Transcripts For CSPAN2 Capital News Today 20121215

Impact on overthecounter derivatives. Earlier testimony for managing directors of Goldman Sachs and barclays as well as other financial institutions. This is an hour 20 minutes. Panel greetings. What youre getting your papers, et cetera organized in front of you, i welcome the second panel. A couple first housekeeping items. Nsn members here have been to testify before others have not. As a reminder before that it had been, or complete statement will be made part of the record. You will be recognized for five minutes for your statement right now so sometimes we seek to capitalize your statement and right in front of you is that clark bair. Goes down to five minutes in the final time. Also, i saw all that you sitting there with the first panel. We understood from the first panel everything is going well. We are going to move quickly through the process and of harmonization not only run the world, but accurate thomas of abuse in the second panel will tell us the exact same thing that its moving smoothly and we have no strong need for concerns. But which case he can make her happily. If not, the old adage of the host, paul hervey and now we hear the rest of the story. So with that, well start right off as we normally do from the left. From berkeley is a recognized and welcomed me to the panel and you are recognized for five minutes. Thank you. Good afternoon, chairman garrett and members the committee. My name is keith bailey. I am from barclays in that division. I appreciate the opportunity to testify on behalf of the institute of International Bankers of the doddfrank at in its impact on the market. The iab greatly appreciates the hard work done by regulators and congressional committees. We face the cftc in getting this right to operate on such a global basis. A test on a focus on continuing certainty of the type of seven regulations the effect its having on the risk of the market of the implementation process is not on a more stable footing. They recognize the need for International Consistency and coordination implementations of derivative reforms. As the committee is aware in support of this goal, the overseas applications of you as two activities either a director in significant effect in the u. S. Commerce for the potential for evasion. We support the goals of title vii which provide great transparency and increased oversight of the swaps market. There is growing concern of the cftc and divergence and the sec regarding the process and timing in the house slots and security base wipes are a furry and declines. As the committee is aware, the industry is facing quickly approaching the highest deadline. Without the benefit of final payments with the International Scope of these rules. The lack of clarity related to the rules crossborder application manifests itself in particular with respect to three aspects. The cftc sdc to more pressing concerns with the requirements. The first is to has to register as a swap deal or. Given the nature register, firms of which make decisions if i look so as to which entities to register with the cftc. Making these decisions without being fully informed to the rules that apply in literal take to comply and position untenable love love and predict ability. The inability properly to plan affects the ability of firms. The second major challenges the creation of a new definition of u. S. Persons. The cftc has proposed a definition expansive and without precedence posing difficulty for Market Participants to know which would be in scope. This is important because if a dealer treats at the u. S. Person anywhere in the world, that transaction will be subject to u. S. Requirements to execute the trade on a u. S. Clearinghouse and soft execution facility, potentially with local regulations. Conflicts introduce Compliance Risks resulting in trades not occurring. Now i definition of u. S. Person will reduce instances this conflict regulated to initially recognize each others clearinghouse and exchanges. The u. S. Definition further contributes to the uncertainty over who has to register with the socalled aggregation rule. As it stands now, it they register with the cftc to themselves register a swap elucidate transect even a single transaction with the u. S. Person. This is significantly increase the number of registered swap dealers and the resources the cftc will require to regulate them. It is hard to see how the liabilities of nonus entities with only limited to u. S. Facing activities could pose a risk to u. S. Commerce. Substitute complaints is the third issue. For example, to what extent has it had accountable to the cftc for Risk Management of global swap it dvds if they are different than those of its home country prudential regulator. The cftc is proposing to apply the usher potential regulated growth, but only if there will surpass a substitute complaints test that will require a high degree of culpability. The iab agrees that the numerous Global Regulators who suggest such an approach wont work as demonstrated this past october come such uncertainties create paralysis in the market. Clients regulators and title viis objectives for transparency in efficient markets are the losers. The resolution of these issues cannot read until until the last minute. At greater length in a written statement thursday steps the cftc can take to eliminate uncertainties. Such actions would provide the space needed for Global Regulators to strive for convergence in achieving with derivatives reform, that provide the time for the cftc and the fcc to establish a consistent with the crossborder application of title viis requirements. Thank you from yesterday to contribute to dialogue and look forward to any questions you may have. Mr. Bopps for coalition users. Thank you for being on the panel. To recognize for feminists. Make sure you do clothier might close to you. Mr. Chairman, Ranking Member waters, i want to thank you remedy the coalition for derivatives and users to be presented at this important hearing. The coalition includes more than 300 enduser companies and trade associations and collect it would represent thousands of users across the country. And as i united one respect to the strip it is to manage risk not to create it. They are able to maintain more stable and successful operations through the use of a variety of Risk Management tools including derivatives. Yet come attributes used and users must be put in it. Enduser trades account for less than 10 of the notional value of the overall Derivatives Market. The coalition has been drink each that the regulatory process, many with regulators dozens of times submitting nearly 20, others. We very much appreciate regulators to hearing our concerns and taking time to meet and speak with us on numerous occasions. We also work with congress in a particularly Care Committee on legislative means to prevent unnecessary burdens from being imposed on businesses. On behalf of the coalition id like to take a moment to think the Financial Services for his hard work in all of the legislation to the house to address an unintended consequences of the doddfrank ites. In particular want to thank congressman grimmett peters for the enduser does, cumbersome and were. The overwhelmingly bipartisan complete show process to both those in the house demonstrates changes to the doddfrank act that makes sense and can achieve a concert. With Regulatory Compliance deadlines looming, and the next you must however the coalitions concern with the direction in which circles appeared to be headed. Regulations relating to Merchant Capital requirements to enter affiliate trade commission centers and application of rules across borders. Ill touch upon these points briefly. The proposed margin requirements in particular those proposed by prudential banking regulators are especially troubling with her main street businesses. Congress is clear throughout the legislative process and text of the doddfrank act that endusers should not be subject to margin requirements because they do not natively contribute Systemic Risk. Congress also made clear imposing margin requirements for necessarily impede users ability to efficiently and effectively manage risk. As proposed, however, the rules contradict intent to impose the necessary margin requirements on users are diverting working capital from productive business use a survey conducted by our coalition 23 initial margin requirement could reduce Capital Spending by as much as five to 6. 7 billion in the s p 500 companies alone, cost them 100,000 to 120,000 jobs. Barroso concert in her affiliate derivatives trades, which take place between affiliated entities within a Corporate Group peace market spots. There were two Serious Problems that need addressing. First out of the cftc is proposed will come at financial endusers have to clear purely internal traits between affiliate unless endusers posted variation margin between the affiliates are not specific requirements for an exception. If endusers have to post variation margin, and theres little to exempting trade clearing requirements is the cost could be similar. Second, many endusers approximately one quarter of those who survey executes swaps at this of course makes sense as Many Companies make it more efficient to manage their risk sensually and have one affiliate in the market except dozens or hundreds of affiliates making trades and coordinated fashion. It appears in the regulars interpretation of the doddfrank act that nonfinancial endusers of the situates. Either dismantle are hedging centers and finding your way to manage risk or quickly rather trades. Stated another way, this problem threatens to deny the enduser clearing exceptions to endusers because theyve chosen to hedge risk and it shouldnt highly effective in risk reducing my. It is difficult to believe this is the result Congress Hope to achieve. Finally the proposed crossborder guidance also a cause for concern for the coalition. Guidance on impose additional costs on endusers to diminish hopes of counterparties. Her concern for the creation of the new bacon bits of entity from nowhere in the four corners of the doddfrank act. The term commonly used in the proposed guidance could be applied to hedging centers enforce endusers to abandon structures for executing trade. At the congressional development of the doddfrank act regulatory process. The coalition has advocated a more transparent to reduce market for the imposition of lawful Company Regulatory standards that enhance Financial Stability while avoiding needless cost on endusers. We believe imposing bush did not contribute to the financial crisis would create more economic instability, restricts job growth, decrease productive investments and hamper u. S. Competitiveness in the global economy. Thank you. The appreciate that. Ms. Cohen, welcome to the panel. You recognize for five minutes. Chairman terry, Ranking Member waters, my name is colin abbott direct tour at Goldman Sachs. The responsibilities include developing and delivering trading hedging and Risk Management solutions to the first otc trip to client specific focus on the market changes resulting from global Regulatory Reforms. And my current broadband church regularly with Market Participants that transacting swaps two miniaturist, excess liquidity and improve returns. Thank you for inviting me to testify at todays hearing to hear her live and answer any questions you have. Goldman sachs supports the overarching goals of doddfrank derivative positions including decreasing Systemic Risk and increasing transparency and devoted substantial resources to build necessary compliance systems. Commissioners and staff at the regulatory agencies including the cftc were given a difficult task and we commend a burst of vocalists of the legislation. Along with customers we been carefully monitoring the way regulators who the crossborder region, including how the u. S. Regime will interact with the Regulatory Reform efforts underway in iguchi 20 jurisdictions. Today i will race for challenges we and our clients with title vii implementation and consequences that might result from proposed crossborder guidance. First come in the cftc has taken a sleeping approach to his jurisdiction beyond u. S. Shores. Recent meetings held by the cftc and others have made it clear swap Market Participants in nine u. S. Regulators have substantial concerns about the expansive approach. These concerns will inform the ways in which Market Participants operate with some local banks in asia, europe and south america signally to u. S. Financial institutions they will have to start treating to avoid cftc swap dealer registrations. Approach may also encourage foreign break theaters to be similarly expansive as they crossed the Regulatory Reform machines. Second, the cftcs definition of u. S. Persons that dictates registration and application of title vii requirements is overly broad and at times they hurt as a result, Market Participants do not know whether they or their counterparties are or are not u. S. Persons and cannot make informed business planes. In addition, the breadth of the definition makes it nearly certain that some Market Participants will be the u. S. Person for the purpose of u. S. Regulation and media person, causing unnecessary overlap and potential regulation. Third, regarding sequencing, the cftc is chosen to finalize the title vii rules and require compliance with them before specifying. As a result, Market Participants be significant uncertainty as to oppose me apply. In contrast, the sec recognizes the need to finalize the crossborder application of its rules well before requiring compliance. Our fourth and final concerns relates to the fact that the cftc is crossborder approach has not been developed in coordination with nonus regulatory regimes. In the shortterm, the timing dispatch to the Cftc Skolnick and that of the iguchi 20 jurisdictions could cause swap customers to move their business to u. S. Regulations cannot govern swap transactions. While a permanent solution to these issues is being developed, its critical the cftc address the industrys immediate concern to avoid harmful and potentially permanent disruption to the swap market on and around December December 31st. Specifically come the cftc should temporarily permit the simplified form of the u. S. Person definition in the cftc is october 12 registration election letter for compliance with all title vii obligations. This definition is simple and clear, but still captures the vast majority of entities that Market Participants generally consider u. S. Persons. All family u. S. Person definition is developed in consultation with other regulators from the cftc should apply. Frank requirements to transactions between registries want to lose in the u. S. Person customers only. We appreciate the opportunity to offer views to congress and regulators as we Work Together to fully implement these new rules. Thank you and i look forward to your questions. From the new jersey association, welcome to the panel. Thank you, chairman terry, Ranking Member waters. I am representing to feel Merchants Association of new jersey, Petroleum Association and feel institute. Our members collectively distribute 60 of the castling and 90 of the heating oil consumed by the american public. We want to commend the cftc for dedication moving forward to featuring swaps market regulations which would bring greater transparency, certainty and fairness to a commodity Market Participants. Bona fide users of commodities, feel those features and sauce markets are not serving the best interest for what they were created for managing risk in discovering praise. So i title vii . For the first time all swaps are there clear not reported to repositories. This is an important step to help the cftc capture transit dollars traded in the swaps market. Additionally title vii is important because it limits speculation on energy trade enhances prohibition prosecution of fraud manipulation, promotes consumer protection. While the rules might not be perfect, the commodity futures modernization act of exempted wall street Firm Position limits and requirements to ensure transparency