[Senate Hearing 107-865]
[From the U.S. Government Publishing Office]
S. Hrg. 107-865
NOMINATIONS OF: HARVEY J. GOLDSCHMID
PAUL S. ATKINS, DONALD L. KOHN
BEN S. BERNANKE, AND PHILIP MERRILL
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
harvey j. goldschmid, of new york, to be a member of
the u.s. securities and exchange commission
__________
paul s. atkins, of virginia, to be a member of
the u.s. securities and exchange commission
__________
donald l. kohn, of virginia, to be a member of the board
of governors of the federal reverse system
__________
ben s. bernanke, of new jersey, to be a member of the board
of governors of the federal reserve system
__________
philip merrill, of maryland, to be the president and chairman
of the export-import bank of the united states
__________
JULY 18, 30, AND OCTOBER 4, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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___________________________________________________________________________
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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
Dean Shahinian, Counsel
Thomas Readmond, Republican Professional Staff Member
Jospeh R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
THURSDAY, JULY 18, 2002
Page
Opening comments of Chairman Sarbanes............................ 1
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 4
Senator Dodd................................................. 5
Senator Allard............................................... 6
Senator Corzine.............................................. 6
Prepared statement....................................... 24
Senator Enzi................................................. 7
Prepared statement....................................... 24
Senator Miller............................................... 13
Senator Carper............................................... 15
WITNESSES
John Warner, a U.S. Senator from the State of Virginia........... 1
George Allen, a U.S. Senator from the State of Virginia.......... 2
NOMINEES
Harvey J. Goldschmid, of New York, to be a Member of the U.S.
Securities
and Exchange Commission........................................ 8
Prepared statement........................................... 25
Biographical sketch of nominee............................... 27
Response to written questions of:
Senator Bunning.......................................... 71
Senator Akaka............................................ 71
Paul S. Atkins, of Virginia, to be a Member of the U.S.
Securities and
Exchange Commission............................................ 9
Prepared statement........................................... 53
Biographical sketch of nominee............................... 55
Response to written questions of:
Senator Bunning.......................................... 72
Senator Akaka............................................ 72
Additional Materials Supplied for the Record
News article by Robert Novak, dated July 18, 2002................ 74
----------
TUESDAY, JULY 30, 2002
Opening statement of Chairman Sarbanes........................... 77
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 84
Prepared statement....................................... 93
Senator Gramm................................................ 87
Senator Reed................................................. 87
Senator Corzine.............................................. 90
Senator Miller............................................... 92
NOMINEES
Donald L. Kohn, of Virginia, to be a Member of the Board of
Governors
of the Federal Reserve System.................................. 79
Prepared statement........................................... 93
Biographical sketch of nominee............................... 96
Ben S. Bernanke, of New Jersey, to be a Member of the Board of
Governors
of the Federal Reserve System.................................. 81
Prepared statement........................................... 106
Biographical sketch of nominee............................... 108
----------
FRIDAY, OCTOBER 4, 2002
Opening statement of Chairman Sarbanes........................... 119
WITNESSES
Barbara Mikulski, a U.S. Senator from the State of Maryland...... 119
John Warner, a U.S. Senator from the State of Virginia........... 121
NOMINEE
Philip Merrill, of Maryland, to be President and Chairman of the
Export-Import Bank of the United States........................ 124
Prepared statement........................................... 129
Biographical sketch of nominee............................... 130
Response to written questions of:............................
Senator Miller........................................... 144
Senator Santorum......................................... 144
Additional Materials Supplied for the Record
Letter submitted by Congressman Steny H. Hoyer, of Maryland,
dated
October 3, 2002................................................ 145
Letter submitted by Edmund B. Rice, dated October 3, 2002........ 146
NOMINATIONS OF:
HARVEY J. GOLDSCHMID, OF NEW YORK
AND
PAUL S. ATKINS, OF VIRGINIA
TO BE MEMBERS OF THE
U.S SECURITIES AND EXCHANGE COMMISSION
----------
THURSDAY, JULY 18, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING COMMENTS OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
The Committee on Banking, Housing, and Urban Affairs
convenes today to hold a hearing on two nominees to serve on
the Securities and Exchange Commission--Professor Harvey
Goldschmid and Paul Atkins. I am going to defer the balance of
my opening statement because we have two of our colleagues here
to present one of the nominees, and I know they have other
pressing demands on their time.
Senator Warner, why don't we hear from you and then we will
go to Senator Allen.
STATEMENT OF JOHN WARNER
A U.S. SENATOR FROM THE STATE OF VIRGINIA
Senator Warner. Thank you very much, Mr. Chairman, Senator
Gramm, Senator Dodd, Senator Enzi, colleagues. It is a
privilege for me to be here today to introduce to this
Committee, under the advise and consent procedure of the U.S.
Senate, the President's nominee for the Securities and Exchange
Commission.
Mr. Atkins has a vast and distinguished career in the
private sector and several years of service at the Securities
and Exchange Commission. Consequently, I and others strongly
believe that he is eminently qualified to take on these
important responsibilities, particularly at this critical time
in the history of corporate America.
His background at the SEC and in the private sector enables
Mr. Atkins to take a balanced approach, in my judgment, on
reform and accountability issues, working in the best interests
of the private sector and the consumers alike.
At the height of the Congressional inquiry calling for
increased corporate responsibility and reform on accounting
standards, it is critical we confirm those individuals who will
fill the existing vacancies in the Commission and do so in a
balanced manner.
In the coming months, the Commission will be tasked with
making important regulatory decisions. Consequently, I will put
the balance of my statement in the record. I thank the
distinguished Chairman and the Members of the Committee.
Chairman Sarbanes. Good. We appreciate that very much,
Senator Warner.
Senator Allen.
STATEMENT OF GEORGE ALLEN
A U.S. SENATOR FROM THE STATE OF VIRGINIA
Senator Allen. Thank you, Mr. Chairman. Thank you for your
leadership on this Committee and for holding this hearing. It
is good to see Senators Gramm, Dodd, Allard, and Enzi here as
well.
I am before you this morning to offer my strong support for
the confirmation of Paul Atkins, one of President Bush's
nominees to be a member of the Securities and Exchange
Commission.
I will discuss Mr. Atkins' strong qualifications in a
moment. But Paul has his family here with him, his wife Sarah,
two of his three sons, Peter and Stewart, and other members who
are in the Washington area for a wedding this weekend. I am
sure that will be a wonderful discussion at the wedding
reception.
Mr. Chairman, Mr. Atkins is one of my constituents, a
resident of Arlington, with a wonderful family. He has been
nominated to the SEC at an important time. It is a hot time
now, but it is going to be hotter on the SEC. You are jumping
into a frying pan with the scandals this Committee has been
addressing, trying to restore confidence and accurate
accounting, accurate portrayals of the financial condition of a
company, as well as corporate governance. Mr. Atkins is the
right person at the right time to bring that experience, that
knowledge, and especially bring the character that people want
to see in making determinations on the SEC.
He is certainly coming in at a challenging time. But he has
worked since leaving education on financial markets. He has
worked in the private sector with the SEC to protect investors,
as well as make sure that the private sector companies comply
with SEC regulations. He has also worked at the SEC under two
of its distinguished chairmen, Richard Breeden and Arthur
Levitt. During his tenure on the Commission, he spearheaded a
variety of initiatives that are truly relevant in today's
market environment,
focusing on investor communication, investor education, and
efforts to improve corporate governance.
This is an important time for the SEC and I think that the
SEC is one of the key players in making sure that confidence
and proper governance are restored. And I think that this
gentleman, Mr. Atkins, has all the qualifications one would
want including experience and character to serve on the SEC and
to serve our market system. I hope you will move very
favorably, and he has my full support.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Allen. And we thank
both of our colleagues. I know you have other engagements and
if you wish to excuse yourselves, please do so.
Senator Warner. Mr. Chairman, could the nominee introduce
his family at this time to the Committee? Would that be
appropriate, Mr. Chairman?
Chairman Sarbanes. Well, we were going to do that later.
Senator Warner. All right.
Chairman Sarbanes. No, no, no. Since you have raised the
issue, why don't we go ahead and do it now?
Go ahead.
Mr. Atkins. Okay. Thank you, Mr. Chairman.
With me here is my wife, Sarah, two of my sons, Stewart and
Peter. For the sake of decorum, we left our 2 year old, Henry,
at home.
[Laughter.]
My mother, Carla Atkins. My mother-in-law, Ethelmae
Humphreys from Missouri. My brother Harold and his fiancee,
Tracey Wyatt, who is from the great city of Baltimore. They are
getting married this weekend, which is the reason why everyone
is in town. My uncle and aunt, Burhard and Ute Gusovius.
Chairman Sarbanes. Very good. Very impressive.
Senator Gramm. A man whose mother-in-law is for him is all
right.
[Laughter.]
Senator Warner. I am out of here.
[Laughter.]
You are on your own.
Mr. Atkins. Thank you.
[Laughter.]
Chairman Sarbanes. Behind every successful man stands a
surprised mother-in-law. Is that it?
Senator Gramm. That is right.
[Laughter.]
Chairman Sarbanes. Professor Goldschmid, do you want to
introduce your family now here at the outset?
Mr. Goldschmid. I would be delighted. My wife Mary is right
here. With Mary are our two sons, Paul and Joey. I will mention
my third son, Charlie, in the opening statement.
Chairman Sarbanes. Very good. I will finish my statement,
then yield to my colleagues who are with us.
The SEC, as Senator Allen just observed, plays a critical
role in protecting investors, ensuring the integrity and
efficiency of the securities markets. In recent months, the
securities markets have experienced a severe erosion in public
confidence. Investors have seen too many instances of faulty
accounting, misleading stock recommendations, unreliable
auditor certifications, and inadequate issuer disclosures, all
of this at a time when the value of stocks has fallen
significantly.
We are making an effort here in the Congress to address
these problems. Just 3 days ago, the Senate passed the Public
Company Accountability Reform and Investor Protection Act of
2002, which came out of this Committee, by a vote of 97 to 0
and we are now going to conference with the House. The
conferees were appointed yesterday.
I welcome the two nominees that are before us this morning.
Professor Goldschmid is Dwight Professor of Law at Columbia Law
School. He received both his BA and his JD degrees from
Columbia. He has really never managed to get out of the
confines of Columbia University.
[Laughter.]
He clerked for Judge Paul Hays of the Second Circuit Court
of Appeals, practiced law with the firm of Debevoise &
Plimpton. In 1970, he joined the Columbia Law School faculty
and has continued teaching there ever since. In 1998 and 1999,
he took a leave of absence from Columbia to serve as the
General Counsel of the Securities and Exchange Commission.
Professor Goldschmid has held numerous positions in legal
associations, served on numerous legal panels, coauthored books
on trade regulation, written many articles on securities law,
antitrust, corporate law, and legal education.
Mr. Paul Atkins is a graduate of Wofford College and from
Vanderbilt University School of Law, where he was on the
Vanderbilt Law Review. He then went on to work with Davis Polk
& Wardwell in New York and in Paris. From there, he went to
work at the SEC, on the staff of the SEC, and eventually was
Executive Assistant to Chairman Richard Breeden and then
Counselor to Chairman Arthur Levitt. In 1994, he joined Coopers
& Lybrand, which later became PricewaterhouseCoopers. And
currently, he is the Principal of the Financial Services
Regulatory Advisory Group at PWC. Mr. Atkins has published
articles on the role of the compliance officer. He is coauthor
of a book, Generally Accepted Risk Principles. And I am looking
forward this morning to hearing the testimony of both of our
nominees.
And I yield to Senator Gramm.
COMMENTS OF SENATOR PHIL GRAMM
Senator Gramm. Well, Mr. Chairman, thank you very much.
Let me begin by thanking our nominees for their willingness
to serve. This will be a very difficult time to be at the SEC.
I have had the great privilege in my period of service on this
Committee as a Member and Chairman and Ranking Member, to work
with many great commissioners. I have had an extraordinarily
high opinion of our last two chairmen. I sat on this Committee
and listened as everyone lavished praise on Harvey Goldschmid
for all the knowledge and experience he had. And now, you can
hardly open a paper without criticism being made--who did I
say?
Chairman Sarbanes. Harvey Goldschmid.
Senator Gramm. We are going to hear it for Harvey
Goldschmid today. I mean Harvey Pitt.
Chairman Sarbanes. Yes.
Senator Gramm. And now, you can hardly open a paper without
someone saying that the fact that Harvey Pitt did not just come
in off the turnip truck, that he actually was engaged in
representing various interests before the SEC. And of course,
he was one of the most active general counsels and the youngest
general counsel in the history of the SEC. Now all those things
are a source of criticism. Well, this is the same Harvey Pitt
that was here. He, like his predecessor, Arthur Levitt, is
doing an excellent job, in my opinion.
So that is the criticism that comes with public service. I
just want to say that I appreciate people's willingness to
serve the greatest country in the history of the world, and we
appreciate it.
I look forward to working with both of you in your capacity
when you are confirmed.
Chairman Sarbanes. Very good.
Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you, Mr. Chairman. And let me extend my
best wishes to both of you as well, and to welcome your
families here, and these young men here. This is a very
important moment to watch their father in a confirmation
hearing.
I want to underscore the comments of both my Chairman and
the Ranking Member in terms of the obligation to do whatever is
possible to restore confidence in the marketplace in this
country.
It will be a challenging time. Candidly, I cannot think of
a more exciting time to be at the SEC. You are coming on when
the expectations are going to be high, and rightfully so, that
we do everything we can to rebuild what has been historically
the great selling point, I have always said, of our markets.
We do not always offer the most attractive deals in the
world. There are other countries that race to the bottom, to
use Arthur Burns' line, when it comes to the regulatory
process.
We have resisted that over the years, although some have
tried to move us in that direction. And the fact that we have
not has been an attractive quality about why foreign capital
seeks to come to these markets historically. And it is why I am
worried today that they are not because they, for the first
time in years, feel as though our structures may not be what we
have always claimed them to be. Everyone involved in this, the
private sector, the President, the Congress, but principally
the SEC will bear responsibility for helping us rebuild that
sense of confidence.
I also agree with Senator Gramm. I did not know Harvey Pitt
at all. I never really met him. I knew nothing about him,
really. I heard his name mentioned. But, in my view, he hardly
has been on the job. I think he came on the job in September.
Enron broke in October. We focus our attention on personalities
rather than what needs to be done to get us back on track.
There may come a time when Harvey Pitt may be the wrong person
for the job, but it is terribly premature and distracting for
us to be talking about personalities rather than what needs to
be done within the regulatory and legal schemes in order to
rebuild the confidence necessary for us to attract capital to
our markets again. So I am not going to join the chorus on the
Harvey Pitt discussion. I would rather we focus our attention
on what needs to be done as public policy people to straighten
things out here, rather than to try and engage in the attacks
on individuals.
Finally, let me just say to both of you here, and I think
you both worked at the SEC so you have a good understanding.
You are not coming in as complete outsiders here. In fact, you
and I talked about this yesterday, Mr. Goldschmid. And that is
that you have been chosen by the President. That is a high
honor.
But unlike a Cabinet officer, in my view, the SEC is in a
special category. It is not unlike the Secretary of State or
the Secretary of Defense, for different reasons. Here, the
temptation of every White House is to have people get in line
and support their policies. However, it is critically important
at the SEC that you refrain from getting caught up in the day-
to-day machinations or agendas that are set, both here in
Congress and at the White House.
I would urge you to resist that, regardless of the
Administration that is in office. The SEC is the organization
that we really count on to provide that confidence. And if
there is a sense that decisions are being made for a short-term
political advantage rather than the long-term financial
interests of our country, then the SEC is damaged. And if it is
damaged and its credibility is in question, then everything
else will be as well. So it is going to be critically
important, if confirmed by the Senate, that you be pillars of
the institution you have once worked for in terms of restoring
the sense of confidence that this institution can do the job it
has been asked to do historically.
With that, I welcome you. Thank you both for being willing
to serve as well.
Chairman Sarbanes. Good. Senator Allard.
COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman. I would like to
join my colleagues in congratulating you on your appointment by
the President.
You do have a huge challenge in front of you. You are going
to be under a microscope in every little thing that you do, not
only your personal lives, but all your decisions on the
Securities and Exchange Commission are going to be under a
microscope. You are going to find yourself under a lot of
pressure.
I am one who has felt that we need to have reform in the
SEC. You are going to hear a lot of good ideas about what makes
up good, reasonable reform. And so, you are going to have to
put aside the chaff, look for the facts, act on behalf of what
is best to restore the confidence in our markets. I think that
is the real challenge. And the sooner we can get that
confidence restored, the better.
I want to wish you both luck in carrying on your
responsibilities and thank you for being willing to serve.
Chairman Sarbanes. Very good.
Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman. I appreciate your
holding this hearing and going forward. We need some new blood,
not because the people there are not doing a good job, but in
my opinion, we just need to make sure we have an SEC that is
fully staffed and attentive. It is an extraordinary
institution. I have had plenty of personal experience and have
great respect for it.
I am sure you all will be positive and worthy contributors.
But I think there is an extraordinary need to do some of the
kinds of things that Senator Dodd was talking about, bringing
objectivity and a fairness to this process that make our
markets healthy and consistent with the principles of a Nation
that people are innocent till proven guilty, as well as making
sure there is a real check and balance to what goes on.
I hope that you will also be strong advocates to make sure
that the SEC has the resources to be able to do the job that it
is expected to do. Sometimes regulation and regulators who are
presumed to have the ability to do something and then do not
have the resources to really do it, set up a false sense of
security that ends up undermining the quality of our financial
markets.
So, I am pleased you all are here. I look forward to
hearing your testimony and believe very much in the institution
and think now, more than ever, the SEC has an extraordinary
role to play in our society.
Thank you.
Chairman Sarbanes. Thank you, Senator Corzine.
Senator Enzi.
COMMENTS OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman.
I am very pleased that we are beginning to move the
nominees for the Commission forward. I believe that it is
important for us to get all the Commissioners there to work on
enacting the important legislation that we have been working
on.
I would also say that both of our nominees have very
accomplished records, and I am pleased both of them hold the
Commission in high enough regard that they are willing to
return to Government service. We thank you for that. You have
had a taste of the outside and I know the sacrifices that are
entailed in coming back into Government.
The issues facing the Commission will require a major
undertaking. Reforms about the methods by which we review and
discipline publicly traded companies, executives, and others
associated with the formation of the capital markets are
underway. And it is important that we have quality individuals
with utmost integrity to fill these positions.
I want to join Senator Gramm in a few comments in support
of Chairman Pitt. I have looked at some of the numbers of the
work that he has generated already. He appears to have exceeded
all previous years. Part of that is because we are in a bit
more of a crisis now than we have been in previous years. But
the activities that are going on now did not start now. They
started earlier. And I am glad he is deeply involved in solving
some of those problems.
I would ask that my complete statement be a part of the
record. And I would also ask that a column by Bob Novak that
appeared in today's Chicago Sun-Times also be a part of the
record.
Chairman Sarbanes. Without objection, so ordered.
Gentlemen, it is the practice of this Committee to place
nominees under oath at their nomination hearing.
So I would ask both of you to stand now. Do you swear or
affirm that the testimony that you are about to give is the
truth, the whole truth, and nothing but the truth, so help you
God?
Mr. Atkins. I do.
Mr. Goldschmid. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Goldschmid. I do.
Mr. Atkins. I do.
