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OVERSIGHT OF THE OFFICE OF FINANCIAL 

RESEARCH AND THE FINANCIAL STABILITY 

OVERSIGHT COUNCIL 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 14, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–48 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 14, 2011 ..................................................................................................... 1 

Appendix: 

July 14, 2011 ..................................................................................................... 45 

WITNESSES 

THURSDAY, JULY 14, 2011 

Berner, Hon. Richard, Counselor to the Secretary of the Treasury, U.S. Department of the Treasury .................................................................................... 5 

Krishna, Dilip, Vice President of Financial Services, Teradata Corporation ..... 24 

Liechty, John, Ph.D., Professor of Marketing and Statistics, and Director 

of the Center for the Study of Global Financial Stability, Smeal College 

of Business, The Pennsylvania State University ............................................... 30 

Paller, Alan, Director of Research, The SANS Institute ...................................... 26 

Taleb, Nassim N., Ph.D., Distinguished Professor of Risk Engineering, New 

York University Polytechnic Institute ................................................................ 28 

APPENDIX 

Prepared statements: 

Neugebauer, Hon. Randy ................................................................................. 47 

Berner, Hon. Richard ....................................................................................... 48 

Krishna, Dilip ................................................................................................... 58 

Liechty, John .................................................................................................... 66 

Paller, Alan ....................................................................................................... 74 

Taleb, Nassim N. .............................................................................................. 82 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Written responses to questions submitted to Hon. Richard Berner ............. 102 

Written statement of the United States Government Accountability Office .................................................................................................................. 113 

Written statement of the U.S. Chamber of Commerce .................................. 133 

Capuano, Hon. Michael: 

CBO Amend to H.R. 4173 ................................................................................ 138 

CBO Estimate of H.R. 4173 ............................................................................. 139 

Letter to Hon. Gene Dodaro, Comptroller General, GAO, dated July 13, 

2011 ................................................................................................................ 149 

Letter to Chairman Neugebauer, dated July 13, 2011 .................................. 151 

Liechty, John: 

Letter to Senator Christopher J. Dodd, Chairman, Senate Committee 

on Banking, Housing and Urban Affairs from six Nobel Laureates, 

dated February 11, 2010 .............................................................................. 153 

(1) 

OVERSIGHT OF THE OFFICE OF FINANCIAL 

RESEARCH AND THE FINANCIAL STABILITY 

OVERSIGHT COUNCIL 

Thursday, July 14, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 3:25 p.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

Posey, Hayworth, Renacci, Canseco, Fincher; Capuano, Baca, and 

Carney. 

Ex officio present: Representative Bachus. 

Also present: Representatives Grimm, Hensarling; and Maloney. 

Chairman NEUGEBAUER. Today, we are going to have a hearing 

on the oversight of the Office of Financial Research (OFR), which 

is a newly created entity from the Dodd-Frank Act. It is affiliated 

with the Financial Stability Oversight Council (FSOC). And I am 

sure that our witnesses will articulate a little bit more of that relationship. 

One of the things that I think we have tried to do in this committee is we are trying to figure out what the puzzle is going to 

look like when it is completed. One of the things I have said about 

Dodd-Frank, with nearly 300 different rulemaking opportunities, is 

that we are trying to—as we are issuing all of these rules, and we 

are standing up all of these entities, we are really putting together 

one of those large puzzles, those 250- to 300-piece puzzles. 

I think the bad news is that we don’t know what the puzzle is 

actually going to look like when it is completed. And so one of the 

things that we have tried to do in our committee is to bring some 

sunlight on some of these parts of Dodd-Frank as we are approaching the first anniversary of that entity next week, but also to make 

sure that we begin to try to understand what the puzzle is going 

to look like. 

One of the things that is kind of interesting about OFR is that 

it really kind of looks like the twin of the Consumer Financial Protection Bureau (CFPB). They have a lot of similarities. One is that 

they are overseen by one Director. 

They are tucked into the Federal Reserve (Fed) and have limited 

oversight capacity from Congress. And they have some very broad 

2 

powers. Some of those powers will be discussed as we get into the 

hearing. 

I think one of the things that I find a little bit troubling is, first, 

we have all of these entities that really give one individual a lot 

of power. And second, that there is no real opportunity, in many 

cases, for oversight. And in many cases, also, there is no real appeals process for the actions and the rulings of this individual. 

Obviously, this other issue that is going to be discussed today is 

then what is the cost and the benefit of standing up such an entity. 

So I look forward to the hearing today, and hopefully we will shine 

a little bit of light and learn a little bit more about the OFR. 

With that, I yield to the ranking member of the subcommittee, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Berner, I would like to welcome you to the committee. I 

think that there are some serious questions here. I fully expect you 

will have appropriate answers for them. I know that some of these 

things you may not have any answers for, because we are in the 

new world. 

I am looking forward to hearing from you. I think that there are 

a lot of questions that we will all have. I have no doubt that you 

will have some of the same questions yourself. 

That is the way we are going to go. 

So I am looking forward to your testimony, and thank you for 

coming. 

Chairman NEUGEBAUER. And now, the vice-chairman of the subcommittee, Mr. Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

If there is one thing consistent about the Dodd-Frank legislation, 

it is that what looks good on paper often makes for bad policy and 

practice in reality. 

The mission of the Office of Financial Research makes it sound 

like a rather benign entity. Its mission, to act as the research arm 

for the Financial Stability Oversight Council, is sensible enough. 

However, as this subcommittee has examined the OFR, a couple 

of troubling issues have emerged. 

Any time an agency is given such free reign to collect and store 

information on the private sector, it deserves extra scrutiny. The 

government has a role to play in protecting investors and consumers, but good intentions cannot be the catch-all excuse for government overreach. 

If we expect the private sector to pull us out of this recession, 

then we cannot, at the same time, grind them under the boot of 

the government. We can and must strike a balance between proper 

oversight and excessive regulation. 

Today’s hearing is an important part of striking that balance. 

Protecting the taxpayers means not only examining financial institutions, but examining the examiners. After all, money is coming 

out of the economy to pay the salaries and expenses of these new 

agencies. And the public deserves to know that this is money well 

spent. 

I look forward to the testimony, and I yield back. 

Chairman NEUGEBAUER. Now, the gentlewoman from New York, 

Mrs. Maloney. 

3 

Mrs. MALONEY. Thank you, Chairman Neugebauer and Ranking 

Member Capuano. I am very pleased that you are having this oversight hearing. I believe this is an important part of Dodd-Frank. 

During the hearings that we had during the financial crisis, I 

asked a number of the heads of these organizations, some of whom 

failed, some of whom took TARP money in order to continue to 

exist, what one reform did they think was the most important. 

And they said, collecting data. This was the private sector that 

let us know, in real-time, at the end of the day what the exposures 

were internationally and nationally on financial products. 

They felt that that was the most important reform that we could 

make. So I think it is important. I look forward to the testimony, 

and I thank you for having the hearing. 

Chairman NEUGEBAUER. Thank you. 

And now the vice-chairman of the full committee, the gentleman 

from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. I certainly appreciate you calling this hearing. 

I had the opportunity to serve on the conference committee for 

Dodd-Frank. And of all the provisions in the 2,300-page behemoth 

bill, perhaps none was more overlooked and underappreciated than 

the creation of the so-called Office of Financial Research. 

I offered an amendment during the conference to strike its existence. I am very concerned about its existence. We will now have 

an entire new agency based on the premise that if we have sufficient numbers of unelected, unaccountable bureaucrats, who have 

unlimited information about our personal buying habits, coupled 

with an unlimited budget, that somehow they can prevent any type 

of economic downturn within our society. 

I think the premise is false. Frankly, I think it is dangerous. I 

think that this office represents a hacker’s dream and a civil libertarian’s nightmare. And I do not see a compelling reason for its 

existence. 

Essentially, the Federal Government will be able to track what 

Americans buy, who they buy it from, and when they buy it, with 

their subpoena power. 

Staffing—there are no limits to the number of employees that the 

Director may hire, since the Director has the authority to set salaries without regard to the general schedule, and no limit to how 

much the Director can pay these employees. 

The new agency will not be subjected to the Congressional budget or to the appropriations process, or the Executive Branch oversight or its budget. And the agency can levy whatever assessments 

it deems necessary to fund itself. 

So, Mr. Chairman, if ever there was an agency that was crying 

out for a hearing, it is this one. And I congratulate you for calling 

this hearing. I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. And now the 

other gentleman from Texas, Mr. Canseco. 

Mr. CANSECO. Thank you, Mr. Chairman. 

The 2008 financial crisis was caused in large part by accommodation of misguided government policies and the failure of the financial regulators to step in and use their authority, which was more 

4 

than sufficient. It was more than sufficient to halt the incredible 

risk that was building up within the financial industry. 

And despite this government failure, which led to an economic 

meltdown that we are still trying to climb out of, the authors of 

Dodd-Frank gave government a dramatically increased role in our 

financial markets, an example of which is the Office of Financial 

Research. 

The OFR is, at its core, a testament to the belief that government can make anything right or accomplish any goal if only it is 

given more authority. Throughout history, mankind has proven 

itself incapable time and again of being able to consistently and accurately predict crises, especially when they relate to financial 

markets. And there is no aspect of this agency that would change 

that. 

Aside from OFR’s misguided mission, I have great concern over 

the structure of the agency, which operates with very little oversight and accountability. And I thank the chairman for holding this 

important hearing. 

I yield back. 

Chairman NEUGEBAUER. Thank you. 

Mr. Fincher? 

Mr. FINCHER. Thank you, Mr. Chairman. 

And I thank the witnesses for coming today. 

In today’s technologically advanced world, more and more Americans are making financial transactions over the Internet, entrusting that their personal information is safe and secure. 

As we have heard over recent months though, that is not always 

the case. With the recent cyber attacks on Citigroup, the IMF, and 

even the Senate and the CIA, I am concerned about some of the 

information-collecting duties of the Office of Financial Research 

under the Dodd-Frank Act. 

It seems as though the government is trying to reach even further into our personal lives than ever before in the name of financial security. 

While we are all in favor of taking precautions to prevent another financial meltdown in this country, I am not completely convinced that more government is the answer to this problem, and 

that our personal information will be secure as a result. 

The last thing people need in this country, when unemployment 

is at 9.2 percent, is for their financial information to be at risk. 

So I look forward today to hearing your testimony and explanation of some of these things. Thank you. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Grimm? 

Mr. GRIMM. Thank you, Mr. Chairman. 

First of all, thank you for holding this hearing. 

And also thank you, Mr. Berner, for agreeing to testify today. 

As a former Special Agent of the FBI, I am keenly aware of the 

danger that computer hacking and cyber crimes poses to the U.S. 

financial institutions on a daily basis. As recently as May, a massive cyber attack hit a large U.S. bank where over 360,000 credit 

card numbers were stolen. 

5 

Even with advanced IT departments and very, very qualified 

staff, banks are unable to prevent every attempted breach of their 

computer systems. 

The Office of Financial Research is going to have a digital repository of large amounts of data for a majority of U.S. financial institutions. I am extremely concerned that a repository of this nature 

would be a treasure trove for everyone from an ordinary hacker 

who is seeking to steal and quickly—whatever—to a sophisticated 

terrorist organization. 

So I am very interested in hearing your testimony today. 

And with that, I yield back. Thank you. 

Chairman NEUGEBAUER. I thank the Members. 

Our first panelist is the Honorable Richard Berner, the Counselor to the Secretary of the Treasury. 

Mr. Berner, thank you for being here. I enjoyed your visit the 

other day in our office and I look forward to your testimony. 

You are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE RICHARD BERNER, COUNSELOR TO THE SECRETARY OF THE TREASURY, U.S. DEPARTMENT OF THE TREASURY 

Mr. BERNER. Thank you, Mr. Chairman, Ranking Member Capuano, and members of the subcommittee. Thank you for inviting me 

here today. 

I recently joined the Treasury Department as Counselor to the 

Secretary, as you noted. The Secretary has asked me to help him 

set up the Office of Financial Research. And in that capacity, I am 

pleased to come here today to testify on the mission of the OFR, 

on the progress we have made in launching it, and on the initiatives we have under way to achieve our objectives. 

First, some background. As some of you noted, the financial crisis 

made it clear that the regulation and oversight of the financial system was deficient in many respects. We underestimated the way 

shock spread across the financial system with severe consequences 

to the economy. 

Likewise, the crisis also revealed the deficiencies in data and 

analysis. We lack timely and accurate information needed to monitor threats to financial stability and to develop the tools needed to 

mitigate them. 

The Dodd-Frank Act addresses many of these shortcomings. It 

created the Financial Stability Oversight Council to identify and 

respond to threats to financial stability in the economy and to promote market discipline. It also created the OFR to function as a 

shared provider of data and analysis for the FSOC and its member 

agencies. 

The OFR is working to satisfy its statutory mandates and mission: first, to collect data on behalf of the Council and to provide 

them to the Council and member agencies; second, to standardize 

the types and format of data collected and reported; third, to perform applied and essential long-term research; and finally, to develop tools for risk measurement and monitoring. 

As Dodd-Frank requires, the OFR will leverage existing resources to avoid duplication. 

6 

I am pleased to report that we are making significant progress 

towards these goals. Today, I will first discuss OFR’s work on improving financial data. Next, I will discuss the Office’s research 

strategy. And I will conclude with an update on staffing and on information security. 

The OFR’s promise is to collect and make available more and 

better financial data, while reducing the regulatory reporting burden. That is a tall order, but we believe that three aspects of the 

OFR’s approach will make that promise a reality. 

First, the OFR will fill in information gaps, not duplicate. 