and competition and prevent fraud manipulation excessive speculation. Before passage of the csma, 60 to 90 of market for commodity. Today peerless speculative and thats only markets we know about. The sub was speculation undermines mechanisms and exacerbate markets from supply and demand fundamentals. Commodity futures markets established as a tool for true physical hedgers. It wasnt set up for banks to dominate the marketplace. The swaps lookalikes means the christmas financially settles swap markets impacts what occurs in the physical market. We set your speculation has driven prices at the pump. Oldman facts marketrate privacy for oil and other markets reversed from suggesting speculators boosting prices as much as 27 a barrel, which translates upwards of 40 cents to 60 cents a gallon at the pump. Klugman noted thats an eight to 10cent rise. What does they were opposed to speculation. Many speculation the marketplace for fiscal endusers, but distort the market. The speculation on Small Business Petroleum Marketers is a problem with farreaching consequences. Castling and heat the oil retailer says the profit margin from steel sales fall to its lowest point. Small businesses do not advocate or my crude gasoline prices because they operate in such a competitive environment at the higher prices climb, further. They not only hurt motorists, but Small Businesses as well. Re position limits will come its unfortunate u. S. District court ruling vacated the clear intent albeit to send back for further consideration. But in 100 studies published showing speculation has been distracted at the commodity markets. But also like to note echoing statements made earlier relative to bipartisan process that some of his that as recently as 110th congress, 70 House Republicans voted to approve legislation that would establish acrosstheboard limits and provide the cftc with 100 employees to carry a commission. Of that number, 44 or so members of the house. Crossborder trivets, transactions bacher affiliates of u. S. Based firms can have a direct and Immediate Impact on businesses, consumers and stability of the american economy. An ageless editions have access to the Federal Reserve discount window and fdic backing or that the Congress Gave the cftc discretion to go offshore affiliates. If the cftc is unable to effectively regulate u. S. And foreign affiliates, that engagement in swap transactions, title vii of doddfrank will be guided. Given overthecounter Derivatives Market has grown exponentially, small down payment for the cftc to ensure markets to reflect it is critical. The otc market totals approximately 300 trillion in the u. S. In 300 trillion worldwide. We believe the budget is to increase from 205 million to 308. We have the cftc to implement the Peoples Branch without further delay. I think the Senate Committee for the opportunity to testify them up for questions you might have chairman terry, thank you. Thank you very much. Mr. Deutsch for five minutes. My name is tom deutsch comics that do direct your 19 demand for the opportunity to participate today on behalf of the 330 member institutions to the asf to represent the various constituencies and global structured finance markets including issuers and investors can the financial intermediaries, lenders, trustees for the servers and rating agencies. My testimony today address detail to keep unintended consequences of outcomes of implementation of title vii of the. Frank act. Pursuant the number varies the securitization structured finance such as qr ram, risk retention. Certainly a litany of issues in different hearings. Todays hearing is not one in the summer 2010 i wouldve expected in large part because the use of swaps and derivatives and securitization generally at the most plainvanilla type but these of Interest Rate. To Interest Rate Interest Rate fluctuations. I may find a few basic examples. Under finance company to sell to investors. Typically on the loans are sold to borrowers at a fixed rate. That is borrowers want to keep their fixedrate loans and daily fluctuation. They try to sell these securitizations to investors oftentimes the investors want to have me in so that securitizations what a sick sob to effectively be able to allow to enter and create fixedrate on with the issuer. But at the same time be able to sell to investors that pension funds, mutual funds and the lake would like to get floating rate notes. In effect, besides in all three parties when in that transaction for the buyer gets a fixedrate now. The investor gets a floating repurchase and also the issuer is able to provide this much and maximize the investor appetite. They provide a second example. That is an english Mortgage Lender in packaging number of homeowners to mix the homeowners into securitization facility was investors. The english homeowners are required to pay less obviously in u. K. Pounds. English homeowners are required to pay those back, but the u. S. Institutional investors who purchased that theyre based on have to pay their obligations, that is u. S. Pensioners and other investors in funds have to pay those back in u. S. Dollars. As such, the u. K. Securitize her will turn three basic currency swap to effectively protect investors from any currency fluctuations in buying the securitization. That way the english homeowner gets their mortgage in u. K. Pounds, but ultimately the Institutional Investor can focus on the credit and prepayment risk of the securities rather than currency fluctuations. Historically this has been a challenge and theres been little interaction between cftc in securitization. Rule changes and proposals have unfortunately created significant concern for securitization markets. First, posting a cash margin may be required for securitization for the most basic vanilla types. Poor regulations may trip up in rope in many securitization transactions into those rules. First let me address briefly the gas margin. Our concern is securitization that use these vanilla swaps act have cash margin into the transaction and that will take on traditional risk for securitization, the most money muchneeded capital from a tape for securitization vehicles. If you look in appendix one of her written testimony could we provide a detailed example showing the posting of cash margin is required for transaction vehicles. Interest rates were to be with the 95 of the usual fluctuation , at least nearly 10 of the securitization transaction will have to be posted as margin. There is 42 billion a year issue in auto abs and 2011. If 10 had to be post on transactions, that would be 4 billion for police cars on car lots a lot of that reside really. In scenario two, we look at a much higher increase of fluctuation in Interest Rates. Over 20 will have to be posted in this transactions timing approximately 8 billion from auto abs transactions. And much significant credit market in the auto context alone, let alone mortgage credit card, office of the light. But that would also like to thank the cftc further work related to commodity pool in alleviating many concerns associated with it. I look forward to answering questions the committee may see fit. The wholesale market workers as well. Thank you. I am giancarlo in the wholesale broker or other Financial Products. I testify todays chairman of the wholesale markets brokers association, an independent body representing the posadas wholesale brokers that you never Global Financial market. Our member firms for swap execution under doddfrank these platforms for their products. I never seem to register security base thats when final rules are completed. We stand for a swaps regulation that increase transparency, promotes competition and in rhesus Market Participant access. We have kleenex solution to break the reporting mandates through dozens of writings and formal testimony and continue support today. Were they to discuss the end finished rulemaking, the crossborder impact of doddfrank and three, the overnight futurist nation of swaps markets. I start with the rulemaking. We are informed that final sepharose had been presented to the cftc commissioners and maybe finally soon. German chancellor has said the final rules allow swaps to be executed through any means of interstate commerce, end quote. Our member firms spoke on the news. The mr. Chairman, i was pleased to hear chairman in third a few minutes ago that swaps execution be technologically neutral, including please transactions. That is shallot he needs to be stated not just in the preamble to the final rules, but the rules themselves. Rules must be as clear as was the statue. To provide a device to be inconsistent with the express provisions to comment will certainly lead to regulatory uncertainty and market confusion. Since the june release of the interpretive guidance, trading firms are being shunned by foreign counterparties to avoid registering with the cftc. Twotier trading markets are emerging. They can transact in one word u. S. Traders are prohibited from transact team. As we meet today, we are hearing from foreign firms they dont want to trade with american firms do plus they be caught cftc regulation. This development is not good for Global Trading and not good for americas economic interests. Finally i will speak about future station of have the swaps markets. From friday, october 12, 2122 monday october 15, we saw a complete migration of trading activity in u. S. Natural gas and electric power markets from clear slots to economically equivalent futures. Almost no swaps for treating in Energy Markets. This overnight developments in the u. S. Market have been almost entirely because Energy Trading firm sought to avoid registering slops dealers are major swaps participants. It happened because the arbitrage against one project under its jurisdiction swabs in favor of the other product of the features. It happened with little steadier understanding of the unintended consequences on u. S. Market, traders are energy consumers. It happened certainly without a costbenefit analysis. Here are the concerns. First, the features they shouldve swaps harms the competitive Market Structure that doddfrank nature reserve. That is choice of Financial Products chemistry set methods of trade execution, venues and clearing houses. By contrast, the futures market while serving a finite set of commodities. By limiting trading methods and have a single vertical silos for execution and clearing. The features they shouldve swaps leads to monopolistic control, reduced Customer Choice and an avid oblate higher costs of treating and execution. Secondly, features they shouldve swaps markets increases Market Participants and Systemic Risk for the u. S. Economy. Because teachers do not allow for specific exercise states, dare and perfect hedges and cause Market Participants to curb risk and greater earnings volatility. Features they should increase the Systemic Risk because labeling product is a future and listing it on an exchange results in a lower margin requirement than a clear swap, even though the economic characteristics of products may be identical. Then they repeat that. Holding a spot featuring putting an exchange results in lower margin in the same economic equivalent of a swap. Regulars have not analyzed what that means to Systemic Risk it as result in the clearinghouse is observed more risk during liquidity crunch or market crisis. The lower margin may be attracted to some future traders, dire consequences for the american taxpayer. Doddfrank was designed to promote competition, reduce Systemic Risk, facilitate clearing an increase transparency. Congress did not mandate future projects over swaps, monopolies over competition or increase risk to trading firms or the economy. In closing, we call to finish the rules as congress intended, to carefully consider International Impacts and better understand and analyze any further migration to futures. We look for to your questions. Next and final at cover from m. I. T. , mr. Parsons for environmental and policy work, welcome. Thank you. Im john parsons, member of the finance faculty at the school of management. I publish research on hedging and teacher course on Risk Management for nonfinancial corporations and have consulted with a number of companies on hedging issues as well as other Corporate Finance issues. I want to thank chairman garrett and ricky member waters and other members of the subcommittee for allowing me the opportunity to testify here. Although they share hoping in different ways to crack effective regulation that reduces hedging costs and increases the productivity of the economy. I submit a neighbor testimony was hit or miss. I used his remarks to basically describe two broad categories, one that i think this is the mark that will be in effect without reducing costs for Nonfinancial Companies and potentially have some dangerous side effects in another broad category of factions that has a track record of helping to reduce costs for companies, which are able to hit. In the public discussion, title vii and the otc swaps market, i see a very broad misunderstanding of how come these can avoid the cost of hedging. Many people imagine you can avoid those costs if you can avoid margins. A lot of congressional action has been targeted to find ways not marching swaps that would lower costs. Im what people think you can get a free lunch in an area like this. All nonmarching swaps intel credit risk and all credit risk is costly. Thanks know that the lucrative leaders know that. They handle slots accordingly. The examined credit risks and maintain a speak in the old days, but more currently to keep track of credit risks in the price of credit risk when they saw the prof. They charge for. The cost of day. Lobbyists have spot. Commissions to produce largest events of costs as a result of forcing companies to do margins. One of the studies you for the souls cited by mr. Bopps. On the studies are preposterous. All of those studies assume away any costs created by credit risk to not marching swaps. That problem has been publicly stated and criticized. Theres no public defensive inadequacies of the studies and i would recommend that Congress Look for reliable figures for disinterested parties, which stand up to public scrutiny. Some legislation has been aimed at avoiding this cost, is misguided at best and dangerous overs, especially those which try to direct Bank Supervisors to ignore the credit risk that is embedded in nonmarching swaps. Her example, a chart 2682 is one of those types of those. They threatened to return us to an unstable and will supervise financial system. Turning now to the hit i want to type reflate about Central Clearing and how does it affect if tool for decreasing cost. Theres a lot of misimpression the Central Clearing is a new untested mandate originated in doddfrank imposed on the tried and true otc Market Structure that minimize costs. In fact, its quite the opposite. Its a return to a triedandtrue system from the rediscovery of an important innovation which American Financial markets and industry expanded on to reduce costs. I think the way we want to look at the problem is to find a way to improve the extent of Central Clearing, improve the extent to which Central Clearing can reduce costs and there are lots of ways to make that implementation better. So in closing, i hope we can focus on true in effect means for reducing costs to nonfinancial come in as and avoid focusing on it affect ones. Thank you very much. Any thank you and the entire panel. Before you proceed to questions to put into the record, two statements. One is the testimony of terrence duffy, executive chairman of the subcommittee for the committee dated 12. Without objection so ordered. Secondly, testimony of the Companies Supporting competitive derivative markets for this Committee Hearing today. Without objection so ordered. I yield myself at venice. Not necessarily running down the hall is simply cant get that in five minutes. Ill start with mr. Parsons in my mind. Thad cochran is the way were going here. There is another side the Central Clearing and that is that now you are centralizing, hence the name the risk, too, combining risk in this one place and under doddfrank, we