[Senate Hearing 107-606]
[From the U.S. Government Publishing Office]
S. Hrg. 107-606
THE CONDITION OF THE FINANCIAL MARKETS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
THE CONDITION OF THE FINANCIAL MARKETS AND REGULATORY RESPONSES
FOLLOWING THE SEPTEMBER 11 TERRORIST ATTACKS
__________
SEPTEMBER 20, 2001
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Martin J. Gruenberg, Senior Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
THURSDAY, SEPTEMBER 20, 2001
Page
Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 63
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 3
Senator Dodd................................................. 4
Senator Allard............................................... 5
Senator Stabenow............................................. 6
Senator Enzi................................................. 7
Prepared statement....................................... 64
Senator Johnson.............................................. 8
Senator Hagel................................................ 9
Senator Bayh................................................. 9
Senator Bunning.............................................. 10
Senator Carper............................................... 11
Senator Santorum............................................. 64
WITNESSES
Paul H. O'Neill, Secretary, U.S. Department of the Treasury,
Washington, DC................................................. 12
Prepared statement........................................... 65
Alan Greenspan, Chairman, Board of Governors of the Federal
Reserve
System, Washington, DC......................................... 16
Prepared statement........................................... 68
Harvey L. Pitt, Chairman, U.S. Securities and Exchange
Commission,
Washington, DC................................................. 18
Prepared statement........................................... 69
Richard A. Grasso, Chairman and CEO, New York Stock Exchange,
New York, New York............................................. 45
Hardwick Simmons, Chairman, Nasdaq Stock Exchange,
New York, New York............................................. 49
Prepared statement........................................... 73
Robert Glauber, President and CEO, National Association of
Securities
Dealers, Inc. (NASD)........................................... 52
Prepared statement........................................... 75
Additional Material Supplied for the Record
Letter submitted to Senator Sarbanes by Richard A. Grasso,
Chairman and CEO, New York Stock Exchange, dated September 24,
2001........................................................... 79
(iii)
THE CONDITION OF
THE FINANCIAL MARKETS
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THURSDAY, SEPTEMBER 20, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:10 a.m., in room SH-216 of the Hart
Senate Office Building, Paul S. Sarbanes (Chairman of the
Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The Committee will come to order. At the
very outset, I want to ask all in the room to observe a moment
of silence in remembrance of the many innocent people who have
lost their lives as a consequence of these terrorist attacks,
and in the hopes that the injured will fully recover.
[A moment of silence.]
Thank you very much.
We convene this hearing this morning in an atmosphere and
with a focus very different from that which had originally been
planned. Quite some time ago, this hearing was scheduled to
begin a series of hearings on financial literacy, a subject
which, at least in those days, we all regarded as of critical
importance to Americans, and we were going to have it with the
three principals in the financial markets--the Secretary of the
Treasury, the Chairman of the Federal Reserve, and the Chairman
of the Securities and Exchange Commission. The subject, of
course, remains of importance and we will return to it at an
appropriate time. Today, however, in the wake of last week's
unspeakably savage attacks, we focus on the condition of the
U.S. financial markets and the U.S. economy.
Nine days ago, we witnessed devastation that words are
inadequate to convey. Someday, historians will catalogue,
analyze, and calculate the terrible losses inflicted by the
terrorist attacks directed at New York and Washington. But some
losses--families torn apart, communities devastated--will
remain forever beyond calculation.
At the same time, in the wake of these attacks, we saw the
immediate response of firefighters, police officers, emergency
rescue workers, and volunteers. It was a response of impressive
resolution and courage, giving the world, as The New York Times
in an editorial put it, ``a vision of the valor and
selflessness that is the best face of America.'' None of us
will ever forget their enormous contributions and I want to pay
tribute to their steady courage and sacrifice here this
morning.
It gave us an inspiring vision of calm determination, of
steely resolve, and of unity in a common endeavor. Their
example must guide us as we turn to the challenge of rooting
out terrorism. They must also guide us as well, as we carry on
with our fundamental responsibilities--caring for our families,
educating our children, doing our jobs in a sustained and
productive manner, reinforcing the fundamental strength of our
economy, and of the financial markets whose functioning is
essential to it.
In New York, the center of the Nation and, indeed, the
world's financial markets, we can see a phoenix rising from the
ashes. Given the wreckage in downtown Manhattan, many thought
it possible that our markets would not be able to open for
business as quickly as they did. The fact that they did and
that the infrastructure held, on record volume, is a tribute to
thousands of committed individuals in both the private and
public sectors who went back to work under very difficult
circumstances, having lost friends, colleagues, neighbors, and,
in some instances, family members.
Our capital markets are the most effective in the world and
our witnesses are to be commended, along with many others, for
the role they played in ensuring that the United States'
financial system continues to operate efficiently. New York
remains the world's financial capital. The response of our
witnesses here today and others to the crisis was coordinated,
timely, and effective. They prevented a bad situation from
becoming worse by taking decisive and carefully considered
action.
This morning, we will hear in our first panel from the
Secretary of the Treasury, Paul O'Neill. The Secretary has been
detained, but will be joining us shortly, the Chairman of the
Federal Reserve Board, Alan Greenspan and Harvey Pitt, the
Chairman of the Securities and Exchange Commission. In the
second panel, we will hear from the Chairman and the CEO of the
New York Stock Exchange, Richard Grasso, the CEO of the Nasdaq
Stock Market, Hardwick Simmons, and the CEO and President of
the NASD,
Robert Glauber.
As Chairman of the President's Working Group on Financial
Markets, Secretary O'Neill has led the interagency coordination
of the Government's response to the attacks on our financial
center. Secretary O'Neill, the Administration's point person on
fiscal matters, has also been engaged in evaluating the
potential effects of last week's events on the U.S. economy
and, in particular, on the airline and insurance industries.
Under Chairman Greenspan's leadership, the Federal Reserve took
several critical steps to ensure that the financial community
was able to meet its liquidity needs. In addition, the Fed was
in consultation with other central banks throughout the world,
including the European Central Bank, the Bank of Canada, the
Bank of England, and the Bank of Japan, and helped to
coordinate the bank regulatory process here at home, along with
other bank regulators. Securities and Exchange Commission
Chairman Pitt has done, in my view, an outstanding job over the
past 10 days in coordinating industry efforts to reopen the
securities markets in the wake of last week's tragic events.
Once the scope of damage to our financial community became
clear, the SEC quickly issued the relief necessary to enable
issuers, exchanges, and securities firms to get back into
business. I am looking forward to hearing about the activities
of the agencies under the jurisdiction of our respective
witnesses in detail as we move forward to the testimony.
I will withhold the introduction of the second panel until
we actually have them before us. But we look forward this
morning to hearing the assessment of our witnesses of the
impact of last week's events on the condition of the financial
markets, as well as the impact of the economy, the adequacy of
our response thus far, and what more needs to be done.
And gentlemen, we welcome you before the Committee. I yield
to the Ranking Member, Senator Gramm of Texas.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Well, Mr. Chairman, let me begin by thanking
you for that wonderful statement and I would just like to
identify myself with it.
Last week, we had a terrorist assault on two very visible
symbols of America--American capitalism and American democracy.
Terrorists obviously believe that by killing innocent people
and destroying buildings, they can destroy ideas. But
capitalism and democracy are the crowning achievements of man
on this planet, and they are ideas that are not going to be
killed. In fact, under assault, they become more powerful and
more virulent.
I am proud of what we have done since that horrible event.
It has brought out the best in the Nation. I would, Mr.
Chairman, like to say just one thing about all the people who
were killed in the financial center in New York.
We have a strange way, I think, of measuring importance in
our society. If someone holds an office or is highly visible in
some activity, we tend to attribute great importance to them.
But the people who were working at the World Trade Center, in
the very heart of American capitalism, through their
activities, financially helped create millions of jobs and made
a contribution far beyond that which most people are ever able
to make during their lives. Our society tends to value too much
what is done in the public sector and too little what is done
in the private. Someone who creates a hundred jobs has probably
done more to promote mankind than many who are often identified
as great contributors to society.
I am proud of our fine financial markets. America is
clearly not operating if its financial markets are not open.
When our financial markets are open and our democratic
government is functioning, America is alive and well. A lot of
effort went into getting our markets open again. I want to
congratulate Harvey Pitt and to thank Chairman Greenspan for
his action in providing liquidity. I think, overall, given what
happened, our markets performed as they always do--remarkably
well--and it is a great testament to our system and how well it
works. I have no doubt that while this is a setback in our
current effort to get the economy moving ahead, it is a very
temporary setback financially, and the economy will again be
booming, and hopefully soon.
Chairman Sarbanes. Thank you very much, Senator Gramm.
Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you, Mr. Chairman. Let me begin also by
commending you for your opening statement and thank you for not
cancelling a hearing that was going to be held on a subject
matter that is not insignificant, but obviously, the importance
of the events of the last week or so demand that we spend some
time and attention on the subject matter that you have raised
here today.
I am grateful as well to our witnesses who are taking some
time away to appear before us, and particularly those who are
coming up--I know Dick Grasso and Wick Simmons and others who
will be here to share their thoughts with us.
To those of you in the audience who may be watching this,
this does not look like there is a full attention of Members
here. We should note that a substantial number of our
colleagues, I think roughly half the U.S. Senate, is at this
very hour on its way to New York to meet up there with
officials in the city and to take a first-hand look at the
tragedy. I know Senator Schumer, in particular, was torn about
whether or not to be here this morning on a matter that
obviously is of deep importance to him. But obviously, having
been directly affected as he and Senator Clinton have, as our
colleagues from the State of New York, have decided they should
be there in New York and not here this morning. But he will
have, I know, some comments that he would like to include in
the record, Mr. Chairman, regarding this subject matter.
Let me just spend a minute on a thought or two if I could
and echo Phil Gramm's comments as well. I have no doubt in my
mind whatsoever this morning that our markets and our economy
are going to rebound very strongly. Terrorists may have decided
that they could destroy some buildings, but the idea, the naive
thought that by destroying lives and buildings, you were going
to somehow destroy the strength and vitality of U.S. financial
markets is just not the case.
So if nothing else happens here this morning, I hope we can
reassure those here at home and around the world that acts of
cowardice and evil cannot and will not erode the strength or
the backbone of the U.S. economy and our Nation's financial
markets. The losses we have suffered here, the financial losses
and the loss of these buildings are certainly of significance.
But it is the obvious loss of some 6,000 people, and the
thousands more who have been injured, not to mention the
thousands more who will be injured not just physically, but the
families.
I spent a good part of the last 2 days calling families in
my State. We were not hit as hard as New York or Washington DC.
I do not know the total numbers yet, but I was on the phone
with about 40 different families in my State, many of them from
Canter-Fitzgerald, who was particularly hard hit. Some of you
may know that I have just been fortunate enough to be a father
a week ago today. And to talk to some of these women who have
children,
1, 2, maybe 4, or one woman who is about to give birth to a
child, how do you begin to calculate the sense of loss that
these people will feel for years and years to come. It is
important that we talk about the financial implications. But I
think all of us need to maybe state again here today and over
and over again our deep, deep concern for the human dimension
of this as something that will live with us forever.
Mr. Chairman, I have great confidence and wonderful respect
for the witnesses here. We could not be more fortunate to have
Alan Greenspan chairing the Federal Reserve. I have said that
over and over again. It has been important for a lot of
reasons, probably never more important than it is today. And
Harvey Pitt, who is new to this job, but certainly not new to
the issues at all. We are very fortunate to have him chairing
the SEC.
I have great confidence in our financial leadership in the
country, as the Chairman has pointed out, and as Phil Gramm
has. And we are going to hear from others as well this morning
who will offer us some ideas of where things are. But,
ultimately, for those who have any concerns about whether or
not this economy or this country are going to survive this, let
there be no doubt from this moment forward that we will rebound
and we will be stronger than we were today. And so I thank you
for being here.
Thank you.
Chairman Sarbanes. Thank you, Senator Dodd.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman, I too would like
to thank you for holding this hearing on the condition of our
financial markets. Those of us from Colorado, our thoughts and
prayers are with those who are affected by last Tuesday's
tragic events, as we continue to go about the people's
business.
As a free and open society, we will never be able to
completely eliminate the threat of terrorism. But America is
strong and I do not believe that any terrorist can undermine
our country. There is no casualty figure that will come from
this that will make us lose our fundamental purpose as a Nation
and as a people. Despite their best attempts, terrorists have
not undermined America. One clear example of this fact is the
smooth functioning of our financial markets. And here is what I
saw.
The World Trade Center has a number of major financial
institutions. Many of them suffered devastating losses. Yet,
they continue to do business. The New York Stock Exchange and
the Nasdaq are located only a few blocks away from the World
Trade Center. Despite difficulties with power, water, and
transportation, trading resumed in a calm and orderly manner
less than a week later. Bond markets and banks are also
operating smoothly and the Federal Reserve acted quickly to
inject liquidity into the financial system. The SEC also
responded promptly and successfully.
Although markets are now functioning smoothly, I believe we
can learn from these events to better prepare for the future.
Such preparation is vital, not only for a potential terrorist
attack, but it will also help ensure smooth market operation
during natural disasters and other unexpected disruptions.
America is united and our financial markets remain the
strongest in the world. Our hearts may be breaking, but our
spirit and resolve is firmly intact. I am eager to hear from
our witnesses today and I thank you for being here during this
difficult time. I look forward to hearing your testimony.
Chairman Sarbanes. Thank you very much, Senator Allard.
Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. And again, as my
colleagues have stated, thank you for holding this hearing.
Chairman Greenspan and Chairman Pitt, thank you very much
for being here. We would all rather not be here under these
circumstances. We appreciate your leadership and what you have
done in the last week.
The gravity of this hearing is as heavy as the grief that
sweeps our Nation. I have been from one end of Michigan to the
other in the last few days and while many of my friends and
neighbors have not directly been impacted, we all grieve in the
most profound way with what has happened. Many of us have
friends and family who are directly affected.
The attack on September 11 was not just an attack on
innocent Americans, it was also an attack on our financial
institutions, and the economy as well. And while, as my
colleagues have said, our first goal is to support the families
and the victims, and to also find those who are responsible and
hold them accountable, we simply cannot then shut down, or will
not shut down. We must move forward and that is why it is
important that we restore consumer and investor confidence and
the strength and the resiliency of our financial institutions.
And that is why we are here today and we thank the others that
will be speaking today as well.
I found so many inspiring stories that have unfolded in the
last week. And one of those was the story of Canter-Fitzgerald,
who, despite having lost an astounding 700 of their coworkers
in the attack on the World Trade Center, threw themselves into
restoring their computer networks and communications and were
back in business within 48 hours. If that is not the American
spirit, I do not know what is. They went back to work, not
because they were not devastated, but to honor their friends
and their coworkers.
While we have had a string of bad economic news following
the attack, I think it is important that we emphasize and
reemphasize that the underpinnings of our economy are strong
and functioning following this tragedy. Our banking system
weathered this storm with little disruption or panic and I
commend Chairman Greenspan for your quick decisions to reassert
the discount window, that the discount window was available to
meet liquidity needs and to lower interest rates before the
market opened. We commend you very strongly for that.
I also appreciate the Federal financial regulators' swift
work that helped maintain order and stability in our financial
system. I also want to commend the many firms like Verizon and
their employees who worked so hard on tight deadlines to
restore the communications infrastructure that was crucial to
getting our financial markets up and running again.
Despite the destruction, bond trading resumed last
Thursday, as we know, and the stock market reopened on Monday,
thanks to the hard work of so many people, both within the
Government and outside of the Government.
And now as we gear up against terrorism, and we know that
this could last for years, we have to focus also on our economy
because its strength is what gives muscle to our might. We must
bring all the tools of fiscal and monetary policy to bear on
getting the economy moving and easing the doubts of the
business community and consumers. I work on the assumption that
our system is fundamentally strong and that we will become even
stronger, and I know our witnesses will bolster that sentiment
today.
I would just say that as citizens of Michigan have asked me
what they can do to help, in addition to the prayers that they
are giving continually for the victims and their families and
all those involved, I have said to them, when you finish giving
blood, when you have given your donation to help the victims,
go buy American. And from Michigan, we would like it to be an
American-made car.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Stabenow.
Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. And I do want to
thank you for the rapid change of focus that you had so that we
could hold this hearing and make it even more pertinent to the
events that we just had.
I would also like to commend all of the witnesses today for
the leadership that they have shown during the last 9 days. I
do not think any of us can truly appreciate the monumental task
it was to open the markets Monday morning. I would also like to
commend the entire financial services industry for the
commitment they have shown in working with regulators and each
other during this trying experience. Their reassuring tone
about the stability of our markets has been much needed to calm
the fears of those who invest in America's financial systems.
If the stability and security of America's markets was ever
in doubt, I do not believe anyone could doubt their stability
after the September 11 experience. Few financial systems could
have sustained the losses of New York City, the financial
capital of the world, and after only 5 days, been back and
running without any major glitches in the system. The quick
responses by our market leaders are a major reason why systems
have been phased so little.
Also, as an accountant, I am certain that the financial
institutions of this country and following the money will be a
key to digging out the terrorists and the activities that have
happened, and that will play a key role.
I would also ask that my full statement be included in the
record.
Chairman Sarbanes. It will be included in the record.
Senator Enzi. Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much.
Senator Johnson.
STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Thank you, Mr. Chairman, for your
leadership over this past week.
It was just last Tuesday that Chairman Sarbanes and I sat
together upstairs in the Banking Committee hearing room where
my colleague had convened a hearing into the failure of the
Superior Bank. I walked over from my office in the Hart
Building just before 10:00 a.m., where I had just witnessed on
television the unspeakable horror of the collapse of the first
of the World Trade Center towers.
Despite that tragic backdrop, Senator Sarbanes insisted
that we move forward with the hearing. The Chairman was defiant
that the terrorists would not interrupt our work of overseeing
the institutions that support the greatest economy in the
world. Today, we continue that work.
Chairman Sarbanes. I might add that the police came around
and terminated our hearing.
Senator Johnson. Prudence won over defiance at that
particular time.
Chairman Sarbanes. Yes. It was designed to send a strong
message that we were not going to let the terrorists bring the
Government to a complete halt.
Senator Johnson. But today we continue that work, and we
will hear from a distinguished panel about the condition of the
financial markets following the events of last week. I expect
that we will hear a great deal that will make us proud of our
financial system.
As we all know, our Nation's financial players deserve our
respect and thanks for what has been an around-the-clock effort
to make sure that our markets have functioned as smoothly as
possible. We will also, I expect, learn more about the critical
role our financial regulators play in keeping our system
strong.
Today, I hope that we can reserve some time to thank our
regulators for the hard work they do every day to make sure
that our system can withstand attacks in whatever form.
As Chairman of the Financial Institutions Subcommittee, I
intend to spend a great deal of time over the coming months
taking a look at our Nation's banks and financial institutions.
And while we have so much to be proud of, our system is strong
because of our constant vigilance.
We have a responsibility to learn as much as we can from
the lessons of this past week to make our system even stronger.
We should identify areas where we can do better, and have an
open discussion between industry and Government to determine
how we can work together on these issues.
I am proud of the way that our Government has responded to
last Tuesday's attacks. And while nothing we can do in any way
compares to the heroism we have seen in our firefighters,
police officers, and rescue workers, we have had an important
role to play in responding to this terrible crisis.
I want to take just one moment to mention my Unity Bonds
proposal, which the Senate passed last night. As we in Congress
know, many of the best ideas come from our constituents. I am
pleased to give credit to a citizen from my State of South
Dakota who called my office to ask if he could buy bonds to
show his unity with the victims of terrorists and to support
our struggle against those terrorists. Based on this
constituent's idea, I introduced legislation which directs the
Treasury Department to issue Unity Bonds. The revenue raised
from these bonds is to be used to fund our recovery efforts
from last week's attacks and also to fight our ongoing war
against terrorism.
I am pleased that the Senate passed this measure last
night, just 3 days after I introduced it, and I intend to
continue working closely with my Democratic and Republican
colleagues to make sure that this legislation is in fact
enacted into law.
I have received an overwhelming response from constituents
who want to know when they can invest in America through Unity
Bonds. One county commissioner from New York even called to
find out whether Unity Bonds would be available in time for a
drive they are having this week to encourage people to invest
in America through Savings Bonds. And just yesterday, I would
note that a major credit card bank announced its intention to
purchase $10 million of these bonds as soon as they become
available. America deserves leadership that can work together,
and leadership that can work quickly.
Mr. Chairman, this hearing will allow the Senate Banking
Committee to identify ways that we can respond to the needs of
our financial institutions and the markets. I look forward to
hearing from our witnesses and to working with my colleagues in
a bipartisan fashion to respond to the issues that we can
identify today.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Johnson.
Senator Hagel.
COMMENTS OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you. I want to thank the
private and public leadership of our country, including our
witnesses this morning. That leadership represents the strength
and goodness of this country.
Mr. Chairman, thank you for allowing us an opportunity to
have this leadership representing the dynamics and the strength
of our country to come before us today, and I look forward to
their testimony.
Thank you.
Chairman Sarbanes. Thank you very much, Senator Hagel.
Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Mr. Chairman. I know I speak for
myself and everybody else in the room when I say we are looking
forward to hearing from our distinguished guests today, so I
will make three very brief points.
First, to echo the words of my colleagues, I want to thank
the gentlemen who are with us for your leadership during this
difficult time. Consumer and investor confidence is Topic A
right now and I cannot think of a greater source of reassurance
for the American people than to have men of your stature and
experience in the positions that you currently hold. So I want
to thank you for your service to our country.
Second, the events of the past week should remind all of
us of the resiliency of the financial markets and the economy
of this country, but also of the global interdependence and
possibly some of the vulnerabilities of our systems. And I know
that we will go forward from here to focus on those to make
sure that we are prepared to meet any future contingencies of
this unfortunate type.
Finally, I would just like to say, once again speaking to
the confidence of the public, the long history of this country
should give all of us optimism about the future. We have
overcome civil war, world war, periods of great depression,
social instability, even the assassination of some of our
country's leaders, and yet, the American economy and people
have thrived and overcome. And I am confident when the history
is written about the events of the past week, this will be
another episode in the resiliency of the American people as we
move forward to an even more prosperous and secure society. And
again, I want to thank you for your leadership during these
difficult times.
Chairman Sarbanes. Thank you very much, Senator Bayh.
Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman.
I would like to thank you for holding this very important
hearing today. And I would also like to thank our witnesses for
testifying today and for their leadership in reopening our
markets. The Nation and the world owe you a debt of gratitude.
I cannot put into words the sorrow that I and the people of
Kentucky feel. We are sad, confused, frightened and angry. Our
deepest sympathies go out to the victims, their families,
friends, and
everyone who has been affected by this tragedy. But I also
cannot put into words the pride we all feel.
Our Nation has responded. The overwhelming generosity and
patriotism both at ground zero and all over this country have
moved me in a way that I cannot articulate. I commend all of
you for your Herculean efforts to reopen our markets on Monday.
It was very important to show that we have the will to open the
markets in spite of the threats and attacks.
I would like to start by commending Dick Grasso, not just
for the leadership he has shown in getting his market open, but
for giving the Amex space in his building to operate their
market. I am not sure the American people are aware of that
fact. By allowing the Amex to compete in the facilities shows
the cooperation that we have on Wall Street and our Nation's
commitment to free and open markets.
I would also like to thank Mr. Simmons and Mr. Glauber for
their hard work and for all the assistance they have given. I
cannot say enough about Harvey Pitt. We knew we had the right
man for the job when President Bush sent your nomination up
here to the Congress. But if anyone had any doubts before,
surely they have been erased. Now, just knowing that you were
on the watch last week made me and countless others in the
financial community feel better.
I would also like to thank Secretary O'Neill and the
Department of Treasury for their swift response and decisive
action, both in the extensive law enforcement actions and also
in the smaller moves, such as the tax relief steps the IRS has
taken. The last things that the victims or their families
should have to worry about right now are taxes.
Finally, it is no secret that I am probably the biggest
critic of Chairman Greenspan on this Committee, and maybe in
the entire Congress. But I must commend the Fed's action,
starting last Tuesday. Opening the discount window, stabilizing
currencies, and the 50 basis-point rate cut were bold and
necessary moves that you should be commended for.
I should like to note that our other markets were open last
week, also. The Chicago Board of Trade and the Chicago
Mercantile Exchange were both open last week and the bond
market also did a fantastic job in getting back to business
last Thursday. Thank you, Mr. Chairman, and thank you for
holding the hearing.
Chairman Sarbanes. Thank you, Senator Bunning.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman.
Mr. Secretary, I know you have missed most of the opening
statements. We are glad that you are able to join us here.
Senator Gramm. We could repeat them.
[Laughter.]
Senator Carper. I was thinking of doing that myself.
[Laughter.]
But I will not. A lot of eloquence here at this table and a
lot of excellence at the table of witnesses. Just to sum up,
and then we are anxious to hear from you, I think there are
really four daunting tasks that face us as a Nation coming out
of the tragedies of the last week.