Second, by collaborating with Federal financial regulators, the 

OFR can create economies of scale, lower operating costs, and 

eliminate redundant reporting requirements. 

Finally, and most important, the OFR will promote standards for 

financial data. Standardization will improve the quality and transparency of financial data. For example, standards will provide a 

more transparent picture of firms’ activities, improving market discipline. They will improve the ability of regulators and firms to 

manage counterparty risk, assure the integrity of business practices, and lower processing costs. 

The Legal Entity Identification initiative, or LEI, will standardize data and uniquely identify parties to financial transactions. 

It is moving forward, and quickly, with support from both the industry and from global regulators. The OFR is working with financial regulators around the world to define consistent requirements 

for the LEI. 

The private sector and standards organizations have also contributed. A global coalition of them has developed a recommendation 

for potential solution providers. That work is driving the initiative 

forward. 

The Dodd-Frank Act lays out principles and gives appropriate 

authority to the OFR for data collection. We will be thoughtful in 

interpreting those principles. And we will exercise that authority 

responsively. 

Let me be clear: The OFR will not collect data for collection’s 

sake. The OFR will collaborate with FSOC member agencies to collect data they need for analysis and policy decisions. That collaboration will decide how to fill data gaps sufficiently. 

That work is already under way and staff are cataloging data 

used and collected by financial regulators. 

The OFR will pursue its research agenda, as statute and the 

FSOC require. It will produce and sponsor financial research aimed 

at developing the tools we need to assess threats to financial stability. 

The search for an OFR Director is ongoing. Meanwhile, a high 

level of talent is coming into the OFR. We are hiring professionals 

with deep industry experience in data management, technology 

risk, and risk management to establish the data center. We are 

also making progress in building the OFR’s research team. 

Finally, preserving the security and integrity of OFR’s data is a 

critical objective. The OFR will adopt best-practice information and 

security measures. We are pursuing them in three ways. First, the 

OFR is developing policies on post-employment restrictions to prevent misuse of valuable data. 

7 

Second, the OFR is developing robust governance policies and 

systems of controls, restricting use of data and information systems. 

And third, the OFR is establishing information systems that protect data from unauthorized outside access and limit OFR’s employees’ access to sensitive information content consistent with their responsibilities. 

Mr. Chairman and members of the subcommittee, the DoddFrank Act created the OFR to help the FSOC promote financial 

stability and limit the effects on the Nation’s economy of financial 

crises. Better data and analysis can’t prevent financial shocks, but 

we believe our efforts will help reduce their frequency and magnitude. 

Those efforts will also help us improve the quality and scope of 

financial data, and promote and produce research that helps policymakers identify and address threats to financial stability. 

Thank you for your attention. And I will be happy to answer 

your questions. 

[The prepared statement of Mr. Berner can be found on page 48 

of the appendix.] 

Chairman NEUGEBAUER. Thank you very much. And I appreciate 

again your being here. 

Are there statutory limits on OFR’s ability to—how much you 

can levy these financial institutions once you get to that point? I 

know the first 2 years is funded by the Fed. But after that point, 

the statute calls for the OFR to assess, as you guess, some sums 

if necessary. But as you read the legislation, is there a limit to 

what those assessments could be? 

Mr. BERNER. Mr. Chairman, thanks for your question. That is 

something that I think is of concern to us to make sure that those 

assessments are not a burden on the financial services industry. 

Chairman NEUGEBAUER. But there is not a limit. Is that correct? 

Mr. BERNER. Mr. Chairman, I am not aware that there is a limit 

under the statute. But we plan to exercise our responsibility to 

make sure that principle I just laid out is really stuck to. 

Chairman NEUGEBAUER. So as I understand it by reading the 

legislation, there is no statutory limit on your budget either. In 

other words, you could make that agency as large as someone 

wanted to make it and make whatever assessments are required to 

support that organization. Is that true? 

Mr. BERNER. Mr. Chairman, let me try to answer your question 

this way. The— 

Chairman NEUGEBAUER. No, it is kind of a yes-or-no question. 

Are there statutory limits? 

Mr. BERNER. Mr. Chairman, let me put it to you this way. The 

statute requires that the OFR’s budget, what the OFR will spend 

appear in the budget itself, and that the OFR is subject to oversight, both by you and the Congress, and we plan to report to you 

and the Congress, to make sure you know what we are spending 

and what we are spending it on. 

And in addition, the OFR is subject to oversight by the Government Accountability Office, and by the Treasury’s Inspector General Office. 

8 

Chairman NEUGEBAUER. But I just want to be clear, to get back 

to the original question, I appreciate that additional information, 

but there are no statutory limits on your budget? 

Mr. BERNER. Mr. Chairman, I think the answer is— 

Chairman NEUGEBAUER. Yes or no. Which one do you think it is? 

How do you interpret it? 

Mr. BERNER. I am not aware that there is a statutory limit in 

the statute itself. 

Chairman NEUGEBAUER. And also, I think under the OFR, you 

are allowed to actually start setting out RFPs for ongoing risk financial research. And so basically, are there any limits to the 

amount of research that you could be funding or the amount of outsourcing to the universities that could happen there? Is there any 

limit to the funding of those either? 

Mr. BERNER. Mr. Chairman, let me tell you that we are in the 

process of developing our budget for Fiscal Year 2012 and for Fiscal 

Year 2013, and that budget will restrict the amount that we spend 

in the OFR on outsourcing for research or in providing research 

that is produced internally. 

Chairman NEUGEBAUER. Yes. I appreciate that. And you know 

what, I think the point I am trying to make here is that this OFR 

and agency has very broad powers, very broad authority, with really very few checks and balances. 

Basically, you are going to determine your own budget. It is not 

a budget that has to be approved by Congress. 

You can levy assessments to whatever level is deemed necessary, 

and you can do this ongoing research. 

And the final question too is there is, as I understand, really no 

limit to what information that you could require from a company. 

In other words, basically the laws says that you can ask for the information, and if the company refuses to give it to you, you can actually subpoena that company. Is that your interpretation? 

Mr. BERNER. Mr. Chairman, I think what the OFR is designed 

to do is to, as I mentioned in my testimony, fill in the gaps between 

the data that we already have among the FSOC and its member 

agencies. So our goal is to collect data only where we think it is 

missing, and as we need it to fulfill our mandate of looking for 

threats to financial stability across the financial system. 

We are not interested in duplicating information. We are not interested in collecting data for the sake of collection. And we are not 

interested in creating a big database just to have a big database. 

Chairman NEUGEBAUER. Certainly, that might be your perspective. But obviously, we don’t have an acting Director. It is just another position that the President has not filled. So you are actually 

in the same capacity, I guess, as Ms. Warren, in that you are 

standing up for an entity that actually doesn’t have an acting Director. Is that correct? 

Mr. BERNER. I am acting on behalf of the Secretary to set up the 

OFR. 

Chairman NEUGEBAUER. But you have not been nominated by 

the President for this position? 

Mr. BERNER. I have not been nominated. No. And the President 

must nominate somebody to fill that position. 

9 

Chairman NEUGEBAUER. I see my time is up, so I will yield to 

the ranking member. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Thank you, Mr. Berner. 

Mr. Berner, would you have any objection to working with this 

committee or the rest of the Congress in trying to tighten up any 

of the statutory issues that might come up today? 

Mr. BERNER. Thank you for your question. I think that is a really 

important one, because we want to make sure that the Congress 

and this committee, in particular, understands that we want to be 

accountable to the Congress. We want to be completely transparent 

in what we do. 

We want to provide all the information that you require in order 

to look at our activities. And we want to meet with your staff and 

make sure that they fully understand all the issues that we are 

dealing with, so that we have a full and accurate— 

Mr. CAPUANO. If Congress gets concerned at some future time 

that your assessments are too high, and we decide we want to put 

some kind of statutory limit on it, you would work with us to try 

to accomplish that, if necessary? 

Mr. BERNER. Congressman, we want to make sure that the 

things that we do, including the assessments we levy on the firms 

to fund the OFR after the funding from the Federal Reserve expires are reasonable and are sensible, and only what we need to 

do our job. 

Mr. CAPUANO. Are you the only Federal Government agency that 

has subpoena power? 

Mr. BERNER. I am not aware of the subpoena power of other 

agencies, Congressman, but I know that the OFR does have subpoena powers in certain circumstances. 

Mr. CAPUANO. But you are not the only Federal agency with subpoena power, are you? 

Mr. BERNER. No, that is absolutely correct. 

Mr. CAPUANO. That is what I thought. 

I think that some of the—a couple of my questions have already 

been answered. Some of them were in the introductory comments. 

Data security, I think, is a reasonable commentary to make. 

And again, I will withhold my judgment until we see what you 

get and see what information you have. But, I would hope and presume that has to be on the top of your list, as far as concerns as 

you move forward. Is that a fair statement? 

Mr. BERNER. It is a fair statement, Congressman. It is at the top 

of our list. We want to make sure that any data that we have or, 

for that matter, that the FSOC has is absolutely secure. And we 

are well aware of the threats and risks out there, as some of you 

have discussed, we want to make sure— 

Mr. CAPUANO. Are you working with any private companies that 

have had their data breached to learn from their lessons? 

Mr. BERNER. Absolutely. We are trying to learn from their lessons and from breaches that have occurred, to some extent, in government as well. And somebody mentioned the IMF breach. We 

want to make sure that we can learn from all those experiences, 

and make sure that it doesn’t happen again. 

10 

I want to assure you that at the Treasury Department, we handle a large volume of confidential and sensitive data. We have not 

had any breaches. That is no guarantee, of course— 

Mr. CAPUANO. Right. 

Mr. BERNER. —that couldn’t happen in the future. But we put 

that at the top of our priority list. 

Mr. CAPUANO. And the other issue that was raised to me anyway 

was the fact that some sort of—I guess, I would like to ask the 

question, can you guarantee without question, absolutely, that the 

OFR will be absolutely positively able to see the next economic 

threat? 

Mr. BERNER. No, Congressman, I can’t guarantee that. 

Mr. CAPUANO. Gee, I am shocked. Is there anything in the law 

or anything that you are aware of that will prohibit, prevent or 

hinder any of the other regulatory agencies from doing their job? 

Mr. BERNER. There is nothing in the law—the Dodd-Frank Act, 

as you know, Congressman, was set up to enable us to do our job 

better. And that is the point. 

And I would say that now what we need to do is to fully implement the Act in ways consistent with your goals and objectives, the 

goals and objectives we all share of having a safer and more resilient financial system. 

Mr. CAPUANO. So nothing has happened in the Dodd-Frank Act 

or anything that you are aware of, or anything in your agency, that 

would hinder the Fed or the SEC or the CFTB or any of the other 

agencies that have any oversight or any responsibility for the economy? Nothing would hinder them from possibly being able to see 

the next threat even without your assistance. Is that a fair statement? 

Mr. BERNER. I think it is fair to say, Congressman, that we are 

all trying to work together to make sure that, as best we can, we 

can anticipate those threats. We are not going to be perfect, but anticipate those threats. 

And for the FSOC members, among them the Fed and the other 

agencies you mentioned, to try to put in place regulations that will 

strengthen our financial system and that will limit the impact on 

the economy of any financial shock when it occurs. 

Mr. CAPUANO. The reason I ask is because I think it is a fair 

statement. No one wants to take away anybody else’s ability or 

hinder anyone from seeing the next threat. I would argue that the 

Fed might be able to do it. The OCC might be able to do it. 

Who knows? And the truth is, who cares, as long as somebody 

sees the next economic threat coming along or at least we increase 

the likelihood. 

And I would suggest the OFR doesn’t guarantee anything, but it 

simply increases the likelihood that we might be able to see the 

next economic threat coming. 

And with that, I see my time is running out. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. And I would 

just point out that was a very good question about security. I noticed today that 24,000 Pentagon files were stolen in a cyber 

breach. 

I ask unanimous consent to enter into the record the testimony 

of the U.S. Chamber of Commerce—they were not able to attend. 

11 

Without objection, it is so ordered. 

Now, I will recognize the chairman of the full committee, Mr. 

Bachus. 

Chairman BACHUS. Thank you, Counselor Berner, for your presence here today. I just want to go through a thought process with 

you. 

Obviously, the OCC, the FDIC, the Federal Reserve, the MCUA, 

they all collect data. The State banking regulators collect data. The 

CFTC, the SEC, the State security regulators, if you determine 

that you need data, certain information, will you first go to those 

agencies and see if they have that information? 

Mr. BERNER. Thank you, Mr. Chairman. That is a great question 

because I think it speaks to the philosophy that we have about 

data collection. 

First, we want to take stock of the information we have across 

all of the members of the FSOC, which include the agencies that 

you just mentioned. 

We are not in the business of duplicating data collection. We 

want to make sure that we make the best use of the data that we 

have and to make that we can share in a way that is responsible 

among the member agencies. Only then, will we go and look to fill 

the gaps in the data that we think are missing. 

Chairman BACHUS. Okay. 

Mr. BERNER. One of the things in the financial crisis that was 

really important is the way we missed interconnectedness or the 

way that various parts of the financial system reacted and the 

interplay among those parts in the financial system. That is where 

we are going to try to look for the missing gaps and fill in those 

gaps first. 

Chairman BACHUS. All right. So a sort of a precondition will be 

that information didn’t already exist— 

Mr. BERNER. That is correct. 

Chairman BACHUS. —or it is not collected by another agency. 

Mr. BERNER. Yes, sir. 

Chairman BACHUS. The relationship you have with FSOC, are 

they going to gather information independently or are you the 

agency which gathers information if they request, or how do you 

see that relationship? 

Mr. BERNER. Mr. Chairman, that is a very good question. I think 

the answer is, we don’t quite know yet. It is going to be dependent 

on the information and questions. 