Chairman Sarbanes. Thank you very much.
We would be happy to hear your opening statements.
Professor Goldschmid, why don't we start with you and then we
will go to Paul Atkins.
STATEMENT OF HARVEY J. GOLDSCHMID, OF NEW YORK
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Goldschmid. Chairman Sarbanes, Senator Gramm,
distinguished Members of the Committee, it is with great
respect and pleasure that I appear before you today. I am
honored to have been nominated to serve on the Securities and
Exchange Commission.
I have introduced my wife Mary. She is on my right. She has
been an extraordinary partner all through life. She may look a
bit tired today. Normally she is radiant.
Chairman Sarbanes. She is radiant today as well, I hasten
to add.
[Laughter.]
Mr. Goldschmid. She spent all day yesterday in the hospital
with our oldest child Charlie, who we had hoped would be here.
He had a back injury. It looked very dangerous for a while.
Thank God it turned out to be okay.
Chairman Sarbanes. Good. We are relieved to hear that.
Mr. Goldschmid. My other two children are here and are
wonderful, too.
I come from a working class background. My father was a
furrier and a postal worker. My parents believed in our
financial markets, and, because of Social Security and their
investments, retired to a relatively comfortable life in
Florida. Our Nation, as this Committee has indicated, is now
witnessing the most dramatic business scandals that have
occurred during my professional life. On a very personal level,
I feel the pain of the retirees and the investors whose futures
have been jeopardized. If I am confirmed, I promise to do all I
can to punish corporate wrongdoers, and to rebuild faith in the
fairness and integrity of our markets.
The SEC is a great institution. In January 2000, after I
left as General Counsel and returned to Columbia, I spoke with
great pride of the decency, dedication, professionalism, and
common commitment to doing the right thing of the SEC staff
from top to bottom. I welcome the opportunity to return to the
Commission. If the Senate confirms me, I will draw my
inspiration from two great former chairmen of the SEC, William
L. Cary and Arthur Levitt. Bill Cary, my treasured teacher and
colleague at Columbia, was chairman during the Kennedy
Administration. With independence and nonpartisanship, he
reinvigorated the agency and initiated a process of reform that
changed securities laws and financial markets enormously for
the better. Arthur Levitt, my dear friend, you all know. As
chairman, he was outspoken, courageous, uncommonly wise, and as
he often put it, passionate about protecting investors. Day by
day, in his remarkably successful 8 year term, Arthur acted on
his beliefs and in the public interest.
The Senate this week took a bold, balanced, and important
step toward restoring investor confidence. I want you to know
how much I appreciate the critical role that you, Chairman
Sarbanes, and this Committee have played with respect to the
Public Company Accounting Reform and Investor Protection Act of
2002. The Nation is very much in your debt for this piece of
legislation, and for the oversight that you have provided for
our financial regulatory system. I very much look forward to
working with you, Mr. Chairman Senator Gramm, this Committee,
and with Chairman Pitt and Paul Atkins, and my other new
colleagues on the Commission. I feel confident that all of us
working together can more than meet the current challenges.
Thank you, Mr. Chairman, Senator Gramm, Members of the
Committee, for this opportunity to appear today. I would be
happy, of course, to answer questions.
Chairman Sarbanes. Thank you, Professor Goldschmid.
Mr. Atkins.
STATEMENT OF PAUL S. ATKINS, OF VIRGINIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Atkins. Thank you, Chairman Sarbanes, Senator Gramm,
and distinguished Members of the Committee, It is a very great
honor for me to appear before this Committee today. I am deeply
grateful for the confidence that the President has shown in me
by nominating me to be a Commissioner, and I appreciate your
courtesy in calling me before you today. And also in allowing
me to introduce my family and relatives. I also want to thank
in particular Senators Warner and Allen for their kind remarks
on my behalf.
Thank you very much. I appreciate their support.
I have always regarded the Securities and Exchange
Commission as one of the finest agencies of the U.S.
Government. My 20 year career has centered on the financial
markets and the SEC's oversight of them. I have reviewed the
practices of companies that the Commission regulates, advised
firms on complying with its regulations, and worked with the
SEC to investigate and rectify situations where investors have
been harmed. In fact, I had the privilege of serving as a Staff
Member of the Commission for 4 years under two of the ablest
chairmen that the SEC has had: Richard C. Breeden and Arthur
Levitt. It is a personally meaningful coincidence that the
actual term that I have been nominated to fill is the same one
that both Chairman Levitt and Chairman Breeden held. If
confirmed, I would be proud to continue their first-rate
efforts to fight fraud through a vigorous enforcement program.
While at the SEC, I helped pursue policy initiatives that
foreshadowed many of the issues affecting the markets today.
Under Chairman Breeden, my primary responsibilities were
managing his effort to improve corporate governance,
shareholder communications, and strengthen management
accountability through proxy reform. Under Chairman Levitt, I
organized his outreach to individual investors through a series
of investor town hall meetings, consumer affairs advisory
committee, and other investor education efforts, including
brochures and other things.
Since leaving the SEC, I have continued my work in investor
protection by promoting meaningful internal safeguards in the
private sector. I have helped financial services firms improve
their compliance efforts and have undertaken investigations
into corporate fraud, at times in conjunction with the SEC and
the Justice Department. In the course of this work, I have
spoken directly with hundreds of defrauded investors and
learned a valuable lesson in the process--that the impact of
fraud and corporate misconduct is felt far beyond the
headlines. For example, I have heard the Syracuse, New York,
electrical union member tell me how he lost the downpayment on
his house through a complex Ponzi scheme. And I have listened
while a respected doctor broke down in tears when he described
how his staff's pension fund lost thousands of dollars through
the purchase of fraudulent securities.
Abstract commentaries about the evils of fraud in our
financial markets pale in comparison to the direct, personal
impact of these stories. I have no doubt that many Members of
this Committee have experienced similar tragedies from
constituents back home. We need to remember that these people
had their property stolen from them, just as surely as they had
been robbed on the street. It is professionally and personally
gratifying to me that I had an opportunity to recoup even a
small part of their stolen savings, pensions, and dreams.
If confirmed, I will bring to the SEC this important real-
world perspective of how enhanced compliance, rigorous
examinations, and thorough investigations can make a real
difference for investor confidence that ultimately forms the
foundation of our markets. Moreover, I believe I can make an
important contribution to the Commission's ongoing efforts to
improve its own programs and enforcement. The SEC is about to
receive greatly enhanced resources as a result of the
President's increased budget request and the work of many of
you here in Congress. We must ensure that these resources are
used wisely to protect investors to the maximum extent
possible.
I know you have a vote coming up, so if I may just submit
the rest of my remarks----
Chairman Sarbanes. No, no. If you wish to complete it, go
ahead.
Mr. Atkins. Okay. Sorry. For many Americans, the SEC has
long been just another Federal agency in Washington with an
alphabet soup acronym. Today, however, the SEC is at the center
of a crisis of trust in the markets that has dealt a serious
blow to investor confidence. In recent months, those markets
have been rocked by one corporate scandal after another,
causing millions of investors to question the integrity of
capital markets.
Investors need to believe that the auditors of public
companies are unconflicted, ethical, and acting in the best
interests of the shareholders. Investors also need to believe
that corporate officers are honest and have the best interests
of the companies and stockholders in mind, not just what is
good for their wallets. They need to know that their
representatives on corporate boards are actively guarding their
interests. And, most of all, investors should be able to rely
on the financial reports issued by public companies to present
a clear and accurate picture of the financial health of those
companies.
Those beliefs have been shaken in recent months. The SEC's
top priority is to work to restore those bedrock principles and
the investor confidence that keeps our economy strong. With
more than half of all Americans invested in the stock market,
the SEC is entrusted with an enormous responsibility.
The President has issued a powerful call to reinforce the
ethic of corporate responsibility. This Committee and the full
Senate have taken important steps to restore investor
confidence, as have the House and the SEC. Each of these
important actors in this process must remain committed to work
together to restore confidence in our capital markets by
rebuilding a mutual trust among market participants, including
investors, corporate executives, and auditors. If confirmed, I
will dedicate my energy, experience, integrity, and independent
judgment to achieving that goal. I believe strongly that the
SEC is a vital line of defense in protecting individual
investors, and I look forward to the opportunity to return that
institution to serve that cause with Chairman Pitt and my
fellow commissioners.
I look forward to working with you and thank you very much.
Chairman Sarbanes. Thank you both for very fine statements.
We have a vote scheduled at of 10:45 a.m. Senator Gramm has
indicated to me that he is not going to be able to return. So I
am going to yield to him right in the beginning, and then I
will be quite prepared to do that with other colleagues who may
find themselves in a similar situation.
As Chairman, you have to be there at the beginning and you
have to be there at the end.
[Laughter.]
So I am going to ask my questions a little later.
Senator Gramm.
Senator Gramm. Well, Mr. Chairman, thank you very much for
your kindness.
Harvey, you served on the Professional Ethics Executive
Committee for the American Institute for Certified Public
Accountants. Is that right?
Mr. Goldschmid. That is correct, Senator.
Senator Gramm. And in that capacity, you were paid by the
accountants. Is that right?
Mr. Goldschmid. I was paid by the AICPA, yes.
Senator Gramm. Did you feel that that in any way
compromised your integrity?
Mr. Goldschmid. No, sir.
Senator Gramm. You have done work for Merrill Lynch, for
Lehman Brothers, for the National Association of Security
Dealers, for the Nasdaq Stock Exchange, for the American Stock
Exchange. Do you believe that corrupts your judgment or
infringes on your independence in this job?
Mr. Goldschmid. No, Senator, I do not. The Commission has a
sensible prophylactic rule that says there will be a 1 year
recusal for former clients. But I do not believe the work I did
for former clients will affect my judgment.
Senator Gramm. Well, let me say on this recusal thing, if I
might, I believe people overdo this recusal business. I think
that, at least it has been my experience in watching the
process, that, if anything, people go too far. Clearly, if you
are in some way tied economically to an interest in the
present, that that represents a conflict of interest. If you
are affected personally now, that reflects a conflict of
interest.
But I am concerned about this view that the fact that you
have ever been involved in an industry forever or for any
extended period of time affects your judgment, I think that is
a bad view.
I would just like to say for the record, that while I am
sure there is some group somewhere that looks at your long
association in this industry and says, they are getting ready
to put someone on the Commission who has worked for all these
companies that are doing business before the Commission and
that is a bad thing, I want to tell you that I find it
reassuring.
Mr. Goldschmid. Well, thank you, Senator.
I think it is true that anyone who should be nominated for
a commissionership at the SEC will have some potential conflict
by way of his or her past career. One has to have had that
experience.
My experience with the AICPA, of course, was as a public
member of the oversight group, and that was serving basically
in a public capacity, as I understood it. But we do have to be
careful. It is critically important in Washington that we worry
about conflict of interest and appearance. I do think the SEC's
1 year recusal period is a wise rule.
Senator Gramm. Paul, you of course were with Coopers &
Lybrand. You have been involved with two different accounting
firms. We are in the process of changing legislation as it
relates to those accounting firms. Again, I would just like to
say that I think that is valuable experience. If you are
confirmed, you are going to be working for the Securities and
Exchange Commission and not those accounting firms.
Let me ask both of you, in terms of the SEC and working
with this accounting board, I would like as my final question
to ask both of you when the board is established it is going to
be guided by the law we pass.
But as two people who I believe will be Members of the
Securities and Exchange Commission, how do you see the
Commission working with this board? And Harvey, let me start
with you.
Mr. Goldschmid. I hope closely and cooperatively. The SEC
is a Government agency. It must take ultimate responsibility.
And as I understand the bill, the Commission will be in a
position to take ultimate responsibility for all that is done.
The model is the NASDR--the National Association of Securities
Dealers Regulation System. I think it will work very well. The
trick is to make sure the members of the new board have the
integrity, the decency, and the experience we need. But it is a
very workable system.
Mr. Atkins. Senator Gramm, I agree with Professor
Goldschmid. I think you all crafted a very good solution, very
easy solution, by piggybacking on Section 19. So, I do
anticipate it being something like the way the SEC reacts with
the NASD, interacts with that.
Senator Gramm. Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Gramm.
Is there any other colleague who has a time situation,
because I would be happy to yield to them now before the vote
starts.
Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. I do not have any questions. I would just
like to thank both these gentlemen for your willingness to
serve, especially at this particular time. And I wish you well.
Mr. Goldschmid. Thank you, Senator.
Mr. Atkins. Thank you, Senator.
Chairman Sarbanes. Senator Corzine.
Senator Corzine. Yes. A follow up to Senator Gramm's
question. Are you troubled at all that some disciplinary powers
are housed in the oversight board?
Mr. Goldschmid. Not at all, Senator. That is the way we do
things with broker-dealers. Disciplinary matters go to the
NASDR, and there are appeals to the Commission. That system has
worked quite well. And I am not troubled at all as long as the
Commission has the final say. There is an appeal process.
Senator Corzine. Since I will not be returning, I want to
beat the drum on one other thing. I presume you both are in
support of pay parity for people at the SEC.
Mr. Goldschmid. The words are absolutely yes.
Senator Gramm. Well, now we are getting into an area of
conflict of interest.
[Laughter.]
Mr. Goldschmid. Senator Gramm, I remember kidding you at
one point on that. Pay parity, which I know you have supported
all through, will not cover commissioners, as I understand it.
Chairman Sarbanes. Well, you certainly endeared yourselves
at this moment to the people down at the SEC.
Senator Enzi.
Senator Enzi. Mr. Chairman, I am not sure what my situation
will be after the vote. It depends on what the floor debate is.
I am on the health committee as well.
Chairman Sarbanes. So why don't you go ahead now.
Jon, did you want to continue?
Senator Corzine. I just had one final question. I would be
remiss if I did not ask how you felt about expensing of
options.
Mr. Goldschmid. Paul, do you want to take that?
[Laughter.]
Let me step back on that. Clearly, there should be a
shareholder vote on options. It is a common ground today and
developing. I agree with Chairman Greenspan that, economically,
options should be expensed. There are complicated issues as to
valuation. And my view is that this is an issue that should go
to FASB to look at. But FASB should look at the expensing issue
with the independent funding that your bill contemplates; FASB
must have the ability to stand back and reach the right result.
Mr. Atkins. I basically agree with that as well. I think
this issue has been floating around since when I was at the SEC
back in the early 1990's. The pros and cons of it have been
debated. And I think it is best to leave it to FASB.
Chairman Sarbanes. We want to strengthen the integrity of
the decisionmaking process on these issues. And we think what
the bill does by providing the independent funding for FASB, is
a very significant and important step in helping to achieve
that. That is one of the objectives of the legislation.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. And I want to thank
both of the nominees for meeting with me individually and
answering a series of questions I had in regard to the
legislation. I appreciate the answers you gave and the insights
that you offered.
On a little different issue, I would be interested in
knowing what your position is in regard to setting stock
exchange listing standards in the statute.
Mr. Goldschmid. Well, I guess again stepping back, I
thought the report and the proposal by the New York Stock
Exchange was a very good one. It seems to me that the statute
works fairly well, at least if I understand it, in giving the
SEC power to make suggestions and recommendations to the
exchange.
Listing standards are a basic method of working through
corporate governance today in the United States. We used the
listing standards approach when I was General Counsel in terms
of audit committees. I think the bill provisions should work
well.
Mr. Atkins. I basically agree again. I think that,
ultimately, you want to leave the discretion with exchanges.
That helps with competition among the exchanges. But I think
that you all have come up with a good balance.
Senator Enzi. Thank you. Senator Dodd and I are on the
Subcommittee that deals with the securities laws. We have been
contemplating doing a review of those laws. I wonder whether
you would encourage or discourage us from doing that.
Mr. Goldschmid. An academic can never say, ``don't
review.''
[Laughter.]
The securities laws have, however, served us remarkably
well. The 1933, 1934, and 1940 Acts were enacted in a very
different time. But they have served the Nation very well. And
they have been modernized continually by the broad rulemaking
power that the SEC has, and then by various amendments over the
years.
A review makes sense. These are older laws, last century
laws. But the conservative in me says, be cautious. These laws
have been an enormous advantage for the Nation in terms of the
discipline, the accountability, and the quality of disclosure
they have generally produced.
Mr. Atkins. I agree with that. But I definitely think that
it is time to look at these 70 year old laws which you have
been speaking about.
The one thing to keep in mind, when you look at the
petitions and the exemptive applications that come to the SEC,
particularly with respect to laws that are both very broad and
prescriptive, such as the Investment Company Act of 1940.
Because of the SEC's broad rulemaking authority, it has been
able to adapt the law over time. But it shows that the law
itself does not necessarily apply to current conditions. So I
think that speaks that it is a good time to review.
Senator Enzi. Thank you, Mr. Chairman.
Chairman Sarbanes. Presumably, though, you both would agree
with the observation that given the current turmoil that we are
confronting, the fact that we are about to pass a significant
piece of new legislation, which will have to be integrated into
the system, that a thorough-going review of the securities laws
probably should at least await a calming down of the current
market and regulatory situation.
Otherwise, it seems to me, even if you have the very best
of intentions, you are stirring up the pot at a time when we
want it to settle, if possible. Do you have any reaction to
that observation?
Mr. Atkins. I agree completely with that. I think you can
only allocate your resources so much. And so, take one thing at
a time.
Mr. Goldschmid. I agree with that, too. Clearly, there are
priorities right now. And giving confidence to the markets by
dealing with the present issues and implementing your bill is
critical; these are the high priorities.
Bill Cary, when he was Chairman, set up a special study.
And thinking about the markets in the future makes sense; it is
an incredible time in terms of technology and globalization.
But those are backburner issues compared to what is before us
right now.
Chairman Sarbanes. Very good.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman. Thank you both for
being here and your willingness to serve.
I missed the introduction of the family members, but we
welcome all of you, too. And we want to thank each of you for
your willingness to share these two men with the rest of us.
The first question I would ask of you is why you are
willing to do this? You all have, I am sure, full plates. Why
are you willing to do this?
Mr. Goldschmid. I have asked myself that question.
[Laughter.]
Senator Carper. You will probably ask yourself again in a
few years from now.
Mr. Goldschmid. I think that is absolutely right.
[Laughter.]
For me, it is not a good time for the family. Joey, our
youngest, is in high school and it is inconvenient to come.
Financially, we will not even talk about the consequences.
But I have been lucky in life. I have been fortunate. The
family has done well. There is in me a give-back sense. This is
a critically important time for the SEC and the national
markets. In the end, I just felt that I could not say no.
Senator Carper. All right.
Mr. Atkins. Similarly, for me, since I have been at the SEC
before, the opportunity to come back and use my experience both
there and in what I have done since, especially at this
important time, is really very important to me.
Senator Carper. Good. Now I realize you do not want to be
immodest in front of your families or us, or a national
television audience, but why are you the right person for these
posts at this time?
Mr. Goldschmid. Well, I began teaching at Columbia in 1970.
This has always been my area of study--corporate governance,
securities, corporate law; I have been concerned with what to
do, where the Nation should go, what makes sense.
I have been dealing with these issues all of my
professional life. And then, of course, I spent time as General
Counsel of the SEC in 1998-1999, as well as consulting at
various other periods.
Senator Carper. All right.
Mr. Atkins. My experience is not as long-lived as Harvey's
is, but similarly, for 20 years basically this has been my
life, the securities markets and trying to help firms comply
with the regulations and to protect investors through that.
