Transcripts For CSPAN Capital News Today 20091209

consequences of this policy. on surplus, when i first came to this committee, is explained to me as walking around money for people on the ground to health. i remember -- if you help fix the store front in baghdad, that can do more to stabilize i never could than many of the things we could be doing great to do that quickly and efficiently is great. what has happened in afghanistan with the $1.6 billion, 67% is on projects that are bigger than $500,000. that is big stuff, and i am worried that we do not have a single data base on this. it's not monitoring and oversight on these large projects. who is in the command -- who is the person that signs off on sometimes multimillion-dollar projects, much bigger than fixing a window in the storefront or what i believe surplus was intended to do? >> inside my command now, it goes by levels of spending. i signed some, others have to go to general petreaus for approval, but i absolutely agree that there is a need for walking around money and then there is a need for larger projects, particularly in a blank:. how could you build a road -- particularly in coin. i am proud of where we have gone to pull together the review of all money spent, usaid in surplus, we're looking at together now. we are allowed to be part of the u.s. ided private. it is not perfect, i will not keep you. -- we are allowed to be a part of the usa ided project. it is not perfect, i will not get you. -- kid you. >> there will be problems if you do not state joined at the hip on this. i get the insurgency strategy, but i don't think the military would ever have in addition people to oversee large construction problems. that is why aid got into it. i want to be careful that we do not drift away, especially since you are working together and you are heading off to usaid where appropriate. >> thank you both for your service. i would make a recommendation to committee members -- go to the bottom confinement facility you have done a great job there -- the bagram confinement facility. you have done a great job there. i wish we had prisons like that in south carolina. a good detainee policy will help the war effort. you have done a good job there. narcotics support, some of the hypo felt -- high-profile narcotics cases, we need to expand that in a correction area, but those are two facilities to see real success. i want to commend you both for that. to make sure i understand the way forward, because it has been difficult, quite frankly to a record figure out -- quite frankly, to figure out what the rules are. july 2011 -- it is my understanding that we're going to begin withdrawing troops on that date, according to president obama. and the only question is, how many and how fast -- is that right? >> that is my understanding. >> let it be said that the policy going for it is that in july 2011, somebody in afghanistan -- if it is just one guy, somebody is coming home. is that correct? >> that is correct. >> on a scale from 1 to 10, failure in afghanistan -- a failed state -- what would that mean to our national security, one being inconsequential, 10 been catastrophic? >> i believe it would be a nine or 10, not just because i believe al qaeda would move back and but because regional instability, spilling over into pakistan and other areas, would be absolutely-to our interests. >> ambassador eikenberry, what would you say to that question? >> i concur with general mcchrystal's assessment. >> how many taliban are there? i know you do not have exact numbers. >> between 24,027 thousand full- time fighters. -- 24,000 and 27,000 full-time fighters. they affect people's lives significantly in much of the south, kandahar, up to kabul -- they do so in the east, and then in the patches and north and west. a little bit -- in the north, it does not change the pattern of life significantly. except in selected areas. in the south, because of their ability to impact things like the road and commerce, is a significant impact on everything -- the way everyone lives. >> is every taliban a' pa shtu? >> the vast majority. >> that is the reason because that is where they live. how big is their air force? they do not have one. i do not mean to beat you. they do not have an air force or navy. the biggest weapon system would be what? >> they have rockets -- ground- launched rackets. >> how have they been able to accomplish what they have been able to accomplish, but thousands of coalition forces, 90,000 afghan army post, 90,000 afghan police -- have they been able to come back so strongly? >> several reasons. the first is there weren't that many coalition forces or afghan security forces. >> that is a good point. if you had your rate the reasons in terms of the majority, would it be lack of security forces on our part? >> i would put that right with weakness in governance at the local level in afghanistan during the two together -- weakness in security forces and inadequate governance open the door. >> why hadn't the previous commanders open for -- ask for more troops if it was that what is? >> i have not asked the commanders. i know that there were previous request tabled. >> the lack of the afghan government to deliver basic services, is that equal? >> i believe that it is. >> one of the reasons that they can seize power or influence is that they can provide services the afghan government is unable to provide, like resolving legal disputes. >> that is correct. >> in na -- in the next 18 months, to roll them back, we're going to put combat power in that we have never had, right? and we're going to do the government's peace differently than we have ever done, right, ambassador eikenberry >> >eiken? >> as i understand it. >> is 18 months realistic forecasts -- for us to recapture lost momentum in governance and security, knowing at the end of the 18 months, we are going to withdraw no matter what? >> i think that we can reverse momentum, i absolutely do. the most important thing, it determines who secures an area. if we secure that area and we can provide the opportunity for the government of that cannot stand, with assistance, to provide those legal capacities and what not, that is much of it. there's been a vacuum of security and governance together. >> that vacuum is being filled in different forms throughout the country. do you feel totally comfortable with the idea that an enemy now knows that we're going to be let drawing, but they do not know at what pace, that that will not compromise your ability to be successful? >> more importantly, if we carefully articulate and strongly articulate that concept of the strategic partnership over the long haul, that is a much more powerful idea. in the short term, we have additional capability in addition to what we already are using, and the idea of the strategic partnership, that takes the strategic air rise in away from the insurgency. >> -- the strategic horizon away from the insurgency. >> i want the american people to know the job you have been dealt. >> no matter how many afghan army folks are on the payroll or numbers on a piece of paper, we are only using 150. i think that says a lot about the state of the army. another role is the 96-hour rule. as i understand the policy, isaf have to turn over a detainee within 96 hours of captured to the afghan government, and all they had -- all they can do in field interrogations' is ask them basic questions. is that policy going to be in effect as we move ford? >> senator, we're working through that policy as we try to move different forces under isaf. i am working with general petreaus on the right calculus. we call it the detainee facility -- that will go to afghan control. with our assistance, they will run the facility. we will help provide the expertise, particularly like things like exploitation and effective use of diligence. in the long term, that is the most effective thing we can do -- build their capacity to do counterinsurgency and partner with them. >> could you send a committee of list of the rules of engagement that each month -- that each country operates under now an in-depth features so that we can evaluate what each troops can do in terms of engaging the enemy? >> their capriotes -- their caveats and what not. certainly. >> thank you, mr. chairman. let me render my own surly to you for your patriotism, individually and the people that you represent. thank you for your patience this afternoon. my first question, general, would go to you as a follow up on the chairman's question about the disparity of u.s. troops to afghanistan troops. i a understand we are working as hard as we possibly can to redress that balance. just so we can understand what it is we're looking forward to and what to prepare for, is there a risk, until we close that gap -- trainers in combat troops, that our troops will be viewed more as occupiers and therefore we may incur or incite further insurgents and violence, and therefore perhaps even put our guys and gals in more on his way than otherwise? >> there are several components to that. the first is that we did that how we argued will be based on how we operate more than the numbers we have. it is in very ample -- it is very important that our forces work with the level of cultural respect and a clear desire to protect the population. and they are doing a good job of that all the weekend obviously continue to do better. as we work with the afghans, they want to be secured by afghans but they are tolerant and understand the need for coalition forces to do it until afghan security forces are available to do it. i would say that we need to continue to communicate to them that while we're doing this in the bridging period, we're working as hard as we can to build their forces. if they did not see and feel that effort were real and significant, it would be difficult to continue to win their support. >> and to follow up, how do we communicate? do we communicate through our trainees, if we will, to the population or is it we who communicate as best we can in our combat gear, that we're really here to help you and not occupy? >> we do it on a number of levels. we start with the official interaction at the government level. and all the way down to our forces in the field, and ambassador eikenberry's forces, to interfacesu as much as we tointerfaces -- as much as we can. shuras at the local level, as much as we can to communicate the reality of what we're doing to the afghan people. i participate by talking in youth forums, and in every case, we try to give them a clear view of what our real efforts are and our real intentions. >> thank you. this is also one training. i understood that one of the problems or challenges we face in our training is the fact that the middle level commanders, if you will, on like our chain of command, pretty direct an authoritarian, a lot of these folks are cronies and are appointed through favoritism. is that an accurate representation? maybe you could corrected. to the degree that it is accurate, how do we react to that, how long will it take to train and develop that kind of chain of command that we feel comfortable than handing off to come up the population secure and they are doing their job? >> sir, we have extraordinary military in the u.s.. whenever we compare ours to anyone else's, it is very difficult. at every level in the chain of command, over years we have built a culture that is very effective. what i do recognize in the afghan army, and even in the afghan police, is in many cases there is nepotism and corruption. there is inefficiency, and there is not yet a culture that automatically produces those leaders. yet for all the times we see challenges, i go out in one province -- i think you met a young afghan battalion commander. extraordinary professional. those types of leaders are the future. if we partnered effectively, we will grow them. it may take them a generation or two to think -- to get where they want to be, but we can make progress. >> thank you. one other thing about this strategy -- and i know you and i agree, and i think the ambassador agrees, that this will only work if we can work it by, with, and through the afghan government. for everything i can see -- all fraudulent sort of installation, an economy dependent on opium, corruption rampant throughout the government -- am i wrong to say that we are taking a leap of faith here with president karzai, and that my sense of it is -- i have absolutely no doubt about the strength and courage of our folks and what we're going to do -- there seems to be a weak link in the formula. it is that we are placing on president karzai -- but the bet that we are placing on president karzai. what degree of confidence to you have that this is a sound bet? >> the challenge of establishing governance in afghanistan, it goes beyond one individual. this is a societal problem. this is a problem of a state that was utterly decimated by three decades of warfare. it is a state that has two generations without a real education. it is a very profound challenge. we have programs that we're partnered with the afghans to try to help them develop a credible governance. we're making progress in certain areas. in the area of law enforcement, we have a robust training program to try to help develop more confidence civil administration. it is a priority area for president karzai, and we support that. we have major efforts to try to improve the financial accountability. we are making progress in those areas. but against that, this remains an extraordinary challenge. we are encouraged with president karzai's commitment in his inaugural address to try to place more emphasis on this area. and certainly political leadership and political emphasis is going to be absolutely indispensable to make further progress. but it is going to remain a challenge. >> general, is that good by you? >> yes. >> my time is expired. i wish you godspeed. >> thank you, senator byrd. senator inhofe. >> let me you understand that i am probably not alone in disagreeing in no way that the program is put together. the serp program is one of my favorite programs. i think had been responsible and advancing that. what is good about the program is that they do not have to go through all that stuff. i talked to that department as many times as anyone else. when i talk to the commanders in the field, they say anything we can do in three days instead of three months is going to have 10 times the value. i am hoping that you will continue to talk about the success of the program. >> sir, i like to throw something in there. it is important for several reasons. what ever you do it quickly, the afghans appreciate more because they understand. it also increases the credibility of the local leader, the centralized leader we have board. if that person can say yes and produce quickly, it raises his ability to do future interactions and leverage. that is one of the huge values of it. >> we will continue to enhance the program. several people have mentioned the agricultural development team, but not really giving it the credit that i think it is due. people talk about the negative things, but mr. chairman, i want to put this in the record -- from 2007, the number of hectares have gone from -- that was in poppy development -- 193,000 -- 123,000 -- a reduction of 22% in three years. i am particularly proud of this because we have 60 of our oklahoma 45th in a plane going over there for a second time. they come back, and they tell me that the success story and happiness generated by their relationship. how like ask you if you agree with that assessment and like to enter this into the record. >> i'll go first. i absolutely agree with the assessment. the agricultural gains of the 45th of oklahoma are making a profound difference. we have a very good and civ-mil integrated approach. each element brings their own street. the united states department of agriculture has tremendous expertise. they can build agricultural assistance. isaf team know how to build programs. but the agricultural teams can they have their security and mobility, they can get out into parts of the farm areas of afghanistan. >> they have had their hands in the dirt before. they know what they are doing. >> absolutely, is