microphone ship one two three four five six seven eight nine to microphone check for c span one t good morning the meeting the public hearing of the financial crisis inquiry commission will come door order there is a quorum present welcome to our second day of public  hearings on the causes of the financial and economic crisis that are gripping this country as i said and as the vice chairman also indicated yesterday we are a panel that is going to do our level best  behalf of the american people to try to discern the facts and the causes of the current crisis which has affected so many million americans yesterday we heard from a range of experts and folks from the private sector today we have a number of people with us who are the federal state and local level who have been involved in grappling with the consequences of this crisis and i'm looking for today's testimony i want to thank all the commissioners for all their hard work yesterday and what we'll do today and i want to thank the folks in the audience the people watching this hearing as was all the witnesses who will provide testimony to us  truth the whole truth and nothing but to the best of your knowledge thank you very very much we will now command so i will ask that each witness provide an opening statement  have written testimony from the witnesses and i'd like to ask each witness would provide up to ten minutes of oral testimony is my understanding mr holder will provide the testimony for the department of justice and i will also note that mr holder rearrange the schedule here and will be with us for the opening statement and a couple of brief questions and i know it's schedule dictates  commission these inaugural hearings i believe mark a critical step forward in better understanding the root cause of the financial crisis that has held our economy has gripped over the last two years while i appreciate the opportunity to participate in the commission's work and to assist in your inquiry this morning i am joined by lanny breuer the assistant attorney general for the justice department's criminal division lanny spearheads many of our key efforts investigating prosecuting and financial crimes he has submitted written testimony which provides a comprehensive overview of the department's work in these areas and he will be available to answer any additional questions that you might have we must be vigilant in our efforts to safeguard and strengthen the american economy our efforts to fight economic crime are a vital component of our broader strategy a strategy that seeks to foster confidence in our financial system integrity you know our markets and prosperity for the american people in carrying out the strategy the justice department has long focused its efforts one combating financial fraud across numerous administrations democratic and republican alike the department has worked hard to combat fraud and to recover ill gotten gains for the benefit fraud victims despite these efforts whoever we know that financial fraud persists in fact be wall street journal reported earlier this month about that quote crisis and the fraud in the securities and investment banking industries are at their highest level since records began on quote the current economic the crisis has brought these challenges to the forefront now let me state at the outset what role the department plays and does not play in addressing these challenges put simply be department of justice investigates and prosecute federal crimes as i sit here today prosecutors in washington and in ninety four u s attorney's offices around the country are hard at work investigating a wide array of financial fraud cases from mortgage fraud to medicare and healthcare fraud to securities fraud to corporate malfeasance i'm proud that we have put in place a law enforcement response to the financial crisis that is and will continue to be aggressive comprehensive and well coordinated but while the reach of our investigative and prosecutorial function is broad we do not purport to have all the answers as a general matter we do not have the expertise nor is it part of our mission to opine on the systemic causes of the financial crisis rather the justice department's resources are focused on investigating and prosecuting crime it is within this context that i am pleased to offer my testimony and contribute to your vital review the department is a long history of prosecuting financial fraud and we will continue to do so working in concert with our federal state local tribal and territorial partners the justice department is using every tool at our disposal including new resources advanced technologies and communications capabilities and the very best talent that we have to prevent to prosecute and to punish these crimes and by taking dramatic action our goal is not just to hold accountable those who conduct who conduct may have contributed to the last meltdown but to deter such future conduct as well the cornerstone of our work in this area is a new interagency financial fraud enforcement task force which was stabbed in november by executive order of the president and is led by the department of justice at the core of the task force mission is a more robust and strategic law enforcement effort focused on combating four types of financial crime number one mortgage fraud from foreclosure rescue and loan modification frauds to systematic lending fraud in the nationwide housing market to securities fraud from traditional insider trading to ponzi schemes to accounting fraud  misrepresentations to investors third recovery act and rescue fraud including the death of federal stimulus funds and the illegal use of taxpayer dollars intended to shore up our financial institutions and forth financial discrimination including predatory lending practices in minority communities and the sale of financial products that exploit the elderly and the disadvantaged now in combating financial crimes we will aggressively leverage the criminal and civil enforcement resources of the federal government we will tackle every fraud case with b aim of recovering stolen funds for victims and we will enhance coordination and cooperation among the federal state local tribal and territorial authorities so that the perpetrators of these crimes are brought to justice and on this last point let me be very clear when we find businesses or individuals whose disregard for the law has hurt the pocketbooks of average americans we will use every available measure to hold them accountable even before the launch of the task force the department aggressively responded to the financial crisis by redoubling our fraud fighting efforts in addition to convicting bernard madoff who perpetrated the largest ponzi scheme in our nation's history last year we arrested the ringleaders of what has been described as the biggest hedge fund insider trading case in history and we thirty year and twenty five year sentences for two executives of national century financial enterprises following their convictions on spirit fraud and money laundering charges we've also devoted substantial attention to preventing and to prosecuting mortgage fraud right now the f b i is investigating more than two thousand eight hundred such cases up almost four hundred percent from five years ago the recently enacted federal budget for two thousand and ten will enhance these efforts as will the enhanced legislative authority that congress provided the department last year in the fraud in forstmann and recovery act of two thousand and nine i'm confident that with the new authorities with the new resources and a bold new plan of action we can and we will make measurable meaningful progress and working together with our law enforcement and regulatory partners we will succeed in restoring the integrity of our markets preserving taxpayers resources and protecting the vast majority of hardworking americans investors and businesses who play by the rules and who adhere to the law i thank you again for the opportunity to participate in today's hearing and outline the department's ongoing efforts to address financial fraud in the wake of our economic crisis i look forward to working with you and long with assistant attorney general brewer would be happy to answer any of your questions thank you angeline vice chairman thomas commissions i appreciate the opportunity to testify on behalf of the federal deposit insurance corporation my testimony will focus on the market discipline and regulation that led to the financial crisis and suggest reforms to prevent a recurrence the last major financial crisis the thrift and banking crisis of the night eighty resulted in an act of laws designed to improve the financial system these laws significantly strengthened bank regulation and provided banks with strong incentives to operate at higher capital levels with less risk but at the same time they created unintended incentives for an services to grow outside of the regulated sector in a so called shadow banking system but in the twenty years following these reforms the shadow banking system grew much more quickly than traditional banking at the onset of the crisis it's estimated that half of all financial services were conducted by institutions not subject to prevention or regulation and supervision products and practices originated by the shadow banking system have proven particularly troublesome in this crisis many of these non banks through to be too large too complex and too interconnected to resolve under existing bankruptcy laws they also cannot be wound down under the f b i to use current receivership authorit we are now poised to make far reaching changes that will affect how we regulate the entire financial system our approach must be holistic and give regulators the tools to address risk through the system not just in the insured banks where we have long that credential supervision is necessary to be sure we can improve oversight of insured institutions but if reforms only layer more regulation upon traditional banks they would just create more incentives for financial activity to move to a less regulated venue such an outcome would only exacerbate the regulatory arbitrage that did this crisis but if that occurs reform efforts will once again be circumvented as they were over the past two decades numerous