So, for example, in exercising their supervisory responsibilities, 

I have no doubt that the supervisory agencies will continue to collect information from the relevant institutions. And for markets, 

there are new data being collected for markets in a variety of ways 

that we all want to take advantage of. 

And who actually collects the data will be a decision that we will 

make jointly, to make sure that we do it in the best way and the 

most efficient way, and in the most secure way possible, while 

minimizing the cost to the taxpayer. 

Chairman BACHUS. That Council is actually made up of different 

agencies? 

Mr. BERNER. Right. 

12 

Chairman BACHUS. But does that agency itself independently 

have the power to collect data? 

Mr. BERNER. You mean the FSOC— 

Chairman BACHUS. FSOC. 

Mr. BERNER. —Council itself? Or the Council itself, I think derives its power from the statute. The council itself has decisionmaking powers and potentially can collect data. 

But the OFR was set up specifically to assist the FSOC in collecting data and performing research, so that they could turn their 

attention to the important decisions that they have to make across 

the financial system. 

Chairman BACHUS. I see. Let us just suppose, which will come 

one day, you look across the agencies, you look elsewhere and you 

think that data is not available. And let us say FSOC says to you, 

we would like to have this data. Will there be any rulemaking process where you will actually say, we propose to collect this data in 

this form? 

And then those companies which are sources of that information 

will be able to come in and have a 30-day or 60-day or 90-day period to say, we think it ought to be limited to that. Would there 

be any of that? 

Mr. BERNER. Great question, Mr. Chairman. There will be a lot 

of that, in fact. And one good example of that is the way that we 

put out a proposed rulemaking on the Legal Entity Identification 

system. 

We want to make sure that what we do is consistent and actually 

helps industry in doing their job. The interesting thing that we 

found is that there is very strong support for data standardization 

in the industry, precisely because it is going to help them collect 

their own data for their own management purposes. 

They can use those same data to report to the financial regulators. So it actually improves the transparency and quality of the 

data and reduces its cost. 

Chairman BACHUS. You will receive an appropriation, is that correct? Or do you raise all your own funds? I know you have a $74 

million— 

Mr. BERNER. Mr. Chairman, as the chairman of the subcommittee pointed out, for the first 2 years, we are funded by the 

Federal Reserve. Subsequent to that, we will devise a process 

whereby our funding will come from the most important institutions in the financial system. 

Chairman BACHUS. Yes, that was really what I was driving at. 

I don’t know whether a community bank is going to be saddled 

with it. You would probably want the largest, most systematically 

important institutions to bear the burden. 

Mr. BERNER. That is correct. 

Chairman BACHUS. Thank you very much. 

Mr. BERNER. Thank you. 

Chairman NEUGEBAUER. I thank the chairman. 

And now, the gentleman from Delaware, Mr. Carney. 

Mr. CARNEY. Thank you, Mr. Chairman. Thank you for holding 

this hearing today. 

13 

Because I am a freshman, I wasn’t around when this legislation, 

Dodd-Frank, was passed. So I don’t have a full understanding of 

how it was anticipated this agency would work. 

Could you explain that a little bit for me? You are a research entity that is part of the FSOC? The FSOC is comprised of other 

agencies that were mentioned. I assume they have research departments themselves. 

How do you see yourselves working with those other research departments in the other agencies that are part of the FSOC? 

Mr. BERNER. That is an excellent question, Congressman. The 

answer is that we are collaborating very closely with other FSOC 

member agencies and with the research staffs. And that— 

Mr. CARNEY. Do they all have research— 

Mr. BERNER. Many of them do. Not all of them do. And their research staffs and the focus of their research is obviously dependent 

on the responsibilities that they have as agencies. So the Federal 

Reserve is focused on things related to monetary policy, but has recently set up their own Office of Financial Stability. And it sounds 

like there is some overlap. 

Mr. CARNEY. Yes, right. 

Mr. BERNER. They have a small staff. And they will tell you that 

they have a small staff. They are working closely with us to make 

sure that in the work we do, we communicate with each other. And 

there is certainly some overlap because there are always many 

opinions about— 

Mr. CARNEY. So what is your focus is going to be opposite the 

rest? Systemic kinds of risks or— 

Mr. BERNER. Our focus, Congressman, is to look at risks across 

the financial— 

Mr. CARNEY. Across— 

Mr. BERNER. Right. 

Mr. CARNEY. So they are looking in one particular stove pipe and 

you are going to try— 

Mr. BERNER. They may be. So the SEC or the CFTC, for example, might be looking at specific risks related to their responsibilities. We would be working with them to look at how those risks 

or developments really affect what is going on across the financial— 

Mr. CARNEY. And you mentioned in answers to other members’ 

questions that the information that you would be seeking would be 

to fill in gaps where information did not exist. Could you give me 

an idea what those gaps might look like or what that information 

might look like? 

Mr. BERNER. Sure. 

Mr. CARNEY. Because all these other agencies have a lot of information themselves, I assume, with the same kind of concerns that 

have been raised by Members today? 

Mr. BERNER. They absolutely do. And it is an excellent question. 

So it is worth repeating, because I think the answer is, we don’t 

know where all the gaps exist. If we did, then we would have a 

much better idea of the kinds of data that we need to collect. 

In an effort to find out where the gaps are, we are working with 

the other FSOC member agencies to take stock of the data that are 

out there among all those members. That— 

14 

Mr. CARNEY. So is this data that you would pull down from 

banks or financial institutions? There is the concern, and I have 

the same concern, about shielding personal information from a 

hacker. We heard— 

Mr. BERNER. Right. 

Mr. CARNEY. —in some of the opening statements the concern 

about a hacker’s paradise. 

Mr. BERNER. The OFR is not going to be— 

Mr. CARNEY. Those are concerns that these existing agencies 

have right now. 

Mr. BERNER. Sure. 

Mr. CARNEY. Right. 

Mr. BERNER. The OFR is not going to be collecting personal information. That is not our focus. Our focus is to look at data that we 

collect from financial institutions about their transactions, their positions, their exposures, in order to try to assess risk across the financial system. We are collecting data from markets, from the new 

swap data repositories, for example. 

Mr. CARNEY. So it is not consumer personal information; it is 

more business information. 

Mr. BERNER. Financial transactions. 

Mr. CARNEY. Right. 

Mr. BERNER. Exactly. 

Mr. CARNEY. So when you talk about the protection of that information, we are really talking about institutional concerns more so 

than individual consumer concerns? 

Mr. BERNER. Primarily, that is the concern. You asked for an example of the kinds of data we might collect. The exposure of one 

financial institution to another is something that supervisors currently do collect, but it is incomplete. 

We and the other agencies responsible for looking at those issues 

are looking at ways we want to make that information more complete. That is an example of the gaps that exist in information 

today. 

Mr. CARNEY. We have had representatives from some of the regulators and those agencies come here before the full committee to 

talk about some of the tensions among those agencies. Do you anticipate some turf problems with the offices of research in those 

agencies as well? Or do you see less of a problem there? 

Mr. BERNER. I must say, Congressman, it is a very good question. But what I have learned in the short time that I have been 

at the Treasury is that people are very willing to cooperate. And 

what is really important is that we build a level of trust among all 

the people involved, so that they don’t perceive people as intruding 

on their jobs or their responsibilities. Rather, that we all have a 

lot of work to do and we are just collaborating to solve problems. 

And that extends both to data collection and to research. 

Mr. CARNEY. Thank you. I see my time has expired. Thanks very 

much. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Grimm? 

Mr. GRIMM. Thank you, Mr. Chairman. I will make my questions 

brief. 

15 

First of all, as someone who investigated a myriad of crimes, specifically financial crimes for years, I can tell you that when you are 

going after something that is unknown, like gaps that are uncertain, it is like finding a needle in the haystack. So I think you have 

more than your work cut out there. And I am not so sure that is 

the best structure that I would recommend. 

But I am more concerned about financial data, the positions of 

major institutions, whether they are long, short, what they are 

holding, I think that is extremely valuable information, not only 

from the basic wrongdoer domestically, but throughout the world. 

That would be information that could, if in the wrong hands, cripple our markets and certainly hurt our country. A few years back, the FBI, while I was an agent, spent over $170 

million on an IT project, which was called Virtual Case File (VCF). 

And it was to upgrade our system, basically track criminal cases, 

and so on. It wasn’t very sophisticated. But after all that money 

spent and years of time, it was never implemented. They were 

never able to get it to work. 

Before I left the Bureau, they started the second project. It was called Sentinel. And Sentinel was over $400 million spent and 

years of time. And as far as I know, that still hasn’t been implemented. You are talking well over 10 years, $570 million-plus spent 

and the FBI hasn’t been able to get it right to date, to get a system, 

an IT system that is fully protected to the level that they feel comfortable. 

So, I guess, now, the GAO has estimated that by this time next year, $108 million will have been spent implementing the database 

at the OFR. And it looks to me like these IT projects, whether it 

is VCF or Sentinel, and now OFR, they don’t have a good track 

record. 

I just would like you to explain why you think OFR is going to 

be different? Why do you think they can be successful where the 

FBI hasn’t been? 

Mr. BERNER. Congressman, it is a great question, because, like 

you, I am most concerned that we safeguard not just our data but 

also taxpayers’ funds. And so that is really important. 

I think what is different about this, if there is something that is 

different, is that we have the collaboration and cooperation of the 

industry. Because the industry perceives what we are trying to do 

as something that will actually be a benefit for them, both in terms 

of the way they report data to the regulators, which is required 

under statute and under a regulation, and which is something that 

they want to continue to do. 

And they want to collect the same data. 

Mr. GRIMM. If I could though, I think you are making a different 

point. I am speaking more of the IT itself. How do you protect it? 

Assuming everyone is cooperating and they give you the data, and 

you have this database with some very important information. How 

do you—they are going to be spending over $100 million to create 

a system that keeps it safe, so that people can’t hack in, that there 

are safeguards so that those working there can’t take information 

out. 

All of that is part of it. But my experience in the government, 

which is limited to the FBI, but I think it is a good example, is that 

16 

after $500 million spent and over 10 years, they have yet to implement a system that works. 

What makes the OFR different, regardless of how cooperative everyone in the world is being? Everyone has been cooperating with 

the FBI, too. 

Mr. BERNER. Congressman, it is certainly a valid concern. And 

what I was trying to say before was the industry has a big stake 

in making sure that the data they provide to us remain secure as 

well. And they have a lot at stake in making that happen. 

And so we are working together with the industry to make sure 

that in the transmission process, in the collection process, and the 

storage process itself, the data will be secure and their confidentiality is protected. 

Mr. GRIMM. Okay. At this time, I will yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentlewoman from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman and Mr. Ranking 

Member. 

During Dodd-Frank, the goal was outlined in this legislation to 

determine what data gets collected, how it is analyzed and stored, 

and how it is ultimately presented to regulators. And you mentioned you were working on the data element. Could you get to us 

in writing, because it is highly technical and would take a long 

time, what data elements you believe you are going to need for this 

project? I know it is a work in progress, but where you stand and 

where are these elements. Are they already at the Federal Reserve 

or the FDIC or whatever? 

And then another item you mentioned is who collects the data. 

I recall that during Dodd-Frank, we specifically placed restrictions 

on the industry from collecting and storing the data on itself and 

then analyzing its own data and the market trends. 

Is that still the position of Treasury in the Oversight Council, 

that there be an arms’ length relationship with firms or entities 

that should be preserved, in other words, maintaining strict requirements to prevent either real or perceived conflicts of interest? 

Mr. BERNER. Congresswoman, you have two involved questions. 

And you, I think, appropriately ask me to provide you in writing 

with the details on the data elements that we are going to be collecting. And I would love to do that. 

We will get you all the information you need on the implementation, what I called the LEI before, and how that will help us collect 

better data at lower cost. 

As far as the conflict-of-interest question, we want to make sure 

that the OFR and the data that it collects fulfills its mandate. And 

part of that mandate is to collaborate fully with other FSOC member agencies. So I think that kind of collaboration is going to be essential to our success. 

Mrs. MALONEY. Where do you plan on storing this data? Do you 

plan to put it in existing Federal data centers, like in the IRS or 

at the Federal Reserve? Are you planning to have a new, separate 

data storage facility? 

Mr. BERNER. Congresswoman, it is a great question. And the answer is, we don’t fully know yet. We are in the process of setting 

up our data centers using existing facilities. 

17 

As you I am sure know, some facilities have been decommissioned. We are taking advantage of those facilities even before we 

collect any data. And we are using that experience to make sure 

that we test and put through their paces the policies and the protocols that we need to safeguard data even before we collect any sensitive data. 

We will use existing facilities and collaborate with other agencies, to the extent that is possible, to make sure that we are not 

duplicating efforts elsewhere among the members of the FSOC. 

Mrs. MALONEY. And I noticed we have two leaders in academia 

on the next panel. What role has the academic community played 

up to this point in determining how the OFR would be created and 

how data would be collected and interpreted? 

Do you have any contracts with institutions? If so, which institutions of higher learning? What role is academia playing in the determination of how this is done? 

Mr. BERNER. That is a very important question, Congresswoman. 

I am glad you asked it. 

Experts from academia and from the industry and from elsewhere in the government are all playing important roles in helping 

providing guidance for us in the way that we go about fulfilling our 

mission. 

Specifically, we have contracts now with two academics, one from 

MIT, and one from the University of Florida. Those contracts are 

in the public domain. They are out there to help us develop the systemic risk monitoring tools, to monitor threats to financial stability. 

That is one project we are working on. And we can get full information on those contracts to you and what we are working on, to 

make sure that we fulfill our mandate. 