gave clearing houses to title eight, accessed out the discount windows at the same time. So isnt there a potential for an additional cost and or risk . Its true that you know how to risk centralize come of these be careful youre not just moving risk. Central clearing actually reduces risk overall. Thats why so many exchanges at the end of the 19th century and beginning of the 20th 20th century move to it because it allowed them to sell more Derivatives Market actively at lower cost because the absolute amount of risk in the system was last. Mr. Giancarlo, do they comment on that . General comment to which you probably heard earlier today from the commission with regard to the cftc on the rulemaking . Thank you, mr. Garrett. We do. Our trade association supports Central Clearing of swaps transactions. I know mr. Parsons comment, that nonmarching swaps equal credit risk. My concern would be equally true that inadequately marching futures would also equal credit risk for clearinghouse is in a pseudoclearing houses have access to the discount window. I wonder kicked in the next market crisis for clearing houses are too big to fail because the margin rules were made in arbitrage of the situation between swaps and futures in favor of futures. Weve taken care that with access to the discount window. But it would be nice if they wont ever fail. I think they said that about the big banks at one time. Yeah, exactly. I was pleased to hear chairman gensler say that the swap execution in accordance with congress stated intent will allow any means of interstate commerce. It would be to elegy mutual and it is essential that Technology Neutrality nice in the rule itself so theres no confucianist there are any number of other rulemaking set of come out. Thank you. You probably heard my question. With regard to limits that were the cftc is going right now with court case and appeal on it and also with regard to coming up with a potentially new rule on that. Any thoughts on that . Thoughts regarding the parallel track and also with the potential outcome will be on that. Obvious so the court has struck down initially. You commented on that. But a mature library. I think chairman gensler said he needed to leave it to the general counsel to respond. They certainly qualify to respond to the parallel track question. With regard to the position of position limits in their appeal to that case that obviously the court struck it down. The stated position of the cftc as they are appealing that for which we are thankful. But the position limits are long overdue in the courts ruling was completely erroneous. The association of america must have testified 15 times give or take in the years leading to the passage of doddfrank and will not ever hearing a sound position limits to the cert discussed in congress. The ruling is narrow and only washington is the work not known. Its unequivocal that congress intended at the time frames put in their in the court overturned on something called the chevron part 1 or part 2 test. The will of the branch was explicit in the court overturned the will of the elected on a very narrow crown and sent it back. Ms. come you mention one word we trade to get through, which was on sequencing. The lack thereof perhaps inspires how the cftc has handled matters versus how the ftc has handled matters. Do it elaborate on that . Shortcoming thank you for the question. The cftc more than any Global Regulator in the world has attempted to meet the 2012 deadline for derivatives reform. But in doing so theyve assembled a confluence of rules that although affect it at the same time in the next few weeks. The contrast that to the ftcs approach would be provided to the market a sequencing plan conditioned on certain foundational roles such as what product definition, some payment the sec digerati with the cftc and definitions of the major soccer disappointed that trip as well. Unlike the cftc, the ftc has also said the will make their crossborder rule a rule and foundational, just like product definitions in entity definitions so they can take those three foundational pieces of information and other implementation plan. They then went on to give categories of rows which related one to the other, which helped affect to implement reform in a practical and thoughtful way. Was before yield. We try to engage the yet sunk in this matter since it presumably has authority to say lets try to bring parties together and we got not much of a positive answer that. What that field back in a deal to gentlelady who has her notes all they are. Theyd drove for five minutes. Well, thank you so much, mr. Chairman and i just think this is an outstanding panel. I guess i want to say that mr. Giancarlos comment about mr. Gensler preferring the futures market over the swaps market because of this jurisdiction, i guess i find that rather provocative and ill let him respond a little bit. I was more curious about what mr. Parsons thought about mr. Giancarlos comment that this really creates a lot of regulatory arbitrage and unintended consequences as an economist. At like you to comment on that testimony. Its a very important problem in the cf to see us kind of between a rock and a hard place for two reasons. If youre talking about customized swaps, does it really different from futures and can only be dealt with in the otc swaps markets. For example, all these energy swaps that moved from swaps into futures, those are not customized. Those are standardized instrument. They are treat on exchange effectively. They are clearer. This legacy to a standardized swaps and if you require them to satisfy regulation, supervised transparency and clearing, they are virtually from an economist point of view indistinguishable form features. So now you definitely get your regulatory arbitrage. No matter what the cftc does, any little difference in the rates for futures and swaps will send a standardized instruments to one or the other. But theres no way when congressmen neugebauer was discussing this earlier he kept referring to congresses and 10. It is impossible for the cftc to meet the intent of preserving standardized swaps because once you do that thing title vii requires, make them transparent, make them cleared in their regulated, supervised, which they were before. There is no fundamental economic difference of futures that its always going to be little break in the tory difference things to move one to the other. I did promise he could weigh in. Thank you. Two quick points. If in fact always send us a shift of one product from swaps to futures, without any change in liquidity characteristics, which i can go for because thats what we seen in the numbers ive seen there should be no difference in margin. Fiveday margin for swaps and when you for futures. Secondly, if congress and tended to have a competitive trading landscape for swaps and if that landscape is now migrating features, we have to ask ourselves whether the anticompetitive singlefamily, acoustic structure of the futures markets should continue to congress intended to trade through competitive venues and clearing houses. Thank you. Let me ask mr. Bob a question regarding the inner affiliate swaps. Can you speak to how the cftc ruled compared to a bill that we had come to h. R. 2779 and whether you think that margin in turn enhances the markup for inner affiliate swaps because im thinking of companies in my jurisdictions who have really indicated to me that inner affiliate trade is the credit risk really is not very. Its just a book entry or central risk and hedging purposes. So, can you tell me how the cftcs rule would apply . Sure. Youre absolutely right, congresswoman moore. This is an important issue in your bill is still needed. Now the cftc proposed rule is helpful. Theres no question they have created an exception for enter affiliate swaps that applies to nonfinancial endusers. The problem is there are two key issues, two problems not addressed by the cftc will. Everyone, nonfinancial endusers have an eight step process or a criteria process financial users must meet and what criteria is posting margin between affiliates. Again, if you have been a post variation merger between affiliates, the whole point behind an exemption from clearing requirements is defeated because your costs are roughly similar if you have the margin. Second and very importantly there are lots of companies in your district and throughout the country that have treasury hedging centers in the cftc will doesnt do anything to exempt trade. If you have a nonfinancial enduser facing the market, if what that hedging centers set up to do this and turned to swaps, that hedging center would be a financial entity. So now you have a financial to financial swap is not eligible for the clearing exemption even as swaps are entered into for a purely nonfinancial enduser. Its a big problem. A number of your companies about it and its not addressed by the cftc rule. Thank you. Were going to have another round. Maybe. Gentleman from arizona. Mr. Chairman, and is yesterday looking forward to the next round. This is one of the smallest are so many things i want to ask the panel. I need to touch on one thing just because it bothered me. Mr. Parsons, i was going over, if remembering your testimony you come back and his Staff Committee preparation for this hearing. See you in here quoted the committees hearing memo. Im not going to ask where you got it, but traditionally thats an internal document that we were come back and forth, sort of like your lawyer somehow getting the internal lawyers part memos. So someone violated mechanics in the internal rules wielded under. Thats as much be shared admixtures committee knows were not supposed to go there. Eufaula started a conversation. Which you yield . Im sorry about this, that there may kimiko. Youre going to leave me . I wanted to know if i can ask unanimous consent to enter in the record something for the Ranking Members statement from the americans for financial reform. So worker. Any given back his time, mr. Bar that he wants. I want to hit on a overall teammates out with for the season that saw unintended consequences scene multiple bits of conversation seeing regulatory arbitrage and forgive me im going blind to survive. This job is killing me. Is it pronounced giancarlo . Sorry about that. In one hand i hear you have the discussion of swap futures. My understanding is margin should stay the same. So in some ways im not sure where this understanding what you see as completely fair. But first i thought to to regulatory arbitrage internationally. Mr. Parsons, you have really smart people around you. Mr. Deutsch and ive had this conversation in the past. Do we wake up at several sites and first in International Arbitrage and secondly, i read even starting to see movement in the Energy Markets internally . Such as rational economically is deeper to where you perceive the lowest cost of doing trade. And my barking up a tree . If youve had sent out with your smart people, could you find it internationally to arbitrage some of the rule sets . And you find a domestic way . Thank you for the question. Clearly regulators have express and have been doors a profound intent to effeminate regulatory arbitrage internationally. You think you see that very clearly in the efforts in relation to the margin slots. It is difficult to envision that everything could be completely the same across the world. There will be instances of preference. Will be certain entities, certain participants in the market, Pension Plans at a slightly different rule sets that apply to them. I think it is simply unrealistic to suppose were going to get complete harmonization. Seen if they do this in five minute increments can manipulate you and behind me were gameplay than this earlier. What if i routinely turn my swap in slightly customized . All of a sudden out today just move it to an otc type product . A mean, you know, anyone else and i complicating the simple clicks i dont think youre complicating the simple. I think thats something we have to watch closely and we see one instance in the case of future station where investors are demonstrating what they think of it the most efficiency and return. I make the case an example of future station that these are highly regulated markets. But its a good example is the investor behavior driven by different rule sets in a particularly good example is probably in the equity and credit archives for the cftc and fcc share jurisdiction of products treated often by the same trading desks in the same investor bases were significantly different rules promulgated by the two regulators will likely encourage migration between the two products. Its really important question to ask now and keep asking us also finalized. I actually have a real interest in this because in our game theory, we were that would have been if you had International Affiliate . Is there certain they could be trading that she keeps falling on the International Even though its trading at domestic risk. What happens if you break up trading debts so Treasury Management now its broken up through the organization . To set the view of some of the user rules and obligations . If i customize the design of the hedges, to make it around some of the platform trades . Just trying to get my head around where exposures were required to walk into unintended consequences. Gentleman from texas. Thank you, mr. Chairman. Mr. Bailey, lets talk about the turned u. S. Person. How in your opinion should it be defined . Retook to view this you have to be extremely careful in relation to funds and whether you are looking at a relationship with the investor themselves are you as testers or whether the fund manager is an investor. We think this epo definition is very much tied. We have questions around whether the principal place of business should be in the definition. Do. How it was defined on october 12th, based on what needs to be included in the calculation of whether or not are you reached the trading at the register, is close to the appropriate definition they should use for all the purposes under the statute. So, do you perceive any problems or have there been any problems over the uncertainty of defining u. S. Purchases . As it is defined by the cft . Are you asking in regard to whether the market place has continued to be reticent to trade with u. S. Persons . Exactly. On the definition of u. S. Purchases. That is an issue on which we only have such anecdotal evidence and it would be difficult to depend on. I defer that to oncarlow where he said he has seen reticence on the part of european institutions in some cases to trade with entitieses may possibly full under the u. S. Definition if the cftc were to adopted the wider definition proposed in july. Do you have an opinion whether or not a broad definition is a good idea or a bad idea . Oh, a broad definition brings into play considerable risks in relation so introducing higher levels of conflict because entities that have prepares presence in europe and asia would be falling within that definition, with the result the local rules would likely apply to them as well as the u. S. Rules and that puts increased pressure on the need for substitute compliance to resolve that issue. Short time, mr. Gian car carlo, due you want to weigh . My organization has not taken a position on that and i do not wish to make one. I say harmonization is absolutely critical if we are not going vulcanize trading markets. Thank you. Now, mr. Both, i represent a district that is home to large Energy Industry as welling a farmers and ranchers that use derivatives to manage risk. Why should Congress Exempt Nonfinancial Companies from the market requirements . Thats an excellent question. The answer is because Nonfinancial Companies dont do the sorts of dont engage in the sorts of trades that create risk that would warrant marin requirements. Nonfinancial Companies Enter into derivative transactions to manage risk, and baked into doddfrank is a requirement that if a Financial Company is eligible for the clearing exemption they can only be eligible if theyre hedging commercial risk. So the types of transactions they enter into, that end users