[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107- 441
NOMINATIONS OF: ROGER W. FERGUSON, JR.
ANGELA M. ANTONELLI, RONALD A. ROSENFELD
JENNIFER L. DORN, AND DONALD E. POWELL
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
ROGER W. FERGUSON, JR., OF MASSACHUSETTS, TO BE A MEMBER OF THE BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
ANGELA M. ANTONELLI, OF VIRGINIA, TO BE CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
__________
RONALD A. ROSENFELD, OF OKLAHOMA, TO BE PRESIDENT
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
__________
JENNIFER L. DORN, OF NEBRASKA, TO BE FEDERAL TRANSIT ADMINISTRATOR,
U.S. DEPARTMENT OF TRANSPORTATION
__________
DONALD E. POWELL, OF TEXAS, TO BE A MEMBER AND
CHAIRMAN OF THE BOARD OF DIRECTORS OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
__________
JUNE 13, 21 AND 26, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
U.S. GOVERNMENT PRINTING OFFICE
79-540 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
JOHN F. KERRY, Massachusetts RICHARD C. SHELBY, Alabama
TIM JOHNSON, South Dakota ROBERT F. BENNETT, Utah
JACK REED, Rhode Island WAYNE ALLARD, Colorado
CHARLES E. SCHUMER, New York MICHAEL B. ENZI, Wyoming
EVAN BAYH, Indiana CHUCK HAGEL, Nebraska
JOHN EDWARDS, North Carolina RICK SANTORUM, Pennsylvania
ZELL MILLER, Georgia JIM BUNNING, Kentucky
MIKE CRAPO, Idaho
DON NICKLES, Oklahoma
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Sarah A. Kline, Counsel
Jonathan Miller, Professional Staff
Jennifer Fogel-Bublick, Counsel
Brian J. Gross, Republican Deputy Staff Director and Counsel
Melody H. Fennel, Republican Professional Staff Member
Sherry E. Little, Republican Legislative Assistant
Madelyn Simmons, Republican Professional Staff Member
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, JUNE 13, 2001
Page
Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 29
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 4
Senator Corzine.............................................. 5
Senator Stabenow............................................. 5
Senator Gramm................................................ 6
Senator Bennett.............................................. 7
Senator Schumer.............................................. 17
NOMINEE
Roger W. Ferguson, Jr., of Massachusetts, to be a Member of the
Board of Governors of the Federal Reserve System............... 8
Biographical sketch of nominee............................... 31
Response to written questions of Senator Sarbanes............ 39
Additional Material Supplied for the Record
Letter to Senator Paul S. Sarbanes from Eight Members of the
House of Representatives, dated June 12, 2001.................. 47
Response to questions of Eight Members of the House of
Representatives from Roger W. Ferguson, Jr., dated June 12,
2001........................................................... 54
----------
THURSDAY, JUNE 21, 2001
Opening statement of Chairman Sarbanes........................... 59
Opening statements, comments, or prepared statements of:
Senator Nickles.............................................. 61
Senator Stabenow............................................. 63
Senator Carper............................................... 63
Senator Allard............................................... 68
Prepared statement....................................... 92
Senator Reed................................................. 72
WITNESSES
George Allen, a U.S. Senator from the State of Virginia.......... 61
Ron Wyden, a U.S. Senator from the State of Oregon............... 62
Gordon Smith, a U.S. Senator from the State of Oregon............ 71
NOMINEES
Angela M. Antonelli, of Virginia, to be Chief Financial Officer,
U.S. Department of Housing and Urban Development............... 64
Biographical sketch of nominee............................... 93
Ronald A. Rosenfeld, of Oklahoma, to be President, Government
National Mortgage Association (Ginnie Mae), U.S. Department of
Housing and Urban Development.................................. 66
Biographical sketch of nominee............................... 110
Response to written questions of Senator Carper.............. 127
Jennifer L. Dorn, of Nebraska, to be Federal Transit
Administrator, U.S. Department of Transportation............... 80
Prepared statement........................................... 118
Biographical sketch of nominee............................... 120
Response to written questions of Senator Carper.............. 128
----------
TUESDAY, JUNE 26, 2001
Opening statement of Chairman Sarbanes........................... 129
Prepared statement........................................... 145
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 131
Senator Johnson.............................................. 132
Senator Enzi................................................. 133
Senator Miller............................................... 133
Senator Corzine.............................................. 134
Senator Bennett.............................................. 134
Senator Dodd................................................. 141
Senator Bunning.............................................. 145
WITNESSES
Kay Bailey Hutchison, a U.S. Senator from the State of Texas..... 129
Larry Combest, a U.S. Representative in Congress from the State
of Texas....................................................... 134
William ``Mac'' Thornberry, a U.S. Representative in Congress
from the State of Texas........................................ 135
NOMINEE
Donald E. Powell, of Texas, to be a Member and Chairman of the
Board of Directors of the Federal Deposit Insurance Corporation 136
Biographical sketch of nominee............................... 146
Response to written questions of:
Senator Sarbanes......................................... 159
Senator Miller........................................... 160
NOMINATION OF:
ROGER W. FERGUSON, JR.
OF MASSACHUSETTS, TO BE A MEMBER OF
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
----------
WEDNESDAY, JUNE 13, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:40 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The Committee will come to order.
Before we turn to Governor Ferguson, I would like to take
just a couple of moments to talk about the agenda of the
Committee in the coming weeks.
First of all, let me say that I am appreciative to Senator
Gramm for the cooperative way in which he has ensured a smooth
transition. We tried to work together when things were reversed
and I look forward to continuing to try to do that.
I also want to note that we reached a Memorandum of
Understanding at the beginning of this Congress that we would
not alter the staff or the funding ratios over the term of this
Congress. And so, that will continue. We did that agreement in
part I think to give the staff some sense of security as they
looked ahead, I think it was wise to do it then and I continue
to think it is wise. Obviously, we will adhere to that
agreement.
Now, we have a short-term pressing agenda with a number of
items that need to be reauthorized, and that I see is the first
order of business. Let me just mention them very briefly.
First, we have to reauthorize the Export-Import Bank, which
is due to expire on September 30. I have asked Senator Bayh,
the Chairman of the International Trade and Finance
Subcommittee to take responsibility for holding the hearing.
There will be a hearing next Tuesday afternoon on reauthorizing
the Export-Import Bank.
Mr. Robson, the new Chairman is now in place. Actually, I
think he was sworn in yesterday at the Ex-Im Bank. He will be
available to testify.
Second, we need to reauthorize the Multifamily Assisted
Housing Reform and Affordability Act, the so-called mark-to-
market program for multifamily housing. That authority is due
to expire on September 30. Senator Reed, Chairman of the
Housing and Transportation Subcommittee, has scheduled a
hearing on that reauthorization for next Tuesday morning.
Third, the Defense Production Act expires on October 12.
Senator Schumer, Chairman of the Subcommittee on Economic
Policy, will assume the responsibility of holding that hearing.
We are trying to arrange a hearing before the end of the month.
The Iran-Libya Sanctions Act, which imposes sanctions on
foreign companies which make investments directly and
significantly in contributing to the enhancement of the ability
of Iran or Libya to develop its petroleum resources, expires on
August 5. Over 70 Members of the Senate have cosponsored its
reauthorization and I hope to hold a Full Committee hearing on
that again before the recess. I would very much like to do
that.
These are four measures whose authorization runs out. If we
can do the hearings, then we can turn to a markup sometime
after the 4th of July recess. In other words, when we come back
in July.
The Administration, as I understand it, is supportive of
reauthorization in all four of these instances. I am not sure
they have fully developed their position in detail on each
issue, but it is my understanding that they do support
reauthorization.
So this would be consistent with that agenda.
I also want to note, as you will recall, we also reported
out the reauthorization of the Export Administration Act. That
legislation is now pending in the Senate. Both Senator Gramm
and I have talked to the leadership about it and we hope that
there will be some opportunity to get that back up and move
ahead on that. There was a 1 year temporary extension of that
Act. We need to address that question. That is the one we
brought out 19 to 1, as Members will recall.
Finally, last year we passed the Manufactured Housing
Improvement Act. It desperately needs a technical correction,
which is very time sensitive, in order to be able to spend out
the funds collected under the program to run the program. I
have consulted with the Administration, with Senator Gramm, and
with other Members of the Committee on legislation. It is a
very technical thing and we hope that we can get legislation up
by unanimous consent and move that through and correct that
situation.
Next Wednesday, the Committee will hold an oversight
hearing on the condition of the banking system. We are doing
this really as just kind of a survey of the situation. I am not
prompted to do it by any sense of crisis or looming problem,
but I think it would be helpful to get Alan Greenspan, Chairman
of the Fed; Jerry Hawke, Comptroller of the Currency; Donna
Tanoue, Chair of the FDIC; and Ellen Seidman, Director of the
Office of Thrift Supervision, and have them in.
In addition, we will address nominations as they come to us
and as their papers are ready for hearings. We will try to do
that in an expeditious manner.
Now later in the summer, as Members know, I have some
interest in the predatory lending and the financial privacy
issues, and I hope to have some hearings on those issues. Money
laundering, financial education, and literacy are other issues.
Then, I hope we can do a set of hearings on the state of
metropolitan and rural America, the broader jurisdiction of the
Committee.
I have been talking to Members. I hope to complete that
process of consultation over the next couple of weeks, for any
ideas they have or directions they would like to go. I am
anxious to hear from them and we are very open to suggestions.
Now with that by way of preface, and if there are any
questions, I would be happy to respond in that area. We need to
do these reauthorizations. We were already working on doing
that and we just want to carry forward that process and try to
bring it to completion.
With that as a preface, I would like to welcome Roger
Ferguson before the Committee this morning. He has been
nominated by the President for a full 14 year term as a Member
of the Board of Governors of the Federal Reserve.
Governor Ferguson was originally appointed as a Member in
1997, to complete a term which expired on January 31, 2000. He
was nominated on September 14, 1999, by President Clinton for a
full term as a Member of the Federal Reserve Board, as well as
to be Vice Chairman. He was confirmed as Vice Chairman at the
end of September 1999, and that term expires on October 5,
2003. That is a 4 year term as Vice Chairman. No action was
taken in the last Congress on his nomination to be a Member of
the Board. So he had the Vice Chairmanship while he continued
to serve, but he had not gotten another term as a Board Member.
President Bush nominated him for a full term on April 24.
His papers are all complete. They have been with the Committee
now for a number of weeks. Given the importance of the
position, and the period of time he has been awaiting action on
his nomination, I thought we should move his nomination, and
Senator Gramm and I have discussed that.
I just want to say that Governor Ferguson holds an
undergraduate, a law degree, and a Ph.D. in economics, all from
Harvard. After graduate school, he practiced law in New York
with Davis, Polk & Wardwell, one of the leading firms. He then
joined the consulting firm of McKinsey & Company, where he
became a Partner in 1992 and Director of Research and
Information Systems. As I said, he has served on the Federal
Reserve Board since 1997.
By all accounts, Governor Ferguson has served with
distinction as a Member of the Federal Reserve Board. I have a
public statement that Alan Greenspan issued today:
Roger Ferguson has been a distinguished and respected
Member of the Federal Reserve Board, exercising sound judgment
and benefiting our work on a wide range of domestic and
international policy matters. I welcome his nomination to
another term on the Board.
Governor Ferguson has chaired a working group of the
Federal Open Market Committee to review its disclosure
practices. Acting on a working group recommendation, the
Federal Open Market Committee altered its disclosure practices,
including deciding to issue a statement after every FOMC
meeting announcing any action taken by the Federal Open Market
Committee and indicating the balance of risks facing the
economy.
I for one very much welcome this initiative. I think it is
important for the Federal Open Market Committee to make its
decisions known and to try to give the country some of the
rationale that lies behind its decision. I think that increases
economic understanding and that is a very important objective.
Governor Ferguson oversaw the Fed's preparations for the
Year 2000 computer challenge. I think Senator Bennett worked
with him on that, when Senator Bennett and Senator Dodd were
heading up the Special Committee. He also served as Chairman of
the Joint Year 2000 Council, sponsored by the Bank for
International Settlements, to provide guidance to the global
financial supervisory community. He recently completed service
as Chairman of the Group of Ten Working Party on Financial
Sector Consolidation, which examined the causes and potential
effects of consolidation in the financial sector worldwide.
As Vice Chairman, he has served as the Federal Reserve's
Chief Administrative Officer. He is currently Co-Chairman of
the Federal Reserve's Payments System Development Committee,
which addresses public policy issues arising in connection with
developments in the Nation's payments infrastructure.
Governor Ferguson has also been a careful observer of the
economy, and has focused particularly on the role of
information technology in productivity growth.
Actually, I think it is a commentary on the high
professional standards he has set during his service on the
Federal Reserve Board that he was nominated for a full term on
the Board by both President Clinton and President Bush. At the
time of his first confirmation, and I was taken with this, I
recall that he mentioned that the appointment of Andrew Brimmer
to the Federal Reserve served as an inspiration to him as a
youth and focused his attention on serving on the Federal
Reserve as a possible career goal. Perhaps his own service on
the Federal Reserve now will serve as an inspiration to other
young people to pursue public service in their careers.
I am very pleased to welcome Governor Ferguson before the
Banking Committee. And Governor, before we turn to you, I will
yield to any of my colleagues who may want to make a statement.
Senator Bunning. I have a short opening statement I would
like to make.
Chairman Sarbanes. Indeed. Senator Bunning.
COMMENTS OF SENATOR JIM BUNNING
Senator Bunning. Mr. Chairman, I would like to thank you
for holding this hearing, and I want to thank Mr. Ferguson for
testifying today.
Mr. Ferguson, I appreciate you coming to see me last week.
I think we covered a lot of ground. At that time, I expressed
my strong concerns with the Fed talking about the financial
markets. Obviously, every time the Chairman speaks, the market
listens. But I am concerned that the Fed has tried to influence
market levels. That is not the Fed's job. I am very much
heartened by the fact that you agreed with me that it is not
the Fed's job to jawbone the equity markets.
You obviously have had a very distinguished career and I
look forward to hearing your answers to the questions posed by
my colleagues and myself today.
Thank you very much, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Bunning.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman. It is an honor
for me to be here today with you in your first hearing as
Chairman.
Like my colleagues, I look forward to working with you on
ensuring financial institutions and markets in America stay on
the same supreme role that they play today. Those efforts were
the hallmark of the outstanding leadership provided by Senator
Gramm as well in his stewardship of this Committee and I look
forward to them continuing.
I am particularly pleased to hear you outline the issues
that are on the agenda. Issues like predatory lending,
financial privacy, housing affordability, urban economic
development, and financial literacy are things that I think
really can make a difference in improving the quality of life
for individuals and their families. I think it is terrific that
we will have this agenda.
I also want to say welcome to Vice Chairman Ferguson, who
is an individual who has a sterling reputation in the financial
markets. His work on all of a host of things that often are
unseen is terrific testimony to his talent and wisdom and it is
a pleasure to have him here today and I look forward to his
testimony.
Chairman Sarbanes. Senator Stabenow.
COMMENTS OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman.
I too want to indicate my pleasure at seeing you in the
Chair and also appreciate Senator Gramm's leadership of the
Committee. It has been a pleasure to work with both of you and
I look forward to the opportunity for us to be working together
on both sides of the aisle.
I am very appreciative of the agenda that you have put
forward for the Committee and am anxious to work with you on so
many things that directly affect my Michigan residents.
In terms of today, I would like to indicate that, as we
know, our economy has experienced a great deal of uncertainty
over the last several months. We have gone from a period of
exuberant optimism to a dot com bust.
The 1990's were an unprecedented period of growth and
economic expansion in our Nation. Today, however, energy prices
are soaring. Many stocks have reached shocking new lows. And
unemployment continues to rise.
This is not the economy of the recent past, but a new time
of uncertainty and nervousness. Whether we are talking about
the iron ore miners in the upper peninsula of Michigan or the
high-tech executives in Oakland County, Michigan's automation
alley, everybody in Michigan and everybody in the country is
affected by the decisions of the Federal Reserve.
As we make the transition into the new economy, it has
become all the more imperative that the Federal Reserve act
aggressively to keep our economy in strong shape. Combating
inflation and fighting unemployment are critical to our
country's well-being, as I know that you are aware.
The Federal Reserve has taken several steps over the last
year to address the troubling economic signs. I hope that they
will remain vigilant in promoting sound monetary policy,
particularly with the recent massive and, I believe, ill-
advised, changes in our Nation's fiscal policy.
I welcome Mr. Ferguson and I look forward to hearing your
thoughts today on the state of the economy, and your work at
the Federal Reserve. And we appreciate your being here.
Thank you.
Chairman Sarbanes. Senator Gramm.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, thank you. I had to run out to
speak to a bishop who had returned my call. I depend on the
Lord's help in so many ways. When his messengers call, I don't
keep them holding.
First of all, Mr. Chairman, I want to congratulate you on
being the new Chairman of this Committee, and I want to thank
you for your kindness in working with me over the period of
time that I was Chairman. I would like to also thank Members on
the Republican side for their support. I had the great good
fortune of being Chairman when a lot of good things happened,
and your support was critical. I want to personally thank you
for your kindness to me. I want to also thank Members on the
Democrat side, especially the new Members for their kindness to
me at the beginning of this term. I look forward to working
with all of you.
Mr. Chairman, I think you have set an example as to what a
good Ranking Minority Member should be, and one that I hope to
emulate. There are obviously areas where you and I will not be
in total agreement, but I want to assure you that when in
doubt, I intend to try to be supportive.
The outline that you have presented--a reauthorization of
the Ex-Im Bank, multifamily housing, the Defense Production
Act, the Iran-Libya Sanctions Act--these represent bills that
have broad support, and I have no doubt that we can pass
legislation fairly rapidly in reauthorizing them.
I have a few concerns about the Defense Production Act, not
that I don't think the President ought to have these
extraordinary powers, but I do believe in the past that they
have been abused when we were not dealing with periods of
national emergency. This is something I want to ask the
Committee to look at, so that we might set a little higher
standard and threshold for using the Defense Production Act.
President Nixon used it to impose price controls in a period
when we were not facing a national emergency from a conflict
somewhere in the world. We have used it to allocate resources
from time to time when there were no defense implications. And
so, not that I believe this President would ever abuse the
power, but these laws should be based on not knowing who might
be President someday.
Let me also say that I think our correction on manufactured
housing is something that we can do very quickly. Maybe we
could get the Committee to do it by unanimous consent on the
floor, if you wanted to do it that way.
I look forward to working with you, and again, I
congratulate you on your Chairmanship.
I want to congratulate Roger Ferguson. When you have Alan
Greenspan on your side, you have the right man on your side. I
supported confirming you as Vice Chairman, and I intend to
support confirming you to a new term. I appreciate your
willingness to serve. I understand that given your excellent
credentials, you could make a lot more money doing something
else, and I appreciate that you are willing to give that up to
serve at the Federal Reserve.
I am proud of the fact that under my tenure as Chairman we
raised pay for members of the Federal Reserve Board, but we did
not raise it enough so that I can get the presidents of
regional banks interested in being on the Board. So, I think we
still have a major problem. But I appreciate your willingness
to make the sacrifice to serve. It is a very important
position. It is hard to overstate the importance of the Federal
Reserve, and the role it has come to play in American society.
I congratulate you.
I am going to run to a Medicare meeting, but you can
certainly count on my support.
Chairman Sarbanes. Senator Bennett.
COMMENTS OF SENATOR ROBERT F. BENNETT
Senator Bennett. I don't want my silence to be
misinterpreted. I want to join everyone in extending my
congratulations to you upon assuming this position.
You will not recall it, but I remember when Senator Riegle,
who was the first Chairman of this Committee under whom I
served, announced his retirement. I went over to Senator Riegle
on the Senate floor to wish him well in his retirement and he
was talking to you, Mr. Chairman. He said to me, meet the new
Chairman of the Senate Banking Committee. And at that time, I
said, actually, my preference would be Al D'Amato.
[Laughter.]
And it now turns out I got both.
[Laughter.]
My congratulations to you and I am looking forward to
working with you in the same spirit as the other Senators have
commented.
Chairman Sarbanes. Thank you very much. I appreciate that.
Governor Ferguson, it is a standard procedure in this
Committee to ask the nominees to take the oath with respect to
their testimony. So if you would stand, I would like to
administer it to you.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Ferguson. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Ferguson. I agree to that, yes, sir.
Chairman Sarbanes. Thank you very much. We would be very
pleased to hear your statement.
STATEMENT OF ROGER W. FERGUSON, JR.
OF MASSACHUSETTS, TO BE A MEMBER OF
THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Mr. Ferguson. Thank you, Chairman Sarbanes.
I would like to introduce my wife, Annette Nazareth, who
has joined me here.
Chairman Sarbanes. We are pleased to have you. We welcome
her to the Committee.
Mr. Ferguson. Thank you.
Chairman Sarbanes, Senator Gramm, and Members of the
Committee, I am pleased to appear before you today as President
Bush's nominee to serve on the Board of Governors of the
Federal Reserve System. I am honored that the President has
nominated me to serve a full term as a Member of the Board.
As a Governor, I am particularly mindful that the policy
decisions of the Federal Reserve influence the economic well-
being of all Americans. It has been my privilege to serve our
fellow citizens in this capacity since 1997, giving this role
my undivided attention, and I hope to be able to continue in
that service.
During my tenure, we have faced a rapidly changing
environment in many of our areas of responsibility, and I would
like to review briefly some of those developments and our
responses to them.
Congress has given the Federal Reserve three monetary
policy objectives: Maximum employment, stable prices, and
moderate long-term interest rates. We have viewed these
objectives as congruent with a goal of maximum sustainable
growth, which can occur only in the context of long-run price
stability. Fostering financial conditions in which Americans
can realize the full productive potential of our economy has
presented a number of challenges in recent years. The most
important developments have been a step-up in the advance of
technology--both in terms of the production of new goods and
services and the more effective harnessing of past
innovations--and a rapid accumulation of physical capital.
These developments have made workers increasingly more
productive. But faster productivity growth fed back on the
demand for goods and services in ways that complicated the
calibration of monetary policy. Faster growth in productivity
and the reactions of businesses and households to this
acceleration of productivity have combined with other forces--
particularly those associated with the growing
interconnectedness of the global economy--to require
substantial adjustments in the Federal Reserve's policy
interest rate in recent years. But those adjustments in our
policy instrument have been in the service of our objective of
promoting maximum sustainable growth.
Making monetary policy has been only part of the challenge.
During my tenure at the Federal Reserve, we have also worked
diligently to communicate to the public what we are doing with
policy and why. Transparency in policymaking is a key part of
the democratic process, as well as being helpful in fostering
efficient decision making in the private sector. Becoming more
transparent has been a goal of the central bank in recent
years, keeping in mind that we must balance the need to be open
and accountable with the need to maintain an effective process
of decision making by the Federal Open Market Committee.
Transparency requires that we periodically review our
procedures, as we did in 1999, to ensure that they
appropriately balance these considerations. I do not know what
future changes, if any, might be called for in how we
communicate, but I am confident that the Federal Reserve will
continue to look for ways to communicate clearly our policies
and our supporting rationales.
While macroeconomic conditions are of overriding
importance, the role of the Federal Reserve is broader than
monetary policy. Financial stability is an essential
precondition for maintaining a strong economy, and the Federal
Reserve has important supervisory and regulatory
responsibilities for our Nation's banking system. The Federal
Reserve, and other regulators, must continue to foster a
competitive environment that will benefit the users of
financial services, while also promoting safety and soundness.
I believe that we must achieve these goals with a minimum of
regulatory burden and without leaving the impression that any
institution is too big to fail. To minimize regulatory burden
and achieve our other objectives, we should encourage what to
my mind are the best regulators, namely, market discipline and
management accountability. Of late, our challenge has been to
meet these goals as we implement the financial modernization
law. In my opinion, Congress wisely removed several antiquated
barriers to a modern financial structure in the United States,
and we now need to design regulatory and supervisory policies
that reflect the will of Congress and deal effectively with a
changing financial services industry.
Technology and deregulation, forces for change that I have
just mentioned, have encouraged consolidation in the financial
sector. With central bank and treasury officials from 12 other
major industrial economies, I have reviewed the likely effect
of the global trend toward consolidation and its implication
for central banks and regulators. Because financial systems
will continue to consolidate, as the forces that motivate that
evolution are unabated, the regulatory community needs to
monitor developments closely. But our study also found that
existing policies appear adequate to allow regulators to
maintain safe and sound financial industries now and in the
intermediate term and for monetary policy to work through many
of the same mechanisms as in the past.
More than the structure of the financial industry has
changed of late. That sector has found uses for consumer
information and created an array of financial products and
services unimagined even a few years ago. These developments,
in turn, raise some new concerns, and have re-ignited some
existing ones, among consumers and legislators. Congress
grappled with one of these issues, privacy, in the financial
modernization law. Concerns about abusive lending practices
have also reemerged of late. In all areas, but particularly in
areas as sensitive as these, regulators should faithfully
administer consumer protection laws as written. Any necessary
regulations should adequately inform consumers and protect them
against abusive practices while also not discouraging
legitimate extensions of credit, especially to those who might
previously have been denied access to such credit. Financial
literacy will certainly play an important role in avoiding the
growth of abusive or deceptive financial practices and in
allowing consumers to protect their interests. I believe
legislation, careful regulation, and education are all
components of the response to these emerging consumer concerns.
I also hope, however, that businesses recognize that it is in
their long-term interest to maintain the confidence of
consumers by avoiding deceptive and abusive practices and by
respecting the privacy of their customers.
Finally, our payment system affects every consumer and
business. This system too has been, and will continue to be,
changed greatly by emerging technologies. From the time of its
very founding, the Federal Reserve has had the responsibility
to foster an efficient, safe and accessible payment system.
During much of 1998 and 1999, our primary objective in this
regard was to help banks and other participants in the payment
system maintain smooth operations as the century date change
passed. Domestically, we achieved this goal by working directly
with the banking sector. Internationally, I was privileged to
work through multilateral groups to raise the awareness of the
international regulatory community of the nature of the Y2K
challenge. Now, we can take a longer-term perspective and
consider how we might facilitate innovation in the payment
system.
As an overseer and as a regulator, the Federal Reserve
needs to approach payment system innovations with an open mind
and a willingness to adapt. In a dynamic economy, markets need
to play a key role in guiding the development of
infrastructure. This means that innovation and competition will
be central to the future development of the payment system--as
they are in other areas of the economy. Regulators should
strive to remove barriers to innovations when we can do so
without sacrificing important public policies. We should take
every opportunity to foster competition and maintain the
integrity of the payment system, but public policy should not
be built on a single vision or prediction in the future.
Consumers and businesses, as well as service providers will
determine the range of payment services that best meet their
needs.
Mr. Chairman and Members of the Committee, during my years
on the Board of Governors, I have done my best to contribute
positively to all aspects of the Federal Reserve's many
responsibilities. I look forward to the opportunity to continue
to work with you and serve the Nation as a Member of the Board
of Governors. Thank you for your attention and for considering
my nomination. I would be pleased to respond to questions.
Chairman Sarbanes. Thank you very much for your thoughtful
statement. I think we will take 5 minute rounds and then we can
do a second round if Members want to have further questioning.
In the June 4 American Banker, former Federal Reserve Board
Vice Chairman Alan Blinder was quoted saying: ``Everybody knows
that there are institutions that are so large and interlinked
with each other, that it is out of the question to let them
fail.'' This statement contrasts with official Board policy and
it contrasts with a statement you made recently before the
Consumer Bankers Conference that: ``No institution is too big
to fail.''
I think this is a subject that probably needs further
exploration. But I would like to get your perspective on it,
just to sharpen it up, how the Board continues to adhere to
this policy in light of its role in organizing a private-sector
bail-out of the Long-Term Capital Management Hedge Fund in
1998.
There have been some proposals of ways to address the too
big to fail issue, subordinated capital and so forth. Could you
please address that?
Mr. Ferguson. Certainly. I will address your question. It
had many components. I will try to respond to each one.
First, on the principle, the philosophical question of too
big to fail, as I have said, and you quoted me correctly, I
believe that there is no institution that is too big to fail. I
think it is important to remind all participants in the
financial system that any institution can fail in the sense of
having management changed, in the sense of being forced to
divest some of its activities or cease some activities.
Clearly, there is a risk to shareholders of any institution and
there is a risk to uninsured depositors and other creditors of
any institution.
I believe that this is an important message to continue to
put out because, indeed, as you observed, there are even former
officials who believe that other things are true.
Now one of the questions I should address is the activities
with respect to Long-Term Capital. I think, sir, that was a
prime example of what the public would expect a central bank to
do. In that case, the Federal Reserve Bank of New York, which
has access to information about the markets broadly and many
market participants, saw that one of the major participants in
the markets, Long-Term Capital, was clearly starting to have
financial difficulties.
