one i have no idea that they were fiddling with it or the power over there early i don't know that anything to do with the mole but if it were is it working for you now ok that's where my check my check one two one two three my check check check  house presented broad reform proposals to overhaul the financial regulatory system i am pleased to note that several of their key provisions regarding over the counter derivatives are similar to what the house agriculture committee passed earlier this year as part of a bipartisan bill spent over twenty years as the c e o of substantial companies which relied on wall street and used customized derivatives they had currency and interest rate i learned these financial instruments are essential to the proper functioning are twenty first century economy have listened to many experts and studied the administration's eighty four page concept paper if we are to craft a regulatory structure which can keep our nation from ever again repeating the financial which are brought today's economy to its knees we need to first we should merge the s e c and the commodities futures trading commission financial derivatives whether they originate in a commodity as security or neither like whether futures are functionally identical and must be traded cleared and settled subject to the same rule brocaded responsibility might be made to work temporarily but it for long term solutions which will discourage bold action and will encourage regulatory arbitrage second banking regulation should be removed is the important need to bring conference of oversight and regulation to the derivative markets as one of the broader points about the imperative of comprehensive reform there are some over suggested that we're trying to do too much too soon that we should wait for a more opportune moment when the crisis has definitively receded there are some who are beginning to suggest that we don't need comprehensive change even though the cost of this crisis has been brutally damaging to millions of americans hundreds of thousands of businesses to economies around the world and to confidence in our financial system and there are some who argue that by making regulation smarter and stronger we will destroy an ovation and there are even some who argue that we should leave responsibility for consumer protection for mortgages and consumer credit products largely where it is now in my view arguing that we maintain the status quo and that's not something we can accept now it's not surprising that we're having this debate it's the typical pattern of the past as the crisis starts to recede impetus to reform in the face of the complexity of the task and opposition by the economic and institutional interests that are affected and it's not surprising because the reforms proposed by the president and the reforms that your two committees are discussing would substantially alter the financial institutions to choose their regulator to shape the content of future regulation and to continue to financial practices that were lucrative for parts of the industry for a time but that ultimately proved so damaging but this is why we have to act and what we need to deliver is very substantial change any regulatory reform of this magnitude requires deciding how to strike the right balance between financial innovation and efficiency on the one hand and stability and protection on the other and we failed to get this balance right in the past and if we do not achieve sufficient reform we will leave ourselves weaker as a nation weaker as an economy and more vulnerable to future crises one of the most significant developments in our system of during recent decades has been the very substantial growth and innovation in the market in particular the over the counter derivatives market because of the enormous and the critical role these instruments play in our markets establishing a conference and comprehensive framework of oversight for derivatives is crucial al bring very important benefits to our economy by enabling companies to manage risk but they also pose a very substantial challenges under our regulatory system as it has existed in institutions were allowed to sell very large amounts of protection against certain risks without adequate capital to back to the most conspicuous and the most damaging examples of this where the model i insurance companies and banks were able to reduce the amount of capital they held against risk by purchasing credit protection from capitalized special purpose insurers subject to little or no initial margin requirements the complexity of the instruments overwhelm the checks and balances risk management supervision weaknesses that were magnified by very systematic failures in judgment by the credit rating agencies these failures unable to a substantial increase in leverage both outside and within the banking system inadequate in force and authority and information made the system more vulnerable to fraud and to market manipulation and become public because of a lack of transparency markets the government and market participants did not have enough information about the location of risk exposures or the extent of mutual in the connection among firms and this lack of visibility to magnify contagion as the crisis intensified causing a very damaging wave of leveraging and margin increases the classic margin spiral contributing to a general breakdown in credit markets now these problems and driven is were not the sole or the principal cause of the crisis but they made the crisis more damaging and they need to be addressed as part of our proposals for reform are designed to protect the building of the financial system to prevent market manipulation fraud and other abuses to provide appropriately conservative capital margin requirements and strong business conduct standards to better ensure that dealers have the capital needed to make good on the protection they provide forth we propose steps to make the markets fully transparent relevant regulators will have access on a confidential basis to all transactions and open positions of individual market participants the public will have access to aggregated data on open positions and trading volumes and to bring about this high level of transparency with tighten the standard to govern who can participate in these markets and finally we will continue to work closely with our international counterparts to help ensure that our regulatory regime is matched by similarly effect ever other countries but these are global markets and the standards to be effective have to be applied and tourists on a global basis now with these reforms will bring protections that exist in other financial markets commitments without an adequate capital no dealer in these markets would say