enter into, and the fact that theyre not speculating, theyre managing their risk in other words, the transactions offset risk within the company all suggest that not just suggest but that regulation, margin requirements, on Nonfinancial Companies, are not only not needed but would impost additional costs that are simply that we detrimental to these companies. So, do you feel that the actions by regulators have carried out the intent of congress or do you feel theres still some ongoing confusion regarding the end user exemption and. We do not. We do not feel the actions of regulators have carried out faithfully the intent of congress. We agree the cftc margin rule is better and closer to the intent of congress but the prudential regulators market rule would impose margin requirements on end users and they believe, the regulators believe that the doddfrank act as written handcuffs them and does not give them enough authority so they dont have to impose margin requirements on end users. We do not believe regulators should be in the room secondguessing the decisions made by corporate treasurers and their counterparties. Thank you. I see my time is expired. Well just run through. I have a couple questions, not necessarily on the mr. Deutsche, can you speak to talked already about october 12th and prior to that and all the exemptions that have come out from that point in time. Can you speak to your position with regard to the exemptions which are obviously temporary, right . With regard to commodity pools and the basically, is a understand the situation, insecurityization that you basically have swaps within the securitization and the exemptions give you some relief temporarily about not overall. What does that do to market place now and what relief permanently youll be alonging for. Over the summer the securitization market put a lot of pieces together and realized that the commodity pool regulations may actually rope in securitization to be called commodity pool operators; which are by definition operated for the purpose of trading in commodity interests. Most point of securitization, auto loans, credit card, mortgage, really dont arent conceived at all for the purpose of commodity interest but, instead to fund credit fundamentally. We approached the cftc in june and many followup letters and dialogue with staff and commissioners and the chairman himself to get appropriate relief to make sure its very clear that securitization should not be roped into the commodity pool regulations part of the argument there is securitization is already regulated. Correct. Significant amount of regulation from the fcc and other various parts from doddfrank and otherwise and particularly the transparency issues if a securitization has a swap in it, the Disclosure Requirements by the fcc north from the cftc. So wire already effectively covered by the transparency related issue. The real question is does securitization use swaps for the investment exposure, to take investment risks . And in most of the instances they dont take any investment risk, and theyre trying to hedge risks to ealmost until the Interest Rate swap. We have not gone action relief or guidance on october 11th october 11th and this past friday that provides for some legacy relief from the staff for all outstanding transactions and then extension of the compliance deadline for other transactions until march 31st. We look forward to working with the cftc staff. There are certain types of transactions that stale may not fall within the four corners of the relief but the hope is these transactions and the par tase pants dont have to start complying when they wont have to comply in effect. Many types of transactions just clearly arent commodity pool operators, and so far at this point we have gotten most of what be need but i still think theres key areas to get to march 31st. One 0 question. Ms. Cullin you heard the discussion of u. S. Personnel. Thanks for the question. We think there are risks to u. S. Person definition, that is, too broad. One of the recollections we were talking earlier about unintended consequences is again that you can have a Market Participant who is a u. S. Person, a i a eu person maybe not an fcc person and that person could optimize what person or people they want to be. And that is potentially an unintended consequence. I think really the guiding principle, i think the u. S. Person definition has to be addressed in two ways. Number one, the immediate need for a clear consumerrable definition and specifically the one to which we have been implementing so we can go live with a number of very important rules, such as sdr reporting business conduct that will really show leadership to the rest of the world on key packets of derivative reform. We need that clarity so we can start in the next three weeks. Then over time in consultation with other stakeholders here and around the world, whatever definition of u. S. Persons ultimately decided upon has to be something that is clear, consumable, and not debatable from firmtofirm. We dont want firms competing whether or not they see a specific entity as u. S. A. Person. And i would add that one of the accomplishments of doddfrank already underway is all entities that participate in the Financial Market place register for legal entity identifiers, and when they do that, they ridge stare register a country of organization, we can go to the web site ask see whether their country of organization is in the United States or not. Thats the level of clarity we need for the. Person definion. Sounds like where we stand now were creating a schizophrenic definition schizophrenic u. S. Person with multiple personalities. The clients i talk to every day state that is their number one concern. My time is up. Gentlemen for arizona. Thank you, mr. Chairman. Mr. Giancarlo. Im sorry, back to our running through this before. Okay, so, on softs futures. What would you change . We believe i just want to clarify my remarks before. If they werent clear. We believe that margins should be the same for economically equivalent swaps or futures. The name should not determine the margin if theyre economically equivalent. Perhaps you didnt understand that. But we may have to drill down into that one because i think have a couple articles that talk about maybe i need to learn more on the risk side on the margins actually being somewhat equivalent. Say in the north American Natural Gas and electric power markets, which were formerly swaps, and that moved over the course of a weekend into futures, the liquidity in those markets did not change but what hanged from friday to monday was the margin that market the margin was the effect of have thing to do the types of registration . The registration for nontraditional dealers, to facing the prospect of registering as dealers, drove them into futures. So the regulatory the margin changed and the point i was making were creating Systemic Risk back to the 0, question. What would you change . If you were if you had to solve this problem, what you fix . A number of things. One is the margin. Second, theres a number of other differences, one is that the exchanges block trade sizes are commercial identities and take commercial advantage of that in swaps the cftc has taken itself to write the size of blocks, and the fairly clear language of doddfrank that says that sets should be setting block sizes. So, now in one case of futures you have exchanges setting block sizes. In the case of swaps you have the regulator, the noncommercial regulator, and thats going to be another opportunity for arbitrage for using one market over another. The other is timing of reporting. Congress established a regime for swaps. That regime doesnt exist in futures. Arguably that regime is what congress intended but now were seeing congress moved from from congress intense to have that type of reporting regime. There are business conduct rule that apply to swaps that dont apply to futures. So theres a whole series of that indication of movement of one product another theres no real change in the economic nature of the products themselves. This is for anyone else on the panel. Is this something i should fret about . I think the margining rules that we focused on are something that we fret about quite consistently, and im very concerned about it on the basis that if were securitization transactions are required to postmargin, particularly liquid margin in the 10 to 20 range on a do reducing Consumer Credit by four to eight initial the auto market today took significantly change the auto landscape we think. Do others on the panel see a migration here . Is this sort of the unintended consequence . I think there is a certain amount of inevidentability here. When the doddfrank act was passed, the swaps market sold itself otc swap markets sold itself as doing customizes instruments. Now were learning a vast amount of what the otc swaps market does is economically equivalent to what can be done on the futures market. So, you have to eventually decide, should the swaps regulations be set for a market thats customized, which will be one set of regulations . Or should it be set for a market that is standardized . But if right now it was done as if they were all customized but the arent yeah. That was almost where i was before in the previous question. Anyone else think this is worthy of our focus . Speaking of barclays, i would just note that perhaps a curiosity that the market of swap futures doesnt have to register as a swap dealer, which i think was part of the reason why that was such a critical date, october 12th. It included not having to count the swaps as in the tally of what you had to register. Would say that futures has a place in the future representation of the redistive market and swaps. Its just a question of whether or not its intellectually consistent with the treatment of other products in the same space that and there becomes my fear of a market that actually seems pretty efficient. The fear of actually doing damage when were trying to make other things work at the same time, and back to our law of unintended consequences. Mr. Chairman, i yield back. Thank you. Thank you. The gentleman from texas for the final word. Thank you, mr. Chairman. Just a few followup questions. Miss cullin, with regard to crossborder regulations, do you feel that the ftc and cftc should harmonize the crossbored approaches before implementing them . I think thats like product definitions and entity definitions, crossborder application of the derivatives provisions is foundational to implementing derivatives and id also note that a major area of distinction between the u. S. Approach to derivatives reform and the rest of the g20 is that we do have these two regulators who are responsible for different products, and that creates confusion, more confusion, around the rest of the world as they look and try to understand the system to which were implementing. So, i think that there are certain areas where its much more acute than others that the two regulators coordinate tightly and crossborder guidance is one of the most significant. Thank you. Anyone else on the panel care to weigh in on this issue . Mr. Bopp. Following up on what i was asking earlier, regulators decide to impose margin and Capital Requirements on end users, do you feel there is a possibility that companies could begin to use markets outside the u. S. To manage their risk . In other words, a flight of business out of the u. S. . Thats an excellent question, and its one its a question that i think our Member Companies have to think about. Hopefully we heard from chairman that the cftc is trying to make its rule coherent, consistent with foreign rulemaking as well other, rules in other countries. If the prudential regulators if we can bring them in and the rules can become consistently and consistently applied, were still hopeful that the that we can get some relief from margin requirements on a regulatory basis and not have to have legislation passed. Now, with that said, the legislation is Still Critical at this point because at chairman bernanke testified, earlier this year, the fed believes its hands are tied and it has to impose margin requirements even on nonfinancial end users. You think they it will jeopardize the flight of business out of the United States and into other markets . I think that is an option that companies have to think about, and i know that some certainly are giving it thought. I dont think its an option that they want to take advantage of. I think what companies are hoping for is some rationality and the congressional intent behind doddfrank will eslim prevail. Thank you. I yield back. I yield back. And that concludes the questioning and i very much thank this entire panel, both for your testimony that you gave here just now and also for your written testimony, which we and our staff have reviewed previous to this. So i thank you for you. I give a lot of different takeaways from this and it was good we had this panel to see how the implications of the the implementation of title 7, cftc specifically is fanning out and we may be actually getting g into that somewhat schizophrenic situation in more ways than months as this plays out. So i thank this panel again, with the prior panel there may be additional questions for either the members who are here but also from the members who were not here as well, so this committee is open for the next 30 days. And without objection, this hearing is now adjourned. Good day. Coming up on cspan2 a discussion of egyptian president morsi and his opposition, followed terrorists browsing refugee programs and then a talk about innovation and the u. S. Economy. Tomorrow on washington journal your cals and reaction to the shooting in connecticut. Followed by a discussion about how states with Strong Defense industries are bracing for sequestration. The scheduled january across the board cuts affecting federal agencies and departments. Our guest is juana summers, and later advice for preparing 2012 federal taxes and a look at new taxes taking effect in 2013. Kipling gary editorial director Kevin Mcconnell is our guest. Washington journal with your calls, 2003s and emails, live at 7 00 eastern on cspan. Tomorrow, a draft constitution by egyptian president Muhammad Morsi that would expand his decisionmaking powers is up for a vote. The vote has brought protests. Next well talk about developmentness the country and security throughout the region with an expert on the Muslim Brotherhood and a former israeli ambassador to egypt. This is an hour and a half. Looking at the political competition within egyptian society, what is likely to be the outcome not just of the referendum but the next step and the next several steps in this ongoing saga of the egyptian political transition . Looking more deeply inside the Muslim Brotherhood, and looking at this in the regional perspective in terms of egypt, israel, and the aftermath of the gaza conflict, which may seem like it was light years ago but it was only three weeks ago. So, with that, let me briefly introduce our panelists. First, steve cook, our gold prize winner. Senior fellow for middle Eastern Studies at the council on foreign relations. I take great pride in mentioning when he was much younger, steve was a Research Fellow here at the Washington Institute and were very proud of steve venezuela professional accomplishments from that period up until today. Very happy to have you back at this podiums steve. Speaking second will be ache trader. Eric is the washington instates next generation fellow, a doctoral candidate at the university of pennsylvania, where he is completing a dissirte addition on egypts Muslim Brotherhood and is going to give us special insight into the details of mohammad morsi, the Muslim Brotherhood and the quest to achieve a constitution. Then, third, i am pleased to introduce and regretably to say farewell to ambassador cohen, he is the inaugural diplomat ins at the institute, and ambassador cohen served as israels ambassador in egypt from 2005 to 2010 and has an on theground perspective and experience with the politics were seeing on the ground in egypt today. So, first, steve, then