an absolute complement -- indispensable. >> we want to continue to see that success in place. general mcchrystal, has asked this question when the secretary was here and i did not get a comfortable answer. just give me an idea. he put together a threat assessment when you made recommendation. threats -- a low, medium, high -- what was the threat assessment that you would have sent? >> moderate. >> 30,000 would be what? >> we did not try that grade. >> it would be below that. >> yes, sir. >> i would agree with that and i think we need to have that for our own use to quantify. for only the second time since president obama has been in office, i want to compliment him and tell him at all -- least i am. i think you've had some unfair questions in this meeting concerning the end game. i was upset with the end game on to west point. at west point, the speech that he made -- and i am quoting right now -- "we will execute this transition responsibly, taking into account conditions on the ground." he said that. i know both of you agree with that. that is the president's saying that, and to me that means that the conditions on the ground are very important in any decisions made. it is not a calendar decision but a condition -- the you agree with my interpretation? >> i do agree. >> i do as well. >> you made this statement, general mcchrystal, we are in this thing -- actually, secretary gates -- we are in this to win. keeping in mind that there will be troops over there -- we still have troops in bosnia, kosovo, and some of those other places. would you define win? >> absolutely. i absolutely agree with the secretary. i with the five winning -- i would define winning when we have our partners in afghanistan, the government and the afghan security forces, to the point that they can defend their sovereignty with very limited help from the outside. it will be a strategic partnership. but it allows them to enable the people of afghanistan to build their nation and shape their lives as they want to? >> i agree with that. >> center, i would agree that -- senator, i would agree with what general mcchrystal outlined. when the government can take responsibility for its own security, when the taliban is at a level that can be managed by security forces, and al qaeda has been prevented from gaining safe haven inside afghanistan. >> mr. ambassador, the last time we talk, you are in uniform. i want to compliment you both on the great job your doing. the people are talking about the non-u.s. participants. we're going to try to get to that 7000 figure -- and as i looked through this, i had a breakdown -- italy and georgia are but that 1000. all the rest are way below that, considerably. 4300 is my math. i might be wrong on that. tickets to 7000, what can we do -- anything you have not done before? the effort has been there before. is there something open to us now that was not there before? when the president made his commitment, he first called the heads of state of nato and other allies that are there, and perhaps that might have changed their enthusiasm for sending troops and participating? what do you think? >> i think our level of commitment is a big part of the calculus. another thing that we can do is encourage our partners to contribute where they can most effectively. what i am doing is asking for additional help in the training room. industry -- initial entry and training, which fits very well with what partners can provide. >> do you agreed that the president called these other heads of states and tell them what he was going to say, was that helpful? >> i certainly do. secretary clinton several days ago, with general mcchrystal and i in attendance, was at the foreign ministers' conference of nato. this was the first one in brussels says the president made his west point speech. i think all of our sense was the reception there with general mcchrystal's articulation of the strategy, understanding what our way ahead was, it seemed to resonate well. we left brussels with some confidence. >> that is good. thank you very much. >> thank you very much. senator udall is next. >> i thank you mr. chairman. good afternoon, gentlemen. as many of us have said, i want to thank you for your service and i look for it is well to joining minister mccain and senator lieberman in their upcoming visits to afghanistan as she began to implement this important strategy. -- as you begin to implement this import strategy. we've emphasized the importance about the limits of our ability to defeat their taliban. there has been talk about reconciliation with the taliban and how we drive wedges between those interested in the taliban and its presence for political purposes versus those eager to push the forces of chaos and destruction and hatred. i know that we're not in the best position to pursue reconciliation right now, given that the taliban are strong and they lack incentive to change. but i would like to think that we're doing more in this area than we were and we're working closely with the afghan government. can both of you, my question? >> i certainly can start. i do not agree when people say we cannot defeat taliban. i absolutely believe that we've, and i mean the government of afghanistan with coalition help, can the -- can defeat the taliban. and that is putting the taliban in a position where they can no longer accomplish their objection and threatening the government of afghanistan. i think that is absolutely achievable. on route to that, as we've reverse the momentum that they perceive that they have now, we will weaken the resolve of many of the members of the taliban. it is important in that process, that there be opportunities for afghans who might have sided with the taliban, whether they fought with them or to supported them, to be able to come back under the constitution of afghanistan, underrate program that must be supervised by the government, with respect and with honor -- not to feel like they are criminals being brought back again, but being brought back again to the political fold. given that opportunity, if they're willing to meet the conditions of living under an afghan government with the constitution, i think that makes a lot of sense and we're working closely with the government to do that. >> ambassador eikenberry. >> i shared general mcchrystal's assessment that it will be important to have them to come back rather than to push those fighters and mid-level fighters out there, to make the right choice. but with that momentum, i think the push will not have to be that great in many areas. it is interesting during this past presidential election in afghanistan that there were 42 presidential candidates, all unified on one issue -- all 42 talked about reintegration and reconciliation. there is a desire out there among the afghan people to try to find a way to achieve peace. i know that president karzai is very committed to it. he did mention that in his inauguration address. soon we hope a decision will be delivered to have a formal establishment within his government of reconciliation and reintegration commission. with that, then, i know that general mcchrystal and nato- isaf are very prepared to help with the immigration program. >> ambassador, if i might follow up on those comments -- there is a perception that there is a perception among many ethnic pashtuns that they do not have a role in the central government, particularly security institution. is this something we are tuned to? is this something that president karzai could take the lead on, given that he is a pashtun? >> i would say that if you look at president karzai's cabinet, there is a very strong representation of pashtuns. for instance, the minister of the interior is a pashtun. there's a feeling of disconnection from many postern population from their central government. -- many bpashtun population from their central government. that is a very important part of success in the year ahead and the next 18 months, the further deliverance of security, with the profound political impact because it will help bring the pashtun population more close to their central government. >> for the record, these three senators met with you in may when we were in afghanistan. we had a chance to meet with both of those ministers. we were very impressed with their plans and the way they carried themselves. we hope that that continues. general, if i could turn back to pakistan -- for me, my support is based as much on the fact that pakistan is inextricably linked with the success in afghanistan. their reaction is critical to the new strategy. i imagine the comment that prime minister -- the prime minister said where we need more clarity and we will get more clarity and see what we can implements on the planet -- i hope that was for public consumption. are any of you concerned by his statement? >> not by his statement, senator. i talk routinely with the pakistan leadership and we always have to realign our campaigns, but they have a shared interest in our success in afghanistan. as we do in their success. >> ambassador, which you have any thoughts on that? >> i agree with general mcchrystal. >> let me move to the concept that the president proposed, to move the bell curve to the left -- get the troops into the theater faster and then leap faster. i had a few questions about shifting the bell curve. i apologize for throwing them all at 213 are you confident you can expedite the deployment of these 30,000 additional troops? what challenges will this be logistically? does this depend on a timely withdrawal from iraq? general odierno has said that if the elections get pushed back, it will make things more complicated. with a slower withdrawal from iraq impact the troop buildup in afghanistan? i see that my time is running a pre if you want a trance -- tried answer a wonder to of those in answer the rest for the record, i would appreciated. >> the deployment part is very complex but we have a good team working on it. i'm confident we will get the forces in as fast as possible. >> thank you. thank you, mr. chairman. >> thank you very much, senator udall. senator collins. >> general, ambassador, it is great to see. like everyone else here, i was planning to reminisce about having to sit -- having seen you in afghanistan in august, but because i saw both of you yesterday at the white house, it seems that has been taken over by events. but we thank you both for your extraordinary service, which is so appreciated. i cannot imagine how are having better leaders in afghanistan -- our having better leaders in afghanistan and the two of you. having seen part of your hearing on the house side earlier today, you are eager to return to afghanistan and get on with a job rather than appearing here in washington both before the house and the senate. general, you have such great knowledge and deep understanding of afghanistan. you mentioned in your statement today that you were first deployed there in 2002, and it commanded troops there every single year since then. which is truly extraordinary. i also know that you have studied closely the history of afghanistan. in fact, one of the first times that we met, you told me you are reading "the great game," and that you were seeking to learn from the british and the soviet experience in afghanistan. at one point, the soviets had more than 100,000 troops in afghanistan. and yet they did not prevail. now clearly our goals in afghanistan are completely different from the goals of the british in afghanistan, the british and the soviets. but still, that history of the british and the soviet experience, it gives me pause, no matter how brilliant our leaders, how brave our troops, how successful the civilian surge. could you share with us what lessons you take away from the failed british and soviet experiences in afghanistan? and why you believe that our experience can end up in a more positive way? >> one of the things that i have learned is to be very humble about thinking that we have the right a dia, the better idea, and to be very careful as we go forward. i think the common themes that i see it that cost failure in the past is when the afghan people come to the conclusion that an outside force or either -- are either occupiers or culturally in opposition to the afghan people -- even afghan leaders have been toppled from power because they went against the sense of the social fabric of the people. but the british and soviet experience, there came a time when nicole less -- there were almost antibodies against them in the afghan presence. we cannot be superior thinking about that because they did a lot of things correctly. they did a lot of tactical things correctly. but at the end of the day, they could not change the perception that they work outside occupiers trying to impose on afghanistan a bar in system, a foreign thought process -- in this case it was communism, but there were other social changes that ran against the grain of society. it is very important that from a overall point of view, we understand how an afghan culture must define itself, and we would be limited in our desire to change the fundamentals -- we have to respect those and i think that is important. and tactically in the counter insurgents system, the soviets came in barely had handed -- heavy-handed and killed thousands of afghans. the work because their defeat. that worked to cause their defeat. this is a very careful strategy, almost in meeting what we do not know. every time we do something in afghanistan, we have to realize that there are a lot of things that we do not understand. do not think that it is more simple than it really is. >> i think that those are very wise lessons indeed. when i look at the president's plan and his date for beginning the transition and withdrawal of forces, while i share the concerns of some of my colleagues about the signal that sense, it may in fact be a helpful signal, because it shows that we're not like the soviets, that we're not trying to stay there and impose our way of life on them. it may cut both ways. ambassador, let me ask you about another issue that troubles me greatly. we know that the taliban is securing funding for its operations from the narcotics trade in afghanistan. but another source, another significant source, it is from wealthy individuals in bogus charitable organizations or charitable organizations that have two purposes, from the middle east -- from saudi arabia, for example. do we have a strategy for engaging the countries whose citizens are funneling money to the taliban fighters? >> in short, yes, we do, senator. it is a pretty robust strategy. taliban funding comes from profits in our contracting, increasingly from taxation of areas that they might dominate, and the third and most important finding is external coming from ngos and individuals from the gulf and pakistan itself. against that, we have a very vigorous law enforcement effort where we're trying to track finances, and we are working very closely with countries within the gulf, including saudi arabia, the united arab emirates, and others to get at these sources and find ways to shut it down. >> and are you optimistic about securing full cooperation from the gulf countries? >> we are making some progress. how would not want to get into the specifics -- i would not want to get into the specifics, but for the record, we can submit something to you. progress is being made but it is a difficult thing. trying to track finances in any kind of environment is difficult work, but we are making progress. >> gentleman, thank you for your service. today secretary gates and president karzai had a press conference right i am going to read to you from the "new york times." karzai said that his country would not have the resources to pay for its own security for another 15 to 20 years, and would remain dependent on american and nato financial aid until then. so how does that comport with what you all have announced, given that karzai has said this today? >> just four points on that. the first would be debt, as general mcchrystal has said, we have to have a long-term relationship with afghanistan that our leadership has talked about, all long-term diplomatic and economic assistance relationship. just