And so, to be able to give back some of that experience and
to help make things more effective, both inside the agency and
outside, is what I would really like to do.
Senator Carper. How would the SEC be different because you
would serve on it?
Mr. Goldschmid. Well, it is always hard to predict I hope
the decisions will be fair, disciplined, important, and wise.
We will push the agency in every way to do its best.
Senator Corzine correctly alluded to the need for greater
resources. We, or at least I, will promise, and I am sure Paul
will, too, to use those resources with every bit of
effectiveness and wisdom that we can bring to it, and give the
country the confidence that it needs.
Mr. Atkins. Taxpayers and investors deserve the very best,
and to have their resources used efficiently and effectively.
That is what I really hope to accomplish there, to use my
experience to help that.
Senator Carper. One last question, if I could, Mr.
Chairman.
We are now going to conference between the House and the
Senate versions of what I call corporate governance
legislation. There are some provisions in our bill that are
different than the provisions in the Senate bill.
If you could just take a moment, each of you, and talk to
us about the provisions that you think must emerge from the
final compromise, or the principles, how they should emerge in
the legislation that is the final compromise that goes to the
President. What might some of those be?
Mr. Goldschmid. It is a tough question. It may be a long
moment, but, fundamentally, you must have the Accounting
Oversight Board with the independent funding and staffing that
the bill contemplates. It must have adequate resources. It must
be able to do quality control studies and look at the
accounting firms independently. It must be in a position to
discipline effectively, which was not the case with the AICPA's
oversight committee. I was part of that oversight group for the
AICPA for over a year, and I said from the beginning, and I
think people understood, that the disciplinary system did not
work. We tried our best. There were honorable, decent people
serving on what was the Professional Ethics Executive
Committee. It did not work. We need a system of discipline and
accountability that does work.
And so, those are the basic kinds of components, and you
have them in the bill. Independence is also a critical element.
The separation of a large amount of consulting from the
auditing process, with the ability to do that consulting for
other nonaudit clients, is critical right now to making the
system work. I also think the governance provisions of the bill
are very good.
Generally as you can see, I am very high on what you have
done.
Senator Carper. Thank you.
Mr. Atkins.
Mr. Atkins. I agree with the framework that you have put in
for oversight over the accounting profession. I think it is a
very well-balanced approach. And the funding that you are
providing for the agency to help improve its information
technologies program, for example, in some ways, the
enforcement division cannot even comply with some of the
requirements of courts in doing its filings because it does not
have the scanning technology available to it.
So there are a lot of things that really need to be
updated. And so, your addressing those issues I think is really
timely.
Senator Carper. Good. Well, I thank you for your responses
and for your willingness to serve. Good luck. Make us proud.
Chairman Sarbanes. We are going to have to recess for the
vote. I have a few questions, a couple of such importance that
I want to ask them when I return. So we will take a short
break.
I do want to say just before we break up that Senator
Carper asked, why would you want to do this? And I thought your
answers were quite responsive to that.
But I just wanted to observe, this is a magnificent
opportunity to be of service to the country. These are really
troubled times and you both are people of competence and
experience. You have both been in the SEC, which is a definite
plus.
And this is a chance to come in and confront these serious
problems that we are now experiencing, and in helping to
resolve them, to make a major contribution to the country.
Certainly to its economic life, and of course, its economic
life impacts all other aspects of its life.
So, it is a very exciting and challenging time to become an
SEC commissioner. And both of you have manifested in the past,
have a concern about public interest, this is real chance to do
something significant about it.
With that, we will take a short recess and I will return
and resume the hearing.
[Recess.]
Chairman Sarbanes. The hearing will come to order.
I want to ask both of you first about funding for the
Securities and Exchange Commission.
In the extended hearings that we did in March that led up
to reporting out the legislation that is now pending in the
Congress, we heard from witness after witness that the SEC
needs additional resources in order to effectively carry out
its mission and protect
investors.
John Whitehead, former Cochair at Goldman Sachs, told us,
``I think the SEC is underfunded and has been for some years.
When you consider the seriousness to the system of just one
Enron, it is dangerous to fool around with the relatively small
increases in budget that the SEC asks for.''
David Walker, the Comptroller General of the United States,
testified: ``The SEC's ability to fulfill its mission is
becoming increasingly strained due in part to imbalances
between the SEC's workload and staff resources.''
Over the last decade, securities markets have experienced
unprecedented growth and change, and at the same time, the SEC
has been faced with an ever-increasing workload and ongoing
human capital challenges. Most notably, high staff turnover and
numerous vacancies.
We asked the GAO to do a study, and they came in with a
study, which, if you have not had a chance to review it, I
commend to you, in March of this year: SEC Operations--
Increased Workload Creates Challenges. They found that the
SEC's limited staff resources have resulted in substantial
delays in SEC regulatory and oversight processes which hampers
competition and reduces market
efficiencies.
In fact, we have heard from people in the securities
industries complaining that the lack of resources at the SEC
and the significant increase in their workload has lengthened
the time period markedly within which certain clearances or
decisions are reached, and that they find that handicaps their
own ability to function. The GAO also noted that information
technology issues needed additional funding.
Now here is where we are and I want to see how concerned
you are about this problem and how committed you are to trying
to do something about it.
The Senate Appropriations Committee, I think only
yesterday, has reported out a $750 million budget for the SEC.
That is a jump of about $300 million, actually, I think the SEC
is terribly underfunded. I have thought that for many years.
But let me just ask you first, what is your own view of the
issue in terms of the lack of adequate resources at the
Commission to do its current job, let alone additional
responsibilities which it will be called upon to undertake?
Mr. Atkins.
Mr. Atkins. Mr. Chairman, I think that there is a lot to be
done there in bringing it up to snuff, as you have alluded to.
I am sure if it is appropriated, it can be spent. Chairman
Pitt has started a management review of the agency to try to
prioritize and see where additional resources should be used.
Offhand, there are many: Enforcement and--as I referred to
earlier--IT systems, that can be upgraded. And I am sure that
is what this study is going to come up with and help prioritize
that. So, I agree. I think more resources are needed.
Mr. Goldschmid. It is critical, Senator. I like your $776
million figure even better than the $750 million.
But there is no question about the immense need. It is a
need for more lawyers and accountants. It is a need, and this
goes to pay parity, to recruit experienced litigators and
experienced people to help manage divisions. It is hard for
people to live in Washington on what the SEC can now pay,
particularly people with young families, particularly at that
experienced level. We are losing people. We have lost them over
the years. It is critical we get the money.
Technology is another area. That bill, that budgetary
provision, and that action by the Appropriations Committee is
absolutely essential to making the system work.
Chairman Sarbanes. I am very concerned about the pay parity
issue. We have been holding out that promise to people now for
some period of time and we have not actually delivered on the
promise. And I know there are people down there that are
waiting--it is coming, it is coming--but it is not there yet.
And it seems to me--how important an issue is the pay parity
question?
Mr. Goldschmid. For me, it is absolutely critical. Paul and
I talked to senior staff yesterday, and they did indicate that
a number of employees are holding out, hoping that it will be
completely funded. If we continue to lose those first-rate
lawyers of 10, 12, 15 years of service, or we cannot recruit
and we need new litigators for all of these financial fraud
cases, it will make the agency's job almost impossible. It is
critical that we get pay parity funded.
Chairman Sarbanes. Mr. Atkins.
Mr. Atkins. I agree, although the SEC has had recently some
means of meeting pay parity out of whatever resources that they
have. That is what I understood yesterday they said, but it is
not a permanent issue by any means. And I think they are taking
from one bucket into another.
Chairman Sarbanes. They have done a limited amount of it,
but I do not think they have done any benefits. To the extent
they have done it, it has been only on the salary.
Mr. Atkins. I think you are right.
Chairman Sarbanes. It is only part of the package, and that
is a palliative in the short run, but it is not an answer in
the long run. And we need to keep that in mind.
I also am appreciative of the study that the Chairman has
undertaken. But when the Congress is prepared to give an agency
a significant boost in its appropriation, for good reason here,
I think it is clearly more than warranted, and when I am
convinced in my own mind that whatever study you do will show
the need for resources beyond even what the Congress is
thinking of providing, the agency should go ahead and accept
this and not say, well, let us finish the study first and then
we will come and ask you because, by that time, we may have
moved out of the budget cycle. You will be in the next budget
cycle, which would throw it off for another 12 or 15 months or
something. So there is a chance now to move, and we need to do
it. If the commissioners do not advocate for the budget of the
SEC, who is going to do it? You, in effect, have to be in the
forefront. And I certainly hope that you all will assume that
burden, so to speak.
Some of the SEC employees are organized. Therefore, there
is a bargaining process that takes place. We keep hearing
complaints that they do not feel that management is negotiating
with them over contracts in as serious and as fair a fashion as
they think is needed.
This is a source of some concern because you do not want to
have labor/management unrest at the agency. That also would
impede its ability.
I am just curious and I will ask you a general question.
How would you respond to these expressions of concern that we
have been hearing? And generally, what is your view of the
nature of the relationship that one should have with the
employees, and the employee organizations?
Mr. Atkins. It is vital to have a good relationship with
the staff people at the SEC because they are the ones who are
doing the work and they need to feel they are part of the
process and need to feel like the management of the agency is
responsive to them. So that is one thing that, personally, I am
very committed to as far as, in my past and working with my
staff, whether at the SEC or in the private sector. And I
intend to carry that through to this new position.
Mr. Goldschmid. Working out the collective bargaining
agreement has taken a very long time. In our briefing
yesterday, we were told that they are right at the end of the
process. And it is critical we get there, too.
Morale is now weaker at the SEC. The agency has taken some
pounding. We want our employees to feel good and to be treated
right. It is very important that everyone at the SEC, from top
to bottom, feel fairly treated and energized.
And I understand, Senator Sarbanes, what you said to both
of us--this is a critical, difficult time, but it is also a
time of large opportunities. The Commission is in the position
to make a large difference by doing things right.
Chairman Sarbanes. That is right. What we need to do down
at the SEC is we need to get you enough resources so at least
you can really move forward with the needed initiatives, and
start operating in an environment in which you have adequate
resources to do your job, you are not constantly constrained,
as Mr. Atkins said, taking out of one pocket to pay another.
That is no way to run an organization, and anyone will tell
you, if the fiscal constraints on you are that tight, it does
not really lead to efficiency. It leads to inefficiencies. You
ought not to have a loose budget. The budget has to be adequate
to the task and people ought not to be spending a good deal of
their time thinking how can we divert from one place where we
need it into another place where maybe we need it a little
more?
The other is to get the labor situation resolved so that
everyone is pointing in the same direction and moving ahead. I
am very anxious to accomplish that. We are just receiving the
papers on the final nominee for the vacancy. And it is our
intention to try to hold a further hearing next week on the
other two nominees for the remaining vacancies.
The Senate will be in session next week and the following
week before the August break. So that would give us an
opportunity to do the hearing, reporting all the nominees and,
with some good luck, get it through the Senate before the
Senate leaves at the beginning of August, so that people would
be able to move into their positions. So that is the timetable
we are working on. I am hopeful it can be achieved.
Mr. Atkins, I have a couple of questions that I need to ask
to you. Yesterday, the SEC announced a settled enforcement
action against PricewaterhouseCoopers, and its broker-dealer
affiliate, PricewaterhouseCoopers Securities, for violations of
the auditor independence rules. They found that, because of
these independence violations, the firm caused 16 public audit
clients to file financial statements with the SEC that did not
comply with the reporting provisions of the Federal securities
laws.
Steve Cutler, who is the able SEC Director of the Division
of Enforcement, said: ``An auditor's objectivity is critical to
the financial reporting process. Impairment of an auditor's
independence undermines that process and erodes public
confidence in our capital markets.'' He went on to say: ``This
case demonstrates the heightened risk of an audit failure when
an accounting firm assists in and approves the accounting
treatment of its own consulting fees.''
And then went on to speak of the loss of objectivity and
impartiality that you require of an independent auditor, which
is, of course, an essential piece of the legislation that we
have reported out of this Committee. One title is really
devoted to auditor independence and so forth. In your duties at
PricewaterhouseCoopers, did you provide any of the audit or
consulting services that were the subject of the SEC action?
Were you in any way involved in any of that?
Mr. Atkins. No, sir, I was not involved in any of that.
Chairman Sarbanes. Did you make any decisions involving how
PricewaterhouseCoopers would conduct these audits or provide
these consulting services at issue?
Mr. Atkins. No, not at all.
Chairman Sarbanes. And in your work, were you aware that
PricewaterhouseCoopers was violating the auditor independence
rules with respect to the clients that were the subject of the
SEC action?
Mr. Atkins. Not at all.
Chairman Sarbanes. You had no knowledge of it and no
responsibilities in this area, I take it.
Mr. Atkins. It is a completely different part of the firm
from me. So, I was not involved at all.
Chairman Sarbanes. Actually, let me ask you this question
because you are not an accountant. You are a lawyer.
Mr. Atkins. Right.
Chairman Sarbanes. And I say that benignly because I am a
lawyer as well.
[Laughter.]
Tell me a bit about what it was you went to
Pricewaterhouse--well it was Coopers & Lybrand originally.
Mr. Atkins. At the time.
Chairman Sarbanes. What you went there to do when you left
the SEC. Was Richard Breeden the head of the unit at Coopers &
Lybrand?
Mr. Atkins. Richard Breeden was there and actually, when I
was looking to leave the SEC, he basically called me up and
said, you have to come and talk to us at Coopers & Lybrand.
Chairman Sarbanes. Actually, Chairman Breeden gave some
very powerful testimony to this Committee in the hearings that
we held in March. He has been advising and counseling us as we
have moved along here. He has very strong views about
sustaining the integrity of the regulatory system.
But please go on.
Mr. Atkins. Yes. And that is part of his record from even
when he was Chairman of the SEC and before that, with respect
to accounting issues.
But, anyway, basically, the idea was to do mock
examinations of financial services firms and help with
investigations by the SEC from a platform that the audit firm
provides from an independent standpoint, versus law firms which
are viewed more as advocates. So we can wear the white hats and
be even-handed is the idea.
Chairman Sarbanes. You actually were trying to enhance
their ability to meet or to comply with the regulatory
standards. Is that essentially what you were doing?
Mr. Atkins. Exactly. We were trying to come in as
independent examiners, basically, and work with broker-dealers,
investment advisers, and investment companies to help them with
investor protection, help them comply with SEC rules.
Chairman Sarbanes. Let me ask you this question. And
actually, Senator Gramm asked it in a way and he included
Harvey within its ambit by reference to the consulting work
that he had done for both the Institute of Certified Public
Accountants and some of the investment houses.
But this appearance issue is constantly raised by people
and raised in the press. And essentially, it says, here is
someone who has worked for this large accounting firm, or in
your instance, has consulted extensively. And now they are
coming into the SEC and one of the challenges at the moment is
how do we get the accounting profession back to being a real
profession, if I may say so?
One of the sad things in all of this is that Arthur
Andersen, which was founded by a man who was the model of
rectitude in the profession and advocated these high standards
of auditing and accounting behavior, and was succeeded by
Leonard Spacek, who himself was even more a model of that, that
this company which they established fell on such difficult
times. It is really, in many respects, sad because they had
built an institution that commanded great respect and of high
quality, and of course, we know what has happened to it.
So the question then becomes, how can someone who is coming
out of one of these major companies go into the SEC and then
rule fairly and impartially on the matters that are to come
before them?
I am the messenger here. I am reflecting things that are
said or questions that are raised. And I am interested in how
you would respond to that.
Mr. Goldschmid. In my own case, Senator, as I indicated to
Senator Gramm, my accounting role was that of a member of the
AICPA's oversight board, the Profession Ethics Executive
Committee. I was one of the first three public members. My job,
as I understood it, was to represent the public in this
disciplinary process, which, as I say, just did not work,
although there were very decent, honorable people who were
trying in all kinds of ways. I do not see any conflict or
disability there.
It is quite possible, and I consult perhaps a day a week,
not even that, it is quite possible to understand your clients,
to advocate for your clients, and then to come to Washington
and Government and step back from it and remember, what is
critical to remember, that the public interest, and the
protection of investors is what counts.
But as I said to Senator Gramm, prudent rules on conflicts,
on appearances, the 1 year time-out, those all make sense, too.
We have to be careful. We have to assure the public that we are
going to do the job right.
Chairman Sarbanes. Mr. Atkins.
Mr. Atkins. Well, when you work at any institution, that
does not necessarily mean that you have bought into whatever
the organization does--all the different part of it.
As for me, when you are in a situation like that, you do
see the good, the bad, and the ugly, as it were. So that can
help in going into an oversight body like the SEC.
I am not an advocate any longer for the firm. I am leaving
the firm. I am disassociating myself and severing my
relationship. And I am now going to be back where I was before,
8 years ago at the SEC and filling a new role now at the
Commission, instead of as staff to the chairman. So to take off
one hat and go to the other, and having severed that
relationship, ensures investors and taxpayers and you in your
oversight role that I will be able to carry that, should I be
confirmed, be able to carry that role forward.
Chairman Sarbanes. Well, that is a good answer. We have a
system where people move from the private sector into the
public sector and then back to the private sector, and back and
forth.
The real question is, when you go into the public sector,
can you leave behind you as you have just indicated, leave
behind you the private sector and assume your role as
representing the public interest? Incidentally, we are around
here to maintain oversight over that question. I should
probably throw that into the mix.
Mr. Atkins. That is highly appropriate.
Chairman Sarbanes. Into the mix as well. Well, gentlemen,
we very much appreciate your coming today.
Mr. Atkins. Thank you.
Chairman Sarbanes. I want to say to your families, this was
a relatively easy hearing. It is not always like this. You both
bring a great deal of competency to this assignment. It is
important that we try to get the commissioners in place, and
now that we have the full slate here from the Administration,
we are moving forward as expeditiously as we can.
Thank you very much for coming.
Mr. Atkins. Thank you.
Mr. Goldschmid. Thank you, Senator.
Chairman Sarbanes. The hearing is adjourned.
[Whereupon, at 11:35 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
nominees, response to written questions, and additional
material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR JON S. CORZINE
Mr. Chairman, I commend you for holding this timely hearing this
morning. I want to start my remarks by congratulating Mr. Atkins and
Mr. Goldschmid on their nominations and thank them for their
willingness to serve--particularly during this turbulent period.
Mr. Chairman, enough has already been said about the crisis of
confidence that has taken hold of our financial markets, bred
skepticism about corporate governance practices, and created questions
about integrity and transparency of corporate financial statements.
As we deal with these issues, I think its important for us all to
understand that restoring the lost investor confidence cannot be
accomplished solely through the enactment of new laws. Particularly if
new and existing laws are not enforced. The responsibility of
overseeing our markets and enforcing our securities laws lies squarely
at the feet of the SEC.
The first paragraph of the SEC's mission outlines the fundamental
purpose of the agency. It states:
``The primary mission of the U.S. Securities and Exchange
Commission (SEC) is to protect investors and maintain the integrity of
the securities markets. As more and more first-time investors turn to
the markets to help secure their futures, pay for homes, and send
children to college, these goals are more compelling than ever.''
That statement has become even more poignant in these times. Many
first-time investors have returned to stashing their money away under
their mattresses, thousands of workers have witnessed their 401(k)'s
savings--and their dreams of retirement--evaporate seemingly overnight,
and millions of parents now wonder whether it is wise to ``gamble'' on
their child's college education by investing in our markets.