eric, and then shalom. And then open up for your comments. Good afternoon. It is a tremendous pleasure to be back at the Washington Institute. I find it to even though ive been abroad for eight years, i feel nervous, i feel like im performing for mr. First grade teacher again. But its a great pleasure. This where is my career began, and also for those of you who know me but rob does, this where is my family began. Im sure that many in washington know that rob they know rob as a defendant analyst of the middle east, an extraordinarily creative executive director of this august organization, but not as many know that rob is a pretty darn good matchmaker. Back in 195996 i was a fellow as rob mentioned and i married one of the Research Associates that was was there and we have been have ever since then and i think theres five or six Washington Institute couples in defying the odds none have resulted in divorce. So you have done an excellent job. They call me the sung young moon. I was trying to figure out what the other word is for but i decided not do it. But for those reasons, both the beginning of my career and im forever indebted to rob and his organization. Its also wonderful to have been awarded this terrific the gold medal, wreck nix from the institute for my work is truly an honor and, rob, i than to thank Martin Craner who did an unbelievable job in administering the award. And before i get into the issue i want to recognize eric, a fellow penn guy. I went to penn, and its nice to see someone else from penn in this town doing this kind of work and doing it in a cutting edge and honest way, and i also want to recognize ambassador cohen who clearly had the hardest job in the Israel Foreign Ministry being the ambassador from israel. Its a testament that youre still here. Anyway, it was interesting to me that when rob contacted me about doing this, the wanted to call this session, egypt on the brink again. And not only does this have the benefit of being true, yet again, but its a particularly apt description of what were likely to see in egypt for the foreseeable future. And not only is it what we see in egypt for the future but its perfectly consistent with egypts modern history, and the central drama in egypt is the egyptian political history. Rob asked me to keep my remarks focused on the Current Situation. I cant help myself and i have to digress into some of the scenes of the struggle because i think they reflect well on what is likely to health its clear that what were seeing now at this moment in egypt is a reflection of the fact that no party north, the Muslim Brotherhood, not the liberals, not the revolution north carolina, not anybody who you see out there, part of a faction you all know the scene there, have been able to meet egyptians demand for social justice representative government, and national debate. These demands have been, as i say, perfectly consistent going back to the early part of the century no one has been able to answer these questions satisfactorily and never been able to answer the central questions about what kind of principles of government, the organization of government, the relationship and the relationship between religion and state, and what egypt stands for in the post mubarak era and Going Forward. What will egypts trajectory be if domestic politics and foreign posture. The brotherhood has not been able to, despite everything that it has done, has not been able to answer these questions in way that makes the most sense to the vast majority of egyptians. Theyre the latest group to attempt to answer these questions but fail to convince absolutely everybody of the wisdom of their world view and narrative. The problem in egypt notice a lot of people say, oh, well, the problem is november 22nd, president morsi issued these cooks and the way in which he went about and it the way the brotherhood south to enforce it was depressingly similar to hosni mubarak. Went the emergency laws temporary . Looking exactly like what had come before. But its not just about before in which these decrees have come. Its not just about morsi looking at hosni mubarak. Its the content of the decrees and now this struggle of the constitution. The brotherhood was never given the circumstances in post uprising egypt, going to achieve a consensus on these documents so they did not even try. People have said, this was entirely like president mubarak, oe the posters in the square, half b. G. Being morsi and have being mubarak, is one way to put it but i dont think he captured the way in which the Muslim Brotherhood view the world. They see themselves as a van guard who knows what is best for this country. Way back in the summer, i cement some time out of cairo with membered of the freedom and Justice Party and you could see what was coming. They would say if we could just clear away theunder brush, get rid of parts of the bureaucracy at the time the staff was still in dish i we could just get rid of that we would be able to transform this country virtually overnight, and that precisely whahey tried to do on november 22nd. They thought they were being revolutionary. They thought that by outmaneuvering mubarak and the judges, that they would that this would play well in Tahrir Square in order to get a new constitution. But they were wrong because something has happened in egypt. And that is, egyptians are not going to take this type of decrees any longer. This world view that we are vanguard, an elite, that knows what is best, is not is no longer tolerable to the vast to many, many egypt schappes. Its funny, this seems like a noncontroversial point to say three weeks postmorsis keying cut if you suggested these before november 22nd you would have likely stirred a rather stormy debate. After there there was a neartive in this up to and elsewhere that the brotherhood was clearly a force for democracyization and change and progressive politics. And this is where i have to gave lot of credit to my colleague who has been insis extent that this is not the case and if people looked at what the brotherhood did, what they were doing, that we were going to come to this moment. The question is, now what . Now what . The brotherhood has been unable to impose its political will in a way it thought it would be able to, and we are coming to this deeply profoundly contested referendum. We were having a little discussion before. Im going to go with, yes, i think, based on the referendum of march 2011, apartmently elections, council elections, i think the brotherhood is ultimately going to carry the day in this referendum. But theres going to be continued, continued unstable in egypt, and thats why i think the title of the session, egypt on the brink, again, well get together some months from now and have egypt on the brink again, again. We may see the situation deescalate for a time also the brotherhood claims a mandate after this referendum. If they win ill buy you both something. I think you took note. The situation may deescalate for a while as the brotherload goes back too business but it will be confronted by periodishing spasms of unstable, demonstrations and even violence. The consent of this constitutional is such that combining with a genuine Grassroots Level Opposition Movement that hat learned the power of demonstration in the streets, youre likely to see, as the brotherhood seeks to implement its program, continuations of what we have been seeing over the course of the last three weeks, which is going to make egypt a very, very difficult place to govern and make egypt a very difficult place for the United States to engage with. Overall, i think that what youre going to see, were going enter a new state in which the liberals, revolutionary, they were all going to continue to oppose the brotherhood but the real dynamickism is on the political end. Where youre going to see the seem to be in lock step with the brotherhood to some extent on the constitution, but theres enough in this constitution to seek to undermine the Muslim Brotherhood on religious level, and youll see a battle between the brotherhood, and the saudis, not just that there isnt crossover with all three of those but that is where the political dynamickism is going to be. The only way, then, to establish political control is through force or the threat of violence but egypt shawns demonstrated theyre not going to lie down and take this anymore. Importantly, who is in this political environment is actually going to do the Muslim Brotherhoods bidding. The military . The ministry of interior . Its true the brotherhood has its own but its very, very risky pitting one group against another. I dont think the military has a real interest in getting involved until there is a serious threat to social cohesion. If you look at the constitution, the principles which kicked off a week of horrific demonstrations and view lens in november 2011, have been incorporated into the constitution. The military has gotten essentially what it wanted. On august 12th, when morsi was able to move out, it was because he guaranteed the new commanders to guaranteed them promotion, immunity, and, importantly, relieve them of the burden of having to govern egypt on a daytoday basis. I dont think the military comes into the streets unless theres a real threat of violence in a way that threatens egypt. The ministry of interior can play it any way it would like. And that and then were left with opposition against the Muslim Brotherhood and this is where the continuing illinois stability come instability comes on. Let me end with what washington could do and rob command me to talk about what washington can do. What should washington do . What can it do . There are lots of ideas in washington over the course of the last 10 or 15 years about that would do about egypt in general. Now, cut aid, give more aid, give the 2316, not the tanks built in f16, one tv 16, enough. Im deeply ambivalent about all these ideas. Its clear we have important Strategic Interests and u. S. Military and Egyptian Military seem to share those Strategic Interests for now. But who is to say Going Forward that, as we shipped our strategic posture, that egypt will remain as strategically important, excepting, of course, the suez can channel. We seem to be stuck in this we continue to give aid in the hope we are buying something from the egyptians and nobody is quite sure what exactly we are buying. Even so, i dont think theres much that the United States can do. I think cutting aid isnt going to make a difference. Night last weekend not this past one two weekends ago, wrote something about egyptians writing this is a particularly apt way of putting it, since seen as a benevolent actor there anything we do on the aid front or is likely to be counterproductive. But all that being said, i dont think that means we should sacrifice our principles. After all, during the uprising in tahrir, both eric and i actually there at the time and the president s bid arab spring uprising asian wakening in may 2011, the administration, quite rightly, put the United States on quoteunquote the right side of history, and lined up with people who want to live in more open and democratic societies. In that part of the world. So that when president morsi and the Muslim Brotherhood pursue this clearly antidemocratic agenda, its incumbent upon the United States to speak up about democracy, about tolerance, about nonviolence, about the importance of accountability and the equal application of the law, and i think that should be the basis of our policy, recognizing all these other tool wes think we have, we really dont have. But we do have those principles that have guided us here at home and we lined ourself up with those that want to live in Democratic Society its incumbent for us to speak out. Ill leave it at that. Thank you very much. Well leave is to eric to explain us to the Muslim Brotherhood. Thank you. [applause] thank you all for coming. Just want to echo what steve said. Its an honor to share the panel with the ambassador, and also i think its worth pointing out that the night before the revolution started in 2011, steve, aaron, in the back and myself, all had coffee together at the cafe i had tea and so this is just a warning that when the three of us are in a room things get interesting in the next 24 hours. So, its very good to be here. Im going to focus on today what the current episode tells us about the Muslim Brotherhood. What have we learned about the way the brotherhood works. What its values are and what it might do . So im actually going to give you a little spoiler right now. Im going to talk about three thing wes have learned about the brotherhood. First, weve learn its deeply invested in ratifying the stumps right now that may seem very involves its important to remember this Current Crisis did not start as rob said, about the constitution. In fact, started about with morsis constitutional declarations for which he seized unchecked executive power. The brotherhood had used it, however, as a mechanism for pushing forward the constitution, and thats not just some kind of quick, political ploy. Its actually something that has been imported. Secondly, the muss lick brotherhood coordinates its activities with president morsi and vice versa. I laid oat an organizational chart that showed overlap between the Muslim Brotherhood central leadership, the freedom and Justice Party, and the morsi presidency. My theory at the time was that these guys are coordinating each other, but in this crisis we have concrete evidence that is in fact happening. Finally, we have learned, and we should learn this and take note of this, but policy that president morsi is not a compromiser and im going to explain what i mean by that. First of all, i whatnot to take you back to this whole point about the Muslim Brotherhood wanting a constitution now. So were going to unfortunately the heading is cut off. The Muslim Brotherhood wants a constitution now. I dont think you should take that from me. Lets hear what president morsi told me in 2010. [inaudible] [inaudible] so its very important to focus in on a certain aspect of this. For him, the constitution is not only a mechanism to implement the sharia, but notice he seize it as a mechanism for freedom. Its important to emphasize that the brotherhoods view of freedom is not our view of freedom. For us freedom has as a part of it the freedom to do whatever you want religiously. For the brotherhood, freedom is the freedom to have an chicago Islamic State and in fact an environment in which there is not an Islamic State hinges is and is against their freedom. They view any nonislamic system as an imposition so he is saying we have to be free by having an islamic constitution. Not only that, and this kind of hits on what steve was saying says the constitution should represent and reflect the peoples will. The brotherhood believes that egyptians are very religious, theres a ground swell for an Islamic State. I wont comment on whether theyre right or wrong because we dont have fantastic data on exactly what the egyptians want but this is propelling a lot of what they do the belief that this is what the egyptians want, in this case a constitution that implements islamic principles. Now, this actually goes back historically, in 1938, at what was the fifth Muslim Brotherhood conference, the brotherhoods founder spoke of a constitution, and he viewed the constitution as maintaining personal freedom in every way, which is all within this work. He talked about limits on the rules of authority that spoke of the constitution for a mechanism for, quote, implementing the teaching of islam and its systems and rules in the form of governance. This is not just some interesting fact factoid, this is something that a leader mentioned on facebook the other day. So this push for a constitution is very much part of the brotherhoods longterm agenda. Its also an important part of the brothers policy platform, right here. So they talk in the project about the state should be a constitutional nation, not a military state, but the rulers are voting citizens and the uma is the source of power. Get back to this idea that they view a constitution as not only