providing support for the national army and the national police overtime, their security organizations. that will be an effort that we will put together we hope with nato and other countries. we do not know exactly what the cost will be. but it will have to be long-term assistance. the sec said -- we recognize that this will be a burden on the government of afghanistan and that will need assistance. a lot of our economic programs that we're emphasizing right now is aimed at the generation of wealth. but at the same time, trying to find ways to help the afghan government would revenue collection. we are looking at that. the third would be, with regard to longer-term costs, i do not know what the order of magnitude of the cost of an american soldier or marine for one year in afghanistan, compared to an afghan national army soldier or police. if nothing else in our own long- term economic interests, and certainly the afghan interest, to continue to help the afghans stand there police sub -- stand their police up, so that we're not sending more u.s. soldiers are marines, but the afghan soldiers are taking their own place. that is a pretty good return. and the four. would be that as we move forward and afghanistan does gain more security, perhaps the army and police of afghanistan will not need high levels in the future. maybe at some point in time, 10 years from now, the army of afghanistan might be a smaller force than it is five years from now. >> and that is what charlie wilson was arguing for in 1989, to keep a presence going. but we pulled out and we made a mistake. last week, i recalled that for secretary gates when he was in front of us. and he said we're not going to make that mistake again. let me ask you -- one of the things that i asked secretary gates and secretary clinton, general mcchrystal, last week was that we have a military force that can be all the more effective, not a nation- building, but in getting things settle down if we use all the other civilian agencies of government along with ngos. you want to sketch briefly for the committee how we're doing that and to whom you are listening as you said that policy as the commander? >> the person not listen to the most is three seats to my right. -- i listened to the most is three seats to my right. before we even go into an area, we work together to figure out what is required, and how we provide security to make it bearable. they need to flow in almost simultaneously. our afghan partners are not here today but they are at that same meeting as we pull that together. when we were plans for an additional operation in the central river valley now, and as security elements go and, every other aspect is waiting to flow in with it. it is not easy. i do not want to paint it as a simple process. but it is very important. the harder part is coordinating non-governmental organizations and other international partners. we do that through prt's and other nations -- but that is one of the areas where we need to see -- need to continue to seek unity of effort. every man hour of effort is focused towards a single act of -- a single outcome in afghanistan. we do a lot of coordination -- they are in our planning process. >> general, let me recommend something for you to think about. he had been so successful with serp -- you have been so successful serp fund, they had a ready amount of money to build a bridge repair a school whatever. it has been terrific. don't we need that same kind of a party for the civilian entities -- of thauthority for e civilian entities, so that the people on the ground can make something happen, justiciar -- gestational were commanders can? >> i have not been a civilian since i was 17, but i would absolutely agree. >> center, you are correct. we are taking measures -- senator, you are correct. we are taking measures now when we have great support from congress with the quick response fund available to our state department officers throughout afghanistan. that is more of a quick spending program. we're changing the nature of our contracts, rather than multi- year contracts. we're shifting to 1-year contracts to get better performance from contractors. ngos, the ones we work with frequently, and we are also -- the last point i would make is with the reorganization of our civilian efforts, as we talked earlier about this concept, adding senior civilian executives out in regional commands that have the ability -- chief of mission of p authority, and looking for ways to innovate to push them down toward the decision making or the development assistance funds down to the regional level, and perhaps even farther down, closer to the district level, and so we are innovating in certain areas. we may be coming back to congress and asking for some help. >> thank you, mr. chairman. >> thank you, senator nelson. senator thune. >> thank you for your outstanding service to this country. you have a very challenging job on a good days, and there have not been very many good days recently in afghanistan. but the reason that the president and members of congress on both sides and the american people are willing to commit to this mission is because we have such a high level of confidence in your leadership. and so thank you for your willingness to take that on. when you get to this point in the hearing, pretty much all the questions that can be asked have been asked. i want to just touch on a couple of areas that are really important to our success. by the way, just for clarification, there was the announcement of the additional nato troops and a report coming in today from the "london times," more than 1500 of those trades that had been pledged by the allies were already in- country. there may be some double counting going on. do you know exactly what that number is and how close that will bring us to 40,000 that you have requested? >> i do not know the right now, senator. >> with regard to the nato allies and the important role that they play in our effort there, one of the things that is impeding our ability to make the best use of our forces has been some of the cabiveats attached to those troops. how many of those troops ca haveveats and were you doing to get some of those removed so that we can get everybody engaged more in the fight? >> i am ashley surprised by how little the limitations compared to the advantages of having the coalition. everyone is a little stronger together, and in the eyes of the afghans, we are more credible than as a single country. the fact that we are a coalition, i think that is key. each other country brings a different strengths and weaknesses. sun havomvee have caveats that d to be adjusted. i ask everyone to look at a pop -- at their policies, and in some cases their forces cannot move out of a geographical area. if there partnered with an afghan army battalion, then there is hesitation to let that afghan army battalion moved. that takes away from the afghan army leadership, the ability to match forces for operations. that is one of the things that we ask people to work with. in other cases, limitations on not operations or things like that. what we are doing is asking each of our partners to move more toward full counterinsurgencies, and we do have progress in that, and then to look at all ca veats. some have limitations in mobility, vehicles, things like that. the degree to which we can help toem with that enables t >> of the afghan security forces -- and there has been a lot of focus on getting them trained and ready -- that is so critical as we have seen in iraq. are the afghan security forces willing to take on the taliban? i mean, are they willing? >> they are, the ads will. >> there has been a lot of discussion about integrating, reconciling elements of the taliban that might be reconcilable. that has been touched on already. general petreaus had indicated previously that we lack the sophisticated understanding of the taliban to distinguish between reconcilable and irreconcilable elements. u.s. selected our retired british general to head a program of reconciliation with members of the taliban, based on some of the success he had in iraq. i wonder if you could provide some of the details of those efforts, or at least some of the broad features of the program. >> it is a partner program. it has to be an afghan program. what we would be doing is empowering them as much as we can come up with resources, some expertise and experience, and things like that. what we stood up with the general is a section in my command. there's an additional british general that has been provided, and we have a full element working with the afghan government to craft their policy, partnered with not just the u.s. embassy but other indices as well, so that as we go forward, we have a program that is not only affected but understood by people. the integration is a question of confidence. that is confidence on multiple levels as we have learned from our record first, confidence in the individual being reintegrated, that he will be protected from his former taliban partners, and also from anyone in the government of afghanistan who might target him or throw him in jail or something. it's also a question of confidence on the part of government, that the people they bring in our genuine, that they are not seeding the taliban inside their own organization. so the degree that we can pull people out and they looked at each other, it has a very good effect. for this reason, is very important that this program be very carefully thought out and coordinated. as soon as someone loses confidence in and, it boomerangs. -- in its, it boomerangs. >> we are fully engaged with general mcchrystal's program. we have officers in general lamb's staff, and it is predicated on having some momentum against the taliban with that momentum in a good reintegration program, i think it will be a very important tool. >> one last question, my time running out. the demand for persistent intelligence surveillance and reconnaissance capabilities has spurred the air force to yield on manned air craft -- unmanned air drums more rapidly than expected. the majority of the capability has been dedicated to our right. as we began the drawdown in iraq, it the need there is not likely to this free spirit with fewer soldiers and marines on the ground gathering information, the joint forces will rely more heavily on the air component to provide intelligence. with the increasing troop presence in afghanistan, you will need persistent isr in that area. my question is, are you comfortable with the air force's, a plan to operate it of those round-the-clock orbit by 2012. or do we need to invest in the u.s. capability over and above the current plan to ensure that those requirements are addressed? >> i have not looked at how they're going to break down all around the world. there's a balance between afghanistan iraq. secretary gates leads a very focused effort. the one thing i would say is that almost everything we do to increase our capacity, not just the unmanned, but a number of man aspects, and then be part that digests -- is people and information systems that take what we get and turns it into real intelligence. those programs are expensive, but they are extraordinarily effective and extraordinary value-added. they allow us to use smaller forces -- smaller numbers of our forces on the ground. we can go after ided these and terrorist leaders and protect our forces. there's almost no amount of isr that would not be baggy- added to my effort in afghanistan. -- that would not be value- added to my effort in afghanistan. . >> please give your wife our best wishes. my understanding is that currently pashtun recruitment to the afghan security force is a difficult all along the tribal belt that you mentioned -- the southern and southeastern afghanistan because they would run the risk of havingxdç their families subjected to tell than retribution. -- to taliban retribution. can yout( describe the ethnic composition of the afghan security forces? >> yes, ma'am, i could get it to you an exact numbers. çç42% of the population is pashtun. çpashtun participation matches that. it is not represented from the south, as you mentioned. kandahar andç helmand, which bn under talbian control -- taliban control or threat -- it is important that we get security there. the effort now is to increase security, make their families feel comfortable. the rest of the breakdown of the afghan national army falls pretty much along ethnic percentages in the country writ large except for the tajiks who are slightly over represented in the army. >> dozen at the plate on a balanced afghan security force -- does an ethnically unbalan ced afghan security force cause problems in the helmand province? i understand the tajiks speak a different language. >>ç it is a challenge. everyç afghan battalion that we feel it is at the balanced as it comes out of training. we fieldç of force that has a mix. i]çt(>> but you have enough of different ethnicities to do that? >> we have enough. what we don't have enough is southern pashtuns. we have to recruit better. çthe things he said about a battalion operating in helmand, we would like to have more representation of people from that area. >> how do you recruit these individuals? >> the first thing we have to do is establish security there. >> thank you. pakistan continues to pursue a policy of disrupting the pakistani talbiaiban it is tribl areas, most notably in south waziristan. and the afghan talçiban in norh çwaziristan. ken portions of the afghan military be persuaded to change this? you have to take into account pakistan's regional concerns and its relationships with afghanistan and india. the duran line cut across -- and reduced theç pakistani territo. in afghanistan, it is about 12 million pashtuns. about pakistan's attempt to demarcate its border with afghanistan, the afghans claim that pakistan -- that afghanistan is the home to all of pashtuns. islamabad has been using its proxy is to preserve a defect of order and prevent pashtun aspirations of homeland and preventç indian involvement in afghanistan. ççw3ambassador eikenberry, hoe you working with the u.s. ambassador to pakistan and indian prime -- indian ambassador to facilitate positive relationships between islamabad, new delhi and kabul? >> let me concentrate on afghanistan. ambassador holbrooke is the special representative and his responsibilities for afghanistan, and pakistan. the security relationship between india and pakistan has consequences for afghanistan, as you have articulated. but moreç specifically, which r efforts in kabul, they have a very strong relationship with our embassy in islamabadç at te level of ambassador holbrooke and general petraeus. and provide overall policy direction and have sets of programs they have set into motion. xdçççbetweenç ambassador pad myself, we take that direction. we are looking in continuously searching for ways to facilitate political dialogue between kabul and islamabad. we try to facilitate wherever we can. we have an all right up programs to try to develop a mutual trust and confidence -- we have and çarray of programs -- includiç law enforcement programs where the fbi hosts initiatives led by director mueller and the minister of the interior of afghanistan and pakistan. we have programs to help the side improve their customs along the border. we have a promising initiative in which we are hoping to see further progress between afghanistan and pakistan to reach an agreement for transit trade. it is a comprehensive effort. itqi] gets into improvements inl law-enforcement, trade, economics -- the law enforcement, trade, economics and diplomacy. general mcchrystal has a robust program with the military tripartite with afghanistan and nato. >> that was my next question. what are you doing in centcom to facilitate relationships? >> at our level, what we are doing is -- we have a series of tripartite meetings that the principles level. then we also, below that, have operational, levels that meet regularly. we have a series of border coordination centers. there is one in operation. there's a second one moving towards that. there will be a total of six. about a month ago, we briefed our campaign plan it to the general