problems in our financial markets and regulatory system have been identified since the onset of the crisis in thousand and two and early two thousand and three encouraged by record low interest rates there was a boom in the volume of these originations riven primarily by the refinancing of existing mortgages mortgage origination platforms grew to accommodate the surge in mortgage demand by two thousand and four house prices were rising at double digit rate setting the stage for dramatic changes in the structure and funding of mortgage loans because many prime borrowers had locked in their loans by two thousand and three the mortgage industry shifted its attention in its ample lending capacity toward less credit five declining affordability and high priced housing market also contributed to a shift towards nontraditional mortgages such as interest only in pay option mortgages the limited reach your produce supervision allowed risky practices to grow unchecked for example subprime and nontraditional mortgages for originated and securitized primarily by brokers and mortgage companies and by non bank affiliates of insured institutions securiti markets provided much of the funding for these loan growth in private label mortgage backed securities was enhanced by the development of the c d o and c d s market the size and complexity of the capital market activities that the credit  meant that only the largest financial firms could package and sell the securities compensation schemes fuel the growth many compensation systems were not sufficiently to risk management they allowed high short term profits to be translated into generous payments without regard to any long term risk mortgages and many driven products created long dated risk well compensation was weighted toward short term result creating perverse incentives to risk your behavior another important cause of the crisis was a lack of strong consumer protection expression and the non bank sector increasingly complex financial products combined with opaque marketing and disclosure practices proved toxic as a result foreclosures are nearing three million per year and more than fifteen million households are saddled with underwater mortgages finally many financial firms grew to such size complexity and interconnectedness that the market implicitly assumed that they were too big to fail credit rating agencies recognized this implicit year and providing two ratings one with and one without government support as a result of their too big to fail status these firms enjoyed funding at below market rates for the rest they were taking the financial crisis revealed that risk grew across the financial system unimpeded by a stovepipe financial regulatory framework one framework for insured institutions and another less stringent one for non bank entities differences in the regulation of capital leverage and consumer protection among institutions in the shadow banking system and traditional banking sector and the almost complete lack of regulation of o t c derivative allowed rampant regulatory arbitrage the massive expenditure of taxpayer funds and then your collapse of the financial system demonstrate a need for major financial reforms that reduce moral hazard and improve the system's resilienc y these changes should include a resolution mechanism that makes it possible to break up and sell a large complex interconnected with taxpayer support and i am very pleased that the bank c e o s to talk with you yesterday endorse this we believe there should also be a pre funded resolution reserves of wide working capital for this resolution process we also support creation of a stimac risk to provide macro prudential oversight and strengthen and harmonize capital leverage as necessary more effective oversight and improve transparency of derivatives markets is needed and finally a rule making authority to ensure uniform consumer protection throughout the financial system these reforms would go a long way toward preventing another crisis but as the committee examines the causes of the financial crisis i urge you to also consider other longstanding u s economic policies that may have played a role this crisis is a combination of a decades long process where national policies has huge economic activity away from savings and toward consumption away from investment in our industrial base and public infrastructure and toward housing and away from the real sectors of our economy and toward the financial sector examples include federal tax and credit subsidies for housing compensation practices that promote short term profit without regard for the long term risk and implied now explicit government backs tops for large financial problems such backstop subsidize excessive growth and risk taking no single policy is responsible for the economic distortions and no one reform can restore balance to our economy we need to examine national policies from a long term view and ask whether they create incentives that will lead to better and sustainable standards of living our financial sector has grown disproportionately in relation to the rest of our economy whereas the financial sector claim less than fifteen percent of total u s corporate profits in the one nine hundred fifty s and one nine hundred sixty s its share grew to twenty five percent in the one nine hundred ninety s and to thirty four percent by two thousand and eight financial services are essential to our modern economy but the excesses of the past decade were costly diversion of resources from other sectors of the economy we must boy policies that encourage economic distortion fixing regulation can only accomplish so much longer term we must develop a more strategic approach that utilizes all available policy tools fiscal monetary and regulatory to lead us toward a more stable and more widely shared prosperity thank you thank you thank you chairman thomas members of the commission thank you for the invitation to share my inside the chairman of the securities exchange commission into the causes and lessons learned the work of this commission is essential to helping policymakers in the public better understand the causes of the crisis and build a better regulatory structure many of the foundations of securities regulation events of the fall of two thousand since that time the f c c has worked to review its policy improve its operations and address the legal and regulatory gaps that the crisis has laid bare there are many interconnected factors and mutually reinforcing causes of the financial crisis so i appreciate the enormous challenge facing my written statement discusses many of these causes in detail but i'd like to use my time this morning to highlight just seven of the less first requirements around securitization must be strengthened i believe this is essential as one of the major factors in the financial crisis was the rise of subprime mortgage backed securities the securitization of mortgages led to an unintended the staff is engaged in a broad review of the way in which back to curators or regulator we are looking at disclosure offering process and reporting back to us and we're considering several proposed changes designed to enhance investor protection things a proposal to provide significantly more time for investors to conduct a careful analysis before investing the proposals will require that low level data is provided in a format and manner that is accessible to investors and proposal to create a mechanism for ongoing disclosure the second lesson growing out of the crisis is that investors and even regulators in some cases over rely on credit rating agencies throughout the crisis credit rating agencies perform response the commission has undertaken a series of designed to improve ratings quality and reduce reliance by fostering accountability transparency and competition a third lesson is that standards and regulatory gaps emerge when the risks of deregulation are not adequately appreciated and when markets are considered to be almost always self correcting indeed it was quite recently when regulation particularly in financial services as the key to fostering market growth and ensuring us competitive unfortunately the elements of the financial landscape such as over the counter derivatives and hedge funds were subject to minimal no regulation and it meant that regulators lack necessary information to identify understand and address risk in the area the result was a proliferation of complex financial products including derivatives with illiquidity and other risk characteristics that were not fully transparent understood one very significant gap in the regulatory structure is the inadequate regulation of derivatives which were largely excluded from the regulatory framework in two thousand by the commodity futures modernization act this a very large and risk laden market almost entirely out of public and regulatory view to address these gaps and regulatory arbitrage dangers we need greater transparency and oversight of o t c derivatives and major market participants and dealers and such products should be subject to the greatest extent possible to central clearing and exchange trading the current absence of regulation transparency should not be a fourth lesson from the crisis is that there can be a direct relationship between compensation arrangements and corporate risk in fact many major financial institutions created a symmetric compensation packages that paid employees in the form of short term success we know that some of these same decisions result in significant long term losses or failure for shareholders and taxpayers in december the f c c adopted new rules that will significantly improve disclosure in the key areas of risk compensation corporate governance and director qualifications the rules require companies to disclose their compensation policies and practices for all employees not just executives if these policies and practices create risks that are reasonably likely to have a material adverse effect on the company if the financial crisis reveals that a siloed regulatory framework is unable to monitor and reduce risk flowing across entities and market for this reason i support the establishment of a council regulator empowered to evaluate risk across the financial aware of the limits of such oversight and