the committee will reconvene uh thank you for being here as a panel uh there was a little consternation before you arrived here so I I just want the record to be corrected because Mr vulmer when you testified you thank us for our understanding of the limitations of this panel to the committee and I think that was premature because I don't recognize any right of the agency to lay down limitations as to what members of the SEC have to testify to or not testify to before the Congress of the United States and unless I'm mistaken if there's any objections to be made it would be raised either by the Department of Justice or others but that not withstanding I think we're going to try and be as amable as we can and civil as we can just with the idea that I I want it clear to the members of this panel and particularly to you Mr Walmer that in our discussions and prior preparations for the testimony of this panel it became obvious to me that there seems to be a disfunction between the Securities Exchange Commission and this Committee of the Congress in that there seems to be a misunderstanding as to who created who and who is responsible to whom under the Constitution and uh I hope we can disabuse ourselves of that misunderstanding if we can't we should probably take any legal proceedings necessary to determine that because I think we're involved in a extremely serious case that that requires litigation and from listening to the testimony of this panel it appears to me that if uh these cases remain as they very easily May for years in trial and work it is the position of the SEC that they can't discuss the matter can be called upon to testify on the matter and are completely removed from participating with the Congress in creating legislation that may be necessary to correct the matters and although I take great sympathy as a lawyer with the protection of cases to be prosecuted and not to compromise the same we're obviously dealing here with two different situations one is what laws have to be made or changed to protect the greater members of the public and what kind of potential compromises would that Clause to a particular case and in terms of hearing the testimony today of M Mr marus I have tentatively come to the conclusion that the Securities and Exchange Commission has been anointed by God to be all righteous and I hope I can disabuse the members of this panel of that fact because quite frankly we're about to decide just in what nature and how the Securities Exchange Commission should continue to exist and uh the lack of cooperation shown in the last several weeks and I think the abuse of Authority or the attempt to bring a protective shield over a executive agency or independent agency of this government is not acceptable and if that's going to be the process the easiest thing is to follow Mr Mar polus advice and just do away with the entire regulatory system as it's presently constructed in start a new and I I I make that point obvious for a reason there are several things that have happened in the last several years that should be embarrassing to the SEC and let me ask that question are you embarrassed as members of the higher ealon of the SEC with how the made off case has been handled or do you feel that embarrassment doesn't come into it and that's unimportant and that you're above all those things would anybody like to tell me that let me start uh first of all uh if if we have in any way suggested a self-righteousness to you uh I don't feel that I don't feel it towards the Congress and uh to the this is Richard so it's understood and I'll break a confidence one of the members of this panel is are here today having originally told me he wasn't going to testify because he's exempt and it precipitated a call my myself to the chairman which I rarely make although I know her very personally and have known all the chairman for 20 years but it was so annoying to me that when that individual thought he did not have to testify before a committee of the Congress of the United States I've made it very clear either he would be here today or appropriate subpoenas would be issued and those subps would have been issued to everybody's here today and quite frankly we would not have accepted any excuse offer or request for lack of testimony on any facts and have structured a case and let's see just what kind of protections you would have under the law for not testifying if if we cannot have comedy between two branches of government to handle the people's business we've got a serious problem and right now as this panel is constituted and as I've heard the testimony I mean I I you know I like oatmeal and and that's about how I classify the testimony I heard today and now I don't know whether that testimony was written that way and presented that way in order to be a slap at this committee or the chairman himself but it's not appreciated we didn't call you up here for us to hear a traveler's guide of the Securities Exchange Commission we are spending our time and effort and many of us to get to the roots of how in the hell a made off Scandal continues to occur for more than 10 years when a rather credible expert in the field tries to do everything he can year in and year out to alert the appropriate regulator of the federal government that should have handled or looked into that and now I you know that's a little therapy on my part now let me hear your response of how good you intend to be um Mr chairman uh to we are here to help you in your effort we think this is an important hearing as to your original question uh I don't think I think I speak for everyone when I say we hate fraud we hate the fact that people are victimized by fraud we wish it never happened we wish we could get to every but your job is to prevent fraud not to hate it in in in well in the in the enforcement Division and the division that I know the best um our job is in part to prevent it but only as a derivative effect of ourfor actions because we can only bring actions when a violation of the law has occurred now we want to get to every violation the instant it happens and we hope that by our actions U there is less fraud to pursue um that is our mission that's our passion uh I've heard today issues about uh wanting to avoid going after big players there is nothing that makes a member of my staff happier than bring a case the only thing that makes them happier is a big case and if it's against someone of some notoriety or fame that makes them happier still we live for bringing those cases we hate the fact that people uh lose money and we bring hundreds of them every year and I have to say that be sitting here today it is every law enforcer's worst nightmare to miss something and yet it is something that we know is going to happen because there's how do you explain the fact not only miss this but now that the Congress is attempting to close the loopholes and attend to it you feel disposed not to cooperate 100% to see that we do that to protect other frauds that may be occurring and going on right now well let me let me try to address it and I understand your frustration but when we talk about moving forward what we can do to address it the first and to my mind most important thing we can address it is to hold frosters accountable to bring them to justice to bring the full full force of the law against them that includes criminal prosecution civil prosecution and for example quite specifically when you talk about what we did in the past some of what happened in the past May in and of itself violate Federal criminal law and the ability to pursue those cases uh to the full extent that we can is what we're here to protect that does not mean that we should not examine uh what happened uh and even examine it theoretically to think what we could do make assumptions about what the past was and move from there okay let just let me say the Justice delayed very often is Justice denied and uh if we're going to have cooperation and we're going to have an effective enforcement tool of the Securities Exchange Commission we can have the culture mentality that I sense over there that an examination investigation a process can go on forever go on forever I mean I have stories that will shrivel your ears with how long enforcement proceedings have just laid around and no action having been taken and I'm getting the impression that that's the culture now that there isn't an intent to do something so one of the things the committee will be considering in some of its legislation is whether or not we can impose 180 day rle you know let's if we can get criminal prosecutions within 180 days in this country it seems to me once we charge some corporate activity as being a violation of FCC let's move along 180 days get to a trial let's get decide it something like this I want to ask a question how long do you need to resolve the problems that are causing you not to speak or cooperate with this committee how long do you think these prosecutions are going to take before you can speak speak up I honestly don't know the answer and there are three things that are going on so wait if that's the case you don't know the answer it could be years is that correct I don't know well if it is years and you don't intend to say anything I if I listen to how your your uh statement in your Council structure the statement it there are three things you can't help if it's a pending criminal investigation you can't help if the Inspector General is doing something you can't help if it's a ongoing violation I mean man well if there's a snowstorm in Washington the SEC can't help that must be one of the conditions what I want to find out is how long is it going to take for that to be officiated and when can we get together and cooperate and developing legislation that will protect the other 299,999 people other other than May off sure let let me suggest an approach that may help uh because I understand your concerns about how much time it takes to get to specifics but if you want to try to think about how we can help generally we can make assumptions so for example you could assume that U to my mind I like to assume a case where I think the solution is the hardest because if we if we find that solution we will be considerably better off uh so when I when I look at a potential investigation uh let me I hypothesize uh the SEC gets a credible lead uh a lead is followed up on to a certain extent and the investigation is closed without action as it can happen now when an investigation is closed it seems to me there one of two possibilities I well maybe four either there was nothing to be found and nothing was found or there was something to be found and it wasn't found all there probably more but but in those circumstances um if we assume that something could have been found and wasn't what are the reasons underlying that and if if if it's complete and utter corruption the answer is easy you get rid of that which is corrupt if on the other hand the answer is that people of Goodwill were trying very hard the answer may be they lack training and so that's one of the issues that I know has been addressed or they lack expertise so what do we do to provide additional expertise to people so that they have the expertise to look further it could also be that all it is a resource issue that is you look you find nothing you keep looking you find nothing and then something else blows up somewhere else that is appearing to be all more important at the time I mean one of the one of the issues that we are obviously struggling with is if we knew going into something that it was a fraud a provable fraud with evidence that we could present to a FactFinder it would be easy when you don't know that's what you pursue um so I think we would we would be happy to have that conversation that dialogue to think to make the assumptions to make us better uh we try every day to learn from our experience and so among other things we're thinking about uh as the committee has suggested another what can we do on risk what can we do for expertise what can we do to maximize our resources and those are precisely the kinds of things that we are thinking about even though we can't necessarily share the specifics um with the committee thank you Mr Thompson I'm going to call on my ranking member here obviously ask some additional questions and I took more than enough time particularly I had to have therapy I thank you and you know Mr chairman when I when I began my remarks I before I got into my remarks I comment commended you on uh statements that you made earlier today on CNBC uh with regard to the hearing and with regard to what needed to be done um and it was actually by watching that program I I learned a bit of other information and then on there they were issuing talking about at oig and inspector General's report that was was just listed on their website either today or yesterday with regard to a um a different issue um but still within the secc um and it's with regarding to uh uncollected disgorgement what it's called and that's not the point of this here but after seeing that on on I guess it's walk box that it was on I had my staff go and and we pulled out a copy of the report because it really didn't go to what we're talking about here but after going through it it does in two ways one it goes to on the weed side or the ISS uh getting into it goes to the issue of enforcement and whether there's being enforcement done in general um and as I assume the panel knows this report raises a number of serious questions there's about 177 million dollars in uncollected discouragement and for those who don't know and discouragement just means once you have a case and you find the guy and you get the guy that did the bad thing then you want to go after them and actually get back those revenues from him their ill gotten gains and I guess there as the oig says there Le 17670 million in in uncollected disgorgement um and that would be one issue but the larger issue is and going through it it goes this goes back all the way through um uh 1999 um I believe it was at the very beginning talking about that the ogag had done similar studies or reviews and then if you go back at the very end um to look to the uh inspector General's responses to the management comment since the oag gives their opinion and then Management's able to give the response and then oag gives a response to that the better ending of it is this is them oag speaking notwithstanding this effort speaking to in other words the ogag saying over the last 99 1 2 3 four 5 almost eight years nine years notwithstanding the efforts of trying to address this situation the language and the tone the enforcement's response leaves us unconvinced that enforcement will take the oig's findings seriously and Implement tangible and concrete measures to improve its discouragement waiver process I know Mr chairman we're not going into the whole issue of discouragement it it just did raise a proverbial red flag that if there's been seven or eight is years or more of oig saying here is our as an auditor basically saying here is our rec recommendations to make changes and eight or nine years later there's still those questions it raises the flag here is that if this as a body uh comes up with our recommendation saying that we'll just leave it to the SEC to um act unilaterally um to try to implement changes that we may very well as a chairman says be waiting a long time so it just raises those questions I appreciate the fact that I was able to learn that by uh watching the TV today quite literally um what I like to learn a little bit more though is going into some of the issues that the first panel um raised and here here's an here's an easy one um to start things out and whoever can either address this right now or address later on and I see a lot of gray hair um people sitting in front of me the gentleman that is um which the previous panel was speaking to the issue of right here too well I was never going to go there um the the the issue was as far as the experience of the people who are conducting in the enforcement side and the examination side can you provide us with with a response to that as to your number of employees the salaries of your