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20–216 PDF 2005

S. HRG. 108–801

NOMINATIONS OF: ROGER W. FERGUSON, JR.,

BEN S. BERNANKE, PAUL S. ATKINS,

APRIL H. FOLEY, AND JOSEPH MAX CLELAND

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

ROGER W. FERGUSON, OF MASSACHUSETTS, TO BE VICE CHAIRMAN OF

THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

BEN S. BERNANKE, OF NEW JERSEY, TO BE A MEMBER OF

THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

PAUL S. ATKINS, OF VIRGINIA, TO BE A MEMBER OF

THE U.S. SECURITIES AND EXCHANGE COMMISSION

APRIL H. FOLEY, OF NEW YORK, TO BE FIRST VICE PRESIDENT OF

THE EXPORT-IMPORT BANK OF THE UNITED STATES

JOSEPH MAX CLELAND, OF GEORGIA, TO BE A BOARD MEMBER OF

THE EXPORT-IMPORT BANK OF THE UNITED STATES

OCTOBER 14 AND DECEMBER 9, 2003

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

DOUGLAS R. NAPPI, Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

BRYAN N. CORBETT, Counsel

MAURICE A. PERKINS, Professional Staff Member

MARTIN J. GRUENBERG, Democratic Senior Counsel

DEAN V. SHAHINIAN, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, OCTOBER 14, 2003

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Bunning ............................................................................................... 2

Senator Sarbanes .............................................................................................. 11

NOMINEES

Roger W. Ferguson, Jr., of Massachusetts, to be Vice Chairman of the Board

of Governors of the Federal Reserve System ..................................................... 3

Prepared statement .......................................................................................... 27

Biographical sketches of nominee ................................................................... 30

Ben S. Bernanke, of New Jersey, to be a Member of the Board of Governors

of the Federal Reserve System ............................................................................ 6

Biographical sketches of nominee ................................................................... 39

Paul S. Atkins, of Virginia, to be a Member of the U.S. Securities and

Exchange Commission ......................................................................................... 8

Prepared statement .......................................................................................... 28

Biographical sketches of nominee ................................................................... 51

TUESDAY, DECEMBER 9, 2003

Opening statement of Chairman Shelby ................................................................ 65

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 66

Senator Allard ................................................................................................... 68

Senator Miller ................................................................................................... 77

WITNESS

Thomas A. Daschle, a U.S. Senator from the State of South Dakota ................. 68

NOMINEES

April H. Foley, of New York, to be First Vice President of the ExportImport Bank of the United States ...................................................................... 69

Biographical sketches of nominee ................................................................... 78

Joseph Max Cleland, of Georgia, a former U.S. Senator from the State of

Georgia, to be a Board Member of the Export-Import Bank of the United

States .................................................................................................................... 70

Biographical sketches of nominee ................................................................... 87

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Senator Paul S. Sarbanes from the Coalition for Employment

through Exports, Inc. dated December 8, 2003 ................................................. 93

(III)

(1)

NOMINATIONS OF:

ROGER W. FERGUSON, JR., OF MASSACHUSETTS

TO BE VICE CHAIRMAN OF AND

BEN S. BERNANKE, OF NEW JERSEY

TO BE A MEMBER OF

THE BOARD OF GOVERNOR OF

THE FEDERAL RESERVE SYSTEM

PAUL S. ATKINS, OF VIRGINIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

TUESDAY, OCTOBER 14, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10 a.m., in room SD–538, Dirksen Senate

Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding.

OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

This morning we will consider the nomination of three very distinguished individuals. Our first nominee will be Dr. Roger Ferguson, nominated to be Vice Chairman of the Board of Governors

of the Federal Reserve System. Dr. Ferguson first of all is no

stranger to this Committee. He was originally appointed to the

Board of Governors of the Federal Reserve in 1997 and has served

as Vice Chairman since October 1999.

Dr. Ferguson has served with great distinction as Vice Chairman. He oversaw the Fed’s preparations for the Year 2000 computer challenge. I would also highlight Dr. Ferguson’s stewardship

of the Fed and our financial system through the troubling day of

September 11 and its aftermath. During 2003, Dr. Ferguson became the Chairman of the Committee on the Global Financial System, a central bank panel that monitors and examines broad issues

related to financial markets and systems.

Our second nominee is Dr. Ben Bernanke, nominated to be a

member of the Federal Reserve Board. Dr. Bernanke has served as

a member of the Board of Governors of the Federal Reserve since

August 2002. Before Dr. Bernanke became a member of the Board,

2

he was the Chair of the Economics Department at Princeton University.

Dr. Bernanke has published many articles on a wide variety of

economic issues, including monetary policy and macroeconomics.

He also served as the Director of the Monetary Economics Program

of the National Bureau of Economic Research.

Our third nominee this morning is Paul Atkins, for the position

of Commissioner at the Securities and Exchange Commission. He

has been serving as Commissioner at the SEC since July 2002. Before Mr. Atkins’ appointment as Commissioner, he assisted financial service firms in improving their compliance with SEC regulations and worked with law enforcement agencies to investigate and

rectify situations where investors had been harmed. Prior to that

experience, Commissioner Atkins served on the staff of two former

SEC Chairmen. In those positions, he assisted in efforts to improve

regulations regarding corporate governance, enhanced shareholder

communications, strengthened management accountability through

proxy reform. He also organized the SEC’s Individual Investor Program, including the first investor town hall meetings and other investor education programs.