and himself -- and his staff. they did the same thing to u.s. forces at some time back. the idea is confidence-building. it is to get ont( the same page, but then also, to have mechanics in place for things like cross- border incidents so that they do not become something-brea negat. >> if i could add one important area. -- that has been underway for several years, and that his efforts to improve intelligence, exchanges and cooperation between the united states and akistanç and thosestates and efforts led by the director of çcia leon panetta and his counterparts in afghanistan and pakistan. that has been a robust program as well. >> thank you. godspeed. >> thank you. >> to our distinguished gentlemen testifying, general mcchrystal and ambassador eikenberry, i want to congratulate you as my colleagues have done. all the questions have been asked. i do not know what else you have to answer. i hope to see you. i hope to be on a trip next month to afghanistan. i just came back from iraq. it's very interesting visit there. i am encouraged by what is taking place in iraq and the confidence that the iraqi government officials -- we did not see too many iraqi personnel because it was not safe. but i was very encouraged to hear what officials are saying, that the americans are carrying out what they promised to do. that is key. permit me, gentlemen, to get clarification because the questions have been answered. if i repeat some of these, if you want to make your answer short, i would appreciate that. number one -- how effective at the efforts ben to reintegrate the former taliban fighters so that they will no longer fight for the insurgents? >> in the case of the taliban, that effort is still very young and has not yet been affected. but we are --- >> amabassador, in terms of understanding that kabul and president karzai and the central government only controls so many of the senate -- 37 provincesçn afghanistan, what has taken place in a local provinces, working with the local tribal leaders to try to educate, not educate, but to understand the issues taking place. are we working? -- on the military side, but also on the resource side with locals -- were, because of divisions in the country and all the different ethnicities that are there, locals are really in charge? do wew3 have a specific program that is working with the local province, the governors that are there, or the local councils? >> senator, our principal way is working through the government of afghanistan. >> the central government? >>w3 the government of afghanistan. it appoints provincial governors. it appoints district chiefs. when i say district chiefs -- district governors. the police force of afghanistan, it stretches down to the district level at the district level, that is the county level. what i want to say first and foremost is that our programs that we are delivering to work through the government of afghanistan. what we are trying to do, in partnership with the government, is help them get their reach down further, down to that local level and an we do that throughout reenforcing promising programs that have been developed over the last five years. for example, a program that worked well is a program called the national solidarity program. it is run by the ministry of world reconstruction and development. -- rurual reconstruction and development. of village will selec elect a pt for that development. it may be wells. it may be a road that connects them to the district center. it empowers the community through selecting or voting on developmental projects. we have programs like that that we are partnering with the government of afghanistan to try and extend further and farther across the country that deliver security. we are also working with key ministries to see over the next year, the next 18 months, how much more progress can be made in strengthening government at local level and developing capability to deliver a very basic sets of services -- education, health and so forth. >> mr. ambassador, senator hagen raised a question about the languages. are we trying to teach them english there? are we trying to learn their dialect in their native tongues? the american personnel that is there or any foreign personnel in any of those various provinces, whether it is british, chairman or polish? are we trying to teach them english? are we trying to learn our language so we can communicate in their language? >> first of all, the most popular foreign language on demand right now with in afghanistan, all the schools, is the english language. >> unfortunately. mr. ambassador, we must learn the language of the natives and they will accept as a better when we can speak their language. as a student who studied abroad, was pope another language which was chairman, i was very -- who spoke another language which was german, i was very well received. >> you asked about the english language. there separate point about our need to develop better language skills inside afghanistan. i know general mcchrystal said earlier about the afghanç hands program being developed by the department of defense and the military. we are doing better on the civilian side. many of our political officers being assigned are coming in with language training. we need to do better, tho. >> just for clarification, on the straw-down days, -- the draw-down dates, i heard one of our senators asked about when we will start withdrawing our troops on that date. they rotate regulate in and out of afghanistan. i don't think will be able to zero in on july 1, the first soldier will be withdrawn from there. am i correct in that assessment, general? >> the way we are interpreting the president's guidance is we would do two rotations but that count them and then drawn down. in july 2011,ççq i am comforte that it is his intent that we reduce the overall number of u.s. forces in afghanistan, but the rate and pace of that reduction would be based upon conditions on the ground at that time. >> that is correct. i see my time has expired. but you indicated to the other senator, i need clarification. on july 1, we will make the first withdrawal. thatç is what i understood -- >> inw3 july, 2011. that is correct, senator. >> how do you recognize it -- reconciled that with how you begin to assess it in january, 2011. and then the assessment -- if it 2011. is that possible? ç>>çç senator, we will be mag constant assessment with a formal assessment a year from çyçççççóqçw3w3çnow. in july, 2011, içççç believe president has given us instructions to start to reduce u.s. force numbers, but that the w3pace and scope ofç that, how: the assessments on the ground. [[ççxçl -- çnot a battalion or a squadn could goç home. and thenyç say, now[[q+x we sr withdrawal. to do that. >> i hope to see you all next month. çif everything goesçó!gell, l ççów3ççç;÷>> what you havew withdrawal of the senate from -- we will transfer to afghan lead in areas. çit may not wait until july, 2010. çi do believe the president was us to understand that we are going to start a reduction in forces in july, 2011. >> that will be determined on the quantity and the timing of that. it may be a long period, it may be a long period. ççokit may be large numbers,e small. is that a fair assessment? >> yes. >> i am repeating the president's words that it is not -- the july hits. we will know no matter what, whenever we withdraw. what we do is very transparent. they will notice that and they will have their own decisions about what they will do or not do. i want to make sure that is clear. the other thing i want to really echo whatççççççç other me i think what you have been able very positive. there is always room for improvement on accountability. i don't care how much money you have. it will continue to improve. soundsç like you folks have ben doing that. i would also echoç what senator nelson said that the state department should have as much flexibility on how those dollars are spent. i am curious from the general's perspective, would you agree that that the state department should have more flexibility to do similar activities suds you can join these resources together. >> i absolutely would agree. >> -- so you could join these resources together pretty whatever we canç do to streamle -- whatever we can do to streamline the is. i think there is a sizable majority that recognizes the success you have had. çand we should see the same wih the state department, rather than going through this maze you have to go through to access their money and then your money. anything we can do. do you have a comment you want to add to that, mr. ambassador? the other one that i want to clarify, mr. ambassador, it seemed like he wanted to go further in clarifying this. do i think going from 300 to 900 plus individuals from your operation is a great move? absolutely. some will argue it is only 1% of the total work force. if i took that total -- the majority of what the military does is deployed people. you have a huge number of people to deploy any given time. you have to pick and be very selective. so i understand the differences. i am sure we would love a higher percentage, but that is not realistic based on the capacity that d.o.t. has in this sense of deployment between military -- that dod has. in here 2011 budget process, are be able to tell us, are you looking at additional resources that could be added to your budget to create a more robust, deployable forces in the sense of what you need on the ground to assist the military in civilian activities? >> indeed, we are, senator, both in terms ofçç personnel and in terms of our development programs. we are doing a very careful analysis against general mcchrystal's military campaign in order to support that. we are going to need more civilians out in rural areas to support, as he clears it holds areas, then it shifts to the civilian side to the building. so we are looking at additional development programs in order to support that. there will be increases, yes berdych >> if i can interrupt -- i am going to have to leave. >> i will close. >> i don't want you to close. if you are finished before i get back, could you recess for couple minutes? >> sure. happy to do that, mr. chairman. this is a good opportunity. it is always good to be last. i guess i want to make sure of one other piece -- in your allocation of resources, my assumption is your people will need also longer-term potential with the country of afghanistan because ofç the work you will e doing. it is not just, you will be doing the water and sewer lines and be done. you will be moving through. so resources -- it is not just about a one-year but a few years out. is that how you look at it? >> senator, absolutely. multi-year and the whole of government will have to be looking at the sustainment of our civilian force. there will be changes in composition, but it will still be a sizable presence and it will be multi year. it is not only the challenge of getting it there over the next year, year and a half. we anticipated z be called to your requirement. u!we have toçç think aboutç o çqi just wanted to telegraph tht to you. >> a point of emphasis here -- more civilians needed but they continue to emphasize that as our civilians move forward, they are multiplying their affects the through afghans. -- their effects to afghans. as we are starting to reach a point in afghanistan where you had eight years after the fall of taliban, more young adults graduating from vocational schools, universities -- the pull of people is starting to enlarge. -- the pool of people is starting to enlarge. you can reach a point where it is starting to get diminishing returns and the possibility of dependency building up. >> that is a great outcome if you have more of an afghan pool. remind me of this. i am trying to remember from our briefing for what i was there. -- when i was there. we have in afghanistan, i want to say west point light -- explain what we have in regards to trying to do what we can to ensure we have ançç officer cs with an afghan army that is well-trained. remind me of that just so i am clear. :>> they have started a militay academy. they are explaining the size of the military academy in the next year or so. that will provide a court. but they are also commissioning into ways as well. for their non-commissioned officer corps, they have a sergeant majorç academy and thn a series of stairstep professional development programs, non-commissioned officer corps as well. i think that will be important for them. >>ç how involved are we nowñr h that? how long before they take a sizable role in managing those academies? are they doing it now? >> they do it now. they get assistance on courses, but they do it now. >> the manager with their own teaching aids? >> that is correct. we arcist but they run it. >> one last question, and that is the efforts of their national security force and -- what do think is the major change they can move them into the higher number that we want to get to? what is the one or two things will make a difference? >> it is partnering. it is where we put our units with them and operate, co- located in the same outpost together. it is that shoulder to shoulder that is going to increase theirç -- shoulder toç shoulder partnering that will ibkease+ their professionalism. >> thank you veryç much. thank you again for your service. >> your last question is segues perfectly into the first question i was going to ask. ççour our understanding is the have about 19,000 u.s. troops now inçw3 rc. south. i]we have about 11 combat battalions and rc south, but 40 companies, more or less. how many of those 11th u.s. battalions in rc southç çare actually partnered with co- located, shoulder to shoulder now with afghan units? >> mr. chairman, i wouldççç i don't know the number co-located on the basis. but in terms of partners -- >> actually physically with, eating with, living with. how many of the 11 battalions or approximatelyç 40 companies are physically, actually co-located with afghan units? >> i will have to take that for our record. >> couldn't be few? like the answer be few? >> i do not believe so, but i would like to make sure it is accurate for the record. >> ok. xdçbecause when general jones s us that we have got to get more afghan troops out of their garrisons, that is, to me, a major challenge. something i think these to be our mission is partnering to the same extent that it is a british or australian mission. r counterinsurg)e doctrine, as i understand it, and we had a discussion about this before -- our corn to the doctrine is that are part duringç strategyi] is aimed ati] achieving a ratio of one u.s. companyok leading to three afghan companiesç for evy one u.s. company. >> it is. >> and those ratios you gave us that we currently have and hope to havew3 will ideally lead up o that. we are nowhere near one two one. quite the opposite in helmand. çthere was an article in "the washington post" this morningç that describes the increasing influence of taliban shadow government. çi don't think anyone has asked you about this year. i would like to quickly ask you this. t(our votes had begun, so you ae almost free. these shadow governments established taliban governors, police chiefs, and administrators and judges in nearly all the afghan provinces. did you see the article this morning or read it, and do you agree with that? ambassador? >> i did see the article. chairman, what i would say is that this growth of parallel governments in some provinces of afghanistan, a shadow government with real consequences and real capabilities, when i came into afghanistan in may of this year and did my own assessment of the securityç situation, for m, the development of shadow governess was the most striking change i had seen since early 2007 when i last left. when general mcchrystal did his security assessment and highlighted the deterioration of the security situation in important parts of the country, i had keyed in on that. that was one of the factors that led me to be in absolute concurrence with his own analysis of the deterioration of security. >> would you say it is as extensive as the "the washington post" article has suggested? is that accurate? >> i defer to general mcchrystal for specifics. >> have