What the Federal Reserve Bank of New York did was to
address their counter-parties, Long-Term Capital's counter-
parties, brought them all together, explained the situation as
they saw it in the Federal Reserve in New York, and left it to
the private sector to determine how they wanted to respond to
those challenges. They did not suggest, either directly or
indirectly, any sort of potential regulatory quid pro quo.
There was no Government money at stake. The private-sector
participants thought that it was in their interest to help do
what ended up being an important activity, which was, frankly,
a very smooth wind down of Long-Term Capital.
So what we saw in that case, I believe, is an important
lesson, which is, indeed, no institution is too big to fail.
The management of Long-Term Capital and many of their
shareholders lost money. The institutions positions were
unwound, but unwound in a way that was not destabilizing to
markets. There was no Federal Reserve quid pro quo of any sort
express or implied.
And so I think it is important to be quite clear about that
case because it strikes me as a case where an institution was
large and, in fact, did get wound down in an orderly fashion.
I think it is also important to understand that there are a
number of methods that are being used in the markets these
days, or that are being discussed and encouraged or thought
about, to try to minimize the moral hazard of this concept of
too big to fail.
You have touched on one that I think is very important,
which is the question of greater transparency and disclosure.
Through the Basel Capital Accord we also are considering
more risk-based approaches to capital, to make the capital more
risk-sensitive. And the Federal Reserve and other regulators
have been working on risk-based supervision that allows us to
focus much more on the risk-management capabilities of
institutions in order to reduce the probability of any
institution failing.
I should finally end up by saying that, by definition, we
know that in good times and in bad times, there may be
institutions that are poorly managed. We are not a guarantor
that no institution will ever fail. So these risk approaches
that we are taking really are attempting to make the entire
approach of this activity much more risk-based.
But all of these things I think are in the context of no
institution being too big to fail. There are institutions that
are large and complex. Their winding down could be very
disorderly and has to be managed carefully. But any institution
could fail in the sense of management being changed,
shareholders losing money, activities being contracted,
activities being sold off to others, potentially the whole
institution being sold to others, and uninsured depositors and
creditors potentially facing some sort of haircut.
Chairman Sarbanes. Thank you. This may be a subject that
the Committee may want to pursue with the regulators,
particularly in ways of building more mechanisms into the
market structure to control this. But my time is expired.
Senator Bennett.
Senator Bennett. Thank you, Mr. Chairman.
Governor Ferguson, you made reference in your statement to
the charge that the Congress has given to the Federal Reserve
System, primarily that that comes out of the Humphrey-Hawkins
Act--maximum employment, stable prices, and moderate long-term
interest rates.
When Senator Mack was a Member of this Committee, he and I
joined in saying that the Fed should concentrate exclusively--
we indeed introduced legislation that would have repealed
Humphrey-Hawkins--on stable prices. And if we got price
stability in this country, the other things would follow, and
having the Fed try to chase the unemployment numbers and try to
solve unemployment problems with monetary policy was a nice
dream out of the days when the Humphrey-Hawkins Act was passed.
That practicality said you could not do it with monetary
policy, and that if we got price stability, then moderate
interest rates would be a natural by-product. So, we sponsored
legislation to have you focus primarily on price stability.
Now, Senator Mack is gone. I don't have quite the same zeal
for that that he had, even though I still believe it,
cosponsored his bill, and will still pump for it.
But I would like you to respond to that and talk about the
goals of Humphrey-Hawkins and if you have a sense of
prioritizing, that price stability is more important than the
others. In your personal view, or if you are going to say, no,
I have to stick to the Humphrey-Hawkins Act regardless of how I
may feel because that is what the Congress has said, just
simply respond to what I am saying here and give me your views.
Mr. Ferguson. I will give you my personal view. My personal
view is that the various goals laid out in Humphrey-Hawkins can
best be achieved if we do it in the context of long-run price
stability. I want to be clear about that.
I would be cautious about modifying the law in any way,
however, because I do think that it is important for all
central banks to recognize that another way to express their
goal is the goal of what is called maximum sustainable growth.
That can be achieved through long-term price stability, without
question. But I think it is also quite important to recognize
that there are costs to an economy going above potential and
there are costs to an economy going too far below potential.
I think the way we best serve the economy and best serve
our fellow citizens is by using our instrument to do the best
we can to match aggregate demand and aggregate supply and
create conditions that foster maximum sustainable growth, I
want to be mindful of the cost on both sides of maximum
sustainable growth.
In that sense, I am quite comfortable with the goals laid
out in the Humphrey-Hawkins law. I am quite comfortable with
our ability to keep our eye on the ball in terms of the
underlying strength or importance of long-run price stability.
But I think it is also important to recognize that the
other way of saying this is this concept of maximum sustainable
growth and there are costs either above or below.
And I don't want to lose track of the costs that come from
either growth that is above, and therefore, risks inflation, or
growth that is below potential, and therefore risks the obvious
costs that emerge in the economy when resources are
underutilized.
Senator Bennett. Thank you. We are not as far apart as some
might want to make us.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Bennett.
Senator Corzine.
Senator Corzine. Thank you, Mr. Chairman.
Governor Ferguson, Chairman Greenspan said before the
Budget Committee in January that the outlook for budget
surpluses rests fundamentally on expectations of long-term
trends in productivity. I think that gets at that concept of
maximum sustainable growth that is built into those
formulations.
At that point in time, we were looking at 2.5, 2.7 percent
kinds of growth numbers. We have had actually, shockingly,
negative numbers in the first quarter of 2001. It is hard to
identify trends off of one quarter, but a lot of our
assumptions that are built into budget surplus projections are
dramatically impacted by small changes in these numbers, let
alone dramatic changes that might be 3 or 4 percent, if those
were to be sustained. Hopefully not.
Given your background, particularly with regard to
technology and understanding of how that has impacted
productivity growth, do you have comments or could we ask for
your comments with regard to that, and particularly its
implications for budget surpluses.
Mr. Ferguson. I will comment on both the short-run and the
longer-term perspective.
In the context of an economy that is growing as far below
potential as ours currently is, it would not be surprising, and
was not surprising, to see that the productivity number was
negative in the first quarter.
To answer your broader question, I believe there are new
things in the way of technology that will allow potential
growth to return in the long run.
I think that I would put myself in the camp of being
cautiously optimistic that we have not seen the end of the
increases in productivity that we have experienced and
benefited from.
As I talk to technologists in the world of semiconductors,
for example, they point out that there is now technical
capability to build larger chips. There is technical capability
to etch in smaller lines--again, this is largely technical
talk. We are at about 0.25 microns and there is room to make
them even smaller. There is obviously a limit.
They think that will allow for potentially 30 percent
reductions in the price of semiconductors. Given the fact that
semiconductors are in many ways the building blocks of this
high-tech revolution, recognizing that potential increase in
the capability of semiconductors is important.
All of this is summarized in the shorthand called ``Moore's
Law'' or ``Moore's Curve.'' And what I hear basically is that
the semiconductor manufacturers still believe that Moore's Law
is in effect and they will continue to see increasing
capabilities and decreasing prices in the world of
semiconductors, which should drive some ongoing productivity.
The second part of this, however, is that it is not
sufficient to have the technical capability. You need
businesses to adopt these technologies.
My understanding from talking to businesses is that they
believe there is still more to do in terms of becoming more
productive. Some would argue that some of the low-hanging fruit
has already been captured, if you will. But they are quick to
say that they thought that a few years ago as well.
This productivity increase that we have benefited from,
though we are in a bit of a pause now, I am cautiously
optimistic will return and we will continue to see very solid
productivity numbers.
I should also tell you, by the way, that if one looks at
the productivity numbers, from quarter to quarter, they move
around quite a bit. So it is not going to be a smooth trend. It
never has been.
I think what that might imply in terms of the long-run is I
can imagine a potential growth in the economy that is still in
the range of around 3\1/2\ percent, maybe a bit more, maybe a
bit less, but in that range.
Now, you have talked about----
Senator Corzine. Maximum sustainable growth.
Mr. Ferguson. Maximum sustainable growth. You have talked,
however, about issues of long-term forecasts and other things.
Obviously, economists have been surprised, as others have,
with respect to the ups and downs of the economy. I think if
one looks at any of the forecasts from just a few years ago,
you would find that they were far off. There is always some
danger that these forecasts will again miss. I am always very
cautious about a long-term forecast, even though I would
describe myself as cautiously optimistic about the potential of
the U.S. economy in the long run.
Senator Corzine. What would be an early warning sign that
you would be looking for that these productivity numbers were
not going to achieve the kinds of growth targets that would be
built into the kind of projections we have, again, tying it
back to the projected budget surpluses, its impact being such
an important driver of those.
Mr. Ferguson. Economists at the Fed and also in the private
sector who have looked at the drivers of this productivity
increase have pointed to two things.
One is just simply an increase in the productivity in the
high-tech sector. The other is a concept called capital
deepening, which is to say more capital per worker, which shows
up in both equipment and software expenditures and what is
called business-fixed investment.
Their third component is, in all honesty, what is called a
residual multifactor productivity, which is the use of
technology working together with individuals and changing
manufacturing approaches.
Another thing that I would look for in terms of this
question of are we likely to continue to have a positive trend
with respect to productivity increases, is the question of do
we continue to see businesses investing in equipment and
software? Do we continue to see what is called capital
deepening?
If it turns out over the long term that this slows down,
then that I think would be a sign that perhaps productivity is
not continuing to increase and that some of the forecasts for
the long run may not come true. And so, there are really
fundamental business activities that one can look at.
The other one obviously is the question of whether or not
these comments that I made earlier about what I hear from the
semiconductor industry turns out to be true.
If they cannot continue to stay on Moore's Law and, indeed,
we don't get productivity increases in the manufacturing of
high-tech equipment itself, then that is a second element.
The third element, frankly, would be whether or not
businesses continue to restructure to take advantage of some of
these new technologies.
There are at least two or three things that I would look at
and many of them are what I would describe as the microeconomic
underpinnings of the macroeconomic forces that we have dealt
with thus far.
Senator Corzine. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Bunning.
Senator Bunning. Thank you.
Governor Ferguson, hindsight being 20/20, do you think that
the Fed waited too long to reduce the targeted Fed fund rate?
Mr. Ferguson. No, sir. Even with 20/20 hindsight, I do not
believe that to be the case. With the information we had at
hand, we obviously, during the course of 2000, stopped and
waited to see how the economy was evolving. We saw in the late
fall, in particular, and going into the December meeting, that
the economy was indeed slowing.
There was a legitimate question as to whether or not this
was simply a very shallow slowing that was going to pick up
quickly or was it something more serious?
We were quite clear as we came out of the December meeting
that we would be monitoring the incoming data very closely
because there was a question as to exactly what this slowing
was that we were looking at, and how severe it was going to be.
The data became clearer, post the December FOMC meeting.
Anecdotal data, the purchasing managers report, and some other
hard data came in. We returned and moved fairly aggressively on
January 3. And we have continued. We have had four other
aggressive moves and we have lowered our Federal funds target
rate by 250 basis points.
Even with hindsight, knowing what I knew, knowing the
information was on the table, I would say we still did the
right thing.
You should be mindful, as I know you are, that there are a
number of forces that led to this sharp reduction and they
surprised almost all economic observers.
Even in January of this year, the consensus forecasts, the
so-called Blue Chip, was for growth this year of 2.7 percent.
This was in January, once we had recognized that the slowing
was perhaps a little deeper than others had expected.
So a number of forces came to play and many observers were
surprised by the depth of the slowing that was experienced.
Senator Bunning. I think we are pretty much familiar with
that. Some of us strongly disagree with you about the Fed and
the reaction to the Fed's lowering in direct relation to the
Fed's tightening. But that is neither here nor there. You have
given me the answer I wanted.
Do you believe that the Fed's forecasting models are up-to-
date, or do you think that they need more work?
Mr. Ferguson. I believe with all models that there is
always room for improvement, by definition. I think we have
some of the best models in the country for sure, and our
forecasting record has been as good as others'.
I will also say that it is important to supplement the
model-based forecasts with a variety of other data. Anecdotal
information is important. That is one of the reasons, for
example, to have the Federal Reserve Bank Presidents come and
act as voting members, some of them, on the FOMC, because they
bring very good real-time anecdotal information. We also look
at surveys that come from a number of private-sector sources.
Personally, as I travel around, I am eager to hear from
bankers, from industrialists, from farmers. I was just in
Illinois recently talking to some farmers about how conditions
look.
I think it is important to say that it is good to have a
model. A model has rigor. It has some scientific basis to it.
But models are built on past regularities and you need to
update them periodically. And I think we need to supplement
them, as we do, with anecdotal information and real-time
information.
I will also say that, particularly now, there are a number
of individuals who have come and said, ``Well, this particular
piece of data would have given you a better sense of what was
going on.'' My perspective is always, tell me the data that one
has seen. Let's put it into a broader context to see if it is
really a good predictor over a long period of time or happens
to get it right this one time.
Senator Bunning. I only have one more minute.
Mr. Ferguson. Yes.
Senator Bunning. I have a bunch of questions, but I want to
make sure that I get this one in.
Mr. Ferguson. Fine.
Senator Bunning. Do you believe that the Fed should look at
the stock market when deciding monetary policy, either as an
indicator of an inflationary wealth effect or as an indicator
that the economy may be heading south?
Mr. Ferguson. My view on the stock market is, as you know,
because I have said it publicly and said it to you, that we
should not target the stock market. However, I do believe that
the stock market is an important element in creating aggregate
demand in the U.S. economy and therefore we should be mindful
of what is happening in the stock market.
The stock market creates wealth for individuals, which can
translate into consumption over a 2 to 3 year period. It also
for a number of businesses is a source of capital. And so, we
should be mindful of what is occurring in the stock market, as
we are with a number of indicators that indicate what might be
happening to aggregate demand. But we should not target it.
Senator Bunning. Do you believe the Fed monetary policy
should react to market gains or losses?
Mr. Ferguson. I will repeat the answer I just gave, which
is we should be mindful of what is happening in the stock
market because it is a source of wealth.
Senator Bunning. Should the wealth effect or the reverse of
the wealth effect, which was front page in The Wall Street
Journal not too long ago, not effect Fed policy?
Mr. Ferguson. What I have said, sir, is that we should be
mindful of what is happening in the stock market because, in
fact, it does create wealth and wealth can translate into
consumption.
This has been an economic regularity that has been picked
up in econometric models. And I still believe that there is
evidence that there is a wealth effect. Obviously, it is
controversial. I sense that you may not agree with us on this.
But most economists would say that there is a wealth effect.
The numbers around the wealth effect some put in the range of 3
to 5, 3 to 6, 2 to 6 percent of incremental wealth is
eventually consumed. So, in that sense, we should be aware of
what is happening in the market because it does play into
aggregate demand.
You have heard us talk about both the positive wealth
effect and also a negative wealth effect, a concern that
consumers may gradually pull back on consumption because wealth
has, in fact, been destroyed by events in the stock market. And
so, I think we should be mindful of what is happening in the
market because it plays through to consumption, to the cost of
capital, and eventually, to aggregate demand.
Senator Bunning. Thank you.
Chairman Sarbanes. Thank you, Senator Bunning.
Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman.
First, let me congratulate you, Mr. Chairman, on your
sitting in this Chair, not for the first time. The 17 days you
were Chairman you handled the Chairmanship with intelligence,
clarity, and grace--your usual attributes. I know that you will
continue to do it. It is great to have you there.
Chairman Sarbanes. Thank you.
Senator Schumer. I would also like to thank Vice Chairman
Ferguson for his service at the Fed. I know both he and his
wife are exemplary public servants. You are a Washington
financial power couple--financial power public service couple.
That is what I want to say.
You have both done a great job. Our country needs people to
go into public service. Not enough highly qualified people do
these days. And the fact that you are here I think is good news
for our country.
I have a bunch of questions on productivity, but I know my
colleague from New Jersey has touched on those and we discussed
those privately yesterday, although I am troubled by the
decline in the productivity number, let the record show that
the Vice Chair believes that there is still plenty of oomph
left for productivity.
I know the Chairman has the same view because I have talked
to him about that.
I would like to ask about consumer confidence.
With the increase in layoffs we see almost weekly, with the
fact that the economy seems to have slowed down, with the
decline in productivity which eventually does have an effect,
even if it is short-term, but mainly with the layoffs, it seems
to me that consumer confidence is at a pretty good level,
considering everything that is swirling around and is probably
the linchpin of the economy right now, preventing it from going
further down.
What is your view as to how important consumer confidence
is at this juncture in time and where do you think that it
might be headed, given the fact that over the last quarter I
think we have seen more layoffs than we did in previous
quarters? How much of an effect do the layoffs have on consumer
confidence?
Mr. Ferguson. I believe the following. We are in a period
where the economy is, indeed, growing quite slowly. As the FOMC
said, and I believe is still the case, the risks are, as we say
in central banking language, the risks are to the downside
around this slow growth period.
One of the reasons that I am quite mindful of the downside
risks to the economy is the point that you just made, Senator
Schumer. At this stage, consumption has held up reasonably
well. Even the most recent numbers suggest that. However, there
is a risk that, as you indicate, with what I describe as a drum
beat of layoff announcements and unemployment gradually rising,
that consumers may decide that they want to pull in their horns
a bit. And given the fact that much of the forward momentum in
the economy is coming from consumption expenditures, that is a
source of the downside risk. I think you are right to point to
this.
I would say that many people have recognized that there has
been a bit of a disconnect between consumer confidence figures
as measured through surveys, which have been going down during
the course of the year and have stabilized a bit now. Who knows
what the next survey will be? There has been a slight
disconnect with consumer spending behavior, which has held up
reasonably well.
At some point perhaps those two things will come into
closer alignment and it is one of the things that we must
monitor closely as we think about the state of aggregate
demand.
But your concern with respect to consumers, consumer
confidence and consumer spending is one of the things that
underpins the statement that I have made and others that the
economy is growing slowly and the risks in that slow growth are
primarily to the downside.
Senator Schumer. Have there been times in recent economic
history, where layoffs and unemployment did not affect consumer
confidence and consumer spending? Or is there a pretty direct
link in the past? Given your comment to Senator Bunning on
models, what do you think it bodes for the future? Do you think
that we can use the past as a predictor of the future on this
issue?
Mr. Ferguson. One of the things that we note and, again,
back to the econometrics, there are some elements of the
consumer confidence survey that do have what we describe as a
little bit of information content in them. One of those is the
element concerning expected employment going forward. That has
actually ended up being, not a heavy predictor at all, but
having some information content with respect to future
consumption behavior.
History has generally shown that, as unemployment goes up,
consumers tend to pull in their horns. And so, we do have to
again be mindful that there are some risks to the downside here
and I think we have been clear to the public about that, and
you have obviously picked up on that concern.
Senator Schumer. Thank you, Mr. Vice Chairman.
Thank you, Mr. Chairman.
Mr. Ferguson. Thank you.
Senator Sarbanes. I have an issue I want to take up with
the Governor that will probably take longer than the 5 minutes.
But I will defer my round and recognize my colleagues and then
pick up after the second round on this matter I have to
discuss.
Senator Corzine.
Senator Corzine. Mr. Vice Chairman, I have two questions I
would love to hear your observations on.
We have seen almost an unprecedented rapid decline in
short-term rates. Five 50-basis point moves in 4 or 5 months is
relatively unprecedented. But we have not seen the impact in
long-term rates that we have obviously seen in short-term rates
and in fact, they have risen. We have a sharp upward rise in
yield curve. I would love to hear your views on what
information one might derive from that. And I will just get the
other question out and you can think about how you might want
to deal with that.
We just recently passed a tax cut which has immediate
stimulus in it in the current fiscal year and in subsequent
years.
I wonder if the Fed has had an opportunity to check out
what kind of thrust those immediate impacts and efforts on
rebates and changes in rates will have with regard to the
overall growth in the economy.
Mr. Ferguson. Okay. Let me first address your question on
long-term rates.
You are right to recognize that as the short-term rate has
been coming down, more recently the long-term rate has gone up.
In the beginning part of the year, it indeed was coming down
and now it has started to go up.
The question of information content I think is an important
one.
The longer-term rates could be reflecting two or three
different things. First, particularly in the corporate sector,
it may reflect some optimism or expectation that the future
will turn out to be relatively attractive for businesses. The
economy will start to grow again, getting back to potential
relatively quickly. So some think that the information content
is a positive one, that the economy may have reached bottom and
may be shortly turning.
There are others who think that----
Senator Corzine. In contrast to what your weight of
evidence would be with respect to how you are reading the
economy.
Mr. Ferguson. Well, as I said, I expect a period of some
weakness. I have not been very explicit about how long. But
certainly, you are right. This sense of turnaround that might
be coming from the long-term rates is slightly different from
my sense that we have not yet reached bottom, or are too early
to declare that we have reached bottom.
The second piece of information content that some have
taken out of these long-term rates is a concern that inflation
may pick up in the intermediate term.
On this one I think there is information from surveys that
suggests that inflation expectations are relatively well
contained. They may have crept up just a little bit.
I think it is important, as I said to another question,
that we not leave an impression that we don't have an eye on
the price stability issues, even as we talk about weakness in
the economy.
The third element of this, I should say, is that this has
been a period in which businesses, particularly investment-
grade businesses, have been issuing bonds at a relatively large
pace. In May, there were over $650 billion of bonds issued at
an annual rate. You have supply and demand considerations going
into these rates as well. So, you have two or three different
activities that are being signaled through the rates.
As I have said, it will be interesting to see if the
turnaround is as the bond market seems to be expecting. It will
be important for us to continue to have one eye on inflation in
case that should start to become a problem. I do not currently
expect it given the weakness in the economy. But one should
never be complacent about it. And then you have these basic
supply and demand concerns.
As to your question about the tax cut, knowing that I was
coming here, I actually talked to our staff this morning. They
have not yet developed a full perspective on this. But
obviously, I want to give you a responsive answer.
I think the question of how much stimulus is going to
emerge from this tax cut is open to a simple, but unanswerable
at this stage, question of how consumers view it and respond to
it. Economic history has shown that if you have a tax rebate
that is perceived to be short-term, then consumers spend
somewhere around 30, 40, maybe 50 percent of that, but spend it
relatively quickly.
On the other hand, if it is perceived to be just the front
edge of a longer-term tax cut, not just simply a one-time
rebate, then what economists describe as a marginal propensity
to consume out of that is much higher, eventually hitting
something close to 100 percent, but starting probably around 70
percent or so.
The question of how this plays through depends first on how
consumers perceive it and how much of this rebate they spend
early versus holding onto.
The second question is, once we see what is called PCE,
personal consumption expenditure, the question then becomes,
are the goods that the consumers purchase going to be ones that
are coming out of inventory or are they going to come from new
production or is it going to come from imports?
Because each of those three different things have a
different impact on GDP as we measure it in the United States.
Now having said that, I did look to see, since I know our
staff is still working on it, what the private sector
forecasters are saying. And there is a range of views. There
are some who are saying that much of this will be spent and
that it will go, this personal consumption expenditure will go
directly to GDP, not come out of inventory, not come out of
increased imports.
I saw one forecasting house that said they expect the
marginal increase or the marginal impact of this to be about 6/
10ths of 1 percent of GDP in the fourth quarter. I have seen
others that have used numbers that are slightly smaller.
You should be aware that this will be stimulative. The
exact magnitude is something that is still being discussed in
the economics profession. But it depends on how consumers
respond to it, in terms of how much of it they spend, and
whether that spending ultimately comes out of inventory, new
production, or imports.
Senator Corzine. Ultimately, will the Federal Reserve
models reflect what your perspectives are?
Mr. Ferguson. I think, ultimately, what will happen is that
the model will have the relationships built in and then there
will have to be a judgmental adjustment based on other
information that comes in. So the model will give a baseline
answer, but it will probably need to be adjusted somewhat.
Chairman Sarbanes. Thank you, Senator Corzine.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
In April of this year, you delivered a speech on the
subject of transparencies in central banking in which you
detailed recent trends in this area. What future trends do you
envision in this area, since you have a 14 year term? Don't go
out that long.
Mr. Ferguson. It is hard to go out that long. What I said--
--
Senator Bunning. Just give me a general, short-term.
Mr. Ferguson. This is an area that I have spent a fair
amount of time on. I am glad you raised the question.
What I said in that speech was that it is unclear exactly
what changes are next, and I truly meant that. But I also said
that the Federal Reserve, I think, will continue to look for
ways to make clear to the public and to the markets what our
rationale was and what our perspective is going forward.
The reason I say it is unclear is literally, I am not sure,
having spent much of 1999 working with my colleagues to find a
consensus and having built that, I personally want to see how
this works.
I also think that it is an important part of our
accountability that we can communicate to you and others what
it is that we are doing and it is important for us to think
about newer and different approaches to doing this.
We have obviously put out statements. We have adjusted them
to reflect what we call the balance of risks. We are using the
Internet as a great way to communicate and become more
transparent. We will continue to come and respond to questions
here.
But I don't know exactly what is next. I will simply commit
to you that during my 14 years on the Board, I will continue to
be a strong voice for transparency because I think it is part
of what we should do in a democracy and it is an important way
that we can help the markets and others understand what we are
doing.
I will also say, however, that there is always a balancing
in this world of transparency. You want to be as transparent as
you conceivably can be without being destabilizing in any way
and without undermining the ability of the FOMC to reach good
decisions and to have a good and open discussion.
And so, as I go forward with a personal commitment to
continue to focus on transparency, I am mindful that there will
be a balancing that must go on because there are issues on both
sides that have to be looked after.
Senator Bunning. Obviously, the Fed's job is looking to see
if there is inflation-- current, immediate, present, and
future. That is one of the main tasks you have as far as
monetary policy. And I ask Chairman Greenspan this question
every time he comes here and I am going to ask it to you. Do
you see any short-term, intermediate inflation anywhere in the
current economy?
Mr. Ferguson. The most recent statistics over the last
several months, some of the measures, the CPI, for example,
have shown a little bit of an uptick in inflation. Other
measures have not shown that kind of uptick in inflation.
I think much of what we saw in the CPI reflected a pass-
through from oil prices, for example. Some of it reflected
perhaps that the economy as we know was indeed during 1999 and
2000 growing above potential. And so some of that may have been
a spill-over from a period when the economy was growing above
potential.
Going forward, as I answered to Senator Corzine, some think
that the markets are signaling a potential pick-up in inflation
sometime out in the future.
My perspective is that, in the context of an economy that
is growing below potential, and in which resource utilization
is likely to ease, and pressures in resource markets are likely
to ease, I do not think that inflation is likely to be the
short- to intermediate-term challenge that we have to deal
with. However, as I have already said, this is all in the
context of an unchanged, long-term mission as you point out, to
maintain long-term price stability.
So an expectation that inflation will be well contained for
the short- to intermediate-term because the economy is growing
below potential and resource utilization is easing, should not
be taken as any sense of complacency.
Senator Bunning. Well, I look forward to seeing Fed policy
and the transparency of Fed policy in the immediate future, not
only in your June meeting, but also in your meetings that come
after the June meeting.
Thank you.
Mr. Ferguson. Thank you.
Chairman Sarbanes. Thank you very much, Senator Bunning.
In view of some of the questions, I would just like to note
that the charge that has been given to the Fed by Congress, and
the Fed after all is a creation of the Congress, and I quote:
As the Board of Governors of the Federal Reserve System and
the Federal Open Market Committee shall maintain long-run
growth of monetary and credit aggregates commensurate with the
economy's long-run potential, to increase production so as to
promote effectively the goals of maximum employment, stable
prices, and moderate long-term interest rates.
I think you have reflected an awareness of the statutory
framework in which you are operating in your testimony here
today.
I also should note, when Humphrey-Hawkins was passed and
they had a 4 percent unemployment goal, everyone said it could
never be achieved. It was just pie in the sky. The fact of the
matter is that we did achieve it. The Fed in the overall--I
mean, you had some dissonant voices--rejected the notion that
there was a higher level of unemployment, that if you went
below it, you would automatically get inflation. The Fed kept
testing that and we are now at 4\1/2\ percent unemployment
without a significant inflationary problem. That is not to say
we don't remain on alert or cautious. But I do think it is an
interesting commentary about recent economic history.
Now the issue I wanted to discuss with you is that
yesterday I received a letter from eight members of the House
of Representatives. Copies were sent to all of my colleagues.
The letter was sent by members of the Congressional Black
Caucus and the Hispanic Caucus. In that letter--well, let me
quote parts of it because they are raising the question of
diversity in the Federal Reserve System. They say:
The only statistics available indicate that although
minorities and women have increased their presence in the
lower-paying administrative positions, they continue to be
underrepresented in the professional and technical job groups.
Further on they say:
The lack of information outlining the Federal Reserve's
efforts to diversify its staff for ``pipeline'' positions that
could develop into the senior officer level jobs is of great
concern. It is particularly disturbing when considered in light
of recent allegations by several Board employees regarding a
hostile work environment, and intentional discrimination in the
hiring and promotion of minorities at the Federal Reserve. If
there is any truth to any of these allegations, we want to send
a very clear message that this behavior is unlawful,
unacceptable, and that it must end immediately.