regulation this is particularly the case for institutions with many subsidiaries engaging different often unregulated in multiple countries democrats management requires meaningful functional include more effective capital requirements and leverage limitations strong enforcement functional regulation and transparent markets that enable investors counterparty to better understand the risks associated with particular investment  plus another crisis is that markets and market regulation should promote not undermine the investor confidence essential to the flow of capital in the long term success of markets and our economy but since the financial crisis began structure and trading activities to ensure they foster orderly and efficient markets that are designed to protect investors this includes activities such as high frequency trading and our pool and finally the financial crisis has taught us that consistent and vigorous enforcement is a vital part of risk management and crisis avoidance particularly in times of substantial financial innovation through aggressive and even handed we hold accountable those violations the law cause severe loss and hardship and we deter others from engaging we also help indicate the principles fundamental to the stair proper functioning market that investors have a right to disclosure that complies with the federal securities laws and that there should be a level playing field for all investors over the past year the taken steps to improve the speed and effectiveness of it and force an effort from streamlining procedures and removing a layer of management to creating specialized investigative unit we also are currently investigating a significant number of matters growing out of the financial crisis and we have brought more than a dozen cases recently against activities associated with some of the worst practices is still much work to do to ensure that we do not see these problems repeated in the future for example a lot of the lessons learned from the crisis broker dealers a significant proprietary position are now providing enhanced information about positions and a commission  strengthen capital requirements by limiting the ability of large broker dealers to use value or risk models or regulatory capital purposes most importantly we have established task force to review all aspects of the agency's financial regulation allow hedge funds and their managers to avoid oversight to impose the highest standards of conduct on those who provide financial advice and to invest the resources required to keep up with new products properly oversee the financial markets and  hold accountable entities that might be inclined to commit tomorrow's financial conclusion there are many causes and lesson to be learned from the financial crisis the enormity and worldwide scope of the crisis and the unprecedented government and indicated that if it went unchecked it could end up with financial consequences a crisis as large and without saying that was the genesis of what's occurred here even though testimony indicates for many people  other folks you've heard that mortgage fraud was potentially significant contributor here one thing i'd like to ask the department is not already done this is to evaluate what steps were taken in the wake of that  reviewing that which we can do better i'm not familiar myself with that statement but we will look at that i will certainly acquaint myself with with that statement what caused that statement to be made and we will review what  just done since that time and make the results of that search available to great what kind of timeframe do you think maybe i'll ask you to get back to us with what you think is a reasonable timeframe for some that kind of evaluation i don't think take an awful long period of time as i said we are constantly the process of trying to re evaluate what it is that we have done how we can improve on what we have been doing and so i think getting that information to you shouldn't take an awful long time and  as part of that what i'd like to indicate to you is that i have been told by folks who served as assistant u s attorneys in places where there was particularly high levels of  potential mortgage fraud that it was an issue visited up the chain and so i'm i'm very interested given the consequences of question i asked the private sector yesterday as one the information was made available what kind of actions were taken so i'm interested in both what happened on the public side what happened on the private sector side the additional question that i had for you was do you have currently in your opinion or did or did statutory authority sufficient exist to prosecute financial crimes specifically mortgage fraud crimes across this country did exist does it exist today i think we certainly have had tools  that were available to us to help us in the fight against in combating mortgage fraud and as i indicated in my opening statement the number of cases that are under investigation by the f b i is over two thousand eight hundred of those now but with the passage of the fraud enforcement and recovery act in two thousand and nine we were given i think additional enhancements that allow us to look into these cases i think to a greater degree and with more abilit here i extended i think very significantly a number of criminal statutes including the bank fraud statute that allows us to reach the conduct of private mortgage brokers that's a tool that we did not have before this will make it easier for our prosecutors to charge private mortgage brokers who engage in fraudulent conduct so in addition to those tools which did exist we've had these enhanced from congress as recently as two thousand and nine again we are constantly in the process of trying to review  what tools we have where there are gaps in our ability to prosecute these kinds of cases investigate these kinds of cases and we will not hesitate to interact with you and with with congress in requesting additional tools identify needs in that regard one more request for you in this regard as part of your evaluation that i asked you to undertake may be a branch of it were there sufficient if there was knowledge about potential crimes crosscountry the magnitude was there at the time sufficient in force capability as well as authority there have been reports in the wake of the terrorist attacks of september eleventh two thousand and one that there was a diversion of five hundred white collar crime investigators and the f b i away from white collar crimes terrorist activity so as part of that evaluation what warnings were sent up the line including the f b i warning as well as what resources and authority existed didn't exist was deployed or was not deployed i mean i think it's very good question certainly there has been a movement i think very recently and understandably so to move investigat resources to the national security front given what happened in september of two thousand and one some numbers on the other hand in our budget for two thousand and ten we have made combating white collar crime a real priority and the budget request that's been passed by congress and signed by the president provides nearly fifty million dollars in program increases to the department to pursue white collar crime including both financial and mortgage fraud and that has a  limited in these cases are complex ones may take time and money in order to bring to fruition but we are determined given the resources that we have and the enhanced meant that we are going to receive to make this a priority area for  justice department thank you and i think now that i've asked you a little bit of a series of questions i think what i'm really after with the two thousand and four report from the f b i being one of the pieces is an evaluation by you to the extent to which we may determine may not determine that mortgage fraud was a driving force here the extent to which authority or resources or or actions existed did were taken were not taken i think that be very helpful to us if that's a hole that had been plugged would have made a your area of responsibility law enforcement is putting in place from your structure a response to the find quote a response to the financial crisis that is and will continue to be aggressive comprehensive and well coordinated as you know our charge from congress is to put together an explanation for the financial crisis and given the timeframe in which  we need to fulfill that statutory responsibility we are forced to be aggressive as comprehensive as we can be in the timeframe one of my concerns is that we probably aren't as well coordinated as we should be in the collection of the necessary information for us to fulfill that function and if you'll allow me i will ask briefly on the sixth of january as the f c c entered into a written agreement with the federal reserve signed by their chairman for access to and sharing of  information as you might expect the federal reserve deals with some very sensitive information there was a period of negotiations to come up with an acceptable agreement on both sides on the eleventh of this month the office of the controller of the currency entered into an agreement with the f c i see with the appropriate adjustments given the responsibilities that they have  today and we're going to have an agreement signed by the office of thrift supervision my understanding and michelle you can correct me if i'm wrong that by the end of the day  you know the question that i'm going to ask you and you may know the answer well if it's yes then we can move forward although there has been cooperation and clearly given the focus of your law enforcement and the necessity for not divulging information in the pursuit of justice there are a number of areas that would be helpful to us if the department of justice and the f c c could reach a similar negotiated agreement i know we haven't felt that it was necessary to do so up to this point but i hope you can appreciate as it takes a long time to get some of the cases that you investigate to a conclusion arc closure is pinned on the wall and it's the middle of the last month of this year so in anticipation of making sure that we continue to have a smooth working relationship is it possible for you to give an affirmative answer to my