Mrs. MALONEY. Are you contracting with the private sector in 

any way to help implement this or is this done in-house by Treasury? 

Mr. BERNER. Congresswoman, we are taking a look at all the 

avenues available to us in fulfilling our mandate. So if we can find 

private solutions, we are looking for them. 

When we talk about the LEI, for example, that is a public/private 

initiative to make sure that the industry provides input, that they 

provide comment, that they can have a role in guiding the way that 

we collect data and the way that we standardize data, to make 

sure that they were doing it in a way that they find most useful. 

Mrs. MALONEY. And since we are now in a global market, do you 

see this just for American institutions or do you see it as gathering 

information, so at the close of day, you will know the exposure 

globally and the threat globally to financial stability? 

Mr. BERNER. I am glad you asked that question too, Congresswoman, because we do live in global markets and we are dealing 

with global institutions. And those threats, as I think recent events 

illustrate, can arise anywhere in the world. 

So we are collaborating with global regulators. And we are looking to collaborate with them both in terms of research and in collecting data, again so we don’t duplicate efforts in which they are 

already engaged, but so that we learn what they are doing and so 

that we can share data. 

18 

The LEI is, again, a good example of that global collaboration. 

And it is one that is extremely important for its success. 

Mrs. MALONEY. During our many hearings, I spoke to the heads 

of firms that have failed, and some that almost failed. And uniformly, when asked, what do you think would be the single most 

important thing to prevent this from happening in the future, they 

said a centralized database that could see exposure, risk, leverage, 

in a place where you could follow it. 

It is a huge challenge, but it could have great benefits. I wish 

you well. Thank you. 

Mr. BERNER. Thank you. 

Chairman NEUGEBAUER. I thank the gentlewoman and now the 

gentleman, Mr. Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Counselor Berner, thank you for your time today. 

The Office of Financial Research will be requesting sensitive and 

confidential data from financial companies. And the security of the 

data, of course, will have to be considered even before OFR makes 

its first request. So can you tell the committee what processes are 

currently in place, or in place as of today, to govern who will have 

access to that information? 

Mr. BERNER. Congressman, it is a terrific question, because it is 

central to the way that we want to go about collecting data. 

If you think about the fact that the OFR is going to be an agency 

that helps the FSOC member agencies in fulfilling their mandate, 

each of them, to the extent they have supervisory responsibilities, 

already collect data from their respective institutions. 

And so we are not going to take away what they are doing. We 

are going to complement what they do. And the way we are going 

to complement that is to make sure that we have protocols and procedures in place so that people will have access to data appropriate 

with their responsibilities and with what they need to know. 

Those protocols and policies are in the process of development. 

We want to make sure we do that in a way that is consistent with 

safeguarding the data and yet, making sure that we can all look 

across the financial system to assess where risks might be arising 

to financial stability. 

Mr. FITZPATRICK. So the procedures and processes are not currently in place. They are being written at present? 

Mr. BERNER. The procedures and processes are being developed 

in collaboration with other FSOC member agencies. 

Mr. FITZPATRICK. Will there be penalties for unauthorized disclosure of any of that confidential information? The OFR is going to 

have powers, including subpoena powers and other requesting powers, to compel the production of these documents. Will there be 

penalties in place for the unauthorized disclosure of those documents? 

Mr. BERNER. Congressman, it is my understanding that there already are penalties in place for disclosing, in an unauthorized way, 

any sensitive information. And so, that will become—if events like 

that do occur, and we certainly are going to make sure and try our 

best to prevent that, but if they do occur, then that will be a matter 

for the authorities to deal with. 

19 

Mr. FITZPATRICK. Can you guarantee the confidentiality of the information? 

Mr. BERNER. I am here to tell you today, Congressman, that we 

are going to make data security and guaranteeing or assuring confidentiality our top priority. And I want to make sure that we do 

everything we can to communicate to you and to your staff all of 

the policies and procedures we are putting in place, so that you can 

understand what we are doing, and make sure that we are doing 

it in the right way. 

Mr. FITZPATRICK. So the procedures, they are currently being 

written within the OFR. Are there plans by the office to publish for 

public comment, for instance, the criterion for the information request? 

Mr. BERNER. If there are data requests in the way we are collecting data, just as we have done with the LEI, then we will put 

those things out for comment by the public. 

Mr. FITZPATRICK. Sir, you acknowledged in the testimony here 

today that there is no limit on data collection except in your words, 

you said, ‘‘excluding the collection of data for data’s sake.’’ There 

is no limit on assessments, no limit on funding for research. 

The only limit you articulated so far today was the generic 

pledge to be reasonable. It would be more comforting to hear a specific strategy plan with specific goals and metrics. So when might 

we see that plan? 

Mr. BERNER. It is a good question, Congressman. We are in the 

process of developing that. And we want to make sure that you 

have every opportunity to review it with us. 

We are in the process of reviewing that for Fiscal Year 2012. And 

we want to make sure that we go over that with you or your staff 

so you have an opportunity to discuss it with us. 

Mr. FITZPATRICK. So for Fiscal Year 2012, perhaps by the fall of 

this year, we will see the specific plan of the Office? 

Mr. BERNER. Perhaps by then. That seems like a reasonable 

date. 

Mr. FITZPATRICK. Okay. Nothing further. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Posey. 

Oops. Not here, all right. 

Mr. Renacci? 

Mr. RENACCI. Thank you, Mr. Chairman, and thank you, Counselor Berner, for being here. 

I also, as my friend, Mr. Carney said, was not here last year 

when this new Office of Financial Research was put together. But 

let us make some assumptions. 

First, let us assume that gathering all this data is good. But my 

next assumption would be, let us put you on this side of the table 

instead of that side of the table. If you needed to gather all this 

information, and you knew that there were a number of other 

agencies out there that had all this information, wouldn’t it be easier to pick one of the other agencies? 

Because you are telling us—one of the things you have said is 

you are going to have to go out and talk to other agencies. 

Wouldn’t it be easier to have one of the other agencies just have 

this as one of their missions and have one of those other agencies 

20 

do it, than set up a whole other agency with unlimited oversight, 

unlimited budget, and unlimited reach? 

Mr. BERNER. Congressman, the statute set it up to set up the 

OFR— 

Mr. RENACCI. No, no, I understand what the statute did. I am 

asking you a question, I am putting you on my side of the table 

now. 

In a time when we are spending too much money, we have overriding debt, let us say we need to gather this information. Wouldn’t 

it have been better to put this in the hands of one of the other 

agencies that are already there? 

Mr. BERNER. Congressman, I am not sure I can speak to that hypothetical. All I can say is that didn’t happen when those agencies 

were presumably all working together. And I think that is one of 

the reasons that the framers set up the OFR to be an agency that 

would collaborate with the other FSOC member agencies to make 

sure that the data were collected and shared in an appropriate 

way, not to duplicate efforts, but to coordinate and collaborate in 

a way that hadn’t been done before. 

Mr. RENACCI. Again, I understand why you answered the way 

you did. But I think the simple answer is, in a time where we don’t 

have the money and we want to get this information, it is easier 

to take the overhead from another organization and just make that 

their mission, instead of putting burdensome assessments. 

One of the things you testified to earlier is you want to see assessments that are not burdensome. My concern with that is any 

assessment to any financial institution becomes a burden, because 

it takes jobs away from those financial institutions. 

So, again, if we are already assessing it with other agencies, and 

now you are going to add another assessment through this agency, 

it becomes burdensome, no matter what it is. So what we have to 

do here in the Federal Government, even if we need data like we 

are talking about—that is what I said. 

I am not even saying we don’t need the data. I am saying, let 

us make the assumption we need it. We need to make sure we can 

do it in a more efficient way than setting up another entity. 

You also said you want to collect data only where you think other 

agencies are missing that information. So, again, you are going to 

have to go through all these other agencies. Wouldn’t it be simpler 

for the other agencies just to get the information that they need, 

that they are missing again, without setting up? 

I don’t expect you to answer that, because I think we are going 

to go back to the statutory requirements that you are under. 

The ranking member said that if their assessments are too high, 

you would be willing to work with Congress. 

I am almost to the point where I would like for your organization 

to start working with Congress now to realize that maybe we don’t 

need some of these extra burdensome entities and assessments, because this is the time to do it, not once the horse is out of the gate. 

One of the problems with the government that I have learned is 

once there, it is very hard to pull it back. 

But you said something else to the ranking member. You said 

that there is nothing that this agency will do to hinder the other 

agencies or guarantee that you will find anything. 

21 

That tells me—and I don’t want to put words in your mouth, and 

I don’t want to restate what you were thinking when you said that. 

But it says that this agency is just another piece of government 

that doesn’t hinder the other agencies, but really doesn’t guarantee 

it is going to get anything done either. 

Is that what your—where were you at when you said that? 

Mr. BERNER. Congressman, I was simply trying to make the 

point, when the ranking member asked his question, that nothing 

that we are going to do is going to hinder what the other agencies 

do. On the contrary, what we are going to do is complement their 

efforts, so that working with them, we will come out with a better 

outcome. 

Mr. RENACCI. I know I am running out out of time. So I will yield 

back the remainder of my time. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Texas, Mr. Canseco. 

Mr. CANSECO. Thank you, Mr. Chairman. 

Mr. Berner, please give me a brief answer, because we are sort 

of limited in time on these things. Do you view the OFR as an essential tool in helping the FSOC carry out its duties to identify and 

reduce systemic risk? 

Mr. BERNER. Yes, Congressman, I do. 

Mr. CANSECO. Thank you. So you believe that for the FSOC to 

function properly, it needs the OFR data to support it? 

Mr. BERNER. Yes, it needs it. From whatever source, it needs 

more data than it currently has. 

Mr. CANSECO. FSOC has already been engaged in proposed rulemaking regulations regarding systemically important financial institutions. Is that correct? 

Mr. BERNER. That is correct. 

Mr. CANSECO. Okay. So are you of the opinion then that the proposed rules coming out of the FSOC could be flawed because they 

lack the proper input from the OFR? 

Mr. BERNER. Congressman, the OFR is working closely with the 

FSOC member agencies to try to provide them with the information, so that they can make decisions intelligently. And— 

Mr. CANSECO. Is the OFR up and running at this time? Is it 

functioning the way it is supposed to be? Is there an officer already 

in charge? 

Mr. BERNER. As you point out, Congressman, there is no Director. But the OFR is up and running. The OFR is providing information to the FSOC and collaborating with FSOC member agencies 

to make sure that we make the best use of the data that we already have. 

We have come a long way in assessing what I said earlier, namely trying to understand which data we have available. And those 

data are being used by FSOC member agencies already. 

Mr. CANSECO. What criteria is the OFR going to use in deciding 

the information it truly needs from what companies and from what 

companies it intends to get it? 

Mr. BERNER. Congressman, it is a great question, because the 

answer is that we are going to try to look across the financial system to find out where the threats to it exist. And so, the presumpVerDate Nov 24 2008 13:10 Mar 30, 2012 Jkt 067943 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\67943.TXT TERRIE
22 

tion is that it is largely going to arise from the most important institutions in the financial system, from those institutions that are 

most connected, and from those institutions which satisfy the criteria in the statute for being systemically important. 

And so, those are the institutions where we will look first. 

But I want to emphasize that this crisis was not just about institutions. The financial crisis that we have just been through also reflected what was going on in markets. So we can’t just collect data 

from institutions. We have to collect data from markets and market 

transactions. And that is a very important part of the OFR’s functioning. 

And it will be also a very important part of what the FSOC does 

in trying to assess systemic risk or trying to assess threats to financial stability. 

Mr. CANSECO. Are you planning on publishing these criteria for 

public comment, lifting at least some of the opaqueness that currently surrounds the OFR? 

Mr. BERNER. Congressman, it is an excellent question, because 

we are committed to being as open and transparent as we possibly 

can be. We don’t want to put those things out prematurely, before 

we thoroughly discuss and vet them. 

But when we have a pretty good idea that we are doing things 

in a way that we are satisfied with, we are going to put them out 

and make sure that people understand them. 

Mr. CANSECO. Do you know if the OFR is planning on conducting 

robust cost-benefit analysis on its proposed methods for collecting 

this data? 

Mr. BERNER. Congressman, we want to make sure, as I indicated 

earlier, that the way we collect the data is cost-efficient, that it actually reduces the reporting burden for industry, and that it provides benefits to both industry and regulators, and to make sure 

that cost-benefit calculation is very favorable. 

Mr. CANSECO. Mr. Berner, I understand that in the statute there 

is a provision that prohibits the Director of the OFR or an employee who had access to the data center from working in the financial industry for 1 year after they leave the agency. Is that correct? 

Mr. BERNER. Yes, that is correct. 

Mr. CANSECO. And to your knowledge, does this prohibition apply 

to academics involved in projects funded by the OFR or part-time 

workers or contractors who may not be considered employees as defined by the statute? 

Mr. BERNER. My understanding, Congressman, is that anyone 

who has access to sensitive data will be prohibited from being employed to use those data for commercial advantage. And so what 

is very important here is what we were talking about earlier, 

namely data security. Anybody who is a contractor to the OFR 

doesn’t get access to all the data that the OFR or the FSOC member agencies will have. 

Mr. CANSECO. So, therefore, anyone who is exposed to that data 

or who has any kind of access to that data? 

Mr. BERNER. The principle should be that anyone who is exposed 

to sensitive data, and we are going to make sure that the exposure 

23 

is consistent with their responsibilities, will have suitable restrictions on them, yes. 

Mr. CANSECO. Do you think that 1 year is a suitable timeframe 

or should it be longer or shorter? 