you read the article? >> i did. >> is the shadow government as extensive as the article stated? >> mr. chairman, it is, but i would like to provide context. they have established shadow governors in 33 of the 34 provinces. in some areas, the shadow governors can do what is outlined in that article. i]çin other areas, it is more s operational. they have a shadow governor, but the individual does not have that kind of reached or kind of control. even within a province with a shadow governor, they will typically have areas where they have a tremendous amount of influence, self primarily, some in the east. so -- south primarily and some on the east. it is accurate but not for ever were. >> thank you. on the immigration initiatives, you were both extremely clear about the importance of these initiatives taking place in that the afghan government is going to have to lead those initiatives. general, you talked about keeping open the door to reconciliation. ambassador, you talked about -- in going back to general -- you general, you said it is important to their be opportunities for afghans to come back under government rule. and that they be treated with a -- providing they abide by the rules, treated with respect when they do that. ambassador, you also felt that we have got to find a wayxd -- e afghan government has toñr finda way for this reintegration. and that there is a commission which is going to be created, you indicated have we been çsupportive of that reintegratn effort? xd-- have we been supportive of that reintegration effort? whenevert( i talk to karzai, he says the reason we have not gone ahead with this is your guys don't want us to. have we been an impediment to this in any way? are we supportive of this effort, whether it is it reintegration commission or a plan for reintegration? is it clear to president karzai that we are supportive of that effort? >> it is absolutely. >> have we not been supportive over the last years? >> the efforts of -- up until today have been very onç even ç ççunevenxd xdsuccess by the an government? my>> is that partly ouroç faul? ç>> i don'tçó know going backo 2004-2005, i was not in a position -- >> how about in the last year? çit has beenç very clear -- il say since the rival of general mcchrystal and myself, it has been crystal clear -- to president karzai and the afghan leadership that we would be in full support of their efforts. >> would you agree with that, general? >> ok. thank you. t(can you give us thatw3 figure which i ask you about? can youç get is that it possibe overnight? >> yes, sir. >> we all very much appreciate your stay in power, not just in afghanistan -- you're staying power,ç notç just in afghanisn but short commitment to this process. we all wish to god speed and good luck in that regard. your answers today have been clear. president's directives, r seems to me is clear. qyou both indicated do not only support them. you agreeç with them. i think that is clear. it is important, because the clarity of our missionçw3 is essential as well as the resources to a and i know i am speaking on behalf of everybody, everyone who is now voting, we are grateful to you and your families, your troops, the . i]passalong our thanks and our gratitude and our support. we will2stand adjourned. thank you. ç>> thank you very much. [captions copyright national cable satellite corp. 2009] [captioning performed by national captioning institute] >> general mcchrystal -- [inaudible] >> coming up on c-span, president obama discusses his job proposals. the joint economic committee called a hearing on financial industry regulations. then a speech by afghanistan's ambassador to theç u.s. later, the u.s. ambassador to afghanistan and general mcchrystal testified at the house armed services committee. congress continues to examine the president's afghanistan strategy tomorrow when the senate foreign relations committee hearsç from general david petraeus, head of u.s. central command and the u.s. ambassador to afghanistan, ambassador eikenberry, live on c-span 3ç at 10:00 a.m. also live on c-span 3, is set at homeland security subcommittee it looks at security. -- look fáthat is live at 2:30 . eastern. ç>> "american icons," 3 originl documentaries from c-span, now available on dvvd. c the exquisite details of the supreme court through the eyes ofç the justices. look beyond the velvet ropes of public tours into those releasing spaces of the white house, america's most famous home. explore the history and architecture of the capital, one of america's most symbolic structures. "american icons," at 3-disk dvd set. it is at $24.95, plus shipping. >> president obama @ today laid out his plan for creating jobs that would be funded in part by money left over by the troubled asset release program -- relief program, and luke -- including tax relief for small businesses and infrastructure building. this is a half-hour. >> thank you so much, strobe, for your extraordinary leadership here at brookings, and thanks to all of you in attendance. almost exactly one year ago, on a frigid winter's day, i met with my new economic team at the headquarters of my presidential transition offices in chicago. and over the course of 4 hours, my advisors presented an analysis of where the economy at that time stood, accompanied by a chilling set of charts and graphs, predicting where we might end up. it was an unforgettable series of presentations. christy romer, who's here today, tapped to head the council of economic advisers, as wellç as larry summers, who i'd chosen to head the national economic council, described an imminent downturn comparable in its severity to almost nothing since the 1930's. tim geithner, my incoming treasury secretary, reported that the financial system, shaken by the subprime crisis, had halted almost all lending, which in turn threatened to pull the broader economy in a downward spiral. ñrpeter orszag, my incoming budget director, closed out the proceedings with an entirely dismal report on the fiscal health of the country, with growing deficits and debt stretching to the horizon. having concluded that it was too late for me to request a recount -- [laughter] -- i tasked my team with mapping out a plan to tackle the crisis on all fronts. it wasn't long after that meeting, as we shaped this economic plan, that we began to see some of these forecasts materialize. over the previous year, it was obvious that folks were facing hard times. as i traveled across the]iñ country during the long campaign, i would meet men and women bearing the brunt of not only a deepening recession, but also years, even decades, of growing strains on middle class families. but now the country was experiencing something far worse. our gross domestic product, the sum total of all that our economy produces, fell at the fastest rate in a quarter century. $5 trillion of americans' household wealth evaporated in just 12 weeks as stocks, pensions, and home values plummeted. we were losing an average of 700,000 jobs each month, equivalent to the population of the state of vermont. that was true in december, january, february, march. the fear among economists across the political spectrum that was -- was that we were rapidly plummeting towards a second great depression. so, in the weeks and months that followed, we undertook a series of difficult steps to prevent that outcome. and we were forced to take those steps largely without the help of an opposition party, which, unfortunately, after having presided over the decision-making that had led to the crisis, decided to hand it over to others to solve. we acted to get lending flowing again so businesses could get loans to buy equipment, and ordinary americans could get financing to buy homes and cars, to go to college, and to start or run businesses. we enacted measures to stem the tide of foreclosures in our housing market, helping responsible homeowners stay in their homes and helping to stop the broader decline in home values which was eating away at what tends to be a family's largest asset. to achieve this, and to prevent economic collapse, we were forced to extend assistance to some of the very banks and financial institutions whose actions had helped precipitate the turmoil. we also took steps to prevent the rapid dissolution of the american auto industry -- which faced a crisis partly of its own making -- to prevent the loss of hundreds of thousands of jobs during an already fragile, shaky time. these were not decisions that were popular or satisfying. these were decisions that were necessary. now, even as we worked to address the crises in our banking sector, in our housing market, and in our auto industry, we also began attacking our economic crisis on a broader front. less than one month after taking office we enacted the most sweeping economic recovery package in history -- the american recovery and reinvestment act. the recovery act was divided into 3 parts. 1/3 went for tax relief for small businesses and 95% of working families. another third was forç emergeny relief to help folks who've borne the brunt of this recession. we extended or increased unemployment benefits for more than 17 million americans, made health insurance 65% cheaper for families relying on cobra. and for state and local governments facing historic budget shortfalls as demand for services went up and revenues went down, we provided assistance that has saved theç jobs of hundreds of thousands of teachers and public school workers, firefighters and police officers. çthe last third of the recovery act is for investments to put americans to work doing the?m( work that america needs done --ç doubling our capacityç in renewable energy like wind and solar, computerizing medical records to save money and lives, providing the largest boost to medical research in history, renovating classrooms and school laboratories, and oo3upgrading roads and railwayss part of the largest investment inw3xgn infrastructure since the creation of the interstate highway system half a century ago. and even as the recovery act has created jobs and spurred growth, we have not let up in our efforts to take every responsible action to get the economy growing and america working. this fall, i signed into law more than $30 billion in tax cuts for struggling businesses, extended an effective tax credit for homebuyers, and provided additional unemployment insurance for one million americans. and the treasury is continuing to adapt our financial stability plan, helping to facilitate the flow of small credit to small businesses and families. in addition, we're working to break down barriers and open overseas markets so our companies can better compete globally, creating jobs in america by exporting our products aroundxd the world. now, partly as a result of these and other steps, we are in a very different place today than we were one year ago. we may forget, but we're in a very different place. we can safely say that we are no longer facing the potential collapse of our financial system and we've avoided the depression many feared. our economy is growing for the first time in a year, and the swing from contraction to expansion since the beginning of the year is the largest in nearly 3 decades. finally, we're no longer seeing the severe deterioration in the job market that we once were. t(in fact we learned on friday that the unemployment rate fell slightly last month. this is welcome news, and news made possible in part by the up to 1.6 million jobs that the recovery act has already created and saved according to the congressional budget office. çbut i'm here today because our work is far from done. for even though we've reduced the deluge of job losses to a relative trickle, we are not yet creating jobs at a pace to help all those families who've been swept up in the flood. there are more than 7 million fewer americans with jobs today than when this recession began. that's a staggering figure, and one that reflects not only< çe depths of the hole from which we must ascend, but also a continuing human tragedy. it was mentioned that i was in allentown, pennsylvania, this past weekend, and went to a job center where people were engaged in job search. and it ran the spectrum -- blacks, whites, hispanics, young people who were just startingt( their çcareers, individuals 50, 60 years old, looking for a job. and they were putting a braveç face on it, confident thatç eventually things wouldç work out, but you could also see the sense of anxiety, the fear that perhaps this time it wasç different. sometimes it's hard to break out of the bubble here in çwashington and remind ourselvs thatñr behind these statistics e people's lives, their capacity tot( doç right by their famili. çit speaks to an urgent need to accelerate job growth in the short term while laying a new foundation for lasting economic growth. my economic team has been considering a full rangeç of additional ideas to help accelerate the pace of private sector hiring. we held a jobs forum at the white house that brought together small business owners, ceos, union members, economists, folks from non- profits, and state and local officials to talk about job creation. and i've asked people to lead forums in their ownt( communities, sending the results to me, so we are hearing as many voices as possible as we refine our proposals. we've already heard a number of good ideas, and i knowç we'll learn of many more. so today, i want to outline some of the broader steps that i believe should be at the heart of our effort to accelerate job growth -- those areas that will generate the greatest number of jobs while generatingu! the greatest value for our economy. first, we're proposing a series of steps to help small businesses grow and hire new staff. qover the past 15 years,ç small businesses have created roughly 65% of all new jobs in america. these are companies formed around kitchen tables in family meetings, formed when an entrepreneur takes a chance on a dream, formed when a worker decides it's time she became her own boss. these are also companies that drive innovation, producing 13 times more patents per employeeó than large companies. çand it's worth remembering, every once in a while a small business becomes a big business -- and changes the world. that's why it's so important that we help small business struggling to stay open, or struggliow to open in the first place, during these difficult times. building on the tax cuts in the recovery act, we're proposing a complete elimination of capital gains taxes on smallswy business investment along with an extension of write-offs tow3 encourage small businesses to expand in the coming year. and i believe it's worthwhileç to create a tax incentive to encourage small businesses to add and keep employees, and i'm going to work with congress to pass one. ?ndnow, these steps will help, t we also have to address the continuing struggle of small businesses to get loans that they need to start up and grow. to that end, we're proposing to waive fees and increase the guarantees for sba-backed loans. and i'm asking my treasury secretary to continue mobilizing the remaining tarp funds to facilitate lending to small businesses. second, we're proposing a boost in investment in theç nation's infrastructure beyond what was included in the recovery act, to continue modernizing our transportation and communications networks. these are needed public works that engage private sector companies, spurring hiring all across the country. already, more than 10,000 ofç these projects have been funded through the recovery act. and by design, recovery act work on roads, bridges, water systems, superfund sites, broadband networks, and clean energy projects will all be ramping up in the months ahead. çit was planned this way for to reasons -- so the impact would be felt over a two-year period, and, more importantly, because we wanted to do this right. ymthe potential for abuse in a program of this magnitude, while operating at such a fast pace, was enormous. so i asked vice president biden and others to make sure to the extent humanly possible that the investments were sound, the projects worthy, and the execution efficient. what this means is that we're going to see even more work -- and