a way to implement sharia principles but as something that is a ground swell for. So not just about implementing islamic principles which the brotherhood frankly has never really defined. They have been more focused on pursuing power than on any specific ideological at it also about him amazing their claim to power. The brotherhood is a major Major Organization which means if they get 50 plus one they view themselves having legitimacy to whatever is coming next, and what is interesting to me, the deslogan for the brotherhood temperature this push for the constitution has been sharia, im not going to inflect appropriately but talk about two different kinds of shareea, one which is the type of political legitimate mass si that elections and a referendum would give them, and the shareea, namely islamic law. Despite the fact they might win a referendum, it wont convince the masses a constitution is not supposed to be a 50plus one document. Its supposed to be a bradley consensual document in which both the winners and losers agree the rules of the game and without that consensus the losers may try to continue politics through other means. Why we all expect even a past live rep dumb wont solve egypts instability and the brotherhood wont care that at least a Critical Mass of the organize blue public will reject it and thats something we have seen very clearly these last couple of weeks. Secondly, the Muslim Brotherhood and president morsi coordinate. With i get to that, shy say that this is something that we see actually in morsis personal political biography. Morsi from 2000 to 2005, was a member of parliament and also the chairman of the Muslim Brotherhoods parliamentary block, and what has come out, a lot of interesting detail abouted the brotherhood have come out as a nonbrotherhood members have defected from morsis president ial office. What came out this week is when morsi was in parliament, if he got some kind of petition mubarak he would pocket it and not sign off on it until he consulted all the other muslim brothers in parliament. This is a man who coordinates with hi Broader Organization and does not act alone. Lets go the Current Situation in which he is president. I have been seeing a longtime theres clear personnel overlane between the bradfordhood and morsesives president ial Advisory Team. Two weeks ago i was on the air with a brotherhood leader, and he actually told me that i was right. Relationship between one of the major groups that supported him and his president ial office is through two appointed advisers, to his 16 strong advisers staff. Its an institutionally aligned relationship through two members which are also members of the high board of the Muslim Brotherhood. Let me explain that. Basically the president ial palace riz Advisory Team has 16 members. Theres been a lot of attrition during this crisis so may well be down to somewhere between seven and ten. We dont exactly know. And of course you have the brotherhood Guidance Office, which has 20 members, and the overlap is in these two figures, hadad who was in washington a week and a half ago at the white house, hadad who is more sis top Foreign Policy officer. So, how has this coordination worked . Well, first of all, they coordinate on things like the appoint. Of governors and state media. This is factoid that came out this week as former president ial advise ers were defecting from more sis office. I focused on bicaard and husseiny, a former brotherhood officer member. Morsi appointed four or five muslim brothers to governorship but that is seen as a starting point for a much longer process, and that process is coordinated, we know for a fact, with the brother hoods Guidance Office. Also, according to a recently defected aide, more si runs speeches and policies every word by and it a not shasir calling morsi but morsi calling shasir but the most important thing they coordinate on and most pert inept to this crisis it the brotherhoods mobilization. So let me explain the brotherhood structure. Theres one important peas you always need to understand is that becoming a muslim brother is not like checking off a box on a form at the dmv. It is a five to eight year process involving multiple stages of membership, and the whole purpose of this process is to vet muslim brothers for their commitment to the cause and commitment to the brotherhoods ideological principles. You do not satisfy four different types of exams at each level you are weeded out of the organization so these are deeply committed members who serve as food soldiers for the structure im about to lay out. At the top of the structure you have the Guidance Office. The executive body of the organization comprised of 20 members or so. It is advised by the commit year which has 2120 members, the legislative body of the Muslim Brotherhood. So, the Shore Committee will discuss and vote on decisions that are then execute any Guidance Office, down a pyramid structure, with multiple tiers and membership, most important is the family. This is essentially a cell that five to eight people that coordinates a brotherhood command at the local level in neighborhoods across the country. So, for example, as protests picked up against morsis decree, the brotherhood organizedded on december 1st december 1st demonstrations outside Cairo University and elsewhere to support morsi and organized this by having buses from the local level bring people up to Cairo University and it had a hard time getting buses because number of bus drivers, especially in upper egypt, were concerned their buses would get attacked and burped by antimorsi protesters, and they start paying them 130pounds to come up, providing food and other means of transportation. Then on december 4th, you had a new round of antimorsi protests in front of the president ial palace and the what unnerved the brother hides for they ever first time they called for morsi to step down. What happened was the Guidance Office met in morse morsis home on december 4th. They met there and the following day, the brotherhood organized attacks on protesters, including the use of torture chambers. If you look at the videos of these attacks its clear this is organized you have groups of muslim brothers running in a somewhat coordinated fashion at the antimorsi protesters. How die draw this linkage . How am i so sure . Because on december 5th, i was walking with our interns at the institute to call people who had been in that meeting, and we were able to speak to three people from the Muslim Brotherhood who had been on that meeting and confirmed the meeting took place at president morsis house, yes, they coordinated the response to the antimorsi protests. However, of course, they didnt say, and we said to use violence. We said the antimorsi protesters are the hasnt. Were peaceful. But i can tell you for a fact, base owned three different people, that the meeting took place and they coordinated the response to the antimorsi protests. So morsi is not a compromiser. Im going to go with a little biographical here. You have to understand who morsi was in the brotherhood. There was this idea he was this unknown, back room player. Thats half true. What morsesive was was the brotherhoods internal enforce, that meant he played a key role in making sure other brotherhood leaders subscribed to the hardline ideology and tack athletic muss lame brotherhood. Theres this essential Division Within the brotherhood between people who are known as the preachers, not judges and they want the brotherhood to be more of a social preaching organization, and the one who want the brotherhood to be a vanguard for a political program. They have really taken over the brotherhoods leadership since about 2009 in particular, but emerged especially around 2005 or so. And morsi was the chief. It was his job to weed out people, like habib who disagreed with the 2007 party a platform which morsi is credited with having drafted saying women cant run for president. So over time he edged these people out. He was also the mubarak regimes point of contact in the Muslim Brotherhood. So you can say, maybe he is a negotiator. In fact, the reason why the brotherhood chose him was because they trusted that he would toe the organizationals line in these very difficult discussion with the regime. Not only that, the regime this is coming from my interviews with a leader the regime viewed morsi as an authentic representation what the brotherhood was thinking and doing. This is a hardliner, not someone who compromises. Finally, morsi believes that the Muslim Brotherhoods mobilizing prowess practically guarantees a victory. Im not in his head. I didnt ask him this. But the reason that i get that is because, frankly, the only interesting thing that came out of time magazines interview with morsi was that morsi was the Guidance Office leader during last years revolution who was directing movement in the square help was the one telling people where to go and what to go from the Guidance Office. Ive been in brotherhood dominated demonstrations and i know theres always one person in those demonstrations who is speaking regularly with the Guidance Office and then distributing memos, which ive seen to other lower level brotherhood Leaders Within the demonstration so morsi he understands the importance of the brotherhoods mobilize capability sponsor winning and if you think youre going to win, if you think you have the mobilizing capabilities to win youre not going to concede anything. Youre not going to compromise. Why should you in thats for losers. The other thing that morsi is a compromiser. This is a press conference of more si not bag compromiser. This is the press conference from june 22, 2012. I was there. This was two days before morsery sass named as egypts president and before the brotherhood was concerned morsi would be denied so they brought taught a Large Coalition of muslims. A lot of these people feel like he sold them out. Most of these people, who tied with him on the stage at the Fairmont Hotel have since emerged as major critics. These guys. I ask you to focus in particular on ahmed. He was on the stage. He strongly believed that morsi was the key to advance the revolution, especially causing morsis opponent was mubaraks foreign prime minister. Now is aity yack of more si and the Muslim Brotherhood, and the brotherhood accused him of, quote, leading thugs around the president ial palace. These are not the only people who feel treated by morsi and his promise to compromise. Morsi sit smiling. Morsi brought on habib into this office. Marcos, another clip, and these were nonislamists he brought in, and they have all since abandoned hem because they feel sold out. The question is whether where next in the administration does not test moore sis for a couple reasons, the first of which is three reasons. That should be the lesson of the arab spring, but a stable right now partly that stable. Secondly, remember that with her brother is doing now is making egypt is stable because the constitution emerges. Witchel have is a Critical Mass of body politics that rejects it. The idea that the brotherhood might be blue undemocratic that siebel is clearly countered that events in cairo. Finally, theres the fact that more morsi in the muslim or differing Foreign Policy. So morsi was responsible during gaza. At the up sticks are from washington. But the optics from cairo is first of all morsi has entirely of yours israelipalestinian policy. He is not with this release. Not only that coming at that company organize the ceasefire that left hamas stronger. As a victory from downtown cryo. As far as preventing reference. The front a story to be read out by the minute the campaign stop. I would press the administration to get twice that because morsi is playing at home on Foreign Policy, is simply not . Who he is and neglects how currently he is the brotherhood push for things that they wanted and for that reason its important to try to push back now to the extent we can. Thanks for listening. [applause] going to call up ambassador shalom cohen. [applause] speed not well, that was a beautiful performance. Thank you for your kind words and for having me here at the institute. You have given me an opportunity to see out the middle east from here in washington will undoubtedly be to me as they move forward in my career. I am a member of the Israeli Foreign service and ahead during the last 10 years a beautiful chance into tanisha and in egypt, the two angina countries of the arab spring. This experience helps me to better understanding the situation on the ground there and presenting here today and for interview some of my thoughts on it. I will offer some observations on the events in egypt in general and then i will focus on how these events affect israel. But before you start to let me share with you the fact that during my stay at the Washington Institute committee close to so many poetical analysts and researchers, really at the highest level, i was contaminated with what i call the three thinkers that cause you to feel aceto belong to any organization. This bill is still a diplomat to the caution to escape from the success. Engage my talk in front of you and present an official view. Now let me start by saying that she made the arab spring did not begin as a common believe in only two weeks ago in egypt. What happened in 2010 in tunisia and egypt was actually a Popular Uprising with growth about the downfall of the radical regime in tunisia, egypt, yemen and libya. What is taking place in egypt from what we are is it true political struggle for the future character of the country. It is an expression of the sense of democracy to reach struggle for dominance. In my opinion of the arab spring. In 2010, our population overthrew the regime and for the first time. The army did not support the regime and the people on the right citizens have the freedom to express without fear. There is an enormous chance in the arab consciousness and it seems to me we have not fully come to terms with its implication for the future. For example in the arab world buried two types of societies. And those who still live in tyranny for the policy regime. In jordan or to some other allstate countries. In my estimation we are at the beginning of a Journey Towards freedom that can take many years to complete, but will donate different arab world that now. It is early to fully comprehend an absurd this revolution and it seems clearly the new morsi regime, the Muslim Brotherhood has failed to absurd the transformation that has taken place. Otherwise, how would you account for the condit at this regime, which has led almost every political stakes since his power in the book and taken steps by the egyptians as the process of a change in the former secular dictatorship for a religious one. In their eyes, this is not president morsi as the Muslim Brotherhood had promised to them. They came to power promising to machine that will care for all citizens and improve the life. It used to be in the mubarak regime. Instead, after five months, the condition of the countrys worsening their measures. More unemployment, more increase in a personal. Deterioration and infrastructure system. So on and so on. As of now, the feeling industry is that the regime is focusing more on the country rather than dealing with a transformation of egypt into an islamic republic. If the government had better understood the full depth of political liberation of the society, it would have differences. It would have, for example, understood you cannot put, the perfume of freedom and democracy back in the bottle. As we all know, were still in the midst of his political country in egypt, with the liberal, secular and religious islamists are fighting the future country. I believe that this struggle is not against morsi or the brotherhood per se as many egyptian liberals portray. It was not mr. Cohen in as presented by them. I believe that the struggle is against the imposition of any new tyranny. The egyptian people i don the red lines against any attempt to turn the progress. We are struggling for preserving the newfound freedom. The religious or secular who can deliver on the promise of freedom and democracy, those