Mr. BERNER. One year seems to be a reasonable timeframe, given 

that most data, after a years’ time, become less and less relevant 

for any commercial benefit. Obviously, we are going to have to take 

a look at that over time. But to us and given our experience, my 

experience in the financial services industry over 3 decades, that 

seems like a reasonable timeframe. 

Mr. CANSECO. Thank you, Mr. Berner. 

Chairman NEUGEBAUER. I thank the gentleman. 

I wrote to GAO, and I asked them to provide testimony for the 

record on the cost of Dodd-Frank implementation. I would like to 

ask that, without objection, it be entered into the record. 

Mr. CAPUANO. Mr. Chairman? 

Chairman NEUGEBAUER. Yes? 

Mr. CAPUANO. Mr. Chairman, if I may, I have no objection with 

that report, but that report, as you know I have expressed, is a little limited. It is one one-sided. 

I would like to also enter into the record a letter that I have sent 

to the GAO and some other documents, showing that there is a little bit broader aspect that we would like to push through. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. And now the gentleman from Frog 

Jump, Tennessee, Mr. Fincher. 

Mr. FINCHER. Thank you, Mr. Chairman. 

I kind of want to echo the comments made by Mr. Renacci and 

read something from the summary. 

‘‘Beginning in July of 2012, the OFR is funded by assessments 

on large bank holding companies. The OFR’s budget is not subject 

to Congressional appropriations and the OFR can levy assessments 

it deems necessary to fund itself.’’ 

A couple of questions, is there a cap on salaries within the OFR 

on how much people can make? 

Mr. BERNER. It is a good question, Congressman. There is a set 

of salary guidelines. And those are consistent with the pay scale of 

other Federal financial regulators. So, if you will, there is a cap on 

salary. 

Mr. FINCHER. What is that cap? 

Mr. BERNER. My understanding is that cap—I don’t have the 

numbers at my fingertips, but we will be happy to get you those 

data. 

Mr. FINCHER. Thank you. 

And what is the definition of ‘‘large bank?’’ The chairman of the 

full committee, a few minutes ago, said something to the effect of 

the community banks not having to shoulder funding the OFR’s 

budget. What is the definition of ‘‘large bank?’’ Can you explain 

that? 

Mr. BERNER. Sure. The statute requires that any bank holding company with assets more than $50 billion will be subject to supervision by the Federal Reserve. But I want to point out, Congressman, and this is very important, I am glad you raised the question. 

24 

The assessments and the determination of who is supposed to be 

eligible for supervision by the Fed will not be limited to bank holding companies. There are a certain number of non-bank financial 

services companies who will also be subject to that determination. 

and that determination has yet to be made. 

Mr. FINCHER. Okay. The Dodd-Frank statute says that the OFR 

shall announce regulations in the section, including the type and 

scope of the data to be collected. When will you make known these 

rules? 

Mr. BERNER. Congressman, it is an excellent question. We are in 

the process of developing those protocols and procedures. And we 

will make them known as expeditiously and in as timely a fashion 

as we possibly can. 

Mr. FINCHER. It really just seems to me, coming from the private 

sector being a freshman, a business person, that we keep looking 

to Washington and more government for the answers. And we have 

multiple agencies to, again, deal with data collection. 

And in a place and time in this country’s history that financially 

we are in such a bad position, to keep spending the amount of 

money that it seems that we are going to spend in the OFR—I 

know the intent is for the right reason, that we make sure that we 

are protected in the case of problems down the road. 

But I hope we are doing the right thing, spending the American 

taxpayers’ money. It seems like in an open-ended project. So I am 

very frustrated. 

I understand, again, the intent, but Washington, too many times, 

is not the answer. It is the problem. And the private sector, they 

don’t want to have much faith in us. And I just hope we are doing 

the right thing. 

So with that, I appreciate your being here and I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. And Mr. Berner, 

we thank you for your testimony. We appreciate your time. 

With that, we will dismiss this panel and receive the second 

panel. Thank you for coming. 

Mr. BERNER. Thank you, Mr. Chairman. Thanks for having me. 

And I look forward to further hearings and to further communication with you and your staff. 

Chairman NEUGEBAUER. Thank you. 

I will just remind the second panel that your full written testimony will be made a part of the record. We will recognize each one 

of you for 5 minutes. 

The first person we will recognize is Mr. Dilip Krishna. And you 

are recognized for 5 minutes. 

STATEMENT OF DILIP KRISHNA, VICE PRESIDENT OF 

FINANCIAL SERVICES, TERADATA CORPORATION 

Mr. KRISHNA. Thank you, Mr. Chairman. 

Chairman Neugebauer and members of the subcommittee, my 

name is Dilip Krishna, and I am here today representing Teradata 

Corporation. Thank you for the invitation to offer testimony today. 

Teradata is among the world’s largest companies focused solely 

on analytics and data warehousing. Our technology provides businesses and governments with the ability to leverage detail-level 

25 

data, enabling them to quickly recognize emerging trends and take 

appropriate corrective action. 

The recent economic crisis has taught us that our financial institutions are truly a national asset. Responsibly managed financial 

institutions, of which there are many, are the bulwark of our economic system. At the same time, the irresponsible behavior of some 

in the industry has cost the American taxpayer dearly. 

Effective oversight of the financial system is critical to our Nation’s success. At the same time, we want smaller, more efficient 

government that continues to allow the same high level of innovation and leadership that has propelled the prosperity of our market-based system for over 2 centuries. Teradata’s experience over 

30 years has shown us that technology is the catalyst that can create smaller but smarter governments generating immensely valuable results while lowering costs at the same time. 

Financial oversight critically depends on a deep understanding of 

the situation at all times. Known risks must be monitored and unknown risks is covered. 

An efficient, integrated store of information is critical to both 

functions. These competing needs lead to conflicting demands on 

the information store, industrial spent robustness versus lab environment flexibility. What is exciting about today’s information 

technology capabilities is that both of these needs can be satisfied 

by the same analytic system. 

The role of financial oversight is critical to making our systems 

safer and robust data and analytic capability is an important first 

step. 

The Office of Financial Research mandate is broad and vague. 

Our experiences have shown, however, that a data warehouse for 

financial risk analytics is critical to proper oversight. I offer the following comments in regard to successfully developing a data warehouse based on the practices that Teradata has learned from working with the world’s largest corporations. 

Most large corporations have developed such repositories for 

their own business purposes. The common principle employed by 

our successful efforts is to think big but start small. Starting with 

a small, well-scoped initial phase, you can lay the foundation for 

an ambitious long-term program. The data warehouse can start by 

creating a standardized reference data environment, which would 

be useful not only to regulators but to the financial community as 

well. 

Risk analysis in the financial sector requires the use of details, 

position, and transaction data on a periodic basis, and the data 

warehouse can also serve this need by integrating the information 

into the repository. 

The key principle here is to avoid making the perfect the enemy 

of the good. While there are many barriers to perfectly standardizing data, none of these barriers are formidable enough to prevent 

the data warehouse from using what is already available for gross 

systemic risk computations. In fact, the very act of periodically refreshing and integrating this data will break in the system and improve its quality over time. 

A data repository such as this would contain much sensitive data 

with the implications not only to financial institutions but potenVerDate Nov 24 2008 13:10 Mar 30, 2012 Jkt 067943 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\67943.TXT TERRIE
26 

tially to private citizens as well. Therefore, data security technology must be taken very seriously in the effort. The good news 

is that the technology required is available today, and the innovations and technology are rapidly changing the landscape of American business. 

Chairman Neugebauer and members of the subcommittee, the 

time has never been better for leveraging information technology to 

create a strong system of financial oversight that is also cost-effective. Smarter government leads to smaller government and a savings for the Nation’s taxpayers. 

The choice is ours. We can embrace proven technology to 

strengthen the financial system, or we can ignore it, raise taxpayer 

money, and possibly face future catastrophe. 

Again, thank you for the opportunity to testify this afternoon. I 

look forward to answering your questions. 

[The prepared statement of Mr. Krishna can be found on page 58 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Our next witness is Mr. Alan Paller. He is the director of Research at The SANS Institute. 

Mr. Paller? 

STATEMENT OF ALAN PALLER, DIRECTOR OF RESEARCH, THE 

SANS INSTITUTE 

Mr. PALLER. Thank you for allowing me to testify today. 

As we sit here today, Federal computers are being broken into. 

They are being taken over—data has been taken from them and 

they are being turned into zombies so they can be used for further 

attacks. 

You, a few minutes ago, talked about Bill Lynn’s speech earlier 

today when we learned that 24,000 very critical documents that include satellite data and avionics—the data we didn’t want to lose— 

were lost in March. So that is happening as we speak. 

In a minute, I will tell you about a few more of them but first, 

the reason I know about these things is we run the main cybersecurity school where we train the NSA, the FBI, DOD, the banks, 

and the insurance companies in 70 countries. We have 120,000 

alumni. 

We also run the early warning system for the Internet. I hear a 

lot about those attacks, but I use data that is publicly available. 

So what I am going to tell you is an accurate but incomplete picture of what is going on. 

I want to answer four quick questions: one, who is doing the attack; two, what are they looking for and how effective are they; 

three, how do they work, because it is useful to know how they 

work in evaluating whether something that you are doing is at 

risk; and four, are the financial practices, the practices of the 

banks a lot better than what is going on in the government? So let 

us do those quickly. 

Who is doing it? Primarily, the attacks against the Federal Government are by spies, most of them paid for by nation states. There 

is a little bit of organized crime against government, but most of 

the organized crime is going against Exxon and Google and the 

other companies. 

27 

And what are the spies after? Primarily, it is military information like what you heard about earlier today. But there is also what 

General Alexander, who heads the Cyber Command, likes to call 

remote sabotage tools. Once they get in, they actually burrow deep 

and leave a tool there that pops up to ask for instructions randomly over a period of years, so it is an in-place tool that can be 

used to change the data on computers whenever that is needed. 

And then their third goal is financial information and trade information that is used in negotiations between countries. Other 

countries that have the interest of their companies at heart like to 

steal information from our companies so that when negotiations 

happen, they know more about our playbooks than than we do. So 

that is what they are after. 

How bad is it? You heard the one today, another comment like 

that came from General Lord who ran cyber at the Air Force who 

said, ‘‘China has downloaded 10 to 20 terabytes of data from the 

NIPRNet. They are looking for your identity so they can get into 

the network. There is a nation state threat going on.’’ So it is a big 

loss, not a small loss. 

And the kinds of things they have taken, I mentioned a few but 

they got the—the F-35 strike fighters are our most expensive systems, $300 billion. They got a lot of avionics information from that, 

that other countries are already using. 

So it is a massive amount of data. And what is interesting about 

that is they didn’t get it from the DOD, they got it from the contractors. This attack today was also from the contractors. And that 

is important because a lot of what we do in government has been 

outsourced for IT, and it is the contractors who are losing the data. 

And I have one more example. A lot of people think it is just 

DOD, but the Commerce Department got hit very badly. There is 

a division of Commerce that decides which technologies are too sensitive to export, called the BIS Division, and that was what they 

got into. 

So there are a lot of attacks, but notice it is usually a spying 

thing. The reason you see attacks against the NASDAQ and again 

the IMF, say, is that financial data is also a target of attackers, 

but we don’t have really good data on what they were after and 

what they were going to do with that data. 

I want to add two more things. One is, how do they work? And 

let us say they decide you have critical data that they want from 

you and they get to know your staff director, and they spend a lot 

of money finding out what he is working on. And then they fake 

an email that looks like it came from him to the people who do the 

system administration work for you. 

And because it appears to come from the boss and it has critical 

data in it, it fools them into opening the email. The email has an 

attachment that takes advantage of an error that they didn’t fix on 

their computer, bad hygiene. They just didn’t fix it on their computer. That forces the victim’s computer to call out to the attacker’s 

computer to get instructions. 

Those instructions are what to gather and how to gather it. They 

gather it up and then they burrow deep and stay there so they can 

come back later. That has happened to Presidential campaigns, 

Congressional offices, and lots of Federal agencies. 

28 

When you hear a witness say, ‘‘We haven’t had any breaches,’’ 

you should translate that into, ‘‘I have not been told of the 

breaches that we have had,’’ because saying, ‘‘We have not had any 

breaches’’ in a major Federal agency isn’t credible. 

I want to close with a couple of ideas. One is that banks do a 

better job because of two things: there is a lot of money at stake; 

and there are consequences. I go into detail on that in my written 

testimony. 

And finally, don’t decide to act just because there are cybersecurity problems. If you choose not to do something that is important 

because there are cybersecurity problems, you have to stop doing 

everything. It might be a better idea to take advantage of the fact 

that this is important, and if you agree it is, then do a better job 

of doing cybersecurity, and I try to lay out what that means in my 

written testimony. 

Thank you for your attention. I am happy to answer questions. 

[The prepared statement of Mr. Paller can be found on page 74 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Our next witness is Dr. Nassim Taleb, distinguished professor of 

risk engineering at the New York University Polytechnic Institute. 

Dr. Taleb? 

STATEMENT OF NASSIM N. TALEB, PH.D., DISTINGUISHED 

PROFESSOR OF RISK ENGINEERING, NEW YORK UNIVERSITY 

POLYTECHNIC INSTITUTE 

Mr. TALEB. Mr. Chairman, Ranking Member Capuano, members 

of the subcommittee, thank you for giving me the chance to express 

myself. 

I have been sitting here listening, and what I heard was data, 

data, data, and just data was a great thing. 

In ‘‘The Black Swan,’’ my book that sort of matched the testimony, I write that if you give bookmakers 30 pieces of data, they 

will bet with more confidence. And they will predict much, much— 

the predictability will drop over 10 pieces of data. Okay? 

There is something called too much data. 