Mr. Chairman, now more than ever, the public will be closely
scrutinizing the integrity of those who not only run our public
companies, but those who lead the agencies charged with their
oversight. And while many have been critical of the SEC's leadership in
taken on the myriad of challenges facing our markets, I think it is
fair to say that the agency has been operating behind the eight-ball
due to insufficient financial and personnel resources, and also because
it has been operating without full membership of its Board.
Mr. Chairman, this hearing will allow us to learn more about the
character of these nominees, who both come before the Committee with
strong credentials. I look forward to Mr. Atkins' and Mr. Goldschmids'
testimony, and to their response from questions of this Committee's
Members. Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
Thank you, Mr. Chairman, first of all, let me tell you that I am
very pleased we are beginning to move the nominees for the Commission.
I believe that we must get all of the Commissioners there to begin
enacting some of these important reforms being legislated.
I would also say that both of our nominees have very accomplished
records and I am pleased that both of them hold the Commission in high
enough regard that they are willing to return to Government service.
The issues facing the Commission will require a major undertaking.
Reforms about the methods by which we review and discipline publicly
traded companies, executives, and others associated with the formation
of the capital markets are underway. It is important that we find
quality individuals with the utmost integrity to fill these positions.
I would like to say just a few words about Chairman Pitt. I have to
say that Chairman Pitt and I may not always agree, but I believe the
recent attacks on him to be unwarranted. Mr. Pitt has come under fire
for having represented some of the accounting firms who have been
criticized in recent restatements. But I believe Chairman Pitt's work
in the private sector is a great asset to investors. We need
individuals who are willing to work in Government who know and
understand the industries they regulate. I do not want lifelong
Government bureaucrats monitoring these companies.
These restatements did not all of a sudden appear when Chairman
Pitt was confirmed. In most cases, they began during the late 1990's
when companies became intent on not seeing the Internet bubble burst. I
have to ask what was going on at the SEC while these companies were
filing all of these false financial statements? What I imagine happened
was that the companies, who are very familiar with who is at the
Commission and where the resources are being devoted, thought they
could take advantage of the situation because no one was paying
attention.
Just look at what has happened since Chairman Pitt has taken
office. He has opened a record number of investigations of restatements
filed by public companies. He has taken steps to break the relationship
between research analysts and investment bankers. He has supported
legislation that will increase penalties on corporate executives
engaged in fraudulent behavior. And, he has indicated his support of
this legislation, which by the way, I anticipate to be supported by the
majority of the Senate later today.
The numbers are very clear. In Chairman Levitt's last year as
Chairman, 503 total enforcement actions were filed. Already this year,
Chairman Pitt has filed 415. Officer and Director Bars for 2000 were
38--this year so far 71. Subpoenaed enforcement proceedings in 2000
were 9--this year 18. The numbers go on and on. My point is that
Chairman Pitt seems to be left cleaning up the mess his predecessor
left in corporate America.
So, I offer my support for these actions taken by Chairman Pitt.
Instead of attacking him, I am more concerned about what was happening
at the SEC that bred this climate where executives felt compelled to
engage in this unethical behavior. Why weren't some of these actions
taken 3 or 4 years ago? Did the SEC Chairman not see the potential
conflicts that could arise out of research analysts getting
compensation based on investment banking business?
Therefore, I would say that I commend Chairman Pitt for the work he
is doing. From what I understand, the actions he is taking at the SEC
have struck fear throughout the corporate community that they had
better get their act together.
I have a number of issues that I think the Commission needs to
address in the near future. Not the least of which is implementing the
accounting reform bill. In addition, the securities laws need a serious
review. The National Market Structure must be evaluated and revamped.
With technological advances that have been made, we cannot expect the
markets to continue to operate on rules and laws that were developed 25
or 30 years ago. Also, the time seems to have passed the effectiveness
of the current rules under which the Intermarket Trading System
operates. I am looking forward to working with the Commission to
address these and other problems.
Again, Mr. Chairman, thank you for moving the nominees along, and I
look forward to working with you and the other Members of the Committee
on issues affecting the securities industry.
----------
PREPARED STATEMENT OF HARVEY J. GOLDSCHMID
Member-Designate of the U.S. Securities and Exchange Commission
July 18, 2002
Chairman Sarbanes, Senator Gramm, Distinguished Members of this
Committee, it is with great respect and pleasure that I appear before
you today. I am honored to have been nominated to serve on the
Securities and Exchange Commission.
Please allow me to introduce to you my wife Mary. She has more than
supported and encouraged me; she has been an extraordinary partner in
every aspect of my life. With Mary are our three sons, Charlie, Paul,
and Joey, of whom we are very proud.
I come from a working class background. My father was a furrier and
then went on to become a postal worker. My parents believed in our
financial markets, and, because of Social Security and their
investments, retired to a relatively comfortable life in Florida. Our
Nation is now witnessing the most dramatic business scandals that have
occurred during my professional life. On a very personal level, I feel
the pain of the retirees and investors whose futures have been
jeopardized. If I am confirmed, I promise to do all that I can to
punish corporate wrongdoers, and to rebuild faith in the fairness and
integrity of our financial markets.
The SEC is a great institution. In January 2000, soon after I left
as General Counsel to resume my teaching duties at Columbia, I spoke
with enormous pride of the decency, dedication, professionalism, and
common commitment to ``doing the right thing'' that ``motivated the
SEC's staff from top to bottom.'' I welcome the opportunity to return
to the SEC at this critical time for investors and our markets. If the
Senate confirms me, I will draw my inspiration from the performances of
two great past chairmen of the SEC, William L. Cary and Arthur Levitt.
Bill Cary, my treasured teacher and colleague at Columbia, was Chairman
during the Kennedy Administration from 1961-1964. He reinvigorated the
agency and initiated a process of reform that changed securities law
and financial markets enormously for the better. Arthur Levitt, my dear
friend, you all know. As Chairman, he was outspoken, courageous,
uncommonly wise, and as he often put it, ``passionate about protecting
investors.'' Day by day in his remarkably successful 8 year
chairmanship, Arthur acted on his beliefs and in the public interest.
The Senate this week took a bold, balanced, and important step
toward restoring investor confidence. I want you to know how much I
appreciate the critical role that you, Chairman Sarbanes and this
Committee have played with respect, to the Public Company Accounting
Reform and Investor Protection Act of 2002. The Nation is very much in
your debt for this piece of legislation, and for the oversight you have
provided for our financial regulatory process. I very much look forward
to working with you Mr. Chairman, Senator Gramm, and this Committee,
and with Chairman Pitt and my other new colleagues on the Commission. I
feel confident that all of us working together can more than meet the
current challenges.
Thank you, Mr. Chairman, Senator Gramm, and Members of the
Committee, for this opportunity to appear before you today. I would be
pleased to try to answer any questions you may have.
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PREPARED STATEMENT OF PAUL S. ATKINS
Member-Designate of the U.S. Securities and Exchange Commission
July 18, 2003
Mr. Chairman, Senator Gramm, Members of the Committee, it is a very
great honor for me to appear before this Committee today. I am deeply
grateful for the confidence that the President has shown in me by
nominating me to be a Commissioner. I appreciate your courtesy in
calling me before you today.
I have always regarded the Securities and Exchange Commission as
one of the finest agencies of the U.S. Government. My 20 year career
has centered on the financial markets and the SEC's oversight of them.
I have reviewed the practices of companies that the Commission
regulates, advised firms on complying with its regulations, and worked
with the SEC to investigate and rectify situations where investors have
been harmed. In fact, I had the privilege of serving as a Staff Member
of the Commission for 4 years under two of the ablest chairmen that the
SEC has had: Richard C. Breeden and Arthur Levitt. It is a personally
meaningful coincidence that the actual term that I have been nominated
to fill is the same one that both Chairman Levitt and Chairman Breeden
held. If confirmed as Commissioner, I would be proud to continue their
first-rate efforts to fight fraud through a vigorous enforcement
program.
While at the SEC, I helped pursue policy initiatives that
foreshadowed many of the issues affecting the markets today. Under
Chairman Breeden, one of my primary responsibilities was managing his
effort to improve corporate governance, enhance shareholder
communications, and strengthen management accountability through proxy
reform. Under Chairman Levitt, I organized his outreach to individual
investors through an investor town hall program, a consumer affairs
advisory committee, and investor education efforts.
Since leaving the SEC, I have continued my work in investor
protection by promoting meaningful internal safeguards in the private
sector. I have helped financial services firms improve their compliance
efforts and have undertaken investigations into corporate fraud, at
times in conjunction with the SEC and the Justice Department. In the
course of this work, I have spoken directly with hundreds of defrauded
investors and learned a valuable lesson in the process--that the impact
of fraud and corporate misconduct is felt far beyond the headlines. I
have heard a Syracuse, New York electrical union member tell me how he
lost the down payment on his house through a Ponzi scheme. And, I have
listened while a respected doctor broke down in tears when he described
thousands of dollars of the pension fund for his staff (some of whom
had been with him for more than 20 years) that were lost through the
purchase of fraudulent securities.
Abstract commentaries about the evils of fraud in our financial
markets pale in comparison to the direct, personal impact of these
stories. I have no doubt that many Members of this Committee have
experienced similar tragedies from constituents back home. We need to
remember that these people had their property stolen from them, as
surely as if they had been robbed on the street. It is professionally
and personally gratifying to have had the opportunity to help recoup
even a small part of their stolen savings and pensions.
If confirmed, I will bring to the SEC this important real-world
perspective of how enhanced compliance, rigorous examinations and
thorough investigations can make a real difference for investor
confidence that ultimately forms the foundation of our markets.
Moreover, I believe I can make an important contribution to the
Commission's ongoing efforts to improve its own programs and
enforcement. The SEC is about to receive greatly enhanced resources as
a result of the President's increased budget request and the work of
many here in Congress. We must ensure that these resources are used
wisely to protect investors to the maximum extent possible, and I look
forward to the opportunity to help achieve that if I am confirmed.
For many Americans, the SEC has long been just another Federal
agency in Washington with an alphabet-soup acronym. Today, however, the
SEC is at the center of a crisis of trust that has dealt a serious blow
to confidence in our financial markets. In recent months, those markets
have been rocked by one corporate scandal after another, causing
millions of investors to question the integrity of the capital markets.
Investors need to believe that auditors of public companies are
unconflicted, ethical, and acting in the best interests of
shareholders. Investors also need to believe that corporate officers
are honest and have the best interests of their companies and
stockholders in mind, not just what is good for their own wallets. They
need to know that their representatives on corporate boards are
actively guarding their interests. And, most of all, investors should
be able to rely on the financial reports issued by public companies to
present a clear and accurate picture of the financial health of those
companies.
Those beliefs have been shaken in recent months. The SEC's top
priority is to work to restore those bedrock principles and the
investor confidence that keeps our economy strong. With more than half
of all Americans invested in the stock market, the SEC is entrusted
with an enormous responsibility.
The President has issued a powerful call to action to reinforce the
ethic of corporate responsibility. This Committee and the full Senate
have taken important steps to restore investor confidence, as have the
House and the SEC. Each of these important actors in this process must
remain committed to work together to restore confidence in our capital
markets by rebuilding a mutual trust among market participants,
including investors, corporate executives, and auditors. If confirmed,
I will dedicate my energy, experience, integrity, and independent
judgment to achieving that goal. I believe strongly that the SEC is a
vital line of defense in protecting individual investors, and I look
forward to the opportunity to return to that institution to serve that
cause with Chairman Pitt and my fellow commissioners.
Thank you very much.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM HARVEY J.
GOLDSCHMID
Q.1. Obviously we do not want to take anyone's rights or move
so fast that we falsely accuse or jeopardize a case, but it is
very important that the American people see that those who have
broken the law in these latest accounting scandals are brought
to justice quickly. In your role as a Commissioner will you
commit to working toward that end?
A.1. Yes. If confirmed, I will do my utmost to ensure that the
Commission enforces the securities laws in a swift and even-
handed manner against those who violate them. Our Nation is now
witnessing the most dramatic business scandals that have
occurred during my professional life. As you suggest, it is
essential that the Commission act quickly and decisively when
its investigations
uncover evidence of wrongdoing. I support the efforts of the
Commission's Division of Enforcement in recent months to
enforce the securities laws in ``real time,'' and I am
committed to the continued execution of thorough, fair, and
efficient investigations and civil enforcement actions.
Q.2. Will you, as a Commissioner, do everything you can to see
that when promulgating regulations, especially on this
accounting bill where there is a difference of opinion between
the SEC and Congress, that the SEC follows the intent of
Congress?
A.2. Yes. It is the Commission's duty to exercise its
rulemaking authority in a way that is faithful to the intent of
Congress. If I am confirmed, I will work hard to ensure that
every exercise of the Commission's regulatory authority,
including its regulatory authority under the new accounting
bill, is in accord with the intent of Congress.
RESPONSE TO A WRITTEN QUESTION OF SENATOR AKAKA FROM HARVEY J.
GOLDSCHMID
Q.1. The use of soft dollars is opaque and not understood by
most individual investors. In a 1998 report, the SEC defined
soft dollar practices as arrangements under which products or
services other than the execution of securities transactions
are obtained by an adviser from or through a broker-dealer in
exchange for the direction by the adviser of client brokerage
transactions to the broker-dealer. Soft dollar transactions may
result in conflicts of interest for advisers and have an impact
on investors. What should be done to improve the transparency
of soft dollar transactions?
A.1. Client brokerage is an asset of the client, not the
adviser. However, investment advisers that manage client
portfolios commonly receive soft dollar benefits--such as
research, other products, or services--in exchange for
directing their clients' trades to particular broker-dealers.
Soft dollar arrangements have the potential to create conflicts
of interest because the adviser has an incentive to select or
recommend a broker-dealer based on the adviser's interest in
receiving those benefits rather than on the client's interest
in receiving the best execution of trades at the lowest
possible rates. While the Commission currently requires
advisers to disclose their soft dollar arrangements on Form ADV
and to provide that Form to every client, it is my
understanding that the Commission has proposed revisions to
Form ADV that would enhance the disclosure of the adviser's
soft dollar arrangements and the conflicts of interest they
present. If confirmed, I will support efforts to improve the
quality of communications between broker-dealers, investment
advisers, and their clients. Similarly, I will encourage the
staff to consider ways of creating transparency in the
increasing use of mutual fund brokerage to reward the sale of
fund shares by broker-dealers.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM PAUL S.
ATKINS
Q.1. Obviously, we do not want to take anyone's rights or move
so fast that we falsely accuse or jeopardize a case, but it is
very important that the American people see that those who have
broken the law in these latest accounting scandals are brought
to justice quickly. In your role as a Commissioner will you
commit to working toward that end?
A.1. Yes. I believe that the SEC's enforcement role is a vital
aspect of its mission. Investor confidence in the markets
depends on a strong enforcement effort against those who have
broken the rules. It is critical for investors to see that
there is an effective, fair enforcer of the rules.
Q.2. Will you, as a Commissioner, do everything you can to see
that when promulgating regulations, especially on this
accounting bill where there is a difference of opinion between
the SEC and Congress, that the SEC follows the intent of
Congress?
A.2. Yes. As a creature of statute, the SEC derives its
authority from Congress and as an independent agency, it is
called upon to interpret and enforce the law. It is essential
that the SEC abide by the intent of Congress in its regulatory
and enforcement action. As a Commissioner, I will do everything
that I can to ensure that my actions and the actions of the SEC
comport with that intent.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA FROM PAUL S.
ATKINS
Q.1. I have a special interest in financial education along
with several other of my colleagues on this Committee. In your
statement you mention that while at the SEC you were involved
in investor education efforts. What is your evaluation of the
SEC's current investor education efforts and what could be done
to enhance these programs?
A.1. I understand that the SEC's Office of Investor Education
and Assistance (OIEA) has been pursuing a number of initiatives
to reach investors. For example, in January 2002, the SEC
launched a fake ``scam'' website to warn investors about fraud
before they lose money.
When I was on the staff of the SEC, we produced the first
brochures--called Invest Wisely--aimed at individual investors.
I understand that the SEC has continued and expanded this
effort. It produces and distributes educational materials in
print, and the staff organizes and attends educational events
directed at individual investors. In addition, each year
Commission staff individually responds to thousands of investor
complaints and questions. In every facet of its investor
education program, the Commission works closely in partnership
with private organizations, trade associations, and other
governmental agencies to leverage its resources and achieve
greater impact for its educational materials. I look forward to
reviewing the current status of the SEC's program in more
detail and exploring with the Chairman, my fellow Commissioners
and the staff ways in which to expand this very important
effort of the Commission.
Q.2. What is your evaluation of the SEC's current investor
education efforts and what could be done to enhance these
programs?
A.2. Please see above response to Question 1.
Q.3. The use of soft dollars is opaque and not understood by
most individual investors. In a 1998 report, the SEC defined
soft dollar practices as arrangements under which products or
services other than the execution of securities transactions
are obtained by an adviser from or through a broker-dealer in
exchange for the direction by the adviser of client brokerage
transactions to the broker-dealer. Soft dollar transactions may
result in conflicts of interests for advisers and have an
impact on investors. What should be done to improve the
transparency of soft dollar transactions?
A.3. Currently the Form ADV requires disclosure of soft dollar
practices. In my term as Commissioner, I look forward to
reviewing the state of communications between investment
advisers, broker-dealers, and their customers to assure that
there are appropriate disclosures of conflicts of interest and
that the disclosure of other key elements of securities
transactions are clear and easily understood by investors.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
NOMINATIONS OF:
DONALD L. KOHN, OF VIRGINIA
AND
BEN S. BERNANKE, OF NEW JERSEY
TO BE MEMBERS OF
THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
----------
TUESDAY, JULY 30, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:05 p.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
I am very pleased to welcome before the Committee on
Banking, Housing, and Urban Affairs this afternoon Donald Kohn
and Ben Bernanke, who have been nominated by President Bush to
be Members of the Board of Governors of the Federal Reserve
System.
This hearing was originally scheduled for this morning. But
the President had his bill signing with respect to the Investor
Protection Corporate Accountability Act and therefore we put it
off un-
til this afternoon. I hope it did not inconvenience either of
our nominees.
Both of these nominees are highly respected economists who,
based on their records, appear to be well qualified to serve as
members of the Federal Reserve Board of Governors.
Don Kohn is well known to Members of this Committee through
his long service at the Fed. A graduate of the College of
Wooster in Ohio, he received his Master's and PhD, in economics
from the University of Michigan, and then has spent his entire
professional career in the Federal Reserve System, first at the
Federal Reserve Bank of Kansas City and then he came to
Washington and has worked in a number of divisions of the Fed,
including being the Chief of the Capital Markets Section. He
was the Associate Director of the Division of Research and
Statistics, Deputy Staff Director of the Office of Staff
Director for Monetary and Financial Policy. From 1987 to 2001,
he was Director of the Division of Monetary Affairs of the Fed.
And since 2001, has been an adviser to the Board for Monetary
Policy. He has also been Secretary and Economist for the
Federal Open Market Committee.
He is the Senior Career Monetary Policy Expert down at the
Fed, widely respected for his expertise. And we are very
pleased that not only, but I think the Fed staff, have been
honored by this nomination to move from a career staff position
to be a member of the Board of Governors.