One of those is one that Senator Dodd has alluded to. I
have been comforting, seeking to comfort the families in my
little State who have lost loved ones and to help them begin
the difficult task of rebuilding their lives. The President
will talk tonight about the efforts underway to track down and
to ferret out those who have perpetrated these crimes and to
bring them and those who harbor them to justice. Down the road,
we will begin rebuilding the physical structures that have been
destroyed in Northern Virginia and New York City. And last
week, we began, literally within hours of the destruction of
the World Trade Centers and the loss of all those lives, the
hard work of revitalizing an economy that was already on
tenterhooks. As important as the President's comments are this
evening, and I look forward to hearing those comments as he
addresses a joint session of the Congress, your comments today
are equally important.
We are, as Senator Bayh has said, fortunate indeed to have
a team, not just as highly regarded as the one that is
assembled before us, but a team that is as able to work
effectively as you have and the leadership that you have
provided in the last week. Thank you for joining us today.
Thank you again for the stewardship that you have provided for
our Nation.
Chairman Sarbanes. Thank you very much, Senator Carper.
I want to underscore for the record the comment that
Senator Dodd made, and that is that there is a Senate
delegation that went to New York today. And many of the Members
of this Committee who are not here for this hearing are on that
delegation trip. And I just wanted to make sure that that was
understood.
Secretary O'Neill, we are very pleased you are able to join
us. I know you were detained by an important meeting. We are
pleased to have you and Chairman Greenspan and Chairman Pitt
here with us. Mr. Secretary, I think we will start with your
statement and then move right across the table to Chairman
Greenspan and Chairman Pitt. We will be happy to hear from you.
STATEMENT OF PAUL H. O'NEILL, SECRETARY
U.S. DEPARTMENT OF THE TREASURY
Secretary O'Neill. Thank you very much, Mr. Chairman, and
Members of the Committee. I am sorry I was detained. I was in a
National Security Council meeting, which we are having quite a
few of these days as we assemble information and make plans for
actions that need to be taken. So I hope you will forgive me
for being a few minutes late.
Chairman Sarbanes. Certainly.
Secretary O'Neill. I understand your opening statement was
really quite good and touching, and I thank you and other
Members for the things that you have said. For myself, I do
have a prepared statement and with your permission, I will
simply submit it for the record.
Chairman Sarbanes. It will be included in full in the
record.
Secretary O'Neill. And then I think maybe I will open
myself up for questions.
But at the beginning, I would like to say to you how proud
I am of my organization and Alan's organization and Harvey's
organization. And you all mentioned Dick Grasso and the people
at the New York Stock Exchange, and Wick Simmons of Nasdaq, and
Sal Sodano at American. And I do not know whether anyone
mentioned before I came, but all of the firms that make up the
markets that were involved in this restart effort.
The communications companies, Verizon. The police and the
fire people who were working, especially in downtown New York,
were all part of this fabulous recovery process that allowed us
to demonstrate to the world that while we took a direct hit in
our financial district, we were able to reopen the symbol of
America's economy in very short order. And frankly, I think we
did it in just the right time. There were some voices who were
clamoring for opening on Wednesday or Thursday or even Friday.
I think the right set of judgments were made. We made sure that
we would not have a false start.
I must tell you, if I had known on Monday morning that we
would have the largest day of trading in the New York Stock
Exchange as measured by volume that we ever had, I would have
had a bigger lump in my throat than I already did. But we did
it. And I say that in the fullest sense--we, the American
people, did it. And I think we should be proud that we have
gotten restarted and we have demonstrated we can do it. It is
awfully hard not to also say one additional thing. Monday
morning, when Harvey and I were in New York for the restart, it
was a very emotional, touching time, and those of you who saw
it on television probably got a sense of the emotion radiating
out of those faces that were on the floor. But when we went
down on the floor after the restart, people just wanted to
reach out and touch and say, thank you and God bless you, and
tell the President he has our prayers.
It is difficult that tragic events bring us together. For
sure, they have done that. And not just those of us in the
United States, or those of us who were privileged to have been
on the floor Monday morning. But every communication from
countries around the world has been not only comforting and
reassuring and indicating every possible support, but ready to
move into action as soon as we tell them what we want them to
do. So, I think off of this terrible tragedy, we are seeing the
best of society around the world, coming together with a
determination that we will persevere and we will prevail.
Thank you, Mr. Chairman.
Chairman Sarbanes. Well, thank you, Mr. Secretary.
Mr. Secretary, I am going to impose on you to just take a
moment or two. I think it would be helpful if you would on the
public record--if you would do the parts of your statement
concerning the Government securities and the fixed-income
markets, and the part on the Treasury response with respect to
the IRS. I think there are a lot of people watching this
hearing this morning and I think if we can just lay that out
for the public record.
Now you also reviewed what the other regulatory agencies
could do. I think we can forego that because, presumably, we
will be hearing from both Chairman Greenspan and Chairman Pitt
about the activities of their respective agencies. But I think
we want people to understand what is being done and how
concerns and needs are being addressed. If you could take an
extra moment to do that, I think it would be helpful.
Secretary O'Neill. All right. Mr. Chairman, would you say
again? Government securities and which other areas?
Chairman Sarbanes. Then the Treasury response over on page
four, your IRS tax guidance.
Secretary O'Neill. Okay.
Chairman Sarbanes. And your enforcement things. I think
that that would be important. And you might want to say just a
word or two about economic recovery and impact, although I am
sure we will get into that in the question period.
Secretary O'Neill. Thank you. The Treasury has successfully
adjusted its financing needs in the face of the recent market
disruptions. The Treasury and the other regulatory agencies
worked closely with the Bond Market Association to reestablish
an active and orderly fixed-income market.
Following a recommendation by the Bond Market Association
to close the market on Wednesday, September 12, trading resumed
in all fixed-income markets on Thursday, September 13. Further,
Treasury was able to execute a successful action of 3- and 6-
month Treasury bills on Monday, September 17, with 24 of the 25
primary dealers participating.
And I would say we see going forward no concern at all with
being able to do appropriate and necessary Government
financing. The markets are there. They are deep. And so we are
up and running and we will continue to do so.
With regard to the Treasury response and specifically IRS
tax guidance, the IRS and Treasury are providing relief to all
taxpayers directly affected by the terrorist attacks. This
relief includes extending the time for filing tax returns and
extending the time
for making estimated tax payments. The victims of the airplane
crashes--on the ground and in the air--taxpayers whose
workplace or whose records are in a disaster area, relief
workers, and taxpayers in all five boroughs of New York City,
and in Arlington County, Virginia, the location of the
Pentagon, are among those who qualify for this relief. In
addition, the IRS and Treasury are providing relief to
taxpayers unable to meet tax deposit obligations because of
damage or injury inflicted by the terrorist attacks.
Furthermore, for all taxpayers, the IRS has postponed until
September 24, the due date for all Federal tax obligations
other than deposits of Federal taxes, that otherwise would be
due between September 10 and September 24. This postponement
includes, for example, the filing of returns and the payment of
estimated taxes.
In the enforcement area, Treasury has established an
interagency team dedicated to the disruption of terrorist
fundraising. The team is designed to increase our ability to
identify foreign terrorist groups--and I would further say,
individuals--assess their sources and methods of fundraising,
and provide information that will make clear to law enforcement
officials how terrorist funds are moved. This team will
ultimately be transformed into a permanent Foreign Terrorist
Asset Tracking Center in the Treasury Department's Office of
Foreign Asset Control. This is an extraordinary
effort that illustrates the Treasury Department's creativity in
developing new ways to combat terrorists. And I would offer one
other thing for the record on this subject.
We have resolved that we are going to take an intensive
effort to deal with terrorist fundraising like it is never been
done before. We have assembled, and will continue to add to a
list of known
terrorists and suspected terrorists of individuals and
fundraising organization who, through intelligence activities,
we know have provided financial support. And we for the first
time will systematically use all the information, intelligence
assets, that are at the disposal, not only of our Government,
but cooperating governments around the world, to begin a
closing down of bank accounts, asking other governments to
block accounts, and where there is enough evidence to do it
quickly, to confiscate amounts that are in these accounts so
that rather than deal at a high level of abstraction, we are
going to go after individuals' individual accounts, and we are
going to begin today.
On the subject of economic impact, my prepared testimony
has quite a bit here. And I would summarize my view this way.
There is no doubt that we have had and are having economic
dislocations. Some of them are very obvious.
Closing down the Nation's airways for a period of time has
a severe impact, not only on that industry, but on industries
that depend on air service to move parts and supplies and
communications. And that is an important dislocation and there
are collateral dislocations that flow from that that we all
know about.
There are obvious questions about the terrorist-inflicted
financial damage that will be reflected back into insurance
company and reinsurance company processes. And I think we need
to look at those very carefully.
If you step back, if it is possible to step back, and look
at our economy in a broader sense, going back to September 10,
and then looking at the prospects going forward, I believe
this. I do believe that we were beginning to see the
encouraging signs we were all looking for and hoping for that
our economy was going to start growing at a better rate in the
days and maybe few weeks before September 10.
I have heard so many times in the last few days, America
The Beautiful. And I think about the amber waves of grain. And
I remind myself that the amber waves of grain did not stop
growing on September 11. And it is a metaphor for saying that
there are a lot of strengths in the American economy. I think
we all have a sense of a damaged personal spirit and maybe a
hole in our heart that is never going to get repaired. There is
still a great strength and resilience in this American economy.
And I think, as I understand Chairman Greenspan counseled some
Members of Congress yesterday, that we need to be sensitive to
needs that may develop for additional Federal stimulus in one
way or another. We should give ourselves 10 days or 2 weeks to
assess what is going on.
Yesterday I talked to one of the major credit card
companies and they told me that on a year-to-year basis, their
credit card activity was off 20 percent in the period since a
week ago Tuesday. I think that is clearly to be expected
because people stayed home and looked at their television. They
were heartbroken. But we will recover. We need to be, on the
one hand, deliberate. Where necessary, we need to act with
speed. I think there is no doubt that the airline industry has
a cash liquidity squeeze and we need to respond to that. But I
think it makes very good sense that we respond with deliberate
speed to items that are emergent and that we give ourselves a
consolidation period to think carefully about what we should
do.
And then my own view is this, and I know this is very
difficult because our process has an endless list of things
that people would like to do that have been paraded through the
weeks, months, and years and they are kind of the favorite
chestnuts. I believe that this situation and these events are
sufficiently serious, that we should be really careful and
deliberate in assessing what the needs are, and then responding
to the real needs, not to the off-the-shelf political things
that have been paraded around and we have all debated and
argued about. And I think it is possible to do that. I hope it
is possible to do that because it will demonstrate that we are
really together, and that we are focused on the things that
should bring America together. And to the degree that we need
to provide additional things, it should be first about what is
good for America, not what is good for some group or some
interest that is always there waiting.
Chairman Sarbanes. Thank you very much, Mr. Secretary. I am
glad we were able to draw you out a little bit with, in effect,
a supplementary statement, which I think was enormously helpful
to the Committee.
We will take the other two statements before we go to the
question period.
So, Chairman Greenspan.
STATEMENT OF ALAN GREENSPAN,
CHAIRMAN, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Chairman Greenspan. First, let me associate myself with the
remarks of the Secretary. And I agree that he is raising some
very fundamentally important questions which relate to how this
Government functions and should function.
I would also like to associate myself with everything that
has been said by you and the Committee. This is an
extraordinary time and I think we are all deeply touched.
Indeed, I would like to begin my remarks this morning by noting
how deeply saddened I and my Federal Reserve System colleagues
are that so many talented and productive people from so many
walks of life were lost or irreparably harmed last week.
Although we are here today to discuss some of the immediate
economic and financial implications of that tragedy, we are all
too aware that the topic we discuss will be a mere footnote.
The terrorism of September 11 will, doubtless, have
significant effects on the U.S. economy over the short term. An
enormous effort will be required on the part of many to cope
with the human and physical destruction. But as we struggle to
make sense of our profound loss and its immediate consequences
for the economy, we must not lose sight of our longer-run
prospects, which have not been significantly diminished by
those terrible events.
Over the past couple of decades, the American economy has
become increasingly resilient to shocks. Deregulated financial
markets, far more flexible labor markets, and, more recently,
the major advances in information technology have enhanced our
ability to absorb disruptions and recover.
In the past, our economy has quickly regained its previous
levels following the devastation of hurricanes, earthquakes,
floods, and myriad other natural disasters that periodically
better various regions of our country. Although the trauma of
September 11 shares some characteristics with such disruptions,
the differences are important. In contrast to natural
disasters, last week's events are of far greater concern
because they strike at the roots of our free society, one
aspect of which is our market-driven economy. All modern
economies require the confidence that free-market institutions
are firmly in place and that commitments made today by market
participants will be honored not only tomorrow, but for years
into the future. The greater the degree of confidence in the
state of future markets, the greater the level of long-term
investment. The shock of September 11, by markedly raising the
degree of uncertainty about the future, has the potential to
result, for a time, in a pronounced disengagement from future
commitments. And that, in the short run, would imply a lessened
current level of activity. Indeed, much economic activity
ground to a halt last week.
But the foundations of our free society remain sound, and I
am confident that we will recover and prosper as we have in the
past. As a consequence of the spontaneous and almost universal
support that we received from around the world, an agreement on
a new round of multilateral trade negotiations now seems more
feasible. Such an outcome would lead to a stronger global
market system. A successful round would not only significantly
enhance world economic growth, but also answer terrorism with a
firm reaffirmation of our commitment to open and free
societies.
But before the recovery process gets under way, stability
will need to be restored to the American economy and to others
around the world. Arguably, that stability was only barely
becoming evident in the United States in the period immediately
preceding the acts of terrorism. Aggregate measures of
production, employment, and business spending continued to be
weak.
That said, consumer spending moved higher in August and
appeared to be reasonably well maintained in the first part of
September. Industry analysts suggest that motor vehicle sales
were running close to August levels, and chain store sales were
only modestly lower. Purchasing managers had noted an
improvement in the orders picture in August. Moreover, the
dramatic rate of decline in profits was slowing. To be sure,
these signs were tentative, but, on the whole, encouraging.
During the past week, of course, the level of activity has
declined. The shock is most evident in consumer markets where
many potential purchasers stayed riveted to their televisions
and away from shopping malls. Both motor vehicle sales and
sales at major chain stores, some of our most current
information on consumer spending, appear to have fallen off
noticeably. And, the airline and travel industries have
suffered severe cutbacks.
The unprecedented shutdown of American air travel and
tightened border restrictions have induced dramatic
curtailments of productions at some establishments with tight
just-in-time supply chain practices. Automakers, for example,
are reported to have pared production and even closed some
plants in the past week, largely owing to supply shortages,
though, doubtless, short-term demand uncertainties have also
played a part.
The effect on financial markets of the devastating attack
on the World Trade Center was pronounced, as telecommunications
and trading capacities were severely impaired. But the markets
are mostly functioning now, albeit in some cases using
contingency arrangements, and, as in the past, the
infrastructure will be rapidly restored.
For a brief time, the terrorist attack markedly disrupted
payment transfers that are usually measured in terms of
trillions of dollars each day. Many obligators temporarily lost
their technical ability to pay on time, leaving those counting
on receiving payments caught short. The pressures ultimately
ended up concentrated in banks. Those needs were met by the
Federal Reserve, both through record lending at the discount
window and through an extraordinary infusion of funds through
open market operations. To facilitate the channeling of dollar
liquidity to foreign financial institutions operating in the
United States, 30 day currency swap lines were arranged with
major central banks, again in record volumes. It was essential
in such an environment to meet all appropriate demands for
dollar liquidity. As the financial markets and payment
infrastructure return to normal, loans are being repaid, and
the temporarily bloated balance sheet of the Federal Reserve is
now shrinking back to normal.
Nobody has the capacity to fathom fully how the tragedy of
September 11 will play out. But in the weeks ahead, as the
shock wears off, we should be able to better gauge how the
ongoing
dynamics of these events are shaping the immediate economic
outlook.
For the longer term, prospects for continued rapid
technological advance and associated faster productivity growth
are scarcely diminished. Those prospects, born of the ingenuity
of our people and the strength of our system, fortify a
promising future for our free Nation.
Thank you very much, Mr. Chairman.
Chairman Sarbanes. Thank you, Chairman Greenspan, for a
very thoughtful statement.
Chairman Pitt.
STATEMENT OF HARVEY L. PITT, CHAIRMAN
SECURITIES AND EXCHANGE COMMISSION
Chairman Pitt. Thank you, Chairman Sarbanes.
Chairman Sarbanes, Senator Gramm, Members of this
Committee, I very much appreciate the opportunity to offer the
perspectives of the Commission on the condition of our
financial markets following the terrorist attacks of September
11.
I would like to say before I begin how very important and
very reassuring it is to have had the support of this
Committee. I spoke with many of the Members of the Committee
and I have had the insights of many of the Members of this
Committee, which were invaluable. And I would like to
compliment Secretary O'Neill for the leadership that he and the
Department of Treasury have provided. And Chairman Greenspan
and Vice Chairman Ferguson for their wisdom and their insight
into the markets.
The attacks that we are here to discuss caused irreparable
loss of life and untold physical damage. Like many of you, I
lost people I cared deeply about and had known for decades. But
these attacks did not destroy or diminish our strength,
courage, or resolve.
We grieve for lost friends and relatives. But we also
should be proud of the Nation's extraordinary responses to
these events because they demonstrate that our capital markets
are the world's strongest and most resilient and, above all,
they reflect enormously well on our national character.
These attacks did not arise in a vacuum. So we at the SEC
coordinated our efforts with the larger Federal Government, of
which we are but a part, and we work cooperatively with the
industry that we oversee. This Committee has the ability to
pass upon the public leaders. The leaders of our private
markets are not selected by this Committee or by the
Government. I do want to say that the esteem and respect that I
have for Dick Grasso, Wick Simmons, Frank Zarb, Bob Glauber, is
enormous. These people rose to the occasion and they truly
epitomized what is great about America.
At the Commission, we embrace two critical roles. First, to
assist in implementing national policy. And second, to evaluate
and then facilitate the industry's planned responses, while
ensuring fidelity to the protection of investors and national
interests.
We, along with our colleagues from Treasury, traveled to
New York on Wednesday to meet directly with the leadership of
major markets, securities firms, banks, and clearing agencies,
representatives of the New York governor and New York mayor, as
well as Con Edison, Verizon, and the New York Fed. We assessed
the industry's readiness to reopen the markets. Despite the
broad powers that this Committee had given our agency, we did
not dictate a result. Rather, we facilitated an appropriate
market solution. The decision when to reopen the markets was
made by the private sector, in consultation with us and subject
to our review. But it was a private-sector decision.
On Thursday, the fixed-income and futures markets
successfully resumed trading. That same day, industry
representatives unanimously decided to reopen equity and
options markets on Monday, not Friday. Deferring the resumption
of trading until Monday permitted extensive testing of systems
operability and connectivity. Throughout the weekend, our staff
worked with market and industry participants, verifying that
systems were sound and operational. We reached out to major
market participants to formulate appropriate temporary
regulatory relief, to facilitate the reopening of fair and
orderly markets. For the first time we invoked the emergency
powers that you bestowed upon us and we issued several orders
and an interpretive release to ensure an orderly market under
these extraordinary circumstances.
Government is and must be a service industry. So we made
certain we were accessible both to investors and to market
participants. We placed additional information for investors
and market participants on our website and we established
telephone and Internet hotlines for both. I believe this is the
first time that we provided hotlines for industry participants.
We have done this in the past for investors. And we assured
industry participants that they could bring us their problems
and that we would work with them to find solutions without
recrimination, except in cases of venality, and of course,
there were none. The result of these efforts was evidenced on
Monday when all of the U.S. securities markets resumed trading
without incident. Investors once again relied on the strength
and the soundness of our markets.
All market and investor protection systems were squarely in
place. The markets did not give way to panic-selling and the
extra time taken before resuming trading gave investors an
opportunity to reflect and to speak out about the strength of
America's markets. And the world heard them loud and clear.
I appreciate this opportunity to present our views and in
closing would like to recognize again the leadership and wisdom
that my colleagues here provided for us, to make special
reference to the other Commissioners at the Commission who were
very supportive and helpful in all of this, and to a very
wonderful, knowledgeable, and dedicated staff that worked all
the way through the weekend, giving of themselves time and time
again to help us work with the private sector to get our
markets in full operation.
Thank you, Mr. Chairman.
Chairman Sarbanes. Well, thank you very much, Chairman
Pitt.
I say to the Members of the Committee, given the large
number of Senators that are present, we will have 5 minute
rounds.
First, I want to again commend the Treasury, the Federal
Reserve, and the SEC for their response to this situation. All
of your agencies have highly skilled, expert people, and that
talent was brought to bear. That, in the end, is really the
basic strength of our country, in both the public and the
private sector. And we know that people worked all night, over
the weekend, and everything else in order to try to address
this situation. I want to underscore our appreciation to them.
Second, I want to commend all of you for your consultation
with the Congress, which was immediate and continuous, and I
think is very helpful in enabling us to make sure that we have
a unified view on matters, which I think was important in these
days in helping to restore matters.
Now I am reminded a bit of the advice, the medical advice--
do no harm--as the first guiding principle. I think my
colleague, Senator Gramm, has used that advice.
Senator Gramm. I have not lived in vain here.
[Laughter.]
I have not lived in vain here. The Lord's name be praised.
[Laughter.]
Chairman Sarbanes. And Secretary O'Neill, in your
supplementary statement, you indicated your sort of view about
being careful--prudent, I think, would be the right word--
prudent now with how we move with respect to one or another of
the economic proposals that are before the Congress.
Chairman Greenspan, you came up yesterday and participated
in a meeting with the Congressional leadership in which you
addressed that subject. And it is reported in the morning
paper, but I would invite you to take a few moments now to give
us your view on that matter as well, if you would.
Chairman Greenspan. Mr. Chairman, What we know about a
situation such as this is that there are a combination of
forces impinging on the American economy which we cannot at
this particular stage disentangle. Most importantly, we know
that there is a combination of infrastructure problems and
technical and physical breakdowns that have occurred. And until
we can see what the economy looks like without them,
appropriate policy initiatives, in my judgment, are premature.
We have a very complex, sophisticated economy and even the
slightest aberration ricochets throughout the system. And when
you have a devastating impact on the financial system such as
we have been discussing here today, until it works its way
through the system, until all institutions are up and
functioning, until we find that the just-in-time supply
problems which have been occurring as a consequence of the air
traffic problems and the border closings, which are not
irrelevant to this issue, we will not be able to separate what
the underlying demand and supply factors are. And it is they to
which we must adjust policy.
We know that the infrastructure problems will all be
restored, and balance, insofar as the mechanism of the economy
is concerned, will be rapidly back in place. But we cannot tell
at this stage which is a physical problem which will be
reversed in a manner similar to a hurricane or a flood, and
which is a more deep-seated, underlying problem.
And it is the latter, as I indicated, that we have to
address. And what I said to your colleagues yesterday
essentially is that we will know in a reasonably short period
of time--the Secretary has said 10 days, a week to 10 days, a
little longer. It may be a little longer, but not much longer.
And I would strongly suggest that while there is obviously, a
very strongly desired sense to move rapidly, that it is far
more important to be right than quick.
Chairman Sarbanes. I think we ought to underscore that
there have been a number of policy measures taken over the
course of this year, the Fed in successive reductions of the
interest rates, the tax rebate that is now going out, and now
there is going to be a fiscal stimulus from investment programs
to recover--I mean spending programs. Some of those policies I
do not think have had a full chance to work their way through.
Presumably, they are providing, or were providing, and will
continue to provide, some lift to the economy. So it is not as
though those policies had fully worked their way out--well, let
me ask you.
Can we reasonably look at the situation and say that the
impact of those policies may well still be working its way
through the economy in terms of giving it a lift in this
context?
Why don't we hear from both Secretary O'Neill and Chairman
Greenspan on that?
Secretary O'Neill. I would say that there is no doubt that
as a consequence of the actions that the Federal Reserve
already took before September 10, and the coordinated action
taken by the Congress to enact the tax program, including the
rebate program, have left the economy in much better shape and
more than there would have been without these coordinated
fiscal and monetary policy actions. So I think what you say is
very wise. We need to remember what was already in place as we
assess what else we might and should do.
Chairman Sarbanes. Yes.
Chairman Greenspan. I might just add, Chairman Sarbanes,
that that does not mean that future actions are not going to be
required, nor does it suggest that some of the immediate
actions, for example, focused on the airline industry, are not
appropriate. Indeed, they are, because as I indicated earlier,
one of the remarkably sensitive problems we ran into was the
extent to which essentially shutting down the American air
space bottled up a huge amount of economic activity all over
the country.
This was not strictly a New York City issue. I think that
bringing the airlines back--I must say air freight has now come
back quite considerably but there is a whole structure of this
economy which rests on air travel which is important that we
bring back as quickly as possible.
So what the Secretary and I have been saying does not
preclude fairly expeditious action on certain issues. I think
the point the Secretary is making, and which I concur in fully,
is that it is very easy in a period such as this, in haste, to
do things that, in retrospect, are not right. I do not think
that waiting a short while really materially alters the impact
of whatever is done on the economy's pattern of growth over the
next several quarters.