This Committee will continue to look to the Federal Reserve System for its steady head on monetary policy as well as the banking

and payments system. And we will look to the SEC to ensure the

credibility and integrity of our capital markets.

We look forward to hearing your statements this morning and to

an interesting discussion to follow.

Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman.

I am a little disappointed that we are not having a markup today

since I got up at 5 o’clock to get here for it, but I am very happy

that we are having a hearing, especially this very, very important

hearing, and I thank our witnesses for coming to testify.

All three of our witnesses today have experience in their positions which they are nominated for. All are qualified, and all have

a record of work. This is much different from our usual nomination

hearings.

Today, we can judge them on what they have already done in

their jobs and what they have been nominated for. We do not have

to guess; we have a record to look at.

I do not think it will surprise anyone here who has followed this

Committee, but I am going to concentrate with my limited time on

the nominees for the Board of Governors of the Federal Reserve.

As I am sure you both know, I did not support either of your nominations. I was worried and continue to be worried about group

thinking and a cult of personality at the Fed surrounding the

Chairman.

To get my support this time, you will have to do a better job of

convincing me that you will be an independent voice on the Board

of Governors. Too many Governors, in my opinion, simply go along

with the Chairman. I would, however, like to commend Vice Chairman Ferguson on another one of his duties. Not too long ago, the

Vice Chairman gave us a very informative briefing on critical infraVerDate 11-MAY-2000 16:31 May 24, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 20216.TXT SBANK4 PsN: SBANK4
3

structure in the financial industry and possible terrorist threats to

that infrastructure. I saw Chairman Greenspan not too long after

that briefing and told him what a good job you did.

I am probably the Fed’s biggest critic in the Senate, but I also

think the Fed should be commended when they do a good job.

When we met before your last nomination hearing, I asked if you

disagreed with any monetary policy decisions that the Chairman

had made. You told me that you agreed with him on every decision.

That worries me a great deal. I do not think it is good for the

Chairman to have Governors who will not challenge him.

I would not be a very good Senator if my staff agreed with me

in everything that I said or did. To get my support, you both have

to show me that you will tell the Chairman when you think he is

wrong.

Once again, thank you, Mr. Chairman, for holding these hearings, and I thank all of you for testifying today.

Chairman SHELBY. I would like all three of you to stand, hold up

your right hand, and be sworn.

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Mr. FERGUSON. I do.

Mr. BERNANKE. I do.

Mr. ATKINS. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Mr. FERGUSON. I do.

Mr. BERNANKE. I do.

Mr. ATKINS. I do.

Chairman SHELBY. Thank you.

Governor Ferguson, we will start with you. First of all, all of

your written statements will be made a part of the record in their

entirety, and you may, briefly sum up any statement you want to

make.

STATEMENT OF ROGER W. FERGUSON, JR.

OF MASSACHUSETTS, TO BE VICE CHAIRMAN OF THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. FERGUSON. Thank you very much, Chairman Shelby and

Members of the Committee.

Chairman SHELBY. And Governor—and this goes for all three of

you when your turn comes—if you would like to introduce any

members of your family, you are certainly free to do that.

Mr. FERGUSON. Thank you for asking me to do that, because you

have maintained peace in my house.

I would like to introduce my wife, Annette Nazareth, who has

come to join me here today, and she has been here a few other

times at various hearings.

Chairman SHELBY. Absolutely.

Mr. FERGUSON. I am also pleased to appear before you today as

President Bush’s nominee to serve as Vice Chairman of the Board

of Governors of the Federal Reserve System. I am honored that the

President has nominated me to serve a second term in that capacity, and I thank you for holding this hearing.

4

It has been my privilege, as you noted earlier, to serve our fellow

citizens as a member of the Federal Reserve Board since 1997 and

as Vice Chairman since 1999. I have given this role my undivided

attention, and I hope to be able to continue in that service. The policy decisions of the Federal Reserve influence the economic wellbeing of all Americans. During my tenure, we have faced challenges in many of our areas of responsibility, and I would like to

briefly review some of those developments and our responses to

them.

Congress has given the Federal Reserve three monetary policy

objectives—maximum employment, stable prices, and moderate

long-term interest rates. We have viewed those objectives as congruent with the goal of maximum sustainable growth that can

occur only in the context of long-run price stability. Fostering financial conditions in which Americans can realize their full potential has presented a number of challenges in recent years. The impressive step-up in the advance of technological and organizational

efficiencies and a rapid accumulation of physical capital in the late

1990’s have been the key factors affecting our economy’s performance in the past decade. These developments have made workers

increasingly productive. But faster productivity growth, despite its

long-term benefits, has not insulated the economy from cyclical

swings. The sharp reevaluation that occurred in equity markets

and the retrenchment in business investment and spending that occurred over the past several years, together with the effects of terrorist attacks, wars, and corporate scandals, battered the confidence of households and businesses. In response, the Federal Reserve made substantial adjustments to its policy interest rate in

order to cushion the effects of these developments on the broader

economy. Other forces, particularly the growing interconnectedness

of the global economy, have been important background factors in

setting monetary policy. Of late, policymakers have been mindful

of the virtual eradication of inflation and their need to set policy

so that the economy remains in the zone of price stability. But all

of our policy changes have been undertaken in pursuit of maximum

sustainable growth and stable prices.

Making monetary policy has been only part of the challenge.