question is it possible by the end of this month to reach an agreement similar to the others with probably even more necessary understandings of what type of information between the  department of justice will certainly work to make such an agreement possible i would think that would be a sufficient amount of time i think we have to understand that the department of justice we have a series of rules that prohibit us from sharing information the federal rules of criminal procedure with what a grand jury proceedings for instance the privacy act with regard to on investigations and then with regard to ongoing investigations the ability to share information is difficult having said all of that it is certainly our desire to provide you with the information that you need and we would endeavor to work with you to try to reach an agreement quickly as we can ok i don't interpret that as yes in negotiating with the f b i and others they are also similarly constrained with statutes that does not allow them to share information the one that would be most obvious is in dealing with private entities in terms of proprietary or as the law is called trade secrets act we were able to work our way through those difficulties as well my sumption as since we haven't placed a letter in front of you and you've indicated that you're more than willing to work to reach agreement and you indicated that the end of this month seems reasonable and appropriate let me say that i'll accept your answer as  probably and by the end of the month hopefully it will have become a certainty if it hasn't you might be assured that we'll revisit you because we simply cannot conclude our job in the timeframe congress has assigned us if we aren't able to get the appropriate necessary and protection all structure in place to find out what the all right let's show now much now i have a couple of minutes i'm going to take right now and then the vice chairman probably has a couple of questions and then we're going to go to and i'm going to hit and packaged by the largest institutions in the country and i guess if there was a moment which were the primary responsibly for choking off the development of products that ended up polluting our financial market understand the quality of radio so for example rules that require the disclosure of the performance of ratings over a period of time so you can see how they performed downgrades upgrade conflict of interest provisions conflict of interest disclosure disagree with you the fundamental problem to my way of thinking is the business model when the issuer pays for the rating which is relied upon by the investor the buyer of the issuer securities the fundamental conflict of interest is very very difficult so  helpful but we really been encouraging entities to come to us with a new business model we are very open to approving that in the context of our existing authority if we can break down the walls here and get some genuine competition into  that we will be doing a lemonade in the ability of a institution for structured finance products to rely on a rating to set their capital unless they have actually identified can identify the asset in a way underlyin somebody looked at them some identified them and looked at them they just use mathematical models and know what the lower the quality of the credit quality of those loans are we're also trying to get our own house in order our large banks our premiums for large banks right now a component of that  about half a dozen of our existing rules again to reduce our reliance on them and we've made it clear for them in the context of money market funds that have quality restrictions on paper that they can buy that they cannot rely on a rating they must do independent pre them disclose revenues from the major issuers of their rating their performance histories disclosure about how they do due diligence for structured deals a recent proposal is that we would require  issuers to make available to all rating agencies information that would allow any rating agency not just the one they pay for the rating to do an unsolicited raid so investors would have a point of comparison and we've also propos require disclosure of rating shopping so that if i were and i've gone to three ready agencies and said what's your preliminary view of what this security will there is a rating and two of you tell me the double b and one of you tell me that needed to be changed but simply wasn't because what they were doing may not have been right under some understanding of what's right but it wasn't illegal because we didn't have a structure in place thank you bear your comments were were very good especially your willingness outside of your narrow area of responsibility and i thought it was most appropriate in this particular  hearing room based upon the role of the ways and means committee in terms of being frankly the only committee in the house of the constitution and the ability of the person brings originated a person brings originating in the house to deal with the tax code it's amazing to me that a lot of folks still haven't focused on the fact that notwithstanding in the one nine hundred eighty s we were able to remove the deduction of consumer interest as an itemized deduction there is still an overwhelming financial windfall in the tax code for home on a ship versus for example the same rough that you rent rather than own and that what might be helpful from an economic point of view for an individual was almost responsible for the collapse when that individual ability is collectively exercised being able to literally was some of the financial agreements cashed out every month the equity that you had in your home which then could be deducted just a point of interest that we came very close in the mid eighty's to dealing with  the deduction for consumer interest in the disguise of mortgage interest same thing we do  with individual retirement accounts you get penalized in some way if you withdraw for other than the purpose for which it was placed in a tax preferred position health savings accounts any number of examples but yet we still haven't even talked t and that is in the example of how far we need to go not even touching on tort reform or any other number of areas to really get to the bottom of  this some of them shouldn't be that difficult but obviously all the focus is on the committees that have the jurisdiction for oversight and regulation of financial institutions and why  this particular commission notwithstanding the time difficulties that we have is truly unique because we don't have boundaries and i'm quite sure that the final report will comment on aspects of the tax code and other areas which if you begin to lay out the scenarios and the consequences of decisions which seem somewhat appropriate if we hadn't allowed that kind of deduction the equity in the homes that people have would have and you do get a downturn and as the panel we had in front of us yesterday even those in extremely sensitive difficult and technical areas indicated that they never thought home values would ever go to that's why you were supposed to build up equity let me ask you some questions that i i think are specifically in your jurisdiction so that somewhat the same phenomenon could be illustrated based on your answers your particular area of my understanding is that you did not that you personally the agency would you oversee didn't collect insurance premiums for a decade before the crisis in terms of the regulatory structure i mean do you think that you had an overly optimistic view of the  for that legislation to be passed i came to the f d a in june of two thousand and six within two weeks i had proposed rules to start charging premiums on everyone the staff that already been working on it it was very much something i wanted to do and i wanted to do still and this really is more than anything with congressional action as you know because of laws that were passed before that basically the smarter for regulation so i think it should be very high priority for congress and there's only so much regulators can do until that derivatives market could become an end run around the regulated exchange traded financial instruments with futures markets and markets and the options markets they allowed illegal conduct to some extent and we've brought a couple of cases in this regard with respect to insider trading and allow those markets to to absorb illegal activity that then moved out of the sight of the regulators and law enforcement and so i think on that level as well as the macro relationship exchange trade price transparency full oversight of the clearinghouse and all that brings with it and i also think we need to regulate the dealers in the marketplace and while some of the legislation that and on exchanges but regulation of the dealer so that we have capital again transparency management systems in place internal controls within the dealers and transparency again to the public and the regulators prudential supervision i think we have to conclude that the program was not successful in providing financial supervision the program as i understand it was developed as a result of changes in european law that really required  program prior to that the good news is prior to that investment bank kompany we're not subject to any supervision at all so that would be a good thing to bring them under the umbrella of regulation   i don't believe the program was ever adequately staffed there were a handful of people who are responsible not even necessarily on a full time basis for the five largest investment banks in the in the world frankly not just in the united states and i think that i think that the combination really a very new way to approach regulation inadequate resources and then some of the changes that were made to the capital in order to get the holding company supervision broker dealers were allowed to use value at risk models rather than calculate their capital requirements which allowed frankly lower levels of capital to support larger and larger positions in combination led to you know a program that clearly was not a success one of the things we're looking at and really taking the lessons learned as we try to rethink entirely broker dealer capital of the regulator our mission is to hold those