under estimating the power of the people in egypt. Finally, let me say a few words of the Civil Society in egypt. More than 60 of the populations they are in the rest of the arab countries are 30 years old. It is a beautiful young generation very much welcome the good to the modern devices and demand help and assistance in the march to freedom, democracy and better life. The Civil Society with this organization, social groups, youth, the Political Party are indeed the future in my view. It is important to empower so they can succeed in changing the state. As never before, it is now more doable than ever before will be more accepted. So what israel is doing in regard to Student Development and our nextdoor neighbor. We have two principles that got her policy. First, israel follows a strict policy of with internal politics. We abstain from making any Public Statement in the media and International Fora that may be seen as interfering. Second, we emphasize the importance of making their peace treaty without change. Israel is no opportunity for this up session publicly and privately. Fortunately, relations between israel and egypt have not really suffered due to the change of regime. Dialogue and relations among the foreign ministries, the Defense Industry Senate Intelligence Services Continue to operate. Import issue to both sides such as order security, smuggling continued to be part of the bilateral. Unfortunately the same cannot be said at the highest level of the government. Gone are the days, temporarily i hope, with the egyptian president with pickup the phone to chat with israeli counterparts to reprint them breaking for lunch. There is an absence of direct dialogue between the egyptian president s and the figures in israel. Regarding bilateral issues and the israelipalestinian conflict. In other words, what egypt is approached at the leaders of all, it is almost business at the working level. Therefore, israel has continued to be vigilant to ensure that any egyptian regime will take a pragmatic and political approach is to israels relations an especially regarding the peace accord to train the two countries. Thank you very much. [applause] thank you. We put a lot on the table in the last hour and i just want to make sure we put a little bit more. One issue still hasnt come up is the issue of the economy. For example, while all of the events of the last week have transpired, had so far gone i commented upon is the aboutface that president morsi did im beginning to implement some of the requirements for an imf loan. The new taxes that were then lifted and the now delaying of an imf loan in the perhaps coolness the imf now has to egypt, raising the prospect that in fact the egyptian Economic Situation is going to follow the fiscal cliff, which make saris look like a very flat and easy stroll in the park. So thats one issue. Connect to the political turmoil with the economic turmoil spirit secondly i like to make sure panelists address more specifically what is really the problem. Is that the process by which the constitution and referendum were made . Or the actual content of the constitution. What are people so upset about and what should they legitimately be said about . When the referendum is completed and i know steve went out on a limb saying it will be approved. What will be the aftershock about the process or the content or both . I want to get also on the table the question of timing. Why did morsi push now if you tell even his first constitutional declaration. By february, discounts dictation wouldve been approved. They wouldnt be this rush for referendum on and you wouldnt have the crowds in the streets. Why push now for a speedy approval . Before we close, we do have to once again return to the question of the United States. To what extent was our validation of morsi on November November 21st, including New York Times article which praise the president as an engineer who solves problems quoting president obama. To what extent if any was this at least interpreted by morsi as a green light of International Approval for whatever you might decide to do domestically and what lessons should we draw from that experience . s economics content and process, why now with the United States ruled by president morsi . So lets start with you, mr. Cook. It seems to me first if you read the constitution, the brotherhood in keeping with its tradition, economic liberals being sequestration of property, nationalization, private property is sacred. Thats a direct quote. One would think given the safety is that implementing an imf program would be relatively unproblematic except for the fact Politics Around the imf. This is after all a moment of National Empowerment and dignity. There is a relatively small, but very vocal minority opposed to the imf, that would rather eat dirt and submit to the easiest of easy imf programs. Morsi is pulling back from them at this critical moment even if they believe they will win, which they do believe is a way of demonstrating morsi is different from mubarak. In fact there is still a life narrative in egypt at the neoliberal Economic Reforms the imf push on mubarak with the support of successive administrations have impoverished the country even though the economic statistic macroeconomic statistics tell a different story. That is the revolution that remains in morsis pulling back is reflection that at this critical moment teaser needed demonstrating some difference between hemp and mubarak. What will happen in egypt goes over the fiscal cliff . I find it hard to believe that egypt as important as it is, not as important as it once was supposed out this to sink. Thats the egyptians are banking on. I think they understand that they will get along and there will be money to be had. The second issue was process to start with the decree of our 22nd. Everybody got a look, content dislocate the constitution the constitution has been subject to the constituent assembly resigning from the unending effort to reinvent through this very quick shot and referendum with the regime censors had as the judges that will observe a lot less. Whatever. The problem is both. The effort to reenlisting through looks just like the previous era and content license of ways that looks worse than the previous area. Why now . Its funny that you say why now because to me they just been itching to do this for a long time. Those conversations that i had when i was in egypt over the summer unfortunately havent been back since for a variety of reasons. This clear to me they were looking for opportunities to do with ending sequence in sinai and august 8th on the opportunity to do away with the Upper Echelon of the military and security surface. Perhaps i dont know what kind of signal. Nobody asks me to listen in on phone calls between the two president s. I dont suspect everything not, nod, wink, wink year. I think ms is morsi was on a roll. The sequence of events going back to august. Key of the brotherhood had been unpopular up until he got rid of and then was off and running. So why not . He was being praised high and low for the editorial page of the New York Times New York Times, wherever in egypt clearly distinguished in this diplomatic process in gaza against expert patients. People had come back to cairo. So it seemed to me that once again there was a tremendous opportunity. But this is something they have been looking forward to doing for quite some time. I agree with a lot of what steve said. Arista points. One of which on the time and it may be the signals we found had something to do with that. Morsi was receiving and the Gaza Ceasefire in the following morning catalase a crisis that were still talking about and dealing with. I tend to look at politics in the middle east is driven primarily by domestic factors. I think its important to note that morsi in the muslim birthrate expected the assembly, which of course the Muslim Brotherhood, which the south has dominated a therapist could be disbanded a court order. What is so interesting to me about how theyve dealt with it is that actually still the case because of the way the referendum is being handled. Because a lot of judges refuse to supervise this referendum, the brotherhood calls for holding the referendum on consecutive saturdays so they have enough judges to distribute to enough polling places. The problem is under the love the competition has to be ratified within 15 days and when you add another week to voting, it extends the period illegally. So we could be here again in a month with this whole referendum having been a legalized once again by the process. I think there was this domestic, domestic consideration the court to disband the assembly, the primary reason for the decree in the first place. Second thing is i dont see the brotherhood is totally economically liberal. Theres a real mix between certain probusiness cutting the red tape types of language, but also several socialistic language that he picks day, guaranteed health care, all these types of things. I think that tension also exists in the constitution, which they long document in part because of how many votes against the state. I think at the brotherhood were to consolidate its power come is going to create real struggles because on one hand you have reality of an organization provided social services for decades and bases its legitimacy and ability to provide people and on the other hand a number of wealthy businessmen on this leadership would like to see it there downstate. So that tension will remain even beyond this crisis. Will open the floor for your question. Many focusing on the question right now for the same as the important. It seems to me it came from two main reasons, to ideas. The first one is in politics we say what you dont do in the first month in politics as a reader to me not too after that . So maybe this was the idea of the brotherhood and morsi within the regime to try to impose the new set of ideas on the population as soon as they can. They started almost from the beginning and we see that they are trying very hard, even nowadays. The other reason right now is in my view that they are the some of the phenomena of doing the other or imposing, but they were a victim of an depositions, which means for me and i mentioned this in my talk, that its not really absurd the idea. There is a new generation. People now in force, david through the mubarak regime. They know the system of the mubarak regime, how it would work, how the manipulation of the regime. But the new generation, those youngsters, the ones who really know the meaning of democracy are not there with them. So they are trying to impose enacted in the same ways, but they dont understand the game is over. You cannot choose the same. This is in my view the main mistake otherwise it could take much more time to relax and to see the future and to slowly impose their ram manipulation because they did not truly understand the nature change within society. Lets open the floor for questions. This go first in the way back. Yes, eric and then ill work my way around. Hi, Eric Holstein from human rights watch. When there was a debate over whether to hold those elections in one same as the argument of what they call the productive regression. Let them come to power, let the people see they cant govern mlb drawnout and the worst case the opposite scenario was fiorini and scenario. Do you see whats happening now as scary as it is on the brink of some kind of necessary process that egypt needs to go through for 30 years of dictatorship to get to the other side. One gets the impression that the Muslim Brotherhood is not just very disciplined, but also a monolith. During the protest and so forth was a lot said about the Younger Generation and diversification across the Political Landscape including islamists in todays New York Times talks about a neighborhood one would assume at the Muslim Brotherhood stronghold kevork are not only counsel to the government, but they studied the constitution. So they see pushback in different places, including the Muslim Brotherhood for kennedy. So to what extent is this diversification reason to hope there would be pushback in the brotherhood will be will itself . Eric, when it should take this database is the Muslim Brotherhood a monolith and whoever wants to talk about is this car crisis and essential stages egypts Political Development . Sure. Its important to emphasize the islamists in general are clearly not a monolith and thats definitely not my claim. And youre correct and a mention in my talk that there is this distinction within the brotherhood between creatures that judges can the people who want less of a politicized role for the brotherhood, murphy preaching rule in the coats of the sewer mutchler created a strong vanguard, putting ideological debates and pushing forward with the powerhungry agenda. What im saying is at this moment the brotherhood leadership is very much in that school if you understand what it takes to be a muslim brother and the indoctrination and weeding out process is a series of reliable soldiers who will pursue their agenda to and follow their command. In fact, theyve taken a note to do so. As for the young muslim brothers we have somewhat reported disagreements. These are people pushed out of the organization i morsi and more so ill shut there. The image i showed you not there anymore. The image i showed you of that press conference before morsi was named president but this Broad Coalition came to support a number who would then thrown out, but still rallied around him. I said i sent out to do, like what are you thinking . They kicked you out of the response was this is a village after pill for us to swallow, but its just to threaten them for us. So you are right there with this slight disagreement within the brotherhood pushed out and really had as an organization try to embody the vanguard. Thats why we seen such consistency in terms of how its responding to different crises. I like the fact you mention algerian eireann because its haunted for 30 years and egyptian policymakers for 20 some odd years. To directly answer your question, i dont take this as inevitable. I oppose the liberals have been in touch with since this crisis began say we dont believe we can bring morsi down, but hopefully we can teach them a lesson. Its a misreading of the way the Muslim Brotherhood sees the political arena right now i will likely see the political arena postreferendum. I dont think theres anything inevitable or necessary about this moment. The brotherhood, had they had a better understanding of politics by other means than what the revolution is truly about because they relate to it to see the wisdom in building consensus and understanding that the demands are and concerns are many egyptians, even those who voted for them, even as he stood on the stage with morsi last year and. But they do not see the world that way. They see it as a vanguard, as knowing that they know whats best for the country and can transfer in the country and that certain conception of freedom that they hold. Mr. Eric katz on my left. My question pertains to u. S. Policy. Should the United States have taken a clear stand for is a prudent for future u. S. Policy to implicitly support as they apparently have . By the way, ambassador cohen, i did not know israel had a Diplomatic Mission in egypt. Youve got a scope fair. Its about 10 years old. I mean, in terms of what the u. S. Could done, there were a number of opportunities within this crisis were criticized something. For example, when judges pulled out of oversight, when international monitors have been simply could have raised concerns about the legitimacy of the process. We couldve used the relationship that the president at least thinks he has put president morsi to say the situation youre creating in egypt is very unstable. We couldve made a statement about the purpose of constitutions being confessional documents to get everyone on board for the rules of the game. Theyre not supposed to be heavy ideological consequence. I mean, these are things we couldve said. I have to also say that what it have mattered . Thats the question. It depends. On one hand, brotherhood