employees the years of experience that they had within the department now I noticed a number of you speak spoke to your experience here within the um agency the SEC um um first panel Mr maropoulos would probably indicate that he would be suggesting as others would that we'd look for experience outside of the agency as well um so if you could provide that to us a detailed summary of that as prior experience to address that issue and if anybody would like to I know you're not going to have that at your fingertips right now want to address that General allegation if you will that the SEC has made up of folks who'd really come to the table without the adequate practical business experience necessary to get the job and that they're simply sure government employees I think I think we would probably all appreciate the opportunity to get specifics to you uh why don't I start because my division is probably the division that c has the um greatest characteristic that was complained of we do have a lot of lawyers in the division of enforcement and that's because we have to prove our cases in court uh we ultimately can we just run through I see my time is almost running okay never mind let me stop we have lawyers accountants and uh analysts as well as Market surveillance types but I'd let the others talk do I do I have time to Sure supplement that in the examination program we are mostly accountant and examiners there are some lawyers but um the majority of the staff are are examiners and accountants they are cfas and CPAs after the Congress adopted pay parity legislation it gave the SEC the authority to pay our staff at higher salaries that were commensurate with other Federal Banking Regulators it allowed us to bring in a a a greater number of staff that had experience either experience in the industry in a Ting in compliance and so in the last I I would expect four years five years our staff has become much more experience much more well-rounded than they were in earlier years where they were more likely to be hired right out of school so that that happened with the change that Congress gave us to pay our people a little bit more and as a result we we began to keep people longer so they could gain experience and examinations gain experience in dealing with complex products complex strategies um and emerging types of compliance risk so in the last four or five years I believe it's it's a much better situation at the SEC in terms of the the caliber and the experience of the of the examination staff the Chairman's permission to ask elaboration on that the suggestion was and it's probably a good one that if you're able to get some people who are in the industry have worked in the industry most of their lives and then come into the SEC to start doing enforcement examination rule making Etc is there is that a practice to actually out go out and seek that individual who has the 20 some odd years experience who was about to re well whatever to go into this field later on in life let me see if I can answer that question we understand that that that it's such people are very valuable they're very desirable it's simply hard to recruit them we absolutely go out of our way to find people with industry experience and we have such people in our division trading in markets more to point within the division of trading and markets we have a group of people who are explicitly not lawyers who are collected together to supervise certain risk issues at broker dealers these are people with PhD in economics account statistics master's degree exactly the kind of people you would think of you'd want who have quantitative backgrounds to deal with just these kind of issues and I will point out that some of them teach courses in derivatives on their own time either before they came to the SEC or as they're at the SEC in the evenings to just those MBA students that were referred to on the prior panel I also I also just want to add to to just to supplement that that we've in recent years hired former Traders in the exam program which which is extremely beneficial to help us look at trading records and un and and unscramble what what could be violative trading patterns and and that expertise brought in from the industry has been extremely valuable to us one of the things we we really want to do going forward is to expand that expertise to hire more quants to hire more economists to hire more former Traders so that they can provide uh a resource that expertise as a resource to all the staff at the I I would just close on this and let's just say that the The Dilemma that I think that any government regulator is going to have was expressed to me by someone in the industry and that is that they when they deal with you that if they find somebody whether he's a young guy out of school or somebody who's been around for a long time and can teach the course or do these other things and he's a real top-notch guy no matter what you guys are offering him in the private Market they are going to offer him a whole lot more and so we are always going to have that dilemma of trying to get the best and the brightest because the best and the brightest are going to go where the pay is and that may not be with the SEC but I thank you for the latitude to expand I am frustrated beyond belief we're talking to ourselves and you're pretending to be here I really don't understand what's going on previous witness said that you guys as an agency act like you're deaf dumb and blind and I figured you were gonna you were coming here you were going to testify before Congress and don't dare tell anybody you testified before Congress you're going to be subjected to to to violation of false advertising lawsuit all right you've told us nothing and I believe that's your intention I figured you'd leave your blindfolds and your duct tape and your earplugs behind but you seem to be wearing them today and instead of telling us anything you read from the Preamble of your mission statement and broke it up into five segments what the heck went on your mission you said was was to was to uh protect investors and detect fraud quickly how'd that work out what went wrong it seems to me a private with all of your investigators and all of your agency and everything that that you all describe one guy with a few friends and helpers discovered this thing nearly a decade ago LED you to this pile of dung that is that is burning made off and stuck your nose in it and you couldn't figure it out you couldn't find your backside with two hands if the lights were on could you explain yourselves you have singlehandedly diffuse the American public of of any sense of confidence in our financial markets if you are the Watchdog you have totally and thoroughly failed in your mission don't you get it and now other people are investigating what you should have found out and you're hiding behind well maybe we can't talk because someone else is looking at it well you forfeited your right to investigate by not doing it certainly not doing it properly or adequately and now you're trying to tell us that because other people are looking at it you're not going to tell us what's going on like hell you won't what happened here that's a question do we start with he no evil see no evil or do no evil take your pick I only have five minutes let me start with enforcement as I said we did an investigation in we began an investigation in 2006 and it was closed without action why was it closed without action what did you investigate what methodology did you use and if you if in the interest you suspicious when a guy had a onean accounting firm investigating a $50 billion Empire and you keep saying alleged alleged this guy confessed on National Television you might have noticed and as I said our objective is to actually hold him accountable in a court of law bearing our bur miss your chance we have we have a pending action pending in the southern district of New York you took action after the guy confessed he turned himself in don't give yourself any pat on the back for that and Congressman every time why did you find him is the question I understand your question and we cannot answer as to the specifics I can talk generally you know if anybody made the case better than Mr marcoos and I didn't think anybody could about you people being completely inept you've made the case better than him well sir I I I am sorry you feel that way profoundly uh we I think I'm reflecting what the American public feels how are they supposed to to have confidence that if somebody goes to you with a complaint gives it to you on a silver platter with all of the investigation with all of the numbers with all of the data telling you exactly what he did how he did it and why he did it how he knows that and after a period of a half a dozen or or eight years you don't know anything I can only talk about what we do what we do overall no no we want to know specifically I don't want to know what your general purpose in life is I don't need you to come here to tell me that you hate fraud hate when that happens don't you but you're supposed to find it out before it happens in enforcement obviously we can't and I understand that concern in enforcement we bring last year we brought 670 some odd cases in the past two years we brought 70 cases involving Ponzi schemes in those 70 cases all close listen listen I'm I'm I'm sure you have metals and and and ribbons and stuff like that and congratulations on all the good stuff that you've done I don't want to belittle any of that but this is huge how do you miss that and and and we know that there are many made offs out there they're starting to surface you you missed all of those too bring but this one this one you were pointed at and and and Mr Mar Capa says he's gonna give you another one tomorrow he's not even giving it to you he's giving it out to someone else because nobody has confidence in you guys anymore maybe maybe the general counsel Mr vulmer I believe you were the one who thought that your people didn't have to testify here today I I don't know how where you got that but some of us think otherwise may maybe maybe you could tell us how how did they miss all this we're as committed as each of you that's not the question we give you credit for being committed perhaps you could let me answer perhaps you can try to answer and what we what we're asking asking no no we're asking you have to tell us things you you're forgetting what the what this procedure is not coming here to ask we're asking you how did you screw up General's process work it's a process Congress set up to identify the facts that we all need to make these judgments let's let the system work that Congress created there will be some recommendations there will be time for this committee to look at the facts and to think of the recommendations themselves tell out the people who lost their whole lives that they have time feed in this matter people don't have time we need you to tell us something instead of lecturing us that there are law enforcement proc proceedings going on there are personal rights at stake there are the there's the Integrity of the invest we wouldn't be in this mess if you people did your job that's why we've asked the committee no we're ask you we are asking investigations to allow them to proceed could you cite whatever Authority you're you're citing and have cited I I'd be delighted I'd be happy to do that I'd be happy to talk with because you have a right not to answer our questions under the constition amendment procedure I'm not a lawyer I'm I'm a citizen to talk to your lawyers I'm a frustrated citizen happy to give the the references to you or to your lawyers I'm listening give us the references uh there's um a very important uh opinion from the Attorney General Robert Jackson in 1941 where he explained the need to discharge the Constitutional and statutory obligations of the executive branch in connection with law enforcement and civil litigation are you citing executive branch immunity Mr bulmer in response to requests for information from the Congress are you citing executive branch immunity Mr vulmer there's there are various protections are you citing executive branch privilege Mr vulmer uh I would like to let you allow me to answer your question it's a yes or no question sir either you are or you are not no it's not there are a variety of reasons and Privileges and protections they one of them is executive branch protections there's a deliberative process protection they stem from the same desires that you have and we're asking you allow those processes to work we are out of patience and the question obviously is a yes or no question either you're citing executive privilege immunity or you're not doing that I've just explained there are you know if you're citing your fifth amendment privilege you don't make a speech and that's one of them was the executive you are priv was that a yes you're citing executive privilege immunity part it is yes I'm sorry I said yes it is in part have you inquired the justice department or someone else that they have analyzed that position for this hearing today and they've found that the Securities Exchange Commission requested by Congress to discuss a very important pending piece of legislation that's being established to protect hundreds of thousands perhaps millions of people that you have a right representing the Executive Branch the president of the United States to stand on that Authority if you if you pose that question to the attorney general or no then this is on your interpretation this is the position of the agency and and you're the general counsel for the agency I assume you make the legal determinations for the agency no the commission makes the decisions for the agency so this question has been passed from a variety of sources in the general council's office so this has been passed through the new director or or chairman of the commission and the members of the commission and they agree and have instructed you to instruct this panel not to respond to the questions of Congress because of executive privilege and may maybe other privileges contained in the 1941 Supreme Court case is that correct the commission supports this position that wasn't the Chairman's question yeah I the answer to that specific question is no the answer is no so you're acting on your own valtion no I didn't say that no and I would disagree with that you know most of us speak English and we're having a hard time getting an answer from you this is not the this this was not discussed by the commission but it's the commission's position is that what you just said do you do you divine that uh the commission's approved taking this position the commission has voted the position that you will cite executive privilege in not testifying before this commit anding questions I couldn't say that to you honestly because the specific reasons weren't discussed and given by the commission but the basis is that we've we SE your value to us is useless accommodation and we've your value to the American people is worthless the contribution to this proceeding you take into account the concerns that have been well settled over many years and we'd ask you to take those into account our economy is in crisis Mr vmer we thought the enemy was Mr maid off I think it's you you were the shield you were the protector and you come here and fumble through make believe ansers that you that you that you concoct and attribute it to executive privilege that you've not Consulting with the executive branch on Mr chairman I'm through I just to add a second you you we all in the room and we had a prior witness I if I remember correctly his testimony was that uh finro was corrupt and the SEC was incompetent don't you all want to defend against that or do you all accept that of course not Mr chairman on behalf of f we we take great issue with with the representation that we as an organization are corrupt and um are you going to break your are you asserting the same executive Authority I'm not privilege I'm not oh so you're willing to break any rights or privileges you have in order to speak I just want to make sure we fer is not involved in the investigation it's therefore a little