who broke in the laws accountable with respect that we work with our partners will do me a favor do you want to follow up i think that review of what was or was not done at justice may i start with you for banks we rely on regulation to protect us because there is much reduced market discipline because of the backing of banks by the government and i want to congratulate you and thank you for what i thought was very candid testimony about the deficiencies of regulation in general but there is one paragraph that caught my attention a particular i'd like to ask you about you say here in your written testimony the traditional rules used by safety and soundness regulators appear institution analysis did not detect individual institution excesses because many of the peer institutions also analyzed engaged in the same risky activities these activities  profitable to risky activities undertaken by became unsustainable what that sounds like is that it's ok what was ok if everyone was doing it is that what you meant to say i think the performing that kind of analysis much less reliance on really no reliance on the fact that the guy down the street might be doing the same thing i do think though that that feeds into the larger issue of having some type of systemic body you other things that you said that i thought were quite interesting and should be in the record in your written testimony again you said record profitability within financial within the financial services industry also served to shield it from some forms of regulatory second guessing another statement often the potential risks associated with strategies that give rise to outsized profits are not obvious obviously obvious especially when supervisors are examining new bank products or activities and then finally it proved difficult for regulators to reign in profitable legal financial activities without hard evidence that the activities were creating unwarranted risk now all of those things suggest that when activities are profitable becomes very hard for regulators to stop what are the and you should know this one simple question for you and that is there was quite a lot of discussion at the time that we were going through the crisis in two thousand and eight july august september and so forth about manipulative short selling now these things seem to come up every time we have this kind of market crisis and the allegation is that they are creating rumors and they drive down the stock prices and they profit from that has investigated that quite a lot have you continue to investigate that have you found any indication that there is manipulative short selling at a minimum the ongoing effects of the financial crisis both with foreclosures and dealing with depository institutions so i just want to ask you a couple questions about that one is again sort of one of these requests for follow up we had two witnesses yesterday who were pretty aggressive in criticizing and if you could just give us your best thinking about the best case for the four i don't know what you're thinking in terms of modification and don't want to get into that now  in particular just in terms of how effective you believe it's been in terms of number of foreclosures avoided that would be very useful but what i'd like to focus on is you are still having to deal with failing deposit institutions and as i understand it as you resolve those institutions you've got to tap into into the deposit insurance fund you've got something like an eight billion dollars deficit in that now one expert told me that to get back up to sort of your target reserve ratio to the ballpark of seventy five hundred billion dollars that you need as i understand it you've got a proposed rule out there for a new fee to help close some of that gap  tied to bankers what we've got just today now is we've got a new proposal from the administration which is saying let's take ninety billion dollars from large financial institutions and i wan some questions about that in particular about how it affects your ability to have the funds you need in a positive surance fund to resolve these institutions one is as i understand it insured depository are part of of evidence there from a lot of compensation structure encouraged and contributed to some of the problems we're having so we have asked the question about whether that should be factored in our risk based upon insurance premiums this will be if we do lot in premiums i would also say that we have tried to be very mindful of the balance be tween maintaining the integrity of our industry based deposit insurance fund i think it's very important to keep it industry funded and avoid it i never say never but try everything we can to avoid having to borrow from taxpayers to raise had enough of that that we have we did one special assessment which immediately and we realize that the industry is so under stress now so instead we did a prepayment of three years worth of premiums which brings us to cash but they can expense over time we don't have to immediately take the hit to capital so i think this is a good balance where we have about sixty seven billion in cash liquidity which i think will be somewhere in that ballpark or your deposit insurance fund you can't use the same money for two or three purposes if you've got money coming in i understand possible uses of the funds to pay back taxpayers for losses from other you to give us your views on to the extent that there is a new proposal to address too big to fail and address the proposed should those funds first targeted to address ongoing programs we know about  very in which you gave me an answer in terms of the well capitalized banks and the lack of any real discretion to deal with the structure that was there this is part of our ongoing process i am informed that you have provisions called collective action provisions in which regulators can lower a bank's rating malo well capitalized on to give ground and i guess it's back to the question about devices tied to real estate i mean if you are looking at the banks not withstanding under the structure that was there and they were well capitalized did the f d i c look at do you think they should have looked at what i guess is the excess exposure by some of the you had the ability if you were discerning enough to believe that the assets were riskier than would otherwise be required and obviously that makes you pressed others weren't so i guess i'm asking you is the  well you have a watch list obviously so that you look at the dogs and i could back up just for a minute i think it is important understand that most of these talks declines were not on bank balance sheets they were they were outside banks i understand related if we're able to make that judgment to that aspect which could have been available to you under the proper action had you been fully aware of how  related to subprime toxic assets versus the collateral damage that resulted from the big meltdown yes i think we could get that i think that would be important mr george thank you mr chairman having spent the better part of the last decade investigating and prosecuting the financial fraud at enron tempted to go into the special investment off balance but temper my my desire to do that i would like to focus on follow up on something that i approached the private sector people with yesterday really the credit rating agencies is more serious than just investor investor with respect to the rating agencies that eating their own cooking so to speak would would be interesting for us to explore i will say there's one other difference though between credit rating agencies and the other gatekeepers like auditors and lawyers and that whether credit rating agencies ought to be subject to experts liability just the way others are in the offering the securities and whether that might impose some additional discipline on how they conduct their business and  to the extent to which private sector provide capital and accumulate capital might have been involved in encouraging brokers to provide loans to create loans this commission was created under provided the financial fraud to enforcement act provided additional resources to each and every one of your agencies for the purpose of investigating this particular  perspective our job in determining the source of this enormous financial crisis its magnitude is what central and so my question to you is do you or any of your affiliates on this task force have other members the panel this is the happiest day of my life and i want to thank you for resolving for ever whether the uptick rule matters whether short sellers rule in the world and how much mark to market accounting matters i have been waiting for this day banks and the role of the supervisor i didn't quite understand the answer so i'm going to say something i want you to tell me what i'm wrong on the investment banks had no regulatory capital requirement wrong capital which were then realized the broker dealers holding companies were not subject to capital requirements or any regulation at all prior to two thousand and four in two thousand and four the consolidated supervised program was created to bring those holding companies under supervision at the same time they were at the broker dealer level allowed to take a different approach to basel the result of that was that smaller amounts of capital were able to support larger positions ok thank you very much i just didn't follow that first time around so in looking back at the crisis  elsewhere not subject to the f t c voluntary regulations that idea under almost any circumstances that secondarily i don't think the resources were ever technologically or human resources to become the kind of consolidated supervisor that was really called for under these circumstances i can understand very clearly how the changes in the capital rules impacted and we can fix we don't we don't regulate on a consolidated basis  holding companies any longer i can provide resources we can support the program we can rewrite the rules but i can't really address for you all of the failures of the program  pressure on the firms to do really robust economic stress test their models under under the sort of low probability high stress scenario there was a fundamental misunderstanding which was shared by successfully