rest of the country to understand what sometimes in rural america we take for granted. the rest of the country needs to know what we do.
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the second reason is to make sure that we in rural america and the rest of the country understand and appreciate the extraordinary challenges that folks in rural areas face. these are challenges that our farm families and our ranch families face. in the last five years, according to the last census, we lost 80,000 operations, what i referred to as the mid-size operations. we lost 80,000 operators. that is continuing a trend that has taken place over the last 40 years, where we have lost 1 million people who used to farm. part of that is because we have become more efficient and more effective. technology has made it easier to farm more land. but it is also a recognition that there is something going on that we need to attend to. we need to figure out strategies that will allow those mid-sized operators to continue to be able to farm.
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while it is true that most farmers who have large operations are able to support their families from those farming operations, if you take all of farming into account, all of the farmers into account, all of the ranchers into account, only 9% of the family farm incomes come from the farming operation. that means that those farm families who are small or middle-sized operations have to think -- have to figure out some other kind of way to keep the farm. the spouse works, the children work, they all work to create those opportunities. that's a responsibility on the department of agriculture not only to focus on farmers and ranchers, but also to focus on rural development and the capacity to create new job opportunities. in 66% of our counties, according to the last census, we lost populations in rural america. when you lose populations, you
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also lose political representation. you lose that a voice in congress. you lose someone who appreciate what it is like to grow up on a small farm, to deal with the hazard of mother nature and the changing crop prices. you have to have folks in congress who understand that, who have lived that. so, it is going to be important for us to focus on job growth as well as on making sure that we make farming and ranching as profitable as possible. one of the reasons why we may be faced with this loss of population is that there is a difference between incomes between those who live in metropolitan areas and those who live in rural areas. it is about 11 belsen dollars per capita. and 11 belsen dollar different -- it is about $11,000 per capita. and $11,000 difference is something we need to address. that is a challenge for farming
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families, poor rural families. there was a study recently that show that you have to have a lease to hundred $50,000 in sales on a farm before you actually -- you have to have at least $250,000 in sales on the farm before you actually begin to make any money. 90% of the two 0.2 million farmers in this country have to work at least 200 days of the year on the farm just to be able to make it. is that what we want to have, especially if they are the best at what they do? if you were the best athlete, if
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you were the best baseball player, you would make millions of dollars for being the best of what you do. if you are an entertainer or you are the ceo of the company, you make millions of dollars for being the best at what you do. why is it that we do not recognize the same opportunities for farmers and ranchers in this country? it is something to think about. what happens in rural communities when farmers and ranchers struggle and make less is that it creates an opportunity for people to leave. the result is that we have an aging population in rural america. today, 28% of america's farmers are over the age of 65. 28%. that is three times what it is in the general work force. that raises the issue in question of what we are going to do, and what we will need to do
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in order to make sure that young people have a chance at farming. we on farmland in iowa. -- we own farmland in iowa, but the reality is, if either of our boys wanted to be a farmer, it would be very difficult for them, even though we owned the land. how should we address that the next, as we address that? -- how should we address that? how must we addressed that if we are to keep rural america alive? the nation should focus its attention on rural america if for no other reason than 90% of the persistent poverty counties are located in rural america. so, aging population, dispersing
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population, a persistent poverty are all indications that it is important to have a summit. it is important to focus our attention on these challenges. when i referred to the rural revitalization bill, i say we should take into the complex -- -- we should take into consideration the complexity of the challenges facing rural america. what i do not want, and what i do not think you want, is a hang on a philosophy. just hang on. it is going to be ok. we need to think beyond that. we need to think about that day when we can actually turn the corner in terms of the economy of rural america, because of its significance and importance. the third reason why we are having this summit is to make sure that folks understand that we are putting in place a free market to turn that corner.
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it will be a new dynamic in rural communities, a reason for hope and optimism. i am going to talk about that in just a few minutes, but i wanted to take this opportunity to make a few announcements, because we are focused on trying to expand opportunity here in rural america. today, we will make four separate announcement here in missouri. four separate announcements designed to promote value-added agriculture and small business development in rural communities. the first announcement is that we are awarding today, 161 grants across 45 states, including four here in missouri, a little over $22.5 million dollars in grants that were established under the farm bill. these will go to working families and folks who are planning ways in which they can enhance the value of the products they are growing.