In the 1970s, my coauthor—also did that. If you have very sophisticated economic technique, they tend to work on your computer very well, much better than simple techniques. But guess 

what, they degrade when it comes to the real world. 

And I am very interested in the real world, not in what happens 

on computers or in research papers. 

I am here primarily as a practitioner of risk, a risk-taker, a trader, who became later on a scholar because, of course, I lost a lot 

of hair worrying about my trading position, 20 years of trading. So 

I retired and became a scholar. 

So I am here partly as a trader, say 75 percent as a trader and 

25 percent as a scholar. And I have seen all these people with great 

ideas, econometric methods, and so on who work on a computer. 

And, of course, they tend to take a lot more risk, which is the reason I faxed Fannie Mae in 2003, and they answered, we have 15 

Ph.D.s on our staff. And I told them, ‘‘You can have 15 million— 

on your staff. It is not going to help you manage your risk much 

better.’’ 

29 

If you take a lot of risk, you can’t predict. 

So what is the problem with what is going in this proposal? It 

looks like a new version of the central planner, what I call the omniscient Soviet-style central risk manager. Of course, the central 

planner did not work, as we know, and this has not worked. 

Financial risks are not like the risks of cyberspace and things 

like that. They are not that tractable. Financial risks belong to a 

completely different category that you cannot map quantitatively, 

like history, people study techniques. They think that the great 

techniques, that work of statistical physics, can apply to finance. So 

far, these things don’t work outside their computers. 

So what I am saying is, first, these risks became completely unpredictable, so we can have seven or eight more of these offices, 

and they are not going to predict any better. The details are, of 

course, in the appendix I gave you. 

Second, this measure has side effects. Get someone a risk measure and he will take more risk. This has been shown in a lot of 

experiments. If I give a German judge a die and make him throw 

the die before sentencing, high number of this to high and longer 

sentencing on short numbers. You give people numbers, they take 

more risk for sense of security and beyond. 

Also, maybe the main point is that what we need is to move 

away from measuring and trying to predict events and measuring 

risk and doing these kind of fancy things that have never worked. 

You have how many people who did analysis of the sort the gentleman before this panel was discussing, how many? 

All right, 10,000, 20,000? Did they see the crisis coming? No, 

they all just got caught. 

Did they see the crash of 1987 coming? No, they all got caught. 

So almost all, all right. Definitely a smaller number than random 

escaped. So what we need is less is more. 

A very simple rule of thumb: Less is vastly more. And it is very 

hard to tell people who love data that less is more, that less is effectively more in so many domains. What we need are just very 

simple methods of robust defying portfolios. 

The simplest one for me is to remove the agency problem. When 

you fly, when you get on a plane, you prefer the pilot to be on 

board, right? It is a very simple rule of thumb that increases your 

safety. What—like the same was max, a very simple small rule of 

thumb rather than grandiose plans, particularly that these have 

never worked in the past. 

If people look at our track records and then predicting these 

quantitative methods, a horrible record, that was my book, ‘‘The 

Black Swan.’’ And now 4 years later, people are starting to repeat 

my argument a little bit too late. 

Thank you. 

[The prepared statement of Dr. Taleb can be found on page 82 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

And our final witness, Dr. John Liechty, the director of the Center for the Study of Global Financial Stability at Penn State University. 

Dr. Liechty? 

30 

STATEMENT OF JOHN LIECHTY, PH.D., PROFESSOR OF MARKETING AND STATISTICS, AND DIRECTOR OF THE CENTER 

FOR THE STUDY OF GLOBAL FINANCIAL STABILITY, SMEAL 

COLLEGE OF BUSINESS, THE PENNSYLVANIA STATE UNIVERSITY 

Mr. LIECHTY. Thank you, Mr. Chairman, Ranking Member Capuano, and those members of the subcommittee who have chosen to 

brave it out, tough it out until the end. I appreciate you being here. 

I have a couple of things I would like to— 

Chairman NEUGEBAUER. Would you pull your microphone just a 

little closer to you? 

Mr. LIECHTY. Sorry, is that better? I appreciate you coming, if 

you didn’t hear it already. 

There are a couple of things I would like to just highlight. I was 

actually involved in the legislation, in thinking of the idea, of advocating to folks on the Hill and actually helping negotiate the final 

version of what came out of this legislative process. 

I am a private citizen. I got involved in this because I went to 

an OCC workshop that happened in February of 2009, and we had 

just had the financial crisis and people at the workshop were talking about statistics and financial risks. I am a statistician. That is 

my training. 

During the workshop, people were talking about individual institutions and trying to keep individual institutions safe. It is kind of 

like we have just gone through a major car wreck, a big pile-up on 

the freeway and people are saying, ‘‘Well, let us look at each individual car. Let us make sure the oil pressure is fine. Let us make 

sure the brake systems work, but let us not worry about how fast 

they were going or how close together they were with the road conditions that might be changing.’’ All we are going to do is worry 

about these individual institutions. 

So I looked at that group, and I didn’t know a lot about the data 

and what is available. I figured the Fed have the data, to be honest. I raised my hand and said, ‘‘I am a statistician. Let us start 

with the data.’’ We can take that data and begin to try to understand this system. If you think about science, science starts off first 

trying to describe a phenomenon, and then trying to explain how 

the pieces work, then trying to predict it. And eventually, if we are 

really good, we start doing engineering to try to control it. 

In my view and assessment, I would fall in with Professor Taleb, 

in that we are at the beginning stages of describing. We really 

don’t understand a lot of the dynamics. We have a system where 

we look at what the markets produce in terms of prices. That is 

the equity markets, some of the bond markets, the derivative markets. But we don’t see very much of what is going on underneath, 

right? 

And so a group of us said this is a compelling national need, and 

I don’t want to take my time to read it, but I have a letter that 

was signed by six Nobel Laureates sent to the Senate Banking 

Committee advocating that we need to have better data and better 

analytics for the regulatory community. If it is possible, I would 

like to submit that for the record. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

Mr. LIECHTY. Thank you. 

31 

What kind of data can we gather? I agree that we want robust 

methodology, but I disagree that we cannot move forward scientifically to the degree that we cannot begin to quantify. 

I think the analogy is better put in terms of thinking about the 

National Weather Service and where we were with hurricane modeling 50 or 70 years ago when we didn’t have good weather data, 

when we didn’t have a sustained scientific effort trying to understand how the different particles interact and the models that 

would be taking the data from satellites in order to understand and 

begin to build the science needed to see when hurricanes might be 

forming and when they might be making landfall. 

I know there are weaknesses in that analogy, but I think it is 

an interesting place to start in terms of thinking about how we are 

going to attack the problem with financial stability. 

I will describe a couple of effects. Take the hamburger effect. 

This is kind of an example to illustrate the value of this type of 

financial data. When we think about the FDA and how we process 

and keep track of food safety, if somebody gets a piece of hamburger that makes him sick, what can we do? We can track that 

all the way back to the farm where that cow was produced and 

grown. 

We can understand what the risks are because we can see the 

disease, the contamination and how far it went, and how it flowed 

through the system, right? 

When we go and look at mortgage-backed securities and their derivatives and other asset-backed securities which were being used 

as money equivalent in the repo market in 2008, we do not have 

the ability to trace through the market to go all the way back and 

say where these loans came from. 

What happens in the hamburger marketplace is if somebody gets 

sick and you can’t trace back where the core cows are at that might 

be causing the sickness, everybody walks away from the hamburger market. And that is what happened to one of the major 

funding sources providing liquidity, short-term funding. In the 

broader marketplace, that is substantial. 

Another example of where we could create benefit from better 

data would be what I will call the long-term capital effect. When 

long-term capital management was on the verge of going down, the 

Fed pulled major financial players into a crisis management meeting. 

I heard this story from a friend who was at one of the major investment banks involved. Their guy got pulled in, and they calculated that they had a $100 million exposure to long-term capital 

at that time, which is a body blow but it wasn’t a death blow. 

Their guy came back from a negotiation and said, ‘‘We are in for 

$180 million to cover the $100 million exposure.’’ And my friend 

said, ‘‘Why is that?’’ And it is because of the network effects. If they 

say no and we let them go down—we let long-term capital go down, 

we don’t know which of our trading partners might go down, partners where we have much bigger exposures, that could take us 

down. 

Both of these effects not only helped bring about the financial 

crisis, they helped exacerbate it and make people want to run to 

what they felt was safe—U.S. Treasuries, right? They could not 

32 

trade these products, they didn’t know how to price them so they 

didn’t really know where the contamination was coming from, and 

they didn’t know how to value the trading books of their partners 

because they didn’t know how much of these mortgage-backed securities that they held. They didn’t know if somebody else teeters on 

the edge, how that is going to propagate through the system. There 

is data that is not being collected but is essential if we want to 

have a safe and secure financial system. 

I gave up, I assure you, plenty of consulting money to try to get 

this legislation through. I did it for five reasons—Joseph, Jacob, 

Sam, Matt, and Tom. Those are my five boys. I would like them 

to have a safe, secure financial system going forward. 

With regard to where they could have put the OFR, they could 

have put this in the Fed or the OCC. There are a lot of places that 

could have been given the OFR. In the end, there was horse trading in the Senate and it ended up in Treasury. Could there have 

been a little better overhead? Yes, there could have been a little 

better overhead. 

But the thing you have to realize—I am sorry, I have gone over 

here. The thing you have to realize is there are substantial industry savings that will far outweigh the cost of the OFR. I would be 

happy to answer any questions. I apologize for getting a little excited. 

[The prepared statement of Dr. Liechty can be found on page 66 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. I recognize myself for 5 minutes for questions. 

Mr. Taleb, before the financial crisis occurred, you wrote in your 

book ‘‘Black Swan,’’ and I think I quoted here, ‘‘The GovernmentSponsored institution of Fannie Mae, when I looked at its risk, 

seemed to be sitting on a barrel of dynamite, vulnerable to the 

slightest hiccup. But not to worry, the large staff of scientists 

deemed that these events were unlikely,’’ I believe you say. 

First of all, can you tell us why you wrote this? And secondly if 

you claim that no one can predict the process, how are you able to 

predict it? 

Mr. TALEB. I have a very—first of all, the risk of Fannie Mae, 

you can see on an abacus. You don’t even need to have centralized, 

you can look at it. You can look at their books. You can see it on 

an abacus. You don’t need data. I think it takes no time to figure 

out. 

But I have a very simple rule on which I built my entire career. 

If a pilot is overconfident, he will crash a plane. So if someone 

thinks that he has the answer, if he thinks he can predict, particularly in a domain like finance that is hardly predictable or rather 

unpredictable, then he will take vastly more risks than a regular 

person and he will crash that plane. 

So all I did was use that simple rule by saying those who claim 

to see the future will blow up, and the word blow up means have 

lose vastly in excess of what you think you can have. Fannie Mae 

was one of my targets and, of course, many targets and seems to 

play out in 2008, and that is the same principle. 

And I think that what will happen with this committee, not with 

the committee, with the effects of the OFR is they will give people 

33 

a false sense of confidence. They will tell people to take more risk, 

to make the system more vulnerable and will have more blow-ups. 

And after the blow-up, they are going to say, while the government 

was supervising and they didn’t tell us that the incident will take 

place because I know they are not going to be able to predict the 

crisis. 

Believe me, I am certain because these things, like the big event 

that convinced me was the crash of 1987, when I was a trader, and 

I saw people crying. 

There is absolutely no reason for a 23 percent drop, 23 standard 

deviation at the time. Something huge should have happened every 

10 trillion, trillion, trillion years and happen for no reason. Then 

I realized that there are two kinds of people, those who focus on 

robustness and those who try to outsmart the system, like most 

academics like LTC and Variety; they think they can predict and 

calibrate the risk based on that. 

There are two kinds of people. Second category, they usually 

blow up. 

Chairman NEUGEBAUER. There was a lot of data already out 

there pre-crisis. And actually, a lot of people were beginning to recognize how this thing was getting pretty big. And some of these 

were some of the prudential regulators who were supposed to be 

regulating these entities. 

So there are two points I would like to make here and get your 

comments on; one is, that sometimes people have the data, but two 

things have to happen. One, somebody has to interpret the data 

that you can put all of these information into a computer and you 

can give it, and then someone gives it the parameters. But then 

someone has to put those parameters in there and to determine 

what the thesis of what will be a bad event. 

The second piece of that is, is that, the one that computers spits 

out these analogs or algorithms, or whatever they are called, that 

somebody then has to interpret. But the third piece of that is that 

somebody then has to take an affirmative action. 

Mr. Liechty, I hear what you are saying but the question is, if 

people don’t act on the data that they have, what is the value of 

the data? 

Mr. LIECHTY. That is an excellent question. 

The point is, I don’t think anybody has ever had this data before. 

People began to see that there were pressures in the financial market, in the housing market. They began to see that there were balance sheet imbalances. There were people who were making 

subprime loans and that could lead us towards—there were a number of signals that were leading us towards understanding that 

there was the build-up of an asset bubble. 

But I don’t believe even if we had this magic data in order to see 

the entire marketplace and understand how we could go forward, 

that would have been enough. I think this is a new science problem 

that we have to address and that we want to address by simply 

saying, ‘‘Well, nobody can do it. Nobody has done it in the past.’’ 

We haven’t really put the effort in, yet. 

Chairman NEUGEBAUER. Mr. Taleb? 

Mr. TALEB. I would like to disagree. I don’t know the protocol, 

but I would like to say the following: I have on my laptop 20 milVerDate Nov 24 2008 13:10 Mar 30, 2012 Jkt 067943 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\67943.TXT TERRIE
34 

lion pieces of data, 20 million. I could perform all the analytics you 

want on my laptop here. 