bit less complicated for fer but I'm here to answer any question you answer very good Mr Rey we're going to give you a shot to see if you can get any responses well in order to try to do that maybe maybe what we could do is go back to U Mr maris's testimony and maybe we can try to get an answer to some of the points that he raised specifically one was what he described as the over lawyering uh at the SEC his argument was was that it was the inability for some of the Regulators to even comprehend the complicated investment strategies that he presented them uh is there a a concurrence that perhaps that was indeed the problem or can anybody speak to that uh well I don't know if Eric wanted to start I'll start from the why don't you start because this would be enforc right okay and and and you're the director for the division of enforcement and I think that's the big question mark here was he right in that assertion and then we can go to the next point he raised okay I think without speaking specifically about whether he was right or not let's talk about the issue of expertise and I think that's a fair and important issue to discuss as I said earlier the enforcement division is largely lawyers because our expertise is trying and winning winning cases we we have to comply with court rules we have to meet burdens of proof and that's traditionally a a lawyer job within enforcement we have lots of accountants who help us lots of Market Specialists um and investigators to help us on the core mission of the specific cases ours is a pretty micro job did this person commit a fraud can I prove it kind of question now right but the but the complexity of the fraud is the problem yes and you know you have a few people that had maybe 25 years experience well as portfolio managers but unfortunately they were on his side well that in this debate they got shut out by the lawyers apparently well he had his allies in the secc but um obviously again let me not talk about the specifics but talk about the expertise that we do have available to us within the agency and lots of them are represented to my left uh we do go to our peers at the in the division of investment management we go to trading and markets an enormously valuable resource for us in when we're dealing with broker dealers broker dealer issues we have our office of risk assessment which is growing it's a need we recognized some time ago we have um the office of the uh Chief Economist well well let me get to a question real quick of course uh the the percentage maybe you could give me an estimate in in your in your division there of broker dealers or investment advisors or those who have that experience in the exchanges or rating agencies that also maybe are lawyers but but have that kind of experience within the within the division itself within that that that are basically in a position to be uh key decision makers on these kinds of cases within the division itself very few and and but with I I think that was his point wasn't it I understand the point and I think the the issue of expertise is one that I mentioned earlier we do need to address we have it in let me because my time's limited let me go to Eric Siri really quick with a question because you know the testimony this morning mentioned the vast difference in fraud cases uncovered from cases initiated by industry tips and that then was explained against those from audits by regulatory bodies and you must have been struck as we were by the discordant by by the the extreme difference in terms of how many of these came from people in the industry that apparently knew more and discovered more in advance some somehow the private sector was well aware of the madeof Ponzi scheme before the SEC and so you know do you believe that that's an accurate assessment and do you believe the investigative priorities maybe of the SEC are properly set given the outcome that we're not just talking about one case here he was taking in in aggregate the number of cases brought because of whistleblowers how much more effective that was than than the experience of the auditing by the regulatory body um I did understand that the point that he made and I too was struck by that point though in many ways not surprised by it people on the inside of course have knowledge and they have their own motivation for releasing that information when you're on the outside of course it's much more difficult to make those inferences and feted out the division I supervise is a policy division we do not have examiners we don't have an enforcement function so I can't speak I think to the heart of what you asked but I would like to follow up on a point that that uh Linda Thompson made the questions that you had asked were around expertise and I think expertise this event that has that that has happened with with Mr MAA has has caused us to think about the way I think we deploy expertise Mary chairman Shapiro and her opening email to us as a staff said it's time to think about self-evaluation and that we need to honestly take a look at what we're doing and how we are doing it and I think we all as staff take that precisely to heart when it comes to a point like expertise nothing could be truer because that doesn't cost more money that's just a matter of working smarter and I think we we try to do that as best we can we have have resources within the SEC the office of economic analysis almost exclusively Economist with phds my division mostly lawyers but as I said many many other folks I have a PhD in finance so I price derivatives for a living at times so I am comfortable with that nonetheless not all those people are brought to bear on the right problem at the right time that's clearly something we need to work on and when we see instructions like we got from chairman Shapiro I think it's a clue to all of us to figure it out so that something like this doesn't happen again thank Mr 's see the Melissa vean from Illinois where did you appear from I snuck in on you thank you Mr chairman um and thank you all for your testimony here today um I guess I direct my questions either to uh Miss Thompson of enforcement or uh Lori Richards of compliance I'm not sure where where this would fall but clearly the challenges um that people feel we're facing as a nation where there has been lack of compliance and enforcement um isn't new to the SEC Congress certainly provided additional funding we all remember Enron and Worldcom and other situations uh where there needed to be greater scrutiny than has been provided I guess my question is how proactive is and and and what level of best practices are in place uh to ensure that number one when people actually make complaints and suggest someone gets looked at are our lower Lev level staffers allowed to just dismiss those without a full investigation and should that continue or should things have to be escalated automatically through at least several levels of authority before dropping further inquiry um and where there hasn't been any issues raised what T types of best practices are in place to go out there proactively you know in the industry to to seek where there may be uh problems and investigate that at least on a sampling type of basis why don't I start with the complaint process and perhaps M Richards can talk about some of the examination process which are all which is directed at proactively identifying ISS issues um on the complaint process as we U mentioned in our testimony we literally receive hundreds of thousands of complaints every year hundreds of thousands so we simp we can't investigate all of them we take them all seriously we try to respond to them so the process for us is trying to triage them to identify those which have um the greatest risk of the greatest harm as well the greatest likelihood of being um accurate or verifiable and um all of you get all of all kinds of information tips mail too uh and the real challenge is you can get something that looks terribly credible with lots of detail and lots of exhibits and it can be for whatever reason not true not verifiable Etc you can also get something if I can interrupt only because we limited time um given that and given the constraints of resources uh what is the criteria when you get multiple complaints about the same organization year after year H how is it that this doesn't rise to senior level attention if and let me let me let me just back up so we're not being specific about this particular um issue but complaints get followed up they get triaged and they are worked if the if someone decides to pursue it it's not an onoff switch uh you look at something you do some work on it you consult with your supervisors along the way um you may do a little investigation if it looks promising you may do more how much more you do is a decision that gets made along the way balanced against what you're finding so there's no checks and balances within the SEC to say if someone has decided based on their the degree of knowledge they've taken to to pursue how big the risk or harm is clearly if we look at the mtof scenario it met both of those criteria um what are the checks and balances in place to to say that someone else decided that that was worth moving past well I I'm struggling with how to answer that because in the specifics um I think does that have to happen or can it just be arbitrarily dismissed by an individual it is going to be assessed within an organizational group all through super up through supervisors so and and I think that's as far as I can go um specifically now there are certain kinds of complaints that do have specific procedures for example if we get online complaints there are very specific procedures that are followed in terms of responding and which ones get picked up for further investigation also involve judgment calls there are specific procedures with respect to um SAR suspicious activity reports that we review uh we try to for example depending on the nature of the complaint if it's an accounting complaint we have people with accounting expertise review them all with an eye towards bringing expertise to those complaints so let me interrupt again so given that obviously this is was a really big Miss and this dropped repeated L is it a lack of resources or a lack of skill sets among those that are in place that are making these decisions in your opinion let me ass what I would like to let us not assume well I'm not assuming I'm asking so which I not F well first there's a there's a premise I would like to address first I would not necessarily assume that the a complaint was not addressed um and as I so the assessment was inaccurate so is that a skill set issue not and again I I I I'm not trying to quibble because the issue is if the assess assume there is a complaint with a very which alleges something as you say dramatic and specific that complaint in a matter as a matter of practice would be pursued in in an investigative then the question becomes what happens in the investigation and that depends on what you find by way of that my time is out so I'll yield back thank you thank you very much Mr posie wishes to examine for three minutes and reserve two minutes Mr posie uh thank you very much Mr chairman I was watching this on TV eating my lunch and it just occurred to me how uh shocked I would be if somebody dropped into my local police department and said you know there's a bank robbery going on down the street uh can y'all do something about it and they said yeah if we get around to it we will or well we've done bigger robberies and that before we're not going to worry about that it's just it's amazing to to hear the stories and the testimony that that we've heard today truly amazing uh a question for Mr Richards at this point then I'd like to uh reserve some my time you stated that you had been recused from the made off investigation and and I was just um wondering why that was yes thank you for the question question I'm not participating in any of the current I'm not participating in the current examinations or investigations due to the fact that a former employee who was under my chain of command married a member of the madeof family and I attended the wedding so the SEC has established a process that would allow the staff to recuse themselves from any current or ongoing investigation or examination so as to uh ensure that that no possible questions are raised about the objectivity or the impartiality of the examination or the inspection so for those Reasons I'm not participating in the current examinations of the firm follow up Mr chairman so so you asked to be recused chairman Cox uh in December suggested that the SEC would establish a process for the for SEC staff to to ensure that there were no questions I understand but you asked to be recused is that correct yes when guidance was provided by our ethics Council I then took that guidance and recused myself do you think had you not been recused you could have added anything uh any information at all whatsoever would be at all pertinent add it to this testimony to to today's hearing do you mean no to to the investigation I mean it's a question that begs for an answer uh is it innocuous that that that you refuse yourself and it would have no effect on it or do you consider your your insight and and service to be of any value in this I'm sorry sir I didn't understand your question there are very senior staff at the SEC very experienced staff examiners who were working on the examination and on the investigation so I don't believe that there will be any compromises to the quality of the work thank you thank you Mr chairman the gentoman from New York Miss Malone okay thank you um very much um m Mr mopis in his uh testimony earlier testified that he brought complaints five times in writing to the SEC and these were detailed complaints it wasn't I think something's wrong these were detailed complaints that this is wrong they're not trading they're not doing this here's examples and it was a very specific complaint not once not twice not three but four five times to the SEC uh he said he had the support of some people in the SEC professionals saying that this needed to be investigated and uh how many more times would a whistleblower have to bring complaints to the SEC for them to have investigated the maid off case as I think we've made clear we did investigate in 2006 and the investigation resulted in no action no recommendation of enfor action um and so the issue I think to a certain extent becomes in investigations um with any complaint our job is to verify the information but but one of the things he said was that Midol wasn't conducting trades now if you went in and just asked for the trade slips or proof that they were doing trades when whistleblowers were saying they weren't doing trades then you could have shut them down in one half hour you could shut made off down in one half hour by just following up on one of his allegations that they were not conducting trades so uh did the SEC ever use any tools to confirm that made off's trades could be confirmed in Market transactions and as to the specifics of the investigation I can't answer as to what we do when we investigate we try to confirm if we can if there's a complaint we try to confirm uh the elements of the complaint often times a complaint well let me tell you something I'm not an SEC official I'm not an attorney but I have common sense and if I were sent in to find out whether or not he was trading or not I would ask where your trade slips where's the proof that you're trading it doesn't have to be classified information uh I find this absolutely outrageous and if you won't answer it I think I'm going to appeal to the chairman to subpoena and find out what you did in this case he further testified today in a very riveting testimony that in 2001 he offered to go undercover he offered to risk his life to work with the SEC to prove this fraud why was that request turned down and without talking about the specifics let me say that we are a civil law enforcement agency and do not do undercover operations they are uh exclusively province of uh the criminal authorities and we we just we don't do them he also said and I quote and he and he wrote in his testimony