Chairman Sarbanes. Thank you very much. My time is expired.
Senator Gramm.
Senator Gramm. Thank you, Mr. Chairman.
Let me just pick up where the Chairman left off. The way I
look at our situation is that Tuesday, a week ago, things
happened that made all 285 million Americans poorer, whether we
are talking about human suffering or about the decline in the
value of somebody's teacher retirement program, or whether it
was a salesman who found a dramatic restriction on their
ability to travel for business purposes. The plain truth is all
285 million people in America, and really, everybody in the
world, is poorer.
The problem we face is that since any assistance we give to
anybody comes from the same 285 million people, we are
incapable of indemnifying everybody. And for everybody we
indemnify, we make everybody else poorer than they were before
the indemnification. So the question is, what is the cut-off
point?
With the airlines, there is no doubt that the smartest
decision made Tuesday a week ago was to bring every plane down
at the nearest airport--that was a very smart decision. The
disruption, the cost, imposed on airlines was immediate. But
the question is, when you get beyond those very narrowly
defined costs, if you go too far, then how do you justify not
providing assistance to Boeing, or to hotels, or to
restaurants, or to people who lost in teacher retirement? The
point is, where do we draw the line?
Now as I look at the Administration's proposal for the
airlines today, if you look at actual losses to this point, you
proposed assistance at roughly twice that amount, now knowing
that there are going to be losses in the future. I want to pose
a question, but I want to ask everybody if they agree with the
thesis.
This idea that we could somehow settle into a new
equilibrium where there is 80 percent of air traffic as
compared to before, is very dangerous. If I knew that we were
going to end up a year from now with 80 percent air traffic, I
would know we were going to have a recession. The 1 percent of
the people who engage in business travel probably create 20
percent of the gross domestic product of America. So that idea
is unthinkable. Rather than bailing out airlines in the future,
we need to get them flying. We need to invest in safety. We
need to rebuild public confidence, and I believe it will come
back.
Now, given where we are with the $5 billion that was
proposed in the insurance indemnification, Secretary O'Neill,
do you believe that we need a loan guarantee, or do you believe
that the direct cash assistance is enough so that the airlines
that could have made it, will find that they are now capable of
getting loans?
Secretary O'Neill. Well, Senator, as I said earlier, I
think in this extraordinary time, we should be very direct
about what we are going to do and what we think we need to do.
A loan is in fact a financial instrument that has an
economic value. I personally favor during these extraordinary
times not dealing with veils and third-order derivatives, if
you will, for people who know what that means. I favor--if we
are going to give people money, we ought to give them money.
And to the degree that there is a belief that we should give
the airlines more money for some other reason, I think we
should give it to them directly. Now, if
you do not mind, I will tell you what I think we should do for
the airlines.
First of all, to this point of analysis, we need to
understand what the problems are and what it is that we need to
do to get back to a market-determined rate of activity in the
airline business. I would submit to you there is a liquidity
problem. We need to give $5 billion or so in liquidity
assistance to the airlines. We have talked about devices for
doing that and I think we are coming to agreement.
Second, I believe that we need to socialize the cost of air
safety. By that I mean the Federal taxpayers need to pay for
the safety that will assure the public that when they get on an
airplane, they are going to go where they paid to go, without
risk of life and limb. It seems to me it is a very
straightforward proposition and we should have probably gotten
to it earlier.
And finally, in order for the airline companies
individually to be economic enterprises, they need to be in a
position that they are responsible for things gone wrong that
are within their control. And to the degree that that means we
have to socialize the cost of insuring against terrorism, we
need to do that. But as we do that, we should be the back-up
guarantor. We should not interfere in the regular process of
commerce. I think if we provide necessary liquidity and if we
assure the safety of people who travel by air, that companies
that are truly viable will have no problem getting capital
infusions from ordinary capital markets.
So my counsel would be, as we work on these problems that
have come from this tragedy, that we separate out the things
that need to be done that are directly associated with this
crisis and that we not in the process of caring so much, make
the mistake of federalizing industries like the airline
industry.
Senator Gramm. If I could just get a yes or no from
Secretary O'Neill and Chairman Greenspan. I assume that both of
you would strongly agree with the thesis that, if we did loan
guarantees, we ought to have a board that has the
responsibility of not making loans they believe cannot be paid
back, and that we should guarantee only a portion of the loan
so that the lender has some due diligence and something at
risk.
Do you both agree with that and agree with it strongly?
Secretary O'Neill. Certainly, I do. The idea of a loan
guarantee suggests that there is a need for a supplemental
back-up because there is doubt about the borrower being able to
discharge their contractual responsibility. And I would say to
you--this is personal experience talking now--for companies
that are not viable, if you want to give them a loan guarantee,
in spite of the fact that they are not economically viable, 80
percent will not do. You need to give them 115 percent loan
guarantee because only a fool would give a failing company
money if you are only going to get 80 percent of your principle
back.
So, the idea of loan guarantees make no sense. If we take
care of the essential clarity of not putting the airlines at
risk for safety things beyond their capability and we take care
of the imposition of the cost of shutting down the airways for
4 or 5 days, viable airline companies will be able to get money
from intelligent investors because that is what intelligent
investors do, is give money to people who give them a good
return.
Chairman Sarbanes. Chairman Greenspan.
Chairman Greenspan. I agree with what the Secretary said.
Chairman Sarbanes. I am going to turn to Senator Dodd. As I
do, let me just make this observation.
The Congress in the past had loan guarantees for Chrysler,
Lockheed, and New York City. All of those loans were paid back.
In fact, we, in a sense, came out ahead.
So, obviously, we have to look at the facts of this
circumstance. But that program was structured in such a way
that it responded to the crisis that confronted us. But it did
it in a way that it worked out, so that there was no cost to
the taxpayer.
Senator Dodd.
Senator Dodd. Thank you, Mr. Chairman. Let me first of all,
say to the panel again how much we all appreciate your
statements.
Secretary O'Neill, your opening comments, if nothing else
out of this hearing, I hope people listen to what you had to
say regarding the notion of caution and what Chairman Greenspan
has said about better to have it right than fast. There has
been the sense of urgency and it is understandable. People want
to respond. They want to do something. And in our desire to do
something we can do some harm in the process. And your wise
counsel here to those of us in Congress who want to respond to
our constituencies, who want to help. And it is hard when you
are in the mood to help, to sit back and wait while things sort
out a bit. So I am deeply impressed with your statements, all
of you. Chairman Pitt, you made the same points and that is
extremely worthwhile.
I wanted to say at the opening remarks how deeply impressed
I was with the work of Dick Grasso, the exchanges, the working
groups, and all of you here. And I think you were right about
the Monday decision. Boy, what a difference we would have had
if we started on Thursday or Friday and there had been a
disruption. And I think that visual of those of you who were
there ringing that opening bell on Monday was tremendously
important. I know the market has been bouncing around in the
last couple of days. But I think those have been very important
decisions and I just wanted to restate them again.
I would like to raise a couple of questions. First of all,
just to follow up on the line of questioning that Phil had
started. I think it is an important one on the airline
industry. I would hope in your assessment of this, whether you
talk about direct investments--let me put a question mark at
the end of this rather than try to give you sort of an
editorial comment. As you are looking at this, you are going to
be looking at events beginning on Tuesday, September 11
because, frankly, there were problems, in my view, with the
airline industry that existed prior to September 11. And I
would hope that as we try to do things to assess or to correct
problems, we are not reaching back further, in a sense, beyond
that.
That is a difficult thing to do. I am not suggesting that
that is an easy task. But it is going to be extremely important
because your job gets a little bit easier in the point you are
making. When you talked about Lockheed, and I agree with
Chairman Sarbanes about this, having been here with Phil and
others when we went through the New York City, Chrysler, and so
forth. There you were dealing with single entities and it was
easier to get your hands around.
Here you are dealing with multiples, where there are
varying degrees of good management and success. Some airlines,
if we walked in and said, we need help, based on who they are
and who is running them, you would not need much more than
that. There are others, you might not give a nickel to based on
who is running them. So I would hope that as you are looking at
that, you will keep in mind, we are talking about September 11
forward as a result of what has happened.
I wonder if you might as well, since we talked about the
airline industry and where you are in that. In my State
obviously, the insurance industry is a major factor. We have
received calls from the industry themselves as to where things
are. They seem fairly confident and optimistic that they can
handle the situation. But I wonder, Mr. Secretary, if you would
give us your assessment of the implications to the insurance
industry.
Let me point out, by the way, I should have done this. We
got a letter this morning, and I am sure all of us are going to
be getting letters similar to this one. This letter was from a
car livery service in my State, the point again that Phil was
making. This car livery service is going to lose, according to
Susan Garino in my State, 75 to 90 percent of sales already.
This is a little company. This is a small business. I
understand we are going to come in and airlines are going to be
asking for help but what are we going to do for Susan Garino
and her business and the 5, 10, 15 employees. Again, I am not
suggesting you can do something for everybody. But you have
11,000 people at U.S. Air who lost their jobs and 30,000 at
Boeing.
I would like to hear, if I could some comments about what
suggestions you would make in terms of unemployment assistance
to people who also have suffered here. And I realize there may
be some limits. But it seems to me people who are working hard
and doing this--the people in the industry, people at Canter-
Fitzgerald, I have talked to some of these people and they are
worried. They had limited partnerships. They have four or five
kids in these situations.
Now you had a huge loss there, and this may get a little
bit beyond your range of ability. But I think expressing some
thoughts about this to the industry leaders as to what might be
done could be helpful. So I wonder if you might just make some
comments on those three or four items.
Secretary O'Neill. Thank you, Senator. I am really
impressed with your analysis of the situation.
With regard to unemployment insurance, I saw in the
newspaper this morning that there is a question about New York
State. I think we should respond, and we will respond as we
have on other occasions where we have had strains in the
unemployment insurance system. There is no doubt, together, we
will work that out.
I want to go back, before I talk directly about insurance
companies, to this question of the industries that are affected
and the activities that are affected by this airline crisis,
because I have heard from some important hotel people who are
dramatically affected by the consequence of this. And if we are
going to fix their problem, we have to get people back in the
air. And the way to do that is the things we talked about
earlier.
Again, we need to focus very clearly on where the lever
points in our economy are and make sure we are not treating the
secondary or tertiary consequences, but we are fixing the hole
in the system that will make everything else work. And airlines
are really important to that because it will put the
possibility of conventions and the like back in place, many of
which are being cancelled now because people are fearful and
the rest of that. So I think we need to work on the clear
problem and the successful ones will then begin to take care of
themselves.
On the question of the insurance companies, I honestly do
not think we have enough data yet. But I think again we should
follow a principled approach. Where insurance companies are
being called on to fulfill their contractual obligations that
they knowingly and freely took, I think we should expect them
to fulfill their obligations. If insurance means anything, it
means the mutualization of risk and the delivery of payment
when certain events take place. So I think we should be clear
about that principle.
Senator Dodd. My indication is that that is happening.
Secretary O'Neill. I think absolutely, Senator. I am really
proud of a lot of people I know in American business because
they are stepping up to the plate and they are saying, this is
the effect--Sandy Weil said the other day--this is the effect
that it is going to have on our company. We contracted for it.
We are going to pay it. We are not asking for somebody to, in
quotes, bail us out. Again, it is testimony to how wonderful
people are in this country.
There are another set of risks and I think they are more
attentive to going forward than going backward in this sense. I
believe for those individuals and businesses that were at
ground zero, we have already, you have already taken some
action. You all took the initiative in taking some action to
give us resources to deal with some of those things very
directly for the human beings that have been hurt or killed and
for the businesses in the direct impact area.
But going forward, we are going to have to, for example,
back to the airline example, we are going to have to figure out
how we can mutualize, I think on a societal basis, the risk
that is associated with terrorism because no insurance company
in their right mind is going to leave an opening in policies
they write going forward that exposes them to that risk. And I
think we need to fix that.
Senator Dodd. Phil and I have already been having private
conversations about what we might--some suggestions, and we
will be in touch with your shop about it.
Secretary O'Neill. But I think this is the way we should
think about it, Senator.
Senator Gramm. I would just like to say that, one of the
problems we have had in the past is that the insurance
companies had wanted to put reserves together for a cataclysmic
event.
It seems to me that one of the things we ought to look at
now--I know it is after the horse is already out of the barn--
is allowing insurance companies to put together this pool of
their own money to deal with cataclysmic events in the future.
I think that the lesson here might move us toward that
solution. That is something I believe we ought to do as a good
Government reform follow up.
Senator Dodd. We have talked about it over the years. In
fact, Dan Inouye, Ted Stevens, among others, on the west coast,
we have had a lot of huge natural disasters that have provoked
this discussion. But we have entered a new world here on this.
I have used up my time and I will come back. I appreciate it. I
have some questions for you. I do not want you to feel alone
over here, Harvey. We have some questions for you.
Chairman Pitt. I am learning.
Chairman Sarbanes. Senator Allard.
Senator Allard. Thank you, Mr. Chairman. Again, I would
like to commend the witnesses for their quick and thorough
response to the terrorist attacks.
You all exercised a good deal of authority in order to
speed recovery and to get our markets back functioning
smoothly. And particularly, I would say the Fed's quick
response in injecting liquidity. It is a critical component I
think of our economic stability. Do you believe that the
authority at your disposal is sufficient from which you have
experienced to this point? Or do you think in some way, some of
that authority needs to be modified or expanded in some way?
And I would like to have you each respond if you have any
response to that?
Chairman Greenspan. I think our statutory basis is fully
consistent with our needs.
Senator Allard. Okay.
Chairman Pitt. I would just say I think we were given
emergency powers after the 1987 market crash. And this is the
first time we have used them. The only possibility that I can
see for additional authority for us is that we have a 10
business day limitation on our ability to provide extraordinary
relief. My judgment is that that is probably sound and it will
in all likelihood be enough. But if it is not, then we would
like the opportunity to at least let this Committee know that
we think we might need the ability to expand beyond 10 business
days.
Secretary O'Neill. We are going to be coming forward
quickly. As a matter of fact, I have been so tied up today, we
already may have presented the Congress with some proposals for
amendments of some existing laws that will give us the ability
that we need to share information across all government
intelligence agencies and be able to take blocking action on
financial accounts. But with regard to our ability to work
directly on the issues related to the market, I think we found
that we had the authorities we needed on this occasion.
Senator Allard. There has been some news reports that
terrorists may have used the stock market to profit financially
from these attacks. I am curious to know what is being done to
investigate these reports. And are there any thoughts that you
have in regard, if this is happening, how you might address it?
Chairman Pitt. Let me say, we are aware of those reports.
There is a multiagency effort underway under the leadership of
the Federal Bureau of Investigation. But my agency is actively
investigating reports of possible terrorist activity. The
difficulty, of course, is in going through a lot of records and
dealing with foreign transactions as well. But I think our
enforcement division, along with the Federal Bureau of
Investigation, is proceeding with alacrity to try and find out
whether there are any violations of law.
Secretary O'Neill. We are working with Harvey.
Senator Allard. Mr. Chairman, I am finished. Thank you.
Chairman Sarbanes. Good. Thanks very much, Senator Allard.
Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman. And again, thank
you all for being here.
Yesterday in Detroit, we had an excellent meeting with
Secretary Evans and Secretary Chao and leaders from the
automobile industry, other manufacturing CEO's, and top levels
of organized labor. It was an excellent chance to talk about
the manufacturing sector, what the concerns are, the needs are.
And there were two issues in particular that were raised of
great concern that I would appreciate your responding to.
One relates to the issue of credit. And while we know that
there will be a fine line between being cautious in terms of
loans to troubled industries, there is a great concern that
there not be an overreaction in terms of reclassification of
credit or access to credit when in fact that is not warranted.
So there is a deep concern about balancing what happens to
credit availability.
And then the second thing relates to Chairman Greenspan,
what you talked about in terms of the borders and the border
crossings. Our industries are very much involved with just-in-
time supply processes. We have hours of delays now at the
border in terms of the security inspections of trucks.
And while we know that security is the top priority right
now, we are deeply concerned. And Secretary O'Neill, I would
welcome your thoughts regarding how the customs service is
going to address this challenge. We certainly understand about
the need for security. But this is becoming just a critical
issue that has directly involved lay-offs of workers and very
difficult challenges for our businesses.
Secretary O'Neill. Well, thank you very much, Senator.
I have a five-page report anticipating that someone would
care to ask about this question. It is up to date. It is
through yesterday morning's peak hour of activity.
When this issue was first brought to my attention last
Friday, the claims were that there were lines as long as 18
miles backed up at the Windsor Tunnel in Detroit, and at Port
Huron in Buffalo that are the main line alternative routes into
the country from Canada for the automobile companies,
especially for General Motors. I was astounded that these
queues had formed.
But as I investigated, what I found is that we, the Customs
Service and the Treasury, had immediately on the passing of
these events gone into what is called a level-one alert. That
means that the intensity of investigating every vehicle that
comes across the border is raised enormously from normal
practice. And indeed, we had not at that point gotten to the
stage of trying to balance traffic that was coming at us by
letting the manufacturing companies know the length of the
queues between these alternative routes.
Well, I am happy to report, and you probably know this,
yesterday morning, the longest queue and the longest delay was
at the Windsor Tunnel, where it was still 60 minutes and one
mile. But it was the longest delay in the northern border
crossings between the United States and Canada.
I think we put more resources on the issue. I think we are
doing this more cleverly as we understand how to work with this
heightened security concern. And as I look down the list at
Port Huron yesterday morning, during the peak hours, there was
a 10 minute delay with--it is interesting how precise these
things are--a 300 foot queue. I wonder if somebody really
measured it.
But in any event, I think we understand the problem. As a
former manufacturing person, believe me, I understand just in
time. It is one of the ideas that has created the huge
productivity that we have had. We understand it. We are going
to do everything we can to drive these numbers back to very
small minute delays. But we are not going to reduce security.
We feel we must make sure that we are not letting components
for bombs and explosive materials come into the country. That
is got to be our first priority.
But we understand and are working with the automobile
companies and I guarantee you, we will get these levels down so
that we are not the probable cause of any person being out of
work or any manufacturing process being stopped.
Senator Stabenow. I appreciate that very much and look
forward to working with you on that. We are very concerned,
first, that we do focus on security, both Customs and INS. We
are concerned that there has not been enough focus at the
Canadian border. The focus has been at the Mexican border
rather than at the Canadian border.
Secretary O'Neill. That is true.
Senator Stabenow. But we are just very concerned that this
be a sustained effort as we know that we have to sustain our
security efforts, that the increased staff that is necessary to
guarantee that the improvements that you have already talked
about, and I am very pleased to hear that. We want to make sure
that people are continuing to focus on that because this is a
tremendous entree to the country in terms of commerce and
critical to so many of our industries.
Secretary O'Neill. Thank you.
Chairman Sarbanes. Thank you very much, Senator Stabenow.
I would just make the observation, we can have very intense
security, no lines, if we have sufficient personnel and
clearing points. Now I know you cannot ramp up to that
immediately, but in the long run, we can have much tighter
security at our airports and at the border, a much more
thorough check, not create a back-up problem, if we are just
willing to make the investment in terms of increasing the
number of clearance points at the facility. It seems to me sort
of simple. I hope I am not missing something. I know that
ramping up, getting the people is something of a problem. But
other than that, there is a fairly clear solution to this
problem, is there not?
Secretary O'Neill. I think, Senator, there is an immediate
need. There is no doubt that--as long as the system is designed
the way it is, more people is the answer to reducing the length
of the queues.
But, again, I think, as we go forward, we should not freeze
in place what I would hope are temporary solutions, where, with
the use of technology, for example, working with, say, Rick
Wagner at General Motors, and figuring out a way that we can
bond shipments at the plant before they are even shipped so
that we can scan them electronically and have electronic
interlocks so that we know they were not opened in transit.
They could go sailing through border points without further
inspection.
So I think that we need to leave ourselves open to
ingenuity and innovation and not simply fix the problem that we
have today as though that were a permanent fix.
Chairman Sarbanes. I think that is a good observation.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. Building a bit on
what Senator Gramm said earlier about everybody, all 285
million people in the country were affected. I want to
concentrate for just a minute on some of the small businesses
that were affected because I am from Wyoming and under a
Federal definition of small business, there is not a single big
business headquartered in Wyoming.
Those small businesses are facing a lot problems as a
result of last week. Some of them are regional airlines. Some
of them are charter services. Some of them are crop-spraying
companies. But it gets into the peripheral businesses as well,
the ones that provide meals, the ones that run little shops in
airports. And even with big business, what economic incentives
do you think need to be provided to avert further weakness in
the economy? And that is in recognition, too, that small
business is about 90 percent of the businesses of the country.
And they do not have nearly the flexibility in the money market
that the big companies do.
They are very limited and do not have as many sources. So
are there any incentives, economic incentives, that could be
provided to avert further weakness in the economy?
Secretary O'Neill. Chairman Sarbanes has decided that I
should go first.
I understand your concerns, Senator. It was really brought
home to me in the impact area by seeing this story--I forget
which channel it was on--and showing the effect on a deli in
the shadow of where the towers had been and the impact that
this has right there on the site where this person has relied
on 20,000 people and the workforce there, coming in and getting
pastrami on rye, and both the physical damage and the lack of
business is a real thing. For many small businesses that live
on pretty thin cashflow, this is a crisis of substantial
proportions. I think you cannot help but, for them and for the
people you are talking about in Wyoming, you cannot help but
have an ache in your heart for what this means to everyone
around the country, including small businesses.
My first prescription would be that we get as close back to
normal as we can and as fast as we can by dealing with some of
the direct things. We have discussed at length the airline
industry and I think that that has a ripple effect into other
kinds of businesses. We need as best we can, even though it is
never going to be the same, to return to a sense of normalcy in
American society.
And then I guess I would say, honestly, I think we need to
do this diagnosis that underlies what both Chairman Greenspan
and I have said about what, if anything, we could do that would
not be a grant of relief, which we are going to have to take
away from others. It is really a redistribution function to be
given to somebody else. It does not really create much economic
value.
We need to think hard about what is the problem. I am not
so sure yet what is the problem. I was really sure before
September 10 that the problem we had in our economy was related
to the investment side of the equation. The consumers were
quite strong. And many industry sectors were operating at close
to record rates.
I went into my friendly clothing store in Pittsburgh before
this and said to him, how is your business? He said, well, it
is not very good. And I said, compared to what? And he said,
last year was a record year and we are only running at last
year's rate.
And there was a lot of that in our economy. But if you look
at why we were running slow, we were running slow because the
investment rates that had been in our economy in technology,
particularly in telecommunications and computer technology,
were off by 50 and 75 and in some cases of individual firms,
off 100 percent from the year before. And so, if we had the
same economic circumstances today that we had on September 10
and you said, what should we do, I would say then, and I did
say then, that I think we are going through a normal correction
and we should stand by. Circumstances have changed since then
and I think we need to have a period of time to assess, if we
are going to make an intervention, where do we make it?
Consumers have been strong, and I think consumers will be
strong again when they get their feet underneath them and they
start going out to dinner at night again and doing the normal
amount of travel and do not spend so much time looking at the
tragedy that we keep seeing over and over again. And I am not
yet ready to tell you as a final judgment.
But I think if we are going to do something, one thing that
would be helpful to do is some intervention perhaps that would
provide some support for the market value of American
enterprise. What I mean by that is this.
If you want to know what establishes the value for an
individual company or for all the companies in America, we now
have a very refined capital investment process. And the
judgments that investors are making are judgments about the
future free cashflow and what the value is of that future free
cashflow. That is what determines market capitalization.
And what we are seeing right now in this move from--let me
use the Dow Jones Industrials as an indicator--movement down
from 11,000 or 10,500 to yesterday's close I think was 8,600,
is a judgment that the future values of the discounted
cashflows are 20 percent lower than they were. Now, how can we
intervene to create the prospect of higher future free
cashflows?
Well, one way to do it is to reduce the pressure that
companies have from paying taxes. That is not my answer at this
point. But as I analyze the problem of how do we create some
stability for market capitalization that represents our
economy, that is where I look for that purpose.
And then the second issue is what action can we take that
will more quickly than would otherwise happen, restore
confidence and expectations so that consumers go back to buying
houses, cars, clothes, and all those other things they have an
ability to do, rather than retrenching and holding back, they
proceed with confidence about the future. And again, we need 10
days or 2 weeks to think deeply about these things and not just
fire the shots that we happen to have on the shelf from past
thoughts about these things.
Senator Enzi. Thank you. My time has expired.
Chairman Pitt. Senator, if I could just add one comment to
that.
Chairman Sarbanes. Chairman Pitt.
Chairman Pitt. I think that the need of smaller size
companies and particularly with a large local following, also
requires us to think in terms of what impediments we impose on
those companies to be able to raise capital in a more efficient
way from people who have a better idea of what the nature of
the business is, those in their locality.
I believe that there is a fair amount that the SEC can do
to try to streamline the process, without obviously
jeopardizing investors, but that would give smaller companies a
lot more immediate access to sources of capital based on their
record of performance and their prospects.
Senator Enzi. Thank you. And thanks for the concentration
on small business.