During my tenure at the Federal Reserve, we have also worked

diligently to communicate to the public what we are doing and

why. Transparency in policymaking is a key part of the democratic

process and fosters efficient decisionmaking in the private sector.

Becoming more transparent has been an important goal of the central bank in recent years, keeping in mind that we must balance

being open and accountable with the need to maintain an effective

process of decisionmaking by the Federal Open Market Committee.

Transparency requires that we periodically review our procedures

as we did in 1999 and again last month, to ensure that they appropriately balance these considerations. I do not know what future

changes, if any, might be called for in how we communicate, but

I am confident that the Federal Reserve will continue to look for

ways to communicate and explain our policies clearly.

While macroeconomic conditions are of central importance, the

role of the Federal Reserve is broader than monetary policy. Financial stability is an essential precondition for maintaining a strong

5

economy, and the Federal Reserve played a key role in maintaining

financial and economic stability in the aftermath of the terrorist attacks of September 11, 2001. Both you and Senator Bunning have

already alluded to my role and responsibilities on that day, so I

will not go further into the role that I played at that time.

I will point out, however, that the Federal Reserve also executes

its important financial stability responsibilities in less stressful

times through its role in supervising and regulating our Nation’s

banking system. The Federal Reserve and other regulators must

foster a competitive environment that will benefit the users of financial services while also promoting safety and soundness. I believe that we should achieve these objectives with a minimum of

regulatory burden and without leaving the impression that any institution is too big to fail. Currently, we face the challenge of meeting these goals by developing a new capital Accord to apply to the

largest and most complex internationally active institutions. As I

have testified before this Committee, the existing Accord no longer

suffices for these institutions. Now we need to work with our financial institutions and other regulators to replace the existing Accord

with a new one that is more risk-sensitive, builds on advances in

risk measurement and management, and provides proper incentives. And we must do so without unnecessary complexity and

without creating undesirable competitive imbalances or other unintended consequences.

Last, our payment system is a real presence in the economic lives

of every consumer and business. This system too has been, and will

continue to be, changed greatly by emerging technologies. From its

very founding, the Federal Reserve has had the responsibility to

foster an efficient, safe, and accessible payment system. In a dynamic economy, markets appropriately play the key role in guiding

the development of the payments infrastructure. This means that

innovation and competition will be central to the future development of the payments system, as they are in other areas of the

economy. Regulators and Congress should strive to remove barriers

to innovation when they can do so without sacrificing important

public policy objectives. I have been privileged to work with this

Committee on one such initiative, the Check Truncation Act, or

Check 21. This legislation removes a legal impediment and should,

over time, foster greater use of electronics in the check-clearing

process while also preserving the right of consumers and banks to

receive paper checks. Ultimately, Check 21 should allow depository

institutions to provide new and beneficial services to their customers. I look forward, as I know you do, to its prompt enactment.

And I thank the Committee and its staff for the strong support you

have provided.

Mr. Chairman and Members of the Committee, during my years

on the Board of Governors, I have done my best to contribute positively to all aspects of the Federal Reserve’s many responsibilities.

I look forward to the opportunity to continue to work with you and

serve the Nation as Vice Chairman of the Board of Governors.

Thank you for your attention and for considering my nomination.

I would be pleased to answer questions.

Thank you.

Chairman SHELBY. Dr. Bernanke.

6

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, Senator.

I am honored to have been nominated by the President to serve

a full term as a member of the Board of Governors of the Federal

Reserve System. If I am confirmed by the Senate, I pledge to continue to devote myself to the pursuit of the objectives set for the

Federal Reserve by Congress: Maximum employment, stable prices,

and moderate long-term interest rates.

I would like to take this opportunity to talk briefly about the

prospects for the U.S. economy. After several false starts, the economy is showing signs of sustained recovery. The Bureau of Economic Analysis estimates that real GDP grew by 3.3 percent at an

annual rate in the second quarter. Growth of real activity appears

to have been even more rapid, perhaps considerably more rapid, in

the third quarter. Consumer spending, supported by expansionary

monetary and fiscal policies, has remained strong. Notably, new

housing construction hit record levels this year and will likely continue at a high level despite some increases in mortgage rates this

summer. Particularly encouraging, however, are signs of revival in

capital expenditure by businesses. Investment in equipment and

software, especially high-tech equipment, picked up noticeably in

the second quarter and appears to be strengthening further. Rising

sales and profits, easy financing conditions, and favorable tax provisions should support investment spending into 2004.

Although economic forecasting is far from an exact science, private-sector forecasters broadly agree that the economy should grow

at nearly a 4 percent rate in 2004. I believe that forecast is plausible, assuming that the revival in business investment remains

vigorous. Although there are certainly downside risks to that forecast, there are also reasonable scenarios in which growth next year

might be higher than the 4 percent consensus, for example, if the

rebuilding of inventory stocks is especially rapid or if economic

growth among our trading partners begins to pick up significantly.

Although the increased growth rate of output is encouraging, everyone should be concerned that so far, this growth has not translated into significant job creation. Until the job market improves,

this recovery will not feel like a recovery to most Americans. A

number of factors explain why we have not yet seen net new job

creation. Two are particularly worth mentioning.