Our research indicates, and I am not altogether vouching
for its accuracy, that this has only happened three times
previously in the history of the Fed, and this is the first
time that it has occurred in the last 25 years. In our view, it
is an honor that is well
deserved.
Ben Bernanke is currently Howard Harrison and Gabrielle
Snyder Beck Professor of Economics and Public Affairs at
Princeton--my alma mater, I hasten to add----
[Laughter.]
----and serves as Chairman of Princeton's Economics
Department. He received his undergraduate degree from Harvard
in 1975, his PhD from MIT in 1979, and he then went to the west
coast, where he was first an Assistant Professor of Economics
and then Associate Professor at Stanford Business School, and
came to Princeton in 1985 as a Professor of Economics.
He is the director of the program in Monetary Economics of
the National Bureau of Economic Research and he is the Editor
of the American Economic Review. Also highly respected as an
expert in monetary policy and it is clear that he would bring
very strong qualifications to the Board of the Governors of the
Federal Reserve.
So we look forward to hearing the opening statements from
our witnesses and having an opportunity for some questions.
It is the practice of this Committee to swear in the
nominees. So before you give your statements, I would like to
ask you to stand and take the oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Kohn. I do.
Mr. Bernanke. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Bernanke. I do.
Mr. Kohn. I do.
Chairman Sarbanes. Thank you very much.
Since we believe, at least continue to believe, to some
extent, in the seniority system, and since Don Kohn has been at
the Fed for some years and Ben Bernanke is just coming to the
Fed, I think we will hear Don Kohn's statement first and then
we will go to Dr. Bernanke.
And if either of you wishes, if you have members of your
family here that you might want to introduce in your opening or
in the course of your statement, we would certainly invite you
to do that.
STATEMENT OF DONALD L. KOHN, OF VIRGINIA
TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Kohn. Thank you very much, Mr. Chairman.
I would like to introduce the members of my family. This is
my wife, Gail, sitting in the seat I used to occupy.
[Laughter.]
My son, Jeff, daughter-in-law, Sue Matthiesen, mother Pat,
and niece, Zoey Kohn.
Chairman Sarbanes. Good. Well, we are very pleased to have
them here with us.
Mr. Kohn. Chairman Sarbanes and Members of the Committee, I
very much appreciate your expeditious consideration of my
nomination to be a Member of the Federal Reserve Board. I have
enjoyed a productive working relationship with this Committee
and its staff over a number of years. Should the Senate confirm
my nomination to the Board, I very much look forward to
continuing to work with you to promote a strong economy and a
robust financial system that serves the needs of all Americans.
I am most grateful to President Bush for this nomination and
deeply honored by his judgment that my abilities and experience
will help the Board to carry out the critical responsibilities
you, the Congress, have entrusted to it. Having spent my
working life at the Federal Reserve, I may be more aware than
most nominees who come before you of both the challenges and
the rewards of the position to which I aspire.
Our economy has made considerable progress over the last
two decades toward the goals you have set for monetary policy
of maximum employment, stable prices, and moderate long-term
interest rates. We have enjoyed two exceptionally long economic
expansions punctuated by relatively mild recessions, an
inflation rate that has reached what many would consider to be
a zone of price stability, and relatively low long-term
interest rates that have helped to promote wider homeownership.
Technological innovation, deregulation, and globalization, by
fostering greater economic and financial flexibility and
resiliency and more rapid increases in productivity, largely
account for this favorable performance. But the conduct of
monetary policy surely also has played a role in establishing a
background conductive to economic vitality. This policy has
been marked by a balancing of discipline and flexibility--the
discipline of focusing on long-run price stability as a
necessary precondition for maximum employment and moderate
long-run interest rates, and the flexibility within that long-
term discipline to counter disturbances to the economy and
financial markets might threaten maximum sustainable employment
as well as stable prices.
Going forward, in order to do its part in promoting good
economic performance, the Federal Reserve will continue to be
faced with the need to analyze and adapt to a dynamically
changing economy and financial markets. Innovation and
deregulation in markets and the globalization of finance are
affecting the flow of funds between savers and spenders and the
distribution of risks and returns in the financial system.
These changes, in my view, have not detracted from the
effectiveness of monetary policy, and they have increased both
economic efficiency and financial stability. But they have also
opened the economy to new kinds of influences and they are
altering the channels through which policy affects the economy.
In just the last few years, our financial and economic
stability has been challenged by crises originating in East
Asia and Russia, and by huge variations in asset prices here
and abroad as investors strove to peer through considerable fog
to evaluate the implications of rapidly changing technologies
and market structures. The significance of those asset price
movements has been magnified by the growing importance of
wealth to household financial conditions.
Policymakers have been required to decipher the shifting
forces driving the economy and to adjust policy, sometimes
rapidly, to provide a counterweight to developments that
threatened to undermine economic performance. Where possible,
those policy adjustments have been forward-looking--
anticipating the effects of economic forces so as to forestall
emerging instabilities. It is a process in which I have been
deeply involved, working with policymakers and staff, and I
would welcome the opportunity in a new role to bring my
experience and expertise to bear on the difficult, but
fascinating, issues that confront the Federal Reserve's conduct
of monetary policy.
The increasing volume of finance flowing through securities
markets, the spread of wealth to more Americans, and the
growing prominence of global investors in our financial markets
have put an additional premium on the ability of the Federal
Reserve to explain its policy to the public. More people from
more diverse backgrounds are making important decisions based
on their expectations of policy actions and the effects of
those actions. When savers and borrowers understand how the
Federal Reserve sees the forces developing in the economy
relative to its objectives, interest rates and other prices in
financial markets are more likely to be set in a way that helps
to achieve these objectives. I have worked extensively in my
career at the Federal Reserve to help policymakers explain
monetary policy. While we have made considerable progress in
recent years, improving the clarity, completeness, and
timeliness of our various public statements is an ongoing
process that must be continued.
As the Congress recognized when it created the Federal
Reserve, economic stability rests on a foundation of financial
stability. In no area of Federal Reserve responsibilities do
changing market structures pose a bigger challenge than in
carrying out the supervision and regulation of banks and
holding companies. Changes in the legislative framework for the
financial sector in recent years have allowed consolidation
within the banking sector and, now, between banking and other
financial service providers, permitting markets to realize
economies of scale and scope in the delivery of services. This
consolidation, along with the proliferation of new instruments
to price and trade various aspects of risk, I believe, promotes
sounder, more diversified, institutions and a system in which
both those supplying and using savings have many more
alternatives. The regulatory implementation of these new laws
needs to allow the markets to evolve with changing preferences
and technologies, while preserving competition in the delivery
of services and financial stability. It also must protect
against the effective spread of the safety net beyond the core
depositories for which Congress intended special protection. No
depository institution should be insulated from market forces
by being considered too big to fail. But because banks do have
access to the safety net, market signals are muted by moral
hazard. Moreover, as institutions become more complex and deal
in a great number of new instruments, markets and managers may
find it difficult to evaluate some risks accurately, increasing
the changes for unexpected losses. In order to promote
efficient resource allocation and maintain financial stability,
supervisors must anticipate potential problem areas and must
put into place oversight structures that build on existing
market signals and risk management and also simulate market
pressures where those signals are inadequate.
The growing access to credit markets for all our citizens
is another very positive development in our financial system.
It has resulted from efforts to eliminate discriminatory
practices along with the recognition by lenders that profitable
opportunities exist in making credit available to those with
lower income and wealth. But regulators, borrowers, and lenders
are still adjusting to the expansion of the market. Many
borrowers in the so-called subprime segment of the credit
markets are having difficulty servicing the additional debt,
more difficulty than lenders anticipated, resulting in the need
for supervisory actions for a number of bank lenders. In
addition, it has increased the opportunities for unscrupulous
lenders to take advantage of less well-informed consumers.
Clearly, efforts to educate credit users better should have
important payoffs. More generally, the key in this area is to
find the very difficult balancing point for regulation that
allows the markets to generate the greatest number of
legitimate alternatives for borrowers while proscribing clearly
abusive practices.
Meeting these various challenges will require a strong
Federal Reserve System. You have such an institution now. It is
widely respected and relied upon, not only to follow the
appropriate policies but for its advice in a variety of
economic and financial matters. Although the Federal Reserve
tends to speak with one voice, in my experience, decisions are
preceded by healthy give-and-take among policymakers with
diverse views supported by talented and dedicated staff. Should
the Senate see fit to confirm my nomination, I am looking
forward to adding my own perspective to that dialogue as a
policymaker and will do my best to pass on to future
generations an institution just as strong as the one its
current and past leaders have bequeathed to this generation of
Americans.
Thank you, Mr. Chairman. I would be pleased to answer any
questions you might have.
Chairman Sarbanes. Thank you very much.
Mr. Bernanke, we would be happy to receive your statement.
STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY
TO BE A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
Mr. Bernanke. Thank you, Mr. Chairman. I would like to
start by introducing my support group--my wife, Anna, my son
Joel, my daughter Alyssa, my brother-in-law, Victor Friedmann,
his wife, Toni Jo Friedmann, and our neighbor, Todd Hunter.
Chairman Sarbanes. Good. We are very pleased to have them
here with us today.
Mr. Bernanke. Thank you. Chairman Sarbanes, Senator Gramm,
Members of the Committee, I am deeply honored to appear before
you today as the President's nominee to serve on the Board of
Governors of the Federal Reserve System. If I am confirmed to
this important position, I will do my utmost to advance the
economic well-being of all Americans.
The opportunity to serve at the Federal Reserve would be a
great privilege, as it would allow me to apply in the public
interest the fruits of a lifetime of thinking and writing about
central banking and the economy. In my academic career of
nearly 25 years, I have written widely on topics relating to
monetary policy, banking and credit markets, economic growth
and business cycles, macroeconomic history, and the statistical
analysis of the economy, all of which bear directly on the work
of the Federal Reserve. Moreover, over the years I have
maintained close contact with the Federal Reserve System, as a
consultant, visiting scholar, and adviser; and I have visited
and advised the central banks of many industrialized and
developing countries.
In various roles during my career, I have also learned how
to work with people and to get things done. Among other duties,
I have served for the past 6 years as Chair of the Princeton
University Economics Department. I also served as the first
Director of Princeton's new Center for the Study of Financial
Markets; as the Director of the Monetary Economics Program of
the National Bureau of Economic Research; as the Editor of the
economics profession's leading research journal; and--last, but
certainly not least--as a two-term elected Member of the
Montgomery Township, New Jersey Board of Education.
One of the remarkable features of the Federal Reserve
System is the wide range of its responsibilities, including not
only the making of monetary policy but other important areas
such as financial regulation and supervision, consumer
protection, payments systems, international finance, and
others. Although at present my greatest expertise is in
monetary policy and macroeconomics, I am keenly interested in
and broadly familiar with each of the Fed's other areas of
responsibility, and if I am confirmed, I look forward to
learning a great deal more. I particularly look forward to
interacting with, and learning from, both colleagues on the
Board and the Federal Reserve's able staff.
Let me turn briefly to issues of policy and the current
economy. The Federal Reserve has considerable operational
independence, but ultimately derives its legitimacy and powers
solely from its legislative mandate. I would like to take this
opportunity to strongly affirm my support for the monetary
policy goals set for the Federal Reserve by Congress in the
Federal Reserve Act: maximum employment, stable prices, and
moderate long-term interest rates. While one can always hope to
do better, I think the Federal Reserve has, on the whole, done
a remarkably good job of promoting these three objectives over
the past 20 years or so.
In my view, a key operational element in the Fed's success
at achieving its tripartite objectives has been the Federal
Open Market Committee's emphasis on keeping the rate of core
inflation low and stable. Low and stable inflation is
intrinsically beneficial, as it reduces the need for households
and firms to expend time and
resources to protect themselves from the adverse effects of
rapidly and erratically changing prices. Consistently low
inflation also directly promotes the objectives of high
employment and rapid economic growth, by providing a stable
monetary environment in which firms and markets can function
most efficiently. In a low-inflation environment, lenders are
less concerned about erosion of their principal, and so nominal
interest rates tend to be low.
Finally, a strong commitment to low and stable inflation,
by moderating and anchoring the public's inflation
expectations, actually enhances the ability of monetary policy
to respond actively to short-run economic disturbances when
necessary.
For example, during the past year, the Federal Reserve was
able to cut interest rates quite aggressively without
engendering significant inflationary pressures or igniting a
wage-price spiral. Public confidence that inflation would be
kept under control was essential to giving the Federal Reserve
this heightened flexibility.
In my academic writings, I have argued that the efficacy of
monetary policy at achieving its mandated objectives could be
further improved by the Fed's adoption of an approach known as
``inflation targeting.'' In anticipation of possible questions,
let me say a bit more about this proposal. The main operational
change under inflation targeting would be that the Fed, in
consultation with the executive and legislative branches, would
announce an explicit numerical objective for core inflation
over the medium term, say 1 to 2 years.
For example, allowing for the upward biases in inflation
measurement and a zone of safety to avoid accidental deflation
in prices, an inflation target in the range of 1 to 2 percent
per annum for the core PCE deflator might be a good initial
choice, although some might reasonably disagree about either
the number or the choice of index. As part of the targeting
process, the Federal Reserve would report to Congress its
expectations for future inflation, its reasons for any target
misses, and its projected trajectory for bringing inflation to
its targeted level.
It is important to stress that inflation targeting, as I
interpret it, would not represent a major departure from the
current practice of U.S. monetary policy or a change in policy
objectives. Rather, its primary goal would be to build on
policy successes of the past two decades by strengthening the
Federal Reserve's institutional commitment to the approach used
by the Fed under Chairman Volcker and Chairman Greenspan. As I
discussed a moment ago, the center piece of this approach is an
emphasis on keeping the rate of core inflation low and stable.
Based on the experiences of a number of other countries that
have adopted this model, I believe that an explicit inflation
target would improve further the Fed's ability to reach all
three of the goals set forth in the legislative mandate for
monetary policy. Among the potential advantages of an explicit
inflation target are increased stability of the public's
inflation expectations, lower economic and financial
uncertainty, increased central bank credibility, greater
continuity and consistency of policy, and, importantly,
enhanced accountability of the Fed. Although I am favorably
disposed toward these incremental changes in the current
framework of U.S. monetary policy, I know that not everyone
agrees with this view, and that there are important,
substantive arguments to be made on both sides of the issue. I
look forward to discussing these ideas with Federal Reserve
colleagues and others interested in the making of monetary
policy.
Turning finally to the current economic situation: In
recent months, investors have been battered by sharp declines
in equity prices, not only in the United States, but in many
other countries as well. The losses in wealth are large and
serious indeed. Equally serious and disturbing is the rash of
corporate and accounting scandals that have certainly played a
role in the stock market's plunge. Financial markets cannot do
their job of efficiently allocating capital and sharing risk if
investors do not feel that they are receiving accurate and
timely information, or if they fear that those who should be
stewarding their funds cannot be trusted to do so honestly. I
fully support the efforts of Congress and the President to
restore investor confidence in the accuracy and reliability of
financial statements and in the trustworthiness of those who
manage our corporations and financial institutions.
Although the fall in equity prices is frightening and
dispiriting for many, I do not think distinctions need to be
made. Saturation coverage by cable TV networks notwithstanding,
the stock market is not the whole economy. While the gyrations
of the Dow or Nasdaq attract the most attention, the broader
economy--as reflected in the daily activities of American
workers, managers, business owners, and entrepreneurs--has
overcome a significant part of the effects of last year's
recession and the September 11 terrorist attacks, and by most
indications is continuing to grow. Most impressive is the fact
that worker productivity continues to expand rapidly--at more
than an 8 percent rate in the first quarter--despite adverse
cyclical conditions. New capital and innovative technologies
have both played an important role in this resurgence. To be
sure, the cumulative decline in the stock market poses risks
for economic growth over the rest of the year. Despite our
current difficulties, however, we should not lose sight of the
underlying strength of our economy.
To conclude, I am grateful for this opportunity to appear
before this Committee. These are indeed challenging times for
the United States, for our economy, and for the Federal Reserve
itself. I look forward to contributing to the making and
implementation of sound economic policies. If I am confirmed, I
will devote myself to becoming a constructive and effective
Member of the Board of Governors of the Federal Reserve.
Thank you. I will be pleased to answer any questions.
Chairman Sarbanes. Well, I want to thank both of you for
your statements. We will go into 5 minute rounds of questioning
now, unless any Member has an opening statement he wants to
make.
COMMENT OF SENATOR JIM BUNNING
Senator Bunning. I would just like to put one into the
record.
Chairman Sarbanes. Without objection, so ordered.
I am interested in the question of the transparency of the
decisionmaking of the Federal Reserve so that the public can
gain a better understanding. I would just like to hear your
views on how important you think that is and what steps might
be taken to improve the transparency of board decisions.
Mr. Kohn. Thank you, Mr. Chairman. I think it is absolutely
crucial. As I indicated in my opening statement, the Federal
Reserve has become more transparent over the years, announcing
our decisions, giving reasons for the decision, announcing the
votes now. I think we have improved the understanding of the
financial markets and the public at large. We have helped the
accountability of the Federal Reserve with you, the Congress,
by becoming more open. When people understand what we are
trying to do, when markets understand what we are trying to do,
what issues we are dealing with, how we see the forces
developing in the economy, they can evaluate that and they are
more likely to anticipate our actions, to work with us to
stabilize financial markets and stabilize the economy.
So, I think transparency is very crucial to the
effectiveness of monetary policy and I believe there have been
a number of studies coming out in recent years showing that the
increased transparency at the Federal Reserve has, in fact,
allowed markets to better anticipate what we are going to do
and act in a stabilizing fashion. I do not have concrete
proposals for what we could do next to increase our
transparency. This is a subject that is under constant review
at the Open Market Committee. Each step tends to be small and
incremental, in part, because once you take it, you cannot take
it back again. So you need to be sure that it is what you
intend to do. I think we could increase the clarity of what we
are saying, help people understand what it is. This is just
something that we need to keep working at, make small steps,
get the feedback from the market and the public as to what they
would like and what works and does not work, and keep pushing
at it.
Chairman Sarbanes. Good. Dr. Bernanke.
Mr. Bernanke. I agree with Dr. Kohn that transparency is
very important for effective operation of monetary policy. It
reduces uncertainty. It helps markets anticipate and respond
more effectively to monetary policy changes. It is also
important to educate markets and the public about what monetary
policy is trying to do in order to improve decisionmaking. And
finally, clarity and transparency are an important part of the
accountability of the Federal Reserve in representing its goals
and objectives and how it is going to approach those goals and
objectives.
I want to commend the Federal Reserve. On the whole, there
has been a remarkable movement over the last decade or so
toward greater transparency in terms of releasing minutes,
releasing transcripts, providing additional information about
the so-called bias of policy and so on. I think there is more
that could be done. One suggestion which I have already made in
my statement was to announce an inflation target. Perhaps the
minutes and other information could be redacted to allow them
to be released more quickly. I would like to have some
experience on the board before I make too many concrete
recommendations.
Chairman Sarbanes. That is a prudent point of view.
[Laughter.]
Mr. Bernanke. But I think that, in general, my philosophy
is that the more transparency that can be provided, the better,
and I would work toward that goal.
Chairman Sarbanes. I am interested in your statement--you
have this inflation target. What is your unemployment rate
target?
Mr. Bernanke. There is no unemployment rate target, Senator
because what we try to achieve is the greatest possible growth
rate and the lowest possible unemployment that is consistent
with an economy that is not overheating.