Now to their credit, these members of the House went on to
say:
We would like to give Vice Chairman Ferguson the
opportunity to address and correct these issues in the future.
We have provided several questions that we would like you to
raise during the confirmation hearing. Because our goal is
simply to have these issues addressed, you are welcome to share
these questions with Vice Chairman Ferguson in advance. We are
excited to work with you on this matter and hope to rely on the
Vice Chairman to tackle the issue of diversity at the Federal
Reserve.
We thought this letter was of sufficient import that we
sent it down to you as soon as we received it. I think what I
would like to do is get a response from you now on the issue
and generally.
The specific questions they submitted, I think you should
have an opportunity to submit a response in writing to the
Committee after you and the others at the Fed have had a chance
to address them and prepare well-considered answers because I
assume it will require some survey of what your situation is.
Could you respond to the points made in the letter--describe
the Fed's efforts to improve diversity?
Mr. Ferguson. While I was not expecting the letter, I am
pleased to respond to it because it is an issue that I take
extremely seriously.
First, let's put a few facts on the table.
In the time that I have been at the Board since 1997, we
have, through turn-over, retirement, et cetera, appointed 10
division and office directors. These are our highest staff
positions. Half of those people have been women. There has been
one African-American and one Hispanic.
We have appointed 38 new officers during my time at the
Board. Nineteen have been female, 19 have been male. Six of
those 38 appointments have been minorities.
I am extremely aware of this issue. As the Administrative
Governor, one of the things I have done is put into every
manager's four management objectives--one of those objectives
is with respect to EEO. And I will just read very briefly. ``It
is to demonstrate and promote equal employment opportunity and
compliance with Federal laws, and Board policies pertaining to
recruitment, development and promotion.''
So each of our managers is going to be evaluated in part on
how well they have done with respect to meeting the laws and
Board policy because Board policy is congruent with the law and
the world of equal employment opportunities.
I meet with each of our division directors every 6 months
to determine how well they are doing against these objectives
and to give them my personal sense that this is extremely
important to me and to the Board.
I would also point out quite clearly that we have diversity
training and EEO training. That is mandatory for all Board
staff.
I have asked the Board--and this predates this letter by
many months--to review all the policies and procedures that we
have and find out if we are at the upper end of what we can and
should be doing. I am asking them to compare what we do to what
is being done in the private sector. And if there is anything
that the private sector is doing, or the Government agencies
are doing, that we are not, I want to know about it.
In the world of recruiting, we are participating in and
recruit from a number of minority organizations--such as the
National Society of Hispanic Engineers, Hispanic MBA's, and the
National Black MBA Association.
We have worked hard. I personally and others have worked
hard to raise in the minority community awareness of what the
Federal Reserve has done. I have met personally with the MBA
students and the Ph.D. candidates in economics at Howard
University here in Washington.
I have accepted an invitation--again, months ago--to go to
Florida A&M University in Tallahassee, one of the leading
historical black colleges, to teach a class and to speak very
clearly about what we are doing.
So no one should have any doubt about my personal
commitment and the Federal Reserve's commitment to comply with
the laws and to create a workplace in which everyone is
expected to and able to contribute their fullest.
I would like to see as much diversity as we can consistent
with maintaining the obviously high standards that we already
have, and I have myself been heavily involved in this, and I
think I am representing, broadly speaking, the interest of the
Board and the desires of the Board.
I will be working with the staff to respond to the specific
questions. But I am pleased to be on the record here so that
there is no question in anyone's mind of my personal
commitment, or the Board's commitment, in this area of
diversity and EEO.
One other point I would make because I know this from
personal experience. In many of the areas in which we recruit,
particularly among Ph.D. economists, the representation of
minorities is relatively low, disproportionately low.
We are competing for this small pool with private-sector
firms. We think that we have many things to offer in terms of
impact on policy, interaction with other high-caliber
economists, and an important public policy role, and I want the
Fed to attract as many people as we possibly can. But we should
be mindful that for all of the efforts that we put in, we still
are dealing with a relatively small pool. This is, I think, an
important, long-term commitment with respect to the Board.
Chairman Sarbanes. The Federal Reserve Board, as I
understand it, monitors and evaluates the reserve bank's
affirmative action plans and EEO goals. Is that correct?
Mr. Ferguson. Yes.
Chairman Sarbanes. Now is that part of your mandate?
Mr. Ferguson. It is part of our general oversight role,
yes.
Chairman Sarbanes. What is your view of what is happening
in the 12 reserve banks on this issue?
Mr. Ferguson. My view is that, with any 12 organizations,
there are areas of strength and areas where we have to continue
to work.
I don't doubt the commitment of any of these institutions.
Many of them have engaged in various outreach efforts similar
to ones that I have identified. Some of them, because of where
they are located, are finding that their pool is not as broad
and rich as one would like. But they are being relatively
creative in this area.
Again, as I said, in other areas, this is not a place in
which we can be complacent, though, and we have to continue to
watch and make sure we are doing the best that we can.
Chairman Sarbanes. Of course, as the monitoring agent, it
is very important for the Board itself to establish a standard
and set practices that can be pointed to in terms of being
emulated. This effort within the Board to address its own
practices is extremely important. Then I would hope that it
could be carried out into the 12 reserve banks across the
country.
I think this is a matter of consequence. The members who
wrote to us cited a report that was issued by Chairman Gonzalez
of the House Committee in the early 1990's, about 8 years ago,
that found this underrepresentation and urged that it be
closely monitored, and various measures in order to try to
improve it.
In fact, the Chairman himself at the time, Chairman
Greenspan, was not satisfied with the progress that has been
made. And then on occasion, he has cited improvements in the
policy.
I think the concern now is that there has been improvement
at the lower levels, but whether it carries through--of course,
you are responsible and the divisional heads goes right to that
point.
Mr. Ferguson. Not just the divisional heads, Mr. Chairman,
but also the officers.
Chairman Sarbanes. Yes.
Mr. Ferguson. Those are the leading staff members.
Chairman Sarbanes. Well, if you could take the various
detailed questions they attached to their letter that we
forwarded to you and give us a response for the record, we will
include their letter in the record and your response to it.
Obviously, this is a matter that we will continue to pay
attention to in the future. It is important. I am pleased to
hear of your own strong commitment to it. And the members who
wrote it, as I said before, in their letter said: ``We hope to
rely on the Vice Chairman to tackle the issue of diversity at
the Federal Reserve.''
I don't think you should come away from this hearing
without some charge, and we would be happy to give you this
one.
Mr. Ferguson. As I have tried to indicate, it is a charge
that I have already taken up, and I will continue to work in
this area.
Chairman Sarbanes. Now, I wanted to just ask a couple of
other quick questions.
There are academic and trade publications that have
suggested that substantially reducing the number of checks
written in the country would result in substantial cost
savings. The Federal Government now requires most of its
payments to be made electronically. What is the Fed's view
about steps that might encourage a more efficient payment
system?
And in the course of perhaps moving toward increased
electronic transactions, what impact would that have on small
community banks? Would they be able to acquire and officially
use any new technology? Where is the Fed on this issue?
Mr. Ferguson. As you mentioned, I Co-Chair one of the
committees, an ad hoc committee that looks at the future with
respect to payment systems. I agree that there would be some
benefit to moving from a heavily check-based, paper-intensive
system to a more electronic system. About 70 percent of our
noncash payments now are done with check. That has come down
from about 80 percent 10 years ago or so.
As I said, there would be some savings. Fed staff has
estimated over the last 10 years that some numbers show 1
percent of GDP, some numbers show 2 to 3 percent of GDP being
spent, as a societal cost, with respect to the check payment
operations.
Certainly, there are a couple of things that we can do and
we have done.
First, we have to make sure that our regulations do not
stand in the way of experimentation in the world of electronic
payments. And we recently have issued, for example, staff
commentary to Regulation E, which implements the Electronic
Funds Transfer Act, to help businesses understand what can and
cannot be done under the EFT Act.
To answer your question with respect to small businesses--
small banks in particular--they will be capable of continuing
to participate in the payment system even as it becomes more
electronic.
Most EFT networks--the vast majority of them--have very
open rules that allow a lot of members and nonmembers to fully
participate. There are also service bureaus that are
specialized in working with smaller institutions to help them
build the kind of technical capabilities that are required in
this world of electronics.
I think, ultimately, the biggest challenge about moving
from a paper-based system to an electronic system has very much
to do with helping consumers to understand that many of the
benefits that they get out of a paper-based system, they could
expect in an electronic system, and some of the concerns they
have with respect to electronics I think can be overcome.
Whether we move from paper to electronics will depend not
so much on regulators and what we do, although there are some
things we can do. It will depend very much on the private
sector and market acceptance in the private sector.
Chairman Sarbanes. Well, as we move in this direction, I am
encouraged to hear that you are sensitive to this concern about
the small community banks and making sure that they still find
a place within the system and it is not structured
disadvantageously to them.
Actually, your final comment brings up the last question I
want to ask, and that goes back to this issue of financial
literacy and education, which you touched upon in your
statement and which Chairman Greenspan has spoken about on a
number of occasions.
Senator Corzine has left, but this is an issue that he has
raised and I think it is a very important issue and it is one
that we intend to hold some hearings on later in the year to
see what measures can be developed to increase financial
literacy and education.
I agree with you. It is not in lieu of or in place of
appropriate legislation or appropriate regulation. But it does
seem to me that there is a clear need for it out there. This
was something Secretary Summers had been working on at the
Treasury Department during his tenure there and I know that it
is something that the Fed has been addressing.
I don't know if you have specific ideas now, but we would
be interested in continuing to work with you. Is there anything
that you think should be placed on the agenda now with respect
to financial education?
Mr. Ferguson. No. I think you are right to raise this as an
important issue. Obviously, I think the Federal Reserve and
others can have a role in raising the awareness in our
communities and the importance of this matter. The Federal
Reserve banks, the 12 of them, have very active outreach
efforts.
I believe I can speak for myself since I am speaking in a
personal capacity here, and I would be happy to continue to
interact with you and the staff as we together think through
what we can do in the way of financial literacy. It can be very
important in dealing with a number of the consumer concerns
that I know are on your mind.
Chairman Sarbanes. Governor Ferguson, thank you very much.
It has been a very interesting hearing.
I have talked to Senator Gramm. We intend to schedule your
nomination for markup next week, on the 20th, when we are
holding our hearing with the regulators to oversee the
condition of the financial system. It would be my intention in
the course of that hearing when we have a quorum and it is
appropriate, to bring your nomination up. Hopefully, if we can
move on that agenda, we can perhaps complete action in the
Senate with respect to your nomination before the 4th of July
recess, although we don't control the Senate floor.
Mr. Ferguson. I appreciate that.
Chairman Sarbanes. We will try to move you out of the
Committee promptly and get you into place. We know that
Governor Kelly is intending to resign, as I understand it.
There are already, what, two vacancies, I guess, at the Fed,
without the vacancy that would be created by his resignation.
We appreciate that Chairman Greenspan, although the country
thinks so, does not make these decisions all by himself, that
he has a Board that also participates in making the decisions.
We hope to give him some colleagues to help him out.
Thank you very much for coming today.
Mr. Ferguson. Thank you very much, Mr. Chairman.
Chairman Sarbanes. The hearing is adjourned.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of the nominee,
response to written questions, and additional material supplied
for the record follow:]
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
Before I introduce Governor Ferguson, I would like to take a moment
to discuss the agenda of the Banking, Housing, and Urban Affairs
Committee in the coming weeks.
The Banking Committee has a significant and pressing agenda of
legislative matters that it will have to address in relatively short
order. I have asked Senator Bayh, the Chairman of the International
Trade and Finance Subcommittee, to take responsibility for the
reauthorization of the Export-Import Bank, which expires on September
30. A Subcommittee hearing on the reauthorization has been scheduled
for next Tuesday afternoon, June 19.
I have asked Senator Reed, the Chairman of the Housing and
Transportation Subcommittee, to oversee the reauthorization of the
Multifamily Assisted Housing Reform and Affordability Act, the so-
called mark-to-market program for multifamily housing, which also
expires on September 30. A Subcommittee hearing on that legislation has
been scheduled for next Tuesday morning.
I asked Senator Schumer, the Chairman of the Economic Policy
Subcommittee, to take responsibility for the reauthorization of the
Defense Production Act, which expires on October 12. A Subcommittee
hearing on that legislation may be scheduled for later this month.
The Iran-Libya Sanctions Act (ILSA), which falls under the
jurisdiction of the Banking Committee, expires on August 5. I hope to
hold a full Committee hearing on that legislation in the last week of
June. If the appropriate oversight hearings on these expiring laws can
be held this month, I would hope the Committee could move to a markup
of them after the July 4 recess.
In addition, the Committee reported out earlier this year a
reauthorization of the Export Administration Act by a 19-1 vote. That
legislation has been strongly endorsed by the Administration and we
hope to take it up on the Senate floor as soon as the floor schedule
permits. The Committee also reported out by voice vote earlier this
year a bill dealing with SEC fees and pay parity for SEC employees. The
bill was passed by the Senate and we are now awaiting action by the
House on the bill. I am hopeful the Congress will be able to complete
action on this legislation.
Finally, last year the Committee passed the Manufactured Housing
Improvement Act. A technical correction, which is time sensitive, is
needed to allow funds collected to run the program to be spent. I have
consulted with the Administration, Senator Gramm, and others on
legislation that would make the technical fix. I hope we can pass that
legislation by unanimous consent on the Senate floor, perhaps this
evening, and that the House will then take it up and pass it as well.
Next Wednesday, June 20, the Committee will hold an oversight
hearing on the condition of the banking system. The witnesses will be
Alan Greenspan, Chairman of the Federal Reserve; Jerry Hawke,
Comptroller of the Currency; Donna Tanoue, Chair of the FDIC; and Ellen
Seidman, Director of the Office of Thrift Supervision. In addition, I
expect the Committee to hold hearings this month on nominations pending
before the Committee.
Next month I anticipate the Committee will hold hearings on
predatory lending, the state of metropolitan and rural America, and
financial privacy. Later this year I expect the Committee to review,
among other issues, money laundering, and financial education and
literacy.
With that as a preface, I would now like to welcome before the
Banking Committee this morning Roger Ferguson, who has been nominated
by the President for a full 14 year term as a Member of the Board of
Governors of the Federal Reserve.
Governor Ferguson was originally appointed as a Member of the
Federal Reserve in 1997 to complete a term which expired on January 31,
2000. He was nominated on September 14, 1999, by President Clinton for
a full term as a Member of the Federal Reserve Board, as well as Vice
Chairman of the Federal Reserve. He was confirmed by the Senate to be
Vice Chairman of the Federal Reserve on September 29, 1999, and his
term as Vice Chairman expires on October 5, 2003. No action was taken
in the last Congress on his nomination to be a Member of the Federal
Reserve Board.
Governor Ferguson was nominated by President Bush for a full term
as a Member of the Federal Reserve on April 24. Given the importance of
his position, and the period of time he has been awaiting action on his
nomination, I thought it appropriate to schedule this nomination
hearing today.
Governor Ferguson has both a law degree and a Ph.D. in economics
from Harvard. After graduate school, he practiced law in New York from
1981-1984 with the firm of Davis, Polk & Wardwell. He then joined the
consulting firm of McKinsey & Company, where he became a partner in
1992 and Director of Research and Information Systems. As I mentioned,
he has served as a Member of the Board of Governors of the Federal
Reserve since 1997, and as Vice Chairman since 1999.
By all accounts, Governor Ferguson has served with great
distinction as a Member of the Federal Reserve. He chaired a working
group of the Federal Open Market Committee (FOMC) to review the FOMC's
disclosure practices. Acting on a working group recommendation, the
FOMC altered its disclosure practices, including deciding to issue a
statement after every FOMC meeting announcing any action taken by the
FOMC and indicating the balance of risks facing the economy.
He oversaw the Fed's preparations for the Year 2000 computer
challenge. He also served as Chairman of the Joint Year 2000 Council,
sponsored by the Bank for International Settlements, to provide
guidance to the global financial supervisory community as it prepared
for the Year 2000. He recently completed service as Chairman of the
Group of Ten Working Party on Financial Sector Consolidation, which
examined the causes and potential effects of consolidation in the
financial sector worldwide.
As Vice Chairman, he has served as the Federal Reserve's Chief
Administrative Officer. He is currently Co-Chairman of the Federal
Reserve's Payments System Development Committee, which addresses public
policy issues arising in connection with developments in the Nation's
payments infrastructure.
Governor Ferguson has also been a careful observer of the economy,
and he has focused particularly on the role of information technology
in productivity growth.
It is a commentary on the high professional standards he has set
during his service on the Federal Reserve that he was nominated for a
full term on the Board by both President Clinton and President Bush. He
mentioned at the time of his first confirmation that the appointment of
Andrew Brimmer to the Federal Reserve served as an inspiration to him
as a youth and focused his attention on serving on the Federal Reserve
as a career goal. Perhaps his service on the Federal Reserve now will
serve as an inspiration to other young people to pursue public service
in their careers.
I am pleased to welcome Governor Ferguson before the Banking
Committee today.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM ROGER W.
FERGUSON, JR.
Decline in Personal Saving Rate
Q.1. In a speech before the American Bankers Association,
Federal Reserve Board of Governors Member Edward Gramlich said
that, ``Higher rates of national savings are among the unsung
heroes of the good U.S. economic performance in the late
1990's.'' However, the most recent data from the White House
shows a substantial decline in personal savings from over 5
percent in 1996 to minus 0.9 percent today. Do you think that
this is a serious problem, and if so, what can we do to
ameliorate it? What position does this place Americans in if
the economic slowdown worsens? Finally, what are the effects of
this decline with respect to national investment levels and GDP
growth?
A.1. In considering the decline in the personal saving rate, it
is important to remember that it is national saving, not
personal saving, that provides the source of funds for
investment spending in the United States. Over the past several
years, the national saving rate has risen fairly steadily,
increasing from about 15.6 percent of GDP in 1993 to 18.3
percent of GDP in 2000. This increase in national saving helped
to fuel a boom in investment that raised productivity and
boosted GDP. The increase in national saving occurred despite a
steeply declining personal saving rate, as increases in Federal
and business saving more than offset declines in personal
saving. Foreign investment in the United States also increased
significantly during the past decade, providing further support
to domestic investment. The experience of the past several
years shows that national saving and investment can increase
even when personal saving is falling.
From a microeconomic perspective, the decline in the
personal saving rate, rather than reflecting a problem in the
household sector, primarily reflects improving household
balance sheets. The boom in the U.S. stock market led
households to increase personal consumption more rapidly than
income, and thereby lower personal saving. The recent weakness
in the stock market has reduced household net worth relative to
income, though this ratio remains elevated. Moreover, household
credit quality remains fairly good. Thus, although there are
risks, households entered this period of economic slowing in a
reasonably good financial position.
Japan
According to the Japanese banking industry's own publicly
disclosed numbers, about 30 percent of bank assets are
classified by examiners as having problems, which range from
minor to serious. Experience in the United States and other
industrialized countries indicates that if a bank has
classified assets of 10 percent to 15 percent of total assets,
it is in danger of becoming insolvent and needs immediate
supervisory action. The Finance Minister of Japan is reported
to have said a few months ago that ``Japan's fiscal situation
is at the verge of collapse.'' Data from various official and
academic sources indicate Japan's government debt is well over
100 percent of GDP and growing rapidly, and some experts
believe Japan is reaching its financing limits.
Q.2.a. What is your assessment of the Japanese banking system?
A.2.a. As is widely recognized, Japanese banks have sizable
asset quality problems. These include high levels of disclosed
nonperforming loans. The most recent figures indicate that
``problem'' loans, defined as nonperforming loans plus loans
considered to be at risk of becoming nonperforming, account for
approximately 22 percent of Japanese GDP. The Japanese
government has set aside the equivalent of about $580 billion
to help banks (14 percent of 2000 GDP). By contrast, the cost
to U.S. taxpayers of the savings and loan crisis amounted to
$124 billion in 1989 dollars, or 2.2 percent of 1989 GDP. I
have said in the past that the weakness of the Japanese banking
system creates a unique policy challenge for Japanese
policymakers as they work to address the current condition of
their economy.
Q.2.b. What risk, if any, does the situation in Japan pose to
both U.S. financial institutions and the U.S. economy?
A.2.b. U.S. banks are aware of the asset quality problems at
Japanese banks and manage their exposures accordingly.
According to Federal Reserve statistical releases, the cross-
border exposure of U.S. banks to Japanese entities has been
reduced from 36 percent of U.S. bank capital in December 1990
to 9 percent of U.S. bank capital in December 2000. U.S.
supervisory authorities are paying careful attention to
possible problems created by the activities of Japanese banks
that operate in U.S. markets.
Q.2.c. What actions should be taken to improve it?
A.2.c. The Japanese government has recently announced a plan to
reduce nonperforming loans at banks and lower bank exposure to
swings in equity prices. This program accords with the approach
that authorities have taken to date. This plan may have the
potential to contribute to improving the soundness of the
Japanese financial system. However, it is critically important
that the implementation of the plan, or any similar proposals,
be pursued very aggressively.
Remittances
Q.3. It has recently come to my attention that approximately
$24 billion leaves America on an annual basis in the form of
remittances, sent mostly by Hispanics back to their countries
of origin which are mainly in Central and South America.
However, only around $20 billion arrives in these countries,
meaning that $4 billion--over 16 percent--is absorbed in
transaction costs. What are the economic ramifications, in
terms of efficiency and equity, of such high transaction costs,
and what do you believe should be done, if anything, to reduce
these transaction costs?
A.3. Both banks and nonbanks in the United States currently
provide cross-border money transfer services to residents of
the United States. These services include traditional
electronic wire transfers between a U.S. bank and its overseas
correspondent using telecommunications networks such as SWIFT;
electronic money transfer services provided by nonbanks such as
MoneyGram or Western Union; ATM withdrawals overseas using
international EFT networks to debit the cardholders' U.S. bank
accounts; and other emerging networks.
The fees associated with cross-border money transfers may
include charges for initiating the transfer itself, charges to
convert U.S. dollars to a foreign currency, and possibly fees
for the receipt of funds by beneficiaries. Fees may also vary
based on the service provider and service selected, the point
of origin, the point of destination, the amount of money being
sent, and the method of funding the payment. Additional charges
also may be imposed on beneficiaries by the receiving bank for
delivery of funds. Charges will vary depending on the amount of
manual work required by the bank as some wire transfers can
involve significant, labor intensive handling costs for banks.
In the cross-border context, bank charges for both consumer and
corporate wire transfers tend to be higher than the fees
charged by nonbank money transmitters due to lower volumes of
activity, additional handling costs, and correspondent banking
fees.
The Federal Reserve Board has been working to explore
further whether general improvements could be made in handling
cross-border funds transfers using the automated clearing house
(ACH), which is a system through which many U.S. consumers
receive electronic payroll deposits and Government benefits.
The Federal Reserve will launch in July a service for sending
cross-border payments to Canada through the ACH and, then later
this year, will be investigating the feasibility of cross-
border ACH payments with Mexico and other countries. In
addition, the National Automated Clearing House Association
(NACHA), through its Cross-Border Council, is working on a
global effort to improve cross-border ACH payments, known as
WATCH (Worldwide Automated Transaction Clearing House).
The Federal Reserve has also discussed the issue of the
cost, timing, and transparency of cross-border transfers with
other central banks, most recently through the G-10 central
banks' Committee on Payment and Settlement Systems. The
European Central Bank, for example, is carefully monitoring
this issue in the European context and has adopted policies to
encourage greater private-sector efficiency in cross-border
retail transfers within Europe in advance of the introduction
of Euro notes and coins in 2002.
In general, consumers can choose from a variety of
competing alternatives for making cross-border money transfers,
including traditional bank wire transfer, nonbank money
transmitters, international ATM/EFT networks, and other
emerging electronic payment transfer services, as well as non-
electronic methods such as checks and money orders.\1\ Several
of the cross-border remittance services available to consumers
appear to be accessible, easy to use, and provide for rapid and
efficient transfer services. As a result of increasing
competition, fees for making cross-border consumer transfers
also appear to be decreasing, although costs still vary
significantly across companies and countries.\2\ Looking ahead,
the projected strong growth of overseas remittances is likely
to continue to increase competition and the number of
alternatives for making cross-border transfers.
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\1\ Examples of emerging networks are the International Remittance
Network (IRnet) of the World Council of Credit Unions, the City
National Bank of New Jersey/Fonkoze system, and RapidMoney.
\2\ Manuel Orozco, ``Family Remittances to Latin America: The
Marketplace and Its Changing Dynamics,'' InterAmerican Dialogue,
Washington, DC, May 2001.
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Both technological change and increasing market demand for
remittance services should have the effect of increasing
competition and lowering fees. The Federal Reserve, therefore,
sees no need for new legislation in this area at this time.
Particularly in the cross-border cases, it would be all too
easy for institutions to adjust to additional regulatory
burdens by reducing cross-border services and raising exchange
and other implicit charges to the disadvantage of U.S.
residents. Instead, policies should aim to encourage
competition and new alternatives commensurate with growing
market demand.
Consolidation
Q.4.a. Why have we not seen more mergers between banks and
insurers after passage of the Financial Services Modernization
Act? Are you surprised that there have not been more mergers in
the financial services sector since the passage of this bill
and do you expect an acceleration of this pace over the next
few years?
A.4.a. The provisions of the Financial Services Modernization
Act allowing broader financial powers and affiliations for
financial holding companies (FHC's) have been effective for
only a little more than 1 year. During that time, more than 500
bank holding companies have elected FHC status. While there
have been a few affiliations between these banking
organizations and insurers during the past year, many companies
have chosen FHC status under the Act in order to be able to
engage in general insurance agency activities, which, prior to
passage of the Act, were severely limited. This use of the
broader powers achieves one of the primary purposes of the Act,
which is to increase competition in the provision of financial
services and allow more efficient delivery of a broad range of
financial products and services to customers.
The decision to merge with another company is a complex
management decision that ultimately must be made by each
company based on its own consideration of the business
advantages and costs of the affiliation. Many companies appear
to be still evaluating whether the affiliations enabled by the
Act will enhance their business plan and build on their core
skills. Beginning insurance agency activities while considering
affiliation with an insurer represents a cautious approach that
seems to reflect a testing by the banking industry of the costs
and benefits of conducting full insurance activities. As
companies become more familiar and more comfortable with the
risks of these new activities, it is possible that broader
affiliations will become more prevalent. In this regard, there
are a number of added complexities resulting from the
multistate regulatory regime applicable to insurance
underwriting.
It is also noteworthy that many insurance underwriters are
in mutual form or in the process of demutualizing. Acquisitions
involving mutual companies are very complex and the constraints
inherent in the mutual form typically limit the number and size
of potential partners.
There has been more affiliation activity between the
banking and securities industries. Five of the 10 largest and
11 of the 20 largest securities broker-dealers are affiliated
with banks. And with the passage of the Financial Services
Modernization Act, these securities firms are permitted to
engage in full securities underwriting, dealing and brokerage
activities without the revenue and other constraints previously
applied under the Glass-Steagall Act to securities firms
affiliated with banks.
Q.4.b. You have argued that consolidation in the financial
services sector has not caused significant efficiency gains or
losses. Specifically, you have stated that overall operating
efficiency gains from consolidation are weak. If there are
limited operating efficiencies to be gained by consolidation,
what are the benefits and the potential risks of consolidation?
A.4.b. Studies that examine the effects of mergers and
acquisitions (M&A's) on the operating efficiency of financial
services providers have generally found these effects to be
quite weak. At the same time, a desire to improve efficiency is
one of the most frequently cited motives for consolidation.
These seemingly contradictory findings may reflect the
differences between the past and the present, between average
experiences and individual firms' experiences, between expected
outcomes and realized outcomes, or between measured accounting
costs and economic costs.
Most of the studies that find little or no evidence of
efficiency gains associated with M&A's in the financial
services sector predate the most recent wave of financial
consolidation. Financial consolidation in the future may be
quite different from that which has taken place in the past,
because of the effects of the Financial Services Modernization
Act. Thus, even if the types of M&A's that were permissible
prior to 1999 did not result in any significant efficiency
gains, future transactions could produce substantial gains as
firms take advantage of economies of scope that were not
previously available to them.
Even if mergers and acquisitions do not lead to significant
improvements in operating efficiency, there may be other
potential benefits associated with these transactions.
Consolidation, for example, can lead to a reduction in firm
risk through geographic or product diversification. M&A's also
may allow firms to increase their size and /or scope quickly,
which may enable them to better serve the needs of their
customers. At the retail level, however, there is some evidence
of loss of customers to smaller rivals in the early post-merger
years.
