Senate Armed Services Committee grill Gates, Mullen on future of Iraq

This afternoon the Senate Armed Services Committee gave strong recommendations to Defense Secretary Robert Gates and Joint Chiefs of Staff Adm. Michael Mullen after interrogating them through questioning. Senator Carl Levin, perhaps the most diligent and pressing in his questions, was profoundly concerned about the amount of money being spent and that will be spent on Iraq in the future. It was the view of multiple senators that Iraq needs to be paying for far more and that they are using the US as a crutch.

"The Iraqi forces will shoulder more of the burden as we reduce our forces over time," says Gates. He continued to discuss Iraq's economic and legislative successes as of recent. But he goes on to say, "just as there is real progress to report, there are also substantial reasons to be cautious."

There is also a deep concern about the large drug industry in Afghanistan and that the large amounts of money being transferred from drug trade may be going toward weaponry purchases which end up being used against US and coalition forces.


As senators continued to ask pressing questions, Gates and Mullen had most answers, but at times they were rather different that what the senators would have preferred to hear. It's evident that the senators are looking for a different direction than where the war is going.

Committee hears testimony on Army modernization

The U.S. Senate Armed Services Subcommittee on Airland heard testimonies today on Army modernization. Lieutenant General Stephen M. Speakes and Lieutenant General N. Ross Thompson III offered testimony that "focuses on the Army modernization strategy, which is informed both by lessons learned from the wars in Iraq Afghanistan and the Army's operational concept of full-spectrum operations, recently unveiled in the revised Field Manual (FM) 3-0, Operations," reads the testimony.

The witnesses continued to thank the subcommittee and the U.S. Congress for their continued support, but emphasized that funding for modernization programs is the "cornerstone" to their operations.

Fed called to answer for bailout of Bear Stearns

Why did you bail out Bear Stearns? It was the resounding question heard over and over in the Senate Banking, Housing, and Urban Affairs Committee hearing on "Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators." Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox, United States Treasury Under Secretary Robert Steel, and President of the Federal Reserve Bank of New York Timothy F. Geithner, all attempted to answer that question to Congress.

In his opening statement, Senator Chris Dodd (D-CT), said the stunning fall of Bear Stearns was matched only by the sweeping response to its collapse put together by the New York Fed and the Federal Reserve Board of Governors, which, with the support of Treasury, "exercised powers in some instances that had not been used since the Great Depression." However, he said, people on 'Main Street' are struggling to pay their mortgages, and so was the rescue of Bear Stearns justified to prevent a systemic collapse of financial markets, or was it a $30 billion taxpayer bailout for a firm on Wall Street?

Yes, but how big do you have to be, to be too big to fail? Senator Jim Bunning (R-KY) posed that question in his opening statement. Why, exactly, was it necessary to stop the invisible hand of the market? That is Socialism, he said, adding that he was very troubled by the failure of Bear Stearns. A big question, he said, was who let our financial system become so fragile?

Chairman Bernanke said the that pressures in the short-term bank funding markets have increased, and many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and they have increased the amount of collateral they required to back short-term security financing agreements. Credit availability is restricted, and some key securitization markets (including those for nonconforming mortgages) continue to function poorly if at all.

Bernanke, nearly at the end of his prepared statement, arrived to the explanation as to why they had assisted Bear Stearns. The news that Bear Stearns would have to file for bankruptcy, he said, raised difficult questions of public policy. "Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company." He said that our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of "critical markets." The damage caused by a default by Bear Stearns "could have been severe and difficult to contain."

The chaotic unwinding of Bear Stearns could have cast doubt of the financial positions of some of Bear Stearns' thousands of counterparties, Chairman Cox said. But a question remained on whether or not investors were at risk. Despite the run on the bank to which Bear Stearns was subjected, Cox said, its customers were fully protected. At no time during the week of March 10-17th were any of the customers of the Bear Stearns's broker-dealers at risk of losing their cash or their securities.

Under Secretary Steel gave an explanation as to why Bear Stearns was assisted, saying a strong financial system is vitally important for all Americans. When our markets work, he said, people throughout our economy benefit, and when our financial system is under stress all Americans bear the consequences. The focus was more on the strategic concern of the implication of a bankruptcy. The failure of a firm that was connected to so many corners of the market would have caused financial disruptions beyond Wall Street.