Chairman Sarbanes. Thanks very much, Senator Enzi.
Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman.
Gentlemen, I have three questions. My first attempts to
look down the road a little bit after we are through this
initial period of, as Chairman Greenspan mentioned, the
physical disruptions and anticipate what are the risks maybe
out there for the economy and the global economy.
In particular, I would like to ask a question about
Argentina and the risks of contagion in the developing world.
As I understand it, the recent action by the IMF has gotten a
window of opportunity for Argentina to attempt to implement its
austerity program. They have an election campaign coming up and
we all know how those things can be. It might not take more
than an ill-advised remark on the part of one of the leading
candidates to cause a run on their banks.
In any event, as I am informed, possibly as soon as 2 or 3
months, we may see what their prospects are. So my question is,
if at some point in the not-too-distant future it becomes
apparent that they may not be succeeding--we obviously hope
that they do, but they are facing either a potential default or
a devaluation--what are the risks to the global economy from
such an event?
Will it be limited to Argentina, Brazil, possibly Hong
Kong, that also has a peg? Or will it go beyond that? And what,
if anything, should we be thinking about in terms of what
action, if anything, can be done? So what are the risks and
what can we do?
Secretary O'Neill. You do not want to even think about
this, do you, Alan?
[Laughter.]
This is a subject that, aside from the tragedy of last
Tuesday, was on the top of our work list. And it is obviously
not at the top, certainly not in the same sense that it was a
week ago. But we are paying close attention because as a
consequence of what happened here and the recalibration of
capital markets all over the world, the Argentinean premium to
U.S. Treasuries has moved back up again to something over 1,500
basis points; over where we were on September 10.
Now I have to say at the same time that it was 1,800 basis
points until the IMF intervention of a few weeks ago. And I am
sure you must know, Senator, because of the depth of your
question, that we in the U.S. Treasury have been working very
hard with the IMF to see how we can be helpful in situations
like Argentina's and like Turkey's, for that matter, and the
other places that you have mentioned that are in some sense
problematic, to see if there is not a way that we can invent
new devices that work better and that do not result in, in
effect, socializing to the world a process of bad decisions by
sovereign governments. It makes a lot of sense to me.
I think we should be prepared to help and we in the United
States should help developing countries around the world. But I
do not think we should ask our taxpayers to pay for a
continuation of obviously bad decisions by a sovereign
government.
Now, one of the things that we have encountered in working
with the IMF is this--that the securities that have been issued
by the sovereign government in Argentina have provisions in
them that make it very difficult to use leverage as a way to
solve the Argentinean problem instead of tranches of $30
billion or $40 billion or $50 billion worth of taxpayers' money
from here and other places around the world.
And so, one of the lessons that we are learning out of this
process is the need to work with governments around the world
to make sure that they do not create blocking actions in their
issuance of securities so that when they get into this kind of
situation, it is possible to segregate the debt obligations
they have and in effect take part of their debt obligations to,
let me say, a AAA balance sheet, so that the IMF can use its
ability to raise money at 3 percent to help a government get
out of a very difficult situation, instead of giving them money
to support their ability to pay 18 or 20 percent interest
rates.
And as recently as Monday morning, I had breakfast with
Horst Kohler from the IMF and said to him, I think now is the
time that we need to take the action that has been talked about
for years that has never been done. We need an agreement on an
international bankruptcy law, so that we can work with
governments that in effect need to go through a Chapter 11
reorganization instead of socializing the cost of bad
decisions.
So, on the one hand, yes, we are paying close attention to
Argentina. There may be some additional necessary action. We
are working to see if we cannot create the circumstances of
using leverage rather than huge amounts of additional money.
And we are going to work hard and, hopefully, successfully, to
put in place things that people who follow these things have
known for decades we should have done. Maybe one of the
consequences of this tragedy is we will finally take action on
some of these things that we know we need to do.
Senator Bayh. Thank you, Mr. Secretary. You have raised a
number of interesting issues. I would love to follow up on it
some other time.
Chairman Sarbanes, I see my time is expired. I only got to
one question.
Chairman Sarbanes. Let me say this. I know you staked out
three questions. That has been done in the past, of course.
That does not mean you get to use all the extra time you want
in order to get your three questions in.
Senator Bayh. I am new, but I am resorting to using the old
tricks.
[Laughter.]
Chairman Sarbanes. Why don't we do this. We will give you
another question. The time has expired.
Senator Bayh. I will be very brief.
Chairman Sarbanes. I want to ask Members to be brief on
their questions and the panel brief in their responses. And let
me outline for Members what we intend to do.
We want to complete this panel. We will go through a round.
Hopefully, we will not use a second round. I will try to
forebear. I know others have questions. Because I intend to go
on and do the next panel continuously, not to recess and go
over after lunch. So we intend to have the exchange people who
have come down, some from New York to be with us, and follow
right on the heels of this panel.
Senator Bayh. Thank you, Mr. Chairman.
Chairman Sarbanes. Evan, why don't you ask one more
question and then I will come to Senator Hagel.
Senator Bayh. Thank you, Mr. Chairman. I will be very
brief.
Mr. Secretary, I look forward to following up with you at
some appropriate point. It occurs to me that these are
important issues that have been with us for some time. This is
a most inopportune time for further shock to the global system,
and so they may come to the forefront in the next couple of
months.
Chairman Greenspan, if I could just look down the road
again in a few weeks. And I agree with everything that you said
and the Secretary said about the need for patience. It is
better to act wisely than to act quickly, as I believe you
said.
Looking down the road, if we are confronted--my question
gets to one of economic policy and the possibility of fiscal
stimulus beyond that required to respond to the immediate
tragedy, both the defense aspects and the reconstruction
aspects. And here's my question.
In some of the press it is been reported that in the last
couple of days, long-term interest rates have begun to rise a
little bit in the anticipation of the Federal budget surplus
not being as large as had been expected. And I would like to
ask your opinion about, from an economic policy standpoint, the
risks to the economy in the short-run, the benefits of fiscal
stimulus and the potential that they would be offset by higher
interest rates and the effect that that would have on capital
expenditures.
So my question very directly is, is there not some short-
run risk to the economy to completely abandoning fiscal
discipline? And we may be confronted with some of these issues
in the next several weeks.
Chairman Greenspan. Indeed, there is, Senator, and it is an
issue which I did discuss with your colleagues in the
leadership yesterday. It is apparent, at least to some of us,
that the extent to which capital gains, both realized and
unrealized, on homes has contributed to consumption
expenditures this year, it has been a major prop that has
offset, at least in part, some of the very major contractions
that we have seen in the capital goods area.
The cause of that is two-fold. One, of course, we have had
a fairly extensive increase in prices of homes. But more
importantly, and this is relevant to the issue of house
turnover and realized capital gains in homes, which is a major
factor in extraction of equity for personal consumption
expenditures, that has occurred largely because mortgage
interest rates have been low.
One of the elements that you point out which I found
disturbing is that, in recent days, we have seen average
corporate rates, BAA corporates, for example, rising fairly
significantly, and while we do not have as current data on
mortgage interest rates, they lock in fairly closely to the 10
year yields. This suggests to me that we have to be quite
careful because until we find out whether the rise in long-term
rates is merely a reversal of the fairly pronounced decline in
rates that occurred in the weeks previously and, hence, is not
a significant issue, or whether, as you suggest, it might be a
fiscal problem, until we find that out, we are not going to
know what the appropriate balance of fiscal policy, monetary
policy and, indeed, all policies concerned is, because, as I
indicated yesterday, we have to distinguish between gross and
net stimulus.
Gross stimulus is relatively easy to calculate. We can just
look at the extent to which we are expanding Federal
expenditures or cutting taxes and make reasonable judgments as
to what that impact is. But until we can determine what the
secondary effects on long-term interest rates are and, hence,
the negative effects on personal consumption expenditures and,
as you point out, presumably on capital investment, we cannot
make a judgment as to whether in fact a particular package of
stimulus is indeed a stimulus.
And one of the reasons why I have cautioned about waiting
until we can truly segregate the strictly infrastructure
problems which we know are temporary as they impact on economic
activity and underlying demand, we are not going to be able to
get a good judgment on this particular question either.
And therefore, I would hope that within 10 days, it may be
a little longer--it usually tends to turn out to be longer than
we expect, but not a substantially longer period--at that
point, we should be able to make the judgments as to what is
equivalent to flood damage, if I may use that category and what
is real economics.
And in the real economics, the crucial question is to what
extent is the most recent pattern of rise in long-term
corporate rates and, presumably, mortgage rates, a factor?
Senator Bayh. Thank you, Chairman Sarbanes.
Chairman Sarbanes. I might note, I think that that was a
very important question. I think this is a very important issue
that we have to address.
Senator Hagel.
Senator Hagel. Mr. Chairman, thank you.
Secretary O'Neill, as you have ranged out this morning,
over these unknowns as to where we go from here, what action
should we take and consider, as Chairman Greenspan just noted,
referencing your comments and your testimony regarding a 10 or
14 day window, and probably beyond, before we will fully be in
a position to accurately assess what we need to do, with that
in mind, can you tell this Committee if the Administration is
considering any proposals regarding capital gains tax cuts or
any other additional tax cuts?
Secretary O'Neill. Senator, I would say that we are looking
at every instrument that is ever been used before, and some
that have not been used, but have been proposed.
In the spirit of what I said earlier of wanting to make
sure that we do not leave anything out, but that we fit the
solution to a careful diagnosis of what the real problem is.
And as the Chairman said very clearly, to make sure that in the
name of trying to do right, we do not actually cause damage.
And I must say to you, I do think there are instruments
that have been used in the past and some that are suggested
that are of dubious value. But I do not think that we should
rush to judgment about that. I think, in the spirit of what you
did yesterday, some in the leadership had a meeting yesterday
and you reached out to Bob Rubin.
I thought that was wonderful. We need to take advantage of
every smart mind that we can bring to bear on these problems,
and we need to proceed in good faith without a predilection
toward we already have this tool and we already know the
answer, and now is an opportunity when we can go ahead and put
it in place, without careful consideration of what are the
consequences and does it have lasting value to the economy.
Senator Hagel. Does that mean that that is a yes as far as
the Administration is considering capital gains tax cuts?
Secretary O'Neill. We are looking at every single one of
the things that you mentioned as possible things that one might
do. Plus, there are many ideas about minimum wages and the
supplements for nontaxpayers. And I only offer you in the sense
I want to be really clear in backing up what I said to you--we
are not excluding anything.
Senator Hagel. Thank you. Chairman Greenspan, I was very
interested in the section in your testimony regarding trade.
And if I might read back a couple of sentences here to frame
the question.
In your testimony, you said, ``As a consequence of the
spontaneous and almost universal support that we have received
from the world, an agreement on a new round of multilateral
trade negotiations now seems more feasible. Such an outcome
would lead to a stronger global market system. A successful
round would not only significantly enhance world economic
growth, but also answer terrorism with a firm reaffirmation to
our commitment to open and free societies.''
You noted, I am sure, that our U.S. trade representative,
Ambassador Zoellick, had a very direct, thoughtful piece in the
Washington Post op-ed section today which I happen to agree
with. Would you care to reflect on this statement in a more
defined way and connect, if you will, a little more of the
aspect of the terrorist reference--stability in the world,
economic growth, why that is good, why that might have some
impact on what occurred on September 11, if we can move on
beyond where we are?
Chairman Greenspan. Senator, I have not had a chance to
read Bob Zoellick's piece, but I suspect that I could probably
write it, so it may not be necessary.
[Laughter.]
Chairman Sarbanes. You are assuring us that you did not
write it, though, I take it.
Chairman Greenspan. Hardly, Senator.
Senator Hagel. Ambassador Zoellick would be flattered.
Chairman Greenspan. We have developed a really major and,
in many respects, extraordinary economic system on a global
basis in the last 10, 15 years, resting on technology and the
free movement of people, and capital goods. And most
interestingly enough, during the period, we have seen
increasing evidence that the interaction between economies has
enhanced global growth and, indeed, the growth of everybody.
And I thought that an item I read today or yesterday, which
indicated that despite the fact that we have had all of this
major increase in telecommunications capabilities, airline
travel has gone up very markedly, the implication being that
you really still have to deal with persons face to face. It is
sort of the way the human species functions.
The openness of societies, the openness of economies are
very crucial for economic growth and they can be open only if
they are not hampered by violence. Violence is complete
destruction of the institutions of free markets and of global
economic systems. Our system is based on voluntary trade by
free individuals. And to the extent that we engage in that, we
expand the living standards of everybody.
One thing that I was very impressed with, and I must say,
if there is ever even remotely a silver lining in such an
extraordinarily horrible tragedy that we confronted last week,
it is the really quite surprising coming together of everybody.
I have gotten letters from central bankers, finance ministers
from all over the world, and I might add, Arab nations as well,
all expressing concerns about what has happened and wishing us
well. And I was deeply touched by these letters.
I do not know whether or not it means that when you get
into a negotiating situation, that that goodwill tends to spill
over. I think it does. And if it does, it means that we can
make further progress in an area which I think has done so much
to enhance human welfare worldwide since the end of World War
II.
Senator Hagel. Please convey to your people our
appreciation. And thank you very much for your leadership and
commitment to this country.
Thank you.
Chairman Sarbanes. Thank you very much, Senator Hagel.
Senator Carper.
Senator Carper. Thank you, Chairman Sarbanes.
Like Senator Bayh a few minutes ago, I had three questions.
He asked one of mine.
I had wanted to delve into why long-term rates are trending
up, even at the time that we are seeing short-term rates
continue to trend down. I am not going to go there. He has
already gone there and we will wait a couple of weeks and we
will come back and reexamine that issue.
I would like to go back to the points that at least two of
you made earlier in your testimony with respect to what was
going on in this economy in this country in the month of
August, and the very beginning, the early part, the first 10
days of September.
Could you just revisit that for us? And I only want to take
a minute or two on this.
Chairman Greenspan. We were still weak. In other words, we
were still essentially flat, as we had been since the beginning
of the year. But the elements of expansion and contraction were
suggesting that at least the early stages of coming out of it
were there.
One of the major elements was that the rate of inventory
liquidation was very high and had not slowed. Now what we do
know about inventory liquidation is if you keep going long
enough, you will run inventories down to the point where you
cannot continue to liquidate at that rate. And merely slowing
the rate of liquidation will, of necessity, assuming
consumption holds up, raise production and employment and begin
the virtuous cycle which gets us out of these types of
problems.
I do not want to suggest that we were about to turn and
everything for the fourth quarter was going to be a major plus.
That was not our view. But our view was that the elements were
there. Clearly, retail sales were really surprisingly good
considering the fact that this major contraction in asset
values outside of the home equity area was still creating what
we have called, as you know, the wealth effect in a negative
form.
But the system was holding up, as I put it here I think
previously in this Committee, that the American economy just
kept getting battered and battered and battered and it was
still standing. And indeed, as of September 10, it was still
standing.
Senator Carper. Secretary O'Neill, do you want to add or
take away from that?
Secretary O'Neill. No.
Senator Carper. Good. All right. Chairman Pitt?
Chairman Pitt. No.
Senator Carper. Okay. All right. My second question--we
seem to only focus on the need for an energy policy when we are
sitting in lines to buy gasoline for our cars, when they are
having rolling black-outs in California and other parts of the
country.
Your views--given the events, the tragic events of last
Tuesday, is the need for a comprehensive energy policy for our
country, is the need diminished or enhanced?
Chairman Greenspan. Senator, I have always thought that it
has been a very important long-term issue of this country. Our
infrastructure is clearly in difficulty in the electric area,
in gas pipelines, and a variety of other types of problems that
we have.
What we do know is the fact that owing to technology,
natural gas, which is becoming the fuel of preference pretty
much around the country, because of the technology, we are
draining our existing reserves at a fairly rapid pace, which
means that in order just to keep the level of production at
approximately 23 trillion cubic feet, we have to get ever
increasing levels of drilling and expansion or find ways of
importing increased amounts of natural gas, which, as you know
at the moment, is largely only Canada, and there is limits
there, but there are innumerable possibilities. There is now,
as you know, discussions on a pipeline coming out of Alaska,
whether it is Mackenzie River or whether it is going down
Alaska.
But we have to focus on looking at the longer term because
these take years to do. And if we only address long-term energy
infrastructure problems 3 weeks before we need an answer, we
are never going to get there. At the moment, the demand for
power is pretty soft because the economy is soft. That is going
to change. And when it changes, unless we have a longer-term
focus on how we put our infrastructure together, how we set
incentives and rules to, one, maintain energy security while
protecting the environment, we are going to run into trouble.
And I think unless we give it very considerable thought
now, projecting 5, 6, 7 years out in the future, we are going
to get sub-optimal solutions.
Senator Carper. Other comments?
Secretary O'Neill. I agree with what Alan said.
Senator Carper. Thank you. Thank you very much.
Chairman Sarbanes. Thank you very much, Senator Carper.
Senator Bunning.
Senator Bunning. Thank you. I have eight questions that I
would like to ask.
[Laughter.]
Most of my questions have been asked, but I have some
additional ones.
Senator Allard hinted at this, but I think it needs
exploring even more. There have been rumors of international
short sales on the day preceding the attack on the United
States by terrorists. I would like any one of you to comment. I
do not want to jeopardize any investigation you might be making
right now, but Secretary O'Neill or Chairman Pitt, maybe you
could comment on that.
Secretary O'Neill. As Chairman Pitt said earlier, we have a
full-fledged investigation looking at the transactions that
took place and we will pursue those investigations until we are
satisfied one way or another that there is something to the
rumors that have been about, or that in fact these were normal
market transactions.
I saw in one of the papers of record in the last couple of
days, someone had done an analysis and said, well, if you look
at the change in the ratio of puts to calls for American
Airlines 2 weeks before the event, and then a change in those
ratios moving toward September 11, that you have to factor in
the fact that American Airlines had a press conference or
issued a press release saying that our quarterly results are
going to be substantially worse than we thought. And they
basically alerted the market that they were not going to
produce what the market was expecting and therefore, if the
share price does not move, it is not illogical for puts to
significantly outnumber the calls.
The volumes that I saw were 3,000 contracts or something
like that. And while there is no doubt that there was a major
shift in the ratios between puts and calls, it is not clear to
me yet from the analysis that is being done that there was a
huge amount of money at risk. And the question I have asked is
whether these contracts have been completed. I do not yet have
an answer to that.
To the degree they are not completed, I would like to make
sure that they do not get completed until we can satisfy
ourselves that these were not done on the basis of
preknowledge.
Senator Bunning. Obviously, we know who the people are that
are doing that.
Secretary O'Neill. Well, it is not as easy as you would
think because----
Senator Bunning. In other words, you would have to go
through the firm.
Secretary O'Neill. You would start with the firm and then
you start trying to trace back for whom the firm placed an
order. And then, because these are very sophisticated things,
you find in many cases that you have to go through 10 veils
before you get to a real source. So this is tedious, complex
work. Believe me, we are pursuing it.
Senator Bunning. Chairman Pitt.
Chairman Pitt. I just want to assure you, Senator, we have
heard the same rumors and we have devoted, as has the FBI,
substantial resources to tracking down every rumor. If there is
any possibility that any nefarious activity took place in our
markets, you and the American public can be sure that we are
going to pursue it and bring anyone who is involved in it to
justice.
Senator Bunning. Thank you. You talked about the airlines
at length and the possibility or the potential of some kind of
a financial assistance. Could we also include in that financial
assistance your representation of the Bush Administration's
solution to some of the security problems that go with it, like
carry-on baggage, like air safety security for the pilots'
cabin and the $5 doors that separate them from the passengers
on the aircraft?
It is so essential for our American people to know that
they are going to be safe now in reaching the destination that
they took a ticket for. And so, I would insist before I ever
voted for assistance for the airlines of any kind that there be
in place the Administration's thoughts also on those type of
security measures.
Secretary O'Neill. Let me say maybe the simplest answer is
absolutely. And you should not be concerned. You are going to
see all of that. It may have even arrived this morning on
Capitol Hill.
I know over the last few days, we have been working hard on
this and we were solid with what we were going to propose last
night. And I honestly do not know whether we have now
transmitted to you what we propose to do. But all the concerns
you are talking about are addressed by what we want to do.
Senator Bunning. There is a report today on money
laundering and the ability of the Federal Government to track
money laundering in the support of terrorist acts. The Attorney
General is quoted here.
Is there in fact a relationship between money laundering
and the fact that terrorists and those who support terrorism
move money illegally? And are we looking into that? At least
that is what the Attorney General is saying.
Secretary O'Neill. Well, we are looking into it. The
terrorist organizations that we know about are, as they have
demonstrated, clever and adroit.
I think as we chase these individuals and organizations, we
are going to find that their assets would not have been caught
in the general web on the work on money laundering because the
money laundering tends to be a function of drug trade and other
illegal activities that produce very large amounts of cash and
then institutions are needed to convert large amounts of cash
into book entries at banks and the rest because it is just not
practical to do business or to buy other services for an
illicit activity with 10 million one dollar bills. And so, that
kind of activity is focused there.
I want to be careful not to reveal the intelligence
information. But it appears that terrorist organizations have
been funded from legitimate sources, what otherwise one would
call legitimate sources.
Senator Bunning. In other words, money-raising and all
those types of things.
Secretary O'Neill. Absolutely. And so, I think, frankly,
not to get diverted, I honestly think that we can do much
better on the money laundering question than we have done over
the last 25 years.
Senator Levin and I have had substantial exchanges about
that in another committee setting. I am determined that we are
going to begin getting value from money. I do not think we have
done that. I think the way we can get value from money is by,
frankly, using all of the intelligence assets that we have that
have been separated in our ability to use them by statute.
In the Federal Government, we need to take our own
handcuffs off so that we can go after individuals. At the end
of the day, for money laundering and for terrorist
organizations, it is not like going after a company that does
business in a legitimate way. These are very sophisticated
operations. But at the end of the day, all of the money
laundering activity and all of the terrorist activity goes back
to individuals.
And I am convinced that the spinal column of our work needs
to be identifying individuals that we suspect of doing illicit
or illegal activities or being associated with terrorist
activities and going after individuals in a dedicated,
determined way and either putting them in jail or sending them
some place where they never see the light of day again.
Senator Bunning. First of all, I want to thank all of you
for coming and giving your testimony today. And I would like to
urge the Chairman, when the FOMC meets in October, that you
continue your reduction in the Fed rate so that we can get our
economy back on its feet.
Thank you.
Chairman Sarbanes. Thank you very much, Senator Bunning.
I would note that this Committee had a hearing scheduled on
money laundering for September 12. In fact, we were going to
hear from the Under Secretary of the Treasury, Gurule as the
lead witness. Obviously, it was not possible to carry through
that hearing.
But it is now scheduled for next Wednesday. This was a
hearing scheduled well before all of this happened. But we will
have that issue before the Committee next Wednesday. I want to
thank the panel. Obviously, we could go on at some length, but
we have another panel to follow on.
I do want to say that----
Senator Dodd. Mr. Chairman, before you close out.
Chairman Sarbanes. Let me just withhold, then, my final
remarks. Are there any further comments that Members of the
Committee want to make? Or maybe questions they want to leave
with the members of the panel?
Senator Dodd. I will make a comment and submit some
questions because we have to get to the second panel. Just very
briefly, Mr. Chairman.
I raised the issue of the unemployment compensation issues
and I raised it in the context of several questions. Mr.
Secretary, you are nodding your head and I take that to mean
that that is going to be part of the array of issues you look
at on how we can help. These are the people--we talk about
airlines. We need to obviously concentrate on people there.
That is one. Small business obviously is part of that.
I received a notice in the middle of the hearing here that
a major business in my State, one I know you are all familiar
with, United Technologies Corporation, received word today from
their insurance underwriters that they intend to pull their
insurance they provided to United Technologies on aircraft, at
least as to various domestic and international airlines. Their
plans are, if that is the case, then they are going to notify
these airlines not to fly. So you can begin to see the ripple
effects of all of this.
I do not know, presumably when you are looking at the
airline industry, that is an immediate issue that would require
some attention. I do not expect you to necessarily answer it
for me here today, but it adds one more wrinkle as we look at
these questions.
Chairman Pitt, I just wanted to raise this, and I will
submit these questions in writing. These actions that you have
taken, many of them are temporary actions, ones that raise the
easing of company buy-backs, the accounting firms, their
ability to assist their clients to put together books and
records, obviously things you had to do.
I do not disagree with any of the steps. But the question
of how long those actions will be taken, what period of time,
and what other actions you may be planning on taking and who is
taking advantage of them. The Committee, particularly the
Subcommittee, might be interested, and Senator Enzi and I on
that Subcommittee on Securities might be very interested in
getting more detail with you about some of those things that
have occurred.
And last, Mr. Chairman, I thank you for allowing me to make
these points. On the capital gains tax, I was going to raise
this with Chairman Greenspan and Secretary O'Neill. I would be
concerned about exacerbating any selling off, obviously, the
obvious concerns that we have without providing any kind of
real stimulation to the economy as a result of any kind of
capital gains tax cut. I think a case can be made for some sort
of credit for payroll taxes, getting back to that small
business that may be affected.