regulated broker dealers and broker dealer capital and broker dealer net capital and customer protections are designed to protect the assets of the customers as a broker dealer and that worked extremely well for many years who did extensive work identifying the fundamental weaknesses in a lot of securitized assets based on subprime mortgages he took that evidence of the danger that it presented to chairman earlier today i was on a call in program and several of the callers raised the issue of the degree to which this crisis was a function of over governmental regulation and intervention using as the primary example the community reinvestment act mr baier and your investigation any opinion as to accounting standards is which is to provide investors with all the information honest and direct way to make rational capital allocation decisions and so i think it's particularly for the profession to mr chairman and i am at the risk of making your day a little bit less happy commissioner i'm going to go back to short selling his story about this i do want to talk a little bit about transparency as it relates to short selling because there's an awful lot of requirements either for filings or for disclosure that relate to long positions in particular ownership by mutual funds or the position that investment analyst may have themselves or market commentators and those types of disclosure requirements are not necessarily required on the short side and without a doubt short selling is an important part of an efficient market but i do think that it is worth noting that observers within the real economy and perhaps on main street have observed that the lack of requirements for transparency and disclosure on the short side may have exacerbated the financial crisis during its course in particular because if you look at some public companies for example who depend on investor confidence to access to capital markets who at that time might have been renegotiating credit lines as many companies were and you have a stock that goes down ninety fifty percent there is a significant amount of confidence that's lost and an inability to tap the capital markets to say nothing of employees who watch stock prices decline and obviously are frightened and their morale problems that are real in companies that are actually part of the real economy not necessarily part of the financial institutions could you please comment on whether you think there should be more transparency in this area as a general matter of transparency across the board because i think when people understand what all the issues are what all the positions are  all are able to have real market discipline in a way we don't when the markets new short selling reporting requirements were put into place this fall and i'd be happy to provide you with a full for the record description  look at things that would be considered manipulative in that market it's extremely difficult the amount of data to sift through in these cases is over well for us it's an issue of being able to acquire or build the technology to do this kind of data analysis more efficiently than we do it now so when we were discussing earlier about the rumor investigation and the potential short sale manipulation those we we have to review millions and millions and millions of trees in order to try to reconstruct what has happened and it is my hope that the agency will have sufficient resources to do a better job with technology are our i don't mean to make a pitch but our technology budget is fifty percent support for new development is fifty percent below what it was just five years ago so it's really incumbent upon us to have that capability thank you separate question on the shadow banking industry could you comment a little bit on what you think the contribution might have been from the shadow banks to the financial crisis and its  i think to some extent it depends on how you define the shadow banking system i think but so i would i would agree with everything that there has said and i would just reiterate my concern about  get the mike welcome back we will now go to the second session of our public hearing today and i want to welcome the individuals who have come here from around the country to talk to us about the investigations and actions that are taken around this country with respect to the financial crisis as has been our custom as i announced as i noted every session we'll be swearing all witnesses that come before us and so consistent with that i'd like all of you to please stand and be sworn do you solemnly swear or affirm under penalty of perjury that the testimony you  about to provide the commission will be the truth the whole truth and nothing but the truth to the best of your knowledge thank you very much let me also announce commissioners you may notice that mr holt is now sitting to my right there has lenders but it chose not to exercise after the market collapsed in two thousand and six the federal regulators finally addressed poor underwriting by putting out guidance on nontraditional mortgage products but the bulk of the damage had already general that means i came into office just as we were starting to hear rumblings about problems in the colorado housing market in my view which is largely hindsight the states were not well equipped with legal tools to deal with much of what has transpired over the ensuing five years like many states colorado had passed legislation in two thousand and two dealing with so called predatory loans and part after the federal homeownership and equity protection act of one nine hundred ninety four unfortunately like its federal counterpart at the time colorado's limits on balloon payments and prepayment penalties and its prohibition on negatively amortizing mortgage loans applied to such a small subset of the highest cost loans that it proved to be very little deterrent to abusive lending practices loan originators were able to push ever more exotic loan products and introductory rates and low minimum payment formulas with significant cost paid outside of closing took those products beyond the coverage of such laws in two thousand and five colorado was one of only two states that did not regulate mortgage loan originator well we now have licensing of individual brokers we are still one of the few states that does not regulate most of the mortgage lending activities of non depository lenders with respect to the laws we did have in place back in two thousand and five as and deceptive advertising and i join general madigan in encouraging them to carefully examine the advisability of federal preemption in financial industry regulation as things began to unravel in my office joined a law enforcement task force in coordinated our enforcement efforts with colorado's district attorneys and the united states attorney in colorado to ensure various cases were pursued by the most effective means given our resource  office focused our enforcement efforts on deceptive advertising by local loan originators and i don't agree just cases of mortgage fraud affecting colorado consumers in late two thousand and five and early two thousand and six weeks salmon the advertising of dozens of local loan originators for federal truth in lending act violations cease and desist letters went to those advertisers who either were not disclosing an a p r in their print advertising or who were disclosing an inaccurate a p by late two thousand and six our newspapers were full of advertise and promote originators talking option payment arm loans most of these advertisements emphasize low teaser rates and failed to disclose the negative amortization that borrowers would experience of they made only the minimum payments homeowners were led to believe that they were being buying a fixed interest rate loan when in fact only the first monthly payment was at the advertised rate we issued subpoenas to all of these advertisers and conducted numerous depositions of loan originators the witnesses told us the teaser rates really quote made the phones light up and it was clear that thousands of colorado bar hours got into these loans without knowing the true nature of the teaser rates the significant negative amortization that they were adding to their principal balances and the prepayment penalties that came with these loans a number of these loan originators ultimately went out of business and we eventually reached a settlement with seven companies that prohibited them from such advertising several companies refused to settle and we successfully sued them for deceptive advertising we also brought a series of civil and criminal actions against lenders and loan originators engaged in deceptive or fraudulent transactions and against individuals and in fraudulent real estate schemes we've summarized in the written testimony we joined with the illinois and other states in multistate actions against america west and countrywide who also aggressively pursued local companies in colorado and we aggressively pursued criminal cases and i think the fact that we got sentences up to thirty years  in mortgage fraud cases indicates how religious judges felt this conduct was i want to turn to current trends over the past two years my office seen a dramatic shift in consumer complaints we are receiving fewer complaints about mortgage originators and we now have the luminous complaints about mortgage mortgage servicing and foreclosure relief scams in addition to working with loan servicers on an individual complaints on behalf of colorado consumers my office is participating in a multi state effort to work with loan services to encourage loan modifications and other sustainable long term solutions the state foreclosure prevention working group is comprised of fifteen state attorneys general and the conference of state bank supervisors formed in the summer of two thousand and seven this group met early on with representatives of the twentieth twenty largest loan servicers in the united states since that time the working group has been collecting data from thirteen of these companies in an effort to verify the performance of their foreclosure of avoidance programs i'd indicate to you that the majority of the seven who are not disclosing the information are claiming federal preemption and no requirement to do so this