The risk has its protections, Geithner said. There is a substantial pool of professionally-managed collateral that was valued at $30 billion, the agreement on the part of JPMorgan Chase to absorb the first $1 billion of any loss that ultimately occurs in connection with this arrangement, and a long-term horizon during which the collateral will be safe-kept.

In the written statement of James Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, he said they got involved in the matter because the collapse had the potential to cause serious damage to the financial system. They could not, and would not have assumed the risks of acquiring Bear Stearns without the $30 billion facility provided by the Fed, and that the transaction is not without risk for JPMorgan. However, they informed the New York Fed and Treasury that the risks were too great for JPMorgan to buy the entire company on their own. The statement also explains the reason for bailing out Bear Stearns: a Bear Stearns bankruptcy could have touched off a chain reaction of defaults at other major financial institutions, and the consequences could have been disastrous.

The repeated phrase by each and every witness was that the failure of Bear Stearns was a result of a lack of confidence. According to the written statement of Alan Schwartz, President and CEO of the Bear Stearns Companies, even though the firm was adequately capitalized and had a substantial liquidity cushion, "Unfounded rumors and attendant speculation began circulating in the market" that Bear Stearns was in the midst of a liquidity crisis. The unfounded rumors grew into fear and there was a run on the bank.

Democrats Discuss the Advantages of their Budget

Democratic Senators Kent Conrad (D-ND) and Max Baucus (D-MONT.), Representatives John Spratt (D-SC) and George Miller (D-CA) held a press conference today talking about the Democratic Budget. Sharon Patterson-Stallings, a recipient of the Low-Income Home Energy Assistance Program (LIHEAP) and Carmen Berkley, a recent graduate from Pittsburgh University and Vice-President of the United States Student Association also joined the Senators and the Representatives to show their support to the Budget. This week, the Senate and the House will be debating the Democrats’ plan to cut taxes for the middle class, create jobs at home and strengthen the economy.

The plan is concentrated on education tax cuts, energy tax cuts, Alternative Minimum Tax relief and infrastructure. The objective is to restore fiscal responsible balance by 2012/2013.

This budget promises to secure both complex domestic society and economic leadership, “where Bush has failed” said Chairman Miller. It also promises to help homeowners, by property tax deduction, not only itemizing it, helps soldiers get houses, helps families with children and helps College graduates with their loans.

Full Senate Banking, Housing, and Urban Affairs Committee Hearing on Weak Housing Market and Related Credit Crunch Creating Stress in Banking Community

Today the committee hearing focused on the problems currently facing the banking industry, and how those problems are largely caused by the weakening housing market and credit predicament in the nation. Present at the hearing were Chairman of the Federal Deposit Insurance Corporation Sheila C. Bair, Comptroller of the Currency of the US Treasury John C. Dugan, Director of the Office of Thrift Supervision John M. Reich, Chairman of the National Credit Union Administration JoAnn Johnson, Vice Chairman of the Board of Governors of the Federal Reserve Donald L. Kohn, and Iowa Superintendent of Banking Thomas Gronstal.

One colorful individual at the hearing was a member of Code Pink, of the women-initiated peace movement, who walked up to Senator Dole and asked her what she was doing to ensure that US troops were coming home. Wearing a t-shirt with the slogan "Don't Fund War," and a hat of pink flowers and pink ribbons with "Make out, not war" scrawled across the top, the woman was escorted out of the room by a police officer. On her way out she cried, "How about housing for Americans rather than more housing for the military."

The hearing then progressed onto the issue that the weakening housing market was due to credit problems, and that the credit problems, in turn, are due to problems in the subprime market. Chairman Dodd voiced the general sentiment of the hearing, stating, "Where were the regulators? Why didn't they do more? A loan should be given on the loaner's ability to pay."

The panel of witnesses began with Ms. Bair, who called for a return to traditional lending practices. According to Ms. Bair, capital needs to flow to banks in order to provide security following the implementation of Basel II. The value of Basel seemed to be of great concern in the hearing. Senator Dodd questioned Ms. Bair on the impact Basel would have on the situation, to which she answered that because Basel runs on model system, it is only as good as the data they put in them. Therefore, they can only anticipate problems to a certain degree. Mr. Kohn echoed Ms. Bair, stating that as Basel II is implemented, banks must have capital to back it up and safeguard its solvency and overall economic stability. More capital essentially means banks, "being more active lenders who are actively engaged," and whose "viability not threatened."