If we are looking at some things that might be done, I hope
you would consider something like that in the alternative, in
my view. But then, again, I want to subscribe to the point that
you made at the very outset of these hearings, and that is,
take some time and look at all of these matters. I know you
will stay in touch with us up here, all of us who care about
these issues. But, again, I thank you immensely for your
testimony, all of you today.
Chairman Sarbanes. Secretary O'Neill, I think your
observation at the outset that this crisis not be used in an
effort to take off the shelf matters that had sort of been held
up or stymied or that were highly controversial, in which there
were strong arguments on both sides, is very good advice.
I am moved to make that remark in view of Senator Dodd's
comments about the capital gains. It seems to me at the moment
we have developed a very good consensus way of working here in
the Congress, and between the Congress and the Executive
Branch. It seems clear to me that we want to sustain that until
we move out of this period. Then, obviously, we will resume
differences over what policies should be. That, after all, is
what a democracy is all about. We are certainly not going to
close that out altogether.
The other is, Chairman Pitt, I understand that you are
monitoring very closely to see that no abuses take place with
respect to the special rules you have instituted for a limited
period of time. We obviously urge you to continue that.
Gentlemen, we thank you very much. I want to say that we
hope at some opportune time to resume or take up the hearing on
financial literacy. I have talked about that with all of you
and we all agree it is an important matter in the long run and
we want to come back and visit on that.
But, again, thank you very much for coming, and again our
appreciation to all of the people who work with you, your
staffs, who have just mounted a very dedicated effort, and the
response under pressure I think has been very impressive.
Thank you very much.
Senator Dodd. Thank you.
Chairman Sarbanes. We will now go to our next panel, and we
are very appreciative of your patience.
[Pause.]
The Committee will now turn to our second panel. I think
our witnesses are very well known to the Members of the
Committee, but we are very pleased that they have come to be
with us on relatively short notice. I will be very quick so
that we can move to their statements.
On this panel will be Richard Grasso, the Chairman and CEO
of the New York Stock Exchange. I think it is clear over the
last 2 weeks that he was the right man at the right time for
the job he was in. In fact, former Treasury Secretary Bob Rubin
was quoted in The New York Times this week as saying ``Dick is
exactly what they need now. He's ideally suited to this.'' And
I would agree with that assessment.
Wick Simmons is relatively new as the CEO of the Nasdaq
Stock Market, having been appointed to that position on
February 1 of this year. But he's done an excellent job of
helping to coordinate the industry's response.
And of course, few people bring more experience to market
disturbances than Bob Glauber, who authored the Reagan
Administration's recommendations in the aftermath of the
October, 1987 market break. Many of his recommendations, which
were adopted by the Congress, have come into play in this
situation. So obviously, that was a very significant
contribution. I want to say just one word and to try to put a
little bit of this into perspective.
First of all, the New York Stock Exchange on Monday handled
a record 2.37 billion shares, as I understand it, up from the
previous high of 2.09 billion shares, which was back on January
4. The Nasdaq volume was a hefty 2.23 billion shares, but that
is shy of its 3.1 billion share record. And I gather that the
exchange yesterday exceeded the previous record, the 2.09, by a
slight margin.
The point I want to make there is that it is an exceedingly
impressive accomplishment, that having experienced what took
place, you are able to put the markets back into shape to
handle these record volumes. And our congratulations and
commendations go out to you and your colleagues.
The other thing I want to point out and I think it is
important, is the drop in the Dow on Monday is 14 amongst the
average worst percentage declines, well short of the 23 percent
plunge that we had on Monday, October 19, 1987.
Now I do not say that to minimize it because it is still
significant. But just to get it into some perspective so that
people can understand, that the bottom is not simply dropping
out of everything.
And in the course of your remarks, I think it would be
helpful if we could get some of that perspective. I think the
same thing is true of the Nasdaq. I think its drop was the 11
or 12 worst percentage drop. So it is not even in the top 10.
Again, I do not want to minimize it. On the other hand, I
think it is important for people to understand that in the
picture, the overall picture, this is not at the very end of
the spectrum in terms of what is being experienced.
Senator Allard, do you have any comment?
Senator Allard. No, Mr. Chairman. I am anxious to hear from
the witnesses.
Chairman Sarbanes. Senator Dodd.
Senator Dodd. Well, just to further your comments, and to
all of you, you have done a fabulous job in the last 8 or 9
days. And we have held you up here a bit this morning. We
apologize to the second panel. But you can understand the
tremendous interest in the questions and obviously, we have
some for you as well.
Other than that, Mr. Chairman, I just wanted to commend
Wick Simmons for the vision that Nasdaq has had in locating its
offices in Connecticut and Maryland.
This is a very smart, wise, and thoughtful decision on the
part of this organization.
[Laughter.]
I did not want to miss the opportunity to commend you for
that. We thank you. It is a good job that you people have done.
Chairman Sarbanes. It is not my intention to embark on a
controversial matter like that.
[Laughter.]
It will not be necessary for you to answer that, Mr.
Grasso.
Senator Enzi.
Senator Enzi. I included my comments in my opening
statement. Thank you.
Chairman Sarbanes. Thank you very much. Gentlemen, we would
be happy to hear from you. Why don't we start with you, Dick,
and we will go straight across the panel.
STATEMENT OF RICHARD A. GRASSO
CHAIRMAN AND CEO, NEW YORK STOCK EXCHANGE
Mr. Grasso. Thank you, Chairman Sarbanes, and Senators
Dodd, Allard and Enzi. And thank you, particularly, Mr.
Chairman, for those very kind words. This is a collective
effort, and that I am very proud of what you will hear from
this panel.
I want to thank this Committee, and particularly you, Mr.
Chairman, and Senators Dodd and Enzi, whom we communicated with
during the middle of these discussions which led to the
resumption of trading. And most importantly, to all of the
Members of the Committee who I know were very supportive of the
efforts, the collective efforts, I might add, of the markets
and those in Government who oversee the markets.
I would be remiss, Mr. Chairman, if I did not at the outset
say that all that was accomplished since the great tragedy of
last Tuesday could not have taken place without the wonderful
stewardship that we in the private sector had from this
Committee, from you, Mr. Chairman, but also from Secretary
O'Neill, Chairman Pitt, Bill McDonough, president of the New
York Fed, and so many others in Government who really were
inspirational.
And I would be terribly remiss if I did not say that
without the incredible visit of our President, and the
Herculean efforts of our mayor, the lower tip of Manhattan
would today still be in chaos and I am afraid that we would not
be in a position to, as we did this past Monday, resume
trading.
Mr. Chairman, the attacks of September 11 will be ingrained
in our national memory forever. The NYSE was not spared. Three
of our members, hundreds of our member firms' employees, and a
number of my partners were either killed or at risk. Thousands
of others were displaced.
Everyone in our community has lost a family member, a
friend, or a cherished coworker. We are all, some almost 300
million strong, impacted by this heinous act committed against
our way of life. Our thoughts and prayers are with the victims
of the horrific crimes that were perpetrated not only in New
York City, but here in Washington at the Pentagon, and
certainly over the skies in Pennsylvania.
The attack on the World Trade Center hit particularly close
to home, since, as I mentioned, Mr. Chairman, 143 of my
employee partners at the NYSE were housed in the twin towers.
Thank God all escaped safely.
But one thing is certain--the United States remains the
greatest democracy and economic power in the history of the
world, and all of us are committed to ensuring that this
remains the case. Our capital markets are privileged to be a
part of that tremendous economic engine. I am very proud of the
resiliency that our markets have demonstrated in the face of
this heinous crime committed against America and all Americans.
Never, Mr. Chairman, in my 34 years at the Exchange have I
witnessed such a truly remarkable partnership evolve within
minutes between government and industry with the sole purpose
of bringing back order to our Nation and, importantly, economic
stability to our capital markets.
The three principal equities markets, the senior management
of financial institutions, our three principal government
overseers, all came together to achieve, as never before in our
history, the objectives restoring our markets, maintaining the
confidence of the investing public, some 85 million strong in
this great Nation and, most importantly, reassuring the general
public, doing all that we could to send the message to the
terrorists, to those murderers, that our Nation was unified,
our economy strong, our market functional, and that they, the
criminals, had indeed lost.
Last Wednesday, a meeting convened in midtown Manhattan. In
attendance were SEC Chairman Harvey Pitt, who I might add,
demonstrated incredible judgment and skill in making certain
that the private sector, not the Government, restored the
markets as quickly as possibly, consistent with our objective
of providing the best markets in the world.
At that meeting, Treasury was represented by Under
Secretary Peter Fisher. Each of the CEO's of the major markets,
Wick Simmons, Sal Sadano, the CEO of the American Stock
Exchange, were all in attendance, as were the CEO's of the
major financial services firms. Representatives of the Federal
Government's FEMA team, the State Government, our great
Governor George Pataki's team on the scene, and of course, our
wonderful mayor and all of the ancillary services of the city
government played a major role.
The subject, very simply, Mr. Chairman, was reopening our
markets in the face of incredible carnage. Anyone who has been
to the financial district since the tragedy can attest to the
enormity of the challenge that was faced. And I would say to
those who have only seen it on the film clips, nothing can be
more horrific than being there in person to understand what
those wonderful people, those innocent Americans, were
subjected to.
If the business of my market, Mr. Chairman----
Senator Dodd. Just one point on that, and I apologize for
interrupting. I am told there were people from 62 other nations
who lost their lives that day.
Mr. Grasso. I believe, that is correct, Senator.
Senator Dodd. I repeat that often enough because it is
important that there were Americans, but there were a lot of
other people.
Mr. Grasso. A message well delivered, Senator. This is not
just the loss of American lives. Sixty-two nations from around
the world had representatives in that building, or the series
of buildings.
If the business of my Exchange resulted solely from the
convention of 3,000 people on the trading floor, Mr. Chairman
trading could have resumed immediately, since the Exchange and
its technology sites, one in lower Manhattan, one in an outer
borough, were unhurt by the attack.
But our business today depends on interconnectivity. Some
300 broker-dealers introduce the orders of some 85 million
Americans from around the country, and certainly many more from
around the world. Thus, a complex communications and data-
delivery network that spans the globe and is hubbed in several
sites in lower Manhattan, was faced with the challenges of
restoration.
The decision to restore trading on Monday gave our
telecommunications providers critical time to establish the
connectivity necessary to deliver that network of services.
Brokerage houses and their customers around the country depend
upon multiple points of access to the world's largest and most
liquid marketplace.
However, Mr. Chairman, Members of the Committee, I should
add and underscore that resumption of trading on Monday,
September 17, or the prior Friday or, indeed, that Thursday,
would not have taken place until and unless we were all
confident that the most important objective of the recovery
exercise, which was the search for those who may have survived
and the recovery effort for those who had perished, would in no
way be compromised by the restoration of our infrastructure.
Mr. Chairman, I need not say it, but I will for the
record--it is life first, stock trading second. I know, that
every American shares that perspective. Mr. Chairman, the
attack was a declaration of war upon America, that in my view,
has united us as in no time since World War II. Judged in the
light of what we have been subjected to, I believe the
temporary interruption of our capital markets, will be judged
by history to be insignificant.
Our prayers and heartfelt thanks must go to the brave
heroes of New York City's fire and police departments, the Port
Authority police and emergency medical services personnel, and
so many here in the Capitol area and in Pennsylvania who put
themselves at risk in the pursuit of saving lives. Their
heroism was matched time and again, Mr. Chairman, by those who
are now crawling through the rubble to hopefully bring another
person out alive. Nothing in our business could be permitted to
divert or in any way impede that effort.
Once the issues of rescue and recovery of human life were
dealt with, the focus obviously became restoring and resuming
the finest markets the world has ever known. Our goal was to
return the market as quickly and as efficiently as possible to
the historical levels of deep liquidity and investor protection
that are the hallmark of America's free market system. Stated
differently, our measure was to be in a position to serve the
American investor with the same level of excellence they have
come to expect for the past 200 years.
Together with our partners from the SEC, the Treasury and
the Fed, we all knew the public's confidence in our capital
markets would in part depend upon the prompt reopening of our
equities markets. Unnecessary delay would mark a concession of
defeat to the enemy, who sought to disrupt our ordinary course
of conduct.
In the six days following the attack, Mr. Chairman, the
NYSE, in a partnership with the other markets and in a truly
Herculean partnership, with the city and State, FEMA officials,
our central technology provider, Securities Industry Automation
Corporation, Con Edison, and, most importantly, Verizon, the
major communications provider for that portion of lower
Manhattan, worked continuously to restore the connectivity of
America's markets, those who introduce business to those
markets, and those firms to their customers.
There was extensive testing literally from the moment the
system went down until the moment trading resumed. Virtually
every aspect of that interconnected network, markets to firms,
firms to customers, and the clearance, comparison and
settlement process were indeed verified to be functioning as we
would all want.
I am very proud, Mr. Chairman, of the hard work and
determination of the public and private sectors, coming
together in an unprecedented partnership that resulted in a
resumption of trading. As you quite rightly point out, Mr.
Chairman, the volume of trading during these first 3 days of
the trading week has been the most active in the history of the
New York Stock Exchange and approach the most active in the
history of Nasdaq. The best evidence of our success in this
wonderful collective effort is, as you point out Monday's most
active day in our history.
Reopening of our equity markets, again, Mr. Chairman, as
you point out, while down some 7 percent on Monday, was one-
third the level of the decline experienced on October 19, 1987.
Our equity markets are strong. They returned with strength. And
while prices are down, I think the important message we have
sent, Mr. Chairman, is that the platform of economic freedom in
this country, the markets that we have crafted over the course
of 200 years, are intact.
And those, the criminals who attacked our people and our
property, while they took the lives of so many and destroyed
the property of so many, they were completely unsuccessful in
taking the spirit and idealism of this great country. They
failed, Mr. Chairman, miserably.
Their failure was poignantly delivered to the world at
about 9:33 a.m. on Monday. At that moment, after two minutes of
silence and the singing of ``God Bless America,'' less than a
week following this heinous crime, representatives of New York
City's fire, police, emergency medical services departments,
the Port Authority police, flanked by Mayor Guliani, Governor
Pataki, Senators Schumer and Clinton, Treasury Secretary
O'Neill, SEC Chairman Pitt, New York Comptroller Carl McCall,
and my market colleagues--Wick Simmons, Sal Sadano--so many
others, watched those four brave heroes ring the opening bell
and send a message to the criminals who declared war on this
country that they failed.
The decline in markets continues, Mr. Chairman, and some
may be concerned. But as we heard this morning from the first
panel, America is strong. Our economy, while at levels perhaps
not of a year or 2 years ago, is still intact and strong and
will indeed provide the necessary platform for economic growth
to resume at the traditional levels. I would caution those who
believe the downturn to be long-term or to be a permanent
phenomenon.
Eleven years ago, when Iraq moved into Kuwait, the Dow
Jones declined to the 2,400 level. Some 9 years later, it was
at 11,000, Mr. Chairman. Anyone who bets against this great
Nation of ours is flat wrong.
The foundations of our equity market are strong, the will
of our people unified. The Government has come together as
never before in a common pursuit--victory. Victory will be
celebrated by our people, by our economy, and ultimately, by
those in the markets, Mr. Chairman.
Again, I want to thank you, Mr. Chairman, for the wonderful
leadership and support that you have given as this Committee
oversees our markets. All of the Members I have either spoken
with or heard from sent expressions of support to those of us
in the very critical task of restoring the public and the
investor confidence levels to what we have now indeed been able
to accomplish.
Mr. Chairman, I want to say that all America is shining
brightly and our equity markets will one day reflect that.
Thank you very much.
Chairman Sarbanes. Thank you very much.
Wick.
STATEMENT OF HARDWICK SIMMONS
CHIEF EXECUTIVE OFFICER, NASDAQ STOCK MARKET
Mr. Simmons. Thank you, Mr. Chairman, Senator Dodd, Senator
Allard, Senator Enzi.
For those of us who were unfortunate enough to witness the
tragedy, nothing that I describe today will approach the
ultimate sacrifice of thousands of Americans in New York's
financial district and in Washington on September 11. We honor
those who fell that day and convey our deepest sympathies to
their families and their friends.
If destroying the U.S. financial markets was a mission of
our enemy on September 11, that mission failed. The enormous
efforts of the past week demonstrate the vitality of the U.S.
capital markets. I have been part of this industry for over 35
years and I have never been prouder of my colleagues or my city
than I have in the last 10 days.
As was true throughout the financial community, the men and
women of Nasdaq rose to the occasion. Our New York City office
at One Liberty Plaza is the worldwide headquarters of Nasdaq
and sits directly across Church Street from the World Trade
Center. When the tragedy struck, our first responsibility, like
Dick's, was to ensure the safety of our employees. Once they
were safely evacuated, we assured ourselves that our critical
technology facilities were undamaged. In coordination with the
SEC, and Dick, we then determined that trading in the equity
markets should not open until the attack's impact was fully
understood.
We then began the process of evaluating the extent of any
damage to Nasdaq and our market participants in determining the
necessary steps to reopen the market.
We were guided by several principles. First, we would do
nothing that impeded the rescue effort. Second, we would
closely coordinate all our activities with the city and with
the SEC. Third, we would open our market only when the other
markets and major market participants were fully prepared.
Finally, we would be as open and transparent in reaching out to
and assisting our members and issuers in crisis as we are any
other day.
As to Nasdaq's technology, at no time during this disaster
were Nasdaq's systems inoperative. At the time of the attacks,
trading was suspended but Nasdaq's systems and network
continued to operate. Because our primary and backup technology
centers are outside Manhattan, our primary concern was our
ability to connect, as Dick said, with the firms that are
active in our marketplace and provide our liquidity and order
flow.
Nasdaq's geographically decentralized network has several
levels of redundancy designed to withstand singular-point
failures. Virtually all firms are connected to Nasdaq through a
set of several Nasdaq servers on their sites and through their
backup centers. Each of the servers in the Nasdaq network is
connected to two distinct Nasdaq connection centers.
There are more than 20 Nasdaq connection centers located
throughout the United States, four in the metropolitan area
alone. Each of these centers is connected to both our primary
and our backup data centers.
While this may be a lengthy description, it is critical to
understand that disasters such as these, and we have never seen
a disaster quite like this, are not averted by hardening any
single point of failure. Rather, they are avoided by having
resilience built into the network through backup connections
and backup vendors. This is a key learning from this tragedy.
While many of our 393 market-makers and ECN's were not
physically impacted by the disaster, many others face great
challenges in terms of personnel, technology, and connectivity.
That said, firms representing over 60 percent of the daily
volume of Nasdaq confirmed their operational readiness by noon
on Wednesday. We also reached out to the 4,300 companies that
list their shares on Nasdaq. To enhance prospective liquidity,
we recommended that they look at buy back programs and get
board approval if necessary. And I might say here that the
SEC's speedy action to ease these rules was critical to us at
that point in time.
We reached out to the SEC and other Government agencies as
they reached out to us. The unprecedented cooperation between
all market centers with local and National Governmental
authorities was continuous and excellent throughout this
period.
I want to commend the Federal, State and local governments
for their willingness to use their vast resources and
regulatory powers to assist the markets at this time of crisis.
The SEC and the City of New York were particularly instrumental
in helping us open the markets as quickly and smoothly as we
did. All hands were truly on deck.
In my view, the decision process to reopen the markets was
a textbook example of effective cooperation among the market,
Government and private industry. Telecommunication, power and
employee access problems created enormous complications and
risks in reopening the market. In addition, there was total
unanimity among all participants that the equity markets should
open as quickly as possible, but only when we could ensure that
they could operate efficiently with proper liquidity available,
without additional constraints and with universal access for
all investors. We also believe that given the uncertainties, it
was important for investor confidence that all markets open
simultaneously.
After two all-hands meetings, and Dick described one of
those before, and with the strong leadership and resolve of
Chairman Pitt and the full support of the SEC, the Department
of the Treasury and the Federal Reserve Board, the decision was
made that trading should resume no later than Monday, September
17.
This decision was based on three factors. First, through
the efforts of Verizon and MCI WorldCom and the affected
financial firms and markets, there was a geometric improvement
of telecommunications connectivity each day. Second, the
critical importance of the continuing rescue operation at the
World Trade Center site made provisions for widespread physical
access to financial firms and the New York Stock Exchange floor
and an earlier start-up inappropriate. No one wanted to get in
the way. Third, there was complete consensus that the market
should not resume without widespread system connectivity
testing, which could most effectively occur over the weekend.
Nasdaq employees also facilitated communication between the
markets and governmental authorities. Beginning on September
12, and every day until markets reopened, we hosted frequent
conference calls with all the major national market and
exchange participants, including the SEC, other regulators,
FEMA, the equities, futures, and options markets, and all
related clearing agencies. These calls were critical to the
speedy progress we made in restoring our markets.
Nasdaq employees provided technological support to over 800
Nasdaq and non-Nasdaq participants, including market makers,
order entry firms, ECN's, other markets, and even some foreign
markets seeking to establish their local connectivity. Many
firms had to activate their disaster recovery sites, which
presented special technological needs.
The testing of the systems that occurred over the last
weekend played a critical role in our confidence on Monday's
opening. On Saturday, from 9:30 a.m., like Dick and the other
exchanges, Nasdaq brought up our trading systems as we would on
a normal trading day. The testing included firms representing
nearly 98 percent of a normal day's volume and was a great
success. In fact,
everybody took it so seriously, we literally did 20 percent of
an average day's volume in the test and that is unheard of.
Monday was obviously a go.
To achieve the successful reopening of the markets, Nasdaq,
the Government, and the financial services industry all worked
in concert. The strength of the U.S. financial markets today
reflects the cumulative efforts of far-sighted leadership many
years ago and it continues. It was this effort of cooperation
that saw us all through those 8 days and restored the markets
as we have them today.
Thank you.
Chairman Sarbanes. Thank you very much.
Bob, we would be happy to hear from you.
STATEMENT OF ROBERT R. GLAUBER, PRESIDENT AND CEO
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
Mr. Glauber. Mr. Chairman, Senator Dodd, Senator Allard,
Senator Enzi, first, Mr. Chairman, thank you for your kind
comments at the outset.
On behalf of the NASD, I want to thank the Committee for
inviting us to appear here on what is clearly a very vital
subject.
It is vital because the barbaric acts of September 11 were
an assault not only on our country, but on our financial
markets. I am here to tell you how the broker-dealer industry
has responded to these attacks and to describe its condition in
their aftermath.
Under Federal law, the NASD is a self-regulatory
organization for every one of the more than 680,000 registered
representatives in the U.S. securities industry, and all 5,600
brokerage firms that are the pipeline connecting investors to
the markets. We also monitor all trading on the Nasdaq stock
market.
All of which has given us a graphically detailed
perspective on how the industry was affected by the horrific
events of September 11, and how firms are getting back on their
feet. The picture we see is both inspiring and daunting.
We have found stories of heroism and humanity. One key
firm, as was discussed earlier, lost 700 of its 1,000
employees, took a vote to stay open, and worked through the
night to do so. Countless markets and firms, ordinarily the
fiercest of competitors, have cooperated like the closest of
friends. There are some telling numbers. There were 31 main
offices and 30 branch offices of broker-dealers located in the
World Trade Center. We have been able to communicate with
almost every one of them. Much of our work in this crisis has
been to fashion reasonable regulatory relief wherever and
whenever appropriate.
We are also working closely with the SEC and others to
ensure that the rules governing our markets and members are
applied with appropriate flexibility and we are answering a
great number and variety of investor concerns.
I hasten to add that in every step we have taken, we have
continued to put investor protection and market integrity
first. And I can report that there has not been one minute
since the attacks when our ability to monitor trading on the
Nasdaq stock market has been compromised. At this time we have
received no reports from customers unable to locate information
about their accounts. This is largely due to the existence of
duplicate records located at clearing firms, service bureaus,
and backup site. We have posted on our web site contact
information for every one of the firms so that they can be
accessed by customers.
So that has been our bread and butter. But some of what the
NASD has been doing has been terribly far from routine. Some
500 floors of office space in Manhattan have been knocked out.
So we have created an electronic clearinghouse where firms that
now need office space are finding firms with space available.
Other firms have suffered losses so catastrophic, they have
decided to become branch offices of other brokerage houses. We
are smoothing the path as those firms seek to find suitable
partners.
And we have undertaken one service which is truly heart-
rending. NASD records are often the best source of fingerprint
images for those lost in this tragedy. With appropriate
safeguards, we are providing thousands of images for
identification purposes to member firms, law enforcement,
rescue, and recovery authorities and, of course, to the
victims' families.
Senior NASD officials have spoken already to hundreds of
brokerage firms in lower Manhattan. We hope soon to get through
to every one of the 350 additional firms south of 14th Street.
By and large, the firms are all full of courage and resolve.
But make no mistake--September 11 brought an undeniably
heavy blow. We pray for all the friends and colleagues we have
lost and all the families who grieve. That is why we must
celebrate the miracle which we have discussed over and over
again today, and which we should never take for granted, that
the most liquid, transparent and trusted markets in the world
are back in business, and remember all the heroes who made that
possible.
Thank you.