Chairman Sarbanes. You are going to give an inflation
target, but not an unemployment rate target.
Mr. Bernanke. Because, conceptually, sir, we have a basic
idea of what is the optimal inflation rate based on
considerations----
Chairman Sarbanes. Well, now, the European Central Bank has
a target of inflation below 2 percent. But it has been running
there a few tenths of a point higher than 2 percent.
But, at the same time the growth in employment figures have
been disappointing, critics have been charging that the ECB is
responding too timidly to the European economic slowdown. They
argue that while it is important to maintain confidence that
inflation will not grow too rapidly, it is also important to
maintain confidence that output growth is being stabilized,
since businesses make their hiring and investment decisions on
expectations for growth.
If they lack confidence that the Central Bank, or if they
feel that the Central Bank is too committed to an inflation
target that will allow growth to stagnate, can't this result in
lower growth and raise unemployment over a sustained period of
time?
Mr. Bernanke. I agree with the critics of the European
Central Bank, Senator. The European Central Bank has a
hierarchical target which places the inflation rate above any
other objective. My view is that low inflation is in part an
objective in itself, but it is also an instrumental means by
which we achieve maximum employment and rapid economic growth.
I would take the view that an inflation target actually
increases the flexibility and the ability of a central bank to
respond to short-run economic disturbances to promote
employment, to promote growth. That happens in two ways. First,
low inflation tends to lead to long-run economic growth by
creating a more stable monetary environment. But second, and I
think very importantly, by maintaining low and stable inflation
expectations, the Central Bank actually releases itself to have
more ability to respond to short-run economic disturbances.
Chairman Sarbanes. Well, let me ask you this question, then
I will yield to my colleagues.
Mr. Bernanke. Yes.
Chairman Sarbanes. If the United States had inflation
slightly above the personal target you have set out in your
statement, but also had very weak output growth, how would you
reconcile that situation? Particularly, how would you reconcile
it with the legal mandate that has been given to the Federal
Reserve by statute?
Mr. Bernanke. I would attempt to restore the economy to its
equilibrium level, which is the level which promotes maximum
employment and growth.
I would not try to do that by creating artificial inflation
or extremely high inflation. But I would try to turn the
economy to its normal potential growth path as quickly as
possible.
Chairman Sarbanes. What would that mean in that instance,
though, when the inflation is above your target rate, and yet,
the output growth is very weak?
Mr. Bernanke. I would not return inflation to its target at
the expense of creating a deep recession in the economy. I
would take a gradual approach and I would try to make sure that
the economy was on a stable, maintainable, healthy growth path
as part of that process.
Chairman Sarbanes. Senator Gramm.
COMMENTS OF SENATOR PHIL GRAMM
Senator Gramm. Your thesis is that a low inflation rate
promotes an environment in which economic growth is maximized
and unemployment is minimized. Right?
Mr. Bernanke. That is correct, sir.
Senator Gramm. Let me be brief, Mr. Chairman, because we
are going to have a vote here in a minute and everybody is
going to have trouble getting back.
Let me say, I think these are two excellent nominees. We
have been blessed with a lot of good people on the Federal
Reserve Board. The Federal Reserve Bank has become in the post-
war period our most successful independent agency. And I want
to thank both of you for your willingness to serve.
Let me say, in the case of Dr. Kohn, I do not think we
should have staff members go on the board every day. But every
once in a while, it is a good thing. It encourages good people
to come to work at the Fed. It shows that you can literally
come in at the bottom and end up at the top. It is unusual. But
I think in that sense, it is a good thing.
So, I want to commend both of you. Let me stop because I
know other people want to say something or ask a question
before we have this vote in 6 minutes.
Chairman Sarbanes. Senator Reed.
COMMENTS OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman.
Mr. Bernanke, you say your thesis is low interest rates
tend to promote economic growth. But there is an example of
Japan, where interest rates have been very low and economic
growth has been anemic.
As the author of Japanese Monetary Policy--A Case of Self-
Induced Paralysis might you draw some conclusions or give us
some insights about the differences?
Mr. Bernanke. I would be glad to, Senator. I have in fact
advised the Bank of Japan, I think their monetary policy is
very poor.
One of the benefits of an inflation target is that it
avoids deflation as well as excessive inflation. Their
deflationary policies have been highly detrimental to their
economy. They should set an inflation target. They have been
called upon to set an inflation target of, say, 1 to 2 percent
positive, not negative, inflation. They could achieve that if
they had the will and the desire to do so.
Japan is an excellent example of a country without an
inflation target which is allowing prices and the economy to
drift without direction, without a frame of reference. And it
is an excellent case study for exactly my point. Their
performance is due almost entirely to very poor monetary policy
which has been allowing prices to decline now for almost a
dozen years.
Senator Reed. Let me follow up. There has been some
discussion in the financial press at least, of are there
similarities to the Japanese experience here in the United
States that, even though we are maintaining historically very
low interest rates, our growth--we are in a recession--the
growth is coming back somewhat feebly. What would you say to
those types of discussions?
Mr. Bernanke. Sir, while the Federal Reserve needs to pay
close attention to the state of the economy and the state of
inflation, I think the risks of the United States falling into
a Japanese-style deflation trap are extremely small.
There are two reasons for that. First, our banking system
is far sounder and it is not subject to the massive,
nonperforming loan problem that the banks of Japan now face.
Second, I believe the Federal Reserve, whether it has an
explicit inflation target or not, fully understands the
importance of maintaining or avoiding deflation in prices. And
so, I think that we have the safeguards and the initial
conditions that allow us to avoid such a trap.
Senator Reed. Thank you. Dr. Kohn, why don't you comment on
this line of questioning?
One other point that I would put in is that the presumption
that we have a sound banking system is one that I share. But we
have to consider the possible effects of the current downturn
in corporate America--declining stock prices, bankruptcies,
loans that were good 6 months ago, and now might be
questionable. Dr. Kohn, your comments?
Mr. Kohn. Senator, I think we still have a sound banking
system, even if it is facing some problems, and its bad loans
are likely to get a little worse. The capital level of our
banks is extremely high. They are very well capitalized.
I think even more than the soundness from a capital
perspective, is the way our financial system and our economy
operates relative to Japan's. It is a much more flexible,
diverse financial system, so that if one type of institution
has trouble, there are other sources of finance for most
businesses and households, and that is a real strength. It is a
much more flexible economy, much more adaptable economy.
And I would say another very big difference between the
United States and Japan is that our legislators have stepped up
to the problem and addressed the emerging issues, instead of
trying to sweep them under the rug or ignore them and hope they
go away.
So we have a political and an economic system that is more
immune to difficult downward problems.
I completely agree with Dr. Bernanke's analysis that this
is not really an issue in the United States for other reasons
as well. The Federal Reserve, although we do not have an
inflation target per se, is very aware of the risks of a soft
economy enduring, of inflation getting lower and perhaps
turning into deflation.
The FOMC has said in its minutes that it has addressed this
issue and this problem, and will act aggressively to head off
such a thing if it looks like it is occurring. My best guess is
it is not occurring. The economy is growing and recovering. I
do not think we have such a problem. But it is always at least
a little bit of a risk, and the lower the inflation rate is,
the bigger the risk is. But the FOMC is very aware of those
risks.
Senator Reed. Thank you, Mr. Chairman. I note that the
votes are pending, so I will stop here. But just one final
comment.
As Vice Chairman of the Joint Economic Committee, we have
been very concerned about the quality of Federal financial
statistics, and the ability to generate those statistics. And I
would hope that, at the Federal Reserve, you two would share
the interest in institutionally ensuring that we have even
better numbers than we have today.
Thank you, Mr. Chairman.
Chairman Sarbanes. I might note that Chairman Greenspan,
who never recommends a spending program to the Congress, has
recommended that we do better by the statistic. It is not a big
item, but nevertheless--Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
This is for Dr. Kohn. As you know from our personal
meeting, I have very big concern about having an independent
governors board for the Federal Reserve. Given your long
employment with the Fed, how can you assure me that you will be
independent?
Mr. Kohn. Senator, you have my word for it. I have had a
long association with the Federal Reserve, 32 years. I have
worked closely with Chairman Greenspan for the last 15 years. I
think one reason why he and other governors have found me a
useful sounding board, someone they like to work with, is that
I interact well with them and will tell them when I think their
analysis is off, or when I think policy----
Senator Bunning. That is my next question. So since we have
a very short time, I am going to get more than one question in.
Give me an example of when you either privately or publicly
disagreed with the Chairman. And if privately, did you inform
him of the disagreement?
Mr. Kohn. I have had a lot of private conversations with
the Chairman as a staff member. I certainly have told him when
I thought that, as I just noted, the analysis wasn't quite
right. And I recognize that in my new role, that I will need to
take these disagreements into the FOMC, into the Board, that it
will be my job to persuade other voting members of the Board,
of the FOMC, that my analysis is correct and they should do
what I recommend.
Senator Bunning. Last question, and this is for both of
you.
Do you think the Chairman of the Federal Reserve should try
to influence security markets or any other markets by coming to
the market itself and trying to talk the market up or down, in
his testimony before the Banking Committee?
Mr. Kohn. No, sir, I do not think that that is something he
should be doing. I think he should be talking about the markets
as they interact with monetary policy and our pursuit of our
Congressional goals. So he cannot not discuss the markets, but
he should discuss them in the context of how they affect the
pursuit of the goals.
Senator Bunning. Doctor.
Mr. Bernanke. As I have written in some papers, including
one that was presented to the Federal Reserve's annual
conference at Jackson Hole, Wyoming, I believe that the Federal
Reserve should not attempt to target asset prices. It should
respond at most to the influence of asset prices on the
economy. That is, it should keep its eye on the economic ball,
so to speak, and not try to influence or target asset prices.
Senator Bunning. Do you think there is any more room right
now for lowering of interest rates in the current circumstances
we are sitting in?
Mr. Bernanke. We are in a situation where, I would call it
a vigilant optimism, is probably the right approach.
As I said in my statement, I think the economy is
recovering. On the other hand, there is also no sign of
inflation. So we can watch carefully and see how the economy
progresses over the next quarter or two. We are getting GDP
numbers tomorrow. If necessary, we certainly could do so.
Senator Bunning. Doctor.
Mr. Kohn. Senator, I think we do have an economy that is
advancing. There are a lot of positives in the outlook,
including productivity growth, low interest rates already that
stimulate consumption.
Senator Bunning. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman.
These are two extraordinary candidates. Anybody from New
Jersey with a beard is okay with me.
[Laughter.]
Chairman Sarbanes. A rather small club, though, isn't it?
Senator Corzine. Yes.
[Laughter.]
And I think on top is joining that future recommendation.
I also have worked with Dr. Kohn for the better part of 20
years in my private career and find him an exceptional public
servant with great judgment. And I assure you, Senator Bunning,
if there is anybody who will speak his mind, it is Dr. Kohn. He
just likes to do it out of the limelight.
Senator Bunning. Will I know about it?
Senator Corzine. I am sure that if you read the minutes
carefully, you will find his opinions very clearly espoused.
Let me ask a general question which will lead to a
specific. Both of you I would like to hear your comments on. Do
you think our economy is over-regulated and is it stifling
entrepreneurship?
Mr. Bernanke. I will try this one first.
As an economist, I have a tremendous appreciation for the
power of markets. Free markets are a tremendous source of
wealth creation, the most tremendous source of wealth creation
that has ever been created.
Free markets does not mean anarchy, though. Free markets
have to be carefully monitored. There have to be ground rules
that channel the energies of market participants toward
constructive ends, that allow information to be revealed, and
that allow markets to allocate resources in the most productive
way.
In the U.S. economy, there are certainly areas where
regulation no doubt is not optimal, and areas where regulation
perhaps should be increased. On the whole, it is the most
market-oriented and properly regulated economy in the world,
and I think that is a major reason why our growth and our
development has been so
impressive.
Mr. Kohn. Senator, I do not think you can really generalize
about the whole economy. You need to look at it on a market-by-
market or situation-by-situation basis.
The economy has benefited enormously from the deregulation
that has occurred over the last 30 years. I think it has freed
up lots of markets to the benefit of consumers and businesses,
particularly consumers. Think about airlines and trucking and
things like that.
So, I think we should be continually looking for
opportunities to allow those market forces to work and to work
more, provided there can be seen to be enough competition in
the markets so that the benefits of the market forces flow
through to the consumers. That does not mean that all we should
be doing is looking for deregulation. Things happen on occasion
that suggest that----
Senator Corzine. Let me ask a specific with regard to the
derivatives market, and particularly with regard to energy,
natural gas, and electricity markets. Derivatives particularly,
but the markets themselves. Either or both.
Mr. Kohn. I do not really have any expertise in those
markets, Senator.
I think before I would support additional regulation there,
I would want a thorough analysis of what was going on and is
going on. But I would not rule out that possibility if that is
what that analysis showed.
Mr. Bernanke. Derivatives are, on the whole, a very
valuable tool. They allow all kinds of risk-sharing, various
ways of financing various kinds of projects and so on. I would
be very hesitant to do anything that would eliminate their use.
From the Federal Reserve's perspective, the Federal Reserve
is trying to create very sophisticated monitoring systems that
will appropriately assess capital charges against different
types of derivative books.
Like Dr. Kohn, I am not very familiar with the energy
situation. My impression is that there were some problems with
the deregulatory process as well in the energy market which
interacted with some of the risk-taking in derivatives. The
same thing happened in the savings and loan industry. You had
some deregulation, which was not the best, and it interacted
with risk-taking on the part of individuals, to create a
problem. So, I think the whole situation needs to be rethought.
I do not think that derivatives are the center of the problem.
Senator Corzine. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. I think you answered the question that I
had.
By the way, two very good nominees and thank you for your
willingness to serve.
I was going to ask the question which I have asked Chairman
Greenspan the last two times he has been with us, and he was
very forthcoming in his reply. And that was, have either of you
formulated a view on the Feinstein derivatives piece of
legislation?
Mr. Kohn. I have not, Senator.
Mr. Bernanke. Neither have I, sir.
Senator Miller. I believe you need to be looking at it.
Thank you, Mr. Chairman.
Chairman Sarbanes. I will say to my colleagues, of course
we have a vote on and we need to go to the vote. I would be
happy to come back if colleagues want to pursue the dialogue.
Otherwise, it is my intention to bring the hearing to a
close. These are very important positions and the term actually
is more than twice the term of a Senator, just to underscore
the importance of these positions. But if not, it is my
intention to bring the hearing to a close.
Let me say that I am appreciative that both of you in your
statements made reference or set out the monetary policy goals
that have been set for the Federal Reserve by the Congress in
the statute. The Federal Reserve is a creature of the
Congress--maximum employment, stable prices, and moderate long-
term interest rates.
Occasionally, we get nominees who come before us and they
do not really know the statutory standard that they are
supposed to be putting into place in policy terms. It is
encouraging, and reassuring, I guess would be a better word. It
is reassuring, at least to this Member, that both of you have
clearly integrated those statutory goals into your statements.
I spoke with Senator Gramm. We are going to try and see if
we cannot put together a quorum of the Committee tomorrow to
try to report you out. If we can do that, that would open up
the possibility, although we do not control, of course, the
floor calendar. But at least it would get you on the calendar
and open the possibility that you might actually be confirmed
by the Senate before the Senate leaves at the end of the week
for the August recess. And that would then make it possible for
you to move in and assume these assignments.
As I indicated at the outset, I agree with my colleagues
that these are two very good appointments. I commend the
President for making them, and we look forward to trying to get
you on the job.
Thank you for being here.
Mr. Kohn. Thank you very much, Mr. Chairman.
Mr. Bernanke. Thank you, Mr. Chairman.
Chairman Sarbanes. The hearing stands adjourned.
[Whereupon, at 2:56 p.m., the Committee was adjourned.]
[Prepared statements and biographical sketches of the
nominees supplied for the record follow:]
PREPARED STATEMENT OF SENATOR JIM BUNNING
I would like to thank you, Mr. Chairman, for holding this
nomination hearing and I would like to thank our nominees for coming
before us today.
I don't think it has been any secret that I have occasionally
disagreed with the Chairman of the Federal Reserve, Dr. Alan Greenspan.
I think he sometimes starts getting involved in things that he really
is not supposed to worry about, instead of concentrating on monetary
policy. To be fair, many times he gets involved and comments on things
that are not under his job description because Members of Congress ask
him for his opinion. I just wish he would decline to answer those
questions.
I do think that there has been a problem at the Fed, one we are
trying to correct. I believe there has not been a lot of independent
thought over there. Obviously the Chairman is a very intelligent and
well respected man. I am sure he can be very persuasive and possibly
even intellectually intimidating to some especially when the rest of
the Board is going along. But we think all of the board members are
smart. We would not vote for them if we didn't.
What I want of the individual governors are strong people who will
not be afraid to speak up when they think the Chairman is wrong. I want
people who are not afraid to be the lone dissenting vote. We need
strong, independent Fed governors who are willing to challenge the
status quo and to make the hard call. We do not need governors who
never question the chairman, or other board members, who will never
take the contrary view.
This is a 14 year term we are voting on. If we screw it up, it will
be a long time before we can fix it. Many of us won't around be here to
fix it. If our two nominees can convince me that they will be
independent voices who are not afraid to be the lone dissenter, they
will have my support for their nomination.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF DONALD L. KOHN
Member-Designate of the Board of Governors of the
Federal Reserve System
July 30, 2002
Chairman Sarbanes, Senator Gramm, Members of the Committee, I very
much appreciate your expeditious consideration of my nomination to be a
Member of the Federal Reserve Board. I have enjoyed a productive
working relationship with this Committee and its staff over a number of
years. Should the Senate confirm my nomination to the Board, I very
much look forward to continuing to work with you to promote a strong
economy and a robust financial system that serves the needs of all
Americans. I am most grateful to President Bush for this nomination and
deeply honored by his judgment that my abilities and experience will
help the Board to carry out the critical responsibilities you, the
Congress, have entrusted to it. Having spent my working life at the
Federal Reserve, I may be more aware than most nominees who come before
you of both the challenges and the rewards of the position to which I
aspire.
Our economy has made considerable progress over the last two
decades toward the goals you have set for monetary policy of maximum
employment, stable prices, and moderate long-term interest rates. We
have enjoyed two exceptionally long economic expansions punctuated by
relatively mild recessions, an inflation rate that has reached what
many would consider to be a zone of price stability, and relatively low
long-term interest rates that have helped to promote wider
homeownership. Technological innovation, deregulation, and
globalization, by fostering greater economic and financial flexibility
and resiliency and more rapid increases in productivity, largely
account for this favorable performance. But the conduct of monetary
policy surely also has played a role in establishing a background
conducive to economic vitality. This policy has been marked by a
balancing of discipline and flexibility--the discipline of focusing on
long-run price stability as a necessary precondition for maximum
employment and moderate long-run interest rates, and the flexibility
within that long-term discipline to counter disturbances to the economy
and financial markets that might threaten maximum sustainable
employment as well as stable prices.