data collection effort has led to the publication of three reports during two thousand and eight with a fourth report covering two thousand and nine to be released shortly unfortunately each of the first three reports revealed a wide gulf between the level of serious delinquent subprime borrowers and effective loss mitigation efforts with as many as seven or eight out of ten seriously delinquent borrowers are not in any loss mitigation process while those numbers are believed to improve over the last year there are still far too many delinquent seriously delinquent borrowers who either are not aware of loss mitigation alternatives to foreclosure or who are frustrated by the delays in working out a non foreclosure solution foreclosure relief scams are a very significant problem for the state's shortly after i came into office i was approached by a number of our local county officials handling foreclosures called public trustees in colorado about a rapid increase in the number of individuals who were soliciting homeowners in foreclosure for a variety of foreclosure relief services ranging from refinances and motor modifications to investment schemes designed to allegedly save a home from foreclosure i formed a task force of public and private parties to look at this problem in two thousand and six this task force was instrumental in drafting and securing passage of the colorado foreclosure protection act the act prohibits foreclosure consultants from collecting upfront fees from taking a financial interest in a home owner's property and requires that foreclosure consulting contracts contain language designed to protect consumers investors are referred to as equity purchasers under the act are subject to strict written contracting procedures a three day cooling off period during which no documents incoming the property can be recorded and special unconscionable of the provisions relating the sale leaseback transactions not surprisingly over the last two years complaints about foreclosure relief scams have outstripped all other mortgage related complaints into my office delinquent homeowners are besieged with solicitations arriving at their door in their mailbox over the telephone and on the internet we've now taken action against t of thirty three foreclosure rescue and loan modification firms we also have investigations underway against dozens of additional companies that are aggressively advertise in colorado homeowners facing foreclosure many of these points are located outside of colorado many of these companies are located outside of colorado seventeen of these actions were announced as part of two separate sweeps in july and november of two thousand and nine that approximately twenty five state attorney general offices ordinated with the federal trade commission let me briefly touch on other continuing concerns as more colorado consumers of fallen behind on their mortgage payments we have seen an increase in the marketing of other services to those same consumers in addition to the for closure relief solicitations we've seen an increase in pay and other high cost loans in an increase in debt settlement and credit report here frauds as well under colorado law payday loans are limited in amount finance charges and duration in two thousand and two the total loan amount reported by licensed payday lenders in colorado was two hundred forty five point nine million by two thousand and seven that number has increased one hundred sixty percent to six hundred thirty point five million and these figures did not take into account unlicensed payday lenders operating primarily or exclusively on the internet attempting to avoid state licensing let me say a word about debt management scams are also very problematic since colorado's version of the uniform debt management services act took back to the fact in two thousand and eight my office has investigated taken disciplinary action against twenty six debt management companies and is issued twenty two additional ceas violations including failure to make mandatory disclosures and charging excessive fees we've required debt management companies to refund more than one point three million to colorado consumers and assess fines and penalties of one hundred thirty five thousand dollars against them also a problem wrapped up just by saying we're seeing a lot of credit repair scams let me conclude by suggesting the cause and effects of our current financial crisis as you folks are finding out are varied afternoon mr chairman and members of the commission i want to thank you for the opportunity to testify before you today about the miami police department's effort to combat mortgage fraud facing a wave of mortgage fraud investigations county mayor carlos alvarez establish the mayor's mortgage fraud task force in september of two thousand public private partnership a comprehensive approach legislative change prevention regulation and prosecution to reduce mortgage fraud and prevent institutions reported by more than tripled from four when it was over seventeen thousand to over sixty four thousand in two thousand and eight and it's closing in on seventy thousand in two thousand and nine mari estimates that seventy to eighty percent of all those foreclosures contain some type of mortgage fraud so it seems clear that foreclosures and mortgage fraud are intertwined to some degree in both zero seven zero eight florida ranks second in the nation in foreclosures with miami dade again being the hardest hit area  state traditionally the f b i and the hot inspector general's office mortgage fraud investigations in many areas though the f b i is threshold for handling these cases certain dollar amounts and cases that fall below these thresholds must be handled at a local level the f b i miami office for instance had a one million dollars threshold that close to ninety eight percent of all the cases did not meet so compounding that problem that was the fact that no state statute existed to address mortgage fraud is a crime and local law enforcement investigators and prosecutors did not have sufficient knowledge experience or training in taking on mortgage fraud cases in addition the combination of questionable mortgage industry professionals the lack of appropriate resources for state regulators to accomplish the legal mandates of their office and the relaxed lending requirements by lending institutions led to a rapid increase in mortgage fraud that has had a detrimental effect on miami dade county state of florida and the entire country our response of miami dade because local law enforcement had lacked the authority and the ability and the tools to investigate and charge subjects with mortgage fraud task force drafted in law before the passage of florida state statute which allowed local law enforcement throughout the state to arrest perpetrators for the crime of mortgage fraud this legislation form the cornerstone of the task force nevertheless a multifaceted approach was necessary because the mortgage fraud crisis was not created by one or two different components gone wrong but an entire breakdown of the real estate industry to address the various strategies for reducing mortgage fraud in miami dade police department consulted key stakeholders including county and state elected officials leaders of local government business executives law enforcement professionals prosecutors and we formed five committees the first committee was a law enforcement committee that's responsible for detecting investigating apprehending and prosecuting mortgage fraud subjects and enterprises committee comprises largely investigators and supervisors from the miami dade police departments economic crimes our economic crime bureau detective work with other local state federal law enforcement to solve cases and apprehend subjects the state attorney general's office the u s attorney's office and the miami dade state attorney's office prosecuted cases in their respective courts legislative committee which enhances current laws create new laws and ordinances several of the task force members of our state legislators who have assisted in sponsoring and passing state laws to achieve the task forces goals the regulatory committee which enhances and enforces state regulation on all parties involved in the mortgage transaction the business partnership committee which creates and transmit effective business practices and ethical code of conduct to enhance cooperation with law enforcement and different professions involved in a mortgage to attack the problem and stop fraudulent loans from actually being read and an education component which helps law enforcement prosecutors and industry professionals build awareness about mortgage fraud through extensive community visibility and guess speaking events news conferences for major arrests in new legislation to date mayor  mortgage fraud task forces one of the few public private task forces at the county level in the entire united states and it has a tremendous impact on the way mortgage fraud has been viewed in florida a lot my committee has shouldered a lot of the burden in achiev ing this goal to date there have been several thousand reports and inquiries and currently six hundred eighty two investigations are active the economic crimes bureau has made more than one hundred eighty nine felony arrests for mortgage fraud and related charges which represent more than sixty million in losses we have created a training manual and train more than four hundred vest a gator's and prosecutors in the state of florida as far as legislation goes a legislative committee crafted new legislation and enhanced the current mortgage fraud  statute which was sponsored by our state representative in our state senator when margolis these bills were signed into law by governor crist and effective july first of two thousand and eight they enhanced the law enforcement ability to notify the county property appraiser's office when it affected property has shown mortgage fraud and there's probable cause that a mortgage fraud occurred and this is important because a property appraiser's office is now required to re evaluate not only the affected property but the properties around that particular home or that condominium and this will reduce the taxes and has reduced the taxes of all the properties