workers -- on recovery projects in the next 6 months than we saw in the last 6 months. even so, there are many more worthy projects than there were dollars to fund them. i recognize that by their nature these projects often take time, and will therefore create jobs over time. but the need for jobs will also last beyond next year and the benefits of these investments will last years beyond that. so adding to this initiative to rebuild america's infrastructure is the right thing to do. third, i'm calling on congressç to consider a new program to provide incentives for consumers who retrofit their homes to become more energy- efficient, which we know creates t(çjobs, saves money for famil, and reduces the pollution that threatens our environment. çand i'm proposing that we expand select recovery act initiatives to promote energy efficiency and clean energy jobs which have been proven to be particularly popular and effective. it's a positive sign that many of these programs drew so many applicants for funding that a lot of strong proposals -- proposals that will leverage private capital and create jobs quickly -- did not make the cut. with additional resources, in areas like advanced manufacturing of wind turbines and solar panels, for instance, we can help turn good ideas into good private sector jobs. finally, as we are moving forward in these areas, we should also extend the relief in the recovery act, including emergency assistance to seniors, unemployment insurance benefits, cobra, and relief to states and localities to prevent layoffs. this will help folks weathering these storms, while boosting consumer spending and promoting job growth. of course, there's only so much government can do. job creation will ultimately depend on the real job creators -- businesses across america. we were encouraged today to hear from the business roundtable that their survey showed greater confidence and greater potential investment coming out of the business community. government can help lay the groundwork on which the private sector can better generate jobs, growth, and innovation. after all, small business tax relief is not a substitute for ingenuity and industriousness by our entrepreneurs -- but it can help those with good ideas to grow and expand. incentives to promote energy efficiency and clean energy manufacturing don't automatically create jobs or lower carbon emissions -- but these steps provide a framework in which companies can compete and innovate to create those jobs and reduce energy consumption. and while modernizing the physical and virtual networks that connect us will create private-sector jobs, they'll do so while making it possible for companies to more easily and effectively move their products across this country and around the world, and that will create more jobs. and given the challenges of accelerating the pace of hiring in the private sector, these targeted initiatives are right and they are needed. but with a fiscal crisis to match our economic crisis, we also must be prudent about how we fund it. so to help support these efforts, we are going to wind down the troubled asset relief program, or tarp, the fund created to stabilize the financial system so banks would lend again. i don't think i have to tell you there has rarely been a less loved or more necessary emergency program than tarp, which, as galling as the assistance to banks may have been, indisputably helped prevent a collapse of the entire financial system. launched hastily -- understandably, but hastily -- under the last administration, the tarp program was flawed, and we have worked hard to correct those flaws and manage it properly. and today, tarp has served its original purpose and at much lower cost than we expected. in fact, because of our stewardship of this program, and the transparency and accountability we put in place, tarp is expected to cost the taxpayers at least $200 billion less than what was anticipated just this past summer. and the assistance to banks, once thought to cost taxpayers untold billions, is on track to actually reap billions in profits for the taxpaying public. so this gives us a chance to pay down the deficit faster than we thought possible and to shift funds that would have gone to help the banks on wall street to help create jobs on main street. small business, infrastructure, clean energy -- these are areas in which we can put americans to work while putting our nation on a sturdier economic footing. that foundation for sustained economic growth -- that must be our continuing focus and our ultimate goal. ççi've said this before. even before this particular crisis, much of our growth for aç decade or more had been fueled by unsustainable consumer debt and reckless financial speculation, while we ignored the fundamental challenges that hold the key to our economic prosperity. we cannot simply go back to the way things used to be. we can't go back to an economy that yielded cycle after cycle of speculative booms and painful busts. we can't continue to accept an education system in which our students trail their peers in other countries, and a health care system in which exploding costs put our businesses at a competitive disadvantage. and we cannot continue to ignore the clean energy challenge or cede global leadership in the emerging industries of the 21st century. and that's why, even as we strive to meet the crisis of the moment, we have insisted on laying a new foundation for the future. okbecause an educated workforce is essential to a 21st century global economy, we've launched a competitive race to the top fundmy through the recovery act to reform our schools and raise achievement, especially in math and science. and we've made college more affordable, proposed a historic set of reforms andç investmentq in community college, and set a goal of once again leadingq the world in producing college graduates by the year 2020. çbecause even the best-trained worker in the world can'tu! compete if our businesses are saddled with rapidly increasing health care costs, we are fighting to do what we have discussed in this country for generations -- finally reforming our nation's broken health insurance system and relieving this unsustainable burden. because our economic future depends on a financialw3 system that encourages sound investments, honest dealings, and long-term growth,xd we've proposed the most ambitious financial reforms since the great depression. we'll set and enforce clear rules of the road, closeç loopholes in oversight, charge ew agency with protecting consumers and address the dangerous, systemic risks that brought us to the brink of disaster. these reforms are moving through congress, we're working to keep those reforms strong, and i'm looking forward to signing them into law. . . there are those who claim we have to choose between paying down our deficits on the one hand and investing and job growth and economic growth on the other. this is a false choice. insuring that job growth and economic growth are strong and sustained it is critical to ensure that we increase revenues and decrease in spending on unemployment insurance so that our deficits will start coming down. at the same time, instilling confidence in our commitment to be fiscally prudent gives the private sector of the confidence to make long-term investments in our people and in america. one of the central goals of this administration is restoring fiscal responsibility. even as we have had to spend our way out of this recession in the near term, we have begun to make hard choices necessary to get our country on a more stable fiscal footing in the long run. let me just be clear here. despite what some have claimed, the cost of the recovery act is only a very small part of our current budget imbalance. in reality, the deficit has been building dramatically over the previous eight years. we have a structural gap between the money going out and the money coming in. folks passed tax cuts and expensive entitlement programs without paying for any of that, even as health care costs kept rising year after year. as a result, the deficit had reached $1.30 trillion before we walked into the white house. and these budget busting tax cuts and spending programs were approved by many of the people who are now waxing political about fiscal responsibility while opposing higher deficits to get health care costs under control. it is a sight to see. but the fact is that we have refused to go along with business as usual. we are taking responsibility for every dollar we spend. we have done what everyone said was impossible, -- sums that were impossible, cutting spending on wasteful defense systems that even the budget -- even the pentagon said they did not want. i am committed to having the deficit region -- we inherited by the end of my first term cutting in half. i made clear from day one that i would not help -- i would not sign a health reform bill if it raised the deficit by one dime, and i did the senate nor house bills does. we've begun to change the culture in washington. in the end, the economic crisis of the past year was not all result of weakness in the economy. it was also the result of weaknesses in our political system. for decades, too many in washington put off hard decisions. for decades, we have watched as efforts to solve tough problems have fallen prey to the bitterness of partisanship, to prosaic concerns of politicians, to ever quickening news cycles, pork in this campaigns focused on scoring points instead of meeting our economies challenges. we have seen the consequences of this failure of responsibility. the american people have paid a heavy price. and the question we have to answer now, is are we going to learn from our past? or even in the aftermath of disaster, are we going to repeat those same mistake? as the alarm bells they, the din of washington rises, the forces of the status quo will marshal their resources, and answering this question will be a fight to the finish. but i have every hope and expectation that we can rise to this challenge. that we can descend -- we can transcend the failures of past and once again take responsibility for our future. every night i read letters in e- mails sent to me from people across america. ordinary folks. people who share their hopes and their hardships, their faith in this country, their frustration with what has happened in this economy. i hear from small business owners worried about making pay role in keeping their doors open. i hear from mothers and fathers, sons and daughters, who have seen one or two or more family members out of work. the toughest letters are in children's hand writing, the kids write to me. my dad just lost a job. my grandma say. she cannot afford health insurance. kids to cannot just be kids because they are worried about on having her hours cut or dead losing her job or family without health insurance. -- or dad losing his job or a family without health insurance. they are not looking for handouts or a bailout. all they are looking for is a chance to make their own way. to work, to succeed, using their talents and skills. and they are looking for folks in washington to have a seriousness of purpose that matches the reality of their struggles. everywhere i have gone, at every stop i have made, there are people like this. men and women who face misfortune but stand ready to build a better future. students ready to learn, workers eager to work, scientists on the brink of the discovery, entreprenuers seeking a chance to open a small business -- everywhere i go, there are shuttered factories waiting to roarñi back to life in burgeonig industry's. there is a nation ready to meet the challenges and to lead the world in this new century. as we look back on the progress of the past year and look forward to the work ahead, i have every confidence that we will do exactly that. these have been a tough two years. there will know about -- there will no doubt be difficult months ahead. but the storms of the past are receding. the skies are brightening. and the horizon is beckoning once more. thank you very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2009] ♪ ♪ >♪ >> coming up, the joint economic committee holds a hearing on financial industry regulations. then, a speech by a afghanistan's ambassador to the u.s. and then the ambassador to afghanistan and general mcchrystal testified before the house armed services committee. "tomorrow on "washington journal," and analysis of proposed health quarter -- health care reform legislation would drew a armstrong. a discussion of president obama's job policy. we will talk proposed financial industry regulations with paul and george e. and spencer baucus. "washington journal" it is live every morning at 7:00 a.m. eastern here on c-span. the oilers this week, senators continue their debate on the healthcare bill. watch live coverage on our companion network, c-span2, the only debate -- the only network with the full debate on edited. c-span has partnered with cq for more throughout the month. find out at c-span's health care of. >> now hearing on regulating financial markets. witnesses includes the former head of the commodities trading commission who first proposed regulating financial products called over-the-counter derivatives. carolyn maloney of new york chairs the joint economic committee. this is just under two hours. >> i want to thank our distinguished panel of witnesses today to discuss regulating the over the conrad and -- over-the- counter derivative markets. this was triggered in part by the collapse in price of homes and the resulting defaults in the mortgages used to purchase them. in the absence of regulation, financial institutions aggressively purchased the over- the-counter derivatives such as mortgage-backed securities with the expectation that they would generate high returns with minimal risk. to hedge against any risk, they also purchased unregulated credit default swaps that would pay them if the mortgages underlying the derivatives defaulted. this created an illusion that the assets were risk-free, and a tangled web of counterparties. at its peak, this unregulated market was tied to $680 trillion in assets, an astonishing amount equal to 50 times the u.s. gdp. but in the stability of the u.s. and the world economy at risk. this crisis did not start -- did not have to happen. many years earlier, one of our distinguished witnesses, brooklyn-born -- brookooks had e foresight to call for regulating. some have called her "the woman who knew." however, she was ignored by a chorus of critics who handled over -- heralded over-the- counter derivatives as the greatest innovation of the decade because that would spread risk over participants. regulatory a bet -- attempts were voted down. i know this from personal experience, having introduced two amendments that would have regulated this market. both were strongly defeated. congress passed the commodity futures modernization act of 2000. it literally prevented the cftc from regulating over-the-counter derivatives. this was a mistake and we are acknowledging it now. next week on the floor of the house, we will be voting on a regulatory reform bill that will regulate over-the-counter derivatives to bring transparency to these complex financial products and expand the authority of the cftc and the sec to regulate counterparties in derivative transactions. many have argued that derivatives and derivative contracts were the prime reason aig needed to be bailed out with taxpayer funds, because the quantity and value of their contracts were never disclosed said that the impact of breaking these contracts by possible bankruptcy was unknowable. i have confidence that this bill will pass next week. it should have passed years earlier when mrs. bourne pointed out the real challenge and danger of not regulating these derivatives. the house financial-services committee and the house agricultural committee are meeting this week to merge their two versions of the bill that will finally regulates over-the- counter derivatives and bring big dark market into the light. the merged bill will promote transparency by requiring that these previously unregulated derivatives leachate -- be traded on exchanges or clearing