that maid off was and I quote one of the most powerful men on Wall Street and in a position to easily end our careers or Worse end quote he told me he was afraid for his life that he was bringing these allegations he was afraid Midol would have somebody killing because he was bringing these allegations and yet they were brought in a very comprehensive way that would have been easy to prove and uh you can't testify as to what tools you used or what results you got on looking at whether or not he was conducting trades I mean that's pretty pretty basic when people say he's not conducting trades it's a complete um complete lie that would have been able to be proved within a half hour if you looked at it but maybe maybe the SEC was afraid of uh you think the Personnel were afraid of having their careers ended or worse if they looked at maid off as M Mr maropoulos said on that one uh with again without resp without regard to Mr mid absolutely not absolutely not we has has any employees at the SEC ever gone to work for maid off I I don't know the answer to that can you look into that that' be easy check and the um I would say that the the the issue of revolving doors if you the ethics rules are very uh very seriously we take them that that I know we have ethics rules my question was have any SEC employees gone to work for made off if we could get that now the made off feeder funds were advertised advertising unbelievably High sharp ratios uh can you tell us what a high sharp ratio is I yes I can a sharp ratio is the ratio between the expected return on the fund and the risk of the fund so a high sharp ratio means that fund is returning a great deal of return for a unit of risk okay Mr marcoplos testified about the sharp ratios advertised by moff and his feeder funds are or do you agree that the sharp ratios shown by mof's equivalent to a to a baseball hitter hitting 150 home runs a year wouldn't you think that was a warning sign his ratios were so successful wasn't that a warning no one else could get those numbers I've not seen those ratios so I can't say anything specifically again about this case well maybe that's something the SEC should have looked at time has expired um did you look into the chair will next recognize a gentleman from Colorado Mr pearlmutter and request of him uh if he would yield me one minute I'll be glad to extend his time by that amount Mr Mr chairman I will so yield you'll be made whole uh I just wanted to follow up on Miss Malone's very important question uh to which the answer was neither opaque nor vague it was just avoided uh but let me in as much as you're not going to talk to us about specifics which is why we invited you that I ask you a hypothetical question hypothetically if somebody came to you with evidence and a charge that somebody was committing a multi-billion doll Ponzi scheme and said that that person was not actually even making trades would it not be standard operating procedure for you to go and see if he had trade slips our investigations would follow this is a yes this is a yes no question there is no standard operating procedure other than to take if we took a complaint seriously we would try to find out whether the facts were true or not if you took a complaint seriously which obviously you did not is that what you just told us no sir that is not what I and if somebody brought you evidence and made a charge that somebody was committing this type of fraud hypothetically would your procedure in investigation I'm asking you a procedural question now having nothing to do with Bernie anybody if somebody brought you this this information tomorrow would it not be reasonable to expect that you would ask to see their trade slips I think it would be fair to say those are among the things we would look at the other thing that I think and and and and if you did not would you consider that Malin not necessarily depending thank you very much Mr per um thanks Mr chair and um I you know I I got to say just as a a opening statement uh the the charges and the the vehement that Mr maropis directed Ed towards all of you the only person who had any emotion in her voice in the initial opening statements was Miss Richards and I mean they cozy captive gullible go along get along stupid lazy he couldn't used any more adjectives to describe what he felt about this particular uh investigation I mean we've we've had you know he we've heard about all the red flags I don't want to talk about that I'd like to know Mr Donahue what a split strike strategy is if you know uh first I'd start off by saying that I've only been at the commission for three years yeah but do you know I started on Wall Street in 1975 and had many different positions in Wall Street prior to coming to the you know what a split strike my understanding what a split strike strategy is that one uh creates a CA you will buy either a stocks or or or a a basket of socks and uh sell a call uh which limit your upside uh opportunity and you would buy a put which would limit your downside risk had you in your experience ever used a split strike strategy uh no I had not okay Mr luperella what what's your understanding what a split strike strategy is it's similar to to Mr Don's in your experience had you ever used a split strike strategy I have not okay just so you to know I asked Mr Cot and Mr harbach same questions a month ago they didn't have any clue what a split strike strategy was they had never used it and it's classic Ponzi scheme double talk okay you can call whatever it is and then there's the you know secrecy and all that sort of stuff um when let let's let's drop back here for a second because I I really wanted to give all of you the benefit of the doubt coming into this thing but Mr Donahue there actually was a guy named Jim Donahue James Donahue in Colorado with a little company called hedged Investments had precisely the same Ponzi scheme in 1992 only a hundred million was stolen not billion dollar my question is you know when you're training your people do you talk about it's too good to be true therefore it's it's got to be I mean what kinds of things do you ask your people to look for so they are sheriffs they are cops they stop this stuff from happening Mr Donahue well start off by saying that my division is a policy Division I don't have an examiners I I don't um I do ask folks that when when they're looking at registration statements and things of that nature that you look at uh things that might be abnormal uh things that that are too good to be true um and uh that is one of the things that we do ask people to look at and you know there is no free lunch and that's one of the things I do try and uh impress on on folks that are in my division well let me ask you this can I help can I answer that question sir yes with respect to examiners it's the the field office examination staff that go out and conduct examinations the risk of Ponzi schemes the RIS theft is foremost in their minds so they're examining for compliance with with lots of provisions of the federal Securities laws but they're always alert to the possibility of fraud so one of the things that examiners do is they they verify records that are provided to them they would never for example just simply ask are you in compliance with the law or are you engaged in fraud that wouldn't be enough for an an examiner they'd want to see backup records and one of the routine aspects of every every routine investment advisory exam is to seek confirmation of the Holdings of clients directly with a third party custodian it's a very basic audit step and then the examiners will match that with the records that they see at the advisor that sounds great Mr let let let me ask you the question Point Blank and anybody can answer this uh and then I'm going to yield the balance of my time to uh Mr R Curry the coziness okay those sound like very good precautions is sec to cozy with the industry are they captive by this industry are they looking out for us looking out for the taxpayers M Richards you answer that absolutely not examiners as I as I said at the outset they're taught to pull no punches they're taught to to communicate deficiencies and violations without regard to the type of firm the influence of the person they are they are blind to to the type or the nature of the firm that they're examining they they they truly have a pull no Punch's attitude all right I'd like um m chair to give my last minute to Mr R Curry if I could I have one more minute right because I had given a minute I'd yield that to Mr AR Curry thank you I thank the gentleman real quickly uh Mr Thompson uh how long uh was the Matt off actions allegedly going on and I can't answer that as to the specific I can't okay the answer is you don't know uh next question is um you talked about credible lead what do you consider credible lead whether or not a lead is credible and how we assess it depends on the nature of the of the no I I mean I understand I'm a prosec former prosecutor what do you consider a credible lead for the SEC it depends on what's in it it depends on the specificity and it depends on how important how how big it is I got it do you look at the the the person who is giving you the lead absolutely okay and obviously you weigh the The credibility of the person who Pres in the lead do you not yes all right and you give certain greater credibility to people who you determin to be a credible person uh and less to someone who you would deem to be non-credible generally speaking yes although I have to say that some people who appear incredible have credible leads that's true now when when um when Mr uh Mar marus came maropoulos thank you came before you did you consider that a credible lead I can't answer that you can't answer answer that how does that affect your ability to investigate or Mr mid off's uh investigation because that's that is subject of the inspector General's investigation and and ma'am I've used that excuse a number of times and I can't even fathom how that that this could in some way be uh affect the the investigation all right let me ask you this when in 2006 when you investigated um did you make a determination of any wrongdoing on Mr maid off we did not bring an enforcement action and we did not rec that was not my question make a determination whether or not there was any wrongdoing and again I can't answer the specifics on the underlying investigation other than to say what what is public is that there was no investigation did you make a referral based upon your analysis in 2006 can't answer that you can't answer whether or not you made a referral cannot and and again this goes back to whether or not it's to Pres it's to protect the criminal prosecution I I understand thank you I understand about a defendant's rights but you made a refer you you can't answer whether or not you made a referral okay now um next question is this um do I have any more time Mr chairman I don't know whether we should I yeld back to balance time thank you thank you with Mr posy here we're gonna give him two minutes so maybe he could crack this egg thank you Mr chairman and I I'll yield back a minute to shoot to him if I have any less um it it's just such an incredulous tale I I think for everybody up here to understand maybe y all don't have that kind of a problem grasping with it but it's just incredibly unbelievable to the people in this commune to hear these stories I mean you know besides uh Mr M cockus we have the baren article we have the the what is it the okan article we have um got Merl Lynch Goldman Sachs telling their investors don't touch this this this impossible this has got to be a scam we have hedge fund managers money managers with the absolute minimal amount of due diligence you know telling their their clients by the thousands this is a joke this cannot possibly working stay away from this thing and and yet you know our enforcement agency is blind to the whole I mean it's it's literally hard for everybody to believe and you know the question I have uh is did anyone else report to you uh like maropis did and and ask you to look at this you know report the bank robbery going on a block over and while I can answer it specifically as to this I can I can verify uh one of the things Mr maropis talked about which is a reluctance on the part of people in the industry to bring information to us about their peers or others in the industry it is it is a frustration to us that people who legitimate actors in The Securities business who ought to be protecting the legi legitimacy of their business sometimes do not come to us sort of with leads about potential problems so that I can say I can't talk specifically about uh this particular situation and if I could turn to I I I think we all understand your frustration um and if anyone if we knew going into something that it actually was a fraud we wouldn't investigate we'd bring that action if we had the evidence to bring it we would bring it uh there is nothing I mean in a perverse way they makes us happier than bringing those kinds of well I I think a lot of that frustration was probably because we can't believe when they reported the bank robbery in process nobody bothered to look number one and and and since since you brought it up um all these insiders that kept their mouth shut that apparently knew something was going on it is there anything in the statutes that would make them uh culpable in this crime I mean if if if I see um somebody being mugged and I'm able to do something about it and I don't uh I think I share some guilt with the crime I I think sir on you you may at a at a sort of moral or ethical level I think legally the issues become whether you particip enough to be responsible as either a cause or an AER or a better and we will in all investigations look not look cast our net wide and deep to well okay let let's say it wasn't illegal when you license people um don't they have to have u a a relatively uh clean background be free of what they call moral turpitude and and wouldn't that blemish the license of every licensed person if they knew something that you know it's maybe it's not illegal but it but it is a breach of morality at least uh held by most people in this country that that would be a view and and I would think anyone that you suspect that knew this was going on and didn't report it although obviously it would have been un un acknowledged even if they had but had they not reported it I I think their licenses should be in Jeopardy um just on the on the grounds of the moral turpitude free background you expect them to be when they get licensed let me defer that issue to those who know about who are on the licensing issue I don't necessarily disagree finish Mr Donal you're you're recognized for five minutes thank you Mr chairman I asked the Inspector General when he came how many red flags are enough red flags that you stop what's going on and one of the red flags was a $50 billion doll fund with a oneperson accounting firm why was that one flag not enough for you to shut this down earlier without regard to the specifics of this particular case okay let's have a theoretical 50 billion dollar fund with a theoretical oneman accounting sure that's that's where I was headed um we need evidence and that's what we pursue and if we have the have evidence of fraud we bring those cases well how early on did you know that there was a oneman accounting firm involved I can't answer that question well you were told that in 2001 if I'm not mistake I sir I I simply can't discuss the specifics of this one then then let me ask you the next question which is is there a form for examination when your examiners go in things things that if you see these you say this is a red flag something has to be done let let me defer to miss Richards who who is uh who is the expert on examination let me ask Miss Richards in the in the examination context sir given the number of registered investment advisers and I'm assuming your question goes to investment advisors and the and the breadth of their activities we have to take a risk-based approach to deciding both which firms to examine and which issues well let me ask you this when you go in and your examiners go in and they see a 50 