Ultimately, it is the responsibility of shareholders to
determine whether the potential and resultant benefits of
consolidation are real or imaginary. The regulators are
responsible for monitoring and managing potential social and
economic risks. One risk is that consolidation could lead to
increased monopoly power, resulting in harm to consumers of
financial services. Bank regulators and the Department of
Justice examine the competitive effects of proposed bank
mergers and acquisitions, requiring divestitures as needed, in
order to minimize this risk. Consolidation could also result in
the formation of financial institutions that are so large and
complex that if they became troubled they might pose a risk to
the safety and soundness of the entire banking system. Bank
regulators review proposed bank mergers and acquisitions for
their effects of the safety and soundness of the firms involved
and monitor the financial condition of banking organizations.
However, the regulators do not have the authority to reject a
merger or acquisition that meets both competitive and safety
and soundness standards just because of the scale of the
resulting organization.
General Economics / Budget / Tax Cut
Q.5. In your opinion, what is the impact of fiscal policy on
long-term interest rates? Specifically, if we return to the era
of deficit spending, what will be the result on interest rates,
private investment, and employment? What consequences will the
tax cut have for the Fed's conduct of monetary policy?
A.5. Fiscal policy, the associated stance of the Federal
Government in credit markets, and the effect of fiscal policy
on national saving can have a significant effect on interest
rates and the volume of credit available to households and
businesses. The decline of the deficit and emergence of budget
surpluses in the 1990's very likely relieved pressures on
financial markets and freed up savings to be used by households
to finance new houses, autos, and other durable goods and by
businesses to acquire capital equipment. A reemergence of large
and of persistent Federal budget deficits would be likely to
keep interest rates higher than they otherwise would be,
constrain the build-up of the capital stock, and hence impinge
on increases in productivity.
The Federal Reserve does not respond directly to tax cuts,
or fiscal policy in general. Our goal is to maintain, as best
we can, a growth rate in aggregate demand that matches the
economy's ability to increase aggregate supply. Many factors,
including developments with respect to fiscal policy, can
potentially influence aggregate demand and should be factored
into our judgment about the likely course of the economy.
The Effect of Productivity on Long-Term
Economic Projections
Q.6. I have been told that productivity gains as little as one-
tenth of 1 percent below the projected 10 year rate would
result in a reduction of CBO's projected surplus by $250
billion over the 10 year period. Thus, you can imagine my
concern when it was reported that productivity fell by -1.2
percent in the first quarter of 2001. What are the implications
of this with respect to the CBO budget surplus projections?
A.6. The drop in nonfarm business sector output per hour in the
first quarter of 2001 that was reported recently by the Bureau
of Labor Statistics, comes on the heels of gains averaging
nearly 3 percent (annual rate) over the preceding 5 years. The
first quarter decline reflected a 1 percent rate of increase in
output for the sector that was more than matched by a 2.2
percent rate of increase in hours worked. It should be noted
that the rise in hours worked last quarter reflected, in part,
a surge in the volatile component for self-employed workers
(about 15 percent at an annual rate) that clearly is not
sustainable; excluding the hours of self-employed workers
(about 10 percent of the total), productivity was about flat in
the first quarter. In any event, a step down in productivity
growth is quite common when output growth slows, as it has
since the middle of last year.
The pattern of productivity performance in the second half
of 2000 suggests that the underlying, or structural, rate of
productivity growth is still quite robust. Strong growth of
structural productivity would also be consistent with the
anecdotal reports from business leaders, who still see a
sizable untapped reservoir of potential efficiency gains to be
had from recent advances in information technology. In that
context, it is worth noting that survey results from the
National Association of Purchasing Management indicate that
most firms feel they are far from fully achieving the potential
efficiencies that could ultimately be gained from applying
technology to their supply chain management.
I am cautiously optimistic that the rate of structural
productivity growth will be reasonably well maintained, and, if
it is, the drop in measured output per hour in the first
quarter will not have significant implications for CBO's long-
run budget outlook.
Distributive Effects of the Economic Expansion
(and Slowdown)
Q.7. I am pleased to note that the current expansion has
benefited people who have traditionally been left out, such as
minorities, women, and youth. In May of 1992, the unemployment
rate for African-Americans was 14.7 percent, today it is down
to 8.0 percent; the rate for those between 16 and 19 years of
age was 20.1 percent, now it is 13.6 percent; and the
unemployment rate for women has fallen from 7.1 percent to 4.3
percent. Do you believe that these groups will be the first to
suffer and feel the effects from the economic slowdown the
hardest?
A.7. As you indicate, the current economic expansion has
benefited all segments of the population, including minorities,
women, and youth. Indeed, in 2000, the unemployment rates for
African-Americans and Hispanics were at the lowest levels since
unemployment statistics for these minority groups were first
collected in the early 1970's. Similarly, the average
unemployment rates last year for women and teenagers were the
lowest seen since the 1950's. For women, the unemployment rate
in 2000 was roughly the same as for men. For each of the other
groups, however, unemployment rates continue to run well above
the unemployment rate for the U.S. workforce as a whole, with
the differential in 2000 ranging from 1\3/4\ percentage points
for Hispanics to 3\1/2\ percentage points for African-Americans
and 9 percentage points for teenagers.
Moreover, it unfortunately seems to be the case that
minority and youth unemployment rates tend to be more sensitive
to cyclical changes in the economy than unemployment in
general. Economists point to a variety of reasons for this
disparity, including lower average levels of education and work
experience for these groups, as well as differences in the
geographic proximity of jobs to different segments of the
population. Indeed, in the current situation, it does appear
that unemployment rates for minorities and teenagers have moved
up a bit more quickly than for white non-Hispanics, although it
is difficult to get a clear picture of the relative changes in
unemployment rates since the beginning of this year because of
the sampling variability in the monthly statistics published by
the Bureau of Labor Statistics. In particular, comparing the
latest 2 month average for April and May of this year with the
fourth quarter of last year, the unemployment rate has risen a
bit less than 2 percentage point for white non-Hispanics, and
between 2 and 1 percentage point for African-Americans,
Hispanics, and teenagers.
RESPONSE TO QUESTIONS OF EIGHT MEMBERS OF THE
HOUSE OF REPRESENTATIVES IN A LETTER DATED JUNE 12
FROM ROGER W. FERGUSON, JR.
Concerning Diversity in the Federal Reserve System
Questions are numbered according to their sequence in the
letter.
Q.1.a. What has the Federal Reserve Board done in the past 8
years to address this problem? If no formal program or policy
is in place now, do you plan to implement one? When?
A.1.a. Even before the 1993 Report, the Federal Reserve Board
had programs in place to address diversity issues in the
workplace. Since the Report, the Board has taken a number of
concrete steps to strengthen our EEO and employment-diversity
programs and policies including:
Instituting biannual EEO briefings to the Board.
Holding officers, managers, and supervisors
responsible through an EEO component in performance
objectives.
Providing senior management with information on EEO
trends in each division during quarterly meetings.
Conducting diversity training for all Board employees.
Officers, managers, and supervisors also receive mandatory
EEO training.
Expanding outreach programs to both inform minorities
about the Federal Reserve and to build a diverse pool of
candidates for positions.
Reviewing our EEO and employment practices and
evaluating our programs against other public- and private-
sector programs.
As to recent appointments, during my tenure the Board has
appointed 10 division /office directors (the Board has 14
division /office directors, and those staff positions are the
most senior at the Board). Five of these 10 director appointees
are women, including 1 African-American and 1 Hispanic. In
addition, we appointed 38 other officers, of whom 19 are women
and 6 are minorities.
I am personally committed to achieving as diverse a
workforce as possible, recognizing that the Board faces
challenges in reaching that goal. Due to the highly technical
nature of most of our professional positions--economist,
financial analyst, computer specialist, and attorney--the Board
is often in competition with the private sector for the most
highly qualified job candidates. Because of salary constraints,
the Board is often at a competitive disadvantage. In spite of
the challenges the Board faces in realizing our aspirations,
the representation of women and minorities in our officer
positions is roughly comparable to that for other Federal
Government agencies. We will continue our efforts to attract
the most qualified and diverse staff possible.
Q.1.b. Does the Federal Reserve continually evaluate the
diversity representation of its workforce, particularly in
professional and /or technical positions? If so, who is
responsible for such an evaluation and to whom does he /she
report the results?
A.1.b. The EEO Programs Office, under the guidance of the EEO
Programs Director, continually evaluates the Board's workforce.
The results are discussed with directors or senior staff
members during quarterly meetings.
The EEO Programs Director briefs the Board twice a year on
EEO matters and briefs the Committee on Board Affairs (which I
Chair) and the Senior Management Council (which consists of the
Directors of the Boards divisions and offices) as appropriate
on such matters.
Q.1.c. What are the current diversity statistics for the
Federal Reserve System?
A.1.c. See the following Table.
For data on Federal Reserve System Officers, please see
Table 2, in the answer to question 2.c.
Q.1.d. Where and how does the Federal Reserve recruit
minorities and women for senior officer level positions?
A.1.d. Board official staff positions are generally filled
internally, although for the most senior staff positions we
also consider external candidates. These individuals have
generally come from within the Board from grades 29 and 28, the
highest staff grade levels. Ongoing efforts attempt to increase
the diversity of the pool of candidates to be appointed to the
official staff.
Q.1.e. Does the Federal Reserve evaluate its methods of
promoting minorities and women, and if so, what have you found?
A.1.e. The Board monitors the results of its promotions with
regard to women and minorities. Progress has been made at the
division director and officer levels. As previously mentioned,
during my tenure on the Board, 10 division /office directors
have been appointed, of whom 5 are women, including 1 African-
American and 1 Hispanic. I believe this is a positive step.
Q.2.a. To your knowledge, have any of the Report's
recommendations been implemented? Why or why not?
A.2.a. In response to the Report, the Board strengthened its
existing program in the following ways:
The EEO evaluation for Federal Reserve Banks was
changed to require EEO performance reports by the Banks
(which are evaluated by the Board).
Annual meetings are held at each Reserve Bank with
executive Bank staff and Board staff to discuss the
evaluation of EEO performance.
All Federal Reserve Banks have EEO officers reporting
directly to the Bank's first vice president or president.
A conference is held annually at the Board for the
Federal Reserve Bank EEO officers to address EEO
performance evaluations and issues of common concern.
Campus recruitment by the Board for professional and for
intern positions has been expanded at predominately minority
colleges and universities. We also recruit more extensively at
minority professional organizations and diversity job fairs.
The Board also advertises in minority publications such as the
Black Collegiate and the HISPANIC magazine and on numerous
diversity employment Internet sites.
Among the schools and associations at which we conduct
recruitment and outreach activities are Howard University,
Morehouse, Tuskegee, Florida A&M, University of Miami, Spelman,
Clark- Atlanta, Xavier, Dillard, Southern at Baton Rouge,
Florida International University, University of New Mexico,
University of Texas, Hispanic Association of Colleges and
Universities, National Black and Hispanic MBA Associations,
National Association of Urban Bankers, Society of Hispanic
Engineers, and Society of Mexican American Engineers and
Scientists.
In conjunction with the Board's summer intern program,
minority candidates are solicited from INROADS and the Hispanic
Association of Colleges and Universities.
Q.2.b. Does the Federal Reserve Board have a diversity
recruitment, retention, and promotion strategy? If so, how do
you explain the decreasing numbers of professional and
technical positions held by Hispanics and Native Americans
between 1990 and 2000?
A.2.b. Between 1990 and 2000, Hispanic representation in the
professional and technical categories has increased slightly.
Native American representation in professional categories has
also increased slightly. The Board is continually reviewing
recruitment, retention, and promotion to assess which
initiatives are succeeding and where improvement is needed.
Moreover, the Board reviews the EEO practices of other
Government and private organizations to obtain ideas for
enhancing its programs.
Q.2.c. Should a follow-up investigation or study be conducted
to investigate why women and minorities remain significantly
underrepresented at the highest levels of the Federal Reserve
and the Federal Reserve Banks, and are almost completely
excluded from high salaries and promotions to senior level
positions at the Federal Reserve?
A.2.c. We do not believe that any group is ``almost completely
excluded from high salaries and promotions.'' Since 1992, the
Board and the Federal Reserve Banks have made progress in
developing and in promoting women and minorities to senior-
level positions and the Federal Reserve is committed to
continue doing so (see the following Table).
Q.3.a. Has that recommendation been implemented?
A.3.a. Yes. The Board continues to enhance its college
recruitment activities. We have made efforts such as hosting
guest speakers; working with deans of economic, computer
science, math, and graduate programs; and participating in
college fairs. The Board has sponsored a Symposium for
Historical Black Colleges and Hispanic Association of Colleges
and Universities. The agenda for the symposiums included
presentations by the Board's economic divisions to make
participants aware of employment opportunities at the central
bank. See the answer to question 2.a. for a more detailed
discussion of our minority recruitment and outreach activities.
Q.3.b. If so, how long has the Federal Reserve Board had this
program in place and how effective has it been in recruiting
and in retaining minorities?
A.3.b. The Federal Reserve Board had such programs in place
before 1993, and since then it has enhanced them. As a result
of these programs, minorities are well represented among summer
interns, but our programs aimed at recruiting minorities for
full-time positions have had limited success to date. The
success in recruiting summer interns is significant because
summer interns are a source of applicants for full-time
positions. We will continue to pursue these programs. I
recognize from my personal experience and observation that it
will likely be a multiyear effort before we see results.
The Board also recruits qualified minority candidates
through advertising, referrals, unsolicited resumes, general
college recruiting, web sites, and other recruitment
techniques.
Q.4.a. How can the Federal Reserve be a credible ``cop'' if its
own practices of recruiting and promoting women and minorities
into top positions at the Federal Reserve are suspect?
A.4.a. I do not believe that our practices are suspect, and I
am personally committed to ensuring that all employees of the
Board are fairly treated in all aspects of their employment.
The Board has credible recruitment and promotion practices, and
we constantly review them to determine how they can be
improved.
Q.4.b. I have heard rumors of a hostile work environment and of
intentional discrimination in the hiring and promotion of
minorities at the Federal Reserve. To your knowledge, is the
work environment at the Federal Reserve hostile and if so, what
steps have you taken to address these problems?
A.4.b. I do not believe we have a hostile work environment at
the Federal Reserve Board. We would not tolerate it, and we
have strong policies with which to address violations. Should
any indications of a hostile work environment come to my
attention, I would consult with experts, both internally and
externally, to determine the best course of action, and I would
expect the Board to implement fully measures to respond to such
allegations. I am strongly opposed to a hostile work
environment. I believe that all Federal Reserve employees
should be allowed to contribute fully to our mission, and they
are expected to do so.
NOMINATIONS OF:
ANGELA M. ANTONELLI, OF VIRGINIA
TO BE CHIEF FINANCIAL OFFICER
U.S. DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
RONALD A. ROSENFELD, OF OKLAHOMA
TO BE PRESIDENT, GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION (GINNIE MAE)
U.S. DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
AND
JENNIFER L. DORN, OF NEBRASKA
TO BE FEDERAL TRANSIT ADMINISTRATOR
U.S. DEPARTMENT OF TRANSPORTATION
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THURSDAY, JUNE 21, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538 of the Dirksen
Senate Office Building, Senator Paul S. Sarbanes (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. I call our Committee hearing to order.
We just finished a vote, so we were delayed a little bit.
We will now move ahead.
This morning, the Senate Committee on Banking, Housing, and
Urban Affairs will be considering three nominations, the
nominations of Angela Antonelli, to be the Chief Financial
Officer of HUD, Ronald Rosenfeld, to be President of Ginnie
Mae, and Jennifer Dorn, to be the Federal Transit
Administrator.
We will consider the nominees in two panels. On the first
panel, we will take the HUD nominees, Ms. Antonelli and Mr.
Rosenfeld. And on the second panel, we will consider Jennifer
Dorn to be the Federal Transit Administrator.
I want to welcome these nominees. We are pleased they are
able to appear before us today. We understand the importance to
the Administration of filling its top positions. This Committee
has sought to move promptly on nominations as they are sent to
us.
Often, the President announces an intent to nominate. There
seems to be something of an assumption, then, by the press and
the public that the nomination is before the Senate. But that
is not the case. The nomination is not before us until we
actually get the papers completed and that, regrettably, often
seems to take quite a period of time.
Ms. Antonelli, nominated to be HUD's CFO, is the Director
of The Thomas A. Roe Institute for Economic Policy Studies of
The Heritage Foundation, where she has been overseeing the
Foundation's research on budget, tax, regulatory, labor,
technology, and environmental policy, a rather extensive brief,
if I may say so.
She has worked at the General Accounting Office, as well as
worked 3 years for the Office of Management and Budget.
Ms. Antonelli is a Phi Beta Kappa graduate from Cornell
University and received a Master's in Public Administration
from Princeton University, my alma mater, I might note.
The old school tie, I guess, here, Ms. Antonelli, so to
speak.
[Laughter.]
Ronald Rosenfeld, nominated to be President of Ginnie Mae,
has spent much of his career on housing and real estate issues,
as a private developer and in HUD's Office of Housing. Most
recently, he was Secretary of Commerce for the State of
Oklahoma. He too has an impressive educational background,
having graduated with a degree in economics from the University
of Pennsylvania and a law degree from Harvard, also an alma
mater of mine.
We are covering all the bases here today.
[Laughter.]
Mr. Rosenfeld and Ms. Antonelli will be working on issues
that will be of great importance. Housing and urban affairs are
issues that I hope to explore further in this Committee. It is
critical that HUD have the needed resources and staffing,
including qualified people, to head the offices of HUD. Both
the CFO of HUD and the President of Ginnie Mae play very
important roles in housing low-income Americans.
The President of Ginnie Mae directs and provides oversight
for all of Ginnie Mae's activities. Ginnie Mae guarantees more
than $1\1/2\ trillion in mortgage-backed securities and has
securitized 95 percent of all FHA and VA mortgages.
The Chief Financial Officer of HUD is responsible for
overseeing a budget of over $30 billion and the performance of
an agency that works on issues ranging from public housing to
homelessness to community revitalization. In order to
effectively serve people in need, HUD obviously must have
adequate financial systems, as well as resources.
As CFO, Ms. Antonelli, I hope you will work to ensure that
HUD has the resources it needs to run its programs.
We have expressed some disappointment in this year's HUD
budget and hope that HUD fights for additional resources next
year, and I am sure we will be communicating with the Secretary
and the Department about those issues.
We have Senators here to introduce the nominees and I am
going to turn to them.
Senator Nickles, we will turn to you to introduce Mr.
Rosenfeld and then we will turn to Senator Allen to introduce
Ms. Antonelli.
STATEMENT OF SENATOR DON NICKLES
Senator Nickles. Mr. Chairman, thank you very much.
I am delighted to be with you and Senator Stabenow to
introduce to the Committee my friend, Ron Rosenfeld, for the
position to be President of Ginnie Mae.
I have had the pleasure of knowing Ron Rosenfeld and his
wife Patty for the last 10 years. I got to know him when he
worked in the Bush Administration at the Department of Housing.
He worked in that capacity and two or three different
capacities, as well as the Department of Treasury. He did an
outstanding job in that Administration.
Then I had the pleasure of getting to know Ron even better
when for the last few years he served as Secretary of Commerce
for my State, the State of Oklahoma, and did a fantastic job
for Governor Keating and did a fantastic job for our State.
As you mentioned, he has enormous experience in real estate
and finance. He has the background, the expertise, and the
talent to do an outstanding job as the President of Ginnie Mae.
I would urge the Committee to move expeditiously on his
nomination. I thank you for his consideration and I think he
will be a real complement, not only to the Bush Administration,
but, frankly, to the country as well.
Chairman Sarbanes. Thank you very much, Senator Nickles,
for those kind words.
I must say that one of the things that leaped out as I
reviewed Mr. Rosenfeld's biography is how he ended up in
Oklahoma. But we will put that question to him.
[Laughter.]
Senator Nickles. That was our gain.
Chairman Sarbanes. Senator Allen.
STATEMENT OF GEORGE ALLEN
A U.S. SENATOR FROM THE STATE OF VIRGINIA
Senator Allen. Thank you, Mr. Chairman.
I appreciate your leadership in having this hearing. It is
good to see Senator Stabenow as well.
It is my pleasure to introduce to you a resident of the
Commonwealth of Virginia, Angela Antonelli, as you stated
earlier, who has been nominated to be the CFO, Chief Financial
Officer, for the U.S. Department of Housing and Urban
Development.
Angela has a distinguished record of public service and
background in financial policy and management. You mentioned
her education. She obviously had a good education and made the
right decision by moving to the Commonwealth of Virginia in
Fairfax. So, I guess the Princeton education, Cornell
education, do make sure that those students learn the good
places to live and we are glad she chose Virginia.
In the business of HUD, being a CFO, one would look for
someone's background and where their experience is in the
private sector, as well as in the Government sector. And having
worked at the OMB in the first Bush Presidency, I think will be
very helpful. The fact that she worked for Lewin-VHI, Inc.,
which is a well respected independent analysis group, as a
senior consultant, matters.
Angela has worked as a Presidential Management Intern
within the GAO and obviously also with the Department of Labor,
for the U.S. Senate Committee on Labor and Human Resources, and
the Department of Education in New Jersey. Recently, in the
last 5 or 6 years, she served as the Director for The Thomas A.
Roe Institute for Economic Policy Studies at The Heritage
Foundation.
She has the qualifications, I submit, Mr. Chairman and
Members of the Committee, to handle the task, which is a very
important task--the responsibility for the development of the
Department's budget, a $30 billion budget, financial
management, the presentation of accurate financial information,
management integrity, so that when appropriations are being
made, we understand that there is credibility to that and
whatever resources are appropriated are handled in a way that
is strategically meeting their plans, but also serving the
customers, the citizens.
Secretary Martinez has made it his number one priority to
get HUD's house in order. And clearly, the CFO of HUD will be a
leading role-player in addressing the weaknesses of the agency
that have been identified by the General Accounting Office, as
well as HUD's own Inspector General.
So, Mr. Chairman and Members of the Committee, it is my
sincere pleasure to present to you, and support the nomination
of an individual with integrity, character, and capabilities
that will serve as CFO of HUD. And Angela Antonelli surely does
have the experience and the capabilities of getting HUD's house
in order.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Allen. It
is very helpful to the Committee to have your comments before
us. I know you have a busy schedule and we will certainly
excuse you.
Now, I see Senator Wyden here. We are going to take Ms.
Dorn on the second panel. But Ron, you may want to come forward
and just introduce her right now. Our memories are long enough
that we will remember it when she comes up on the second panel.
STATEMENT OF RON WYDEN
A U.S. SENATOR FROM THE STATE OF OREGON
Senator Wyden. Mr. Chairman, thank you very much for your
thoughtfulness and I will try to enhance Ms. Dorn's candidacy
with brevity here.
First, I think that we all remember with great fondness
Senator Mark Hatfield. That is where I met Jenna Dorn. She was
on Senator Hatfield's staff for more than 5 years. And to get a
sense of her appreciation of humor, she just reminded me that
the first 3 years really did not count because she was too
green to know what she was doing.
Chairman Sarbanes. I thought everyone in Oregon was green.
[Laughter.]
Senator Wyden. We are. Nicely put. Nicely put.
[Laughter.]
But she brings great savvy and expertise to her candidacy
to head the Federal Transit Administration. In addition to
working with Senator Hatfield, she was in the Executive Branch.
She was also with the Red Cross.
What I like about Jenna so much is that she just embodies
the approach that you and I and so many have tried to have, and
that is that she is a problem-solver. She is not an ideologue.
She is somebody who gets people together of disparate views and
solves problems. And I think we all know how important
infrastructure issues are.
Jenna has been a long-time supporter of our pioneering
efforts in Oregon with what we call the Banfield Light Rail. I
think that she understands the needs of rural communities, as
well as urban communities.
I would just wrap up by saying that rarely do I think
somebody is as well qualified as Jenna Dorn for a position like
this. You see it in her breadth of experience, in her ability
to work with people, and I am very hopeful that you and our
colleagues on the Committee will report her out expeditiously.
Chairman Sarbanes. Thank you very much. We appreciate it.
Senator Wyden. Thank you.
Chairman Sarbanes. We have been joined by Senator Stabenow
and Senator Carper. I would yield to them if they have an
opening statement that they would like to make.
COMMENTS OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman.
I would only say that I appreciate your holding this
hearing and I want to thank you for your leadership in moving
ahead on important nominations to fill vacancies. I think it is
a real credit to you and your leadership that we have started
the new Committee as quickly as possible. I want to thank you
for your leadership in doing that and welcome the nominees and
I look forward to hearing from them.
Chairman Sarbanes. Senator Carper.
COMMENTS OF SENATOR THOMAS R. CARPER
Senator Carper. I would only add to that, welcome to the
families of the nominees, some of whom are obviously gathered
here today. It is a day of family pride, I am sure, and we are
anxious to begin their confirmation hearing. We welcome you all
warmly to the hearing.
I just want to say to those in the room who might have
actually been part of raising or steering the people who are
the nominees before us today, thank you for embedding in them
the kind of values that would lead to public service. And to
those of you who have gone through the process of filling out
all the disclosure forms that have enabled you to sit at this
table today, a special thank you.
I like to say for people who go through this process, just
to go through the disclosures alone, for you no purgatory.
Straight to heaven. So thank you. Welcome.
[Laughter.]
Chairman Sarbanes. I want to just comment on something that
Senator Stabenow said.
We have been moving ahead with the hearings on the nominees
because we are anxious to help the Administration put its
people into place. But the Committee has not yet been fully and
properly constituted, I regret to say. There has been a hang-up
on the floor in clearing the resolution.
So, we are not going to be able to move to the next step,
which would be the actual business of reporting out the
nominees and then getting them out to the Senate floor until
that is resolved. But we are obviously keeping a close eye on
that and we are trying to line things up as best we can.
We had originally hoped to markup Mr. Ferguson yesterday,
for the Federal Reserve Board. In fact, I announced the
previous week we were going to do that. That was on the
assumption that the Committee would be fully and properly
constituted by that time. That did not occur. So, we had to put
that over. Hopefully, that will happen in the near future and
we will then move ahead with these various nominees that are
pending from the Administration.
I would like to say to the nominees, it is a standard
procedure of this Committee at the nomination hearings to swear
in the nominees. Therefore, I would like to ask you both to
stand and I will proceed to do that now.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Ms. Antonelli. I do.
Mr. Rosenfeld. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Ms. Antonelli. Yes.
Mr. Rosenfeld. Yes.
Chairman Sarbanes. Thank you very much.
Ms. Antonelli, we always give preference to the Chief
Financial Officers. So why don't we hear from you first, and
then we will go to Mr. Rosenfeld. We will hear their opening
statements, and then we will go to the questions.
STATEMENT OF ANGELA M. ANTONELLI, OF VIRGINIA
TO BE CHIEF FINANCIAL OFFICER
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Ms. Antonelli. Thank you very much.
Chairman Sarbanes. And if either of you has family here and
want to introduce them, we certainly invite you to do so.
Ms. Antonelli. Chairman Sarbanes, distinguished Members of
the Committee, my name is Angela Antonelli and I would like to
thank you for inviting me to appear before you today.
I would also like to thank Senator Allen for his time and
his kind words of introduction.
I am truly humbled and honored to be the choice of
President Bush and Secretary Mel Martinez to serve as the Chief
Financial Officer for the U.S. Department of Housing and Urban
Development. If confirmed, I look forward to being part of the
outstanding team at HUD that will work with you and your staffs
to address the housing and economic development needs in our
Nation's communities.
As the daughter of Italian immigrants, I cannot fully
convey to you what it means for me to be here today. A day like
today fills me with gratitude and love for this country and the
freedom and opportunity that it provides. But you cannot begin
to imagine what it means to my mother, Anna Savini, who is here
with me today.
She is sitting right behind me.
To her, I am the reason she came to the United States and
sacrificed so much and started all over. Also, my husband
Michael, who is also sitting behind me, is here with me today.
When I told her I was asked by the President to serve, she
simply said, ``It is the Dream.'' If you are born poor, you do
not have to remain poor; your life's work preordained. No, in
the United States--a land where freedom and opportunity
flourish--you can dream and through hard work and strength of
character achieve those dreams. My career in public service is
based on a sincere desire to make sure that future generations
always see the United States as a land where freedom and
opportunity flourish and dreams for a better life can come
true.
An important part of the American Dream is a home to call
your own and a community of caring people of which you can be a
part. I look forward to being a part of HUD's mission to
preserve the Dream--to empower communities and their residents
to improve themselves by reducing homelessness, creating
opportunities for homeownership, and encouraging economic
development.
As Secretary Martinez has stated repeatedly, the first
priority will be to put HUD's own house in order. The CFO has
responsibility for the development of the Department's budget
and for financial management, the presentation of accurate
financial information, management integrity and departmental
strategic planning. If confirmed as CFO, I intend to work
closely with my colleagues at HUD to address the institutional
weaknesses identified by the U.S. General Accounting Office and
HUD's Inspector General. These weaknesses diminish the ability
of the Department to achieve its mission.