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143 independent producers will benefit from this program, 12 cooperatives, four agriculture production groups, and one entity that is controlled by producers. these grants will allow folks to expand their operations and to continue to add value and continue to create wealth in rural communities. as a companion to that, we are announcing today the availability over the next several months for those who want to apply for a micro- enterprise, a loan program. this is a $45 million loan program that will allow a very small businesses to have the seed capital they need to get started, to be able to fund entities that provide technical assistance to small businesses so that we can create the know- how and structure to encourage small businesses to grow. it may be that somebody has a dream of a small business that will employ one or two people,
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but over time it will expand. this resource will help them do that. we are also announcing today the signing of a memorandum of understanding with the small business administration. in the pastt the small business administration and usda were involved in a friendly competition to see who could get the loan outburst. who could benefit more folks. in the obama administration, our thought is that a more cooperative relationship will be more beneficial to small businesses. the usda cannot make the loan, we are going to turn to our sister agency and say, can you help these folks out? if they cannot do it, they will turn to us, and say, will you help us? we do not want an opportunity to be passed because we cannot figure out a way to get the resources to the people who need it. this memorandum of understanding will help facilitate that. finally, we are announcing a new
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lending program that provides resources to entities who provide credit at low interest rates to small businesses. these four steps are small steps. they do not address the comprehensive nature of the problem we are dealing with, but they are small signs of a new attitude and a new framework in this administration. first and foremost, it starts with the basics. we know that if we can increase market, if we can increase demand for product, then we are going to have good prices. if we have good prices, we will have farmers and ranchers to prosper. if we have farmers and ranchers to prosper, we will have healthier communities. our focus is on building demand. i talked briefly about our trade efforts. let me talk more specifically about them now. we are obviously committed to expanding trade opportunities throughout the world, and we have put in place new structure
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and strategy and processes for dealing with trade issues. rather than sort of a one size fits all, the usda is focused on analyzing each individual country and where it might be in terms of the market continuing. some markets are more competitive than others. some are more restrictive than others. some are gradual. some are very mature. each market will devise and require a different strategy for us to approach it. you cannot approach japan in the same way that you approached south africa. you cannot approach sell africa in the same way your approach india. you cannot approach india in the same way that you approached china. we are individualized in our approach to the countries. we are going to reinforce the existing trade agreements that we have. agreements do not matter unless there are agreements that are binding. if for whatever reason our trading partners are not living up to their responsibilities, we will call them on that.
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we need to expand additional free trade agreement. we of three that we are working on, and we need to continue that and look for other opportunities for bilateral trade. we also have to encourage multilateral trade opportunities, which is one reason why the president is going to spend time on a trans- pacific partnership, in an effort to see if there is an opportunity for us to expand trade opportunities in that part of the world. we also have an approach to biotechnology. this is an important component of agriculture in america. we want to make sure that we analyze fully the risks associated with it, but we also want to make sure that the benefits of biotechnology are advertised and communicated. as we deal with issues of climate change, issues a restrictive water sources in parts of the world, rising concerns about chemical and pesticide use and the impact it could have on water quality,
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biotechnology may be a response and an answer to any and all of those challenges. so, we are anxious to improve our diplomacy on behalf of biotechnology, a farmer to farmer, a scientist to scientist, opinion leader to opinion leader, building a coalition to make sure that the barriers to those technologies are reduced or eliminated. we also want to build relationships, part of our strayed -- part of our trade strategy. we have developed a deep beating the future initiative, which is designed to address global food insecurity challenges that face -- we have developed a feeding the future initiative, which is designed to address global food insecurity challenges that face the world.