billion dollar firm and one accountant does that tip them off that there may be a situation here investment advisers are not required to have an an an an audit so so the fact that it was a small auditor or a no-name auditor may or may not present a risk we would look at other things however like how are the assets custody what are the performance claims that the adviser is making how how about you combine the accounting with the fact that they go into cash at the end of every quarter uh does that then start to smell a little differently if examiners had had examined a selected that firm for examination and had gone in they would definitely look at at the trading in in client accounts and look at whether it's consistent with represent so so in and of itself those are not red flags to you it could be it certainly could be depending on what representations the adviser made to the customer do you have a form of examination that here are some absolutely critical things that we will never pass on when we do an exam one two three four five these are things when we go in we look for these are things when we look at each company yes that the basics we want to see yes when we conduct a a routine examination of an investment advisor we're looking at such things as do they have what are the representations they make to clients are they living by those disclosures what are their what what are the expenses that they're deducting from client accounts are they in some way and and here's the next I'm gonna give my last minute to Mr aruri after this question but it's this back home in Indiana there's a fellow running a tool and die shop who's looking to put a few bucks back into his Mutual fund to try to save for his retirement why should he have any confidence that the organizations out there have been thoroughly vetted by you well with respect to with respect to mutual funds which is which is your question or or hedge funds or or or like any these security funds who you the organizations that you have have uh jurisdiction over we have we have examination responsibility over firms that are registered with the S so that may not include hedge funds it does include mutual funds there is a robust regulatory structure around mutual funds they are also subject to examination by the SEC though given our resources we don't examine every mutual fund firm on a regular basis and then let me say one last thing and then I'll turn over Mr ariri is we had a 78-year old man I believe he was from Mr Akerman or a friend of Mr akerman's who came before us and in 2001 you were contacted by Mr maropoulos he contribute continued to put money in this gentleman did into the mar into the madeof funds because he had confidence in the system in the SEC he believed in you guys as a goal standard he has zero now and they're going to foreclose on his house Mr Ury thank you Mr donelly um Mr Richards if you were to see a uh an investor continually over let's say a 10year period consistently make a 10 or 12 perc um uh return for his investors would you consider that a red flag yes sir I absolutely would the SEC does not now receive performance information the type but if you were to see that you would consider that possibly a red flag yes yes okay next my next question is how about if you saw an investor who was giving 4% of the profit uh to that he would normally receive to the feeder uh companies um would you think that might be a red flag it would be an unusual situation okay um how about um if you saw uh a company that continually at the end of each period uh turned their their cash into uh government Securities would you consider that perhaps a red flag we would want to understand why okay now if if you had those sort of situations then you had someone come in who maybe you consider to be a credible lead uh give you information um what would then prevent you uh from investigating that why would you not investigate that situation my office has authority to conduct examinations routine and cause of registered investment advisor so the first threshold is is it a firm that's registered if you were to see those situations wouldn't it be something and you were to receive what what would be a credible lead wouldn't that be the kind of thing that you would want to look into we would in situations where we receive credible leads the first step is is it a registered advisor if it is we send examiners out immediately okay so show their badges without notice they ask bottom line is you didn't do it you had all of these situations in this particular case and nothing was done by the SEC correct that that's a yes or a no nothing was done this firm registered with the in 2006 following that there was no SEC exam of of this so you you had the scenarios that I just described you had a credible lead and yet nothing was done by the SEC correct nothing there was nothing done by the SEC was there that's I think that's not correct I've testified about the the extent of the regulatory examinations of the firm and Miss T well you just indicated that these things would be possible red flags there um Miss Thompson said that maybe it was a credible you had all of these situations either somebody wasn't talking to someone or there was no investigation done I have nothing further you thank you very much ranking member Mr Bas thank you uh Mr Thompson uh in your testimony you talk you say you can't pursue every tip and you've are you characterizing Mr Mar ais's dialogue as a tip I I do characterize it as a lead or a tip just like others but well at some point it became much more than a tip or a or a lead right because M off was already under investigation I can't talk about it specifically well no I'm just saying it was but I'm saying that in a case where someone's already under investigation and someone gives you in 42 different contacts and I'm talking about meetings discussions they gave you a case on a silver platter he described what was going on to a te and you got an the auditor for maid off was one person in a storefront on Long Island this begs for investigation would you agree that a case like that with all that information should have come caused someone already under investigation someone that had failed to register that was without that that begged for investigation without reference to the specifics we the more credible the more informative a complaint is the more we're going to investigate and a complaint or a lead P our job is to turn it into evidence and you know and and and and and that's what we'd love to do when we when we follow things up we try we we're looking for evidence we can take we can take leads that are very unspecific I'm talking about I'm talking about those where they DEF where where you know of public knowledge what was published in the newspaper what you knew from his operation because you had investigated it you knew that he was that he had failed to comply for years with with the law was there any penalty for that was he sanctioned or was he penalized for that was was there a heightened when someone is violated the law for years in billion dollar transaction billions of dollars is there any punishment or heightened investigation particularly when someone comes to you a credible source and gives you documented evidence without reference to the specific ific um there are OB there are penalties that may be applied to failing to register for but they were not applied to him there were uh there is no enforcement AC there's no public enforcement action prior to the action that we brought in in December as to Mr well that's after Dal blew up yes sir and and and and as I've as I've indicated um unfortunately and this is one of the great sort of limits of of law enfor it is always after the fact when we come in it we don't want it to be we want it to be as close in time to the illegality let tell possible I understand I've characterized this he gave you a case on a silver platter someone you had been investigating for years someone that had failed to comply with your own rules and it wasn't even penalized I let me let me take another pay for play sure in 1997 my now chief of financial services helped compose a letter with 42 pages of documentation on what was happening or what we didn't know we had no idea what was alleged to have happened in Jefferson County Mr Mark polus said it's happening it was happening all over the country municipalities are out billions of dollars from this pay for play scheme we sent that information to the secc chapter and verse I've now determined that there was appar no followup were we is a county commissioner with documented evidence and a congressman writing is that not credible information in 2000 two over two years ago I wrote again pointing out that now some of these people there have been disclosures and cases in Birmingham that substantiated all this and I asked for an investigation now may I think it's certain point after meeting with the commissioner himself with actually calling him and asking him to come to my office finally there was some initiation but you know it was all in the paper by the time that John well more more generally about Municipal Securities issues it Municipal Securities issues are a priority for us we have a working group focused on it we have brought several cases over the last years and uh it is it's one of those areas where unlike s broker dealers Etc there are fewer regulatory speed bumps along the way so that our tools are predominantly enforcement and our our ability to discover the issues is more limited as a consequence but I agree it's an important area to pursue yeah let me just and I'll close with this I have requested that you consider discouragement for these folks are fol the feeder groups in the maid off game that they discords their profit that these wrongdoers in the pay for play scheme that they discour to the rate payers and the taxpayers All Over America their ill gotten gains and I've heard nothing I've had no response to multiple requests that y'all consider that I'd ask you to pursue that we I happy to get back to you on that thank you thank you thank you very much Mr bakus we're we're ready to close because we have another Mark of has to proceed immediately we have two minutes for M Spears thank you Mr chairman very quickly I'm going to hold you to two minutes too all right um I want you each to grade the SEC on how they handled the made off case very quickly can't do it why can't you do it because it would inevitably um you're giving an opinion did the SEC do a good job AB CDF I wish we'd found it earlier so would you give the SEC andf I would not I would not grade it all right let me ask ask you this uh what's the employee salary in the compliance and enforcement section on average what are they making you know I don't know I it's in the hundreds of something it's right so they're making $100,000 $150,000 um how many I can give you more specific information this is a the range of salaries for an examiner in our New York office so a typical examiner could range from $47,000 a year as high as $177,000 all right 40,000 to 170,000 how many of your employees what percentage of your employees in those two branches enforcement and compliance leave the SEC and go to work for a sec regulated entity in enforcement it's very few most if they leave go to Private Practice all right M Richards I think people fewer people leave the SEC than they used to but when they do go they often go to a regulated in the compliance Mr Swanson was the lead attorney on this case he leaves the SEC marries Mr maid off's SCE did you for one minute think that maybe you should go back and look at how he handled that case yes and that's exactly what the Inspector General is investigating the the role of current and for former SEC employees and their interactions with the madeof firm and whether those interactions in any way in any way impacted the conduct of the regulatory oversight of the firm it's exactly what the Inspector General is looking at Mr Einhorn complained about Allied he came to the SEC the attorney that handled that case Mr Braswell um criticized him instead of Allied Mr brazwell left the SEC and went to become a lobbyist for Ally do you see any kind of pattern here I don't want enough to know whether there's a pattern okay we'll have to close it there I'm sorry M fe uh Mr mfay we're GNA give you two minutes but I ask you to take one I just uh yes I will Mr chairman thank you very much I just have um one question um we heard a lot about um the general policy for enforcement at the SEC um Miss Richards talked about the pull no punches attitude and indeed i' I've talked to um folks that are very you know in the financial services industry that are very afraid of a of an SEC investigation um but what I want to know given the the apparent Miss of the mof scheme is can you give us any data and this is I really would like to know even if you can't do it now can you provide any data on the size of the companies on which investigatory or enforcement actions have been taken so that we'll be assured that it's not you're just not just picking on the little guys and throwing the big fish back I think we can get you that uh but among other things I would point to the auction rate Securities cases which we talked about before this Comm U not very long ago I think it was in August um and uh some of the aiding and abetting cases we brought against uh the biggest financial institutions in this country for aiding and abetting enron's fraud City Merill JP Morgan Chase so but we can certainly get you I would appreciate the specific data can I just add that we inspect firms small firms and large firms in in much the same way with the same pull no punches attitude and and those include include firms with billions and billions and billions of dollars under management so all types of firms are subject to infection yeah I I would of course hope that there's the same standard and and uh and then obviously the question continues why why did we miss made off but I know that's a specific case so I'm not asking you that question but thank you very much Mr chairman thank you very much Mr posy 12 words thank you Mr chairman I haven't seen this much bobbing and weaving since Muhammad Ali Roba do uh Mr chairman I would like to acknowledge for Miss Thompson and M Richards and Mr Don who that there has been some very good investigative actions by the SEC and you have some topf flight professionals over there and we're we don't mean at least I don't mean to convey U that hadn't been some very good work by the SEC thank you very much thank you very much um the chair notes that some members may have additional questions for today's Witnesses which they we wish to submit in writing without objection the record will remain open for 30 days for members to submit written questions to today's participants and to place their responses in the record before we adjourn the following documents and or written statements will be made part of the record of this hearing Mr Mar Marco Po's Communications with the security Exchange Commission without objection is so order before we adjourn the panel I just wish to say we're going to inquire into a process procedure to see whether the limitations placed upon this panel's testimony comport with the law and whether or not we are able to take such action as to overcome those objections we will Pro be proceeding with that in the immediate future the panel is dismissed and this hearing is adjourned thank you we're going to start a markup so uh nobody should be standing still people should either be a sitting or B walking through a door cap will people please take seats or else uh leave the room no all right I uh want to open this markup and I'm going to call up HR 787 the excuse me what do we got all that crowd back there for well oh there were two doors why wern't the the financial service committee will come to order we are going to mark up some bills on which we recently had a hearing and I call up SE HR 787 and ask the Kirk to designate it HR 787 to make improvements in the excuse me stop close that door please either in or out but close the door Kirk will continue HR 787 to make improvements in the hope for homeowners I ask sent