First, we have seen truly remarkable increases in labor productivity, which have permitted firms to meet the increasing demands

for their output without hiring additional workers. This strong performance owes in part to heavy investment in high-technology

equipment in the latter part of the 1990’s. Only over a period of

time, apparently, have managers learned how to reorganize their

production and distribution processes to take full advance of the

potential of these new technologies. The resulting increases in productivity have delayed the need to add new workers, but—it is important to note—they also imply that American firms and workers

will be significantly more competitive, and that will help our economy preserve jobs in the long-run.

7

Second, the past few years have been a period of heightened uncertainty, reflecting the aftereffects of the terrorist attacks of 2001,

the wars in Afghanistan and Iraq, scandals in corporate governance, the unsettled state of the world economy, and other factors.

Possibly because of these geopolitical and economic uncertainties,

it appears that employers have been slower than usual to make

commitments to expand their plants, increase their staff, or add to

inventories.

Overlaying these cyclical factors is the continuing restructuring

of the U.S. economy, one that has been going on for decades. Although restructuring is a persistent feature of our economic landscape, the displacement of workers and shifting employment patterns resulting from this restructuring are far more difficult to cope

with in an environment of generally weak labor markets than they

were in periods of rapid employment growth. Inevitably, in a dynamic economy like that of the United States, the process of restructuring will continue and will present an ongoing challenge to

American workers and employers. I believe, however, that the current weakness of the labor market is more cyclical than structural

in nature, implying that aggregate employment will recover and

unemployment will decline as the economic expansion matures.

The exact timing of the recovery in employment, however, is not

completely clear. Modest encouragement can be taken from recent

data on jobs creation, including increased hiring of temporary

workers, often thought to be a leading indicator of more permanent

hiring. Other indicators, such as the failure of the average workweek to expand in recent months, and the very slow decline in new

claims for unemployment insurance, are less encouraging, though

they do suggest at least some stabilization of the job market. I

should note that I submitted this testimony before last week’s decline in new unemployment insurance claims.

However, in my view, the growth of productivity is likely to slow,

at least somewhat, from its recent extraordinary recent pace, so it

seems very unlikely that firms can continue to meet rapidly rising

demands without adding to their capital stocks, as they have already begun to do, and to their workforces. Thus, given the rate of

increase in spending and output that we are now witnessing, a reasonable expectation is that firms will need to add significant numbers of workers within the next several quarters.

Where does this leave monetary policy? Inflation remains low,

and the Federal Open Market Committee has indicated that the

risks to inflation are to the downside. Thus, currently, both the

price stability and maximum employment objectives of the Federal

Reserve point us in the same direction. Specifically, in my view,

monetary policy can afford to maintain its accommodative stance

for a considerable period, certainly until a sustainable recovery in

employment is under way and disinflationary risks have been correspondingly reduced. I expect that the continuing support of monetary and fiscal policies, together with the natural resiliency and

strength of the U.S. economy, will in all probability lead ultimately

to a sustained expansion without inflation, much as occurred after

the so-called ‘‘jobless recovery’’ that followed the 1991 recession.

I would be happy to take questions.

Chairman SHELBY. Mr. Atkins.

8

STATEMENT OF PAUL S. ATKINS, OF VIRGINIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

Mr. ATKINS. Thank you, Mr. Chairman.

First, I would like to introduce my family; I will take you up on

your invitation. First, my sons, Stewart, 10, Peter, 7, and Henry,

who is 3; and my wife Sarah, who is also here.

Chairman Shelby, Ranking Member Sarbanes, and Members of

the Committee, it is a very great honor for me to appear for the

second time before this Committee. I am deeply grateful for the

confidence that President Bush has again shown in me by nominating me for a second time to be a Commissioner. I appreciate

very much your courtesy in calling me before you today.

I would also like to note that it has been a pleasure to work with

Chairman Bill Donaldson and my other colleagues on the Commission, Cynthia Glassman, Harvey Goldschmid, and Roel Campos. I

salute the leadership that Chairman Donaldson has provided us

and the SEC staff. If confirmed once again by the Senate, I look

forward to continuing to work with Chairman Donaldson and my

fellow Commissioners to address the very weighty issues that are

before the SEC.

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. In fact, I should note that I now have had the privilege of working for four SEC chairmen—Richard Breeden, Arthur

Levitt, Harvey Pitt, and Bill Donaldson. I have learned much from

each of these men, and I am happy to count them as friends and

advisors.

As the Members of this Committee well know, in the past few

years investors have been confronted with spectacular failures of

large and small corporations because of bad accounting practices

and outright fraud. The instances of corporate managers engaging

in theft and reckless mismanagement of corporate funds are shocking, outrageous, and completely unacceptable. The revelations of

corporate malfeasance undermined our capital markets in a profound way. ‘‘Corporate responsibility’’ rightfully became a national

issue for the first time in perhaps 70 years. In response to this crisis, this Committee and Congress acted forcefully, and the President signed into law the Sarbanes-Oxley Act of 2002, the most important piece of corporate governance and securities legislation in

the last 70 years.

For many Americans, the SEC, until recently, may have been

just another Federal agency in Washington, DC, with an alphabet

soup acronym. As Enron, MCI, and a host of other corporate scandals—along with the severe downturn in the marketplace—showed,

the times have radically changed. Millions of Americans look to the

SEC more than ever as the defender of their financial hopes and

dreams, as it should and must be. Investors rightfully demand a

tough cop to fight those who steal their hard-earned savings and

investments.

These are unique and demanding times at the SEC. It would be

a privilege for me to continue to respond to this call and to give

9

my best efforts to advance the Commission’s mandate on behalf of

the investing public.