Chairman Sarbanes. Thank you very much. We thank all the
witnesses for extremely thoughtful statements.
Again, I want to commend the extraordinary cooperative
effort that was undertaken within the private sector and
between the private sector and the public sector. The resolve,
the determination, and the judgment which were shown, I think
merit the praise of all of us. You had difficult judgments to
make, difficult calls, and I think you made them right. And we
are back in operation.
How close to normal are the operations in terms of how
effectively it is working?
Mr. Grasso. Well, Mr. Chairman, I would say from a systemic
standpoint, the best and most visible way of answering is to
simply look to the volume levels we have processed. It is
clearly indicative that our system is strong and the capacity
that we have all invested in, which is many times the average
utilization rate--in my own case, we have approximately five
times our daily capacity demand embedded in our network--so the
technology investments of the last dozen years have paid
dividends for all markets.
I do think we would be remiss if we did not recognize, Mr.
Chairman, that markets function based on the performance of
technology and people, not just people in lower Manhattan, not
just people on trading floors, but those in the distribution
network. And it is clear that it will be an adjustment period
for all Americans, and certainly for those who are in the
traditional financial district, before they are able to focus
as they did prior to September 11.
I believe that this effort that Bob and Wick and I have
described, to bring back the marketplace, to bring back our
people and our technology and focus on being the world's
admired capital market that we have been, will be part of the
healing process.
Mr. Simmons. I would only add that, the Exchanges, as you
see us up here, are in better shape than many of our members,
and that we still have four or five major members who had their
facilities located either in the Trade Center or the World
Financial Center, right next door, who are now either operating
out of 650 rooms at the Sheraton uptown, or out of disaster
recovery sites in Connecticut or in New Jersey. So, for them,
it is not business as usual yet. For us, it is much more that
way.
Chairman Sarbanes. Yes.
Mr. Glauber. Mr. Chairman, you mentioned the 1987 stock
market crash. And just as a point of comparison, in that event,
600 million shares proved more than the exchange could operate.
As you pointed out, on Monday, the New York Stock Exchange,
did 2.4 billion shares. What is clear is that the lesson from
1987 was well learned by Nasdaq and by the New York Stock
Exchange that capacity has to be in place so that the markets
can function and investors have confidence. And it was well
learned, voluntarily put in place, and served us so
magnificently on that Monday.
Chairman Sarbanes. I think that is an important
observation.
I take it that you have taken in the Amex and they are
working off of your floor. Is that correct?
Mr. Grasso. Correct, Mr. Chairman. We took a page from the
tragedy back in 1989 when the earthquake hit San Francisco,
where the equity markets and the options markets, almost
overnight, invited the professionals from the Pacific Stock
Exchange who were based in San Francisco, it was their options
business, to relocate to other markets.
Ours included--we built a floor for them. We took that
basic model and immediately after the tragedy, the top
management of the American Stock Exchange came to see me. I
showed them some open space and they said that they wanted it.
And we literally built them a trading floor between Wednesday
and Saturday, which was tested and fully functional. We trade
all of their equities and their exchange-traded funds products,
and we relocated their options business to Philadelphia.
Mr. Glauber. Mr. Chairman, we are actually the owners of
the Amex, that is, the NASD. And I just want to thank Dick for
all the efforts he undertook. It really was in the finest
traditions of commitment to each other in these times of
crisis.
Chairman Sarbanes. And I understood from a comment you made
before that you have not, up to this point at least,
encountered a difficulty in terms of the destruction of records
because of the backup systems that exist. Is that correct?
Mr. Glauber. That is correct. Most certainly large firms
have disaster recovery facilities, as has been discussed. Other
firms clear through third parties, either service bureaus or
clearing firms. And it is only the very smallest firms and
those that have very little business with the public, where
there would be any question. And to our knowledge, there have
been no lost records.
Chairman Sarbanes. Senator Enzi.
Senator Enzi. I would yield to Senator Dodd.
Chairman Sarbanes. Senator Dodd.
Senator Dodd. Thank you very much, Mr. Chairman, and I
thank my colleague for doing that.
Chairman Sarbanes. Senators Dodd and Enzi are the Chairman
and Ranking Member of our Subcommittee on Securities.
Senator Dodd. It just deserves being repeated of just the
tremendous job that all of you have done. Dick, we all watched
all week up there through this and it was--I love the way you
put this this morning to us. Obviously, the human dimension
comes first. And the fact that you made a decision that there
was about all that could be done on that level and that that
was going to trump any decision about opening the markets, as
important as that was.
I know that was said before, but I appreciate your stating
it and restating it here this morning. It is tremendously
important. It just really is. What Senator Sarbanes has said,
to think you have had both the largest and second-largest day
in the history of the New York Stock Exchange in the last 3
days in terms of volume, and the fact that under these
circumstances, you have been able to handle that volume, is a
great tribute to you and your staff and to the brokers and
dealers and specialists and so forth on the floor up there.
As I say, I made these calls to folks in my State, very
difficult calls. I did not know what else to do except to--you
know, we are down here talking about things that we are going
to do legislatively. But in the meantime, I am sitting here and
so I decided to make the calls to some families. I did not
reach everybody in my State. I do not have numbers for
everybody. But I talked to about 40 different families over a
space of some 12 or 14 hours. The overwhelming majority, of
course, were working for these firms that you are talking about
here today. That is where they were.
There are a couple of tragic stories. A 24 year old girl
down for a job interview. All excited about that new job she is
going to have up there for that interview that morning. Just
pure fate.
A young kid out of Columbia, from Ridgefield, Connecticut.
Just so excited about his new job in the financial services
sector, 23 years old. Absolutely beloved kid in his community.
And at Columbia, his classmates are out with his picture up all
over the city, hoping beyond hope that they might find him.
Just one tale after another.
Just one point. You are here, and so I want to raise it
with you here, but it is really not your jurisdiction in a
legal sense. And I know these firms want to get back going, get
the technology up and get the money going. But I hope in your
positions of leadership you will be talking to these folks too
about these families.
You talk about people who have given tremendously, their
entire professional lives, in some cases here, to these firms,
usually limited partnerships in some ways, something put aside
there, but hardly what you would consider adequate to be
raising families of four and five kids down the road. And I do
not know how you do it. But for those of us sitting here who
kind of want to watch, they know we have an obligation to get
the business going and they have to serve their customer base,
and so forth. And obviously, if there are ways that we can help
in that regard, we want to.
But I hope you would convey, as I am sure you have, and
they have, too, publicly, I know you have been talking about
it. But you know what happens over a period of weeks and
months. Memories fade a little bit and people are back and
trying to get things going. And sometimes, that mother or wife
out there who has four or five kids and only met anybody at a
social setting, annual dinners and the like, becomes a
secondary and a tertiary thought.
I just hope that they are going to remain very paramount in
the minds of all of this. That human dimension, Dick, that you
talked about, that as important as it is been over the last 10
days, will remain paramount in the thinking that goes on.
The only real question I have for you, other than for you
to respond to that particular point, is just if you might share
with us, and you do not have sort of a floor, Wick, but
nonetheless, but on the floor, Dick, I always say that the last
thing you want to do is be talked about on the floor of the New
York Stock Exchange. You are in trouble if you are being talked
about. There is always a chatter that goes on.
Try and share with us, if you would, just the mood of the
people on the floor, for the last 2 or 3 days, if you can sort
of capture that for us a bit here.
Mr. Grasso. Well, Senator, you and the Committee Members
will be, Mr. Chairman, very happy to learn that a large part of
the discussion is about people, and not just about those in the
financial community, who have suffered a loss. Many are still
missing, loved ones or colleagues, and what can be done to
help, as you say, Senator long after the, shall we say, glare
of the camera has gone.
Although I would say to you, at least in my business, this
is something that will never lose its glare. They are talking
about the cops and the firemen. They are talking about the
people who were running up the stairs as well as the people who
were running down the stairs. They are talking about how we as
a community, can wrap our arms around those who will need our
strength, both in guidance and prayer and, as you say, Senator,
financially.
The mood of the market on the floor is truly secondary to
the concern about the human factor. Everyone is concerned about
the psychological impact that has been suffered. Anyone who was
in the middle of that horrific day, and certainly anyone who
was in the street, to see the streets of lower Manhattan turn
black, literally, at 10:30 a.m., will never forget that. And so
we have to provide adequate counseling, the blanket, as my
colleagues and I have called it, of human support.
As far as the market, in my closing comments, Senator, I
think there is an observation that is important. As we faced
the conversion of Desert Shield to Desert Storm, the market was
falling from peak to trough, about 20 percent over the course
of 7 months. No one was concerned about the market as much as
they were concerned about the troops and the effort and the
success.
And I believe that people today on the floor, to your
question, and many of your constituents, of course, I see each
day, they are concerned about our effort to never let this
happen again. Not just to do something that is an immediate
feel-good, but to find where the roots are and kill both the
plant and the root, to make certain that we win in the most
universal of senses.
You noted that wonderful recognition, 62 nations lost
citizens, not just America. And this is about making the freest
market and the freest society take global action in partnership
with all of those nations to make certain that this never
happens again.
The market, as we heard from the first panel, the economy
will recover. It is the greatest experience on earth. It is the
human factor and the safety factor.
And I am very pleased, Senator, to where you started your
observations, I am very pleased that no one has ever for the
moment lost sight of people first, commerce second.
You take care of the people, commerce will take care of
itself.
Senator Dodd. Wick or Bob, do you want to add any comment
to that at all?
Mr. Simmons. I would only add one thing. And that is that
what Dick is talking about is something we have to extend for a
number of months now because what happened in New York was a
physical tragedy, but it has left an emotional wound. And it is
an emotional wound not simply for the people of New York, but
for all people at the moment who somehow feel their security
has been threatened.
When they feel their security has been threatened, they
pull their hands and arms in and turn into themselves and to
close friends, what have you. And I think it is going to have,
unless we speak to it, a profound effect on economic behavior
for a few months.
So this very wrap-your-arms-around-people approach which
Dick was talking about is something we have to think about in
terms of the solutions that we provide from Washington and/or
other places in the next few months because we have to repair a
wound which will be difficult to do. You see that wound in the
markets right now. Markets at times like this are one part
reason, two or three parts emotion.
Senator Dodd. Yes.
Mr. Simmons. And you have to let that come out. So, we have
to speak to that emotion, not just simply to the facts. That in
turn I think will provide the kind of equilibrium necessary for
markets to start to really regain their footing.
Senator Dodd. That is important. And you might, with
Senator Enzi and I here, if either of you or any of you have
some thoughts and ideas on what we can do as a Subcommittee
obviously in conjunction with Senator Sarbanes, the Chairman of
the Committee, to work at this or to come up with some ideas
and thoughts on how we can play a constructive role, we would
be very interested. I know I speak for both of us here in doing
that.
Bob, do you have any quick comment on this at all?
Mr. Glauber. Just simply to say, I expect to take you up on
your invitation and talk to you about things that can be done.
We have spent, as you can imagine, a lot of time talking to
the leaders of a number of firms in the business. And
inevitably, the talk starts about what we can do and what they
are doing to continue running. And it inevitably turns to
colleagues they have lost. And it reminds you over and over
again that this is a human tragedy before it is a business
tragedy.
Senator Dodd. I thank you, too, we have done it all the way
along, Senator Sarbanes, Paul Sarbanes, did it and you have
done it in your opening and these comments, too, Dick, and that
is those policemen, those firemen, and those EMS service
people.
I know a number of people from around Stanford,
Connecticut, went in to New York, as they did I know from New
Jersey and elsewhere. And the thought, how many times I have
heard those stories of those firemen charging up the stairs of
that World Trade Center, at the 30th and 40th floor, trying to
get up to deal with that immediate crisis, as people are coming
down. And to know that 400 or 500 of these people, whatever the
numbers are, is just incredible.
We saw the tragedy in Wooster, Massachusetts, when six
firefighters lost their lives and the outpouring people felt
then. And the dimension of this is just--the human aspect of
this is so hard to grasp, that I do not think--in fact, I am
glad we do not in some ways. The human mind is not capable in
the short term of understanding the magnitude of a tragedy like
this, and we are protected in a sense from that as a result of
it. It will take time for us to really understand how profound
an event this was.
And I think, Wick, your comments are so appropriate, that
we have really got to work at this. We talk about children
reacting at this. Adults need to, too. And boy, if we do not do
that very well--as you say, the wounds will heal in that sense.
But the deeper aspects of this--and I hear folks today, some of
our colleagues flying back here, they were the only person on
the plane coming back from their respective States. An eerie
feeling coming across the country.
So our confidence has been damaged, but it is coming back.
And an awful lot of the reason it is coming back is because of
what you three have done and as you would say very quickly,
there are literally hundreds and hundreds of people that you
work with every day that are restoring some confidence and
faith in these markets.
And Senator Sarbanes, I thank you immensely for holding the
hearing. I would have liked to have gone on that trip up to New
York today to be with our other colleagues, but I thought and I
think we thought here, this is maybe our most important job, to
be here this day and to provide a forum so that you can tell us
what is going on and what had happened, what steps are being
taken, and to tell Americans out there, and people throughout
the globe, we are back, we are still a little damaged, but we
are getting stronger every hour. And we are going to be more
vital than we ever were before as a result.
I thank all three of you.
Chairman Sarbanes. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. I too want to extend
my thanks for your taking time out of what is the fourth open
day of the markets to come down here and spend some time with
us and with the American people. It is our hope and my belief
that your appearance here today makes a difference in the
market and with the country. It is reassuring to have you
personally tell what has happened and what is being done.
I really appreciate the leadership that you have shown
through this. The American ingenuity of putting everything back
together. And because of your testimony, we have a little
better idea of the complexity of what had to be done. And that
miraculous testing that went on over the weekend in light of
all of the things that people would have rather have done
because of the tragedy. And the cool way in which you counseled
each other and talked about when the appropriate time would be
for opening and the way that you communicated with us on the
opening so that we also could communicate to the country that
it was a normal process in light of what had happened, and
could give what reassurance was possible there. Without your
leadership, your preparation, that would not have happened. But
also, without the people that worked with you, and again, I
appreciate all the communication that your staff provided to me
and people that work with me.
One of the things that this tragedy has shown, I think, is
the importance of every single person. It does not matter what
the job is. We have learned that we are dependent on all of
those other people, regardless of what their specific talent
is. They are all part of a major puzzle for this country. And
no place else could it come together like it did here.
I heard a pilot on a plane yesterday doing his little
speech at the beginning and encouraged everybody to visit with
their neighbor a little bit because they were going to be
family for a few hours. If it is one thing that has come out of
this tragedy, we are all finding out that we are family and we
are going back to a retail atmosphere in this country.
We have been at kind of a wholesale situation where we look
at people as groups of people. And now we are looking again at
them as individuals and in some instances, meeting them for the
first time. So I do appreciate all you did to keep everything
running and then to get it back up to full speed on Monday.
Something I am curious about is some of the costs that were
involved in this to the Exchanges themselves, both the cost of
being closed down and the cost of starting up.
Have any of those been put together yet? And if they have,
can you give us some kind of an idea of the range of that?
Mr. Grasso. I must say, in all candor, Senator, and I thank
you for those wonderful comments, costs were never a factor. It
was restoration.
If I begin to quantify at least my own market, we turn on
an average day about $46 billion which produce, an average day
of about 1.2 billion shares. Our yield on that as an engine or,
if you will, as a source of revenue for the Exchange, is
roughly $109,000 per year for each average daily million shares
traded.
But that was never a focus. And to the credit of everyone,
not just the New York Stock Exchange, but the Nasdaq, the
American Stock Exchange, and all of the firms who basically
opened their doors to one another, cost was never an issue.
The focus was on the American people, 85 million investors
amongst them, directly using the markets, let us get them back
up and running. And we will worry about the costs later on. I
think that the real cost here was in human life and in human
suffering. And no one can attach a financial statement to that.
Mr. Simmons. I would only add that, to us, it was more
important, as Dick said, to get the markets up and going
because, ultimately, if people lose faith in our ability to
operate markets and they cannot vote financially at times like
this, then we will pay a far, far greater price down the road
than we pay today. So there really was no concern for that
whatsoever, on member firms' part or on our parts.
I think our objective was simply to get up what it is we
do, which is to provide a field of play, if you will, with
complete integrity that people can trust and vote economically
in.
Mr. Glauber. I would just echo what Wick said. The cost
will be very large, both in interrupted business and in damaged
and lost facilities. But people have not been thinking about
that. They have been thinking about getting the markets up and
running and taking care of each other and taking care of those
who have been killed.
Senator Enzi. In light of this kind of a situation, another
thing that is extremely easy is hindsight. I want to
congratulate you for the foresight of having the off-site
backups that you had that definitely aided in getting this
going. In light of the tragedy, will you be looking at
additional backup sites for the respective exchanges?
Mr. Grasso. Well, Senator, I will speak to my market.
We have a distributed technology network. Prior to the
tragedy, we had three pieces of real estate on which we could
trade. We happened to trade only on one. We now, as a result of
our new partnership with the American Stock Exchange, have a
fourth. And I think we have already had the two of us, the
thought that we might take on additional alternative sites, so
that, to the extent that several physical facilities are in
some way damaged or incapacitated, that we never lose the
ability to bring the market up.
I should point out, however, as I think you will recall
from your visit to the campus recently, 92 percent of our
orders, which produce about 53 percent of our daily volume, are
done on our electronic commerce platform. They do not need
physical convention. So, at a minimum, we could jump-start the
market on that basis.
But with sites in lower Manhattan, the American Stock
Exchange, and one in an outer borough, we think we have moved
in the right direction, looking forward. But we do not preclude
perhaps one or two more.
Mr. Simmons. Nasdaq has no floors, as you know. It is all
electronic. But that does not mean that we do not have
facilities that we have to be sure have the ability to migrate
whatever it is that we process on those facilities to another
facility.
Primarily, we need redundant hardware and the ability to
move our software and our connectivity, our network
connectivity, to different sites. And you can bet that we will
put extra emphasis going forward into making sure that those
sites are regularly tested, not just backup sites in name only.
Senator Enzi. Thank you. If I could just do one more quick
one for Mr. Glauber.
Chairman Sarbanes. Sure.
Senator Enzi. On September 14, you issued a telemarketing
fraud alert. I am not sure whether the country is aware that
that is a role that you play.
What has been happening in that fraud area?
Mr. Glauber. We did, as you say, Senator, put an alert up
on our website to investors, as we have done on other issues
from time to time.
What I can tell you, right now is that we have had no
direct evidence specifically of that going on. But we have seen
media reports regarding potential charitable scams in the wake
of the tragedy. So we considered it to be a great danger and
wanted to alert the investing public to it. We will just keep
our eyes wide open on that issue as the days unfold.
Senator Enzi. Thank you for that role and everything else
that you do and, again, thanks to the leadership of all of you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much, Senator Enzi.
Well, gentlemen, we thank you very much for coming and for
your patience. I think it was important for you to be here. We
know it was on a short notice that you responded to the
Committee. But we thought it important to have both this panel
and the previous one in terms of giving people a better
understanding of what has transpired and what is going on right
now.
I do want to say again that I think you and your colleagues
certainly rose to the challenge. The competency and judgment
that were reflected I think you can take a great measure of
satisfaction in. I was very much struck by the priorities that
were reflected here today in your testimony, your concern for
the human dimensions of this tragedy. It is enough to make you
weep when you think of the talent and the dedication of the
many men and women, young and old, that were caught up in this
and whose lives have been taken from us, and the loss that that
represents.
You are self-regulatory organizations and as I indicated to
the Chairman of the SEC, we desperately hope that no one will
seek to take advantage of this situation in some way. And I
know you will be monitoring that very closely, as will the SEC.
Hopefully, anyone inclined in that direction can put it to one
side at this moment of challenge.
We look forward, as Senator Dodd indicated, in working with
you and with Senator Enzi and any suggestions you have as to
further measures that might be taken to strengthen the system,
make it more ready and more prepared. I am struck by the fact
that, as I indicated at the outset, that many of the
recommendations that Bob Glauber put forward after the 1987
occurrence, came into play now and were of importance. So if
there are lessons to be learned here, we stand here ready of
course to work closely with you in a cooperative fashion to
implement that.
Finally, I am going to impose on people for just a moment
because I want to read actually into the record this very fine
statement, in my view, that the New York Stock Exchange printed
in Monday's The New York Times, which I think reflects what you
all said here today, and out all across the country. And I
thought it was a very sensitive and perceptive statement.
As we close, I am going to impose on people, it is not very
long, but I am going to impose on people for a moment or to to
actually read it into the record:
At 9:30 this morning, a bell will be rung on the floor of the
New York Stock Exchange and trading will resume as it has for
209 years.
Today, that bell means more to us than just business. It will
also be sounding out our deepest thanks for the bravery and
sacrifice of so many who unhesitatingly came forward to give so
much in this difficult time.
It will ring out our heartfelt prayers for those we have
lost, their families and loved ones.
It will steel our collective determination to never let
cowardice, intolerance and evil sway this great and free
society from its strong and sure course toward a better
tomorrow.
We will go forward from here, stronger in spirit and purpose,
knowing that history has proven the ability of our financial
system to survive the darkest challenges time and again.
We will do our utmost to preserve the bedrock foundations of
worldwide prosperity and well-being.
And we will sound that bell and let freedom ring.
Thank you for coming today. The hearing is adjourned.
[Whereas, at 2:00 p.m., the hearing was adjourned]
[Prepared statements, response to written questions, and
additional material for the record follow:]
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
We convene this hearing in an atmosphere and with a focus very
different from that which we had planned. Our original intention was to
begin a series of hearings on financial literacy, a critical subject
for all Americans, with three principals of the financial markets--the
Secretary of the Treasury, the Chairman of the Federal Reserve, and the
Chairman of the Securities and Exchange Commission--to open the
discussion. That subject remains a matter of great importance, and we
will return to it at an appropriate time. Today, however, in the wake
of last week's unspeakably savage attacks, we focus on the condition of
the U.S. financial markets.
Ten days ago, we witnessed devastation that words remain inadequate
to convey. Someday, perhaps, economic historians will catalog, analyze,
and calculate the terrible losses inflicted by the terrorist attacks
directed at New York and Washington. But some losses--families torn
apart, communities devastated--will remain forever beyond calculation.
At the same time, in the wake of the attacks whose magnitude
Americans could only begin to discern, we saw the immediate response of
our firefighters, police officers, emergency workers, and volunteers.
It was a response of astounding resolution and courage, giving the
world, as a New York Times editorial put it, ``a vision of the valor
and selflessness that is the best face of America.'' None of us will
ever forget them, and I want to pay tribute to their steady courage
today.
It gave us, in addition, an inspiring vision of calm determination,
of steely resolve, and of unity in a common endeavor. Their example
must guide us as we turn to the challenge of rooting out terrorism.
They must guide us as we carry on with our fundamental
responsibilities--caring for our families, educating our children,
doing our jobs in a sustained, productive manner, reinforcing the
fundamental strength of our economy and the financial markets whose
functioning is essential to it.
In New York, the center of the Nation's and indeed the world's
financial markets, we can see a phoenix rising from the ashes. Given
the wreckage in downtown Manhattan, few thought it possible that our
markets would open for business on Monday. The fact that they did, and
the infrastructure held--on record volume--is a tribute to thousands of
committed individuals in both the private and the public sectors who
went back to work under very difficult circumstances, having lost
friends, colleagues, neighbors, and in some instances, family members.
Our capital markets are the most effective in the world and our
witnesses are to be commended, along with so many others, for the role
they played in ensuring that the United States' financial system
continues to operate efficiently. New York remains the world's
financial capital. The response of our witnesses to the crisis was
coordinated, timely, and effective. They prevented the situation from
becoming worse by taking decisive and carefully considered action.
This morning we will hear from the Secretary of the Treasury, Paul
O'Neill, Chairman of the Federal Reserve Board, Alan Greenspan,
Chairman of the Securities and Exchange Commission, Harvey Pitt, as
well as from Chairman and CEO of the New York Stock Exchange, Richard
Grasso, CEO of the Nasdaq Stock Market, Hardwick Simmons, and CEO and
President of the NASD, Robert Glauber.
As Chairman of the President's Working Group on financial markets,
Secretary O'Neill has led the interagency coordination of the
Government's response to the attacks on our financial center. Secretary
O'Neill, as the Administration's point person on both fiscal and
economic matters, has also been engaged in evaluating the potential
effects of last week's events on the U.S. economy and in particular, on
the airline and insurance industries. Under Chairman Greenspan's
leadership, the Federal Reserve took several critical steps to ensure
that the financial community was able to meet its liquidity needs. In
addition, the Fed coordinated policy with other central banks
throughout the world including the European Central Bank, the Bank of
Canada and the Bank of England, and helped coordinate the bank
regulatory process here at home along with the other bank regulators.
Securities and Exchange Commission Chairman Pitt has done an
outstanding job in coordinating industry efforts to reopen our
securities markets in the wake of last week's tragic events. Once the
scope of the damage to our financial community became clear, the SEC
quickly issued the relief necessary to enable issuers, exchanges and
securities firms to get back into business. I look forward to hearing
about our witnesses' activities in more detail shortly, when we turn to
our first panel.