it gave oversight and we will bring the risk reducing and financial stability promoting the benefits of central clearing to these important markets  so that it's fair to say secretary that you would agree that if the regulator knows about the if the regulator has the necessary tools that should be sufficient to address and to avoid potential systematic risk  police those markets to prevent manipulation and fraud and that requires a level of reporting and transparency that we do not have today and you indicated in your opening comments secretary that for these kind of contracts potentially  products i can't i can't tell you how much higher but let me just explain the rationale for that the first is of course is that these customized products can often tell more leverage more uncertainty about future risk left about the future risk and that  requires a higher level of capital to compensate for that level of risk the second is of course we want to avoid the situation where people are encouraged to use customized when there's a standardized option that is economically compelling that you would agree that there are a number of industries where the energy or variety of industries where the circumstances are so unique that there has to be an option for these customers contract i do believe that and i have a stack of letters here in my book from companies across the country in the power business in the commodities business in the business of producing that speak to the importance of making that option but i want to underscore that because those products become come with a lot of risk and a lot before the deadline we put in the white paper which is the n s a temper because we know we want to you to move you want to move quickly on this and i agree with you they made a lot of progress but they're not there yet and what what we're doing is working closely with both agencies to try to explore options and bring them together in a position both can support but in that process as you know we're consulting very closely with both so that we're working in parallel to a point that it's going to be not that not just we have them together with the treasury on a common position but that we're more likely to find a common ground that you both your committee can support but we're not we're not quite there yet so i in this room and many others over a long period of time for merging both those agencies are judgment is a necessary condition and the most important in some ways the hardest thing to do is to bring the underlying statutes laws conformity and convergence we think that's the most important thing to do in part because your colleague chairman frank said the critical test of whether we do enough to improve the system is going to be what we do the basic constraints in the senate the substance before i got to ask my questions and just to put things into proper perspective i'd like to pose a couple of them now the stimulus bill was advertised to just wondering where you think your plan went wrong congressman thank you for raising that question i think if you step back and look at where we are today relative to where we're at the end of the year we have a chieved the critically important effect of helping slow the rate of decline the economy helps stabilize the financial system business consumer confidence have improved very substantially the rate of decline economic global of the rate of change and in terms of put money in the pockets of taxpayers to provide substantial forms of this is to reduce the risk that they're forced to fire tens of thousands of teachers workers and firemen and there are very substantial investments products that started they have already started to take effect and will have their impact on the economy in the second half of this year so my own sense is and i think this is a consensus of broad based economists that there has been substantial improvement in arresting what was the worst recession globally we've seen in generations and those are the result of the actions this congress took put in place and complimentary actions taken by governments around the world to help address if you if you look at the dynamics of all recessions even as growth starts to improve and turn positive unemployment tends to continue to rise that is the natural element of not lending it people have money to buy a new car but they're not people have money to take a vacation but they're not taking and the consumer confidence isn't what we have like it to be and the money's not getting spent and  of money relative income in the run up to this crisis what the economy is going through is a necessary and very healthy adjustment as families and the government goes back to living within their means that is causing a greater contraction demand for credit than we normally see in a recession and you're seeing a very healthy increase in private savings behavior probably in response to that i think those are necessary healthy dynamics although they will produce a slower recovery that the gentleman  pennsylvania the chairman of the committee mr holder secretary as you know the majority of over the counter derivatives are traded here in europe have you been discussing your proposal with your european counterparts and if you can come to an agreement with the european commission and the european parliament what is the prevent these markets to go to some other nation with regulatory very important question we have been working very closely with them in this very substantial convergence and overall approach and i think the o and with our good friends from the financial services committee with us along some of us on the agriculture committee might say that they feel that they are sitting in tall cotton however i must say that having said that and how much we appreciate you taking this time i think this hearing is premature the fact of the matter is that i very much agree with you that we need to have as much transparency in these markets as possible be also must have that much transparency and more in the deliberation of this legislation it is critically important that you be able to answer questions from members on both sides of the aisle about the specific details of legislation which does not yet exist so i would ask you first be willing to return to meet with these two committees and answer our questions when we actually have the substance of the legislation in front of us and can get more precise answers from you i will respond to any of the taishan by your chairman to come before you and help and help make the legislative process work on the pace that is appropriate that's a good answer and i would convey to both chairman my hope that they will make this an open and bipartisan process and assure us that once the legislation is in