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as middle-class is growth in countries, we see an increased demand for what americans grow and raise. building those relationships is part of a robust commitment to trade. it is also about building new markets. i want to talk briefly about the work that the deputy secretary has been engaged in and i have been engaged in about building a local capacity. every american needs to know where their food comes from. we need to reconnect people with their food supply. why is that necessary? when i was born in 1950, as i said earlier, when a farmer for 12 folks, but every person in america was probably only one or two generations removed from somebody who farmed. today that is not the case. people may be three, four, five generations removed.
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we cannot lead a generation grow up thinking food comes from a grocery store. it comes from hard work and sweat, from farm laborers who worked in difficult conditions, and folks who helps process of that food. there are many hands engaged, and there needs to be appreciation for that. know your farmer, know your food is designed to make that connection. if we can get local schools to have a better understanding of what is grown in the area, and maybe even contract local producers, maybe we can create enough incentive, enough need for a local processing facility, a local water facility, a local warehouse, or a local storage community that will not only create wealth in the community, but will also create jobs in the community. that is what know you're a farmer, know your food is about. it is not about one particular type of agriculture. it is about all of agriculture.
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yes, it is about farmers markers. that is a growing area, a growing need that we have to address. but it ought not to be and should not be and will not be at the expense of agriculture. this is about all agriculture, and this is part of a strategy for global demand. we want to make sure that markets are fair and competitive. it ought not to be that if you are a large producer you have an unfair advantage. we are making sure the playing field is as level as it can be so that folks can compete effectively. all of this is designed to build a fair, open, available market and an expanding market. that is one strategy. the second strategy revolves around biofuels and energy. this is an extraordinary opportunity for this country. i alluded to it earlier.
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we need to break away from our dependence on foreign oil that puts our environment at greater risk. why not create fuel every single year from the hard work as farmers and ranch families? why not create biofuel refineries and renewable energy plants like show-me energy to create jobs, create markets for products that otherwise might not be valued as much? why not create opportunities for biofuels to respond to challenges like we have done in the gulf? show-me energy may be engaged in responding to and helping to solve the crisis in the gulf. consider this. there was a study of what it would be like in america, and in
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rural america, if we got to a 36 gal. -- 36 billion gal. of biofuel by 2022. it would be about one-fourth of our petroleum gasoline needs. what if we reached that 36 billion gaa. a threshold? what would it mean? here is what it would mean. according to the study, 807,000 new jobs in rural america. somebody has to build the plant, maintain it, run net -- run in and make the parts for it, that will all be done or the demand for the plant is, and that is in rural america. $95 billion in investment in these plants is coming to rural communities. the great thing about biofuels and bioenergy is that it is not about huge bio refineries that
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service 5, 6, 8, 10, 15 states. you have to space-bar these by refineries and these renewable energy -- you have to space these refineries and these renewable energy plants every two hundred miles. so there will be multiple opportunities in this state. utilizing the resources that are available here, which might be corn for example, or in the northwest it might be weak -- wheat, or elsewhere, algae or livestock, there are tremendous opportunities for us to grow this economy $95 billion. we're not talking about renewable energy. we're just talking about biofuels.
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we will reduce our demand for foreign oil by 350 billion bar.. 350 billion fewer barrels that we are buying from folks who do not agree with us. it is not only creating economic opportunity, it is strengthening national security. that is a pretty big deal. is a huge deal for rural america. we need to seize it. we need to figure out not just how we build the production systems, but the distribution systems that get these resources where they are needed, and how we help detroit and other car manufacturers to understand the need to build the kind of cars and that will create the demand that we will be able to create a distribution system that creates the jobs for rural america. we are anxious to do this.