Our other witnesses are also well known to the Committee. It has
been said that Richard Grasso, the Chairman and CEO of the New York
Stock Exchange, is the right man at the right time for the job. Former
Treasury Secretary Robert Rubin was quoted in The New York Times this
week as saying ``Dick is exactly what they need now. . . He is ideally
suited to this.'' I would agree with that assessment. Wick Simmons is
relatively new as the CEO of the Nasdaq Stock Market, having been
appointed to that position on February 1, 2001, but by all accounts he
has been doing an excellent job of helping to coordinate industry's
response. And few people bring more experience to market disturbances
than Robert Glauber, who authored the Reagan Administration's
recommendations in the aftermath of the October 1987 market break.
This morning we will want to hear from our witnesses their
assessment of the impact of last week's events on the condition of the
financial markets as well as the impact on the economy, the adequacy of
our response thus far, and what more needs to be done. I look forward
to hearing their testimony.
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PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
Thank you, Mr. Chairman. First of all, I would like to commend all
of our witnesses today for the leadership they have shown during the
past 9 days. I do not think any of us can truly appreciate the
monumental task it was to open the markets Monday morning. I would also
like to commend the entire financial services industry for the
commitment they have shown in working with regulators and each other
during this trying experience. Their reassuring tone about the
stability of our markets has been much needed to calm the fears of
those who invest in America's financial system.
If the stability and the security of America's markets was ever in
doubt before September 11, I do not believe anyone could doubt their
stability after this experience. Few financial systems could have
sustained the losses of New York City, the financial capital of the
world, and after only 5 days been back and running without any major
glitches in the system. The quick responses by our market leaders are a
major reason why systems were phased so little.
The Federal Reserve's, the SEC's, and Treasury's actions through
this ordeal have been nothing less than superb. The Fed's coordination
with the banking community provided the liquidity needed to maintain
public confidence in our banking system and the SEC's recognition to
relax specific regulatory burdens, particularly Rule 10b-18, provided a
much needed buy side to the market.
While we can all applaud the actions of industry and regulators
alike, we should also learn how to further prevent market fallout if,
god forbid, future attacks occur against our financial markets. We must
ensure the industry has backup system upon backup system in case of
multiple attacks on the financial system itself. I look forward to
hearing from our witnesses today to learn what systems are used to
ensure no loss of data would have occurred even, if the attack had
taken place during market hours.
I hope to hear the thoughts of our witnesses as how best to further
strengthen our markets. Between decimalization and a depressed stock
market, a number of brokerage houses and traders were already on shaky
financial ground. A number of large firms had announced widespread
layoffs and profits had been reduced severely. I hope to have direction
as to what we, as legislators, can do to sustain the vibrancy in the
industry.
I also have strong concerns with recent accounts that terrorists'
cells around the world possibly gained financially by market
manipulation on industries which were affected. I am anxious to learn
what leads the regulators are pursuing to investigate potential
illegalities. I also want to find out what can be done in the future to
prevent terrorists from attempting to manipulate the market in this
manner. This should be a foremost priority. It is impossible to break
the backs of these terrorists organizations if they continue to be
heavily funded--especially if that funding is coming from manipulation
of the U.S. stock markets.
Again, Mr. Chairman, I thank you for holding this most important
hearing, and I look forward to hearing from our panel.
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PREPARED STATEMENT OF SENATOR RICK SANTORUM
Chairman Sarbanes, I appreciate you holding this hearing today on
the status of our Nation's financial markets. Clearly, this is an
extremely important hearing given the tragic terrorist events of last
week which attempted to strike at the heart of our Nation's strengths:
our national defense and our premiere financial systems. Proudly, I can
say, those responsible for the horrific attacks were not successful.
What we have seen over the course of a week is a Nation unified in
ways never imagined. From the charitable assistance across the United
States to the heroic efforts of emergency and medical personnel in
Washington, New York, and Pennsylvania, to businesses successfully
rebuilding and ready for work this past Monday. The demands have been
enormous but have been answered with overwhelming charity and resolve.
We will explore in today's hearing the status of our financial
markets, but I believe it is first important to commend our Government
officials and industry leaders for their work in ensuring the continued
strength and resilience of our markets. To Treasury Secretary O'Neill,
Federal Reserve Chairman Greenspan, and SEC Chairman Pitt--your level
of cooperation and prompt action to provide regulatory relief was
essential to market participants and their subsequent reaction. To NYSE
Chairman Grasso and Nasdaq Chairman Simmons--I commend you as well for
ensuring the market was technologically capable for Monday's opening,
but just as important, that investors were confident in that extensive
planning and preparation.
What we have seen over the past few days in terms of trading and
market activity has been relatively encouraging. While there were large
point drops, record lows were not realized in terms of overall market
conditions. Without a doubt, there are many challenges ahead. We must
be vigilant in the short-term of daily market activities, as well
investor response to interest rate cuts, and full implementation of the
tax refund. In order to ensure a firm financial footing in the long-
term, Congress must work with the Administration to develop an economic
stimulus package that will encourage businesses to invest in our
economy, restore confidence, and stimulate spending. I look forward to
hearing the opinions of our distinguished witnesses this morning on
what policy options they would consider to be beneficial for the near-
and long-term welfare of our economy.
There are two areas, in particular, that I believe will demand a
strong response from Congress: support for the airline industry, and a
renewed commitment to our domestic energy security. As we know, one of
the hardest hit industries as a result of last week's events has been
the airlines. Pennsylvania is the largest hub for U.S. Airways
employing 17,000 employees in two locations: Pittsburgh and
Philadelphia. While U.S. Airways was not one of the targeted, hijacked
airlines, the losses have been systemic. On Monday, the airline
announced a layoff of 11,000 employees. And other airlines have
followed. Assistance to the airline industry has been discussed--
assistance that will certainly be needed to maintain solvency. We may
also need to explore, however, other policy options that will
contribute to the extended health of this industry outside of a purely
financial remedy.
Finally, I am extremely concerned about lack of progress we have
made on debating a national energy policy. This is vital to our
domestic security, given uncertain times ahead, as we are 60 percent
reliant on foreign sources for our petroleum needs. We can and should
be committed to acting on this front--and acting soon.
Mr. Chairman, there are many factors that will contribute to the
long-term health of our economy, and it will require the collective
strength of Congress, the Administration, and the private sector to
make it happen. I look forward to hearing the testimony of our
witnesses, and to working with them in the coming months on these
pressing matters.
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PREPARED STATEMENT OF PAUL H. O'NEILL
Secretary, U.S. Department of the Treasury
September 20, 2001
Mr. Chairman, Senator Gramm, and Members of the Committee, I am
grateful for this opportunity to appear before you today to discuss the
effects of the recent terrorist attacks on our Nation's financial
system and our economy.
I traveled to New York City on Monday, for the opening of the New
York Stock Exchange. What I saw was a testament to America's
determination and ingenuity.
The people who live and work in lower Manhattan took a horrible
blow last week. And yet, amid the rubble of broken buildings and the
sorrow of lost friends and colleagues, the New York Stock Exchange not
only opened and ran smoothly, but handled a record number of
transactions on Monday. I can think of no better testament to the
resiliency of America and her economy. Among the countless heroes of
the past week are the workers in New York's financial district--from
the brokers and traders to the police and firemen to the phone and
water utility workers. In the face of enormous personal and human
losses, these professionals worked around the clock to put our Nation's
financial center back into operation. I am grateful for their efforts
and for the cooperation with which they have worked with the Treasury
Department and the Federal financial regulatory agencies.
As noted by observers from Alexis de Tocqueville forward, the
United States is a Nation of commerce. While horrifying it is perhaps
not surprising that unseen enemies seeking to strike at America's very
heart would choose to attack her most visible financial center. It was
surely their hope and intention that the economic engine of the world
would be paralyzed as a result. We denied the terrorists any such
victory. Our economy--our prosperity--will not be destroyed.
The economy of the United States remains strong and resilient. And
the Nation's financial markets, in spite of having sustained a terrible
blow, continue to function. Shares are being bought and sold on the
stock markets, firms are able to borrow funds for continued operation
in the Nation's debt markets. Of course this is not to say that the
events of September 11 have had no impact on our financial community.
But thanks to careful planning and preparation for potential disaster,
and swift action by both the private and public sectors, the United
States' financial system is operating with only temporary disruption.
Private Sector Response
Private financial institutions and firms have long planned for the
possibility of disruption to the flow of information and damage to
their operational facilities by implementing programs of redundancy.
Records, as required by both prudent business practice and by law, are
routinely duplicated and stored off site. Contingency plans enabled
firms to restart their operations quickly from alternate locations. We
know from conversations with company representatives and press reports
that firms whose facilities were totally destroyed and who tragically
lost many key staff in the destruction of the World Trade Center were
back in operation within days making certain that the country's
financial markets continued to function.
Federal Regulatory Response
Federal regulatory agencies have also been swift to act. They have
taken a number of steps to ensure the continued functioning of the
Nation's financial markets, including measures to assist customers of
financial institutions, ensure market liquidity, and stabilize
securities and futures markets.
Customer Relief
The Federal Reserve Board (FRB), the Office of the Comptroller of
the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal
Deposit Insurance Corporation (FDIC) and the National Credit Union
Administration (NCUA) have issued guidance to their regulated
institutions requesting that they undertake prudent efforts to work
with customers affected by Tuesday's attacks, or by resulting delays in
mail delivery. These efforts include waiving late payment fees,
extending loan terms, restructuring debt obligations, and easing credit
terms where a customer has a demonstrable need resulting from the
events of September 11.
Market Liquidity
To preserve market liquidity, the banking industry has provided
hundreds of billions of dollars in liquidity to their customers,
including credit extended under standby letters of credit and credit
commitments. As a result, banks' balance sheets have grown as these new
loans have been made. In turn, financial regulators have facilitated
market liquidity in two important ways. First, the Federal Reserve has
met the demand for liquidity by banks through unprecedented credit
extension involving the discount window, the repurchase market, and
other tools available to it. Second, the Federal banking agencies
issued a joint statement to all banks that recognizes the potential for
these actions to inflate banks' balance sheets and hence erode banks'
capital ratios. The statement announces the agencies' desire to work
with those banks for which such credit extension may lead to a
temporary decline in capital ratios.
Government Securities/Fixed Income Markets
The Treasury has successfully adjusted its financing needs in the
face of the recent market disruptions. The Treasury and other
regulatory agencies worked closely with the Bond Market Association
(BMA) to reestablish an active and orderly fixed income market.
Following a recommendation by the BMA to close the market on Wednesday,
September 12, trading resumed in all fixed income markets on Thursday,
September 13. Further, Treasury was able to execute a successful
auction of 3 and 6 month Treasury bills on Monday, September 17, with
24 of the 25 primary dealers participating.
Equity Markets
The Securities and Exchange Commission (SEC) undertook a number of
regulatory relief measures in preparation for Monday's reopening of the
stock markets. These included providing relief under Rule 10b-18 which
provides a safe harbor from liability for manipulation in connection
with purchases by an issuer of its own stock. The relief gives issuers
greater latitude to provide buy side liquidity this week. The SEC also
announced limited relief under Section 16(b) to facilitate purchases
this week by persons subject to that statute.
Futures Markets
The Commodity Futures Trading Commission (CFTC) worked closely with
the SEC and bank regulators to address intermarket coordination issues
and facilitate an orderly reopening of equity futures markets when the
primary stock markets reopened. The CFTC continues to be in close
communication with the New York futures exchanges to support their
efforts toward safe, orderly resumption of trading in contracts based
on energy products, metals, agricultural, and other commodities.
Treasury Response
In addition to the steps taken through Treasury's financial
regulatory bureaus, the Department has also responded to the events of
September 11 on the tax and law enforcement fronts.
IRS Tax Guidance
The IRS and Treasury are providing relief to all taxpayers directly
affected by the terrorist attacks. This relief includes extending the
time for filing tax returns and extending the time for making estimated
tax payments. The victims of the airplane crashes (on the ground and in
the air), taxpayers whose workplace or whose records are in a disaster
area, relief workers, and taxpayers in all five boroughs of New York
City and in Arlington County, Virginia (the location of the Pentagon)
are among those who qualify for this relief. In addition, the IRS and
Treasury are providing relief to taxpayers unable to meet tax deposit
obligations because of damage or injury inflicted by the terrorist
attack.
Furthermore, for all taxpayers, the IRS has postponed until
September 24 the due date for all Federal tax obligations (other than
deposits of Federal taxes) that otherwise would be due between
September 10 and September 24. This postponement includes, for example,
the filing of returns and the payment of estimated taxes.
Enforcement
Treasury has established an interagency team dedicated to the
disruption of terrorist fundraising. The team is designed to increase
our ability to identify foreign terrorist groups, assess their sources
and methods of fundraising, and provide information that will make
clear to law enforcement officials how terrorist funds are moved. This
team will ultimately be transformed into a permanent Foreign Terrorist
Asset Tracking Center in the Treasury Department's Office of Foreign
Asset Control (OFAC). This is an extraordinary effort that illustrates
the Treasury Department's creativity in developing new ways to combat
terrorists.
Economic Impact
The destruction of much of the Nation's financial center in
Manhattan may cause short-term problems and uncertainty. And the
personal toll has been staggering for the companies and people in New
York's financial district.
We cannot say at this very preliminary stage exactly how these
events will affect the economy. We do not have sound estimates of the
dollar amount of damage that occurred in New York. Yet I would call on
the Committee, and indeed all Americans, to be cautious in assessing
the forthcoming short-term economic reports. This past week Americans
have been making charitable donations, giving blood, gathering in
prayer, and otherwise demonstrating our national unity and our
determination to overcome threats facing our country. While these
activities may not appear in any economic report, they are a reminder
of our humanity and strength as a country.
Consider our financial system. The markets will inevitably have ups
and downs. Americans should not react with fear that the stock market
has declined but rather marvel in that it is open, that for every
seller there is a buyer. Financial firms that suffered devastating
losses are operating, serving customers, clearing transactions, and
ensuring that the financial lifeblood of our economy continues to flow.
On Sunday, the President called us back to work. While the country
is back to work, it still grieves. But in the long-term the economy
remains sound. Although the financial sector has been damaged, it
continues to function. Moreover, the economy's productive capacity is
fully intact, ready for whatever trials lie ahead.
Indeed, America's dynamic economy is not located in any one place.
Innovation and productivity are found in every factory and farm, every
laboratory, every financial institution, every small business, and
every home office across America. That spirit cannot be destroyed.
We at Treasury have been inundated with phone calls from people
wanting to know what they can do to help. Every American can make a
contribution by helping to keep our economy strong by getting back to
work and going forward with the spending plans they made before
September 11. Each and every American should know that by continuing to
work and spend, they are doing their part to restore our Nation and our
economy in the wake of last week's attack.
We have every reason to maintain our confidence in the U.S.
economy. No evil, no matter how unspeakable, can destroy America's
productive spirit. If anything, this evil act strengthens our resolve
to be the most free, most vibrant economy in the world.
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PREPARED STATEMENT OF ALAN GREENSPAN
Chairman, Board of Governors of the Federal Reserve System
September 20, 2001
I would like to begin my remarks this morning by noting how deeply
saddened I and my Federal Reserve colleagues are that so many talented
and productive people from so many walks of life were lost or
irreparably harmed last week. Although we are here today to discuss
some of the immediate economic and financial implications of that
tragedy, we are all too aware that the topic we discuss will be a mere
footnote.
The terrorism of September 11 will, doubtless, have significant
effects on the U.S. economy over the short-term. An enormous effort
will be required on the part of many to cope with the human and
physical destruction. But as we struggle to make sense of our profound
loss and its immediate consequences for the economy, we must not lose
sight of our longer-run prospects, which have not been significantly
diminished by these terrible events.
Over the past couple of decades, the American economy has become
increasingly resilient to shocks. Deregulated financial markets, far
more flexible labor markets, and, more recently, the major advances in
information technology have enhanced our ability to absorb disruptions
and recover.
In the past, our economy has quickly regained its previous levels
following the devastation of hurricanes, earthquakes, floods, and
myriad other natural disasters that periodically batter various regions
of our country. Although the trauma of September 11 shares some of the
characteristics with such disruptions, the differences are important.
In contrast to natural disasters, last week's events are of far greater
concern because they strike at the roots of our free society, one
aspect of which is our market-driven economy. All modern economies
require the confidence that free-market institutions are firmly in
place and that commitments made today by market participants will be
honored not only tomorrow, but for years into the future. The greater
the degree of confidence in the state of future markets, the greater
the level of long-term investment. The shock of September 11, by
markedly raising the degree of uncertainty about the future, has the
potential to result, for a time, in a pronounced disengagement from
future commitments. And that, in the short run, would imply a lessened
current level of activity. Indeed, much economic activity ground to a
halt last week.
But the foundations of our free society remain sound, and I am
confident that we will recover and prosper as we have in the past. As a
consequence of the spontaneous and almost universal support that we
received from around the world, an agreement on a new round of
multilateral trade negotiations now seems more feasible. Such an
outcome would lead to a stronger global market system. A successful
round would not only significantly enhance world economic growth but
also answer terrorism with a firm reaffirmation of our commitment to
open and free societies.
But before the recovery process gets under way, stability will need
to be restored to the American economy and to others around the world.
Arguably, that stability was only barely becoming evident in the United
States in the period immediately preceding the acts of terrorism.
Aggregate measures of production, employment, and business spending
continued to be weak.
That said, consumer spending moved higher in August and appeared to
be reasonably well maintained in the first part of September. Industry
analysts suggest that motor vehicle sales were running close to August
levels, and chain store sales were only modestly lower. Purchasing
managers had noted an improvement in the orders picture in August.
Moreover, the dramatic rate of decline in profits was slowing. To be
sure, these signs were tentative but, on the whole, encouraging.
During the past week, of course, the level of activity has
declined. The shock is most evident in consumer markets where many
potential purchasers stayed riveted to their televisions and away from
shopping malls. Both motor vehicle sales and sales at major chain
stores, some of our most current information on consumer spending,
appear to have fallen off noticeably. And, the airline and travel
industries have suffered severe cutbacks.
The unprecedented shutdown of American air travel and tightened
border restrictions have induced dramatic curtailments of production at
some establishments with tight just-in-time supply chain practices.
Automakers, for example, are reported to have pared production and even
closed some plants in the past week, largely owing to supply shortages,
though, doubtless, short-term demand uncertainties have also played a
part.
The effect of the devastating attack on the World Trade Center on
financial markets was pronounced, as telecommunications and trading
capacities were severely impaired. But the markets are mostly
functioning now, albeit in some cases using contingency arrangements
and the infrastructure will be rapidly restored.
For a brief time, the terrorist attack markedly disrupted payment
transfers that are usually measured in terms of trillions of dollars
each day. Many obligators temporarily lost their technical ability to
pay on time, leaving those counting on receiving payments caught short.
The pressures ultimately ended up concentrated in banks. Those needs
were met by the Federal Reserve, both through record lending at the
discount window and through an extraordinary infusion of funds through
open market operations. To facilitate the channeling of dollar
liquidity to foreign financial institutions operating in the United
States, 30 day currency swap lines were arranged with major central
banks, again in record volumes. It was essential in such an environment
to meet all appropriate demands for dollar liquidity. As the financial
markets and payment infrastructure return to normal, loans are being
repaid, and the temporarily bloated balance sheet of the Federal
Reserve is now shrinking back to normal.
Nobody has the capacity to fathom fully how the tragedy of
September 11 will play out. But in the weeks ahead, as the shock wears
off, we should be able to better gauge how the ongoing dynamics of
these events are influencing the immediate economic outlook.
For the longer term, prospects for continued rapid technological
advance and associated faster productivity growth are scarcely
diminished. Those prospects, born of the ingenuity of our people and
the strength of our system, fortify a promising future for our free
Nation.
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PREPARED STATEMENT OF HARVEY L. PITT
Chairman, U.S. Securities and Exchange Commission
September 20, 2001
I appreciate the opportunity to offer the Securities and Exchange
Commission's perspective on the condition of our financial markets in
the aftermath of the recent terrorist attacks in New York and
Washington.
September 11 was a terrible, dark day. The terrorists who attacked
our Nation's Capital and the World's Financial Capital, inflicted
irreparable losses of innocent lives and caused untold physical damage;
but they did not destroy or diminish our Nation's strength, courage or
resolve. We grieve for our lost friends and relatives; yet the Nation's
response to this catastrophe has been extraordinary. On Monday, all the
Nation's securities markets resumed trading, a trenchant symbol to the
perpetrators of the heinous attacks.
As the events of last week and this week demonstrate, our capital
markets are the strongest and most resilient in the world. They reflect
the character of our great Nation. When tragedy struck last week, our
Nation responded by coming together. Police, firefighters, emergency
medical personnel, members of the military, and civilians participated
in rescue efforts to save those injured in the attacks.
This same spirit of cooperation imbued the tremendous efforts by so
many in the private and public sectors to restore the vitality of all
of our securities markets less than one week after the attacks. Over
the past week and a half, we have been privileged to work with the
major U.S. securities markets and securities firms, industry
associations, service providers, and Federal and State Government
bodies--all of whom have provided leadership and invincible
perspicacity in this crisis.
An attack of this nature and magnitude cannot be viewed in a
vacuum. Accordingly, we coordinated our efforts with the larger Federal
Government of which we are a part, and we worked cooperatively with the
industry we oversee. We had two critical roles: first, to assist in
implementing national policy; and second, to facilitate the responses
planned by the securities industry, and ensure that those responses
were consistent with the protection of investors and the national
interest.
Upon learning of the World Trade Center disaster, we established
communications with the organized securities markets and participated
in frequent telephonic meetings of the President's Working Group on
Financial Markets. In addition, we provided information to the White
House and Members of our Senate and House oversight committees. In
times of crisis, we believe strongly that our obligation is to keep all
those with a role as fully informed as possible.
Although the Commission has broad power over the securities markets
and the professionals who operate in them, we viewed our role as
ensuring that the markets and market professionals acted in unison and
in furtherance of the interests of public investors. Thus, we listened
first and responded only when the industry reached consensus. The
overarching national goal was to have our securities markets up and
running as soon as practicable, but only if there was no threat to
public investors.
All the major markets and market participants decided, as a safety
precaution, to remain closed for trading on Tuesday. We supported this
decision as a responsible approach, and immediately issued a press
release to notify investors of the change in normal trading patterns
and to assure them this was a temporary phenomenon.
Concerned about safety and the well being of so many in the
industry, we spoke with heads of firms to extend sympathy and express
our hope that their employees would be accounted for, safe and sound.
Sadly, many people employed in the securities industry are missing or
dead, and we will mourn their loss. Fortunately, many personnel
miraculously were evacuated to safety and reunited with loved ones.
Thereafter, our staff and we continued monitoring developments and
helped coordinate efforts to assess the situation and reopen the
securities markets. Commission staff contacted broker-dealers located
in lower Manhattan, as well as other major broker-dealers, investment
advisers, mutual funds, and service providers, to determine their
status and operational capability. We also remained in regular
communication with the clearing agencies to assure they remained
functional and to assess any connectivity problems with their
participants. Virtually all securities firms that suffered significant
physical damage were able to relocate to alternative disaster recovery
sites. We believe that much of the securities industry's success in
meeting the demands of this unspeakable horror was due to the hard work
and effort made to prepare for Y2K. Securities firms had contingency
plans and emergency procedures designed to manage the conversion to
2001, never imagining that these plans and procedures would see them
through the events of September 11.
We arranged to meet in Manhattan with the leadership of major
markets, securities firms, banks, and clearing agencies, along with the
offices of the Governor and Mayor, Con Edison and Verizon, and the New
York Fed, to assess the situation and determine readiness for a
reopening of the markets. Our role in arranging this meeting was not to
dictate a decision, but to facilitate a market solution. The decision
on when to reopen the markets was made by the private sector--the
markets and major market participants--in consultation with the
Commission. We held daily joint press conferences to keep the public
fully and timely advised.
At meetings beginning the afternoon of Wednesday, September 12,
this group unanimously agreed that, while every effort should be made
to reopen the markets as soon as possible, there should be no
interference with rescue efforts or jeopardy to securities industry
personnel returning to work. Additional considerations included whether
employees would have access to their workplaces and whether there would
be adequate and reliable electric power and telecommunications
services.
Connectivity among various market participants was also a
significant concern. The industry representatives unanimously decided
last Wednesday that the equities and options markets should not reopen
Thursday, but rather Friday or Monday at the latest. Having
participated in the discussions that produced that decision, our agency
was confident the right decision had been reached under the
circumstances.
On Thursday, the fixed income markets and futures markets
successfully resumed trading. Although trading was relatively light and
the number of market participants smaller than usual, no major problems
were reported. When connectivity problems with clearing banks affected
the government securities clearing agency, we closely monitored these
problems in conjunction with the Federal Reserve.
We traveled to the financial district on Thursday morning to
examine the facilities of the New York Stock Exchange and to meet with
service providers (Verizon and Con Edison), as well as representatives
of the Mayor's Office involved with rescue efforts, and representatives
of the New York Fed. When industry representatives met later that day,
they unanimously decided to reopen equities and options markets on
Monday, not Friday.