Twenty years ago, we had nothing. We had no laptops even. It 

was Moore’s Law working everywhere. The same has applied to financial data. We have so much data, it is not even funny. 

Predictability is decreasing and we got more data. So it is not 

like we didn’t have this. We have more data than ever in history 

today. And tomorrow, we will have more than today, and it is growing exponentially. So I do not agree with this argument that we 

need more data or the problem was lack of data. 

Chairman NEUGEBAUER. My time has expired, unfortunately, so 

I recognize the ranking member, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Dr. Liechty, can you guarantee me—guarantee me that if OFR 

is up and running, we will not have another economic crisis? 

Mr. LIECHTY. I cannot guarantee that. 

Mr. CAPUANO. I didn’t think so. 

Mr. Paller, can you guarantee me that if I put you in charge of 

the data on my little BlackBerry here, that no one will ever be able 

to break into it? 

Mr. PALLER. Nope. 

Mr. CAPUANO. Mr. Krishna, could you guarantee me that no one 

could ever break into my BlackBerry, if I gave it to you? 

Mr. KRISHNA. Absolutely not. 

Mr. CAPUANO. Mr. Taleb, could you guarantee me if I made you 

the Chairman of the Fed or OFR, or any of the other agencies, 

could you guarantee me that you could foresee the next economic 

crisis? 

Mr. TALEB. To the contrary, I guarantee that I would not see the 

next economic crisis, because it is— 

Mr. CAPUANO. I think that is a fair guarantee for all of us. 

The reason I asked this is because, I guess, the next question I 

have is, there are no guarantees in life. All of this is simply an attempt based on the last problems we have been through to decrease the likelihood, at least, that we will repeat the same mistakes. I don’t think anybody would have any doubt that there will 

be other issues, and someone will come up with something new tomorrow that we can’t foresee. 

That is not what this is about. This is simply about trying to decrease the likelihood that there will be another crisis which, of 

course, there will be. But, at least, that the next one may not be 

as deep, or at least won’t be the same issues. 

Is there anything wrong with trying to gather more data? Even 

if you don’t use it, even if others might use that same data to come 

up with different conclusions, because I totally agree with what the 

chairman says, all the data in the world doesn’t mean anything unless you can now analyze it. And all the data in the world or even 

3 pieces of data—if I put 5 economists in the room, I am going to 

have 15 different opinions on what it does. 

But I would like to know the problem. What is wrong with trying, within human capabilities, to gather as much data as possible 

and to try to keep our security on the economic system? 

Mr Liechty, is there anything wrong with trying this? 

35 

Mr. LIECHTY. I don’t think there is anything wrong with it. I will 

take the point Mr. Taleb raised about people getting risk measurements that they could then say, ‘‘I can take more risk.’’ 

And I would say that we have actually have had people take tremendous amounts of risk because we have had, for example, rating 

agencies, which have been giving AAA ratings to financial companies which are offering and issuing bonds, these special purpose vehicles where the agencies themselves have no real sense of what 

the underlying risks were. They don’t understand the tail. They 

don’t understand how the behaviors might cascade through the system. And I agree that can be very dangerous. 

You have new agencies and they collect all of this data, but there 

are very strict rules about what data this agency can give out. It 

is not as if this agency can collect data and then turn around and 

give risk metrics and risk inputs to the market participants. It is 

going to be used in making good decisions about macroprudential 

regulations, about when you have concentrations in the marketplace, when you might have marketplaces that can’t handle certain 

amounts of flow under different stress scenarios. These things lead 

to liquidity failures and freezings of the markets. That, I think, is 

useful. 

I think it also will help encourage the market participants to do 

what they really need to do, which is to start building their own 

systemwide view of the marketplace and begin to build their own 

ways in measuring systemwide risk and pricing and trading, and 

making sure that we don’t have instruments that have a lot of 

what you could call tail risk— 

Mr. CAPUANO. Mr. Taleb, I can see you are anxious. Go right 

ahead. 

Mr. TALEB. I have had to face this question for about half of my 

adult life, and let me give you the typical answer I give people. 

If your pilot happens to have lost his maps, and you are flying 

toward the Himalayas and someone says, ‘‘Look, I have a map of 

Saudi Arabia,’’ should he use it? No. 

The data can increase not only risk-taking, but can get you in 

trouble. This is what—so just— 

Mr. CAPUANO. But I need to follow through the illogical conclusion. You are not suggesting that we never collect an ounce of data 

on anything because any data raises risk? 

Mr. TALEB. I am not. No, I am not saying that. I am saying that 

data beyond a certain threshold— 

Mr. CAPUANO. What is the level? 

Mr. TALEB. Sorry? 

Mr. CAPUANO. How much? 

Mr. TALEB. Beyond a certain minimum— 

Mr. CAPUANO. Twenty million data? 

Mr. TALEB. We passed that threshold a long time ago, which is 

data— 

Mr. CAPUANO. So we should give data back? 

Mr. TALEB. No, we have data that if you could supply people with 

the data and analytic— 

Mr. CAPUANO. How is then? 

Mr. TALEB. —that are going to take a lot more risk. 

36 

Mr. CAPUANO. How is it then that over the last 3 years that I 

have asked many different panels to tell me how much money was 

in hedge funds, nobody could do it, if there is so much data out 

there? How come nobody today can tell me how much money is in 

sovereign wealth funds? How come nobody can tell me today what 

the leverage points are on those sovereign wealth funds? And if 

there is so much data out there, how come I can’t get the answers 

to relatively straightforward questions? 

Mr. TALEB. I am sure that these people don’t want to commit but 

you can get a lot of data on sovereign wealth funds and a lot of 

analysis on it. 

Mr. CAPUANO. I think— 

Mr. TALEB. But my point— 

Mr. CAPUANO. Yes. 

Mr. TALEB. No, no. My— 

Mr. CAPUANO. I get data. 

Mr. TALEB. Yes, of course, I am getting more data was noise— 

because of noise, it is going to degrade it. So you are going to get 

several more guesstimates of guesstimates of guesstimates. 

The point is that giving sterile information like knowing how 

much there is—and these funds and sovereign funds, may lead you 

to start taking more risk, and that is my point. 

Mr. CAPUANO. I understand that. And guess what? 

Mr. TALEB. Yes. 

Mr. CAPUANO. When I look both ways as I cross the street, it encourages me to cross the street because I have taken on that risk. 

Mr. TALEB. Exactly, because that does not— 

Mr. CAPUANO. So I shouldn’t look both ways before I cross? 

Mr. TALEB. No, because that is not general information. 

Mr. CAPUANO. I should never cross the street. 

Mr. TALEB. No, that is an analogy. Again, you should not cross 

the street blindfolded. And actually I answered this, and I answered from my book, ‘‘The Black Swan.’’ 

Mr. CAPUANO. But the data comes in and when I take that blindfold off, all of a sudden I see traffic. Oh, my God— 

Mr. TALEB. There is too— 

Mr. CAPUANO. —there is too much data, I cannot cross the street. 

Mr. TALEB. Because that is not sterile. 

Mr. CAPUANO. There is a line. 

Mr. TALEB. Because that is not sterile information. 

The point is that, in a natural habitat, we are very good at selecting information and at making our own filtering in the natural 

habitat. In finance, we haven’t been doing finance for 200 million 

years. We have been looking—we have had eyes for hundreds of 

millions of years. 

So finance is not a national domain for us. The data is different. 

The statistical property is different. 

Mr. CAPUANO. I don’t suggest that it is easy. 

Mr. TALEB. Yes, I know. But I am saying, that inferring, that 

more data equals, okay? 

Mr. CAPUANO. No, no, no. Let me— 

Mr. TALEB. It is a big fallacy. 

Mr. CAPUANO. That is not my suggestion. More data equals more 

security. My comment is that maybe there was a time, but I 

37 

haven’t seen a time on any factor that data, i.e., knowledge, is a 

bad thing. It can be used badly. It can be interpreted poorly. We 

can make mistakes with it, but I have never seen a time in human 

history when more information was considered bad except in the 

Dark Ages. 

And I am going to be honest, I understand fully well. Where the 

comment can be made, the data is inappropriately translated. That 

happens all the time, and it will continue to happen forever and 

ever. 

But I have to be honest. You are the first person I have ever 

heard tell me that I should get less information in my life— 

Mr. TALEB. I am— 

Mr. CAPUANO. —and therefore, simplify it because I will take no 

risk. I appreciate the comment and I appreciate your position. You 

have had a lot of success with your own view, but I guess— 

Mr. TALEB. Okay. 

Mr. CAPUANO. —information is good. 

Mr. TALEB. I am not the first person to say there is a whole literature called anchoring. If you make people flip a wheel of fortune, and they know that this data is random, it will automatically 

impact— 

Mr. CAPUANO. But I also know that if you keep people without 

any information at all—I get that. Information brings risks. I get 

that. 

Mr. TALEB. No, no. Information— 

Mr. CAPUANO. And I understand that. 

Mr. TALEB. No, no, that data—if I ask someone his Social Security number, their last four digits, and then how many dentists are 

there in the Washington phonebook, the numbers will be correlated. 

If I put the question in reverse, the numbers will not be correlated. So data has an impact on decision-making and my point 

to that, given particularly when it’s stale data, as we have in finance. 

Chairman NEUGEBAUER. I thank the gentleman for his questions. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr. Krishna, you were in the hearing room earlier today when 

Congressman Grimm was talking about two projects of information 

technology in the Department of Justice, both of which came in 

wildly over budget, blew the budget, a higher cost than expected. 

One was never implemented, I think he said, and the second 

project has not yet gone live. 

In your experience, what is the principal reason that IT projects 

never get implemented, and many of them, if not most of them, end 

up costing much more than originally anticipated? 

Mr. KRISHNA. Thank you, Congressman, for that question. I 

think there is one word that I would use and that is ‘‘scope.’’ 

IT projects are notorious for going over budget. There are statistics that show that as little as 30 percent of all IT projects that are 

begun are actually completed, and we are not talking about completed within the budget, absolutely completed. 

So the question is, what makes these projects successful? And 

the one-word answer, as I mentioned, is scope. Keeping the scope 

38 

tight, narrow, specific, and then addressing a project that goes off 

and builds to that scope. 

We worked with a lot of financial institutions, building these 

sorts of data repositories, and the ones that are successful start off 

small. They certainly have large visions, large mandates out there, 

but they start off very small and try to address a simple need first 

and then build based on that foundation. 

Mr. FITZPATRICK. So as an IT professional, from the IT perspective, would you be concerned about an agency of the Federal Government that has no limits, either in the statute, no limits declared 

yet, no plan yet prepared from the scoping point of view? 

Mr. KRISHNA. We are certainly concerned about any mandate 

that is too broad and too wide. In fact, when the Dodd-Frank conference discussions were occurring, Congressman King and Congresswoman Maloney had worked on amendments that would 

tighten the focus of the Office of Financial Research. Teradata definitely supported those notions. Unfortunately, they have not been 

adopted. 

We certainly believe that a narrow tight scope for such an effort 

is important, at least, in the first stage. 

Mr. FITZPATRICK. Professor Taleb, you have mentioned in your 

written testimony that the rationale behind the OFR is a Sovietstyle of thinking, not a direct quote but basically that is what you 

had indicated. Can you expand on that? 

Mr. TALEB. Yes, this idea that top-down, you can see the risk 

top-down is—and the problems with it is the debate is very old. 

The debate was central planner but it is called omniscient central 

planner who can see everything and, of course, has the ability to 

set prices. That is an old debate and, of course, that went away and 

now we are repeating the same experiment by thinking we should 

have a centralized omniscient risk manager who can see risks. 

I have discussed what I call ‘‘etrogenie,’’ which is a side effect. 

Like any drug has a side effect, I have discussed the side effects 

and it has appeared in conversations before. And I think the side 

effects are so very severe. Of course, we have direct costs. Cost 

overruns are almost certain in technology, particularly with government projects. 

But we have side effects that are vastly worse than the cost overruns. 

Mr. FITZPATRICK. I am also concerned about the big central planning, and as Mr. Paller and Mr. Krishna’s comments, the very 

broad scope of what the OFR is tasked to do here. 

Professor Liechty, do you have any concern about the broad powers that have been granted to OFR in terms of the ability to collect 

all kinds of information? Do you have any concern about that 

scope? 

Mr. LIECHTY. It is a very good question. I would take the exception to a Soviet-style approach. I don’t think you can understand 

a system unless you collect data about the system. Before you can 

monitor, you have to measure. That is the fundamental rule. Somebody has to collect that data. 

In the street, they could do that if they wanted to. If they are 

not moving in that direction, that is fine. 

39 

The OFR actually has very limited authorities. We specifically 

said when we were negotiating about the OFR, that we did not 

want the OFR to have any regulatory authorities. When I say limited, I mean that it cannot set any capital requirements. They cannot make any prescriptions in terms of the health of financial companies and how the marketplaces work. 

The only thing the OFR has the authority to do is to set standards and to request data from a set of companies as defined in section two of the Dodd-Frank Act. 

Mr. FITZPATRICK. But, Professor, I think you have indicated that 

tools are not yet in place to do that. I want to just quote your written testimony. We discussed the science behind predicting a financial crisis. And you said, and this is a direct quote—‘‘Is it true that 

the science and the tools have not yet been developed? But that is 

a call to action not a cause for despair.’’ 

So what assurance can you give us, Professor, that the science 

and the technology will ever catch up to the mission of the OFR, 

and more importantly, what happens if it doesn’t? 

Mr. LIECHTY. Maybe I can reflect back on the National Academy 

workshop, which was organized in November of 2009, and I put 

this in my written testimony also. The basic thrust to that was 

that we have good starting points for the science, we have good 

starting points for the models, but we are not there. 