Going forward, in order to do its part in promoting good economic
performance, the Federal Reserve will continue to be faced with the
need to analyze and adapt to a dynamically changing economy and
financial markets. Innovation and deregulation in markets and the
globalization of finance are affecting the flow of funds between savers
and spenders and the distribution of risks and returns in the financial
system. These changes, in my view, have not detracted from the
effectiveness of monetary policy, and they have increased both economic
efficiency and financial stability. But they have also opened the
economy to new kinds of influences and they are altering the channels
through which policy affects the economy. In just the last few years,
our financial and economic stability has been challenged by crises
originating in East Asia and Russia, and by huge variations in asset
prices here and abroad as investors strove to peer through considerable
fog to evaluate the implications of rapidly changing technologies and
market structures. The significance of those asset price movements has
been magnified by the growing importance of wealth to household
financial conditions. Policymakers have been required to decipher the
shifting forces driving the economy and to adjust policy, sometimes
rapidly, to provide a counterweight to developments that threatened to
undermine economic performance. Where possible, those policy
adjustments have been forward looking-anticipating the effects of
economic forces so as to forestall emerging instabilities. It is a
process in which I have been deeply involved, working with policymakers
and staff, and I would welcome the opportunity in a new role to bring
my experience and expertise to bear on the difficult, but fascinating,
issues that confront the Federal Reserve's conduct of monetary policy.
The increasing volume of finance flowing through securities
markets, the spread of wealth to more Americans, and the growing
prominence of global investors in our financial markets have put an
additional premium on the ability of the Federal Reserve to explain its
policy to the public. More people from more diverse backgrounds are
making important decisions based on their expectations of policy
actions and their effects. When savers and borrowers understand how the
Federal Reserve sees the forces developing in the economy relative to
its objectives, interest rates, and other prices in financial markets
are more likely to be set in a way that helps to achieve these
objectives. I have worked extensively in my career at the Federal
Reserve to help policymakers explain monetary policy. While we have
made considerable progress in recent years, improving the clarity,
completeness, and timeliness of our various public statements is an
ongoing process that must be continued.
As the Congress recognized when it created the Federal Reserve,
economic stability rests on a foundation of financial stability. In no
area of Federal Reserve responsibilities do changing market structures
pose a bigger challenge than in carrying out the supervision and
regulation of banks and holding companies. Changes in the legislative
framework for the financial sector in recent years have allowed
consolidation within the banking sector and, now, between banking and
other financial service providers, permitting markets to realize
economies of scale and scope in the delivery of financial services.
This consolidation, along with the proliferation of new instruments to
price and trade various aspects of risk, I believe, promotes sounder,
more diversified, institutions and a system in which both those
supplying and using savings have many more alternatives. The regulatory
implementation of these new laws needs to allow the markets to evolve
with changing preferences and technologies, while preserving
competition in the delivery of services and financial stability. It
also must protect against the effective spread of the safety net beyond
the core depositories for which Congress intended special protection.
No depository institution should be insulated from market forces by
being considered ``too big to fail.'' But because banks do have access
to the safety net, market signals are muted by moral hazard. Moreover,
as institutions become more complex and deal in a great number of new
instruments, markets and managers may find it difficult to evaluate
some risks accurately, increasing the chances for unexpected losses. In
order to promote efficient resource allocation and maintain financial
stability, supervisors must anticipate potential problem areas and must
put in place oversight structures that build on existing market signals
and risk management and simulate market pressures where those signals
are inadequate.
The growing access to credit markets for all our citizens is
another very positive development in our financial system. It has
resulted from efforts to eliminate discriminatory practices along with
the recognition by lenders that profitable opportunities exist in
making credit available to those with lower income and wealth. But
regulators, borrowers, and lenders are still adjusting to the expansion
of the market. Many borrowers in the so-called subprime segment of the
credit markets are having difficulty servicing the additional debt,
more difficulty than lenders anticipated, resulting in the need for
supervisory actions for a number of bank lenders. In addition, it has
increased the opportunities for unscrupulous lenders to take advantage
of less well-informed consumers. Clearly, efforts to educate credit
users better should have important payoffs. More generally, the key in
this area is to find the difficult balancing point for regulation that
allows the markets to generate the greatest number of legitimate
alternatives for borrowers while proscribing clearly abusive practices.
Meeting these various challenges will require a strong Federal
Reserve System. You have such an institution now. It is widely
respected and relied upon, not only to follow the appropriate policies
but for its advice in a variety economic and financial matters.
Although the Federal Reserve tends to speak with one voice, in my
experience decisions are preceded by healthy give-and-take among
policymakers with diverse views supported by talented and dedicated
staff. Should the Senate see fit to confirm my nomination, I am looking
forward to adding my own perspective to that dialogue as a policymaker
and will do my best to pass on to future generations an institution
just as strong as the one its current and past leaders have bequeathed
to this generation of Americans.
Thank you. I would be pleased to answer any questions you might
have.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPAPRED STATEMENT OF BEN S. BERNANKE
Member-Designate of the Board of Governors of the
Federal Reserve System
July 30, 2002
Chairman Sarbanes, Senator Gramm, Members of the Committee, I am
deeply honored to appear before you today as the President's nominee to
serve on the Board of Governors of the Federal Reserve System. If I am
confirmed to this important position, I will do my utmost to advance
the economic well-being of all Americans.
The opportunity to serve at the Federal Reserve would be a great
privilege, as it would allow me to apply in the public interest the
fruits of a lifetime of thinking and writing about central banking and
the economy. In my professional academic career of nearly 25 years, I
have written widely on topics relating to monetary policy, banking and
credit markets, economic growth and business cycles, macroeconomic
history, and the statistical analysis of the economy, all of which bear
directly on the work of the Federal Reserve. Moreover, over the years I
have maintained close contact with the Federal Reserve System, as a
consultant, visiting scholar, and adviser; and I have visited and
advised the central banks of many other industrialized and developing
countries.
In various roles during my career, I have also learned how to work
with people and to get things done. Among other duties, I have served
for the past 6 years as Chair of the Princeton University Economics
Department. I also served as the first Director of Princeton's new
Center for the Study of Financial Markets; as the Director of the
Monetary Economics program of the National Bureau of Economic Research;
as the Editor of the economics profession's leading research journal;
and--last, but certainly not least--as a two-term elected Member of the
Montgomery Township (New Jersey) Board of Education.
One of the remarkable features of the Federal Reserve System is the
wide range of its responsibilities, including not only the making of
monetary policy but other important areas such as financial regulation
and supervision, consumer protection, payments systems, international
finance, and others. Although at present my greatest expertise is in
monetary policy and macroeconomics, I am keenly interested in and
broadly familiar with each of the Fed's other areas of responsibility,
and if I am confirmed I look forward to learning a great deal more. I
particularly look forward to interacting with, and learning from, both
colleagues on the Board and the Federal Reserve's able staff.
Let me turn briefly to issues of policy and the current economy.
The Federal Reserve has considerable operational independence but
ultimately derives its legitimacy and powers solely from its
legislative mandate. I would like to take this opportunity to strongly
affirm my support for the monetary-policy goals set for the Federal
Reserve by Congress in the Federal Reserve Act: maximum employment,
stable prices, and moderate long-term interest rates. While one can
always hope to do better, I think the Federal Reserve has on the whole
done a remarkably good job of promoting these three objectives over the
past 20 years or so.
In my view, a key operational element in the Fed's success at
achieving its tripartite objective has been the Federal Open Market
Committee's emphasis on keeping the rate of core inflation low and
stable. Low and stable inflation is intrinsically beneficial, as it
reduces the need for households and firms to expend time and resources
to protect themselves from the adverse effects of rapidly and
erratically changing prices. Consistently low inflation also directly
promotes the objectives of high employment and rapid economic growth,
by providing a stable monetary environment in which firms and markets
can function most efficiently. In a low-inflation environment, lenders
are less concerned about erosion of their principal, and so nominal
interest rates tend to be low. Finally, a strong commitment to low and
stable inflation, by moderating and anchoring the public's inflation
expectations, actually enhances the ability of monetary policy to
respond actively to short-run economic disturbances when necessary. For
example, during the past year the Federal Reserve was able to cut
interest rates quite aggressively without engendering significant
inflationary pressures or igniting a wage-price spiral. Public
confidence that inflation would be kept under control was essential to
giving the Federal Reserve this heightened flexibility.
In my academic writings, I have argued that the efficacy of
monetary policy at achieving its mandated objectives could be further
improved by the Fed's adoption of an approach known as inflation
targeting. In anticipation of possible questions, let me say a bit more
about this proposal. The main operational change under inflation
targeting would be that the Fed, in consultation with the executive and
legislative branches, would announce an explicit numerical objective
core inflation over the medium term, say 1 to 2 years. For example,
allowing for the upward biases in inflation measurement and a zone of
safety to avoid accidental deflation in prices, an inflation target in
the range of 1-2 percent per annum for the core PCE deflator might be a
good initial choice, although some might reasonably disagree about
either the number or the choice of index. As part of the targeting
process, the Federal Reserve would report to Congress its expectations
for future inflation, its reasons for any target misses, and its
projected trajectory for bringing inflation to its targeted level.
It is important to stress that inflation targeting, as I interpret
it, would not represent a major departure from the current practice of
U.S. monetary policy or a change in policy objectives. Rather, its
primary goal would be to build on policy successes of the past two
decades by strengthening the Federal Reserve's institutional commitment
to the approach used by the Fed under Chairman Volcker and Chairman
Greenspan. As I discussed a moment ago, the centerpiece of this
approach is an emphasis on keeping the rate of core inflation low and
stable. Based on the experiences of a number of other countries that
have adopted this model, I believe that an explicit inflation target
would improve further the Fed's ability to reach all three of the goals
set forth in the legislative mandate for monetary policy. Among the
potential advantages of an explicit inflation target are increased
stability of the public's inflation expectations, lower economic and
financial uncertainty, increased central bank credibility, greater
continuity and consistency of policy, and, importantly, enhanced
accountability of the Fed. Although I am favorably disposed toward
these incremental changes in the current framework of U.S. monetary
policy, I know that not everyone agrees with this view, and that there
are important, substantive arguments to be made on both sides of the
issue. I look forward to discussing these ideas with Federal Reserve
colleagues and others interested in the making of monetary policy.
Turning finally to the current economic situation: In recent
months, investors have been battered by sharp declines in equity
prices, not only in the United States but in many other countries as
well. The losses in wealth are large and serious indeed. Equally
serious and disturbing is the rash of corporate and accounting scandals
that have certainly played a role in the stock market's plunge.
Financial markets cannot do their job of efficiently allocating capital
and sharing risk if investors do not feel that they are receiving
accurate and timely information, or if they fear that those who should
be stewarding their funds cannot be trusted to do so honestly. I fully
support the efforts of Congress and the President to restore investor
confidence in the accuracy and reliability of financial statements and
in the trustworthiness of those who manage our corporations and
financial institutions.
Although the fall in equity prices is frightening and dispiriting
for many, I do think distinctions need to be made. Saturation coverage
by cable-TV networks notwithstanding, the stock market is not the whole
economy. While the gyrations of the Dow or Nasdaq attract the most
attention, the broader economy--as reflected in the daily activities of
American workers, managers, business owners, and entrepreneurs--has
overcome a significant part of the effects of last year's recession and
the September 11 terrorist attacks, and by most indications is
continuing to grow. Most impressive is the fact that worker
productivity continues to expand rapidly at more than an 8 percent rate
in the first quarter--despite adverse cyclical conditions. New capital
and innovative technologies have both played an important role in this
resurgence. To be sure, the cumulative decline in the stock market
poses risks for economic growth over the rest of the year. Despite our
current difficulties, however, we should not lose sight of the
underlying strength of our economy.
To conclude, I am grateful for this opportunity to appear before
this Committee. These are indeed challenging times for the United
States, for our economy, and for the Federal Reserve itself. I look
forward to contributing to the making and implementation of sound
economic policies. If I am confirmed, I will devote myself to becoming
a constructive and effective Member of the Board of Governors of the
Federal Reserve.
Thank you. I will be pleased to answer any questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
NOMINATION OF
PHILIP MERRILL, OF MARYLAND
TO BE PRESIDENT AND CHAIRMAN
OF THE EXPORT-IMPORT BANK
OF THE UNITED STATES
----------
FRIDAY, OCTOBER 4, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 2:30 p.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The hearing will come to order.
The Committee on Banking, Housing, and Urban Affairs
convenes this morning to take up the nomination of Philip
Merrill to be President of the Export-Import Bank.
We have two of our colleagues here to introduce Mr.
Merrill. And before I do my statement, I will go to them
because I know they have other pressing engagements.
Senator Warner. Mr. Chairman, one of our colleagues is due
in another hearing, so, apart from seniority, I will yield to
my good friend, Senator Mikulski.
Chairman Sarbanes. Well, John, I was going to recognize
home State preference, in any event.
Senator Warner. Oh, I see.
[Laughter.]
It is your Committee. You can run it as you please.
[Laughter.]
Chairman Sarbanes. Senator Mikulski.
STATEMENT OF BARBARA MIKULSKI
A U.S. SENATOR FROM THE STATE OF MARYLAND
Senator Mikulski. Thank you very much, Senator Sarbanes,
for having this hearing. And I thank the distinguished Senator
from Virginia for yielding to me.
It is the Senators from the Potomac here today to introduce
Phil Merrill to you. And as the senior Senator from Maryland,
you know his background quite well.
For the record, I would like to ask unanimous consent that
a letter from Congressman Steny Hoyer extolling the virtues of
Mr. Merrill as to why this appointment should be made, would be
entered into the record.
Chairman Sarbanes. Yes, I have Steny's letter here and it
will be entered into the record. And when we have a little more
time, I may even quote from it.
But please go ahead.
Senator Mikulski. Well, thank you. Senator Sarbanes, you
have been a reformer on the Export-Import Bank and you have
been a leader to ensure that this Bank meets the needs of the
American foreign policy, promotes exporting jobs abroad, and
really ensures management and fiscal responsibility.
Your reform philosophy on the Export-Import Bank I believe
will be best carried out by Mr. Phil Merrill, who is being
nominated by the President. Mr. Merrill brings an extraordinary
career to this job, a career that covers both public service
and the private sector.
First of all, the job requires someone who understands
business, banking, and management. Mr. Merrill is an innovator,
an entrepreneur and a successful businessman. And when one
reviews his record, as we know, he has been a leader in
publishing both the Annapolis Capital, the Washingtonian
magazine, and the whole Capital-Gazette umbrella organization.
Six newspapers in Maryland, as well as a magazine. So he knows
how to meet a bottom line and he knows the stresses on business
because of his interaction there all of the time.
At the same time, Mr. Merrill brings a great deal of
background in the area of foreign policy. He has earned both a
national and international reputation, serving in six
Administrations. He served as an Assistant Secretary General of
NATO. He was awarded the Distinguished Service medal, the
highest civilian award at the Department of Defense. He has
held other posts at the Department. He has even negotiated the
Law of the Sea Conference, and I remember what a tidal mess
that was.
Mr. Merrill. Rubick's Cube.
Senator Mikulski. He served as a special assistant with the
State Department and as a senior intelligence analyst, and we
could go through a variety of work that he has done both at the
Defense Department and at the State Department. Again, knowing
foreign policy and making sure that there is sound management
to implement our policy.
He also has a history, as does his entire family, Ellie and
his three children are here with us today, Doug, Cathy, and
Nancy, of being a philanthropist. Most of the philanthropy, has
been very quiet and has been focused on education, the
environment, and probably a lot of other things that we do not
even know about but that it is somewhere in that thick brief.
What is clearly visible has been his role in education--The
board at the Hopkins School of Advanced International Studies,
the board of visitors at the University of Maryland. And not
only being on boards, but essentially putting his own personal
and family resources behind that.
He has recently endowed the University of Maryland with $10
million at the school of journalism to ensure competency in the
field and also a framework of ethical journalism. Isn't it
great that somebody is willing to put up $10 million so that
journalists would know how to write, be competent, and have an
ethical framework? This is who we want in our Government.
And then, of course, he has been a staunch supporter, as
has been the Chairman, of the Chesapeake Bay Foundation. For
those of us who have worked with the Bay Foundation, we know
they were in kind of frugal and limited facilities. Through Mr.
Merrill and, again, the Merrill Foundation and the support of
the entire family, has just created a new environmental
framework, a new architecture, and a green building to operate.
So a successful businessman, a public servant with
extensive experience in foreign policy, and a philanthropic
heart that also is matched by, quite frankly, a contribution.
It is not about what your wealth does. The fact that you
were willing to continue to be a giver, and what we see in Mr.
Merrill is that he continually wants to give back to this great
country that made his own success. I hope we move him
unanimously through the Committee and the Senate.
Chairman Sarbanes. Thank you very much. We appreciate that
very strong statement on Mr. Merrill's behalf. And I know you
have a conflicting engagement.
Senator Mikulski. Excuse me.
Chairman Sarbanes. Senator Warner.
STATEMENT OF JOHN WARNER
A U.S. SENATOR FROM THE STATE OF VIRGINIA
Senator Warner. I am going to ask that my statement be
placed in the record because that was a magnificent
introduction by our colleague from the great State of Maryland,
and she summarized so much of the pertinent information.
I join you today because I have been privileged to be a
personal friend, but also in recognition of the silent but very
important philanthropy that has been spread throughout the
greater metropolitan area of Washington by both the nominee and
his lovely wife, Eleanor, known to us as Ellie. And I might
add, I think the record should reflect that this has been a
husband and wife team for many years, both of them having
served in public office.
Ms. Merrill was on Senator Keating's staff, and you and I
recall that eminent Member of our institution of many years.
And then she went on to the Department of State to serve in
positions of communications.
So it has been a team effort to put together this
extraordinary career, which has been recited by my colleague
and more fully laid out in my biographical sketch.
But I did not know that you had worked on the Law of the
Sea. When I was the Secretary of the Navy under Mel Laird,
Eliot Richardson, and Jim Schlesinger, as the Department's
representatives.
Chairman Sarbanes. Those were the glorious days of the
Navy, too.
Senator Warner. That is right.
[Laughter.]
Mr. Chairman, we had 1,800 ships when I was Secretary.
[Laughter.]
But, anyway, that was an extraordinary challenge, Law of
the Sea, and it did not unfold quite the way all of us wished,
but who knows.
But this man is eminently qualified to take on this post,
as the Chairman and our colleagues in the Senate know. And I
would just conclude by saying that I think that America is
fortunate that an individual who has done so many things
diversified to prepare him for this important task, once again
steps forward for public service.
So I urge the Committee to have this hearing completed,
wrapped up, and hopefully, get to the floor. And I indicate to
the Chairman, full willingness on our side of the aisle to
follow the Chairman's instructions to expedite this nomination,
such as can be confirmed before the unknown concluding date of
this Congress.
Chairman Sarbanes. Well, Senator Warner, thank you very
much for that statement, and also for that offer to be helpful
on the floor as we try to move the nomination through.
Senator Warner. Yes.
Chairman Sarbanes. The papers just came a couple of days
ago, and we are trying to move along here.
Senator Warner. Well, we are expediting a number in our
Committee. And you know, having been around here a quarter of a
century plus, it can be done.
Chairman Sarbanes. Thanks very much, John.
Mr. Merrill. Yes. And it is very kind of you, and kind of
you to come personally.
Chairman Sarbanes. Let me say at the outset that I regard
this as a very important nomination. One of the major economic
challenges our country faces is competition in international
trade.
My own view is that as long as that competition is based
simply on the price and quality of the goods and services being
sold, I have every confidence that U.S. exporters can do very
well.
However, it is not that simple. Other governments move in.
They provide export subsidies to their companies in one way or
another, and that places our exporters at a competitive
disadvantage that they cannot be expected to meet on their own.