that the rest of the reading be dispensed with without objection so ordered let me say we have I think three bills today one of which has some controversy I believe the other two do not um and uh therefore uh we're going to begin with the one that is contr virial um so that we can presumably dispose of that members can leave and then we can deal with the non-ch viral ones um the uh Flor is now open for amendments on HRC 787 the general from New Jersey Mr Adler Mr chairman I have an amendment at the desk Kirk will designate the amendment amendment to HR 787 offered by Mr aler New Jersey page four line I ask you the reading be dispensed with the Gent New Jersey has recognized for five minutes thank you Mr chairman my Amendment would cap at $1,000 the payment that loan servicers could receive from the federal government for the purpose of refinancing a loan when I was reviewing this legislation I noticed there was not a limit to the amount that the serer could receive my amendment is a common sense change that will put a ceiling on the amount of taxpayer dollars that can be paid to the serer my Amendment does not mandate that a service excuse me that a fee is provided to the servicer rather it just states that if the hope for owners homeowners board decides to provide a fee to servicers then it cannot be for more than $1,000 capping a payment to a servicer for rancing a loan is not unprecedented last year um when Freddy Mack and Fanny May launched their streamlined modification program they included flat payment of $800 to servicers in addition when the FDIC took over indac they put into practice a streamlined system to modify mortgages to encourage participation Services received a fixed payment of $1,000 for each loan modified through the program FDIC officials have already modified more than 5,000 troubled mortgages owned by Indie Mac the payment is intended to help cover expenses for each loan modified with the hope for homeowners program it is not intended to be a bribe to the serer to participate in the program my constituents and I believe viewers are outraged by the tarp with many viewing the first $350 billion to be wasted quite frankly they do not trust Congress or the treasury Department they need reassurance that their money will not be abused my Amendment will close off any possibility that an ordinate inordinate sum of money could be paid to a loan servicer for refinancing a loan I you you'll back to balance my time is there further conversation gentleman Delware thank you Mr chairman I think the gentleman's amendment is a reasonable approach to a difficult a problem but on a related matter I would simply point out to my colleagues that we should explore ways to incent loans servicers to modify loans and again this bill is about refinancing but modification is another area of great concern and we will need to address that at some point in this committee I will be introducing legislation Mr chairman which will encourage loan servicers to modify troubled loans yet split any fees the servicer might receive for the modification in other words the service would receive a payment up front and then a second payment sometime later perhaps a year later once a record of repayment is established and modification is considered as a success I will do that later but I believe uh modification uh can be a vital Step at avoiding the gentleman yield well I do yield I appre and the gentleman's been very helpful in trying to get us to the point where people who want to do this thing can do it we will probably be going to the floor with this package next week if that amendment that the gentleman is talking about and given the way geris will a more broadly applicable one would probably be in order so I'd be glad to work with him and if he could get that ready that might be something we could add next week I think we all agree that to the extent that we can encourage voluntary efforts here we should do it so the staff of the committee will be available to work with the gentan on that thank you Mr chairman I appreciate the offer we'll try to get it done Mr chairman yes uh gentleman from California the uh Amendment um I'm not opposed to loan services being incentivized uh and I know that Indy Ma and Sheila bear included um $1,000 payments to loan services ERS in the operation that they put together and I think Fanny and Freddy included some uh incentives to loan services but this is what I'd like uh this committee to consider as I said a long time ago when I first got into uh the discussion on on these services that it's a totally unregulated industry that most members don't understand very well we don't understand these contracts uh between servicers and the uh Banks and others uh and I think we need to look at this comprehensively I would think that we should not amend this bill today the language that's in this bill regarding Long serviceing allows the board to deal with this issue I think we should leave it at that because we don't have a definition of modification we have 10 15 different things that are referred to by services and others as modifications some modifications include the markdown of interest rates the markdown of principles others just take uh and rearrange the payments and put a lot on the back end and so I have been talking to a lot of of the independent Services I've taken a look at the Private Industry that sprung up that you'll see advertisements on television about uh one is known as the federal uh loan modification company uh it's a private entity that ask for $500 up front and people think as part of the government this entire area is going to have to be looked at it's going to have to be um uh determined by the members of Congress and public policy what modifications are and so I would hope we'd just leave this alone for today not amend it not go any further than this and look at a comprehensive approach to dealing with an unregulated industry that we don't really have a handle on are you back the balance of my Time Is there further debate Mr chairman Texas uh I just would uh ask the gentleman from New Jersey uh uh is I want to make sure that understand what the the Thousand limitation is is that the that would be the fee that the servicer would charge in other words if it was a complicated uh transaction and they needed to get outside Council to do uh Document Preparation or something like that would that be included in the the thousand or would they be able to uh or you see what I'm saying is there's there may be entt title work or something needs to be done the gentlemen as I said it's not what the servor might charge somebody else but the argument has been that there should be some federal payment to the services and gave this would only apply to that not to the general Services charges to third parties no say that again Mr chairman this would this applies to what the federal government would pay the servicer you said what he the servicer could charge the servor might charge parties this doesn't restrict that I I understand that I would bet I was wondering if there were putting any kind of limitations on what what was what would be included that is this a is this is this a flat fee or that the federal government or would pay up to or well the general deal it's it's now permissive it would be a maximum for each loan $1,000 per loan they could pay less so it's but but and this is in the federal payment up at the discretion of the board and I think that's the the question I'm trying to get at is is are we kind of in other words if there is there any incentive in to do this for less or are we just kind of setting the price you actually it's now PR been done for nothing I mean that we're setting the president of saying we're going to pay them uh and general Del I think correctly said we would pay more there was some concern that uh you know for each loan that there might be uh they are after all getting paid the services do get paid by the people uh who've hired them to service so then it's a question of people's judgment and so I guess the question is so the the person that has the loan the person that may be getting their loan rework could also be subject to an assessment by the by the and then we're going to give them a, yeah you're nothing in here would restrict that whatever the law is I know but I I think the question is are we paying something are we is this almost becomes instead of an inducement it sounds more like an entitlement to me is that we're saying by the way here's another thousand of General it's it is not an entitlement it's it's if in the Judgment of the oversight board this or the administrators it was necessary okay so so it's a maximum it's not an automatic spe okay I'm not not sure I'm not sure U agree that that's maybe the way to structure it but I I don't know what we've been told Again by H and others is that some of the services frankly the deal they weren't in the business of trying to do it any more than correct checks and pay them out and that if we expect them to start making the more complicated decisions invol the modification they may need help just being able to handle it to hire people and to do it uh and and it would be up to the Thousand I mean right now it's open-ended so the gentleman's Amendment does is to limit it to a th000 per loan it is meant to be to some extent compensation for uh expenses the notion is that the the lack of any payment even for cost incurred is a disincentive that's what Hud's advice to us was but it looks like to me it's more in the interest of the uh person holding the note to pay to encourage that person to to rework that then then the federal government putting extra booty in in in the but if the general deal this amendment he's he's got the wrong objection here this amendment limits authority to pay the jod in the bill but is that just add the the payment Authority let me double check yeah this is a cap on Authority that's already in there it's a cap on the authority that's already so they already had in the previous Bill we had and it was unlim is a cap on that Authority okay I I I think the gentleman I I take my time back and I yield to gentleman did you have any other comment that you wanted um this doesn't limit the amount of money that a servicer can Pro pay to councel um to get good councel it does limit the amount of exposure the federal government has on each one of these Lo REM modifications that's the goal to make sure that we're not paying an unlimited amount of money um to try to rev up the program uh that I think needs some help so I think this is a common sense way to limit the federal government's taxpayers exposure um to a loan remodification program thank you gentlemen in come on the amendment gentl nor I I'm just I guess I'm a little ambivalent about this too because one of the reasons we're here today is um we put so many different restrictions into the original hope for homeowners uh um bill um which limited discretion and the reason we're here is that the program has not worked um and yet this this amendment seems to me to micromanage uh it or have the prospect of micromanaging it and uh and run counter to um the notion that we are trying to encourage uh servicers to to really be more aggressive in modifying these loans uh so I um that's one side I guess the other side is I guess um my concern is this couple with uh the safe hober uh could have the um adverse effect that people start to um to go in the opposite direction um but I I think I'm more comfortable with the board um uh balancing these than I am trying to micromanage it here in in Congress uh um maybe the gentleman uh Mr Adler will want to respond uh um to to the concern I'm expressing I hear the concern I don't frankly think that the um the absence of a a volume of loans that for the hope for homeowners program um was specifically because of a fee or lack of fee and we have seen success with the FDIC imposing a thousand limit on the refinancing servicing fee um in the inac mortgage context and they've refinanced 5,000 loans successfully so I think um that's a good example of how it's worked and not discouraged sort of Lo remodification we're trying to have achieved here so I think but if they imposed a maximum of um and and use their discretion to do that what would make us think that uh this board wouldn't do exactly the same thing and and why would we want to require an a further Amendment to the statute if we put in the wrong number that wasn't uh enough money to um uh to uh encourage services to do this that's that's the concern I'm expressing well the gentleman yield I I I think um Congress needs to do a little bit more of that sort of oversight and regulation I think we've seen experiences of the last number of months that have not been um yielding good results for America and I think this sort of limitation is common sense it's worked in the context of the indac um mortgage refinancing I think it can work here as well the question is on the amendment General from Alabama uh thank you Mr chairman Mr chairman uh I think we do have to choose here between trying to protect the sh the taxpayers and see that this program at least the costs U are reasonable and I commend the gentl question is on the amendment all those in favor will say I oppose no the I have any Amendment agreed to the uh General woman from West Virginia has an amendment yes sir I do yes sir I do thank you Kirk will designate the amendment amendment to HR 787 offered by Mrs I ask S the amendment be considered readed and I reserve a point of order against the amendment the gentoman is recognized for five minutes yes thank you Mr chairman and I understand that uh we've been working together with you and I appreciate your Indulgence for letting me offer this amendment which I plan to uh withdraw but I wanted to generate some discussion on an issue that I think is going to be before us not only today but uh in the next several weeks you had mentioned your intent to uh to merge the hope for home hope for homeowners reform legislation with the mortgage cramdown legislation and I wanted to raise a an issue concerning FHA and the rural housing service loans that are guaranteed and what kind of effect a a a bankruptcy or uh mortgage cram down legislation what effect it would have on um the FHA now and also on future uh folks who access those loans uh as we know FHA has been going through a transformative uh uh time now as and is now service or originating over onethird of the uh mortgages that we see uh being created right now and they have a long established um uh and highly successful foreclosure prevention and loan modification programs that only take weeks to implement and the fear is through HUD and others and I share this concern is that the low-income borrowers who many times are accessing FHA and uh and VA and rhs uh to have them um um uh be subjected to higher premiums or a more lengthy process because of the um uh the bankruptcy cram down legislation I think um raises a caution flag for me and for those of us who have worked and you included and um all of us together to make sure that FHA can meet the demands and the and be modernized to be able to create and meet the uh um the needs of U of the borrowers for the future particularly those low income yes sir General would yeld let me say this um I think it's not your main because we're not be doing bankruptcy the bankruptcy bill will be coming to the floor at that point an amendment to would then be an order and well I it's obviously not up to me I would tell the gentleman I would tell the rules committee that I thought it should be made in order because I think it's a legitimate policy question I probably wouldn't vote for it but it's an important policy question and so U uh you know I would just say at the point next week probably when the bankruptcy Bill comes up I would hope the General woman would offer the amendment to the rules committee and I'll testify in favor of I appreciate that Mr chairman and uh realizing that it was not Germaine but it's a really important topic is why I want to take a bit of time of the committee's Indulgence to to open this discussion the amendment is withdrawn now you have an amendment at the desk amendment to HR 78 I ask