Thank you.

Chairman SHELBY. Governor Ferguson, this past summer, we

had a very different type of crisis with an energy blackout on the

East Coast. Did the Federal Reserve review the performance of financial and payment systems in response to that crisis?

Mr. FERGUSON. Yes. We have taken what I would describe as an

informal look at that, not through a big study, but yes, we have

looked at it.

Chairman SHELBY. Do you know if you have learned any lesson

from that yet? I know there is a lot of difference between that and

September 11——

Mr. FERGUSON. There are some differences, obviously, but I think

it has pointed out yet again the reliance of the financial industry

on underlying infrastructure such as electricity, water, et cetera.

I think we have learned a couple of things or observed some

things on that point. First is that indeed, post-September 11, many

financial institutions did put into place backup arrangements, generators, et cetera, that proved to have been successful in the case

of individual institutions.

Second, I think we learned again that one should think of this

as a ‘‘wide area’’ challenge, if you will. Being focused on a single

building, for example, is not sufficient; you must think about the

entire network that supports that. And that continues to be an important issue and challenge for the institution. But I would say by

and large, my personal view is that the degree of resilience that

was demonstrated in the blackout is much higher than would have

been the case a few years ago. I think that institutions are moving

in the right direction, although obviously, no one can be complacent

yet in that regard.

Chairman SHELBY. Thank you.

Dr. Bernanke, I recently had an opportunity to discuss economic

and financial issues with officials from the Japanese and Chinese

Governments in Tokyo and in Beijing. How would you assess the

conditions of the banking systems in those two countries?

Mr. BERNANKE. Both countries have serious, significant difficulties with their banking systems. The Japanese banking system has

been in serious trouble since the collapse of the so-called bubble

economy in 1989. There remains a very heavy preponderance of

nonperforming loans, new credit is not being extended, and profitability remains low.

However, there have been some recent signals of possible improvement. The Resona recapitalization is a positive step in the

sense that beyond simply injecting capital into the Resona Bank,

the Government of Japan has taken a much stronger hand in demanding reforms and profitability. They changed the management.

They demanded more rapid reductions in nonperforming loans and

so on.

Also interesting is the recent order by the Financial Services

Agency, the so-called business improvement order, which essentially demands that banks which have received capital injections

improve their profits over the next few years.

10

Under the leadership of Mr. Takenaka, who has been an important force for reform in Japan, what we are seeing is slow but

steady movement toward accountability in the Japanese banking

system. They are far from out of the woods, but I think they have

made some useful steps. That will be assisted by some signs of economic recovery in Japan fostered by monetary policy, increase in

the stock market, and so on.

The short answer is that there have been some improvements

like the increased accountability. We still have a long way to go in

Japan.

China is a rather different situation. In China, until economic reform took place, the Chinese banking system was essentially the

instrument of the state’s allocation of credit. They have not made

the transition to a capitalist free market banking system. They remain deeply under water in terms of their credits, so it will be a

considerable amount of time before that system is operative in the

sense of a Western free market banking system.

However, I know the Chinese are quite interested in doing that.

I think that is an important step toward opening up their capital

markets, allowing both more incoming financial flows, as well as

allowing Chinese citizens to invest abroad. I think this is a very

important priority for the Chinese Government, but they have a

long way to go. They do not have the managerial skill, and it will

take a while for them to get that situation straightened out.

Chairman SHELBY. Is reform in both Japan and China to their

banking systems critical to the sustained health of our economy?

Is there a connection there?

Mr. BERNANKE. Yes, there is a connection, Senator. One of the

reasons that it has limited our domestic economic growth has been

essentially the weak condition of most of our trading partners.

Japan is a particular case-in-point. The Japanese economy is the

second-largest in the world, yet it has been very depressed now for

about 15 years. Domestic reforms, both structural and to the banking system, along with expansionary monetary policy, have the potential to bring Japanese growth, domestic demand, higher. That

would be a very important step toward increasing the demand for

our exports and for our growth.

The Chinese case is a bit different. China is not suffering from

lack of growth, and is growing very rapidly. But clearly, first of all,

its integration into the world financial market and into the world

exchange market depends on reform in the Chinese banking system. And second, there has certainly been interest in the United

States in having the Chinese move eventually to a flexible exchange rate system. One important barrier to doing that immediately is the problems in the banking system. Free capital flows

would create large withdrawals from their domestic banks, which

would lead presumably to a financial crisis.

Therefore, in order for China to move effectively to a flexible exchange rate system, they do need to make substantial reforms in

their banking system, and for reasons that we understand, that

would be useful for the United States economy as well.

Chairman SHELBY. Thank you.

Mr. Atkins, mutual fund investors receive disclosure documents

that are often confusing and do not contain adequate information

11

for investors to understand the full fee structure of their fund.

Given your experience in investor education, how would you recommend improving upon the transparency and disclosure regarding mutual funds?

Mr. ATKINS. I think that is an excellent question. As far as the

essence of choosing between funds, it is really fee structure and

other expenses that should most concern investors. That is where

we can really concentrate at the SEC to try to bring more transparency. I believe our Investment Management Division is working

on just such proposals.

Chairman SHELBY. It is very important, though, is it not?

Mr. ATKINS. It is vitally important.

Chairman SHELBY. Especially in view of some of the revelations

that have come recently, dealing with some of the mutual fund

operatives.

Mr. ATKINS. Exactly, yes, and transparency is——

Chairman SHELBY. Key to it.