To the position of Chief Financial Officer, I bring 15
years of policy, budget and management experience. I have
worked with and for many of the organizations I will be working
closely with to carry out my responsibilities as CFO, including
Congress, the GAO and the Office of Management and Budget. I
will be able to bring my experiences working for the Federal
Government and State government, as well as the private and
nonprofit sectors, to contribute to the effective management
and leadership of HUD.
Congress and the public are aware of the problems that have
plagued HUD. Although GAO has removed the Department as a whole
from its ``high-risk'' list, there are still many activities
that remain at risk. Under the leadership of Secretary Mel
Martinez, I look forward to working with Congress in a
bipartisan manner to address these issues, restore credibility,
and do a better job with the tax dollars that hard-working
Americans trust to us.
I am deeply grateful for the confidence President Bush and
Secretary Martinez have placed in me. I take the
responsibilities and the challenges ahead very seriously.
Mr. Chairman and Members of the Committee, thank you for
your consideration of my nomination and the opportunity to
appear before you today. I would be pleased to answer any
questions that you may have.
Thank you very much.
Chairman Sarbanes. Thank you very much, Ms. Antonelli.
Mr. Rosenfeld.
STATEMENT OF RONALD A. ROSENFELD, OF OKLAHOMA
TO BE PRESIDENT, GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION (GINNIE MAE)
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Rosenfeld. Mr. Chairman, first, I would like to
introduce my wife Patty, who is sitting right behind me. Patty,
would you stand up, please?
I would also like to thank Senator Nickles for his kind
words of introduction.
Mr. Chairman and distinguished Members of the Committee,
thank you for the opportunity to appear before you today. I
would also like to express my deep appreciation to President
George W. Bush for his confidence in me, as evidenced by his
nominating me to be the President of Ginnie Mae, the Government
National Mortgage Association. In addition, I would like to
indicate my gratitude to Secretary Mel Martinez for selecting
me to serve in a strategic position on his team.
Upon learning of the President's intent to nominate me, I
called my father, who is 92 years old, to share the good news.
His response was, ``Not bad for an immigrant's son.'' If the
truth be known, he was an illegal immigrant who managed to
elude our immigration officers for a few years, but was
ultimately caught and deported. His incredible good fortune was
that he was deported to Canada rather than to Eastern Europe
from where he came. He subsequently met my mother, who had
legally immigrated from Eastern Europe, and they were married
in 1935. At the time of their marriage they had a net worth of
$100. The success of our family cannot be explained by
``compound interest.'' But rather, that success is attributable
to hard work, opportunity, and giving their only child the
educational opportunities they never had.
The story of my family is wonderful, but it is not unique.
With slight variations, it is the story of the Martinez family,
the Jackson family, and the Bernardi family. Each of these
family names is now preceded by the title of Secretary, Deputy
Secretary, and Assistant Secretary. These people, together with
John Weicher, Dick Hauser, and myself, if confirmed, and others
yet to be selected, will be the people to whom President George
W. Bush has entrusted the leadership of the Department of
Housing and Urban Development. Only in America!
I am honored to be chosen by President George W. Bush and
Secretary Martinez to be the President of Ginnie Mae. If I am
confirmed, I will strive with all my energies and abilities to
meet their every expectation. I am sure that like most every
other Presidential appointee who has appeared before this
distinguished body, I never dreamed of having the privilege of
serving our country in this way. But having said that, I
believe I bring to this opportunity a background and a level of
experience that is most appropriate.
Upon graduating from law school, I chose not to practice
law but rather, to become an undercapitalized homebuilder.
Actually, being undercapitalized was not a choice but just a
reality. There is simply no better way to learn about the
importance of credit than by not having it, and there is no
better way to understand the significance of the continuity of
credit than by having your customers not be able to purchase
your product.
After 15 years in the real estate development business,
which had expanded into multifamily and commercial development,
I became a partner in a regional investment banking firm. This
was my introduction to capital markets and to the world of Wall
Street.
With the backdrop of the oil bust and the savings and loan
crisis, I joined HUD in 1989, as Deputy Assistant Secretary for
Single Family Housing. This historically obscure post had the
challenge of disposing of 70,000 single-family foreclosed
houses--a daunting task in traumatic times. I then moved on to
become the General Deputy Assistant Secretary of Housing--FHA
Commissioner.
Subsequent to that, I was asked to represent the
Administration in its relations with the real estate industry
while serving at the Department of the Treasury. Throughout
this entire period, markets were not functioning and our real
estate credit system was in shambles. Fortunately, time and
prudent stewardship have a way of resolving problems and after
a few years, order was restored.
Thereafter, my wife and I went to Oklahoma to help a friend
who had just been elected governor. We intended to stay about 4
months and we actually wound up staying 4 years as a result of
the Oklahoma City bombing. After that horrific event, Governor
Keating asked if I would help him enhance the economic
viability of the State as the Secretary of Commerce. In that
capacity, I learned about the challenges of living in small
towns, rural areas, and underserved markets.
One might reasonably ask--what does that background and
those experiences have to do with Ginnie Mae? The answer is
everything. Ginnie Mae's mission is to help provide affordable
homeownership opportunities for all Americans by facilitating
efficient secondary market activities for Federally issued or
guaranteed mortgages, thus linking the capital and Federal
housing markets. In somewhat clearer terms, Ginnie Mae is about
credit, capital, and providing resources to underserved areas.
Historically, Ginnie Mae has been a very well-run
organization. As President, I will be guided by the old medical
adage, ``Do No Harm,'' as well as my own desire to do good.
Most of us in this chamber know the thrill and the significance
of owning our first home yet there are many Americans who have
not yet had that experience. They deserve a chance and it is
the role of Ginnie Mae to help make that possible.
Secretary Martinez has made it a cornerstone of his
administration to expand homeownership for low- and moderate-
income families. I believe that Ginnie Mae, together with its
partners in the private sector, as well as FHA, the Veterans
Administration, and the Rural Housing Service, can do exactly
that. I welcome the chance to be a participant in this very
worthwhile endeavor.
Thank you for your consideration.
Chairman Sarbanes. I thank both of you for very thoughtful
statements.
Senator Allard is with us and I yield to him if he wants to
make a statement at the outset before we go to questions.
COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman.
I have an opening statement I want to submit for the
record.
Chairman Sarbanes. It will certainly be included in the
record.
First of all, let me say that both of your statements
resonated with me since I am also the child of immigrant
parents. Otherwise, I am not sure that I would be entitled to
preside at this hearing here today.
[Laughter.]
Ms. Antonelli, let me put a couple of questions to you
first.
In 1998, you wrote an article--actually, you have written
quite a number of articles--in which you stated that HUD had
problems with management, waste, and abuse.
As I think you all probably know, HUD has made significant
progress in overcoming the problems of its past. In 1999, the
GAO reported that HUD had made credible progress in overhauling
its operations under the HUD 2020 Management Reform Plan
implemented by then-Secretary Cuomo. Two years later, GAO found
that HUD had continued to make progress in addressing these
problems and at that time, GAO took HUD off its list of high-
risk agencies.
One area that the GAO found marked improvements in was its
information and financial management systems. They reported:
``HUD has taken actions to improve and strengthen the
selection, control and evaluation of information technology
projects. In addition, HUD has reduced the number of financial
management systems that are not in compliance with Federal
regulations.''
In October of last year, GAO found that HUD's strategy
should help HUD continue to make progress in resolving its
remaining material weaknesses.
Now these reports do not suggest that there are not still
problems and we recognize that there are still problems. But it
does appear that HUD is on the right track in improving its
management and its systems.
As the CFO, you will oversee many of the systems that the
GAO report addressed. What is your intention with respect to
following the General Accounting Office's recommendations in
continuing with the HUD 2020 Management Reform Plan that are
helping to strengthen the Department?
Ms. Antonelli. Senator, addressing the remaining management
weaknesses that have been identified by the U.S. General
Accounting Office is a top priority for Secretary Martinez and
it is a top priority for me if confirmed as CFO.
There has been a tremendous amount of progress and I know
that in the short time that I have been meeting with the team
at HUD, there are a lot of outstanding people who have been
doing tremendous work to significantly improve the quality of
the financial systems that exist at the Department.
It is true that GAO has removed the Department as a whole
from the high-risk list. But as you know, there are still a
number of activities that remain at risk. Those material
weaknesses will again remain a high priority. We will continue
to track the recommendations of the General Accounting Office
and of HUD's Inspector General.
Again, in this Administration, and under Secretary
Martinez, it is among the highest priorities to continue to
address the remaining weaknesses.
Chairman Sarbanes. My time is running down here. I am going
to yield here in a moment to Senator Allard.
Let me put a question to you, Mr. Rosenfeld. Later, I will
come back. I have some other follow-up questions that I want to
ask Ms. Antonelli.
First, let me just note for the record your extensive
experience in the housing and finance field in general, and the
time you spent at HUD in particular. You have really held
nearly every position at the Federal Housing Administration,
aside from Commissioner--Deputy Assistant Secretary for Single
Family Housing, Acting Deputy Assistant Secretary for
Multifamily Housing, and the Acting General Deputy.
I think given the close relationship of Ginnie Mae to FHA,
this kind of intimate knowledge that you gained from your
previous service at HUD should certainly help you in carrying
forward your responsibilities in this position.
You state in your questionnaire talking about the late
1980's and early 1990's: ``During a period of significant
decline in real estate values, many private sector participants
in the mortgage business decided, quite appropriately from
their standpoint, not to continue their primary business
activity. This created a downward spiral in values and further
exacerbated the problem. During this entire period, Ginnie Mae
conducted business as usual and was a strong barricade against
even greater credit problems.''
Am I to draw from this statement belief on your part that
there is a strong role for Ginnie Mae to play in the
marketplace?
Mr. Rosenfeld. Mr. Chairman, I believe there is. I believe
that a lender of last resort is an imperative phenomenon in our
credit system. And I think that, certainly in the area of
housing, the Government housing program, as well as Ginnie Mae,
serve that role, which is very significant.
I remember as a young man not being able to believe the
stories of the Depression in terms of how values could decline.
Quite frankly, it has been an enormously educational
experience, not necessarily a pleasant one, but certainly
educational, to be a participant in the credit problems in the
late 1980's and the early 1990's. It certainly has enhanced my
belief that a lender of last resort is a critical component of
our economic system.
Chairman Sarbanes. Thank you.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I want to first recognize the statements where both of you
indicated that you came from very humble roots. I think that
speaks loads for freedom. It speaks a lot for what we have here
in America, and obviously, both of you hold that very dear. It
is good to hear that refreshing type of testimony.
Ms. Antonelli, I want to follow up a little on the material
weaknesses and internal controls that were alluded to by the
Chairman. Do you have plans to shore up some of these internal
controls?
Ms. Antonelli. Senator Allard, absolutely. At this point, I
have been briefed on a number of these issues and I am learning
about these issues. But, clearly, there are several management
challenges that the Department does continue to face. Some of
these challenges include issues relating to trying to reduce
subsidy overpayments, improve the utilization of funds, and
generally make sure that the financial systems that are in
place are complying with statutory standards that have been
established. And also, to just make sure that staff resources
are allocated effectively, not only within the Chief Financial
Officer's office, but also throughout the Department.
So, I will, again, if confirmed as CFO, be working very
closely with the senior team at HUD, as well as the outstanding
staff in the Chief Financial Officer's office to address many
of these management weaknesses that exist. And the types that I
just described are some that most directly affect the
responsibilities of the Chief Financial Officer.
Senator Allard. Congress passed the General Results and
Performance Act and I hope that you can follow wherever we
asked that we set up specific objectives within the departments
and then measure results in measurable terms. I believe you
have had some experience with that type of management approach.
Would you comment further on that?
Ms. Antonelli. The Government Performance and Results Act,
which was passed in 1993, the implementation began in 1997, and
so we are about 4 years into the implementation, I think the
concept of asking a very fundamental question about the extent
to which Federal programs are producing results and holding
them accountable for producing results is a very reasonable
thing to do.
The Department of Housing and Urban Development has a
strategic plan, like all agencies do, under the requirements of
the Act, and an annual performance plan that they issue.
This is something that again, in my role as CFO, if
confirmed, I will be reviewing the strategic plan and the
performance plan, and in the context of the budget development
process, continuing the efforts to link more closely the budget
and funding to performance and identifying effective
performance measures and ways that we can effectively measure
performance and report on that in the context of our annual
budgets.
Senator Allard. Now the General Accounting Office has found
that HUD has enormous unspent balances. More than $108 billion
remain unspent.
Ms. Antonelli. Right.
Senator Allard. Of that amount, more than $12 billion is
not even allocated. What do you plan to do to reverse this
trend?
Ms. Antonelli. Well, at this point, you are absolutely
right. The unspent balance issue is a significant one. It does
constitute a significant amount of money. Some of those unspent
balances are long-standing issues. And these are weaknesses
that have been identified by GAO, IG, and others. It definitely
is a priority of the Secretary, as I understand it, to address
the issue of the unexpended balances.
Currently, my understanding is that the Department is in
the process of reviewing specific programs that have these
types of unexpended balances to better understand why they
exist and what, in fact, can be done under existing law and
regulation to perhaps address this problem, make sure the funds
can be more effectively allocated to serve people who currently
cannot be served for a variety of reasons, including this
particular problem.
Obviously, to the extent this problem exists, it to some
degree does undermine the credibility in terms of budget
justifications to ask perhaps in some cases for increases of
funds for programs where these types of unexpended balances
remain a problem. It is a material weakness. It is a problem
that is considered very serious and it is a priority of the
Secretary's to address it. And as CFO, I would certainly do
everything to be able to support that effort.
Senator Allard. Mr. Chairman, I see my time is coming to a
close here. I have a couple more questions for Mr. Rosenfeld.
Will there be another opportunity to ask questions?
Chairman Sarbanes. Yes, we are going to do another round.
Senator Allard. Very good. Thank you.
Chairman Sarbanes. Senator Reed, I notice that Senator
Smith has come, and I know he wants to make a statement of
introduction for Ms. Dorn, who is on the next panel.
Gordon, why don't you come on up and do that now. I know
you have other engagements.
STATEMENT OF GORDON SMITH
A U.S. SENATOR FROM THE STATE OF OREGON
Senator Smith. Thank you, Mr. Chairman. I appreciate that
courtesy. I am helping Joe Biden with all these nominations
down in Foreign Relations and we miss your presence there, but
know you are Chairing this great Committee as well.
Mr. Chairman, colleagues of the Banking Committee, I regard
it as a high privilege and pleasure to be here to introduce a
friend and a fellow Oregonian, Jenna Dorn, whom President Bush
has nominated to be the head of the Federal Transit
Administration.
She is joined by her two wonderful sons, Ben and Jon.
Chairman Sarbanes. It is a excuse to get out of school. Or
is school over for those guys?
[Laughter.]
Senator Smith. I know Ben and Jon very well and they look
for that excuse, I think.
Chairman Sarbanes. Yes.
[Laughter.]
Senator Smith. Jenna and I share something in common. She
began her career working for Mark Hatfield. Like her, I have
learned abundantly from Mark Hatfield and am given the
privilege of trying to fill his place in the U.S. Senate. Both
of us maintain a strong commitment to his ideals and friendship
with him.
But Jenna has since that time broadened her professional
experience in remarkable ways. She has served in the Government
as an Associate Deputy Secretary of the U.S. Department of
Transportation under President Reagan and Assistant Secretary
for Policy for the U.S. Department of Labor under President
Bush. After that, she worked with Elizabeth Dole at the
American Red Cross as its Senior Vice President, and then as
President of The National Health Museum. So, she has served
with distinction wherever she has gone. And she has a broad
knowledge of Capitol Hill that will serve the country, the
Administration, and the Congress well.
I have no reservation in heartily recommending her to you
and to encourage that she be passed to the floor and confirmed
in this responsibility.
So it is with pride and appreciation that I am here in her
behalf.
Mr. Chairman, I thank you for your courtesy.
Chairman Sarbanes. Thank you very much, Senator Smith. We
appreciate your coming and we certainly value the kind remarks
you have made about Ms. Dorn.
Senator Reed.
COMMENTS OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman.
Let me welcome the nominees. I have had the chance to meet
with them. They are extraordinarily talented, experienced, and
patriotic, and we thank them for their willingness to serve.
Mr. Rosenfeld, if I can jump right into the details of your
job. But given your experience previously with FHA, you bring a
lot of perspective to your proposed job at Ginnie Mae.
The President's budget for fiscal year 2002 will call for
an increase in premiums for FHA multifamily insurance. This
increase will raise the cost of using the program, reduce
affordability and may, in fact, preempt some projects which
would be deemed economically infeasible.
In general, the new FHA apartments are affordable to
working people at about 100 percent of median income. I wonder
if you have any thoughts on this proposal.
Mr. Rosenfeld. Well, quite frankly, Senator Reed, my
reaction to the proposal relates to its effect on Ginnie Mae.
And if I am confirmed, that will, of course, become an issue
that will be relevant to me. My sense is that to the extent
that apartment construction is decreased, that would suggest
there will be less securitization by Ginnie Mae of those kinds
of insured loans.
But I am sure the President has his reasons and the
Secretary. So, I would defer the policy issue in the
consideration of that to the President and the Secretary.
Senator Reed. But as the head of Ginnie Mae, you have at
least the opportunity to try to react to that policy and still
continue to fund multifamily developments that will reach
moderate-income Americans. Would you try to respond in an
affirmative way to continue the construction of these projects?
Mr. Rosenfeld. If I were asked, and I indicate that I have
not been asked at this point, but if I were asked, I am clearly
in favor of enhancing opportunities to create apartments for
low- and moderate-income people.
However, I also understand the significance of running a
prudent enterprise in a fiscally responsible manner. And to the
extent that premiums need to be raised to ensure the fiscal
responsibility of an enterprise, that may have to occur.
Senator Reed. Thank you, Mr. Rosenfeld.
Ms. Antonelli, the budget that is being presented for HUD
this year has, in my view, some critical gaps. There is a 25
percent cut to the Public Housing Capital Fund, termination of
both the Public Housing Drug Elimination Program and the Rural
Housing and Economic Development Program. This inhibits HUD's
ability to perform its work and significantly inhibits the
quality of life of many residents of HUD projects. You will
have a critical role as the CFO. Can you give us some
assurances that you will try to reverse these cuts and try to
provide for adequate funding for some of the core programs at
HUD?
Ms. Antonelli. Senator, obviously this budget proposal that
has been put forward by the Department, I have not been
involved in a significant way. But I will emphasize to you
that, if confirmed as CFO, I will uphold the policies of the
President of the United States, President George Bush, and
Secretary Mel Martinez, in the context of the development of
the budget each year.
These are the proposals that have been put forward and we
look forward, the team at HUD, as we go through the
finalization of this year's appropriation process and the
budget process each and every year, to work very closely with
you and the other Members of Congress and your staffs to engage
in a dialogue on these types of programs and come to agreement,
hopefully at the end of the day, about what are the right
things for the Department of Housing and Urban Development to
be doing and what are the most important priorities.
But certainly I support the President and I support
Secretary Martinez. But as a team, we will work closely with
Congress on these types of budget issues.
Senator Reed. I guess we all assume, appropriately so, that
once a decision has been made, that of course you will be
supportive of the leadership. But within the context of forming
those decisions, you will have a very critical voice. And one
would hope that you would look carefully at these programs and
advocate strenuously for programs that you believe are
important which might otherwise, for reasons unrelated to the
needs of clients of HUD, be sacrificed. I would hope that you
do that.
Ms. Antonelli. I will do the best I can. Thank you.
Senator Reed. Thank you, Mr. Chairman.
Chairman Sarbanes. I would like to follow up on the very
question Senator Reed was asking because I think it is
important.
Looking over your writings, I don't think it would be
unreasonable for one to have some concern that you would seek
to cut the HUD programs, that you would come in with a mindset
toward reducing these programs.
I am really prompted in part by something Senator Wyden
said about Ms. Dorn when he said that she was a problem-solver,
not an ideologue. And I would like to pursue that very point
with you.
How fixed are you in your own view, not now, coming within
the cocoon of the President or the Secretary's decision, how
fixed are you in your own view about these HUD programs?
HUD has been given a mission and needs resources to carry
out that mission. How do you square that?
Ms. Antonelli. Well, Senator, in the context of the work
and the research that I have done, and previous positions that
I have held, I would like to suggest to you that while some
might be considered to be, and one might be considered an
ideologue, I would argue that in many respects, much of the
work that I have done is, in fact, with very much the intention
of stimulating a public policy debate, in an attempt to try to
help solve problems, to identify problems and to solve
problems.
So in the context of HUD's programs, I will not present
myself as a detailed expert on these programs. But I certainly
believe in looking at these programs very carefully and
assessing.
Secretary Martinez has said on numerous occasions that HUD
consists of several hundred programs. We should look at those
programs. We should look at each and every one of them very
carefully and make sure that we are accomplishing effectively
HUD's core mission. And to the extent that there are areas
where there is duplication or inefficiencies, that we could
work better with other agencies to deliver services more
effectively, and that consolidation can occur.
I think one should be open to the possibility that things
can be done more efficiently, more effectively, and that in
some cases big is not always better and more is not always
better.
You can do a better job by taking what you have and trying
to, again, make it work more efficiently and effectively.
Chairman Sarbanes. Well, now, you have written two
executive summaries, one entitled, ``Five Good Reasons to Close
Down the Department of Commerce,'' and another one called,
``Five Reasons to Pull the Plug on the Department of Energy.''
I gather you like to think in terms of five.
[Laughter.]
Senator Reed. She should be in the Defense Department,
then, the Pentagon.
[Laughter.]
Chairman Sarbanes. Now, fortunately for you, this did not
get to the Department of Housing and Urban Development, I
guess.
[Laughter.]
So you do not find yourself in the awkward position which
our former colleague, Senator Spencer Abraham's found himself
when he was nominated to be the Secretary of the Department of
Energy, since he had earlier, while he was here on the Hill,
called for the abolition of the Department of Energy.
That all seems to have faded from his mind now, I might
note.
[Laughter.]
But this again leads me to put the question perhaps in a
different way, whether you come into this job with a kind of
mission in your own mind to reduce the Department. I want to
distinguish that from trying to gain efficiencies, to eliminate
this waste and mismanagement to which you referred back in 1988
and to which I made reference, and with which we have all been
struggling and trying to do.
I am trying to get some sense of what your mission is and
how open you are in your thinking, how practical and pragmatic
you are going to be in your thinking as you approach these
problems.
Ms. Antonelli. Senator, I can assure you that I am very
open-minded and willing to consider all perspectives and I
think I do in the context of the work that I have done.
In both of those pieces that you cited, much of what is
discussed in those pieces really highlight many of the concerns
at the time that piece was written, at the early stages of the
implementation of the Results Act, the departments' strategic
plans, their first annual performance plans, which were rated
by Congress to be extremely poor.
There was also legislative proposals from, I believe, the
House Budget Committee, Chairman John Kasich, to look at
perhaps closing down these departments.
But in the context of what was written there, much of what
is encompassed in those papers really reflect very harsh
criticisms that have been put forward on numerous occasions by
many oversight departments like GAO or by the departments' own
Inspector General, expressing serious concerns about continued
wasteful spending and management deficiencies, inability to
determine whether or not results are being achieved for the
money that is being spent in those departments.
These pieces were meant to, again, contribute to the debate
that was being held at the time and I think still continues
today and is embodied in a statute like the Government
Performance and Results Act that we need to take a critical
look at these programs and in all honesty assess really whether
they are working, as well as they should and what are the
options to try to improve these programs or address these
problems.
And look not only within an agency, but also across the
entire Government, to the extent that there is significant
duplication and overlap of programs across departments, to
evaluate whether there are opportunities for consolidation.
In the conclusion of my Department of Commerce paper, I
state very clearly that while one might think about a situation
where there would not be a Department of Commerce, that in and
of itself does not suggest that every program within Commerce
is not worthwhile. It simply suggests that maybe there is some
restructuring that one might want to consider and there are
programs within that Department that are very valuable, that
are certainly justifiable, and should be funded.
It is just a question of how Government ultimately is going
to be organized most effectively to deliver those services.
Chairman Sarbanes. Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
Well, I hope, Mr. Chairman, we have not gotten to the point
where if we advocate anything other than bigger bureaucracy and
more power in Washington, somehow we are an ideologue.
I think that we need to continue to look at these programs
and make sure the taxpayer dollars are being well spent and
that whoever the clients are for those programs are being well
served.
I hope that we continue to search out ways in which we
continually can improve the programs so that they do a better
job of serving those clientele. And if there is a way to save
taxpayer dollars in doing that, I hope that we seek out those
solutions.
Mr. Rosenfeld, during your tenure in this appointed
position, I think there needs to be some key performance goals
on what you want to accomplish. How will the Congress know
whether or not you have accomplished them?
Mr. Rosenfeld. Senator Allard, in the case of Ginnie Mae,
the performance goals that may exist or that we may establish
are relatively easy to determine because they are almost
numerical in nature. We operate--I should say, if I am
confirmed, we will operate an enterprise that has a relatively
small product line. Namely, the securitization of Federally
insured mortgages.
We hope to, again, if confirmed, look at other
opportunities to perhaps modestly expand that product line if,
in fact, it is prudent and can be done in a business-like
fashion, and will, in fact, become a significant benefit to the
public.
I think that--again, if confirmed--we will set forth the
goals that we have and they will be pretty transparent because
there is really no way to hide from the numbers.
Senator Allard. Unlike Fannie Mae and Freddie Mac, Ginnie
Mae securities are backed by the full faith and credit of the
U.S. Government. I think this represents, at least potentially,
an enormous liability to the taxpayers. As President of Ginnie
Mae, what would you do to help safeguard the taxpayer dollars?
Mr. Rosenfeld. Well, as Ginnie Mae is currently structured,
the risk component of our enterprise I think is well managed in
that about 80 percent of the business that Ginnie Mae does is
FHA-insured and in that category, the risk for Ginnie Mae is
very, very slight, perhaps 1 percent. About 20 percent of our
business is related to the VA programs. And there, we do have
somewhat greater risk in the way of catastrophic decline in
housing prices.
I think the important thing, in response to your question,
is that we continue to be cognizant of the fact that the
granting of the full faith and credit as a credit enhancement
to any indebtedness is an enormously serious matter and should
be guarded with great zeal.
I recall the past where we in this country guaranteed
deposits in savings and loans. One need only live through that
experience to realize the significance of a full faith and
credit guarantee on an indebtedness.
Let me assure you, Senator, that I will treat with the
utmost degree of seriousness, if confirmed, the extension of
any sort of guarantee of full faith and credit.
Senator Allard. Mr. Chairman, I am finished. Thank you.
Chairman Sarbanes. Thank you, Senator Allard.
Senator Reed.
Senator Reed. Thank you, Mr. Chairman.
Mr. Rosenfeld, the previous Administration initiated a
targeted lending initiative which gives a price break of up to
50 percent on Ginnie Mae's guarantee fee on home loans made in
central cities, empowerment zones, enterprise communities,
Indian lands, and other underserved areas. It has resulted in
$15.5 billion in securities, representing over 160,000
mortgages.
I wonder if you are committed to continuing this effort in
a very particular sense, and also in a broader sense, increased
efforts to ensure that in these areas, central cities, minority
neighborhoods, et cetera, that there is more homeownership.
Mr. Rosenfeld. Senator Reed, let me assure you that we have
every expectation of continuing the targeted lending program.
To the extent we can enhance it and improve it in a prudent
manner, we would intend to do so.
Senator Reed. Thank you very much.
Ms. Antonelli, let me just go back to the context of the
questions that were posed by Senator Sarbanes and just ask
specifically, what do you believe the mission of HUD is?
Ms. Antonelli. I believe that the mission of the Department
is to make the lives of Americans better. What does that more
specifically mean? That means to increase homeownership, which
I very strongly believe is such a critical part of the American
Dream. As I said in my statement, reducing homelessness and
really empowering communities to enhance their economic
development.
Senator Reed. Do you believe that HUD is achieving that
mission today?
Ms. Antonelli. I think that there are a lot of very good
things that HUD programs accomplish to make people's lives
better.
If it is wrong of me, I am frustrated where I see that
programs that we have in place are not working the way they
should be working and that there is money that hard-working
Americans give to us in terms of their tax dollars that is not
being spent to help improve people's lives. There are a lot of
people who are eligible for services that today are not
receiving services. And we need to understand why that is
happening.
I would suggest that there are certainly problems, the
nature of those material weaknesses have been highlighted and
have existed for some time with HUD programs that we need to
become very serious about addressing and making sure that we
understand why programs are not working and how we can make
them better and to make them better and to make sure, if
confirmed as CFO, that we are doing the best job we can
providing information to policymakers within the
Administration, but also, very importantly, to Members of
Congress to be able to understand what is happening with these
programs, if they are achieving their intended objectives, and
if they are not, what do we have to do about it?