They are just not on a level playing field.
The Export-Import Bank exists in part to help U.S.
exporters level the playing field by matching the subsidies
offered by foreign governments and allowing our exporters to
compete on the basis of price and quality.
For that reason, I believe it is vital that the Export-
Import Bank be led by someone of exceptional stature and
experience who can assert the Ex-Im Bank's important role in
U.S. trade policy.
The previous president, John Robson, certainly met that
standard and I take a moment this morning to honor him and his
contributions to the public interest of the country and to
regret his untimely death.
Let me say, I am confident that the nominee before us
today, Phil Merrill, can meet that standard as well. I know our
nominee well. He is a leading citizen of our State, has had a
long and distinguished record of service both to the State and
to the Nation.
He received his undergraduate degree from Cornell
University, later served on its board of trustees. He is a
graduate of the program for management development at the
Harvard Business School. He worked as a reporter for the Newark
Evening News, as a writer-reporter for WABD Channel 5 in New
York, for J. Walter Thompson and company after service in the
Army.
And from 1961 to 1967, worked for the Department of State
as a Special Assistant to the Deputy Secretary of State, and
Senior Intelligence Analyst in the Bureau of Intelligence and
Research.
He attended the University of Chicago for a year on a
Stevenson Fellowship. And then he acquired and became Chairman
of the Board of Capital-Gazette Communications, publishers of
the Washingtonian magazine, the Annapolis Capital, and a number
of other newspapers in Maryland.
During this very successful business career, he left from
time to time to do public service, Counselor to the
Undersecretary of Defense for Policy in the early 1980's,
Assistant Secretary General of NATO from 1990 to 1992. He
received the medal for distinguished service in 1988 from the
Secretary of Defense, which is the highest civilian honor given
by the Department of Defense.
As others have mentioned, he has been involved in a number
of very important philanthropic activities, working in the
nonprofit sector, the Aspen Institute, the Chesapeake Bay
Foundation, the Johns Hopkins University, the University of
Maryland. It is a very long list and I will not go through all
of it, but we welcome and commend that kind of citizen
involvement, which contributes so much to the strength of our
Nation.
I believe that Phil Merrill will bring to the position of
President and Chairman of the Ex-Im Bank the kind of seasoned
experience and senior leadership positions in both the private
and public sectors that the Ex-Im Bank requires.
Earlier this year, the Congress, after a great deal of
effort, but we finally succeeded in reauthorizing the Ex-Im
Bank, through September 2006, and provided it with significant
expanded authority. So its statutory mandate is there now for
almost 5 years, as we look ahead into the future.
In a sense, that sets the stage for a new President to come
in and carry out the Ex-Im Bank's mission with energy and
imagination, and I am sure Phil Merrill will take full
advantage of that opportunity, and we look forward to working
with him in his important role.
Now I do want to put in the record the letter from
Congressman Hoyer. Let me just read the first paragraph of it.
Dear Mr. Chairman:
I write to express my strong support for the nomination of
Philip Merrill to serve as Chairman and President of the
Export-Import Bank of the United States.
Mr. Merrill has a long and distinguished career of public
service, and I believe his experience and background make him
an ideal candidate to lead that important organization.
And I also have a letter from the Coalition for Employment
Through Exports, from Ed Rice, the President of that
organization.
We work very closely with the coalition on a number of
issues involving exports. In my opinion, they are a highly
responsible organization. We have been privileged to have the
benefit of their advice and counsel over the years, and I am
going to take just a moment to read a fair part of this letter
because the Coalition is extremely interested in the work of
the Export-Import Bank. Its member companies embrace a lot of
our major exporters.
Dear Mr. Chairman:
As the Committee considers the nomination of Philip Merrill
to be Chairman and President of the Export-Import Bank, I write
on behalf of our Coalition members to support Mr. Merrill's
confirmation and to express our appreciation to you and your
Committee colleagues for your expedited action on this matter.
In nominating Mr. Merrill, the President has chosen an
individual who would bring a solid combination of experience
and accomplishment in both the business world and Government
service. Experience in both of these sectors is important in
leading the Bank as it grapples with difficult issues related
to globalization and U.S. competitiveness in world markets.
In addition, the Bank is also faced with implementation of
the recently enacted changes in the Bank's statutory charter,
which will require energetic and skilled leadership by a new
Chairman. Mr. Merrill's long experience in business management
and in a variety of sensitive Government assignments would be a
particularly important asset in accomplishing these new
mandates.
We continue to value the leadership that you and your
Committee colleagues provide in overseeing and reauthorizing
the Bank, and we look forward to working with Mr. Merrill
should the Senate confirm him for this position.
Sincerely, Edmund B. Rice, President of the Coalition for
Employment Through Exports.
And we are very pleased to have that letter, given the
continuing and constant interest of the Coalition in the work
of the Ex-Im Bank and the work of this Committee with regard to
it, and it will be put in the record.
Now, it is the practice of the Committee of long standing
to place nominees under oath. So, I am going to ask you to
stand and take the oath.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Merrill. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the U.S. Senate?
Mr. Merrill. I do.
Chairman Sarbanes. Thank you very much. We would be happy
to receive your statement, and if you want to introduce the
members of your family that are here, we would be glad for you
to do that as well.
STATEMENT OF PHILIP MERRILL, OF MARYLAND
TO BE PRESIDENT AND CHAIRMAN
OF THE EXPORT-IMPORT BANK
OF THE UNITED STATES
Mr. Merrill. Mr. Chairman, I first want to thank you and
Senators Mikulski and Warner for those wonderfully gracious
introductory statements and for your respective, let me say,
prior attention to my family, and particularly to Ellie.
I call to the Chairman's attention that everytime that I
have come into Government, the general consensus has been that
when Ellie has taken over our company or our companies, they
have done infinitely better than under my management.
[Laughter.]
And so, you may have the wrong Merrill here.
[Laughter.]
I also want to introduce my daughter Nancy and my daughter
Cathy and her husband Paul Williams, who were kind enough to
show up here today.
Mr. Chairman, I am very pleased to come before you,
frankly, especially you, as you consider my nomination to be
President and Chairman of the Export-Import Bank of the United
States.
I want to thank President Bush for his confidence in
nominating me for this position and if confirmed, I looked
forward to working with you and with the other Members of the
Committee to promote the Bank's basic function of promoting and
creating U.S. jobs.
It is particularly interesting to me, or fortunate to me,
to have the Chairman of the Committee, at least at this point,
be from my home State of Maryland, and so, that is a fortuitous
coincidence.
I know the Committee has my biographical information, so I
will not go into the details of that, but ask that they be
submitted separately.
It is with some mixed emotion that I appear before you
today. The previous Chairman, John Robson, was a friend for
more than two decades, and I, like you, am saddened by his
death.
However, I am also honored and excited by the opportunity
to serve our country again. If confirmed, I shall pursue, what
I said here was with energy and enthusiasm, and I will now add
imagination, to the challenges and opportunities that are
presented in carrying out the mission of the Bank to support
U.S. exports and U.S. jobs.
I am no stranger to the public policy arena or the
Government process. So the question might be, why do you want
to do this again? I will quote something that John Robson said
in his confirmation statement: ``I have never found a canvas as
big to paint on as public service offers and I am particularly
excited about the prospect of leading the Export-Import Bank.''
I echo that sentiment.
If confirmed, this would be the seventh time I have taken
the oath of office. Actually, the eighth, if one includes, as I
do, the very first time as a private in the United States Army.
Each time I have felt the same mixture of inspiration,
dedication, determination, and appreciation for everything this
country has done for me, for my family, and for the cause of
freedom and free institutions.
If confirmed for this position, I believe I would bring to
the Bank:
--a record of successful business management and
investment;
--extensive Government experience in international affairs
and the ability to assess both political and commercial risk;
and
--a strong desire and demonstrated willingness to serve our
country.
The Export-Import Bank has enjoyed strong bipartisan
Congressional support since its establishment under President
Franklin Roosevelt. The Bank performs important roles in
fostering American exports and thereby stimulating economic
activity and job creation here at home.
The bipartisan support from the Congress and President Bush
for passage of Ex-Im's 5 year reauthorization, for which I
thank you, Senator, ensures that the Bank will continue to move
forward to help U.S. exporters.
I note particularly the desire of Congress to devote
resources to small- and medium-sized enterprises. I pledge to
make every effort to carry out that charge and to assist these,
as well as all other U.S. businesses in the highly competitive
international markets of the 21st century.
If confirmed, I look forward to working with this
Committee, the Congress, the career professionals at Ex-Im
Bank, the Administration's trade team, the entire exporting
community, and especially with the Chairman.
You have my commitment to continue close dialogue with this
Committee and the Congress as the Bank adjusts its policy and
operations to the challenge of the 21st century.
Mr. Chairman, I respectfully ask for your favorable
consideration of my nomination and will be pleased to respond
to your questions.
Chairman Sarbanes. Well, thank you very much. I have just a
few questions for the record.
First, you have been nominated for a term that expires on
January 20, 2005.
Mr. Merrill. That is right.
Chairman Sarbanes. Is it your intention to serve out this
term, if confirmed?
Mr. Merrill. Absolutely, yes, sir.
Chairman Sarbanes. Second, I want to talk about this tied
aid credits and these market windows that some countries are
using.
This has been kind of a running issue and in the latest
authorization, I think we pretty well put it to rest because
there was an internal dispute within the Administration between
Ex-Im Bank and the Treasury.
The Congress I think resolved that dispute. I was on this
Committee when we first put the war chest into place. That was
an effort to arm the Ex-Im Bank so that it could counter what
other countries were doing in support of their exporters.
We made an effort, of course, through the OECD to try to
get rules that preclude some of the special financing so that
the competition can remain on price and quality. But do you
have a view about this whole issue about the tied aid war chest
and the role it can play?
Mr. Merrill. Well, Senator, yes, I do. From our point of
view, we need it as a tool essentially to level the playing
field. It is not a perfect world. If confirmed, I will work
diligently with the Treasury Department to implement the tied
aid procedures which have been mandated in the new Ex-Im Bank
charter, which I have here. But this is really an OECD problem
and we have to work with them to bring it under control.
Chairman Sarbanes. Well, we have been doing that and that
has been of some help. But we have to continue to counter.
Now something has developed that concerns us. Germany and
Canada, in particular, are using a new tactic to undercut the
OECD rules on export credit terms. They have set up, in effect,
private enterprises, but essentially, government-sponsored, to
supplement official export credits. They call those market
windows, and they are currently at least exempt from the OECD
rules. So they come in with that and they end up providing
financing terms significantly more attractive than what OECD
rules allow. And the U.S. exporters are very much concerned
about that.
Now we gave in the reauthorization to the Ex-Im Bank
explicit authority to match market window's financing, which it
previously did not have. It may be implicit, but it was an
arguable question.
We gave them explicit authority to match it and we also
directed the United States to seek negotiations for
multilateral disciplines and transparency within the OECD
credit arrangement encompassing market windows. But how
important a problem do you think that this is?
Mr. Merrill. Well, it is a very important problem. I am
aware that Canada and Germany have pushed the limits to the
uttermost in terms of making what they call private deals and
are really public subsidies available. I think you have it
right when you say--well, anything you say, I am going to say
you have it right.
[Laughter.]
But in this particular case, I think you have it right when
you say that they are a bigger problem by far than the rest of
the OECD countries.
Nevertheless, it could spread. The key word is
transparency, and that is what we have to push for. That
requires us to cooperate with any number of other agencies,
especially the Treasury.
Anyway, it is a big problem, I am aware of it, and I intend
to pay very close attention to it and keep it down to the
lowest possible amount that is humanly or administratively
possible.
Chairman Sarbanes. You have a particular opportunity to
broaden the national consensus in support of the Ex-Im Bank and
the push for exports. I know you will do this, but I hope that
you will have an open door for the Coalition for Employment
Through Exports that I mentioned, for the labor movement.
Properly presented, we ought not to have any split there
because it is, as you said, you are for exports and jobs. You
went right to it, and made the job connection.
A number of unions have actually been supportive of this
export effort and they recognize the benefits that flow to
their workers from it. Actually, export industries usually pay
better. The pay scales are higher.
But you have the bully pulpit as the head of the Ex-Im Bank
and therefore, a chance to work on developing this broad
national consensus. And it is very important that you have an
open door to all of these various groups to feel that they are
in consultation with the Ex-Im Bank and that their concerns and
that their advice and counsel is heard.
Mr. Merrill. Senator, let me say that I have some
experience in that area. Again, I agree with you that you have
the benefit in this job and with this Bank of having the
support of labor, as well as management.
That is a very analogous situation to which the Defense
Department has found itself over the years because you have had
any number of labor institutions very supportive of varying
acquisition and production programs. I probably should stop
there, but I will give you one anecdote.
I once invited the leaders of the 10 largest labor unions
in the country to lunch with Cap Weinberger. Nine of them
showed up. We paid attention there to our supporters. By the
way, the one who did not show was William Wimpensinger of the
electricians. But all of the nine showed up, including the head
of the National Maritime Union, where I have been a card-
carrying member.
And so, I think the analogy is fairly precise. That is, the
Bank is in the same fortunate position of needing, seeking, and
having the support of both the business community, export
community of the United States and the labor community of the
United States. And I intend to take full advantage of it.
Chairman Sarbanes. Very good. I have no further questions.
Let me just say that the Congress will clearly be in
session next week. We do not know whether beyond that. And I am
hopeful that we can consider those nominees the first part of
next week and try to move things along.
We are anxious to get people into place before the Congress
adjourns so that they can get on the job.
Mr. Merrill. I am equally anxious and do not particularly
want to wait 5 more months.
Chairman Sarbanes. All right. Very good.
Mr. Merrill. So I thank you for everything you have done.
Chairman Sarbanes. The hearing stands adjourned.
[Whereupon at 11:45 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of the nominee,
response to written questions, and additional material supplied
for the record follow:]
PREPARED STATEMENT OF PHILIP MERRILL
President and Chairman-Designate of the
Export-Import Bank of the United States
Friday, October 4, 2002
Mr. Chairman, Members of the Committee, I am very pleased to come
before you as you consider my nomination to be President and Chairman
of the Export-Import Bank of the United States. I would like to
recognize the members of my family who are here today--My wife, Ellie,
my daughter Nancy, and my daughter Cathy and her husband Paul Williams.
I want to thank President Bush for his confidence in nominating me
for this position and, if confirmed, I look forward to working with
this Committee, and Chairman Sarbanes from my home State of Maryland.
I know the Committee has my biographical information, so I will not
go into the details of my qualifications but ask that they be submitted
with this oral statement.
It is with some mixed emotion that I appear before you today. I
have mixed emotions because the previous Chairman, John Robson, was a
friend for more than two decades, and I am saddened by his death.
However, I am also honored and excited by the opportunity to serve our
country again. If confirmed, I look forward with energy and enthusiasm
to the challenges and opportunities that are presented in pursuing the
mission of the Bank to support U.S. exports and U.S. jobs.
I am no stranger to the public policy arena or the Government
process. So the question might be, why do you want to do this again? I
will quote something that John Robson said in his confirmation
statement:
``I have never found a canvas as big to paint on as public service
offers and I am particularly excited about the prospect of leading the
Export-Import Bank.''
I echo that sentiment.
If confirmed, this would be the seventh time I have taken the oath
of office--actually, the eighth--if one includes, as I do, the very
last time as a private in the United States Army.
Each time I have felt the same mixture of inspiration, dedication,
determination, and appreciation for everything this country has done
for me, for my family, and for the cause of freedom and free
institutions.
If confirmed for this position, I believe I would bring to the
Bank:
A record of successful business management and investment.
Extensive Government experience in international affairs and
the ability to assess political and commercial risk.
And of course, a strong desire and willingness to serve our
country.
The Export-Import Bank has enjoyed strong bipartisan Congressional
support since its establishment under President Franklin Roosevelt. The
Bank performs important roles in fostering American exports and thereby
stimulating economic activity and job creation here at home. The
bipartisan support from the Congress and President Bush for passage of
Ex-Im's 5 year reauthorization ensures that the Bank will continue to
move forward to help U.S. exporters.
I note particularly the desire of Congress to devote resources to
small- and medium-size enterprises. I pledge to make every effort to
carry out that charge and to assist these as well as all other U.S.
businesses in the highly competitive international markets of the 21th
century.
If confirmed, I look forward to working with this Committee, the
Congress, the career professionals at Ex-Im Bank, the Administration's
trade team, and the entire exporting community. You have my commitment
to continue close dialogue with this Committee and the Congress as the
Bank adjusts its policy and operations to the challenge of the 21th
century.
Mr. Chairman, Members of the Committee, I respectfully ask for your
favorable consideration of my nomination and will be pleased to respond
to your questions.
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RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER FROM PHILIP
MERRILL
Q.1. The renewable energy technology (RET) industry includes
companies representing solar power, wind power, fuel cells, and
modern biomass. As the domestic RET industry matures they
believe that the growing energy needs in the developing world
could provide huge export opportunities for U.S. companies.
They believe the Export-Import Bank could assist the domestic
RET industry with access to these markets. What has been the
Ex-Im Bank's past and current experience with financing needs
for renewable energy technology companies? What would be your
view and the Bank's view of financing for RET companies in the
future?
A.1. While I have not been briefed on specific transactions, I
am aware that Ex-Im Bank has had a long-standing commitment to
supporting renewable energy exports. Although a number of broad
factors outside of Ex-Im Bank's control impact the renewable
energy export market, Ex-Im Bank clearly can play a valuable
role in promoting renewable energy exports. As evidence of the
Bank's commitment to supporting such exports, earlier this year
the Bank established an advisory committee to provide advice
and recommendations to Ex-Im Bank regarding renewable energy
export financing. I am optimistic that renewable energy export
financing by the Export-Import Bank will increase in the
future.
RESPONSE TO A WRITTEN QUESTION OF SENATOR SANTORUM FROM PHILIP
MERRILL
Q.1. I understand the Export-Import Bank was contacted in July
by Members of the House Financial Services Committee regarding
allegations of fraud and money laundering by beneficiaries of
Ex-Im guaranties. I am aware of allegations that Tyumen Oil
Co., an Ex-Im Bank beneficiary, may be committing fraud and
diverting profits by wiring funds through banks located in the
United States to offshore entities. As you are aware, the
``Maloney Amendment'' in the recently enacted Ex-Im Bank
Reauthorization Act of 2002 specifically provides for the Ex-Im
Bank to ``deny an application for assistance with respect to a
transaction if the Bank has substantial credible evidence that
any party to the transaction has committed an act of fraud or
corruption in connection with a transaction involving a good or
service that is the same as, or substantially similar to, a
good or service the export of which is to subject of the
application.'' Are you familiar with situations such as this,
where beneficiaries of Ex-Im guaranties are alleged to be
committing illegal actions and to have an undue impact on the
economies of countries such as Russia? If confirmed as
President of the Ex-Im Bank, do you believe this type of
situation would warrant your attention? Do you believe there
should be standards related to this to which Ex-Im
beneficiaries should be held accountable?
A.1. While I have not been briefed on specific transactions, I
am aware that Ex-Im Bank takes very seriously matters of fraud
and corruption, in that such matters relate to
creditworthiness. I believe that Ex-Im Bank should and does
conduct due diligence with respect to fraud and corruption
issues as they relate to Ex-Im Bank transactions. If confirmed,
I assure you that all such matters would warrant my attention.
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