Mr. ATKINS. —primary; exactly.

Chairman SHELBY. Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. I am

pleased to welcome the nominees before us this morning. They

have all been here before, but we always welcome this opportunity.

I want to ask a question of Mr. Ferguson and Mr. Bernanke first.

I have discussed this issue before, and that is the issue of equal

employment opportunities at the Federal Reserve. Vice Chairman

Ferguson, I think you and I had a good exchange about this in one

of your earlier hearings.

In February of this year, a number of Members of the House, including a significant number of Members of the House Financial

Services Committee—and of course, they do not participate in the

nomination process, but they do get in touch with us about it from

time to time—wrote to the Chairman: ‘‘We are writing to request

data on the current status of the equal employment opportunities

at the Federal Reserve System.’’ And they referenced the staff report that the Committee had done when it was then the House

Banking, Finance, and Urban Affairs Committee back in December

1993, which would now be about—we are coming up to the 10th

anniversary of that report—and asked a number of questions.

In April, the Congressional Black Caucus wrote to the Fed, to

Chairman Greenspan, to Vice Chairman Ferguson, and Governor

Olson, who I think is in charge of the personnel policies as I understand it amongst the Governors of the Fed, expressing what the

Congressional Caucus said was ‘‘a deep concern about the treatment of African American professionals at the Federal Reserve’’

and asked for an inquiry, and then they referenced the particular

case. But I am interested in what the situation is at the Fed on

this important issue.

Mr. FERGUSON. Senator Sarbanes, thank you for giving me an

opportunity to address this issue. This is an issue on which there

can be no doubt about the commitment from the top to have all of

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proach, without any extraneous factors coming into play, as I have

said to you before in this room and in other locations.

It is quite important to recognize, if you will, what the statistics

tell us, because I do not think the Fed story has actually come out

fully. As I look at the statistics on the Federal Reserve Board, for

example, looking at our most senior people, at what we call the officer level, which is the equivalent of the Senior Executive Service

for the civil service, in 1992, 20 percent of those individuals, our

officers, were female, and about 11 percent were minorities. In

2002, 10 years later, 31 percent were women and 16 percent were

minorities. Compare that to the last statistics we have for the Senior Executive Service in the civil service, where 24 to 25 percent

were women, and 14 percent minorities.

So at the most senior levels, I would say two things are reflected

in those statistics. One, there clearly has been progress, and two,

frankly, I think the Board of Governors’ staff results have been better than what one sees in the Senior Executive Service, the most

senior part of the Government in general.

If you look at overall demographics, not just the senior levels, at

the Board, about 51 percent of our employees as of year-end 2001

were women, 42 percent were minorities. In the Federal Government, the numbers were 45 percent and 31 percent, respectively.

Again, I think we stack up very favorably against the entire U.S.

Government.

If we think about our pipeline grades, the people that are likely

to move into leadership roles over the next few years, in 1992, 30

percent of that group were women and 9 percent were minorities;

in 2002, 41 percent were women and 18 percent were minorities.

I can go on with a number of other statistics on hiring and promotions, but the message I want to leave you with is that we take

this issue extremely serious. There is no complacency in the Fed

on this issue and there will not be. And if one looks at the trends

over the last 10 years, we certainly have seen great progress and

advancement for women and minorities, and we stack up very favorably, in fact, I think are better than comparables such as the

Senior Executive Service or the Government overall.

How have we done that? We have done it because there is, as

I said, no sense of complacency at the top in the Federal Reserve.

We have put through a number of processes and procedures that

have enhanced the focus, if you will, with respect to the EEO

issues that you have raised. We have an annual review process

that we established to assess diversity and outreach efforts in each

of our divisions. Each division has an annual recruiting and outreach plan to both inform minorities about employment at the

Board and to build a diverse pool of candidates. We have an explicit EEO component of performance objectives of the officers and

managers. We have undertaken best practice assessments, and this

type of information we have shared with the House and have

shared with you as well.

I appreciate the opportunity to answer this question, because in

fact I think the Federal Reserve Board has done very good work

over the period before and while I have been there and will continue to do so. As I have said, the statistics stack up quite favorably against reasonable comparators here in Washington, DC.

13

I could broaden that statement, and I will if you want me to

spend more time on it, talk about the Federal Reserve System overall, but the message tends to be exactly the same if one looks at

the statistics for the System overall. It is one of the improvements

in all levels, I believe, at least over the last 10 years and a strong

pool of individuals in the pipeline, if you will, prepared to be promoted to more senior ranks.

I realize that there is an interest in this issue, but I think our

responses put us in reasonably good light, and there is no complacency.

Senator SARBANES. Let me just go below the level of the statistics

for a moment. What can you tell us about the actual process within

the Federal Reserve to deal with employee grievances, whether it

is harassment on the job, discrimination, the ability to have that

looked at in a fair and objective way without punishment or retaliation to the employees bringing the allegations?

Mr. FERGUSON. We have a multitiered process for grievance resolution, starting first within the division, so if you have an evaluation—we call it a PMP—that the employee disagrees with, that

individual has the right within that division to ask for a reconsideration. And then, through our HR, human resources, chain of command, those grievances can be carried higher and higher through

the Federal Reserve Board infrastructure, ultimately coming to the

Board of Governors.