I think there are problems that exist. And everything that
has motivated me in terms of my career in public service is
very much driven by a desire to make people's lives better,
that they can achieve the American Dream. I am frustrated when
I don't see that happening.
Senator Reed. Assuming that you can work out these
identified management problems, can HUD achieve its stated
mission with the resources it has today?
Ms. Antonelli. Senator, there is still a lot that I will
need to do in terms of getting in-depth into many of these
programs. So it would be hard for me to say exactly to you what
is an appropriate HUD budget.
But rather than the amount of the budget, I think, again,
in the context of being results-oriented, are we accomplishing
HUD's mission? Are we doing those things? Are we reducing
homelessness? Are we increasing homeownership and helping
people achieve the American Dream? Are our communities
prospering? To me, if we are able to achieve those types of
results and measure that concretely, then at the end of the
day, that is what is most important.
And I cannot tell you what right amount of money should
reflect it. It might be more than what the current budget is.
It might be exactly what it is today. It might be something
less. I cannot answer that for you right now.
Senator Reed. It seems, though, that your response suggests
that you are very clear that management issues have to be
addressed. You are very clear that information issues have to
be addressed. But you have formed no conclusion, assuming you
accomplish those things, whether the present resources and
projected resources of HUD can deal with the mission, which is,
as you put out, making the lives of all Americans better.
That is a pretty broad mission if that is the mission. And
I guess my instincts are that, and I commend you and wish you
well in fixing the management, it has to be done, but even a
perfectly organized and efficient system to put every American
in a safe and decent home, is going to require some more
resources.
Thank you.
Chairman Sarbanes. We want to draw this panel to a close so
that we can go on to our next nominee.
Ms. Antonelli, the Committee is still waiting for answers
to written questions sent to the Department from the budget
hearing, the oversight hearing that Senator Allard held a while
back. Could you ask the Department to get those answers to the
Committee? We think enough time has intervened that we should
have responses by now.
Mr. Rosenfeld, we appreciate your coming before us today
and we appreciate your willingness to come back into Government
and to bring your experience to bear on some of these problems.
Ms. Antonelli, I think the best way to close with you would
be simply to ask you to read to us again the last paragraph on
the first page of your prepared testimony. Do you still have it
there in front of you, the statement you gave at the outset?
Ms. Antonelli. I am sorry. Which paragraph, Senator?
Chairman Sarbanes. The last paragraph on the first page.
Ms. Antonelli. On the first page. As the daughter?
Chairman Sarbanes. No, no, last paragraph. It is the one
that begins: ``An important part.''
Ms. Antonelli. An important part of the American Dream is a
home to call your own and a community of caring people of which
you can be a part. I look forward to being a part of HUD's
mission to preserve the American Dream--to empower communities
and their residents to improve themselves by reducing
homelessness, creating opportunities for homeownership, and
encouraging economic development.
Chairman Sarbanes. Let me say that I am taken by that
paragraph. And as you are going to move ahead here in this
process, let me say that that statement on your part given to
us in your opening testimony, weighs heavily with me and we
hope as time progresses we will be able to work together in
order to implement those objectives.
We thank you very much for being here. We are honored that
your mother was able to be present with us, and your husband.
Mr. Rosenfeld, we are delighted your wife was present with us
today.
We will now adjourn this panel and move on to the next one.
Thank you all very much.
Ms. Antonelli. Thank you, Senator.
[Pause.]
Chairman Sarbanes. We will now turn to our third nominee
this morning, Jennifer Dorn, who is being considered for the
position of Federal Transit Administrator. I want to welcome
her before the Committee this morning. We look forward to
working closely with her in her new position, as I believe that
transit is a vital component of our national transportation
infrastructure.
We very much appreciate the two Oregon Senators coming this
morning to introduce her.
I am pleased to observe that America's transit systems have
experienced tremendous growth in recent years. The Washington
Post recently ran a story entitled, ``Mass Transit Rules The
Roads''--this was just in April--which noted that Americans
took over 9.4 billion trips in transit in the year 2000, the
highest level in 40 years.
In fact, transit ridership has increased by 21 percent over
the past 5 years, growing faster than the U.S. population, 4.8
percent, faster than highway use, 11 percent, faster even than
domestic air travel, 19 percent.
However, this success brings new challenges. Communities
across the country are realizing that transit offers a solution
to many of the difficult problems facing them--moving people
from welfare to work, alleviating congestion, reducing energy
consumption, and safeguarding the environment. These
communities are looking to the Federal Government for
assistance in getting their transit systems started. These are
communities that want to come into transit.
At the same time, we must protect the existing Federal
investment in transit by ensuring adequate support for cities
and States that are already running successful systems.
Many existing systems are reaching their capacity, as
ridership has grown far beyond what the systems were originally
designed to handle. This capacity crisis will become a
significant problem on even more of the Nation's transit
systems in the near future.
In my view, it is becoming increasingly clear that we will
have to significantly increase Federal support for transit to
help communities make the investments in infrastructure and
system preservation that will be required to move America into
the 21st Century.
This is the context in which Ms. Dorn will assume the role
of Federal Transit Administrator, the Nation's lead spokesman
for transit.
Ms. Dorn has an impressive background, having served in top
positions in both the public and private sector, at the U.S.
Departments of Transportation and Labor and at the American Red
Cross and at the National Health Museum.
I am looking forward to working with her on addressing
these challenges and ensuring the continued success of
America's transit systems.
We are pleased to welcome her to the Committee this
morning.
Ms. Dorn, if you could stand, I will give you the oath and
then we can proceed to your testimony.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Ms. Dorn. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Ms. Dorn. I do.
Chairman Sarbanes. Thank you very much.
We would be happy to hear your statement. If you want to
introduce your young men to the Committee, we would be happy
for that to happen as well.
STATEMENT OF JENNIFER L. DORN, OF NEBRASKA
TO BE FEDERAL TRANSIT ADMINISTRATOR
U.S. DEPARTMENT OF TRANSPORTATION
Ms. Dorn. Thank you, Mr. Chairman.
I will take the mother's prerogative, even though Senator
Smith graciously introduced my two sons. Jonathan is 11--would
you stand Jonathan? Benjamin is 9 today, as a matter of fact.
Chairman Sarbanes. Good. Happy birthday.
[Applause.]
Ms. Dorn. Mr. Chairman, I certainly agree with the thrust
of your statement about the transit components of our
transportation structure being so vital.
I also appreciate very much the fact that both Senator
Smith and Senator Wyden would agree to come before your
distinguished Committee today. I think both of them represent
the hallmark of public service and have set a fine example that
is in the Oregon tradition of bipartisanship.
I am very proud of that. I think it represents how working
together is important in all aspects of our Government, but
perhaps particularly so as we debate the issues revolving
around transportation and transit.
So, I am honored to have been introduced by them and hope
to live up to that kind of tradition. If I am fortunate enough
to be confirmed, then that is the kind of hallmark I hope to
bring to my job.
Indeed, it is an honor for me to be nominated by President
Bush and a privilege to be here before you, Mr. Chairman, and
this distinguished Committee.
I was very impressed and humbled by my fellow nominees'
statements and reminded yet again of the importance of the
opportunity to serve the public.
I was also reminded how wonderful it is to be able to have
two young boys who are learning about the Government process by
being here today. Ben, my younger boy, leaned over to me after
one of the statements and he said, ``Mommy, if they lower the
tax dollars, will they lower it just for America or for the
whole world?''
[Laughter.]
And so I realize how beneficial it is for our young people
to know more and more about Government.
Fundamental to so much of our economic strength and the
quality of life is our transportation system in this country.
And an increasing component of that success is transit. If it
is planned carefully and executed well, it is indeed vital to
our future even more than it was in the past.
As well it should be. As you so well articulated, Mr.
Chairman, transit provides economic development. It ensures
livability in communities. And it also provides for the public
good. That is a very important Federal role, providing for
those who have no other choice but to use a transit system. It
needs to be there.
I am very passionate about a number of things, Mr.
Chairman, most importantly about public service, as I think my
experience will attest.
I am humbled to serve President Bush and the Administration
if confirmed by this body, and to serve under two outstanding
transportation leaders who are far more expert than I. I have
long admired Secretary Mineta and his work in the
transportation field, as well as Deputy Secretary Jackson. So
it would be my privilege to work with a fine team, if
confirmed.
If I might, I would just take a couple of moments to
indicate to you at this preliminary stage the priorities that I
see for the Federal Transit Administration.
First among them, I believe, is meeting the increasing
demands for transit across this country.
Second, I believe improved oversight is very critical and
it also fulfills the purpose of the first goal. We need to have
credible programs in order to meet that increasing need.
Third, I think the employment issue is critical for not
only our FTA workforce but also our transit industry workforce.
We face many challenges in terms of attracting the right kind
of experts who need to understand issues of complexity when
building large projects or meeting the needs of various
constituent groups.
If I could just elaborate a bit on the first two.
We have seen dramatic changes in a number of our largest
communities across the country, as you indicated in your
opening statement, Mr. Chairman. There is a widespread
recognition that transit can play an important role in the
largest of communities.
As you noted, ridership is at record levels and local
investment has never been higher. And that is important to all
of us.
At the same time, in much of America, transit plays a
supporting role in local transportation as well, providing a
safety net for low-income persons, for the elderly, and for
those with disabilities. And in these instances, it is my firm
conviction that the Federal program is important.
Reauthorization is a critical point at which we begin to
focus on these things. And if I am confirmed, I believe it is
an important role that I and my team would have in terms of
making sure that we bring the relevant data to the policy
table.
We have had certain levels of programs and program matches
and shares, and while history is an important guide, it should
not be a stranglehold.
I think that one of my main tasks will be to ensure that
Congress, OMB, the President, and the Secretary, get the kind
of information that will allow them to make timely and relevant
decisions which respond to today's and future needs. I consider
transit as being a very important need.
Knowing, however, there is never enough money to do all
that we wish in transit or almost in any type of Government
activity, I would be eager to explore with the Committee, ways
that we can better leverage our Federal tax dollars. I think
there are a number of opportunities that have already been
initiated in previous administrations and that need to be
continued.
Innovative finance is an important arena, as are service
innovations, increased intermodal cooperation, more effective
implementation of technology, communicating best practices, and
the effective use of the private-sector where it makes sense
and where it can provide efficiencies.
I certainly intend to learn more about the factors that
make some transit investments more successful than others. And
that leads me to my second priority, and that is improved
oversight.
GAO has indicated that perhaps the most significant
management challenge for the FTA is to manage a growing number
of transit projects nationwide. And the President's budget
provides for an increase in that regard.
We are also engaged in planning oversight and it was
through the wisdom of Congress and TEA-21 that Congress was
very explicit about a rigorous review process for new starts.
I think that serves the Nation and the individual projects
well. We have learned a great deal. It is my understanding that
over the decades, or two decades, that these projects have been
undertaken and many improvements have been made.
But I think we can always place more emphasis on a number
of oversight arenas to give the public the confidence that
localities have the information they need to make effective
decisions.
Sometimes, from what I have been reading, the cart may come
before the horse. And that is that communities may tend to
define the solution, whether that solution be rail system,
road, bus, rapid transit, or some other approach, before they
have adequately defined the problem and identified all the
alternatives.
I feel very strongly that there is an important Federal
role in transit, but that the local decision is imperative and
should guide us. That local decision should have transparency
so that all of the alternatives are indeed addressed.
As I mentioned, the third priority, I believe like many of
the Federal agencies, that the FTA faces a serious workforce
challenge. And I believe that FTA, from the data that I have
been given, has the oldest workforce of all of the agencies in
the Department of Transportation. Nearly half of the FTA's
workforce is eligible to retire in the next 4 years. The
transit industry faces similar challenges in recruiting and
retaining individuals of specialized skills.
I know the difficult job that many of our transit operators
face in trying to meet the needs of the public in a complex
environment.
With that, Mr. Chairman, I am very pleased to be able to
answer any questions, or attempt to answer questions that you
might have.
Thank you.
Chairman Sarbanes. Thank you very much, Ms. Dorn. We very
much appreciate your statement.
Actually, let me just pick right away on one of the points
you made involving the local level.
FTA has joint responsibility with the Federal Highway
Administration for issuing regulations to implement the
planning provisions of TEA-21. In part, those planning
provisions are designed to increase and clarify the role of
local communities, in effect, the citizens in the development
of transportation policy.
For example, there is a provision in TEA-21 which I was
intimately involved with, which requires metropolitan planning
organizations to provide to the public an annual listing of
transportation projects which have received Federal funds. This
is an effort at transparency, of making more information
available to the public so that they are in a better position
to comment.
We receive reports that without guidance from the
Department of Transportation, local planning bodies are
uncertain how to comply with the public participation
requirements of TEA-21, leading to incomplete and inconsistent
compliance. Prompt issuance of final rules would obviously help
transportation planners and community organizations to have
access to the information they need to fully participate in the
transportation planning process.
I really bring this to your attention, because I think this
question of these regulations is an important question. I also
think FTA could take steps to assist transit agencies in
complying with the planning requirements of TEA-21, even in the
absence of the implementing regulations. Are you familiar with
this problem or have any awareness of it?
Ms. Dorn. Yes, Mr. Chairman. In my brief tenure, that has
been brought to my attention.
If confirmed, I would certainly see what kinds of
assistance we might be able to give even in the absence of
regulations to help provide this transparency. I am in total
accord with the need of the local community understanding fully
what the Federal Government programs mean for them locally, and
I know this is an important matter.
I am very eager to work with the Federal Highway
Administrator when he or she is appointed because I know that
they have a significant responsibility in promulgating these
regulations.
I do understand that they have been quite contentious and
it may take a bit of time to work that out. You have my
commitment, that if confirmed, I will do everything I can to
move this expeditiously and to try to achieve the outcome you
have suggested.
Chairman Sarbanes. Thank you very much. I mean, obviously,
we would like to get the regulations for the planning
provisions of TEA-21 in place before we turn to the next
authorization, which will be in the next Congress. Thus, we
will then have a building block to work with.
Federal law requires that transit grant recipients spend a
portion of their money on transit security projects, such as
increased lighting, increased camera surveillance, emergency
telephone lines to contact law enforcement or security
personnel. Obviously, this is important to the users of transit
and it is also important to the employees of the transit
system.
The law gives grant recipients the option to certify to FTA
that the required security expenditure is unnecessary. And I am
curious as to what your view is of the steps that FTA should
perhaps take to ensure that transit agencies are making
adequate investments in systems security. There is some concern
that it is being overlooked to some extent.
Ms. Dorn. Mr. Chairman, it certainly is an important issue,
particularly given the number of circumstances which have
occurred locally, and I know, to a degree, in other parts of
the country.
I am not fully informed about all aspects of this issue. I
do know that the Federal Transit Administration has the
authority, when a transit operating agency requests it, to
perform a security audit. The FTA will do its very best to
accommodate the request and help ensure that those security
measures are adequate.
Whether that is a sufficient authority, I am not versed
enough to know, but if I am confirmed, I will certainly look
into that matter. I think that security and safety are
absolutely vital to continuing an increase in ridership. If
people are not confident that they will be safe in transit,
they will not use it, and we need them to use it.
Chairman Sarbanes. I think that is a very important point.
People almost sense it, or there is a word of mouth that
spreads that this is a safe system to use, and obviously that
attracts users, or that this system has security problems
associated with it, which of course drives away users.
One very quick question, because I see that my time has now
expired. As the debate begins on a new transit-highway
reauthorization bill, which we are going to be leading into,
will the Department or FTA, more narrowly, be conducting any
listening sessions to hear more about what is needed in Federal
legislation to address transit issues?
We would like you to, in a sense, make some commitment to
do these listening sessions across the country. Obviously, you
have to be selective. You don't have an infinite amount of
time. But we think that could be very helpful, to get the input
from the local authorities and others in terms of what they
think ought to be in the next authorization.
Ms. Dorn. I wholeheartedly agree, Mr. Chairman. It is my
understanding that Secretary Mineta has indicated his desire to
hold those listening sessions throughout the country. And I can
assure you that, from my vantage point, it is important to not
only participate in those formal sessions, but also I view a
large part of my job to be a listener, informally as well, to
members of the transit community, to the labor community, and
to the community leaders who have responsibility for transit. I
think it is an important job, especially in light of the
upcoming reauthorization.
Chairman Sarbanes. Good.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I would like to welcome Ms. Dorn.
Ms. Dorn. Thank you.
Senator Allard. We appreciate your willingness to take on
the responsibilities as FTA Administrator. More specifically, I
would like to know what you will do to promote opportunities
for the private sector, to be involved in transit service.
I am particularly interested in whether or not you would
support reestablishing the Office of Private Sector Initiatives
within the Department of Transportation.
Ms. Dorn. Thank you, Senator Allard.
Few things are more important outside of delivering service
to the public in an effective manner than that we do so in a
cost effective manner, as well. And I think in certain
instances, and perhaps in more instances than we actually
practice, utilization of the private sector is very important.
It would be premature for me to say to what degree or in
what programs we should enhance that participation. I am fully
aware that the law requires us to do that in the Federal
Transit Administration. And if I am confirmed, that will be one
of my first areas of endeavor, to see how is it that we can
improve the service through efficiencies that I think have been
demonstrated where private-sector contracting, for example, is
utilized. Where it makes sense, it works well. And so I would
be eager to work with the Committee on that, if confirmed.
With respect to the organization of the Federal Transit
Administration, I have not yet had an opportunity to look at
the boxes, so to speak. I can tell you from my experience in
Government and my personal perspective in leadership that even
if a box is not created for a certain endeavor, if it has the
priority of the Administrator and the Secretary and his or her
team, and that is well known, that this can be as effective a
tool as any kind of organizational structure.
So, I would just not want to be tied into that structural
piece. But you would have my firm assurance that I will do
everything I can to make sure that we can make our systems even
more cost effective.
Senator Allard. I would certainly appreciate that. I have
been concerned for some time about the mass transit funding
formulas. It goes clear back to when Senator Alfonse D'Amato
was actually Chairman of the Committee here, representing a
large metropolitan area. I represent a State that is a rapidly
growing State, and there are many parts of the country that
find themselves in rapidly growing areas where they want to
look at mass transit as an alternative kind of way of getting
to work and getting around in their communities and find that
the formula has made that difficult for them to even get
started. I worked with Senator D'Amato on the last
transportation bill to get some more money available for these
new systems.
I think we want to be sensitive to these areas of the
country that already have existing systems. I don't think we
want to cut into their maintenance and operation and what they
need.
But I am disturbed when I see how much goes just to a few
cities and it seems like the rest of the country gets left out.
And many times, that is where the new revenue is coming in,
from these other parts where there is more growth and whatnot.
I would hope that you would be willing to work with me on
trying to find fair and more equitable ways to distribute some
of those mass transit dollars.
Ms. Dorn. Absolutely, Senator Allard. I know that this will
be an issue of hot contention, as we proceed in
reauthorization.
From the perspective of the Federal Transit Administration,
I recognize very clearly that there are various ways to define
need, and in fact, need is the basis on which the formulas have
been established in statute.
I certainly recognize, as you and I have discussed
previously, that maintaining the existing systems in urban
areas is a critical need, as is addressing those kinds of needs
in new and rapidly growing areas, such as in the Southwest.
Rural needs are equally as important.
So working with Congress to see how we can equitably meet
all of those needs is a priority.
I recognize that in this case, equity is really in the eye
of the beholder. That means that we will have to do a certain
amount of compromising, recognizing that we don't have all of
the funds that we may need. But my goal would be as yours is,
to make sure that we have an equitable distribution so that
transit throughout the Nation can continue to be successful.
Senator Allard. All I ask is that you look through the eye
of this beholder.
[Laughter.]
Thank you, Mr. Chairman.
Chairman Sarbanes. Now, we will turn to the eye of another
beholder.
[Laughter.]
Senator Reed.
Senator Reed. Thank you, Mr. Chairman.
Let me first say, Ms. Dorn, that if the Federal Transit
Administration behaves under your tenure, as well as your sons,
we will be in good shape.
[Laughter.]
This is even worse than church--there is no music.
[Laughter.]
Ms. Dorn. It is the promise of McDonald's afterwards.
Senator Reed. Well, promise us lots of transit projects and
we will all get along great.
[Laughter.]
Let me just ask initially two basic questions. Currently,
under TEA-21, there is an 80-20 split between highways and
transit. And as we go forward with the reauthorization, would
you suggest or advise that this split be maintained or that
there be any changes made?
Ms. Dorn. Mr. Chairman, I believe that it would be
premature to comment definitely. However, if I could just give
you my philosophical perspective.
Historically, as you have rightly point out, the 80-20
share has been established in law and guaranteed, in fact,
under the highway trust fund.
Certainly, as in the allocation formula that Senator Allard
just mentioned, the issue of the share will be of significant
debate, as it has been in the past.
I am a firm believer that history should be a guide, but
history should not be a stranglehold. I believe it is very
important that if I am confirmed as the Federal Transit
Administrator, I make sure as much data are available for
decisionmakers to determine this issue based on need, rather
than strength of an ideology or strength of a lobbying group.
And I wholeheartedly believe that the highway industry, as
well as the transit industry, is interested in having an
adequate transportation program. So it will remain to be seen
whether that match or that share continues as it is. But my
job, I believe, is to provide the information so a useful
debate can occur and decisions made on the merits.
Senator Reed. Thank you.
Another aspect of this issue of allocation is that within
the transit programs, the Administration has proposed a 50-50
split on funding a share between the States, localities, and
the Federal Government. This is in contrast to the highway
projects in which they are still suggesting an 80-20 split.
First, this raises an obvious issue of those projects which
States will not undertake because they cannot come up with a
50-50 match.
Second, it is a philosophical issue. At a time when
everyone, and my colleague, Senator Allard, who I concur with
in terms of trying to encourage mass transit, seeing out in
Denver where they can build highways, but that doesn't help
them in their environmental quality and, indeed, moving people
around.
And yet, if we adopt this approach where States are
penalized more, effectively, for transit projects than highway
projects, I think it would be indeed a mistake. I wonder if you
might respond to that as best you can.
Ms. Dorn. Thank you, Senator. I would be happy to.
I certainly support the President's proposal for a 50-50
match at this point. As you are well aware, it commences in the
year 2004. The purpose was to give the States and the
localities an opportunity to plan. I would point out a couple
of things, however, with regard to that.
First of all, the current legislation permits a Federal 80-
20 match. However, in practice, it is my understanding that the
average share is about 50 or 53 percent, Federal-local. The
purpose of this 50-50 split, as I understand it, is to
accomplish two goals. One is to encourage greater local
transportation investment and involvement. Two, and perhaps
even more compelling, is to provide a better leverage for
limited Federal funds.
The reality of this situation, as I understand it, is that
we have 192 projects that are authorized and in the pipeline.
And of the $9.6 billion, we have only $435 million remaining to
be committed, through the end of the authorization.
This is of concern to the Administration. So that is why we
gave the heads-up for the year 2004.
I would, however, be eager to work with the Committee
because I believe there are a variety of ways, of means that we
can accomplish these goals. I know that we can work with the
State and local leaders in the interim to explore alternative
funding as well.
I think this issue will be terribly critical as we approach
reauthorization and the timing of reauthorization is
commensurate with the timing of the 50-50 proposal.
Senator Reed. Thank you very much. Again, one way to deal
with the dilemma is to put more resources in so that we can
fully fund at an appropriate 80-20 or whatever the share is,
without resorting to this 50-50 arrangement.
Again, I don't think I am alone, but my governor and my
highway department and my transit departments complain bitterly
now about making the 20 percent match for highway projects, and
whatever match there is in terms of saying, they just don't
have the resources, but they have the real demands to fix
highways and improve transit.
We look forward to working with you, Ms. Dorn.
Ms. Dorn. Thank you very much, Senator. I do, too.
Chairman Sarbanes. I just want to pick up on that. I think
this is an extremely important issue. It won't come to a head
until we do the next reauthorization.
It is one policy issue if the Federal Government says, or
the Administration says, we want to give only 50 percent on
these transportation projects, transit and highways. And we
want the States and localities to come up with more money.
Now that raises, obviously, certain issues that have to be
addressed. An argument for it is the Federal money will go
further. An argument against is the States and localities say,
where is the money going to come from? But at least that
approach keeps transit and highways in the same parallel
position.
It is another thing if the Administration says, we want to
cap the transit share at 50 percent, but we are going to
continue the highway share at 80 percent.
One of the things that we have worked very hard at over the
years is to try to put them, highways and transit, in an
equivalent position and certainly to eliminate tipping the
scale in a way that a locality would decide how to meet their
transportation needs, not on the basis of all of the factors
that go into transportation, environment, how you move people
and so forth, but the fact that they get 80 percent Federal
money if they go in one direction, and under the proposal,
would get only 50 percent if they go in a different direction.
So, I think as a transit administrator, you have to be very
sensitive to the difference in those two approaches because if
we go to 50 percent transit while we stay with 80 percent
highway--I might want to stay with 80 percent with both. Or you
could go to 70 percent with both. You can work that, but you
would keep it even.
You have another situation, if you change the dynamics of
choice that the local people are confronted with. We have
worked very hard to try to get them on a parallel basis so that
the decisions can be made on transportation-related criteria,
and not on the basis of which approach gives us the most
Federal money.
Ms. Dorn. May I respond?
Chairman Sarbanes. Yes.
Ms. Dorn. Mr. Chairman, I agree substantively with your
point and the disparity is in fact a puzzle to me. But I have
not had the opportunity to hear the highway perspective. I
think we will probably, if I am confirmed, have some
interesting discussions. I think that this is an advantage of
Secretary Mineta's strong feeling about the ``one D.O.T.''
We cannot afford, for the benefit of all of the local
communities which the Federal Government serves, to look at
these issues in silos and to perhaps unintentionally skew the
local choices.
I look forward to working with you and I hope that we can
come to some accommodation. I believe we share the goal to
increase effective transit programs and that is an important
thing for the future of this Nation. I pledge to you that I
will work very hard on that issue.
Chairman Sarbanes. Ms. Dorn, the fact that in practice it
is not always at 80 percent, in my view, is not decisive
because the fact that it could be at 80 percent, on occasion,
it is used in order to make the localities able to move with
the project. And the fact that it can be used at 80 percent
does keep some parity with the highway money.
I do know that in practice, the localities have been
willing to come up with more money in order to move transit
projects, which gives some indication of the importance that
they attach to these transit projects.
I have just a couple of questions.
Many in the transit industry credit TEA-21's funding
guarantees with reinvigorating the transit program in America.
The guarantees have given transit planners a measure of
certainty that the Federal Government will stand by promises
made in TEA-21. In an industry where capital improvements often
require years to complete, some level of certainty about the
funding stream is essential. What is your view on a guaranteed
funding stream and its importance for transit?
Ms. Dorn. My view, Mr. Chairman, is that this mechanism has
been terribly important to States and localities in terms of
their assurance that there is some level of stability in terms
of the funding. It allows the States and the localities to, in
fact, plan. I think that in turn provides an effective leverage
of Federal funds.
Under reauthorization, I know that I, like the Secretary,
will work with OMB and the Congress to do everything we can to
ensure that we provide the necessary funding levels.
I would also note that the President has indicated that all
of the revenue generated by the Federal gas tax should be used
for transportation purposes. And it seems that the funding
mechanism has been an excellent way to help ensure that that
comes about.
Chairman Sarbanes. Finally, as I think you are aware, many
of our national parks and other public lands are experiencing
greatly increased visitation. In 1975, the total number of
visitors to America's national parks was 190 million. By 1999,
that number had risen to 287 million. And it is climbing. This
record number of visitors, which has brought a record number of
cars, has resulted in increasing stress on our national parks.
Obviously, congestion detracts from the visitor's experience,
contributes to the degradation of the natural and historical
and cultural resources.
There are reports of people waiting in their car, inching
along, 5, 6 hours, in order to get into a national park--
Yosemite or Grand Canyon or whatever it may be.
I want to work with you. I have the intention of
introducing legislation, Transit in the Parks, designed to help
our parks and our public lands address these problems. And it
would undertake to provide Federal assistance to support the
development of alternative transportation in these sensitive
areas.
In other words, people would drive to a marshaling area
outside of the national park and then leave their automobile or
trailer or whatever there and then be transported into the
national park through some form of mass transit.
There are lots of possibilities. Some of the national parks
are already experimenting with this. We will be in touch with
you as the Administrator to involve you in that effort. It is
not right at the core of what you do, but I think it is
becoming an increasingly important challenge. And there is a
lot of receptivity to it, including, interestingly enough,
there are a number of States who don't have the kind of urban
population that calls for a transit system to move people back
and forth to work. But they do have within those States some of
these major national parks, which are increasingly confronted
with this problem.
Actually, I have talked to some of my colleagues who
normally do not focus on mass transit at all because they do
not see it as relevant to their State, who now see that this
would offer an opportunity to enhance this park experience and
to enhance the economic development that is associated with
those national parks.