writing that we won't rush to market up without having the opportunity for the millions of americans who are very much affected by it as well as their representatives having the opportunity to ask the questions that need to be asked in particular i would note that you had indicated you hope that the members of the committee would us to know how we think that that would work but let me ask you specifically about one area that is of considerable concern to me and many others you've told us that the are still working on how best to divide up the jurisdiction the derivatives markets and dealers when this division of jurisdiction responsibility is finalized does the administration intend that would exercise exclusive regulatory jurisdiction over their assigned area provision of the commodity exchange act has worked well to avoid regulatory duplication and conflict and i would hope that it would be built into the legislation on o t c derivatives as well and you confirmed to me that it will be a good question a lot of merit in th the delicate careful process we're trying to work now with those two agencies i see that you have the same problem that i have with this process and i wonder if you could tell you what i think i think of course i agree that it's going to be all in the substance in the details  d and we do carry the burden of presenting before you detailed proposals in legislative form so you can consider those recommendations and we're going to live on that commitment i thank you i wonder if you would be willing to assure  the committees that you would get back to us on that specific question in writing once you have the information in front of you that would absolutely i think when we propose our recommendations on how to solve these jurisdictional questions a necessary part of the answer will be we try to improve the economy that uncertainty lends itself to borrowers that i visit with we are current company is making a profit and yet our banks can't tell us whether we're going to reauthorize renew our business means that we will increase consolidation and yet one of the theories we've operated under that we want to avoid that are too big to fail and yet many of the things it seems to me that are happening at the continual consolidation in the industry my point is that while it's damaging to my bankers it's ultimately damaging their borrowers which is ultimately damaging to the united states economy and i would appreciate any response that you might tell me that would g just took on too much risk during the boom and the cost of that is fundamentally unfair of us what happened the financial crisis fall not just on those took too much risk but they fall on a bunch of businesses and banks across the country which were very responsible and that's why these things can be so damaging and that's why it's very important that we do everything we can to put a better foundation for recovery in demanding growth and try to make sure that the financial system has capital where it's necessary and if these markets for credit start to get moving again and that's what that's the basic philosophy that underpins everything we've done you're also right that there is a risk in financial crises that people overcorrect after a period of taking on too much risk that they take too little people they got way overextended pull back too much and also a lot of collateral damage and again that's the basic rationale in a financial crisis to try to make sure you do as much as you can to provide enough support for the economy to get back on track but i'm very much aware of the concerns you expressed i believe that the principal bank supervisors are too carefully managing those those risks and you're right also right any time you think about reform legislation in the financial area that's going to come with a period of uncertainty minimizes uncertainty and i think that's one reason why we want to bring clarity relatively quickly to the rules of the game that govern our financial system going forward if we are to wait to do this the markets would be left with a greater period of uncertainty that might deter more lending and i simply would ask that you continue to differentiate or begin to differentiate in my opinion the difference between the significant financial players and those that are out there in the business everyday of making loans to consumers to buy an automobile to purchase a home plant a crop it does seem to me differentiation between those kind of banking institutions and the financial institutions ought to be they ought to be treated with respect to them to insist on a more aggressive forward looking approach to this than we would be possibly with the private sector entities that  in these markets are going to have different regulatory authorities but we want to make sure that there's going to be a common approach sufficiently conservative that's a similar approach we bring to think about the design or requirements generally with multiple entities that involved  order to provide the gentleman manage risk but given that the financial dealers do not have depositors unlike large financial and low or no systemic risk profile but maybe i could respond this way at the centerpiece of our proposals is to make sure that the major participants in these markets because of their importance to the economy be held to more exacting standards higher more constraining requirements for leveraging capital in the where risk is taken and where energies are taking short term liabilities borrowing short term and taking a longer term risk that requires capital is protect the system if you don't apply a uniform set of potential requirements around those entities and what'll happen is more parts of the system then what will happen is the risk to those system where there are lower as we've already seen in this financial crisis that's important to guard against that i mean you have to be completely comprehensive but you have to capture enough of the core participants that you avoid that risk another area that i am concerned about is we're going to be doing more limits on the trading of energy derivatives take for example or oil which i think is what has really been the driving force behind the call for increased regulation over the counter market oil as you know globally trade and it's price is not solely by activities in the united states market other markets so i find it kind of dubious that we can control speculation and hold down the price of oil simply by unilaterally regulating our market would not congressman that i think across the country not just in your district you still see businesses and families under enormous financial pressure and you're still and we're going to be living with some time for some time with the consequences of digging