Obviously, there is also a parallel process for those who want to

go into the formal Equal Employment Opportunity complaint process which ultimately would lead to resolution at the EEO Commission. Clearly, by definition, we cannot tolerate any retaliation that

might occur for someone exercising their rights.

The reality is that I, and I think all of us, are very interested

in having a very robust process for these grievances, because if

there is any evidence of misbehavior along the lines that you talk

about, I as Vice Chairman want to know about it, and I think my

colleagues on the Board want to know about it. A grievance process

that starts within the division but the moves outside the division

is a superb way to ferret out those facts. I do not think one can

identify a better, more robust grievance process than the one that

we currently have. It is open to all and is open without any sense

of retaliation.

Senator SARBANES. Thank you, Mr. Chairman. My time is up,

and I will yield to my colleagues, but I hope we will have another

round.

Chairman SHELBY. We will, yes.

Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

These questions will be for the Vice Chairman and Governor

Bernanke, if you will please give me your opinion on these.

The first question is have you disagreed with any monetary policy decision that Chairman Greenspan has made since you have

been on the Federal Reserve Board—each of you?

Mr. FERGUSON. Let me start, and then Governor Bernanke can

respond.

It is clear from my record that I have not dissented from any

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serve are not the decisions of an individual; they are the decisions

of a committee. I am a voting member of that committee, and I

have to this date not dissented.

Having said that, that does not mean that I am not exercising

independent judgment. There are a number of ways in which I can

have and will continue to exercise independent judgment. You have

seen some of them in the role that I played with respect to September 11, where I had to take the responsibility independently of

the Chairman, who was not available. I would encourage you to

look at my entire record in terms of independence of judgment.

If I had a strong disagreement with the direction the Committee

was taking, I have an obligation, which I have exercised many

times, to express myself formally and forcefully, in the Committee

discussions to try to persuade my Committee colleagues to see the

economic forecast, the economic outlook, and the risks to that outlook and the consequent policy implications the way that I see

them.

Senator BUNNING. But in the long-run, you voted with the Committee.

Mr. FERGUSON. Well, but in the long-run, that means that the

Committee and I all reached a broad consensus that I could feel

comfortable with.

If there were to be a point going forward when I felt strongly

that the Committee was reaching a consensus that I could not be

a part of, then, by definition, I would exercise my right to dissent.

Senator BUNNING. How long have you been on the Committee?

Mr. FERGUSON. I have been on the Committee since November

1997.

Senator BUNNING. Since 1997.

Mr. FERGUSON. The fact that I have not yet dissented means that

I have managed to get the Committee to vote——

Senator BUNNING. All the Committee to the position you wanted?

Mr. FERGUSON. The Committee and I ended up, obviously, in the

same position, yes, so that I could comfortably support and be part

of the consensus.

Senator BUNNING. The final decision.

Mr. FERGUSON. Sometimes that required my moving, sometimes

it required their moving.

Senator BUNNING. Thank you.

Mr. Bernanke.

Mr. BERNANKE. I have not dissented in my year on the Federal

Open Market Committee because I basically agreed with the direction of policy, which has been to ease in order to try to revive the

U.S. economy and improve employment while maintaining price

stability.

However, I have been an independent voice both within and outside the Federal Reserve System through a series of speeches and

other public discussions. Among those topics on which I have been

prominent in providing leadership include the discussion of alternative monetary policy tools which might be used in the event of

a deflation or the zero lower bound binding on nominal interest

rates; I have made strong arguments against the intervention of

monetary policy into the stock market and other financial markets,

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serve can maintain a competitive monetary policy for a longer period than usual because of the slack in the system created by weak

labor markets.

There is an area where in fact I have disagreed quite publicly

with the Chairman, and that is in the area of how best to achieve

Federal Reserve transparency. As I discussed in my initial confirmation hearing a little over a year ago, I am a proponent of what

is called ‘‘inflation targeting.’’ Despite the name, the approach is

not in any way inconsistent with strong commitment to the dual

mandate of the Federal Reserve. What it does is attempt to provide

more information and more transparency about the Federal Reserve’s objectives and long run goals. In particular, I have argued

that the Federal Reserve should provide information to the public

about what it thinks the long-run inflation or average inflation rate

over the business cycle should be, and I have also argued for other

measures for increased transparency such as moving up release of

the minutes and providing more frequent forecasts by the Federal

Open Market Committee.

Certainly in the area of inflation targeting, Chairman Greenspan

quite clearly disagrees with that position, and our disagreement

has been public, it has been cordial, it has been based on intellectual arguments. Nevertheless, I clearly have staked out an independent position on that very important area of monetary policy.

Senator BUNNING. Thank you.

I want to talk to you about regulations on national banks. I have

a lot of small businessmen in my State, and they are complaining

vigorously about the banks not being free and afraid to make loans

because of the regulations that the Federal Reserve has in monitoring loans. I could give you chapter and verse if you like, but I

am not going to do that for fear the Fed will come down on the

head of some poor banker down in Louisville, Kentucky. But the

fact of the matter is I have some very small businessmen who cannot get any money out of the banks. No matter how good or how

well they seem to be doing, the banks are reluctant because of regulatory burdens on specific loans to get any capital influx from an

ordinary lender.

Can you give me any reason that that would be? In other words,

if you come in and regulate one of the major regional banks in, say,

Louisville, and your regulators go in and take a look at what kinds

of loans have been made, and they check and say ‘‘This is not permissible,’’ and all of a sudden, the poor bank gets in trouble.