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we are working hard to get the long-term commitment to the financial support. we are encouraging congress to vote for a tax extender fort biodiesel. we want the senate to vote on that as soon as possible. we want to increase role in research and development in advanced biofuels and food stocks to figure output -- to figure out how to distribute them more efficiently. i remember being at a facility in virginia as part of the rural toward -- tour, and looking that waste being converted into fuel which some believe can be
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spread as a substitute for fertilizer on land and that will capture carbon for centuries. that might allow the farmers to sell at the waist -- sell the waste to get fertilizer that is a less expensive and be paid for sequestering carbon. it is a tremendous opportunity. i will tell you that is the second strategy, the second part of our kramer. the third part is building the 21st century infrastructure. there is no reason why today we cannot have the 21st century infrastructure in rural america. that is broadband. with the first set of grants from usda under the recovery reinvestment act, we were able to expand broadband
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opportunities to over 529,000 households. 92,000 businesses will benefit from this investment. community cottages and hospitals will benefit. -- community colleges and hospitals will benefit. it is a substantial investment that will allow small businesses to expand their market globally, allow them to figure out how to reduce their costs by reaching for the lowest cost input, allow farmers and ranchers real-time information on markets, a tremendous opportunity to have telemedicine and distance learning, allowing young people to start small businesses and stay in a small community. that is the third element. the fourth element is the great american outdoors. we need to take full advantage of it. outdoor recreation is a 30 $700 billion industry. are we capturing that in rural america?
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are we able to maintain and expand habitat, increase hunting and fishing opportunities? are we making sure we take full advantage of the two hundred 6 million people who visit our national forests every year and the kind of economic activities that may be generated from those visitors? are we thinking about that in terms of the rural economy and if we can redirect resources in a way to fully enhances the farmer and rancher while at the same time creating new outdoor recreational opportunities. if we do, can we capture those dollars? can we roll them around in a rural economy? $730 billion industry. it is ripe for rural america. how do we get more capital investment in rural america? in ohio, there currently using
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credit to preserve the quality of water so that communities do not have to build a water treatment facilities. it is a better idea for farmers and ranchers to be paid for various conservation techniques to avoid pesticides and chemicals getting into the water than it is to build a multimillion-dollar water waste facility and then charged users for this facility. that is what an ecosystem market can do. in oregon, instead of buying your refrigeration unit for waste-water facility because a plan he did the water too much, they pay people in "shade credits." that is an ecosystem market. that is an opportunity for capitalism to be invested in rural america.
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we need to verify, validate, and be held responsible for these credits. we need to make sure that they are credible. the market has value. there is a significant opportunity, if we do this right, to bring billions of dollars -- these are not my numbers. these are the university of tennessee and a variety of studies that have been conducted. if we do this right, billions of dollars can be reinvested back into rural communities, creating new opportunities. this is the framework that we are trying to build the will revitalize the economy. biofuel and renewable energy. 21st and -- 21st century infrastructure. better use of land conversation peppered -- better use of land conservation, and an ecosystem market. it requires us to have a conversation about how to build on this framework, how to
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improve this primer, how to adjust tax policy and the like to make sure that this -- how to improve this framework, how to adjust tax policy and the like to make sure that this works the best it can. it gets back to values. i travel to afghanistan as part of my responsibilities as a secretary of agriculture. it is not as military folks over there. it is at the forest service and the usda over in afghanistan risking their lives. i asked the folks, what would you separate yourself from your family? why would you seearate yourself from your friend? why would you take yourself from your comfortable home and community and travel halfway around the world to a barren place where you are never sure if your next step might be your last? why would you do that? every single person i talked to, of all the people we had over
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there, they all came from small towns. they all came from rural communities. they all felt it was their responsibility, their obligation, their duty, to dearer -- to their country, to you, to me, to take that risk. they are humble people come regular folks. they do not think of themselves as heroes. they do not think of themselves as great. but they are. and you are. people who live in these rural communities, who fight every single day. that is why it is important for this country to spend time and attention, not just the farmers and ranchers talking about the farmers, not just the agricultural community, not just the folks who are an agricultural businesses, but all of us. because that value system that says you have a responsibility to give something back is risked
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when the population diminishes, when there are fewer opportunities for young people, when people are compelled or forced to go someplace else other than where they want to be, because they know they can raise their family in a good community. they want to give their kids a good education. they know that their neighbors will care for them if they have trouble when they live in a rural community. that is what is at stake here. that is why we are having this conversation, in the hopes that we can put the spotlight where it belongs, on the soul of america. thank you very much. [applause] >> everyone has an agenda, and >> everyone has an agenda, and as long as you know

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