you sent the amendment be considered as read once it is distributed I uh recognize myself for five minutes to explain what this is about when we originally considered hope for homeowners Gent Texas Mr hensling offered some amendments to deal with fraud uh the committee agreed to them subsequently we received a critique from HUD under the previous administration Mr Montgomery Mr Preston that we had tighten this up too much um I had frankly forgotten that I had agreed to these changes and at one point presented a bill under the tarp bill which uh eliminated them the general from Texas properly reminded me that I uh had agreed to these and that was part of the process by which they went forward and uh it was inappropriate for me to have presented a legislation which deleted them that legislation was a tarp bill which did not go for in the Senate and this would now preemptive what I then asked him in turn was if our staffs could work together to achieve the purpose which he correctly pointed out but in a way that HUD might find less burdensome um what I am offering now is a result of those conversations I it's not everything that gentem Tex would have wanted I appreciate and I would say that you know we' agreed to this I again would stress the the impetus to revisit this did come from HUD and what we try to do in the conversations and I think his staff and our staff worked very well together um and then General from Illinois noted one other thing that we' kind of omitted that was our fault that we' put back in it's an effort to retain the anti fraud Provisions uh in a way that uh Frankie HUD would still rather not have in and that's both the old HUD and the new HUD some things survive changes in administration uh and that don't bother me attitude is is part of it but I do think this is a reasonable effort to preserve the anti fraud impetus of the general from Texas in in a uh context that we think is workable even if HUD might not and I uh yield back DL Texas wish to be heard on this uh thank you Mr chairman again I uh I appreciate you working with us and negotiating in good faith again it's not everything that uh that I would want but it's certainly an improvement uh I appreciate you working with me I appreciate the ability to work with the gentle lady from Illinois on this provision as well uh and again these Provisions were earlier adopted by this committee so I hope they could be adopted in their present form again I thank them if you would I would just note that uh I'm very glad that the gentlemen from Texas and I were able to collaborate on this but I would note that uh since we don't have any Windows there has reported to me that hell has still not frozen over um is there any further discussion if not the question is on adopting the amendment all those in favor say I oppose no the eyes have the Amendments adoped gent Texas recognized gent n Mr chairman I have an amendment at the desk Amendment Kirk will designate the amendment you got to wait me to say it okay just trying to keep up with you amendment to HR 787 I ask sent the the am be considered V don't worry go second easier and easier the uh gentleman from Texas is recognized for uh five minutes uh I thank the chairman and last July Congress enacted the hope for homeowners program which was a $300 billion foreclosure mitigation initiative and we were told it would help some 400,000 families uh and remaining their homes so far we've heard and we had testimony yesterday 25 loans have been modified while the bill makes changes to the Improvement and attempt to to appeal to more lenders and borrow the bill eliminates all the provisions that I felt like were safeguards for the taxpayers CBO estimates that 40% of the homeowners who refinance under this program will redef fault on their loans let me repeat that in other words if we go in and help these homeowners 40% of them almost half of them are going to Red default on their loans CBO now estimates that this program will will only help refinance about 25,000 mortgages over four years and that that will cost 675 million due to losses on loans uh that will fall to uh taxpayers the problem is is that's $27,000 per homeowner that their neighbor is going to pick up the tab in other words we've got people out there that we know are struggling uh to make their payments uh some people are having to take jobs and they're struggling to make their house payment yet their neighbor may be able to go into some kind of a restructuring uh and and uh get up to $227,000 is is is is some of the numbers that are being kicked around I don't think the American people are really excited about making their neighbors mortgage payment and their payment as well uh eliminating this program and I know there's a number of people on both sides of the aisle here that are interested in making sure that we we are not in Hind uh and yet we do things that will help people American people stay in their homes uh but quite honestly there's a lot of programs out there right now we've got the FED thinking about doing things we've got the gsse are doing things we know that FHA is uh doing things we got a lot of programs that we we we are uh initiating on this and here's one that's been on the ground that's not successful does that mean we quit trying no it doesn't but what it says about this program is that that it didn't work uh and that it's very costly uh and now we've uh diluted the protections for for the taxpayers uh and I'm not sure that there are better use of our resources if we are truly interested in helping stimulate housing and in fact Republicans have brought forth some some solutions uh uh on how to do that to stimulate the housing market get get uh housing going again where uh housing values go go up and people aren't underwater uh yesterday we U uh heard from lady from FHA and they've helped over 400,000 people uh with the FHA secure effort maybe there's a way to look at that model that model seems to be helping more homeowners uh than this program uh the Federal Reserve as I indicated they've laid out plan we know that President Obama uh has uh has an idea on how to help home owners but when every once in a while you know Congress doesn't get it right I think when we don't get it right then it's up to us to say you know what maybe we need to to rethink uh this program uh because quite honestly uh you know when you start spending the kind levels of money that we're spending and by the way we're spending money we do not have trillions and trillions of dollars that we're going to have to borrow H and somebody else is going to have to pay that back in fact what we're in fact doing with some of these programs is we're helping people uh uh stay in their homes that uh that maybe necessarily made a bad decision or shouldn't have been there and we're going to ask our grandchildren and children uh to pay for those mistakes and so uh I know that the chairman has worked very hard uh as other members of the committee uh on looking at ways to do that and I look forward to continuing to having that dialogue but I think what we've seen from testimony uh and from what the uh scoring is on this this this is maybe not the right uh solution and so what this does is it says for all those folks that have already entered into the program the program uh remains in place but for uh moving forward that the program is is is would cease and uh I I think it doesn't mean we cease our efforts it just means this this this particular program didn't work and we need to look at other Solutions I recognize myself for five minutes and say that if the gentleman's logic had been applied across the board um hope now would have ended in fact there have been a series of Trials and errors here uh the administration proposals FHA secure and others that he talked about went through even greater revisions if you looked at the original version of FHA secure if you looked at the original version of uh hope now and I forget all the names we've all given all these things they didn't work either and uh so the gentleman sites some successes I think he's cited more success than we've had but he cites successes that would not have occurred if his logic had been followed because in all those cases the original program model didn't work and we uh had some revisions based on experience in this case we did have some decisions came to Center that tighten this uh what we now have is HUD telling us what it would do to make this work and he cites the president the FHA they are in accord they believe this is one way for it to work as to the red defaults uh I was struck with a FHA witness and she was a career witness not a political one and I have to say we've had two hearings recently with the FHA in both cases they were represented by career people who were very impressive and I wanted to acknowledge that they believe with this kind of improvement it will work and they will get a much lower default rate so this is really the gentleman's amendment is really kind of an early vote on on the whole bill and the gentleman you yes well I appreciate and there have been programs where uh that in in government in every area where there have been we went back and make improvements and many of those programs where that was basically the the only program in place and we were trying to make it work I I think the point I'm trying to make to the gentleman is that one we've already seen that there's not been Market acceptance of this program it turns out to be very expensive well I'll take my time back gentl to say that's exactly the point he just made that I responded to that is is true of all these other programs that the initial cut in something that we're not clear about hasn't always worked and what we have done is to revise it taking into account the empirical evidence that we got the gentleman's opposed to it philosophically uh and I understand that uh but this notion that if it's not right the first time or it doesn't work the first time you abolish it would have led to the abolition the programs he cited are you well I I think what I'm saying is that while this program is not working uh it's not the only game in town and I'm wondering if we would be better served as I said in my statement by transferring these resources uh to some of the other initiatives you know and and we well I'll take back my time to say this first of all again I want to stress if we had follow the gentleman's logic there wouldn't have been any other games in town the other games are there only because people were willing to do these these adjustments secondly no one size fits all this is aimed at a situation in which you could get right down to principle it won't apply to everybody uh one of the advantages as chairman banki said is that when you get right write down to principle you're less likely to get read defaults and I think yes they are going to try to have the administration some uniform approaches but whether you're using fny man Freddy ma or Indy ma they are somewhat different and the reason is that people are not all similarly circumstanced so I think it would be a mistake not to have a variety of programs that could appeal to uh different people differ circumstances Is there further discussion gentle from Alabama thank you Mr chairman Mr chairman uh foreclosures are a problem I think both sides the all agree with that they're a problem not only for the borer but for the lender uh we we acknowledge that but there also a problem for the neighbor for the people who live on the street for the community uh abandoned homes are a tragedy for not only a family but uh their tremendous problem for law enforcement for fire for the communities and they they can lead to blighted areas for that reason I think that we and the minority have tried to work very hard in helping create programs which will address foreclosures but our number one concern in doing this is that over 90% of the American families uh are not in trouble they're paying their mortgages on time or they rent or they they've owned their own house and we have to focus on approaches that don't penalize them it's essential fairness that we do everything we can do in crafting these programs to not only allow people to qualify as the Chairman's doing for these programs but also protect the taxpayers the Americans who are pay hang on time in fact we had a witness yesterday who said I don't make a lot of money I saved six months up I lost my job but I've paid on time I've worked two jobs and I thought she gave some very credible testimony and I'm hearing that back home I I'm hearing uh and I that it's fundamental unfair to punish those who've played by the rules uh discharged their obligations lived within their means and acted prudently by forcing them as taxpayers to subsidize those who who have have got in trouble now you'll recall the freshmen weren't with us but back in July we passed Hope for homeowners it was I won't say that the proponents were wly off the mark in what it promised but they said that it would meet the needs of 4,000 400,000 barriers and it would protect taxpayers so they put in taxpayer protections important taxpayer protections well as a result of these qualifications and taxpayer protections you had a mere 400 applications and a mere 25 new loans because the others didn't meet the taxpayer protections so the chairman is taking a program which fail by by virtually every metric and one of the reasons it failed is because it protected taxpayers it didn't allow people who were going to who couldn't make the new loan qualify so what he's doing here in my uh humble opinion is he attempts to fix a fundamentally flawed unfixable program uh by abandoning key taxpayer safeguards and that's not just my opinion uh the the Congressional budget office nonpartisan projects that if we make these changes that will'll still only help 25,000 barriers at best far far fewer than the 400,000 promis but even more importantly according to them and and Mr Nan bow said this if we approve this help which will probably go to 25,000 homeowners the cost is600 $70 million in potential defaults because 40% of the people will default you know that that's getting up close to a billion dollars of taxpayer losses you know what's that due to our obligations for Social Security Medicaid and Medicare we're already on a collision course With Disaster and that that factors out and this this is not me this is this is CBO by taking a with gentlem to $227,000 per loan and the lady sitting out there yesterday that said I made my payments on time I played by the rules I don't think that we the government ought to spend $27,000 per uh loan to help these people when they're better programs Miss Capo and and Mr Castle you said you'll cooperate with them there are programs that that are you said it abely right well let me say this and then I'll yield the gentleman is Right other programs have gone through a tremendous amount of vetting adjustments and didn't work at first but because we changed them they're working now and they're protecting the taxpayer and and Miss Capo Mr Castle we have we promised that we want to get a workable program and we think that some of those programs have gone through the fire and prove their word and prove that they better protect the the taxpayers are the way to go and I I do appreciate you saying you would work with them um the gentleman from Ohio was recognized first gentleman for I'm but I asked gentl to give me 30 seconds he me first I said I would work with Miss Capital Mr castle that was in the context of this program I haven't seen additional programs I'd be glad to work with alternative programs I haven't seen those so yes I that baffles me the last comment I said I would work with them in the context of improvements here secondly the gentleman's a little inconsistent about CBO because he talks about the 25,000 and we got to listen to CBO and he then mocks the 400,000 which came to CBO so his uh confidence the 400,000 figure was not anything that came from any member of this committee or its staff that was cbo's figure so uh the the infallibility of CBO is in questioned at the very least does not seem to me you can treat them as absolute gospel in the one case and then mock their figure