It is going to be an additive ongoing process, potentially multidecade effort in order to gain the kind of understanding that we 

need. 

If you look back at the impact that—go back to the weather analogy and the impact that hurricanes had across America, historically, and there is a long history. And you look at the response that 

we have had from the government’s perspective to try to understand hurricanes, to collect the data, and to do the science, it started with Thomas Jefferson and culminated in legislation in 1970 

when Richard Nixon actually created NOAA. 

The legislative reaction began to get the science in place to be 

able to understand the dynamics of the weather system and to be 

able to forecast, to predict, and to safeguard the people. I think the 

science will get there. 

To be very candid with you, I am not sure how fast it will go, 

but I believe we can do it. 

Chairman NEUGEBAUER. I thank the gentleman. And now, Mr. 

Renacci? 

Mr. RENACCI. Thank you, Mr. Chairman. 

Mr. Krishna, you actually started off the testimony with probably 

the line that summarizes this whole thing: Technology can lead to 

smaller and smarter government. We need to get smaller and 

smarter. 

With that, Mr. Liechty, I can tell you that it is interesting to 

have all the information in the world and, in some ways, I agree 

with Mr. Taleb that in my past life, I would go into a company and 

I would have to analyze the risk of either acquiring or operating 

that company. 

You reminded me of a new testimony, as I walked into a room 

one time, like this, filled with information, filled with information 

for the last 10 years and the next year all of everything that comVerDate Nov 24 2008 13:10 Mar 30, 2012 Jkt 067943 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\67943.TXT TERRIE
40 

pany has done. And I can tell you, the more information that was 

sitting in the room, the more scared I was. 

And guess what I learned from that? I learned that on the reverse side, when somebody would come in to one of my clients and 

want to see what the risk was, I would tell them to fill the room 

up with information. Because the problem is, it is not about the information you have, it is about access to the right information, and 

that is the problem. 

So you could have rooms full of information, you could have all 

that information but you have to have access. And the problem I 

have even with your hamburger analogy is, you might find out that 

you have bad meat at a farm and you might go down there and 

figure out the process that occurred. But while you are trying to 

fix that, there is another problem going on. So you are fixing that 

problem but there is another problem. 

So it is not only access that has been able to move through information and been able to move in the direction to fix things. I am 

not too sure just having this information is the answer. 

But what I am sure of, and I am going to ask you the question— 

what I am sure of is that there is a cost to getting this information. 

And it is interesting because all of you who have talked about 

information, whether it is a room full or just the right access information, the question is—and I am going to lead back to what the 

ranking member said, he made a comment, if you have all the information stored—and I may change this a little bit, because if you 

had all the information stored at a central location, can you guarantee me that you will reduce the likelihood—and I am changing 

what it was said, the likelihood of an economic failure? 

Because if you can’t do that, should we give an organization unlimited oversight, unlimited budget, and unlimited reach? 

Keep in mind, I am all for information. I just want to know if 

we should be setting up a whole other organization with unlimited 

oversight, unlimited budget, and unlimited reach, knowing that we 

possibly cannot even predict the likelihood of another economic failure. And I would first start with you, Mr. Liechty. 

Mr. LIECHTY. Okay. Thanks. May I address the cost issue just 

briefly? 

I was unaware of how the financial systems’ back offices worked 

when I started this effort. But I very quickly became educated 

about this. They are in disarray. They have very poor standards. 

They spent billions of dollars in backroom operations just clearing 

and settling trades because they have a lot of mismatch between 

identifiers and standards as reported from the industry. 

So when we proposed the idea of an Office of Financial Research 

and pulling together standards for reporting transaction data, the 

basic trust is there. Banks, clean up your back offices, get everything reported. There is only one bank I know in the world that 

puts every transaction they do in an electronic format the data that 

happens, and that is Goldman Sachs. 

Everybody else has things on spreadsheets and different systems. 

They cannot get a comprehensive risk position. So they are like the 

room mentioned where you walk in and you see all these boxes, 

you have no idea, and you say, I am scared. 

41 

You walk into Goldman, they have it all together and they can 

pull it right together for you. We would like to see that throughout 

the industry. We think that would be useful and valuable, right? 

But more importantly, it would reduce their operating cost. 

One of the major banks who work with us said it would reduce 

their operating cost by 20 to 30 percent. We are talking about 

multi-billion— 

Mr. RENACCI. I am not sure if I will agree with that, but I am 

running out of time. And I want to switch over to Mr. Krishna, I 

have a question for you. 

I heard, I think one of you testified and it might have been you, 

if the information is out there, banks have it. A lot of this information is already out there. Wouldn’t it be easier—again, and you 

would only hear me in any one of my arguments arguing about information on getting it. 

But wouldn’t it be easier to challenge one of the organizations we 

already have set up to come up with—and I might be simplifying 

this, a computerized program that can access some of this information and get it very easily then set up a whole other organization 

and a whole other big brother government organization that goes 

forward and cost the taxpayers more money? 

Mr. KRISHNA. Congressman, you are right. It would certainly be 

possible for any one of these agencies to collect the data and to implement it. There is no particular reason for one or the other agency to be chosen, in my opinion. 

The only criteria, and I would think this goes back to your earlier comments is if the data is out there but it cannot be processed, 

that is the real problem. So any one of these agencies, if they had 

the processing capability and the technology exists, the will to do 

it is all that is needed. If they had that, they could absolutely accomplish the same tasks. 

Mr. RENACCI. You would agree, though, there are computer programs out there that can take this information, bring it together, 

and access it in a formable way that you can understand. 

Mr. KRISHNA. I would certainly agree with that. In fact, I would 

even direct you to a new piece of legislation that is being proposed 

by Chairman Issa, which deals with the same problem in other domains in the Federal space. The same approaches can absolutely 

work regardless of where the action is set within the government. 

Mr. RENACCI. Again, I like your idea. Technology can lead to a 

smaller and smarter government—let us work toward that. Let us 

eliminate extra government agencies that aren’t needed. Let us get 

the information we need. It sounds like we can do it somewhere 

else. 

Thank you. 

Chairman NEUGEBAUER. The gentleman from Texas, Mr. 

Canseco, is recognized for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman. And I would like to, 

first of all, associate myself with Chairman Neugebauer’s statements that he made, as well as those of my colleague, Mr. Renacci. 

I served on a bank board for quite a number of years in Texas. 

And well before the 2008 crisis, we knew what was coming down 

the road. I think that it was also known here in Washington and 

in this very room, but politics got in the way. They had all of that 

42 

information but they weren’t able to really look at it until panic ensued. 

But with that said, I really believe that what we have is a lot 

of information out there in the public sector and a lot of it is also 

within the realm of the government; it is just out there. 

And there are many other people who predict it, and it is best 

within the private sector rather than in the public sector because 

the public sector may be provoking panics or provoking other 

things that are not necessary and are better placed within the private sector where individual investors or individual people within 

the economy can make the appropriate decisions. 

Let me ask a question, Mr. Taleb, in your opinion, does the government have a good track record of predicting financial crisis? 

Mr. TALEB. No. Let us look at facts. I don’t know what details 

you want me to show you but the government agencies, say the 

New York Fed, they have data about New York banks. They know 

the exposures, you can extrapolate. Did they predict the crisis? Of 

course not. They predicted the opposite. 

The Fed, same thing, and then the theory, the great moderation. 

They concocted a theory that we had a huge build-up of hidden risk 

of an events that was obvious. And you don’t need a lot of data or 

you can figure it out just from what is out there. 

There was a lot of risk and not only that, the government didn’t 

see the crisis coming but they have made opposite statements; with 

the New York Federal Reserve, they saw the opposite. 

So, can governments predict crisis? No. 

Mr. CANSECO. Yes. 

Mr. TALEB. Okay. 

Mr. CANSECO. And then you would agree with me that really it 

is nothing more than an opinion until it becomes true and then it 

is a prediction. 

Mr. TALEB. Okay. Has it happened in history to see regular— 

how many regulators have their eyes on the last few crisis that 

they predict no. So I don’t know why, suddenly, by fiat now we are 

going to have an agency capable of doing that. 

Mr. CANSECO. Thank you. 

Is there any aspect of the OFR that makes you think that the 

government will now be able to predict financial crises with precision as supporters of the OFR claim? 

Mr. TALEB. That is the— 

Mr. CANSECO. So obviously, the answer is no. 

Mr. TALEB. Suddenly, yes. And so, suddenly, yes, just like by fiat 

tomorrow, starting, say, January 1, 2012, suddenly, governments 

will be able to predict. This is what I am reading here is it is a 

denial of there is something in forecasting. Because a lot of people 

think—about 90 percent of people think that they drive better than 

a median driver. And forecasters already think they are better forecasters. The best way to do it is to show them their track records. 

If you showed the government the track record of government 

and their own track record in forecasting, I think that would mitigate these ambitious plans and bring us back to reality and, probably more modest tricks to reduce risk. 

Mr. CANSECO. Mr. Taleb, you were asked in an interview with 

Business Week last July, what are the sources of potential danger 

43 

or fragility that you are keeping an eye on, and your answer was, 

the massive one is government debt. 

So to your knowledge, will the potential danger caused by the 

debt we are facing in this country be a focus of the OFR or will 

the agency only focus on risk within the financial institutions? 

Mr. TALEB. I think you cannot dissociate, because what happened 

is the private debt has been transferring. We have a form of capitalism called the socialization of losses but not, of course, privatization of gains. 

So we have this debt bank, debt moving into government debt. 

So, of course, the financial crisis now would be in a form of governments having borrowed too much worldwide and we have seen that 

in Europe. And I think that is the big problem, and instead of 

doing all these projections, we should probably try to get that 

under control. 

Someone asked me, how does someone lower his personal risk? 

And I say, 95 percent of your risk is gone. The financial risk is 

gone, if you don’t have debt. The rest is peanuts. It is the same 

statement. 

If you lower government deficits, you reduced massive amount of 

risk in the economy. Then the rest will be just peanuts. 

Mr. CANSECO. Thank you, sir. 

Mr. Liechty, can you give us an example of a regulator that was 

able to predict and therefore prevent a financial crisis before it occurred? 

Mr. LIECHTY. I don’t think we are advocating predicting financial 

crises. We are advocating trying to understand the system so we 

can minimize the chance of crisis happening; to mitigate the impact 

of those crises. But to your question, I can’t. 

But I don’t think that is the right answer. I could give you a different analogy, if you would like. 

Imagine—okay. I will try my third analogy and see if it works. 

Now, imagine that you had people in a shopping mall and you 

were trying to predict the behavior and the flow of people within 

the shopping mall. Why do they go to a shopping mall? All kinds 

of reasons, just kind of like trying to predict the price in the marketplace, right? It is very hard. They come in, the best you can do, 

typically, is some kind of statistical analysis. 

But if you know the structure of the shopping mall and suddenly 

there is an explosion and a fire in one part and you know the position of everybody who is in that shopping mall, you would have a 

very good idea of what they are going to try to do in these extreme 

situations, and you can understand and predict when that is going 

to actually cause problems—exactly which person is going to fall, 

which person is going to get hurt, or how they are going to get 

hurt, and how the systems can be brought down, that may be not 

very hard to predict in this scenario. 

But certainly understanding the system like that would help in 

understanding how to manage that kind of a crisis, for example, 

when Lehman Brothers failed, they really had no idea of the interconnection to that institution and how its failure would propagate 

over into commercial paper market. 

Mr. CANSECO. Let me interrupt you there and ask you this, because I think, it is very important what you are saying. Right now, 

44 

would you consider the debt crisis that we have in this country as 

a predictable crisis? 

Mr. LIECHTY. It is a predictable crisis, I think it is a political negotiation that makes me very nervous. 

Mr. CANSECO. No. Is it a crisis that this country is in debt? 

Mr. LIECHTY. Is it is a crisis this country is in debt? 

Mr. CANSECO. And as deep as— 

Mr. LIECHTY. —a crisis. Let me— 

Mr. CANSECO. No, but is it a crisis? 

Mr. LIECHTY. A working definition of crisis is when the financial 

markets are disrupted to the point that the government has to intervene to keep them going. There can be a small crisis. There can 

be firms who have fought and failed, but when we have a systemic 

event, it is because we don’t have commercial paper markets because we don’t have access to mortgages. If the government defaults on their debt— 

Mr. CANSECO. Or you don’t believe that the government, right 

now, is in a debt crisis? 

Mr. LIECHTY. I think— 

Mr. CANSECO. We are at $14.3 trillion in debt. 

Mr. LIECHTY. I am not a macroeconomist, I am not— 

Mr. CANSECO. Okay. 

Mr. LIECHTY. I don’t feel comfortable or qualified to give you— 

I certainly say if we default on the debt on August 2nd, that makes 

me very nervous. 

Mr. CANSECO. But is the fact that this government owes $14.3 

trillion, is that a crisis for this country? 

Mr. LIECHTY. It is a very dangerous situation. 

Mr. CANSECO. It is. It is a crisis, so it is predictable, right? 

Mr. LIECHTY. I think the crisis that we would like to predict is 

how a default could propagate. 

Mr. CANSECO. Right. And therefore, we need to do something 

about it. Is that right? 

Thank you. Mr. Chairman, my time has expired. 

Chairman NEUGEBAUER. The members of the subcommittee 

would like to thank the witnesses from both of the panels for your 

time today. We understand and recognize that your time is very 

valuable. The information, your testimony, has been helpful to us 

as we do our jobs here at the committee and in the Congress, so 

we appreciate that. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. The meeting is adjourned. 

Thank you. 

[Whereupon, at 5:38 p.m., the hearing was adjourned. 

(45) 

A P P E N D I X 

July 14, 2011 

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