houses. capital market requirements will be established so that the financial institutions can no longer make risky bets, and informations about trading and volumes will be publicized said that market participants will longer be uncertain of the value of their securities. although these bills exempt some derivatives from regulation, the exemptions are then sent to balance the curent -- concerns of some businesses that need customized derivatives and the potential risk to the financial system. the house financial services committee has also passed a bill establishing the consumer financial protection agency to shield consumers from deceptive financial practices. although our economic recovery is far from complete, the economy is moving back on track. helped along by the recovery act. third quarter gdp grew 2.8% after contracting for four consecutive quarters. and at the markets have recovered substantially and interbank lending is back to its pre-crisis level. now was the time to pass to act these reforms -- to enact these three forms, common-sense regulations on the financial- services industries to ensure stability and say this and soundness of the system. i want to thank the witnesses for coming and i look for to hearing your testimony. and i'd do also want to a knowledge mr. steele, who had the privilege of working on many important issues -- initiatives for our government. welcome to all of you. in the chair recognizes mr. brady. >> thank you, madame chairwoman. this important hearing, reading the testimony was informed it in and of itself. many policy mistakes contributed to global financial crisis that began in august 2007 and triggered the recession four months later. these include the federal reserve's all early accommodative monetary policy from 2002-2006. international imbalances -- and president clinton's initiative to increase homeownership among low-income families by reducing down payment requirements and making turns more flexible, increasing the availability of alternative financing products. without any consideration for the ability of low-income families to meet their non- traditional mortgage obligations, as well as a continuation of this policy by george w. bush. to extort banks to make large numbers of risky, subprime residential loans to low-income families. and finally, and adequate supervision of the alternative financial system based on loan securitization and highly leveraged non-depository financial institutions, especially fannie mae and freddie mac. banks perform the economically valuable but inherently risky function of intermediation in liquidity transformation by accepting deposits payable on demand and making term loans available to families and small businesses. many of the nature activities become contagious and may trigger runs three to minimize the risk of financial problems while retaining the enormous benefits of liquidity transformation, congress created the federal reserve in 1913 to serve as the lender of last resort and established federal deposit insurance. by the fall of 2007, the alternative financial system, which you referenced, composed of fannie mae, freddie mac, independent investment banks, finance commandments, hedge funds, and other assets totaling $12.70 trillion. it was in central for innovation and liquidity transformation function similar to banks without any of the safeguards congress had established. since the financial crisis began, a number of banks and other financial institutions have failed which required at fire sale price, conservative ships, or massive federal assistance to survive. these include aig, bear stearns, citigroup, lehman brothers, and merrill lynch. and what are the common threats to these failures are quite a sight-failures? they made bad investment institutions. they were overly dependent on short-term liabilities outside deposits to insure their investment. consequently they severed liquidity crisis when the creditors became aware of the magnitude of the investment losses. these liquidity crisis for the modern version of bank runs. computer clicks replaced queues of depositors withdrawing their money. last the goal had prevented commercial banks -- glass- steagal had been in commercial banks from these problems. i have a number of questions for the panel. what changes should be made to the risk-capital standards for banks? should congress require all banks to spanish standards? should they be established for other like a highly leveraged financial institution? should all banks and other highly leveraged financial institutions be subject to simple limits on leverage in addition to any risk based capital standard. should fannie and freddie be restructured or fully privatize? should any of those funds to be transferred to the federal housing administration and the place transparently on the federal budget? should highly leveraged non- depository financial institutions have access to the federal reserve discount window, and if so, under what circumstances? and how should these derivatives be read -- regulated? do they need to be regulated differently than other derivatives? i look for it your testimony today. >> thank you very much, madam chairman. thank you very much, all four of you. we very much appreciate the opportunity to listen to the things that you're going to say. i will not take up very much time here but i want to express my appreciation for you. as we all know, this country is dealing with one of the most difficult and damaging economic circumstances that it has experienced over the course of our history. it is the worst set of circumstances that we have experienced since 1929 through the unemployment rate is now above 10%, and that is the official one. there are others who would love to have jobs but cannot get them because of the economic conditions that we're dealing with. a lot that has to do with this sharp decline in the economy, which had to do in large measure with the manipulation of commercial and investment banking. the elimination by the pass congress to prevent that combination, that manipulation to take place. these are some of the things that we're dealing with, including a number of other things in regard to the way in which investment operations are engaged in, including the effect it's had on the price of oil and gasoline. and so the price that people have to pay for the necessities that they are required to have in the context of growing unemployment makes the situation much more difficult and damaging and even dangerous to address. but it needs to be addressed and it needs to be addressed very affectively. all the things that you are going to have to say, i am sure, are going to be very important to our ability to engage this situation in a much more effective way. so i think you all for being here and i am anxious to hear what you have to say. thank you very much. >> thank you so very much. i like to welcome all the witnesses and to introduce the panel. one practice law for many years in washington and was in a partner in a firm. from 1996-1999, she was chair of the u.s. commodities futures trading commission, the cftc, the federal government agency overseeing the futures and commodity option markets and future professionals. what acting there, she served as a member of the president's working group on financial markets. this born is a 2009 recipient of the john f. kennedy library foundations profile in courage award, presented annually to public servants who have made courageous decisions of conscience without regard to the personal or professional consequences. she received the award in recognition of her efforts as chair of the cftc to urge that the over-the-counter derivatives market should be subject to federal oversight and regulation. the failure to regulate that market is now seen to be a major cause of the recent financial crisis. among other awards, she was recognized as a champion in legal times list of the 90 greatest washington lawyers of the last 30 years. in 2008, she was a recipient of the american lawyer lifetime achievement award for her career long leadership in private practice and public service. she is a graduate of stanford university and stanford law review, where she was president of the standard law review and receive the outstanding senior award. robert litton is from the brookings institute. it is also the vice-president for research and policy at the kauffman foundation in kansas, city. he previously served as the associate director of the office of management and budget, and deputy assistant attorney general. from 1979, he was the regulatory and legal staff specialist at the president's council of economic advisers. he holds a b.s. in finance any also has a law degree from yale. a ph.d. in economics from yale university. james carter is chief operating officer for the national community reinvestment coalition, an association of 600 local development organizations across the nation dedicated to improving the flow of capital to communities and promoting economic mobility purity is also a visiting professor at columbia university in the great city of new york, and prior to his appointment to ncrc, he was planning research for the fannie mae corporation. he is also held positions as assistant director for tax policy for the congressional budget committee, and he holds eight degree in architecture from columbia and a master's of see the and regional planning from the university of pennsylvania. robert steele is a former president and ceo of wachovia. he served as undersecretary of the treasury for domestic finance from 2006-2008. previously, he spent almost 30 years at goldman sachs, found in the firm's equity capital markets group. he is currently chairman of the board of the aspen institute 3 he served on the board of a bank and currently serves on the board of wells fargo. he is also a past chairman of the duke university board of trustees, and holds a degree from duke university and an m.b.a. from the university of chicago. i want to thank all of you for coming and i would first recognize mrs. bourne and then go down the line 3 and you are recognized for as much time as he may consume. [inaudible] [inaudible] congress passed a statute in 2000 that eliminated virtually all regulation of the over-the- counter derivatives. it was called a modernization that. because of that statute, the federal or state regulators currently has oversight responsibilities or regulatory powers over this market. the market is totally opaque and is often referred to as the dark the market. it is enormous. in june of this year, the reported size of the market exceeded $600 trillion in value. while over-the-counter derivatives have been justified as vehicles to manage financial risk, they have not practiced, spread, and multiplied -- they have in practice bread and multiplied risk throughout the economy. lack of transparency and price, excessive leverage come rapid speculation, lack of adequate capital and provincial controls, and a web of interconnections among counterparties have made the market extremely dangerous. warren buffett has appropriately dubbed the market of derivatives as financial weapons of mass destruction. they include credit default swaps, disastrously sold by aig, and many of the toxic assets held by our biggest banks. it is critically important for congress to act to impose their roles necessary to close regulatory gap and to protect the american public. the commodity futures trading commission and the securities and exchange commission should be granted primary regulatory responsibilities for derivatives trading, both on and off exchange. all standardized and advisable derivative contracts should be traded on regulated exchanges and cleared for regulated clearing houses. these requirements would allow effective regulatory oversight and enforcement efforts. that would insure price discovery, open this, and transparency, reduce leverage and speculation, and limit counterparty risk. if any trading in the over-the- counter derivatives is permitted to continue, such trading should be limited to truly customized contracts between highly sophisticated parties, at least one of which requires such a customized contract in order to hedge its actual business risk. furthermore, if any continuing over-the-counter derivatives market should be subject to a robust regulatory regime, requiring transparency -- >> could you speak up more clearly? many people are having trouble hearing you. >> i am not sure that the microphone is working. >> can you check her microphone, please? >> it says that it is on. but to clean a little closer. >> ok. >> is that better? >> that is better. >> ok. there should be for the over- the-counter market registration, record keeping, and reporting requirements for all the over-the-counter derivatives traders. and they should be subject to business conduct standards. all over-the-counter trades -- are, this works. >> much better. >> they should be subject to market requirements in all large market participants in the subject to capital requirements. they should be publicly reported on an aggregated and timely basis. and the market should be subject to effective prohibitions against fraud, manipulation, and other abusive practices. these measures would go far toward bringing this enormous and dangerous market under control. there should be adopted and implemented if we hope to avoid future financial crises caused by this market. the country cannot afford to delay or weaken our response to the crisis. if we as a people do not learn from our experiences and respond appropriately, will would be doomed to repeat them. thank you very much. >> thank you very much. dr. litton. >> thank you for inviting me to testify today. i will hit the highlights of my prepared testimony and the material that accompanies it. i'm here primarily to present the financial reform recommendations of the bipartisan puke financial tax force -- pew and at a task force of which i am a member. congress has worked hard to develop a of a comprehensive legislative package to which chairman money just referred, aimed at preventing a repeat of the sorry emmons. the name four -- the need for reform could not be greater. facing the financial system is critical to restoring faith in our financial institutions and markets, as well us to strengthening our lending institutions to the point where they can feel comfortable again lending to businesses and consumers. you will find many common elements between our recommendations and the specifics in the bill that have come out of the house financial services committee and are now being considered by the senate banking committee. our task force members came into the process with very different views. much like the differences you see in congress. we debated these views intensely, but calmly, and we learn from each other. and for my part, there were a few mines change, including my own, on some issues. what we did not cover the waterfront and some members with a prepared -- would have preferred a different approaches, we came up with a package of principle reforms that we believe would be a significant improvement over the status quo. bob steele will elaborate on some of the specifics. here are mine. we need monarch in by an oversight council for the financial agencies. specifically, this council on its own initiatives or upon recommendation of the fed should add to minimum standards for capital, liquidity, margin, and leverage to prevent or slow the formation of future asset or credit bubbles. second, there are several ways to make sure that no financial institution is too big or too complex to fail. we can do this through capital and liquidity requirements that increase with an institution size and complexity, and by mandating that large institutions file and gain regulatory approval of water called wind down plans. third, we recommend the consolidation of all current provincial federal financial supervision into a single regulator. we believe that eliminating gaps and duplication in our current fragmented system will be a significant improvement, but at the same time, we would retain the dual banking system under which banks would have the opportunity to choose between a state and federal