I just want to say, we look forward to trying to work with
you on that problem. I think, if I were going to be an
Administrator of the FTA, it would be an initiative I would be
interested in because, in a sense, it would be sort of
historic. It would be a new breakthrough and it would give you
a wonderful reason to take your two young men and visit these
national parks across the country. So it could be a good
summertime experience there.
[Laughter.]
Ms. Dorn. I totally agree, Mr. Chairman. Notwithstanding
even that personal sort of benefit, as an Oregonian I have
spent many a weekend in national parks and national forests.
I commend you for your strong interest in this and I look
forward to working with you. It is my understanding that FTA
has provided technical assistance to different parks which are
seeking to make transit opportunities more available. I am
proud that we have already done that. I know that you have
mandated a study through TEA-21, which I have not had the
opportunity to read, but I believe that it is working its way
through the Department and the Administration. It is currently
under review.
I am proud and personally delighted that the President also
has undertaken an initiative to upgrade and improve the
maintenance of these national treasures. I will be eager to
work with you on that matter. It is important.
Chairman Sarbanes. Good. I will close with this
observation.
Your career has been quite a distinguished one, including,
of course, the number three position in the Department of
Transportation at an earlier time, when Mrs. Dole was the
Secretary. But you have also worked with, of course, Senator
Hatfield. I don't know that you could come before the Members
of the Senate with a better connection, as it were, than to
have been associated with Mark Hatfield, for whom we have
tremendous respect and affection and who was such a
distinguished and able member of this body. And of course, you
later worked with Elizabeth Dole, for whom we also have very
high respect.
Ms. Dorn. I have been very fortunate in my career to have
wonderful mentors.
Chairman Sarbanes. Yes.
Ms. Dorn. I feel privileged.
Chairman Sarbanes. We are pleased to have you here before
us. We will try to move your nomination along.
I think you heard me earlier when I indicated we still have
not been able to fully constitute the Committee. So action is
actually awaiting that, and once that is done we hope to move
you along and get you down to the Department of Transportation
and get you working.
Ms. Dorn. That would be great. Thank you.
Chairman Sarbanes. Thank you very much.
The hearing is adjourned.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
nominees, and response to written questions follow:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Sarbanes for holding this hearing.
It is important that we get vacant positions filled as quickly as
possible, and I appreciate his expediency in scheduling hearings. It is
my hope that this Committee can work with the White House to quickly
fill the remaining positions.
As the Ranking Republican on the Housing and Transportation
Subcommittee, I am particularly pleased that we will have a chance to
hear from our witnesses today. Although housing and transportation are
sometimes the forgotten issues of this Committee, I believe that they
are some of the most important. Housing and transportation matters
touch the everyday life of every citizen, and our nominees today
understand that responsibility. I believe that they are all well
qualified and will be assets to the Department of Housing and Urban
Development and the Federal Transit Administration.
It is especially important that we get very good people at HUD.
Most of HUD's programs are still designated as ``high-risk'' by GAO, so
HUD needs leaders who can take the actions necessary to turn HUD
around. There are also important responsibilities at the FTA. As more
communities face a transportation crunch, the responsibilities of the
FTA and its Administrator will increase.
I would like to conclude by saying welcome to our witnesses today.
I look forward to your testimony, and I look forward to working with
you on matters important to the people of Colorado.
PREPARED STATEMENT OF JENNIFER L. DORN
Administrator-Designate, Federal Transit Administration
U.S. Department of Transportation
June 21, 2001
Thank you, Mr. Chairman and Members of the Committee.
It is an honor to have been nominated by President Bush to be the
Administrator of the Federal Transit Administration and a privilege to
appear before you this morning. If confirmed by the Senate, I very much
look forward to working closely with Secretary Mineta and the Members
of this Committee to ensure that America's transit systems serve the
transportation needs of people across the Nation.
As you may know, I had the privilege to have been nominated by
President Reagan and confirmed by the Senate to serve as Associate
Deputy Secretary of Transportation in 1985 under Secretary Dole.
Combined with my tenure as a Special Assistant to the Secretary and as
the first Director of the Department's Office of Commercial Space
Transportation, I had the opportunity to spend 5 years at the
Department of Transportation--years which reinforced my commitment to
public service and to the vital importance of an effective
transportation system in ensuring the vitality of communities
everywhere. It is with great anticipation and enthusiasm that I hope to
return as the Administrator of the Federal Transit Administration.
I also had the privilege to serve at the pleasure of President Bush
with the consent of the Senate as the Assistant Secretary of Labor for
Policy in 1989. From that vantage point, I developed an understanding
of the importance of transit in providing access to jobs, as well as
the importance of a ready and able workforce to build and operate our
transit systems.
My leadership and management experience has not been limited to
Government. At the American Red Cross, I saw how people working
together could solve seemingly insurmountable problems. As Senior Vice
President of the American Red Cross, I managed a budget that reached
$400 million and a workforce of over 400 people who helped mitigate the
terrible effects of natural disasters and ensure the provision of a
safe and adequate blood supply. When hurricane winds or earthquakes
destroy or incapacitate vital transportation facilities and routes, the
economic effects of such disasters are magnified and getting relief
services to those affected is made even more difficult. It is in the
midst of such disasters that one can fully appreciate the role that our
Nation's transportation services play each and every day in making our
communities more livable, safe, and economically strong.
Mr. Chairman, I am an advocate for a Federal transit assistance
program which achieves some of our most important national
transportation goals. If confirmed, I will make full use of the Federal
Transit Administrator's office to work with communities and their
leaders in four critical areas:
Providing and enhancing mobility and accessibility for people
in urbanized areas, our suburbs and rural communities.
Ensuring the safety and security of our Nation's transit
systems.
Working to encourage the development of transit systems that
promote economic growth.
Playing an active role in developing livable communities while
protecting our environment.
As you know, transit is not an end in itself. It is a means by
which we accomplish other goals, the principle one of which is
providing mobility to people. Just as local needs and problems differ,
so must the transit programs that are designed to meet those needs. It
is self-evident, perhaps, to say that the needs of New York City are
fundamentally different from the needs of Omaha, Nebraska. What has not
always been so clear, however, is that we must have a Federal program
that is adaptable and responds to the needs of all.
In the largest metropolitan areas, where traffic congestion is a
pressing concern, transit is central to the transportation system,
serving every element of the community. In the Washington, DC area, for
example, the Metro system is now reporting 700,000 daily riders, making
it difficult to imagine highway congestion levels without such a
transit option. In other communities, transit serves primarily as a
safety net, providing mobility to people with few other options--the
poor, the elderly, and persons with disabilities. Our Federal programs
should respond to each of these situations, as well as to the many
variations that exist between these two examples.
The Federal role in transit began in the early 1960's, in response
to urgent needs in many communities as private transit operations
across the Nation failed. The Federal Government partnered with local
governments to maintain mass transit in the face of widespread
insolvency among private transportation providers. Early in the
program's history, the Federal Government focused on improving the
physical infrastructure of transit and on ensuring the financial
viability of public transit systems.
During the past two decades, more and more local communities began
to recognize that transit could and should play a larger role in the
community transportation system. The Federal program was critical in
many regions that sought to better integrate transit into their plans
for economic development and livable communities. More recently, there
has been dramatic growth in the number of communities--of many
different sizes--that recognize that transit can enhance the livability
of the community, promoting and responding to economic growth and
development. It can also serve as an important safety net for the 80
million Americans who do not drive because of age, disability, or
income.
The Federal role in surface transportation has been in support of
State and local government. The basic responsibility for making local
decisions and meeting local transportation needs has and should rest
with State and local government. The Federal transit program, from the
start, has played a supporting role in local transit programs. That
fundamental principle should remain and be enhanced.
Mr. Chairman, should I be confirmed, I will gratefully dedicate my
energy, experience, and commitment to the vital mission of the Federal
Transit Administration. I am particularly mindful of the important
discussions that will take place during the upcoming reauthorization of
the surface transportation program. And I pledge to this Committee that
I will vigorously pursue the mission of increasing transportation
choices in local communities. I am eager to work with you, with the
President, with Secretary Mineta, and with transportation colleagues
throughout the country to continue to improve transit in America.
Mr. Chairman, thank you again for the opportunity to address the
Committee. This concludes my testimony, and I would be pleased to
answer any questions that you may have for me this morning.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM RONALD A.
ROSENFELD
Q.1. What are your thoughts on allowing Ginnie Mae to enter
into a public /private risk-sharing initiative that allows
Ginnie Mae to securitize conventional loans that are partially
insured by the private market?
A.1. The issue raised by this question requires a response with
two separate components. The first is an inquiry as to whether
Ginnie Mae can execute such a program and more specifically can
it execute such a program successfully. The second is whether
from a policy standpoint such a program would be prudent.
Given the 30 year history of Ginnie Mae, its innovations,
its profitability, its record of minimal ``findings and
material weakness'' by the Inspector General and GAO, there is
no question that such a program could be operated by Ginnie Mae
with the caveat that such additional resources as may be needed
would be provided.
The question of whether such a program could be operated
successfully is more complex. Here the place of beginning is
not to rely on the generally benign description of a ``public /
private risk-sharing'' but rather to inquire, in great detail,
as to the specifics of the arrangement. From Ginnie Mae's
standpoint, the critical issues include, but are not limited
to, the nature and extent of the risks being undertaken on
behalf of the Government, the financial and structural
qualifications of the private sector participant, the fee
structure, etc.
It would seem that an arrangement as envisioned by the
question could be successfully developed provided that the
terms and conditions of the relationship were determined by
Ginnie Mae representing the interests of the Government rather
than by having the operative provisions being determined by the
private sector participant.
The issue of whether the concept is prudent should be
addressed by only one voice emanating from HUD and that voice
should be that of Secretary Martinez. In my opinion the
framework in which to formulate a position on the matter must
include an evaluation of the entire structure of our mortgage
finance system including an evaluation of the current merits of
our system of GSE's.
Q.2.a. Ginnie Mae's single-family guaranty fee is scheduled by
statute to increase from 6 basis points to 9 basis points in
October 2004. This cost increase will likely be passed on to
FHA and VA borrowers. What is your position with regard to this
change in Ginnie Mae's fee structure?
A.2.a. The imposition of fixed fees as determined by the
Congress is not conducive to the success of Ginnie Mae. We
operate in a competitive marketplace and our clear mandate is
to help families realize their dream of owning a home. An
example is our Targeted Lending Initiative where we help
facilitate homeownership by reducing our guarantee by up to 3
basis points. The pending change to a 9 basis point guarantee
fee, without discretion, would eliminate this important
program.
The process of buying a home is complicated and costly. As
we attempt to be innovative and creative with other
participants in the financing of single-family housing our
options are severely limited by a mandated fee structure. In
addition, as we strive to encourage others to reduce costs it
does not enhance our credibility to raise our fee.
Q.2.b. Would you support a study to evaluate the impact of this
increase on the homebuyers and on Ginnie Mae's volume?
A.2.b. I would be in favor of such an impact study. The most
likely scenario is that the increased fee would be paid by the
first-time homebuyer at the time of closing rather than being
absorbed by the mortgage originator. Such an outcome is
counterproductive to what Ginnie Mae attempts to accomplish. To
the extent that a study provides reliable data it would be
helpful to all parties considering this policy matter.
RESPONSE TO WRITTEN QUESTION OF SENATOR CARPER FROM JENNIFER L.
DORN
Q.1. Will you continue to support flexible funding that allows
Federal Highway allocations to be used by States for transit
infrastructure projects, that is, buying more buses, building
capital facilities?
A.1. Since the advent of flexible funding in the Intermodal
Surface Transportation Efficiency Act of 1991 (ISTEA) and its
continuation in the Transportation Equity Act for the 21st
Century (TEA-21), local officials have had the flexibility to
allocate Federal highway and transit resources to solutions
that best meet the needs of their residents. In my view, local
communities are in the best position to know what their
transportation needs are and should remain responsible for
managing those needs within the framework of national
priorities. I support flexible funding because it is an
important component of meeting the transportation
infrastructure needs in communities across the Nation.
NOMINATION OF:
DONALD E. POWELL, OF TEXAS
TO BE A MEMBER AND CHAIRMAN OF THE
BOARD OF DIRECTORS OF THE FEDERAL
DEPOSIT INSURANCE CORPORATION
----------
TUESDAY, JUNE 26, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538 of the Dirksen
Senate Office Building, Senator Paul S. Sarbanes (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. Let me call today's Committee hearing to
order. I want to welcome everyone.
We meet this morning to consider the nomination of Donald
E. Powell to be a Member of and Chairman of the Federal Deposit
Insurance Corporation Board.
I think we will turn, because I know she has other pressing
engagements, to our colleague, Senator Hutchison, to introduce
Mr. Powell.
Two Members of the House also wish to make statements. The
House is apparently voting at 10 a.m. So when they come over we
will give them an opportunity to speak as well.
But I think we will move forward with the hearing. And
before any of us makes any statements, we would be glad to hear
from you, Kay.
STATEMENT OF KAY BAILEY HUTCHISON
A U.S. SENATOR FROM THE STATE OF TEXAS
Senator Hutchison. Thank you, Senator Sarbanes.
I just want to say that Senator Gramm and I both know Don
Powell very well and have worked with him in the State of Texas
for a long number of years.
I cannot think of anyone that I would more highly recommend
for the office of Chairman of the FDIC than Don Powell.
He does have a background in banking. He's the President
and CEO of First National Bank of Amarillo, Texas, and he
certainly has knowledge and experience in this area.
He has seen banking at its best and banking at its worst,
having gone through the 1980's when Texas was going through a
difficult time. And I think that the Vice President of the
American Banking Association, Don Ogilvy, said it best--his
background and expertise makes him very qualified to head a
Federal agency which provides confidence for depositors and the
U.S. banking system.
In addition to being one the premier bankers in Texas and
being active in the American Bankers Association, he has also
dedicated his life to public service.
He has served as Chairman of the Board of Regents of Texas
A&M University and he was a wonderful visionary leader for
Texas A&M during his term as Chairman, which has just recently
ended. He has helped build the university to one of the premier
public universities in America and raised its academic standing
and has made it a real force for education in America.
I cannot think of anyone who would be better in this type
of position and someone who will be dedicated to assuring that
our banking system remains the safest and most secure in the
world.
With that, I certainly recommend him to you and hope that
you can expedite his confirmation so that he can get to the
job.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Hutchison.
We very much appreciate your coming and we certainly appreciate
your statement.
I know you have other engagements. So if you wish to excuse
yourself, we understand.
Senator Hutchison. Thank you, Mr. Chairman.
Chairman Sarbanes. I want to welcome Donald E. Powell
before the Banking Committee this morning.
The President has nominated Mr. Powell to be a Member of
the Board of the Federal Deposit Insurance Corporation and to
serve as its Chairman. His nomination papers were completed as
of June 11, 2001, and we scheduled this hearing promptly
thereafter. Mr. Powell earned a B.S. in Economics from West
Texas State University and studied at the Southwestern Graduate
School of Banking at Southern Methodist University.
Mr. Powell spent his entire professional career in the
community banking industry in Texas, first as a General Loan
Officer in the First Federal Savings and Loan in Amarillo, and
then subsequently with the First National Bank of Amarillo. He
became Chairman and CEO of that bank in 1987, and managed the
bank through financial difficulties that the banks were
experiencing in the 1980's, and from all reports, did an
outstanding job of bringing that institution through some
difficult times. The First National Bank of Amarillo was
acquired in 1993 by Boatman's Bancshares, which in turn was
acquired in 1997 by NationsBank.
Shortly thereafter, Mr. Powell purchased a small bank which
he renamed the First National Bank of Amarillo. That title
seems to stay with him as he moves through life here. He holds
onto it tenaciously, I gather.
Senator Gramm. It is a nice title.
[Laughter.]
Chairman Sarbanes. That institution, for which he serves as
Chairman and CEO, operates six branch offices in Texas with
over $360 million in assets. The bank offers the traditional
range of retail and commercial bank and trust services, so Mr.
Powell brings to this appointment a lifetime of experience in
the banking industry, and that has been recognized by a number
of comments that we have received from different groups, of
course from his home State Texas bankers and from other banking
associations, noting his long-time experience.
I am also very much taken by Mr. Powell's contributions to
his community. He has been Chairman of the Board of Regents of
the Texas A&M University system, which has over 90,000
students, which at one point, I gather, for 12 years, was
graced by the presence of Senator Gramm on its faculty.
Mr. Powell has also served on the boards of many other
nonprofit, public, and community organizations, including the
United Way, the Harrington Regional Medical Center, the City of
Amarillo Housing Board, and a number of other educational
institutions.
Mr. Powell, I respect your community involvement and I
think it reflects a sense of civil responsibility and
obligation, which we certainly welcome.
The Chairman of the FDIC plays a critical role in
maintaining the strength of the U.S. banking system. He or she
makes important decisions on complex issues affecting the
Federal deposit insurance system, the oversight of the safety
and soundness of bank operations, and many other aspects of the
financial markets.
So it is a critical position in terms of the proper and
effective workings of our financial system and we welcome Mr.
Powell here today and look forward to hearing his testimony.
Before I turn to you, Mr. Powell, I will turn to Members of
the Committee for any comments they may wish to make.
First is Senator Gramm.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, first, let me thank you for
your very kind comments.
It is a great privilege for me to be here to welcome Don
Powell. There are so many things that I could say about this
good man. He is one of the most respected citizens of my State
and he has a long record in banking and finance.
He took over the First National Bank of Amarillo at a very
troubled time for that bank. In fact, The New York Times wrote
shortly after he took over the bank: ``For nearly a century
now, the bank has been the Rock of Gibraltar of the Texas
panhandle. As the largest bank in the area, its capital helped
build the vast cattle, farming, oil, and gas industries. Its
leaders led the United Way and other charities, and it bought
the works of local artists.'' The point of The New York Times
article was that this Rock of Gibraltar was in very difficult
financial straits. Under the leadership and steady hand of Don
Powell, however, that bank made a dramatic comeback and it is
again the Rock of Gibraltar of the panhandle of Texas.
Obviously, there were many people who contributed to that, but
the leader of the effort was Don Powell.
I appreciate, Mr. Chairman, you recognizing his extensive
commitment to public service. Don Powell has been very actively
involved in promoting good works throughout the State of Texas,
and I want to thank him for his willingness to serve the
greatest country in the history of the world. It is very
difficult to get good people to undergo all of the rigors and
strains of public service.
I just want to publicly say to Don Powell that I appreciate
his willingness to take on this job. This is a very important
position. In fact, nothing is more important to the strength of
the American economy then safe and sound financial
institutions. With the dramatic change in law that has been
adopted in the last 10 years, the FDIC has become a far more
important institution than it has ever been. And quite frankly,
it makes me feel comfortable, Mr. Chairman, to have someone who
will be in that job who has had practical experience in trying
to deal with exactly the kind of problems that the FDIC is
trying to help banks, large and small, deal with all over the
country.
I thank you, Mr. Chairman, for holding this timely hearing.
Chairman Sarbanes. Thank you.
Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Chairman Sarbanes and Ranking
Member Gramm.
Welcome, Mr. Powell. I extend congratulations to you. I am
confident that you will follow on Donna Tanoue's leadership at
the FDIC.
This has been a good year, Mr. Chairman, for the Powell
family, with Colin Powell as Secretary of State, Michael Powell
at the FCC, and now Don Powell as Chairman-to-be of the FDIC.
[Laughter.]
I am pleased to have this opportunity to succeed the
Chairman of the Financial Institutions Subcommittee and look
forward to working with Senator Bennett in that matter.
We heard from our banking regulators last week and we are
fortunate to be witness to an extremely strong banking industry
at this day and time.
While we have to remain vigilant in monitoring warning
signs of a softening economy, we find ourselves with an
important opportunity to take stock of our financial
institutions.
I am committed to taking advantage of this opportunity to
propose comprehensive reform of our deposit insurance system
and I hope to be able to introduce bipartisan consensus
legislation sometime after the July 4 recess.
As I noted in our previous hearing, it is hard to argue
with the FDIC's observation that the current deposit insurance
system is procyclical.
In good times, most institutions pay nothing for insurance
coverage and in bad times, when they can least afford it, there
is the potential for them to be hit with large premiums.
Currently, over 92 percent of our banks and thrifts pay no
deposit insurance premiums. And while it is not always popular
to say so, I think we need to examine together whether that, in
fact, makes sense.
We need to revisit our current system while our banks and
thrifts are healthy and really think through whether our
institutions could sustain 23 basis point premiums under less
favorable conditions--or even now, if fast growth in insured
deposits caused the fund reserves to dip below the designated
reserve ratio. At the same time, I think it would be a mistake
to allow the insurance funds to grow beyond the size necessary
to ensure the safety of our institutions.
As many of my colleagues know, I have been concerned for
some time about our small banks and the troubles they
increasingly have in attracting core deposits. And any
legislation we introduce should in some manner address that
funding problem. I look forward to working with the FDIC on
comprehensive deposit insurance reform in the coming months.
One other issue that I will continue to monitor is the
implementation of the Expanded Guidance for Subprime Lending
Programs that was issued jointly by the four banking agencies
earlier this year. As I have noted in a letter to the agencies,
many have expressed concern to me that the guidance may have
broader consequences than was originally intended.
As a general matter, I have been encouraged by the
increasing number of responsible lenders willing to extend
credit to consumers who in the past may have had to find
sources of credit outside the mainstream financial marketplace.
At the same time, I understand that often times, such
lending programs may present a higher risk to lenders and I
appreciate the regulators' vigilance in taking steps to manage
that risk.
It is my hope that the regulators, legislators, and the
lending community can work together to develop standards for
subprime lending that are clear, that are appropriate, and that
are balanced.
I believe it is possible to manage risk and protect
consumers, while addressing abuses that may have taken place in
the past, without drying up credit to our communities.
I look forward to working with the FDIC to ensure that the
exam guidance is implemented in a way that is consistent with
the intentions described by the agencies.
I thank you for your willingness to bear the scrutiny of
this Committee and I look forward to hearing your thoughts on
these and other issues this morning.
Congratulations, Mr. Powell.
Chairman Sarbanes. Thank you very much, Senator Johnson.
Senator Enzi.
COMMENTS OF SENATOR MICHAEL B. ENZI
Senator Enzi. I thank you, Mr. Chairman, for bringing this
hearing to us at this time. I know that when the current
Chairman leaves on July 11, that we will have two vacancies on
the Board. So, I appreciate anything that you do to expedite
this one.
Chairman Sarbanes. Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman.
Mr. Powell and I had a very good meeting a few days go and
I came away very highly impressed.
This is another great appointment by President Bush and I
look forward to working with you. I wish you well and as
Senator Gramm said, thank you for serving in this arena.
Chairman Sarbanes. Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. I would concur. I enjoyed very much the
meeting I had last week with Mr. Powell. I respect the work
that you had to do when you took over a troubled institution.
It's a real test of leadership and I congratulate you on that
and on your work in your community.
I do think that there are some very important issues,
particularly the deposit insurance reform issues that Senator
Johnson talked about. And also the potential merger of BIF and
SAIF, which I think are key issues. I have other questions over
a period of time about CRA and other issues, but I think this
is a great appointment.
Chairman Sarbanes. Thank you very much.
Senator Bennett.
COMMENTS OF SENATOR ROBERT F. BENNETT
Senator Bennett. I have no statement, Mr. Chairman, other
than to welcome Mr. Powell and look forward to his service.
Chairman Sarbanes. Good. We have been joined by our two
colleagues from the House. We very much appreciate them coming
over. We understand they would like to make a few remarks about
Mr. Powell, and we are certainly happy to hear from them.
Congressman Combest, why don't we go with you first, and
then Congressman Thornberry.
I gather you share the Town of Amarillo, so to speak.
[Laughter.]
Mr. Powell is somehow or other divided between these two
Congressmen.
[Laughter.]
Congressman Combest.
STATEMENT OF LARRY COMBEST
A U.S. REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS
Representative Combest. Mr. Chairman, thank you for
indulging us with a vote and letting us arrive a few minutes
late.
We both do proudly share Mr. Powell and Amarillo and we
appreciate very much your letting us come over, knowing him as
a personal friend and fully in support, obviously, of his
confirmation as Chairman of the Federal Deposit Insurance
Corporation.
All of you have before you information which I think will
show the qualifications that Mr. Powell has for the position.
But what you do not have before you I think is equally as
important, and that is something that we could speak to, and
that is respect and admiration that Don Powell has held in his
hometown.
There is no one who is more respected in Amarillo, Texas,
than Don Powell. And he has earned this respect in his
professional and his personal and his charitable dealings
throughout that community for many years.
He has done a great deal for his community and I think,
more importantly, he has done a great deal for the people in
that community. And I think that shows the character and the
personality of Don Powell that probably might not come through
in looking at many of the things that you have relative to his
qualifications.
I think he is amply qualified and as you will see in this
hearing, Mr. Chairman, Don Powell is just a really nice guy as
well.
Thank you very much.
Chairman Sarbanes. Thank you, Congressman Combest.
Congressman Thornberry.
STATEMENT OF WILLIAM ``MAC'' THORNBERRY
A U.S. REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS
Representative Thornberry. Thank you, Mr. Chairman, Senator
Gramm, and Members of the Committee.
I appreciate also the chance to just say a few words in
support and admiration really of Don Powell, recognizing,
however, that his success in life, as is often the case, is a
result of team work. His partner Twanna is a key part of why
Don has been such a success.
I would like to make just a couple brief points.
One is that Don has worked his way from the bottom to the
top of the banking industry, starting as a loan officer in
1963, and he has done it the old-fashioned way. As the
commercial used to say, he has earned it. He has earned it with
his intellect, hard work, and integrity, and I know he will
carry those qualities forward.
I would also say from my perspective that he led the First
National Bank of Amarillo during a very tough time in the
1980's, as many of you know.
Not only does coming through that time successfully speak
well of his credentials, but also I think it makes him better
prepared to be the Chairman of the FDIC.
Finally, I would just say that I know first-hand that he
takes community service very seriously. The reason that he has
been honored as man of the year in Amarillo or history-maker is
not because he is President of the bank. It is because of what
he has given to the community, often dealing with young people.
I hope that maybe at some point you have a chance to get
into the details, for example, of the Ace Program, where every
student that goes to the at-risk high school in Amarillo has a
chance to go to college. It is because of Don's leadership that
that takes place.
Community and service are not just words. He lives them,
and I know he will take that spirit to the FDIC as well.
Chairman Sarbanes. Thank you. We very much appreciate your
coming over and giving the Committee the benefit of your
statements. We know you have pressing schedules, so if you wish
to excuse yourselves, the Committee understands that, of
course.
Mr. Powell, if you will stand, I would like to administer
the oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Powell. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Powell. Yes, sir.
Chairman Sarbanes. Thank you very much. We would be happy
to hear your statement.
STATEMENT OF DONALD E. POWELL
OF TEXAS, TO BE A MEMBER AND CHAIRMAN
OF THE BOARD OF DIRECTORS OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Powell. Thank you, Mr. Chairman.
Before I make my prepared remarks, if I might, I would like
to introduce a dear friend who is here today. I am sorry that
my family is not here. I do have two boys and four wonderful
grandchildren. My wife is away and she is here with me in
spirit.
But part of my extended family is here and it is a
gentleman that I love very much and served with me at the Texas
A&M University System Board of Regents, and I am delighted that
he is here today, and I would like to introduce him--Fred
McClure.
Chairman Sarbanes. Good. We are very pleased to have you
with us, sir.
Mr. Powell. He is an attorney and from time to time, I kid
him about being my personal counsel. But, clearly, he is not
that. He is a dear friend.
Chairman Sarbanes, Ranking Member Gramm, and Members of the
Committee, it is a great pleasure for me to appear before you
today. I am humbled that President Bush has nominated me to
Chair the Federal Deposit Insurance Corporation. If I am
confirmed by the U.S. Senate, I give to you my solemn pledge to
work closely with all Members of this Committee and the other
financial institutions regulatory agencies to maintain
stability and public confidence in the Nation's banking and
thrift systems.
While I am a newcomer to Washington, DC, I am no stranger
to the banking industry. For the past three decades, I have
been involved in virtually every aspect of the banking
business. In the early 1960's, I started out as a loan officer
at a small savings and loan in the Texas panhandle, and I
eventually became President and Chief Executive of the First
National Bank of Amarillo. During the severe economic downturn
of the late 1980's, I led, with the assistance of others, the
difficult but ultimately successful efforts to revive First
National Bank. Indeed, by 1993, the restoration was complete
and I take great pride in the fact that our successful
turnaround was recognized not only by our community and
shareholders, but also by our Federal regulators.
Being nominated to this position has great personal
significance for me. As a long-time banker and a life-long
resident of Amarillo, I understand how important a strong and
committed bank is to the citizens of our Nation's communities.
When we were faced with the challenges of restoring the First
National Bank to financial health, I understood the severe
adverse consequences that failure would have brought to all
segments of our local community. In short, it is from personal
experience that I can speak directly to the importance of our
Nation's insured banks and thrifts--they are the financial
lifelines for all the citizens of all our Nation's communities.