out of this mess we started this year with and in acknowledging and pointing out the fact that we have made very substantial progress in trying to repair the damage caused by this crisis and lay the foundation for recovery we do not yet have an economy going again and i think it is likely that this is going to take a while to come out of but i think that underscores an example as you pointed out underscore the importance of this government doing everything we can to try to mitigate these pressures and that's what the recovery act is designed to do and that's what the programs we've done to help are designed to do and they are having their necessary desired effect they are starting to get some traction but you're long time to get into this you know as a nation we were living way beyond our means for a long period of time people took on way too much debt and it will take some time to work through that but we're making progress a very substantial increase in private  businesses to engage in more customized more tailored against the specific and unique risk they face in the event the standardized products don't provide adequate protection so we're preserving that capacity we think is important for the economic benefit you laid out go through a clearing house is that correct because you're dealing with these underlying mortgage backed securities which are all over the spectrum all over the field and therefore to try to say that we're going to standardize them might be problematic i agree but again i would not  recent actions and given the fact that this is worded in a way that does not require an unwinding process given the fact that based on current is going to stand behind its money supply we are going to design our regulation to ensure that there is no necessity for the government to intervene and prop up the money in the future and a very foolish for anybody investing now to even vaguely think that it's likely that we will fail to do that but in the event that we fail the world can rely upon the american money we will take the actions necessary mr sherman and i just had a difference of opinion concerning whether or not tarp was an ill advised move i thought it was he thought it was and i thought it was dreadful that we had to do this and a real failure by leadership in this country across a broad range but it was something that i thought we needed to do and i'd be shocked if to we were going to require this require this require that it proposed to require well we also will require is the way you put it i think there are good things to require devil's in the detail of course we'll work those details out but the specter we have is we don't want to disadvantage american business we don't want to disadvantaged a merican financial industry and you also refer finally we will continue to work with our international talked with other countries about this very question regulatory arbitrage country to country it's been a challenge for us i have no real confidence that you're going to be able to line up all of the countries that some country won't decide to  not adopt the strict requirements that we think are advisable in order to have a competitive advantage in order to have that country become a financial center hence things like the cayman islands  prop up and i think it's just a nice history to suggest that there won't be countries like that as any thought been given to the united states perhaps teaming up with europe and coming up with a a fundamental regulatory scheme that sort of minimum standards that are acceptable and then simply announce that investors will not be permitted in any way directly or indirectly we're going to look at substance not the form to be in our markets if they are elsewhere playing in markets that are not living up to this minimum regulatory standard unrealistic to think that we're going to be able to do much more and that's why congress legislated a reform framework over the last year but unfortunately late in the process now we are going to have to come to the congress and propose how to deal with the future but now is not the that gentleman the gentleman from new york mr murphy mr chairman i want to say thanks for all your hard work on this and i know that you've been pushing for clearing of credit default swaps long before any of us ever heard about it and i know that you were out there and we've been able to get that done earlier than we are now a couple questions i missed some of the testimony you may have answered this already in your testimony you talk a lot about clearing houses in clearing stuff putting it on exchanges as one to one or there are some transactions that might be cleared and point considering putting minimum requirements for march for the clearing houses for the clearing house is absolutely i think one of the important things because they concentrate risk to make sure that there are adequate margin safeguards against the risk of default because i wan be confident i think competition is good but i want to be sure we don't have a race to the bottom people shop for the cheapest clearing house last question hedge accounting i hear from a lot of the companies i talk to the hedge accounting to be specific enough to get the treatment they want requires them into a customized marketplace kind of going against what we're trying to do how can we address that to try to bring that together where people who truly are hedging aren't pushed to do something that takes them off of a standard or the no i think it is a an important part of getting this all right because we can try to push it in one direction but if we get into the accounting rules where we're marking one side of the balance sheet to market not the other or we're driving them to do something that moves them out of what's the most stable financial system   their economic value in my capacity to take advantage of risk and again our judgment is yes there is but the system has greater protections around that but the existence of an underlying asset is not a good measure about what  to shift gears here since i'm sure you're a little tired of discussing this but this is an issue near and dear to my heart and dozens of my colleagues on both sides of the aisle and have to do with the delphi and hopefully you're familiar of this with the auto task force and the fact really two groups here completely different differently in terms of their pension responsibilities the hourly workers got one hundred percent coverage why the salary workers stand to lose potentially through why the judge has the may have been made and why the alternatives were not tenable we have to do that i'd like to hopefully come up with a solution but yes i would appreciate having that opportunity to thank you gentlemen the gentleman from oklahoma