charter. fourth, derivative markets clearly should be strengthened by using capital requirements to drive more otc derivatives to a central clearing houses and essentially -- and eventually exchanges. they should be tied to long-term performance, much like the kind of things that the fed has recently proposed. other ideas for enhancing market discipline are spelled out in the report. finally, we support the creation of a new consumer financial products agency. i look for to your questions. >> mr. karr. >> thank you. on behalf the nassau community reinvestment act -- coalition, i'm asked to discuss whether it a consumer financial protection agency's modeled on any of the proposals in the house or senate could or would have prevented the responsible mortgage lending that triggered the financial crisis that led to the implosion of the housing market. it is impossible to answer a hypothetical with such certainty, but if a agency had been in place, structured with the appropriate authorities, such an agency would have prevented the bulk of the most egregious predatory lending in the market. climbing our way out of the current crisis will require that the regulation be real honest to to -- reoriented to serve the american public. much more will be needed to accomplish the full recovery. those additional acts include better managing a foreclosure crisis and putting americans back to work. i will focus specifically on the consumer protection. one of the most dispiriting aspects of the crisis isxd thatt was largely avoidable. for more than a decade, financial institutions engaged in practices intended to mislead the ability of consumers to judge the worth of products offered in the marketplace. over the past decade, the subprime market pushed loans that were reckless and irresponsible. they produced huge profits for mortgage brokers and mortgage finance institutions and wall street banks. irresponsible loan products and inadequate underwriting with other these were all part of the problem. all of these issues are thoroughly documented in articles, news stories, policy papers, and more. federal regulatory agencies were fully aware of these problems and they had the authority to act. they choseñi not to agree on thr rare occasion where they did,xdt was to preempt state laws to prevent states from protecting the rights of their own citizens from the abuse of financial practices. walt most of the abuses were in the housing market, they came to permeant many aspects of the that it's a system,ñr including credit and debit card policies, on reasonable check processing procedures, and more. repairing the economy requires we reorient the regulatory system for the well-being of the american public. removing tricks in traps creating instability for consumers and ultimately for the system is the whole. the administration and both houses of congress are considering the establishment of a consumer protection agentcy that would consolidate the enforcement currently among many agencies. it would eliminate the current practice of regulatory arbitrage, whereby financial firms are allowed to select their regulator and based on how poorly they protect the public. the complement would be able to assure the same quality of financial products across institution types. proponent -- opponents have argued that this would undermine the safety and soundness of the financial system. its safety and soundness begins and relies on the integrity and reliability of the products offered to consumers. the administration's legislation requires standardized product and it -- for financial firms. arguments against this are that standard products will stifle innovation. this is without merit. the 30-year fixed rate mortgage has been the gold standard for decades. that did not stifle alternatives. its reliability and safety are the key to success. it was a leading contributing factor in the spread of reckless subprime loans that were the core of the initial for closure crisis. one of the major differences between the present proposals to deal with the treatment of the community reinvestment act. h.r. 3127 of leaves primary regulation with the federal reserve board. this is a mistake. many financial service providers historically and routinely offer products at a community level. excess of conservation of subprime loans and african- american and latino homes is only one aspect of this. others included having the breadth of coverage over independent operation, product discloses that can be reasonably understood, and funding strain not susceptible to the vagaries of shifting political winds or economic downturns. this agency can cultivate an environment of integrity into the financial system, restoring trust and confidence in the financial system is central but the frame -- both for the american public as well as international investors. >> thank you, mr. steel. >> i am pleased to be here today as part of the bipartisan financial reform task force. along with my task force colleague, dr. litan, i appreciate the opportunity to discuss the recommendations which we submitted along with are prepared testimony. we hope our principles and recommendations are helpful with regard to the fed to reform process. our task force began work last summer and has covered a large amount of ground. we believe we have a solid and substantial framework and look forward to further debate coming hearing your reactions and learning from them. the task force recommendation reflects many of the topics now under consideration in the house financial services committee and senate banking committee. further, they share much in common with the recommendation advanced by secretary paulson in treasury in june 2007 and the blueprint for a modernized and its regulatory structure, a report i worked on as undersecretary for domestic finance. given the time constraints today, i would like to highlight a single, crucial recommendation of our work. what is become known as the too big to fail problem is in many ways at the heart of the financial reform effort. there are different ways to approach this challenge. congress could arbitrarily limit the size of financial institutions. they could limit the scope of their activities. or they could work to ensure that any failure is less likely to cause a financial crisis. we favor the latter strategy. it is a strength of the american system that the opportunity to succeed carries with it the prospect of potential failure. to my mind, this system provides the best possible opportunity for shared prosperity. as a result, our task force recommends that all financial institutions should be free to fail. but three to fail in a manner that will not the stabilize the financial system. the task force recommends three specific things with regard to this issue. first, a sliding capital scale so that the larger, more complex, more risky, and more systemically important institution, the higher the standard for capital, liquidity, and leverage to which it should be held. second, institutions above a certain size should submit for approval a living will or funeral plan that will describe in detail how the firm, were it to fail, could be wound down with a reduced impact on the over -- on the overall economy. third, and this solution should be adopted for failing or failed non-depository institution. while the fbi say -- the fdic should continue to wind down base, for others, there should be strengthened bankruptcy protection as a presumptive approach. only after strong safeguards had been that should be there in ñiadministrative resolution process as an option of last resort. this proposed two-stage approach to winding down non-bank financial institutions brings together two quite desirable policy objectives. it maintains the market discipline of the banks, while at the same time providing the government with a new tool to protect the financial system in times of unusual stress. in all cases, moral hazard is reduced as shareholders, unsecured creditors, and senior management will bear the burden of the failure. to create this two-step process, congress what -- should amend the bankruptcy code is necessary to make bankruptcy to presumptive process for managing all failing non-depository financial institutions. in addition, congress should create a new federal financial institution bankruptcy court and grant its sole jurisdiction in the united states for these cases. in those exceptional circumstances when a bankruptcy would posed unacceptable systemic risks, a new administrative resolution process should be created for failing non-depository financial institutions. process should be used only after strong safeguards had been satisfied. congress should decide how strong the safeguards are and what form they should tapered for example, congress could require consultation and form an agreement between treasury and the concern federal financial regulatory agencies before the resolution mechanism is activated. congress could also opt for stronger safeguards. this would empower congress to make these decisions. there are several methods to insert a higher hurdle. this is one that our task force considered. at that failing non-depository financial institution were judged to be a threat to the stability of the financial system, the administration could seek congressional appropriation for what it sees the appropriation, it could into the bankruptcy process and the proposed bankruptcy court. congress would have a limited and fixed number of days in which to make such an appropriation. the fed could provide financing and collateral, preventing the firm to continue operating while congress deliberated 3 if congress did appropriate, the state of the firm would be translated to the administrative procedure for it if not, the bankruptcy would proceed and the fed would exercise its collateral what's ex's in circumstances permitted -- once an exigent circumstances permit it. we hope that this will complement the current work been done on this issues as well as to provide additional memo to the overall financial reform effort. while there are unmistakable sign that our economy has stabilized, it is imperative that congress act with urgency to an act comprehensive and effective reform. thank you very much. >> that you very much. i want to thank all of the panelists. because this is the first time that ms. born has testified before congress since she left public service in the late 1990's, i would like to direct my first series of questions to her. mrs. born, when your chair per cent of the cftc, why were you so concerned about the over-the- counter derivatives market? >> i took office in 1996. three years before that, the cftc, my agency, had exempted customized swaps from the exchange trading requirements of our statute. but it kept fraud and manipulation powers over the market. when i got into office, i learned that the market was growing exponentially. it was at that point, at $30 trillion of notional value, we had no record keeping or reporting requirements. so there waso transparency. i could not effectively oversee that market for fraud and manipulation, even though we knew there had been major cases of fraud -- bankers trust and otc derivatives, a dealer had defrauded procter and gamble and other customers. we knew that there were major cases of manipulation. sumitomo corp.ñr have used over- the-counter derivatives in copper to manipulate the world price in copper. we also knew that there was speculation on borrowed money in the market that was causing some major defaults, like you just mentioned. orange county, calif., which had been speculating on interest rate over the counter derivatives with taxpayer money and was forced into bankruptcy because of its losses. i was extremely concerned because neither our agency nor any other federal agency had a sufficient amount of information about the market to know the extent to which this enormous and quickly growing market was threatening the financial fabric of the country. and in fact while we were undertaking our inquiry into this market, and i was appearing before a number of committees of congress, discussing whether or not over- the-counter derivatives should be subject to any federal regulation, the long term capital management crisis came. long-term capital management was an enormous hedge fund, which unbeknownst to any federal regulator, had managed to acquire opposition in $1.25 trillion of over-the-counter derivatives, even though it only had $4 billion in capital. over a weekend, the fed learned that it was about to collapse. and the federal reserve felt that if it collapsed with that kind of a position in the over- the-counter derivatives, it would threaten the financial stability of the country. 15 of our largest banks and investment banks words over the counter derivatives counterparties -- work its over- the-counter derivatives counterparties. they were all able to come up with hundreds of millions of > dollars each to prevent the collapse. but that demonstrated very vividly to me the dangers of contagion, the way that these instruments spread risk through the economy, and the danger that the failure of one institution, because of its trading, would bring down other institutions, because of the connections through counter party relationships. >> i was a member of the financial services committee at that time and i remember there was a huge interest in moving forward with regulation. but then the economy improved and was booming, and the need for regulation was ignored, and we went forward with this problem, and look at the disaster that because the financial crisis. we should have acted then, and we're determined -- president obama, to enact comprehensive regulatory reform. if we had acted in, we would not be in this crisis. my time is expired and i recognize senator brownback. >> i am sorry that i am late. i had another important hearing. i am delighted with the panel that is here in the topics being covered. i want to go direct to the dealing with large financial institutions and their failure, and how to handle that as an overall -- as a government. that is one of the key things that has come out of this crisis, and our inability to handle something too big to fail. and then we have the taxpayer take the risk on it. and that adds a lot of moral hazard into the marketplace. if we do not fix it, it seems to me it makes that moral hazard bigger in the next round that takes place. so that people will say, last time they did not fix it. and it strikes me that these bubbles build faster quicker. it is almost like financial storms bill quicker, faster, bigger now than they used to. whether it is the dotcom bubble and housing bubble and birds, and i think we have a government bubble and burst. if we do not get in a position now to be a good deal with these large institutions and tell them -- the marketplace will send that we're going to protect them, and then there will be more money going to place it really should not. i like to know, dr. litan and mr. steel, and mr. testimony. tom mahoney is a man that i worked with of paramount on this. do you generally support the model of what he is putting forth on this, or perhaps this is your model and he is adopting it. i like to get into some of the detail on this, if there is a kind of collective thought coming together on how we structure ourselves to deal with this in the future? >> thank you, senator. in my comments this morning, i highlighted my perspective that this too big to fail issue is really at the crux of the crucible of all the issues that we're thinking about. it is a mission-critical part of what we're focused on. with regard to mahoney's comment. we are familiar with the word. i think that the key construct -- the philosophy of this point of view is that resolution should be very painful. if we go thru resolution, then whether it is bondholders, management, shareholders -- they should separate significant pain. we echo that same sentiment. he goes in a much greater detail in the actual technicals on how he would organize his resolution process than we did in our work, but what he seems to look at as important, -- is important. we offered a different two-step

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