Deferring the resumption of trading until Monday permitted
extensive testing by market participants of systems operability and
connectivity. Throughout the weekend, Commission staff worked with
market and industry participants to monitor and coordinate extensive
systems testing by the exchanges, clearing agencies, and market
participants. We offered assistance to every affected firm in New York
City, and provided staff where requested. The Commission also sent
staff to the major markets to monitor the testing. Participants in
those tests included the New York Stock Exchange, and its specialists,
floor brokers, and member firms; Nasdaq and its market makers and
market participants, including ECNs; regional exchanges; DTCC; and
SIAC. Fortunately, only minor problems arose and those were readily
resolved. The tests ultimately verified that all systems were sound and
operational.
We received invaluable assistance from FEMA, the Mayor's Office of
Emergency Management, and New York State officials in assuring that
market participants needing electrical or communications services
received appropriate priority. They also kept us apprised of their
assessment of the structural integrity of damaged buildings in the
financial district.
From a regulatory perspective, last week the Commission reached out
to major market participants, both directly and through industry groups
such as the Securities Industry Association and the Bond Market
Association, to determine whether it could provide appropriate
temporary regulatory relief to facilitate the reopening of fair and
orderly markets. The New York Stock Exchange, the NASD, Treasury and
other regulators undertook similar outreach efforts.
As a result, the Commission for the first time invoked its
emergency powers under Securities Exchange Act Section 12(k) and issued
several orders and an interpretive release to ease certain regulatory
restrictions temporarily.
A cornerstone of this relief was facilitating the ability of public
companies to repurchase their own shares, thereby providing greater
liquidity. Specifically, the Commission, for 5 business days following
the resumption of trading, has permitted issuers to repurchase their
securities without meeting the volume and timing restrictions that
ordinarily would apply under our Rule 10b-18 safe harbor, and to do so
without adverse accounting consequences. Our efforts were aided by the
announcements of major public companies of significant buy-back
programs. We also permitted brokerage firms to calculate net capital
without considering the days the markets were closed. We allowed mutual
funds, to borrow from and lend to related parties to facilitate
liquidity.
We also responded to physical ramifications of the World Trade
Center attacks. We provided temporary relief permitting Amex
specialists to function like floor brokers under certain conditions due
to space limitations of the Amex's relocated operations to the NYSE
floor. We issued an interpretive release permitting accounting firms to
provide bookkeeping services to, and help recover records for, audit
clients with offices in and around the World Trade Center. To
facilitate mutual fund board meetings, we relaxed in person meeting
requirements.
While we broadly solicited and considered suggestions for
appropriate temporary relief, we did not implement all suggestion we
received, such as prohibiting all short selling, moving to 10 cent
quotation increments, and extending settlement cycles in the equity and
corporate debt markets. We did, however, take action--not intervention
wherever we could to be responsive to industry concerns and to
facilitate a smooth reopening of the markets.
We also made ourselves accessible to investors and market
participants. We believe that government is and must be a service
industry. Last week, the SEC placed additional information for
investors and market participants on our website regarding market
recovery efforts. Investors were invited to e-mail questions to our
staff at a new hotline, [email protected]. We established a special toll-
free investor telephone line. For the first time in our history, we
also established dedicated telephone lines for inquiries from market
participants and for firms seeking additional relief. And, we assured
industry participants that if they came to us with their problems, we
would work with them to find solutions, without after-the-fact
recriminations, except in cases of venal conduct.
Fortunately, on Monday, September 17, all U.S. securities markets
resumed trading without incident. Our staff closely monitored the
resumption of trading. We had staff available at the markets to provide
assistance where necessary and made staff available on-site at each
major broker-dealer that wanted our assistance. Commission staff
remained in constant contact with major market participants throughout
the day, and was available to address any regulatory issues that arose.
America's investors once again were able to rely upon the strength and
soundness of our markets. All market and investor protections were
squarely in place. The markets did not give way to panic selling;
delays in resuming trading gave investors time to reflect and to speak
up about the strength of America's markets. And, the world heard them.
Over the last week and a half, we have witnessed an extraordinary
level of cooperation among market participants in the face of this
tragedy. For instance, the New York Stock Exchange opened a portion of
its floor to accommodate trading in equities and exchange-traded funds
by the Amex. In addition, the Philadelphia Stock Exchange is permitting
Amex options members to continue their livelihood by temporarily
trading in the Philadelphia Stock Exchange's trading crowds. In less
than a week, the entire options business of the Amex was moved to the
Phlx. People worked day and night to ensure trading in those options
opened on Monday without a hitch and that all options series were once
again available to America's investors. Brokerage firms that 2 weeks
ago looked for every advantage over their competitors are today
providing space to competitors that suffered as a result of the
attacks. The most competitive markets in the world are also the most
compassionate.
Our Northeast Regional Office at 7 World Trade Center was destroyed
in the aftermath of the attacks. First and foremost, we have been
focused on the human side of this tragedy and confirming the safety and
well-being of all of our employees. We are gratified to report that
every one of our employees has been accounted for and is safe. The
staff of the office is convening offsite today to begin the healing and
emotional recovery process, and we are making sure that counseling is
readily available to anyone who wants it. As far as the work of the
office is concerned, we have moved quickly to get things back on track.
We have already identified new office space and hope to begin occupancy
as early as October 1. Until then, the United States Attorney's Office
in Brooklyn has generously provided us with office space for use by
Northeast Regional Office supervisors to oversee the office's recovery
efforts. Within two days of the attack, we had retrieved all documents
stored electronically and had commenced a review of every single
investigation and case currently underway in the office with the twin
aims of ensuring that we do not miss any imminent deadlines and of
developing a plan for completing our investigations and cases in timely
fashion. While our review has not been completed, we are optimistic
that we will not lose any significant investigation or case as a result
of the loss of our building. No one whom we have sued or whose conduct
we have been investigating should for a single moment doubt our resolve
to continue our pursuit of justice in every such matter.
There also will not be any serious long-term impact on the
Commission's oversight of securities firms located in the New York
area. The Commission's records related to examinations of all
securities firms are maintained electronically in a central database,
and were unaffected by the tragedy. Electronic copies of our
examination reports and deficiency letters are maintained off-site for
investment advisers, investment companies, broker-dealers, and transfer
agents. Records relating to open examinations will be reconstructed
from records that exist at registrants' offices and from other sources.
We are planning to utilize examination staff from other offices
(Boston, Philadelphia, and Washington, DC) and to work with self-
regulatory organizations (the NYSE and NASDR) to ensure that
examination cycles are fulfilled and that appropriate examination
oversight is maintained. We are very mindful of the disruption to many
firms' operations and records, and are ensuring reasonable
accommodation to requests for extensions of time for on-site
examinations or to produce records and other information.
We can be justifiably proud of our market participants and the way
they have performed. Everyone pulled together to overcome this disaster
and successfully reopen the U.S. equities and options markets.
Americans demonstrated continued confidence in our markets. With the
momentum built from this experience, we will move forward to make our
markets even stronger, more transparent, and more vibrant. As a Nation,
and as an agency, we will not allow terrorists to destroy our spirit or
impede our mission.
On behalf of the Commission, I appreciate the opportunity to submit
our views on the current state of the markets in America. I am happy to
try to respond to any questions the Committee may have.
PREPARED STATEMENT OF HARDWICK SIMMONS
Chief Executive Officer, Nasdaq Stock Market
September 20, 2001
Thank you Mr. Chairman and Members of the Committee for inviting me
here today.
On behalf of the 1,228 employees of the Nasdaq Stock Market, and
the thousand of Nasdaq trading participants and Nasdaq issuers, I would
like to review our response to the horrendous acts of September 11,
2001.
Nothing I describe today will approach the ultimate sacrifice of
the thousands of Americans in New York's financial district and in
Washington on that terrible day. We honor those who fell that day, and
convey our deepest sympathies to their families and friends.
If destroying the U.S. financial markets was a mission of our enemy
on September 11, their mission failed. The enormous efforts of the past
week demonstrate the vitality of the U.S. capital markets. I have been
part of this industry for over 30 years, and I have never been prouder
of all my colleagues or my city than in the last 10 days.
I. Our Immediate Actions in Response to Events of September 11
As was true throughout the financial community, the men and women
of Nasdaq rose to the occasion. Our New York City office at One Liberty
Plaza is the worldwide headquarters of Nasdaq and sits directly across
the street from the World Trade Center. When the tragedy struck, our
first responsibility was to ensure the safety of our employees. Once
they were safely evacuated, we assured ourselves that our critical
technology facilities were undamaged. In coordination with the SEC and
the New York Stock Exchange, we then determined that trading in the
equity markets should not open until the attack's impacts were fully
understood. Through Nasdaq's Crisis Management processes, Nasdaq senior
management was in constant contact with our primary operations
centers--even as we evacuated ground zero and set-up temporary
operations in downtown and then Midtown Manhattan.
We then began the process of evaluating the extent of any damage to
Nasdaq and our market participants and determining the necessary steps
to reopen the market. We were guided by several principles: First, we
would do nothing that impeded the rescue effort. Second, we would
closely coordinate all our activities with the SEC. Third, we would
open our market only when the other markets and major market
participants were fully prepared. Finally, we would be as open and
transparent in reaching out to and assisting our members and issuers in
crisis as we are in our every day operations.
As to Nasdaq's technology, at no time during this disaster were
Nasdaq's systems inoperative. At the time of the attacks, trading was
suspended but Nasdaq's systems and network continued to operate.
Because our primary and backup technology centers are outside
Manhattan, our primary concern related to our ability to connect with
the firms that are active in our marketplace and bring liquidity and
order flow. In fact, Nasdaq continued to operate systems later than
normal on Tuesday to allow firms manual access for reconciliation and
mutual fund pricing and related activities. Nasdaq's systems operated
virtually continuously throughout the rest of the week to allow firms
to test connectivity.
Nasdaq's geographically decentralized network has several levels of
redundancies, which are specifically designed to withstand these types
of catastrophic events. Virtually all firms are connected to Nasdaq
through a set of several Nasdaq servers on their sites and in their
backup centers. Each of the servers in the Nasdaq network is connected
to two distinct Nasdaq connection centers.
There are more than 20 Nasdaq connection centers located throughout
the United States--4 in the NY metropolitan area. Each of these centers
is connected to both our primary and backup data centers. Additionally,
while WorldCom provides the overall management of our network, each of
our critical connections is backed up by another vendor so as to offer
resiliency against a systemic vendor failure.
While this may be a lengthy description, it is critical to
understand that disasters such as these are not averted by hardening
any single point of failure, rather they are avoided by having
resilience built into the network through backup connections and backup
vendors. This is a key learning from this tragedy.
Therefore, one early priority was to reach out to the 393 market
makers and ECNs that are part of the Nasdaq market. We spoke to each of
these firms. We asked: Can you connect with our network? Can your
employees get to the market terminals? What problems do you foresee?
While many of our firms were not physically impacted by the
disaster, many others faced great challenges, in terms of personnel,
technology and connectivity. Nasdaq staff worked around the clock to
provide whatever support we could. This included providing alternative
trading facilities, provisioning backup facilities with new equipment,
testing backup and new network connections, providing assistance in
acquiring emergency resources and gaining access to critical facilities
in lower Manhattan.
We also reached out to the 4,322 companies that list their shares
on Nasdaq. We asked: To enhance prospective liquidity, we recommended
they look at buy back programs and get board approval if necessary.
We reached out to the SEC and other Government agencies, as they
reached out to us. The unprecedented cooperation between all market
centers with local and national governmental authorities was continuous
and excellent.
I want to commend the Federal, State and local governments for
their willingness to use their vast resources and regulatory powers to
assist the markets in this time of crisis. The SEC and the City of New
York were particularly instrumental in helping us open the markets as
quickly and as smoothly as we did. All hands were truly ``on deck.''
II. The Decision to Reopen on September 17
In my view, the decision process to reopen the markets was a
textbook example of effective cooperation among the Government,
markets, and private industry. Telecommunication, power, and employee
access problems created enormous complications and risks in reopening
the market. In addition, there was total unanimity among all
participants that the equity markets should open as quickly as
possible, but only when we could ensure that they could operate
efficiently with proper liquidity available, without additional
constraints and with universal access for investors. We also believed
that, given the uncertainties, it was important for investor confidence
that all equity markets open simultaneously.
After two all hands meetings, and with the strong leadership and
resolve of Chairman Pitt and the full support of the SEC, Department of
Treasury and Federal Reserve Board, the decision was made that trading
should resume no later than Monday, September 17. This decision was
based on three primary factors. First, through the efforts of Verizon,
MCI WorldCom, and the affected financial firms and markets, there was a
geometric improvement of telecommunications connectivity each day.
Second, the critical importance of the continuing rescue operation at
the World Trade Center site made provisions for widespread physical
access to financial firms and the New York Stock Exchange floor and an
earlier startup inappropriate. No one wanted to get in the way. Third,
there was complete consensus that the markets should not resume without
widespread system connectivity testing which could most effectively
occur over the weekend. The successful resumption of trading on Monday
would be an important signal to our citizens and the world. It was
accomplished by extraordinary efforts by thousands of financial market
and brokerage firm employees who collectively are owed an enormous debt
of gratitude.
The SEC reassured the markets, indicated appropriate relaxation of
regulatory constraints, and focused the markets on critical systems.
The SEC's speedy action to ease the rules governing corporate stock
repurchases was especially helpful and responsive to the needs of
Nasdaq-listed companies with which we were working.
III. The Nasdaq Response Team
Nasdaq employees also facilitated communication between the markets
and governmental authorities. Beginning on September 12, and every day
until the markets reopened, we hosted frequent conference calls with
all major national market and exchange participants, including the SEC,
other regulators, the Federal Emergency Management Agency, the equity,
futures, and options markets, and all related clearing agencies. These
calls were critical to the speedy progress we made in restoring our
markets.
Nasdaq employees provided technological support to over 800 Nasdaq
and non-Nasdaq participants including market makers, order entry firms,
ECNs, other markets, and even some foreign markets seeking to
reestablish their local connectivity. Many firms had to activate
disaster recovery sites, which presented special technological needs.
The testing of systems that occurred over last weekend played a
critical role in our confidence in the opening on Monday. On Saturday,
from 9:30 a.m. to 4 p.m., Nasdaq brought up our trading systems as we
would on a normal trading day. The testing included firms representing
nearly 98 percent of a normal day's volume. The focus of the testing
was on the ability of all market participants to connect to and
interact with one another. We also simulated a circuit breaker trading
halt to ensure that it could be properly implemented if necessary. We
kept a toll-free line open for members all day so that they could
communicate with us and troubleshoot problems.
We were extremely pleased that the testing was successful. Nearly
all participants were connected to Nasdaq within the first two hours.
Over 2,400 of the 2,700 Nasdaq servers at market maker locations were
operational. Because most market makers have multiple servers, Nasdaq
was confident that it had a successful test of virtually all market
participants. On Sunday, Nasdaq trading systems also were available
from 9:30 a.m. to noon for follow-up testing to ensure that any
outstanding issues identified on Saturday were in fact resolved.
In the last 3 days we have traded almost 6 billion shares on the
Nasdaq Stock Market. We have maintained connectivity with all our
market makers, 110 of which are located in the New York City area.
Everyone who wanted to be represented in the market had access.
Throughout this week, investors in New York City have simultaneously
and instantaneously received the same trading information as investors
in San Francisco, despite the heavy trading volumes. To make trading
appear ordinary, the effort behind the scenes was extraordinary.
IV. Conclusion
To achieve the successful reopening of the markets, Nasdaq, the
Government and the financial services industry all worked in concert.
The strength of the U.S. financial markets today reflects the
cumulative efforts of far-sighted leadership many years ago. Of course,
the Congress laid the foundation with the passage and careful oversight
of the U.S. securities laws.
Our markets are not static. They will and should continue to
evolve. We should not allow events of September 11 to delay or detract
from this evolution, which is critical to preserving the competitive
position of U.S. markets in the global economy.
The U.S. financial industry has demonstrated it is resilience and
resolve to maintain the most liquid and stable markets in the face of
terrible challenges, and clearly Nasdaq's trading network has
demonstrated its unique value as a part of this infrastructure.
Our work is not done. We will have new challenges in the coming
months. I am confident that the men and women of Nasdaq and the
securities industry will act with the same grace under pressure that
characterized their performance since the events of September 11.
----------
PREPARED STATEMENT OF ROBERT R. GLAUBER
President and Chief Executive Officer
National Association of Securities Dealers, Inc.
September 20, 2001
Introduction
Good morning, Mr. Chairman, Senator Gramm, Members of the
Committee. On behalf of the NASD, I want to thank the Committee for
this opportunity to testify--and to commend you for holding a timely
hearing on a vital subject.
It is vital because the barbaric attacks of September 11 were an
assault not only on our country, but also on our financial markets. I
am here to tell you how the broker-dealer industry has responded to
these attacks, and the condition we have found it to be in in their
aftermath.
As a self-regulatory organization, or SRO, the National Association
of Securities Dealers is not a trade association. Rather, under Federal
law, our job for more than 6 decades has been to help write and
administer the day-to-day rules that govern the U.S. securities
industry--and every one of the more than 5,600 registered broker-
dealers in the United States today. We also monitor every trade
executed on The Nasdaq Stock Market, the largest volume market in the
world. And Mr. Chairman, I am proud to say that at no time during the
past week and a half was our ability to monitor Nasdaq trading or
protect investors compromised.
This role has given us a graphically detailed perspective on how
firms were affected by the horrific events of September 11, and how
they are getting back on their feet. The picture we have found is
inspiring. It is also daunting.
The first time I testified before the Banking Committee was in 1988
and I was here to present the Brady Commission Report on the market
break of 1987. While no one could foresee the current situation and the
national tragedy we find ourselves discussing today, it is nonetheless
significant that what we learned from the crisis in 1987 made the
markets stronger, in much the same way I am confident this crisis will
make the markets stronger. The lessons learned in 1987 have provided a
solid foundation for what the industry has done in this crisis--and
that has enabled us to cope with the events of September 11 and their
aftermath.
State of the Firms
There were 31 main offices of broker dealer firms located in the
World Trade Center. There were 30 branch offices of firms located there
as well. Over 350 additional firms have offices in the affected area
south of 14th Street in Manhattan. Many of these firms have performed
herculean tasks to get up and running. One key firm lost 700 of its
1,000 employees; took a vote to stay open; and worked through the night
to do so. Countless markets and firms--ordinarily the fiercest of
competitors--have cooperated like the closest of friends.
Over the last 9 days, we have focused on providing a range of
critical services to these firms. Our first and most immediate task
last week was to do our best to contact the member firms with offices
in the World Trade Center. From that first phone call onward, we have
offered these firms our support and assistance. Our senior management
staff has almost completed calls to every member firm in southern
Manhattan.
The cost of the week long business interruption and physical
dislocation compounded with investors pulling back from the market will
create a challenging set of circumstances under which these firms will
have to operate. We have talked to hundreds of firms and they have
serious concerns. Our job is to help them continue operations while at
the same time maintaining the safety of the markets.
Regulatory Relief
Last week, we gave firms relief from registration provisions and
information barrier requirements that permitted firms in the affected
area to staff their trading desks in time for the markets' reopening on
Monday. We also granted regulatory relief from certain technical rules,
including the 3 quote rule, in recognition of the overtaxed
communications system in New York. While keeping investor protection
foremost, we coordinated with the SEC on many issues, including trading
halts while the market was closed.
We will grant 120 additional days to all registered representatives
to fulfill continuing education requirements and will likewise extend
test windows by 120 days. Anyone reapplying to work in the industry
that misses the 2 year window because of this week's events will be
granted a waiver. We have negotiated fee refunds for test no shows or
cancellations with Prometric, our testing and continuing education
subcontractor. We are granting blanket extensions until October 1 on
any regulatory requests, and stand prepared to extend these as
necessary.
Information Clearinghouse
In addition to providing this relief from regulations without
compromising the protection of investors, we have served as the focal
point for reliable information for firms and investors. We have worked
to keep member firms informed about what the rules are and what type of
relief is available.
We created an office space clearinghouse network where the firms
that need office space because of the tragedy can find firms that have
space available. Some firms, as a result of their World Trade Center
office destruction, seek to become branch offices of other firms. We
are assisting those offices in that endeavor.
One other service is done with a truly heavy heart. NASD maintains
a vast database that contains fingerprint images for registered
employees and the back office employees if they have access to books
and records or to funds or securities of customers. So we are providing
such images for identification purposes to member firms; law
enforcement, rescue and recovery authorities; and families to aid in
the search for missing persons and in identifying victims.
In addition to providing aid to the firms, we are answering
questions from investors unsure about the status of their brokers and
portfolios. Especially important are customers worried about their
accounts with a broker in New York impacted by the crisis. For these
investors, we have posted the customer contact information on the NASD
website. Where no contact information is available, we have directed
customers to a NASD Call Center that can then provide them with
individualized research and assistance.
On September 14, we issued a telemarketing fraud alert that warns
brokerage firms and investors of the scams that, sadly, have already
sprung up to take advantage of Americans' urge to contribute to relief
efforts.
Role of Clearing Firms In the Orderly Resumption of the Markets
Many of our members are clearing firms--companies that arrange for
the settlement of securities transactions. Of the approximately 120
clearing firms we regulate, the substantial majority is located outside
of lower Manhattan. As such, most NASD clearing firms were not directly
affected by the World Trade Center attack. Many of these firms were
closed on Tuesday with their operations department staff returning on
Wednesday and working through Friday. In several instances, firms
reported that they used the time to stress-test accounts and contact
customers about account balances. The most frequent contacts were to
customers with margin accounts whose equity appeared to be approaching
the maintenance margin requirement, or customers with accounts that
were anticipated to decline in value upon the resumption of equity
trading in the U.S. This latter group included investors whose
accounts, for example, contained airline stocks.
While the NASD cannot attest to these practices at all clearing
firms, it is clear from our contact with member firms that many of them
instituted the policies and procedures that I have just described. We
believe that the widespread dispersal of member firms across the United
States, coupled with the firms' implementation of their risk management
policies, substantially contributed to the orderly manner in which
trading resumed on Monday, September 17, 2001.
Continuing to Self Regulate
Through this entire crisis, NASD has continued to operate as a
self-regulatory organization. We have continued to protect the
integrity of the securities markets and promote investor confidence.
Our services are provided primarily through our subsidiaries--NASD
Regulation, Inc., and NASD Dispute Resolution, Inc. The NASD also owns
the American Stock Exchange and holds a significant, though minority,
stake in the Nasdaq stock market.
We have over 1,500 employees devoted exclusively to carrying out
our regulatory and enforcement responsibilities. We carry out our
mandate from our Washington headquarters and 14 district offices
located in major cities throughout the country. Our New York District
office, located at One Liberty Plaza, is our largest office and has
been closed temporarily. We have relocated examiners from our New York
office to our New Jersey, Long Island, and Philadelphia District
Offices. By doing this we were able to continuously support and serve
our members and our markets. We are working on reestablishing, as
quickly as possible, our physical presence in New York at an alternate
location.
Conclusion
I want to thank the Committee for this opportunity to describe our
industry's efforts to help get the markets back into full operation. As
the industry's self-regulator of broker dealers, we think it is
important to express pride and confidence in the markets' reopening; to
express sorrow for those lost; and to remind investors, our members and
our markets that we are here to provide answers, information and help.
Make no mistake, these attacks were an assault on our financial
markets as well as our Nation. We will ensure their ultimate failure by
working together to maintain the most liquid, transparent, and trusted
markets in the world.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR STABENOW FROM ALAN
GREENSPAN
Q.1. As we look ahead to the next few quarters, I know one
thing that will be on the minds of a lot of CEOs is the issue
of corporate credit. Financial institutions are going to have
to walk a fine line between being cautious on loans to troubled
industries and turning off access to credit too quickly. Would
you please comment on this challenge?
A.1. Despite recent increases in loan delinquencies and charge-
offs, commercial banks remain highly profitable and well
capitalized and thus have the capacity to lend. In making
lending decisions, however, banks must take account of the
current and expected economic environment. In reaction to
perceptions of a more uncertain economy, significant fractions
of banks have reported in surveys tightening their lending
standards, increasing fees and spreads of loan rates over the
cost of funds, and hiking nonprice loan terms such as
collateral requirements since the middle of 2000. The surveys
suggest that banks have become particularly cautious about
lending to more risky borrowers.
Even though banks apparently have become less accommodative
lenders, they have continued to provide credit. For example, in
the immediate aftermath of the terrorist attacks, many
companies turned to banks when their ability to raise funds in
the money and capital markets was temporarily disrupted. In
addition, in our most recent surveys of lending officers,
several banks indicated a willingness to work with customers
that were affected adversely by the atrocities of September 11.
More generally, it is in banks' own interest to preserve
the viability of their customers if at all possible, and thus
they presumably are willing to lend even to troubled industries
if it can be done prudently. In a competitive banking industry
such as ours, and one that has a capacity to lend, there is
good reason to expect that credit will be available to all
reasonable credit risks.