affected by the fraud not only the individual property but everyone involved in the bill also created a second degree felony for the mortgage fraud that occurs over one hundred thousand dollars in two thousand and eight at the federal level house resolution six fifty three the nationwide mortgage fraud task force act two thousand kendrick meek was passed in the house of representatives and it was amended as a nationwide mortgage fraud coordinator act in two thousand and eight and unfortunately ran out of time in the senate was filed again on january fourteenth two thousand and nine as a five twenty nine nationwide mortgage fraud task of two thousand and nine the legislation sought to create a nationwide program modeled after my mortgage fraud task force to address mortgage fraud in the united states may twentieth of two thousand president obama signed public law one eleven goes following the recommendations of the task forces regulatory committee the florida office of financial regulation and department of business and professional regulation enacted regulations to expedite emergency hearing licenses of real estate agents and mortgage brokers involved and arrested for mortgage fraud or other related fraud the immediate suspension will prevent the agent or broker from victimizing unsuspecting home purchasers regulations also required background checks and licensure for all loan originator additionally a complete overhaul of the state regulating the mortgage industry was in this year's legislative package the business partnership committee created real estate best practices manual to distribute to miami dade county real committee also sought and received private funding from florida bankers and other professions involved in mortgage business to assist in financing the costs involved in investigating and prosecuting mortgage fraud the education committee has created a public complaint form with website access to report mortgage fraud and it's on the mayor's web site there is also an established database of speakers available to appear at engagement half of the task force additionally an aggressive media campaign to educate the public and prevent victimization has been undertaken in conclusion mr chairman the task force is committed to making a difference in the quality of life of the citizens of miami dade county by reducing the number of incidents of mortgage fraud although this is a tremendously large problem in the united states the steps have been taken in miami dade can be duplicated elsewhere in florida and throughout the country the task force is comprehensive multi disciplinary approach that has proven to be successful in miami dade county is being sought as a model for attacking mortgage fraud in the  mortgage fraud task force and its accomplishments can provide a solution to the national financial crisis with the task force model hard work and perseverance by dedicated public servants and industry professionals that was created by greedy not any wrongdoing in that process i'm just saying that our hope our hope for situation with lots of people participating in the process at least over up until recently and i haven't seen the latest because what they're talking about is fraud for profit or fraud for housing and again you're talking about two different animals somebody numbers to get into a property that they really can't afford so that is a fraud however and preemption and nobody really takes the time the extent to which state regulation would really interfere with interstate commerce for example keeping us out of pursuing  i look through your testimony all of your testimony and you make a very strong case is that there is very substantial abuses mortgage lending going on in your state and that's probably true if we had fifty of your counterparts here i do want to stress however that our job is to report to congress and to the american people about what caused the worldwide financial crisis and that's why it is so important for you if you can to be able to provide us with information that would allow us to assess the dimensions of the fraud problem in relation to the entire sub prime lending problem there are probably twenty six million subprime and all to that's a huge number probably is well over a trillion dollars that we're talking about here in terms of potential losses throughout the world financial system so we have to do to the extent possible to get that information the chairman has asked our staff to look for it  particular i would like to ask you in your role with the north american securities commission to see what they might have within their jurisdiction because of course they cover all of north america and if there is something in their files of studies done that might give us a sense of the dimensions of this we very much appreciated i'd like to give you the opportunity to tell me if there is anything you know or anything that you think any place you think we should go to find this information please tell us now we'll be asking you of the baseline level of foreclosures and the increase in foreclosures and if you look at those people i in my simplistic way divide them up into four groups of people first group are victims people who were suckered by some bad lender mortgage brokers someone who pulled them into taking a mortgage that they never should have taken these are people we clearly feel sorry for especially on the back end now when their properties being foreclosed on they're being hit in all sorts of ways the second are knowing but i'm lucky people people who understood that they were taking a rest they basically understood what they were doing they wanted to get into the home the people who were knowing and were intentionally speculating on home prices continuing to appreciate maybe there were more of those in certain areas of the country than others i don't really know and then the fourth category are the fraudulent individuals the people who were doing the fraud from the borrower side rather than on the lender side these were people who were lying in terms of the information they were providing i'm trying to think about it from the standpoint not of the universe of mortgages that were out there but if you look at a universe of one hundred people who are facing foreclosure kind of what's the breakdown because if this is eighty percent victims that says one very significant thing about how we should be thinking about foreclosures if it knowing people what can you tell us about what you see and how that might influence our understanding of the relative components of the universe of people  phenomenon of the artificial increase in the property valuations and folks got into property and paid far too much money then what they were actually work and then when the bubble burst and all those properties went down to what they were actually were folks are holding half a million dollar mortgages on a two hundred thousand dollar property their best move is to go into foreclosure not to pay that half a million dollars bringing us to the next wave of fraud investment bank ratings agencies and none of those parties retain the risk that ultimately the failure of the underlying mortgages will will imperil the securities themselves that risk falls exclusively on the purchasers who are customarily pension funds and other investment vehicles that have accumulated the retired potential retirement benefits of others  who if anybody has undertaken responsibility to pick up the pieces of those lost those lost opportunities and once they're purchased i don't really know even what the assumptions are made as to what the amount of interest will be generated by those particular loans what assumptions are necessarily made in the securities will they pay one percent will they only pay one percent for three months will they move to twelve percent i just don't know the answer  to empower people who actually are the closest to the problem because you are the early warning system for these issues which ultimately come to federal attention at some point but frontline job of being able to pull together your task force for mortgage fraud and all of you have identified the fact that there were some early warning signs about the problems inherent in that i'm wondering if there's anything that you're seeing today that continues to concern you as we look at our financial system going forward there are a lot of concerns one of the most particular concerns of the state and local folks working with our in one of the roughest neighborhoods in miami and this is a lot thank you for covering my back but so far to date we've delivered over one hundred cases to our property appraisers office and the significance of that is with the fraud that occurs in neighborhoods we're having to have two comparables in a particular neighborhood and those two comparables raised the valuation of the property in that entire grid that the property appraiser uses so all the other folks that were not involved in the fraud their taxes went up because their homes were artificially inflated by the fraudsters and especially in condominiums in miami dade county and you know better than anyone down in the court or there wasn't a whole lot of difference but one of the things that we have noticed is that there's an amazing number of felons who are now unable to get when people were applying for mortgage licenses were being disqualified as a result of  the collapse one of the things that's going on in colorado credible increase in the scrutiny of appraisers we have greatly tightened our laws and as a result of the problem with  the two thousand and four action that inhibited your ability to prosecute and generally over see mortgage brokers conduct from no longer registered investment advisors was there any practical effect to that i mean pre and post was or different real level of scrutiny in terms of rating agencies were states bringing actions or quite  more as i myself learned about the warning in two thousand and four is one of the things i think as a commission we look at is as we look at the causes to also look at the early warning signs that were out there we know that there were many in many places but i do think you've been very helpful in that respect witnesses thank you very much for coming all the way here thank you for your time