Our Nation's banking system today is the envy of the world.
It is vibrant. It is innovative. And it is now strong and
secure. We have the most professional regulatory and
supervisory system in the world. But globalization of financial
services, innovative technologies, and legislatively expanded
powers and authorities have changed banking dramatically and
forever. These changes will continue, and they require us to
deal with issues our predecessors could not have dreamed of. I
am confident that with its staff of highly qualified and
dedicated professionals, the FDIC is well equipped to respond
to these challenging and ever-accelerating developments.
In assessing the impact of recent developments on the
financial institutions industry, I am reminded of the immensely
difficult challenges the FDIC has faced and surmounted in the
nearly seven decades since its establishment in the midst of
the Great Depression. Undoubtedly, as the financial markets
evolve, unanticipated policy questions and developments will
continue to arise. In the past, I know that the FDIC encouraged
extensive and rigorous debate in addressing the difficult
issues of the day. And it is with the same spirit of open
debate and discussion that I intend to approach the many
challenging new issues currently on the Agency's agenda,
including the appropriateness of any structural reform of the
overall deposit insurance program.
Let me shift gears for a moment and discuss briefly several
issues that I know are of great interest to the Members of the
Committee, your constituents, and the financial institutions
industry, as expressed to me by Senators these past few weeks,
namely, the Community Reinvestment Act, ``predatory'' lending
and privacy.
The Community Reinvestment Act has been the law of the land
since 1977. And the Federal Reserve Board recently found that
the CRA has contributed to the financial health of our Nation's
communities by bringing credit to localities that, in the past,
have been underserved. As a banker, I also well understand the
significant challenges all insured financial institutions face
in complying with the rigorous requirements of the CRA. As you
may know, the regulatory agencies, including the FDIC, are
about to embark on an extensive review of the CRA regulations.
I am anxious to be part of this process and to learn more from
all interested parties, including bankers and community groups,
whether any changes are needed to make the CRA more effective.
I also look forward to exploring with the staff of the FDIC and
the other agencies how the changes made to the CRA by Gramm-
Leach-Bliley have affected insured financial institutions and
the communities they serve.
Another issue about which I share the Committee's deep
concern involves financial institutions engaging in what
generally has been referred to as ``predatory'' lending or
``predatory'' pricing. From my perspective as a professional
banker, I can say that the application and enforcement of
normal bank underwriting guidelines can go a long way toward
eliminating this practice. I look forward to working with the
FDIC staff and other agencies to determine how we might
effectively bring an end to this abusive practice.
Finally, with the explosion of personal information
maintained on individuals coupled with the growth of the
computerized storage of such information, I recognize that
privacy is becoming a critical issue for many consumers. As you
know, for the first time, Gramm-Leach-Bliley imposed a set of
privacy guidelines on financial institutions. I look forward to
observing how well these provisions are working in practice.
After time, if necessary, I will apprise the Committee of the
necessity and appropriateness of any statutory enhancement to
existing protections.
Chairman Sarbanes, Ranking Member Gramm, and Members of the
Committee, obviously, I have just touched upon a few of the
most important issues facing the FDIC. Let me assure you that,
in addressing this formidable array of legislative and
regulatory challenges, I will never lose sight of what I view
to be the central mission of the FDIC: Protecting depositors,
ensuring the safety, soundness, and financial integrity of
America's banks and thrifts, as well as the ready availability
of the essential financial services provided by these
institutions to all Americans.
Thank you for inviting me to appear before you today. I
look forward to working with the Committee in the future.
I would be pleased to respond to your questions and
concerns.
Chairman Sarbanes. Thank you very much, Mr. Powell, for
your statement.
Last week, this Committee held an oversight hearing with
the bank regulators. I assume you have had a chance to be
briefed on that hearing.
But in any event, the FDIC, of course, has recently made
recommendations with respect to the Nation's deposit insurance
system, involving risk-based premiums, required reserve ratio,
rebates, merging the BIF and the SAIF funds, and the amount of
insurance coverage per account. Have you had a chance to think
through your reaction to these recommendations? Or how do you
view them? I am not pressing you. You may need some time in
there as the Chairman before you can make any definitive
statement. But tentatively, at least, how do you view what they
have laid out on the table?
Mr. Powell. Mr. Chairman, first of all, I compliment the
FDIC and its staff for their thorough review of this important
mission that they have just concluded. I believe they spent
some 12 to 15 months analyzing this and had input from various
communities.
I have read the recommendations. I am not sure that it
would be prudent for me to come with any definitive conclusions
at this time without making sure that, in fact, I have heard
all voices that had input into these important matters. I
understand the recommendations and I think it is premature for
me to come to some definitive conclusions without hearing from
others.
Chairman Sarbanes. Well, I think that is a prudent
statement.
One of the things that came through, though, at the hearing
was the view that these recommendations were part of a package,
that really, to move on one, you should move on another and
that you ought to take them in their totality and not just pull
one out of the package. Do you tend to agree with that
observation?
Mr. Powell. I am not sure that I recognize the importance
of their recommendation. I am not sure that it is critical that
we link all of the recommendations together at one time.
Again, I would want to review and hear from those that had
input into it, but perhaps there are more important
recommendations and we might rank those recommendations. I
don't think that it is important that they all be linked
together, per se.
Chairman Sarbanes. Every time there is a change of command
at the FDIC, we get contacted by constituents who worry about a
reduction in force and that employees who have developed this
expertise at the Agency may be let go.
It seems to me that there are plenty of challenges for the
FDIC, so I start, I guess, from the premise that I don't see a
need for the workforce to--it has been reduced in the past. I
am not sure that process needs to continue.
But in any event, it would seem to me that some premium
should be placed on reassigning employees within the FDIC to do
other types of work, if there are certain areas in which the
Agency undertakes some downsizing. And often, they can be
reasonably trained, I think, to pick up a different line of
activity, which is being done by outside attorneys or other
professionals.
Now there is a bargaining agreement that the Agency has
with the representatives of the employees. Could you work with
those organizations in dealing with the staffing issues,
particularly along this path of cross-training people so that
if the workload ebbs in certain areas and flows in others, the
people can move with the workload?
Mr. Powell. I would be very sensitive to the comments that
you have made, Senator. Yes.
Chairman Sarbanes. I think our view is that, generally, a
very competent staff has been assembled at the FDIC, with a
high level of professionalism, a high level of expertise and,
of course, we are anxious to sustain and maintain that.
Obviously, as Chairman, I presume it would be one of your prime
responsibilities.
Mr. Powell. Yes, sir.
Chairman Sarbanes. Senator Gramm.
Senator Gramm. Thank you, Mr. Chairman.
The last thing I want to do, Don, is force you into
discussing controversial issues. So, probably, the most logical
thing for me to do, instead of asking you where you stand on
these issues, would be simply to take the few moments I have to
talk about these issues.
The first issue related to the FDIC, which is very much in
debate now, is whether the insurance limit should be raised.
The argument for is that it would help small banks attract
deposits. The argument against is that anyone who remembers the
terrible days of the S&L crisis, when you had brokered
deposits, saw this incredible flow of deposits into banks that
were clearly insolvent in $100,000 increments, greatly
destabilizing the system.
We were in the terrible position of not having the money to
close these institutions down.
I remember sitting exactly where Senator Miller is now
throughout this whole debate. So it had a profound effect on my
thinking. I think that experience is the primary reason that I
am opposed to raising the deposit limits.
Deposit insurance is very important for small depositors.
But it is important that large depositors look at the stability
of banks and that is part of the disciplining process for
banks.
The second issue that you are going to run into is
predatory lending. Even though I have thought about it as much
as anybody in the Senate, I am still not yet sure what this
issue is about.
I have no doubt, with the huge numbers of lenders, that
some are abusive. And I don't have any sympathy for crooks.
My concern, however, is that I am beginning to see a
proliferation of lending where banks are using their improved
marketing skills to find people with marginal credit who cannot
get loans at prime, but can get access to the credit market at
subprime rates.
I guess I am sensitive to it because my momma borrowed
money from a finance company to buy a house. And she paid a 50
percent premium to borrow that money. Some people might look at
that as predatory lending. But given the circumstances of my
household, banks were not going to make that loan.
The net result of that loan is that my mother was probably
the first person in her family since Adam and Eve ever to own
the house she lived in.
I would call that, from the point of view of family-
building, about as important a loan as you could make. I don't
remember the name of the finance company, but they were public
benefactors.
I want to be sure, in the name of combating predatory
lending, that we don't deny access to credit for people who
don't have perfect credit ratings, don't have stable jobs, and
have difficult family situations.
I would just ask you, in looking at this, to ferret out
abuses. But we don't want to institute law or regulation that
simply produces a situation where the easiest thing to do is
simply not to make marginal loans.
The final issue which you are going to run into is privacy.
You mentioned it in your opening statement, and I would just
like to say that I am sensitive to privacy--I value my own
privacy.
But I am very much moved by the fact that, as I look at
economic data, about 20 percent of the cost of anything we buy,
on average, is attributable to the cost of bringing buyers and
sellers together. And whatever we can do in using market
information to eliminate that cost, we can raise the standard
of living for ordinary people dramatically.
So, you have a real question of what it means to protect
``privacy.'' I get every gun magazine, every hunting magazine,
every dog food and dog medicine magazine, and catalogue --I
guess because I subscribe to Gun Dog magazine. Is that a
violation----
Senator Dodd. You have dogs, don't you?
Senator Gramm. I have dogs.
Senator Dodd. You had me worried there.
[Laughter.]
Senator Gramm. Is that a violation of my privacy? Or am I
better off as a result of it?
I do not get a Neiman-Marcus catalogue. They probably have
looked at my consumption patterns and decided that I am not a
good candidate for a $14 catalogue.
Senator Dodd. Bet you are going to get one now.
[Laughter.]
Chairman Sarbanes. There is an open invitation for a
Neiman-Marcus catalogue.
[Laughter.]
Senator Dodd. You are on C-SPAN here.
Senator Gramm. Wait a minute.
[Laughter.]
I need to end because the red light is on. But I would say
this--I have been using that analogy on this issue for 3 years.
I have not yet received a Neiman-Marcus catalogue, and I should
not get one. It costs them, I understand, $14 to send, and it
is not a good investment of their money to send one to me.
Now, is my privacy violated by the fact that Neiman-Marcus
has figured out that I am not a good potential customer,
whereas, a veterinary catalogue probably is?
I think that is a question we must come to grips with. It
is not that they are interested in my private life or any of
that kind of business. They want to know, am I buying dog food
or am I buying luxury items? And am I poorer by their knowing,
or is my privacy violated?
So, I just want you to pray hard over these things when you
are making decisions, because I think they are very, very
important. They may not be clear. They may not be black and
white. But, gosh, they are very important.
Thank you for your indulgence, Mr. Chairman.
Chairman Sarbanes. Thank you very much.
Senator Miller.
Senator Miller. I don't have any questions, Mr. Chairman.
Chairman Sarbanes. Senator Bennett.
Senator Bennett. No thank you, Mr. Chairman.
Chairman Sarbanes. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. First of all, Mr. Powell, I want to
congratulate you for not responding to Senator Gramm.
[Laughter.]
You are one smart cookie. You are going to do fine.
[Laughter.]
Mr. Powell. He is one of those important voices that I
hear.
[Laughter.]
Senator Dodd. I know. That is always a good test for me.
This compulsion to feel like you have to respond to everything
that gets said up here. That is a good indication that you are
going to do fine in this job.
Congratulations to you and welcome. You have a wonderful
background and experience.
Just to follow up on Senator Sarbanes, you are taking over
from a wonderful individual that many of us have worked with. I
told a story the other day about her coming to my State. It
literally took a day for her to get there with the terrible
weather. It may not have been cosmic in scope, but there are
400 or 500 people up there who dedicated a good part of their
professional lives to help out in dealing with these issues in
Connecticut, and she came up and met with them, and we are very
grateful.
You cannot do that all the time, obviously, in terms of
allocation of your own time. But it is tremendously helpful.
Senator Gramm has mentioned his concerns about predatory
lending. And just for my purposes here, we are not interested
in putting undue restrictions on institutions. But for people,
to take the very example that the Senator from Texas talked
about--people who are on the margins--and to be able to own
their own home and get started is tremendously important. And
making it possible for them to do it so that they don't fall
back.
Many of our laws are not written for good people. They are
written for that small, or relatively small, percentage that
violates the law and takes advantage of people.
We probably do need to look at it. It is more than just
anecdotal, I am afraid. And obviously, your advice and counsel
on that is something that we will be anxious to receive.
Privacy issues are very complicated, but very serious as
well. And again, I think that all of us appreciate the needs of
businesses to be able to market. We also know that there are
those out there who will take information and use it for less
than just purely business purposes, and we are worried about
that.
I can tell you, I don't care which State you go to, this is
right under the surface with people. It is an explosive issue
and it needs to be handled well because there are unintended
consequences of well-intended legislation, whether it is in the
area of health care information or business and financial
records of individuals.
It needs work, but it is serious and people are worried
about it.
Just as an aside, it is been several years now, I told the
story of being with a friend of mine who was in the business of
collecting data and was trying to make a decision on whether or
not to invest in a company that literally had in the backseat
of an automobile a personal computer and a printer in which
they could literally read a license plate and take down that
license plate, program it, and provide about a foot and a half
worth of public data, now.
This was public information that was available. I suspect
that I knew more about the owner of that automobile than he or
she knew about themselves in terms of what was available
through public information. And to the extent that this
information is available and then gets used and shared in ways
that could be harmful to people, and a lot of it can be
misinformation, false information, as well it could be
tremendously damaging to people.
Whether it is health care records or financial records, the
kind of information being collected from children, parents, and
individuals who want to have a greater sense that they can be
protected. We need to work at that and obviously, your counsel
and advice is something that I would look forward to hearing.
These are two very important questions.
I again thank Senator Sarbanes for raising the issue about
the personnel of the FDIC. We have been very impressed with
them over the years.
We passed Gramm-Leach-Bliley about a year and a half ago. I
wonder, just as someone who has been in the banking field, how
you see this legislation. Have you seen any effects on small-
and medium-sized banks as a result of the passage of that bill,
just in the short time since its adoption?
Mr. Powell. Senator, I think it is too early for us to
assess the consequences. I think that there are some great
opportunities and the legislation allowed banks to diversify
the risk.
At the same time, I think there were some parts of it that
we just don't know how effective it is going to be and time is
going to tell us more as we go forward.
I have not heard any strong voices from the banking
community that there is anything in there that is bad, per se,
that they cannot live with. But I think the voices have been
rather mute. We don't know yet. Several institutions are
attempting to take advantage of some of the new opportunities
and we will just have to wait and see what happens.
Senator Dodd. Thank you very much. We wish you well. We
look forward to working with you.
This is probably a subject matter at some point, Mr.
Chairman, not now, but maybe in a year or so, that we might
want to take a look and see how the the Gramm-Leach-Bliley bill
is doing.
Chairman Sarbanes. Well, it was such a difficult struggle.
Why don't we let it settle a bit?
[Laughter.]
Senator Dodd. I said a year, year and a half or so.
[Laughter.]
Thank you very much, Mr. Chairman.
Thank you, Mr. Powell.
Mr. Powell. Thank you, sir.
Chairman Sarbanes. Let me just make this observation.
You are coming in, I think, at a very challenging time. I
was just looking at a review of some indicators.
First of all, after 5 very good years, the rate of
nonperforming commercial and industrial and personal loans
increased by over 26 percent in the year 2000. While
delinquency rates for credit card and consumer loans are below
the high levels that we experienced during the last economic
downturn back in 1992, they have risen back to levels
comparable to 1993.
Consumer leverage seems to be at an all-time high. Credit
card debt is rising rapidly. Debt service payments now
constitute over 14 percent of disposable income.
The mortgage bankers tell us that 10 percent of the
mortgages backed by the Federal Housing Administration are now
30 or more days delinquent. In fact, The New York Times said
just a few days ago, ``that the mortgage problems underscore
one main reason many policymakers and economists are so
concerned about whether the United States will enter a
recession this year.''
We have had the percentage of commercial and industrial
loans that are noncurrent--that is, delinquent--there has been
an increase in the amount held by large banks, not by small
banks, apparently.
There are a lot of concerns out there, I think, as you take
over. Obviously, you will need to review all of that.
I think the FDIC may well have to consider intensifying its
examination of these issues without at the same time cutting
off the appropriate flow of credit. That is always a problem
and we are very much aware of that.
We have contradictory objectives. We have a downturn. The
Fed has been cutting the rates, obviously, to stimulate
economic activity. Presumably, they will cut them again
tomorrow. The Open Market Committee is meeting right now.
On the other hand, when you have a worsening economic
situation, you have a deterioration in some of your credit
standards.
So how do you make sure that they are not extending credit
where it shouldn't go without cutting off economic activity?
I think that is going to be a very sort of first-item
challenge on your agenda.
Now, we had the benefit of the four regulators last week
before the Committee. We just did a straight oversight
committee. It was not prompted by some crisis situation. We
thought just as a standard practice, we should do that from
time to time.
Of course, we had the current Chairman, your predecessor
here. Your coming in now, so you have a chance, one, to examine
what they told us and, two, to examine the Agency's activities
with a fresh perspective, and we certainly invite you to do
that.
Chairman Tanoue told us on this sub-prime lending issue
that the FDIC has intensified our supervisory attention to the
roughly 150 banks and thrifts with sub-prime lending programs.
Senator Gramm made a reasonable point. We have a sub-prime
market. We are not trying to dry that up. We just want to get
at the excesses that are taking place.
In fact, I was struck in your statement by your reference
that the application and enforcement of normal bank
underwriting guidelines could go a long way toward eliminating
the practice. What you have is these loans, in some instances
being made unrelated to the borrower's ability to repay and
solely based on the equity and the collateral, which they then
proceed to strip away from them over time by the fees,
refinancing, and all the rest of it. So, they never relate it
to their ability to pay it back. It is just whether they are
holding enough equity, that they can strip it away from them.
I think there is something that the FDIC and other
regulators can do to monitor the sub-prime lending market. And
the other regulators are looking at this issue, as you know,
and of course, we invite the FDIC to do so as well.
We look forward to working with you. I think as you have
stated in your statement, it is a real challenge.
I understand that you are in a position and intend, if
confirmed, to abide by all the conflict requirements, which in
your instance, since you are coming right out of the banking
industry, are quite extensive.
But we understand you have undertaken that obligation or
are in a position to do that. And of course, that is part and
parcel of moving forward into this position.
With that, the Committee will conclude. Members may have
some questions that they will want to submit to you. I am not
certain if they do. We hope you will answer them promptly and
get them back to us.
Mr. Powell. Thank you, sir.
Chairman Sarbanes. The Committee stands adjourned.
[Whereupon, at 10:55 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of the nominee,
and response to written questions follow:]
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
I would like to welcome Mr. Donald E. Powell before the Banking
Committee this morning.
The President has nominated Mr. Powell to be a Member of the Board
of the Federal Deposit Insurance Corporation and to serve as its
Chairman. His nomination papers were completed as of June 11, 2001. I
have scheduled this confirmation hearing as expeditiously as possible.
Mr. Powell earned a B.S. in Economics from West Texas State University
and studied at the Southwestern Graduate School of Banking at Southern
Methodist University.
Mr. Powell has spent his professional career in the community
banking industry in Texas. From 1971 to 1997, Mr. Powell worked for the
First National Bank of Amarillo, in which he became Chairman and CEO in
1987. He managed the bank through the financial difficulties that banks
experienced during the mid-1980's. The bank grew to $800 million in
assets and was acquired in 1993 by Boatman's Bancshares, which in turn
was acquired in 1997 by NationsBank.
Shortly thereafter, Mr. Powell purchased a small bank which he
renamed First National Bank of Amarillo. That institution, for which he
serves as Chairman and Chief Executive Officer, operates six branch
offices in Texas with over $360 million in assets. The bank offers
traditional retail and commercial bank and trust services, as well as
management services for farm, ranch, oil and gas assets.
Mr. Powell has been active in his community. He has been Chairman
of the Board of Regents of the Texas A&M University system, which has
over 90,000 students. Mr. Powell has also served on the boards of many
other nonprofit, public, and community organizations, including the
United Way, Harrington Regional Medical Center, High Plains Baptist
Hospital, City of Amarillo Housing Board, Amarillo College, and West
Texas State University Foundation.
The Chairman of the FDIC plays a critical role in maintaining the
strength of the U.S. banking system. He makes important decisions on
complex issues affecting the Federal deposit insurance system, the
oversight of the safety and soundness of bank operations and many other
aspects of the financial markets.
We look forward to hearing the testimony of Mr. Powell before the
Committee.
----------
PREPARED STATEMENT OF SENATOR JIM BUNNING
Mr. Chairman, I would like to thank Don Powell for testifying today
and I would like to thank you for holding this hearing in such an
expeditious fashion.
I think President Bush has once again demonstrated that he will
continue to ask outstanding people to serve in his Administration.
Obviously, Mr. Powell has a great deal of experience in the banking
industry. I think he will do a fine job at the FDIC.
I hope that the Committee will report this nomination, once we get
our own organization settled, in an expeditious manner.
Once again, I urge all of my colleagues to accept Mr. Powell's
nomination.
Thank you, Mr. Chairman.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM DONALD
E. POWELL
Supervision and Regulation
Q.1. In the 1990's, the Federal Deposit Insurance Corporation
established a Division of full-time examiners responsible for
compliance and consumer affairs that is entirely separate from
the Division of Supervision, which examines for bank safety and
soundness. Do you support this type of organizational structure
and feel that it promotes effective supervision?
A.1. The examination and supervision of financial institutions
continues to become more and more complex. New products
(including products designed to serve low- and moderate-income
individuals) and services, competitive pressures, management
and technology issues, among others, all contribute to the
complexities faced by both financial institutions and their
regulators. I do see some benefit to the existing FDIC
structure for examination and supervision, which provides for a
specialized examination workforce for the compliance and
consumer affairs and safety and soundness areas. From the
perspective of financial institutions, I believe it is vitally
important that two goals are met: That they are sent a clear
and uniform message about their financial and regulatory
standing and that the examination process is not unduly
burdensome. Thus, it is critical that the compliance and
consumer affairs exam function is closely coordinated with the
safety and soundness examination function. If confirmed as
Chairman, I will work hard to ensure those goals are met and
that the FDIC provides the industry and the public with a high
level of service.
Liquidity and the Federal Home Loan Banks
Q.2. Over the last decade, core deposits have declined as a
percentage of bank and thrift assets, as individuals have taken
advantage of new investment options. Declining deposits have
forced banks to look elsewhere for sources of liquidity. Small
community banks, which may have limited access to alternative
funding sources, are increasingly relying on advances from the
Federal Home Loan Banks as a way to meet their liquidity needs.
What are your views on this development and its implications,
if any, for the financial services industry?
A.2. As a community banker, I can fully appreciate that the
competition for core deposits is intense. Depositors have many
choices about where to place their funds, both inside and
outside the banking system, and the range of choices continues
to grow. That is a healthy trend, but it means that fewer banks
can fund their loans solely through deposits generated from
within their communities. The prudent use of Federal Home Loan
Bank advances can be a valuable source of liquidity; especially
advances with intermediate and longer terms. Of course, FHLB
advances like any liability investment, can be misused. My
expectation is that the inappropriate use of advances, like
other deficiencies in risk-management at individual banks can
be addressed on a case-by-case basis through the examination
process.
Too Big to Fail
Q.3. Former Federal Reserve Board Vice Chairman Alan Blinder
was quoted in the June 4 American Banker stating that
``everybody knows that there are institutions that are so large
and interlinked with each other that it is out of the question
to let them fail.'' Dr. Blinder's statement contrasts with
official Federal Reserve Board policy and Fed Vice Chairman
Roger Ferguson's recent declaration that ``no institution is
too big to fail.'' Vice Chairman Ferguson has also observed
that, ``After consolidation some firms shift to riskier asset
portfolios, and consolidation may increase operating risks and
managerial complexities.'' Please discuss your views as to
whether some institutions are too big to fail and how your
views would impact the FDIC's policies and practices regarding
supervision and insurance.
A.3. In 1991, in the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), Congress prohibited protection of
uninsured depositors and unsecured creditors if protection
would increase the cost to the FDIC. Congress allowed only one
exception, known as the systemic risk exception, to this
general prohibition. The exception was crafted to ensure that
it would be rarely invoked, and, in fact, it has not been
invoked.
The mere possibility of a systemic risk determination,
however, and full protection for all depositors and all
creditors, may create a public perception that some insured
institutions are still too big to fail. That perception, if it
exists, likely exacerbates that misperception. I know from my
own experience as a community banker that many community banks
also believe that the possibility of a systemic risk
determination gives very large institutions an unfair
competitive advantage. Nothing in the law, however, requires
that uninsured depositors and creditors be made whole even if a
systemic risk determination is made. Blanket protection for all
is not and should not be guaranteed.
A systemic risk determination would also pose problems for
the deposit insurance funds, not merely because of the
potential for large losses. If a systemic risk determination is
made, the FDICIA requires that the extra costs be recovered
through special assessments on the affected fund's members
based essentially on average total liabilities minus
subordinated debt. As the FDIC noted in its Options Paper, the
funding arrangements for systemic risk raise several issues
such as the procyclical nature of this special assessment, and
the fact that small banks would still be required to pay for a
systemic risk determination even though they would never
receive similar treatment if distressed. If confirmed as
Chairman, I would welcome the opportunity to work with Congress
to address this important public policy issue.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER FROM DONALD E.
POWELL
Q.1. Mr. Powell, as a banker, you experienced the financial
difficulties of the 1980's in Texas. What was your philosophy
for dealing with problem banks then and how has that experience
played a role in your approach to banking and resolving problem
banks today?
A.1. As you know, my perspective is that of a banker who
survived the 1980's and 1990's, but had a problem bank at one
point. I felt the most effective way to return a troubled bank
to health was to address the bank's problems directly and
aggressively. I also found it advantageous to work closely and
honestly with regulators, who had an interest in our success.
While timely corrective action can go a long way toward
addressing a bank's problems and reducing the losses in the
event of failure, I also believe that it is important for
supervisors, within reason, not to overreact and unduly limit
an institution's ability to correct its problems. In short, a
private resolution that results in a viable bank is always
better than receivership.
There is no formula that will tell regulators exactly what
to do in every situation. The correct response calls for sound
judgment, common sense, and measured steps. I believe that
combining my own experience at a troubled bank with the
experience and expertise of the FDIC's professional staff, we
will be able to strike a proper balance in the supervision of
problem institutions. If confirmed, I also anticipate that I
will continue to look for ways to improve the supervision
program for all institutions, including those not experiencing
problems.
Q.2. As you know, the FDIC sits with the other banking
regulators on the Federal Financial Institutions Examination
Committee (FFIEC), the Capital Markets Working Group, and other
interagency committees. What will be your approach to the
FDIC's participation on these committees?
A.2. The Federal Financial Institutions Examination Council and
related interagency working groups and committees provide a
necessary venue for the regulators of the banking, thrift, and
credit union industries to coordinate the development of
uniform supervisory standards and polices. Significant issues
that affect all insured depository institutions, such as
examination standards, capital adequacy, the CRA, money
laundering, and the like, have been addressed by the FFIEC in a
coordinated fashion. The FFIEC also serves as a focal point of
coordination with State supervisors. Coordination of uniform
supervisory policies across the financial services industry is
critical to ensure a ``level playing field'' and aids the
development of the least burdensome, most effective response to
supervisory concerns. Participation in interagency committees
helps the regulators to achieve these goals. If confirmed, I
would expect that the FDIC will be an enthusiastic participant
in the FFIEC and the other interagency committees.
Q.3. The FDIC participates in the Basel Supervisors Committee,
as well as other international bilateral forums on deposit
insurance issues. What is your view as to the FDIC's role in
the international financial community and dealing with
countries that look to the FDIC for their expertise in issues
surrounding deposit insurance?
A.3. The FDIC is the world's premier deposit insurance entity.
Its participation in international efforts to achieve financial
stability through bank supervision, deposit insurance, and
failed bank resolution techniques is critical. As I mentioned
in my testimony, one of the challenges we face as regulators is
the globalization of the banking system. Banks today operate
worldwide and coordination of the regulation and supervision of
these institutions is exceedingly important. I would anticipate
that the FDIC, along with the other U.S. regulatory
authorities, will continue to be active participants in these
on-going efforts. More broadly, we live in a global economy.
Economic upheavals in Mexico, East Asia, and Russia over the
last decade have demonstrated that, however distant a financial
crisis may appear, it can significantly impact this country's
economy and its banking system. Consequently, the FDIC's
international activities can have a significant domestic
benefit. In addition, I am certain that there are lessons that
the FDIC can learn from the experiences of other nations in
administering their deposit insurance systems and in bank
supervision, more generally. If confirmed, I intend for the
FDIC to continue its international role.