in the other Mr I yield back to it's General Ohio time y General Ohio's time thank you Mr chairman Mr chairman the criticism I'm hearing back in Ohio and and certainly what what we heard on the Foreclosure task force in Ohio wasn't that the federal government was doing too much and that there were too many programs addressing foreclosures but that we weren't doing enough and while I appreciate the gentleman's argument uh suggesting that those that have been playing by the rules shouldn't suffer at the same time time he does recognize and I think he made the point himself that a foreclosure on a street doesn't just affect that family but it affects the people that are playing by the rules and so by not helping the family that's going into foreclosure by not keeping them in that home you are hurting the same folks that the gentleman's arguing on behalf of I've got a house two two houses down from me on my street and that impacts my property value it impacts the property value of the people across the street street so by intervening whether or not that particular family played by the rules you're helping their neighbors so when we talk about 25,000 homes 25,000 homes being saved we're not just talking about 25,000 homes we're talking about communities we're talking about neighborhoods and it's about saving neighborhoods and the notion that we should be getting rid of programs that might be helping 25,000 homeowners takes us in the wrong direction we should be doing more to help homeowners and we should be more doing more to help their neighbors and uh I I support the program with the gentleman y with the gentleman y now let me say this we we agree that it's a problem we agree it affects the community and we're in agreement with you that we want to to try to help in fact 788 we're going to support that I commend the gentleman that's going to help a lot of homeowners it's not going to cost the taxpayers anything the the lenders will have to step up to the plate the investors those that created the problem they programs M Capo and Mr Castle are willing to go with some programs that are working much better that that we can that may have a cost of two or five or $6,000 for taxpayers as opposed to 27,000 so let's work together would the with the gentleman yeld to me yes he keeps referring to these programs that the gentleman Delaware and the gentleman West Virginia has would they show them to me they've apparently showed them to the DL Alabama but not to me I don't know what what he's talking about in terms of those programs we're talking about the programs that you mentioned excuse me it's not your time let's have some rules here it's my time the gentleman yeld to me they don't ex yes if we talk about hope now when FHA secure but not nothing that we've been talking about appli to them my comments to them apply to this program and yes we should continue do these other programs but but he's suggesting that there were things that I haven't seen I thank the general M Mr chairman I'm just simp saying excuse me I yield back balance my Tong gentleman do thank you Mr chairman um I don't have a plan that you haven't seen by the way um I I have some concerns about the hope now program as well from what we have heard and and I think that we this is a good discussion because I think it truly needs to be looked at carefully it obviously is not work particularly well now and can we revamp it in such a way that it will work well uh so I I would hope that uh we all understand that as we go about our votes but I would like to yield the balance of my time to the gentleman from Texas Mr mugar thank you gentlemen uh the the chairman was uh complimentary of the of the witnesses yesterday and I I thought that they were professional I didn't I didn't have the answers to all the questions but I believe one of the quotes from the from the lady from Hub was we really need to scrap this program and start over and basically that's that's what that's what we're saying is that we've and if the number one the program's not working uh uh obviously CBO has a different perspective on on on the cost per homeowner now uh but the most important thing is is a lot of the protections for the people that are ully going to pick up to have to pick up the tab have gone out of this legislation from the time that we passed it so here's what we know we got a program that that's going to be expensive uh we've got a program that hasn't been effective and third we've got a program now that says that you know that we're going to disregard the taxpayers interest and try to see if we can make business pick up I don't think we ought to try to increase particip in this program at the expense of the taxpayers with the gentlem basically that's basically what we're doing I would yield to the lady gentem actually it's not my time I'm sorry I have to yield the time back to the gentleman Mr Castle uh thank you does Miss beam request time yes I yield to her thank you you know I share the concerns um of the gentleman from Texas regarding the efficacy of this program clearly it didn't achieve what we had all hoped that it would but given that we're we have roughly 84 400 foreclosures per day in this country I don't think now is the time to limit the options available both to servicers uh who would like to to provide homeowners with options to stay in their homes these are creditworthy home creditworthy homeowners that's already in there that's a taxpayer protection and while I would have liked to seen uh slightly stronger protections and fought to include them with you uh in the original U bill that we introduced we are still maintaining the basic taxpayer protections of creditworthy individuals um and and if we look at some of the other programs like the FDIC program they have higher foreclosure rates predicted in them because people are still upside down and just stretching payments sound against not present values which they would be able to do in this program so I just strongly urge um members respectfully agreeing on what we're trying to accomplish that we do have taxpayer protections there still is equity uh sharing in this to protect taxpayers as well and provide more options I yield back thank you reclaiming my time I I uh yield whatever time I have left to the gentleman from Alabama Mr Bas thank you let me urge uh members on both sides instead of putting taxpayer money in a bucket with holes and pouring taxpayer money in it and letting it run out the holes why don't we go with these more proven programs where when we put that money in it stays there and it and it doesn't result in a will the Gent the CBO says is a 40% failure rate and there are programs available will the gentl you I I second well let that's my point there are there are buckets that don't have holes in them that and that's where we ought to go we're all concerned about foreclosures you know City Bank has reworked 400,000 of these mortgages uh 400,000 uh other programs have been successful because the chairman has has put good input and listen in a bipartisan way we're not saying we don't care we're not saying we don't want to help we simply say there are programs where we can do this and Safeguard the taxpayer and that is fairness demands that uh the gentleman from FR of gentlem you me 15 seconds my colleague from Alabama gives a little bit more Credence to City group's claims than I would be prepared to do as to all those the general I thank general for yielding thank you Mr chairman speaking in opposition to the amendment uh I I think we all understand the the massive foreclosure problem we have and the fact that it is not declining it's accelerating I think we also understand the balance of protecting taxpayer interests and rights I also know that what I have heard over and over and over back home is two words do something do something it's it's just on so many levels do something about this foreclosure problem now I would suggest that a menu of different ideas would be welcome it doesn't have to be just this program even if this program picks up 25,000 uh foreclosures and and avoids those people from being thrown out I I join the gentleman from Ohio in his common it's not just 25,000 households they're impacted but we are talking about hundreds of thousands of people and thousands of neighborhoods that are being impacted by this uh I don't agree uh respectfully with the gentleman's comment about the that goes with it there's always value attached to a lot of times we hear these numbers thrown around we're losing hundred million well there's value in every one of these homes it it may not be what the mortgage is but there is a value so I think the numbers are overstated but more importantly I think the point that many of us are raising is this one was not working in its present form this hope Bill and the fact that the ideas have now been evolving and maybe we can make make some improvements to them and maybe it won't be 25,000 maybe it'll be 100,000 and maybe there's some other ideas that are out there such as uh this the house resolution 788 which gives encouragement for modification of loans by the servicers and we passed a bill back in July which encourages lenders to reduce the value and that didn't work so well so let's just keep going back and finding the right Solutions but there's no one Silver Bullet there's not one solution and I would respectfully suggest that this is a program that deserves a a second chance and I would just welcome I think all of us are looking for addition ideas not necessarily to waste money but to find ways to keep people in their homes and for that reason Mr chairman I would suggest that we uh defeat this amendment I this bill in place we have three other amendments um is there further discussion on this one gentlem thank you Mr chairman clearly one thing this committee agrees on is that there is a lot of pain in this economy I'm not sure anybody has a monopoly on pain and on challenge but when I look at the bill that is before us you have to ask yourself the question who are you trying to help why are you trying to help them and at what cost does it come to their fellow citizens if you're going to help them so I suppose there's a couple of reasons that you would want to go forward with this program one is kind of the macroeconomic view well housing led us into this economic Challenge and so this is a program that's going to help lead us out I don't know if CBO got it right but 25,000 homeowners and I'm just talking about the macroeconomic view even if they're in the ballpark I'm having a hard time believing that this particular program is going to lead us out of this recession that's Point number one so then you get into maybe the fairness argument well we just need to help these people because they're struggling well there's a universe of people I do want to help people who are unemployed we have growing unemployment in the United States uh people who have due to disability or illness through no fault of their own can no longer make their mortgage payments I want to find a way to help those people but let's not forget there were a lot of individuals a lot of individuals who were not honest about their income who were not honest about their wealth who were not honest about their occupancy who would also be benefited benefit from this program there were people who made a a decision a decision to use their homes as a private ATM when their neighbors did not there were numerous numerous people who engaged in zero down programs who essentially were not homeowners they were speculators who chose to live in their speculative investment and while Americans all over this country are struggling to pay their own mortgages should they be forced to help pay their neighbors again there's a basic question of fairness here that I think we have to Grapple with and we need to all be aware there's a universe of people who have already been helped voluntarily two and a half million of these mortgages have been renegotiated because by and large it's in the interest of the parties to do it now we have legislation before us that I suppose enlarges that universe but at some cost according to CBO 675 million is that the right cost I don't know but I can tell you this much as a member of the budget committee if you look at the history of CBO they are notorious in underestimating the cost ultimately to the taxpayer of these programs and so I don't have a whole lot of confidence that that is necessarily our final figure another figure we need to remember and although there will be more more delinquencies more foreclosures today in America 95 roughly 95% of all Americans either own their home outright they rent or they are current on their mortgages and they're the ones who when they are having their paycheck stress their family budget stress are being asked to pick up the tab for this program now according to the lady we had from HUD yesterday she doesn't know what the cost of the program is but she said there will be a cost to the program and so I I believe that we need to work to help lift all boats I believe in foreclosure mitigation but I think there's a better way to do it without a direct taxpayers subsidy and that ought to be working to preserve jobs that people have today that ought to be to grow forther job opportunities in the future uh it ought to be also as a republican alternative to economic growth to offer a tax credit that would help take off some of the Surplus that we see in the market today but I just don't think this is the program that is going to work I appreciate the sincerity of the chairman to realize something doesn't work we got to try another way but we're also on the Precedence of the Obama Administration coming out with a whole new plan dealing I believe with the purchase of toxic assets and these mortgage back securities uh I just don't believe this is the way to go to place further tax burden on the people who are going to ultimately have to pay this bill and Mr chairman i y back the balance of my time the uh gentlemen we we will return after the votes uh to complete the uh legislation gent California thank you Mr chairman uh I know CBO is talking about 25,000 homeowners I think if we get this program right it'll help far more I'll tell you now there are more 25,000 people in my district who want to participate in this program if we can get it uh designed so that the lenders uh will participate I would hope that as this legislation moves forward that we go a little closer to the shared appreciation Provisions found in the original program than those found uh in this bill the reason for that is we've got tens of millions of mortgages underwater they add up to four trillion of uh Mortgage in excessive value and most of those homeowners are never going to get any federal help so we need to show the folks that aren't going to get any help that this is a program that's fair that those who are um getting help have to give up something that those who get no help are able to retain and a shared appreciation provision allows us to go to our constituents and say yes that other person got help but they gave up a big share of the profit that we all all hope to reach uh to reap when we uh sell our home uh I don't think that shared appreciation will prevent any the uh homeowner from participating in this program the problem with this program is not a lack of homeowners that want to participate uh we all have tens of thousands of people in our district who want to participate in this program so the fact that those who get to participate have to give up some of the appreciation is not going to deter them for participating so I hope uh to work with the chairman as this bill goes forward uh through the process to strengthen the shared appreciation Provisions both to be more fair and to minimize the ultimate cost to the treasury there is a vote pen there further discussion if not the question is on this amendment those in favor will say I oppose no no the NOS have it the amendment is not agreed to the gentlem of Texas gentleman request a recorded vote those joining with him will signify sufficient number the recorded vot is ordered we will recess we will come back and finish the uh legislation today I'm of