a csa stabber, dedicated to a regimented organization. I see them very well same excuse me, youre interfering, which is what they said took her dont want when he said it should be a secular state, something the white house would probably not do. On the other hand, by not saying anything, the signal we send as we have some sort of arrangement with the Muslim Brotherhood. Im not one who believes that we are proMuslim Brotherhood. I believe actually were trying to do as little as possible but the optics and cairo are very come in very dangerous because theres now this broader population straight to mobilize against the brotherhood and firmly believe we are not only not with them, but actually with the brotherhood. The most dangerous example is the christian. The most communities who are convinced that this administration is supporting the Muslim Brotherhood. We should be doing something to counteract that. Bad piece of public diplomacy. I agree with what eric said. Let me just put a finer point on it. The fact we had nothing to say on november 22nd on november 23rd about this constitutional decree has now fed a narrative that once again we are treating stability for democracy, which is not a healthy thing because once again its a cinematic presentation, its not as if we were seen as a benevolent act here. Now its reinforcing the idea these are words that are morsi could keep gaza quiet, he could virtually do anything in the domestic political arena, which is unfortunate for us to contend with after the uprising. Can i just added 2 cents on this. My own video is that the problem predates november 22nd of and there are a lot of analytical and prescriptive errors we have made over the last year and a half and dealing with egypt. I would say that i think we were much too quick to lower the bar on what constitutes statesmanship and what president morsi contributed to the gaza resolution. I think when you look much more closely under factbook of the various actors played in the contribution, significant was not new at the level of statesmanship and farsighted as he was recognized with. I think that handcuffed as they did later. More generally, president obama was absolutely right in january and february of 2011 to appraised the change underway in egypt. And if the United States deserves credit for praising what the president called this hopeful moment to open nature to the prospect of universal rights, we had a responsibility to follow through and you say whether a general, whether that hopeful moment is being pursued and whether we can still support because in fact that is what much of this is about. Egyptians know whether or not theyre going down that path whether theyre going down a path that america can still support in a deep desire to know this is sooner rather than later. Rather than waking up one morning and finding 535 people on capitol hill are on a path that america cannot support. So i believe we should have been bolder, not getting it deletes about this or that article, but older in our statements in terms of the process and content of this constitutional development. Next question. I have yes, hillary. Hi, Hillary Kroger with the jerusalem post. This questions for ambassador cohen. You talk on the operational level things been business as usual. Im wondering if you talk about the smuggling situation inside and i am whether thats also stayed as it has been. Secondly, whether you think theres reason to believe that will stay the same but that there could be a trickledown from a leadership change in attitude to that operational level that you might also see the operational relationship with israel eroded over time, too. Went on to take a couple more questions as well. Dave pollak on my left. Thank you. I wanted to ask about the comment that steve cook made early on that assertive left hanging. What you said was when the dust settles, what we are likely to seize the political dynamism they think is their expression. Torn between the brotherhood. In other words, within the islamist spectrum of politics. Can you or anyone on the panel tell us a little bit about that . These are the people who want 25 in the parliamentary election that street gangs that are apparently permitted by the new constitution to enforce public order and morals. I venture to say also that the Younger Generation, were several speakers have alluded to is not all a bunch of liberals and democrats. Theres millions of young ordinary types in egypt who are very far from being in this era denture rear. Right in the center. Jamie weinstein of the daily collar. You mention the Muslim Brotherhood as cadres, but maybe not police and the military. My question is, do we know to what extent, if at all that has been any Muslim Brotherhood sympathy within the military, maybe below the general level that may be another revolution would help install an islamic dictatorship . Why dont we just take a moment and address these three questions. Shalom will start with a question about israel and gaza Border Security and that will move on to the army. Cooperation between the two countries and that large and cyanide, cooperation on this smuggling of others since terrorism. As we understand the situation now, it seems there is a real split between the political level and military level in asia have regarding to israel are not going to get there. It seems that there is a real after coming from the brotherhood and maybe from the president is said to take the portfolio of israel re to all kinds of cooperation that the two countries have together to the Intelligence Services and security. In this regard, the relation between the two countries are continued as before essay mentioned. It is at least for now im what you say the future is to keep those relations intact because it is part of the interest. We dont want to deteriorate the relationship over this questions when they understand they have a real interest in not. What you do in the future the relationship at the brotherhood was in power and really will be more going after this question of Peace Process. I dont think so. I think the reason the Peace Process is a pillar of stability in egypt, israel and the region at large. I think theyll keep it as it is. Overcrowd the after all of this regime behaved except we in the same circumstances. I mean that mubarak would do problem really some steps. One would be recalling ambassadors. So this is that most of it she recalled the ambassador. The park will try to moderate between the two sides in a kind of go between the israelis and hamas. Mubarak would contact the American European countries to show them as part of the game and its important and much more than that. We see kind of a resemblance is types. The only change that really appeared as for the first time most of the steps number did not do, which is to call and accept him as head of hamas to the president ial palace, which was the time of mubarak and your behavior. Now he wanted to distinguish himself from the regime the fact that he is part of hamas or neugebauer rather of hamas. So they really accepted the visit of the leader of hamas in cairo at the highest level talks. So this is that large but i have to say about it. I think we will continue to see the kind of distinguished Political Behavior to his israel, which is not there anymore and the security and military behavior that will continue to exist. Thank you. Steve. Thanks, dave. And they were listening. But i didnt say when the dust settled because i dont think the dust will settle. Going forward you have a dynamic relationship between the brotherhood as well. The basis for that is anecdotal as well as what is in the constitution and was happened over the course of the last year or so. He say who are these bourgeois bureau types . Weight on every kiosk in all of the future. We have deliver social services and these are professional, who schwall, they dont know anything. I think there is a sort month of islamist regret going on here that i think they want to oneout the brotherhood on. Second, if you look at the content of the constitution where it addresses islam or sharia, there are the bases of a conflict between the southeast and article ccxix over with the interpretation is and its going to be this effort to say thats not in keeping and its going to drive this conflict between the two. And above it all to reestablish its prestige. Youd are d. C. Trying to hit the sweet spot of the center of egyptian politics here. To the extent that the liberals continue to not get together, that revolutionary revolutionaries for a vote to, if through a Political Movement from the 50s through 2027370001 the remnants of the old regime when it comes down to electoral politics will split despite this coalition. That is the story of egyptian politics historically that she really will find the debates and contestation going on. Quickly when i was doing Systematic Research 10 years ago or so for my dissertation, i would ask this question every opportunity. They would say to me, we are on it. Dont worry about it. If its anything on top of its making sure theres no islamist in the military. But they were on it and then there was a revolution. Who knows really whats going on. We know the Egyptian Military is a reflection of egyptian society. People quite clearly sympathize throughout egyptians. They sort of try to do with this by a discourse that included islam. The military is that the songs principles. The whole justification for taking part in operation desert shield, desert storm to protect the two holy places of saudi arabia. To the extent theres any data or any inkling of how many words that could possibly have been, we dont know whats been going on at that lower level. We know there was during that transition between mubarak and morsi significant happiness to keep people quiet so that there wouldnt be dissension in the ranks. [inaudible] is historically been a strategy. From the very beginning they said we need the military in order to advance their political agenda. Thank you. Eric. Itis on tobacco with steve said. Our constitution is an invitation to struggle among different branches of government. This constitution is invitation to struggle among islamists in egypt and the definition of sharia about the future of allah or what it means to ensure morality. I do think thats the future. The one thing to think about or two things to think about for the future brother in struggle is their very different types of groups. The brotherhood is one organize regimented thing. Fallacies are divided among different groups. It is really interesting to see if they do in the next parliamentary election that they did in the first, which is organized under one coalition. If they do that, they know who to vote for. If theyre divided, which is possible when you see the emergence of the wouldbe president ial candidate putting together his own party. It would be very interesting to see whether they can hold together. The second feature of the struggle will be about recruitment. As i said, brotherhood has described a process. This kind of like a conversion. You are commanded to living according to the prophet mohammed. It will be more chat date to this regimented five to eight year process. Something to keep in mind. From my days, the military said that talks the receiver comes out, not a minute, but i did meet my Summer Research this one guy who was formerly in the military. Im not going to say exactly how i met him, but the point of this discussion was everyone was calling in general. I asked him i asked him i didnt call you general . Reincarnate quakes value of the Muslim Brotherhood . He said yes. How did you keep that secret . The Muslim Brotherhood consistory manhunt to hide affiliation. As steves dissertation advisor likes to say, the proand it just added. That is one anecdote. If you find multiple of these, we may see a pattern, but we dont have that at the moment. Just one closing thought. I think very very impressive bunch and what eric and i were meeting with some of the leaders of the party a couple months ago for an impressive young people. During a coffee break, one of them explains that he met his wife at harvard. A well educated here in america at the finest universities and his wife, they met at harvard. That is something we can look forward to is a harvard educated with the leadership coming in egypt. With that, please join me in thinking first ambassador shalom cohen, my colleague eric trager and graduated but zakat urkel prizewinner, steve cook. Thank you all very much for joining us today. [inaudible conversations] tomorrow on washington journal, your cause in reaction to the shooting in connecticut. hes not safe on that bus. Ive been on that bus. They are as good as gold. All of us in this country were starting to see people coming out and talking about their experience of this phenomenon that so many of us had experienced in one way or another and had no words for other than adolescents, other than curling up. When suddenly people were starting to stand back and say hormone, this is in a normal part of growing up. This isnt a normal rate of passage. I think there was a moment where there is a possibility for change. Director hersh and i decided to start the film under that feeling that places are bubbling up, coming up to the circus to say this isnt something we can accept any more as a normal part of our culture. Most things in america were. Designing washington city. There is competition he submitted the design for a palace. America is like having a palace. It is not particularly aweinspiring. In fact, in 1821 to european diplomat told the congress is neither large nor aweinspiring, but the answer that congressmen gave set the building served his purpose. It were larger and more public and, perhaps some president would be inclined to become his permanent resident. Next, Homeland Security and state Department Officials testified at a hearing looking into the piece of refugee programs by terrorists. Posted by a house Homeland Security subcommittee chaired by congressman patrick meehan, this is just under an hour and a half. [inaudible conversations] counterterrorism and intelligence will come to order. The subcommittees meeting today to your testimony regarding expectation of refugee programs by terrorists. I like to welcome everyone to todays hearings. I look forward to hearing in todays witnesses at the department of Homeland Security and the state department. Id also like to take this opportunity to thank them for taking the time to be with us here today. Youre a dedicated Public Servants and we thank you for the hard work you do on a daytoday basis and i know youve provided to the briefing to my staff over the last year on the very security concerns related to the various feeds the refugee programs and i greatly appreciate your assistance on this important issue. From 2004 to 2007, the buddy sectarian insurgency in iraq produced substantial civilian displays and and emigration from the country. In response to this growing humanitarian crisis, Congress Passed legislation, which gave iraqis who helped u. S. Government or military the opportunity to receive special Refugee Status and resettlement in the United States. Of the motivation behind creating the special immigrant categories were wellintentioned , the fact remains that in may 2011, 2 iraqi nationals who were given Refugee Status and resettled in the United States were arrested and accused by the fbi of plotting to send weapons and money to al qaeda in iraq. One of the men arrested had openly discussed his Prior Experience as an insurgent in iraq and the ied attack he participated in against u. S. Troop. The fingerprints as a refugee who was charged for trace by the reactor to comment on unexploded ied that was recovered or u. S. Forces in northern iraq. In the wake of these arrests, dhs secretary Janet Napolitano and others have publicly acknowledged security screens have been expanded to more than 50,000 iraqi refugees whove already been settled in the United States. According to press reports this february, intelligence indicates that the threat posed by refugees with ties to al qaeda is much broader than previously believed