Mr. FERGUSON. Senator, I have appeared before this Committee

many times, and there have been times when I am not sure I know

the answer to your question. This is, I must admit, one of those

times.

The reason is that I cannot think of any regulation that the Federal Reserve has promulgated that is targeted in any way at limiting legitimate loans to any segment of the population.

Senator BUNNING. Can I bring the people before you at the Federal Reserve?

Mr. FERGUSON. Absolutely.

Senator BUNNING. The people who want to borrow the money

and who want to lend and are frightened to death to do it.

16

Mr. FERGUSON. What would help me—I am not a very frightening person—what would help me a great deal——

Senator BUNNING. No—but the Federal Reserve is a frightening

body.

Mr. FERGUSON. We will take care of it. What would help me a

great deal is to know which regulations they think might be impinging on private credit decisions that can legitimately be made.

By definition, there are behaviors that one does not want to see in

terms of inappropriate evaluations, but I would be interested in the

regulation that they think is standing in the way of an appropriate,

legitimate, independent credit evaluation being made by the banks.

Senator BUNNING. Okay. We will bring you chapter and verse.

Mr. FERGUSON. That is absolutely fair.

Senator BUNNING. All right. I want to ask one question about

mutual funds, and then I will get to the rest of them on the second

round.

I was in the business for 25 years. The mutual fund industry at

that time was the most transparent of all of the vehicles that you

could invest in. They wrote everything down in a prospectus—not

everybody understood what was in the prospectus—and they wrote

down their fees, they wrote down everything. The fact that some

mutual funds and some brokers hedged and did what is illegal

should not come down on the heads of the mutual funds but on the

people who regularly violated the law. There is a law against buying after the close at certain mutual funds and then selling on the

opening and have the market open stronger. That is what some

hedge funds did, and some brokers violated that trust.

Now, that has nothing to do with the mutual fund industry except in those individual cases. I have never seen a more honest and

regulated group of people than the people who generally run mutual funds.

Tell me if you see it differently.

Mr. ATKINS. No, sir, I do not. What we were, I think, trying to

address before as far as disclosure goes is that over the years, as

our rule book has expanded, so have the prospectuses and the

statements of additional information that mutual funds put out.

This has made it very difficult, I think, for investors to grasp the

essentials because of all of our mandated disclosures. So, I think

that is one of the things that we want to focus on and try to alleviate.

And certainly, I think most people in the mutual fund industry

are honest and forthright and trying to do the right thing for their

mutual fund shareholders; obviously, there are some bad eggs, as

in every group.

Senator BUNNING. We found that out. Thank you very much.

Thank you, Mr. Chairman.

Chairman SHELBY. Thank you.

Dr. Bernanke—Governor Bernanke—you are both—if economic

growth develops as is currently forecast in the third and fourth

quarters, do you believe that labor markets will show significant

improvements?

Mr. BERNANKE. As I discussed, Senator, in my statement, I do

believe we will see some significant improvements within the next

few quarters. The basic reason for that is that the productivity

17

gains we are seeing now—6.8 percent in the second quarter, probably higher than that in the third quarter—are simply not sustainable. Firms, as they respond to higher demands for their products,

simply must increase their capital and labor inputs. So, I am confident that with the rate of growth of output that we expect to see

in the next few quarters and into next year, that employment will

pick up.

We have begun to see very early signs of that in the labor market, admittedly very early, in terms of some change in the direction

of payroll growth and decline in unemployment claims. Those are

very preliminary. I do not want to overstate the importance of

those, but they are consistent with the view that we will soon be

seeing more significant growth in employment.

Chairman SHELBY. Do you feel overall pretty good about the

economy as to where we are today and where we are going?

Mr. BERNANKE. I am distressed by the slow recovery at the labor

market. I recognize that creates a lot of hardship for many Americans and many communities. I do feel, though, that as the economy

recovers and as employment recovers, we will have in fact a very

strong, productive, noninflationary economy in the years to come.

I do feel good in the longer term, but I believe that at the moment,

we have a lot of work to do still.

Chairman SHELBY. Thank you.

Mr. Atkins, the intermarket trading system—you have made

some interesting statements regarding the trade-through rule requirements of the intermarket trading system. The trade-through

rule and the ITS as a whole have been the subject of a lot of criticism. What do you see as the future of ITS, and do we still need

the trade-through rule? I know we are talking about technical stuff,

but you are a Commissioner.

Mr. ATKINS. Yes. It is something that I think we really need to

look at; it is long overdue. The trade-through rule and the ITS system were put into effect back in the mid-1970’s, and obviously,

with today’s improved technology, there are a lot of people out

there who are interested in various aspects of the system as far as

pricing and trading go.

I think as part of our overall reassessment of market structure,

which I know the Chairman is going to be talking to the Committee about later this week, we need to look at this again.

Chairman SHELBY. Can we assure customer protection with

greater focus on what you call the ‘‘best execution’’ obligations of

brokers? That goes to the heart of it, doesn’t it?

Mr. ATKINS. Yes, sir. That is the heart of our whole system and

the broker’s relationship with his customer—to give best execution.

And, it is all based on the national best bid and offer, and I think

that concept is crucial.

Chairman SHELBY. Given the trading technology—you alluded to

it—that we have today, is it not possible to accomplish the important customer protection goals that led to the trade-through rule

without the rule’s impediment on trading speed?

Mr. ATKINS. I think that is exactly part of our reassessment.

Now that we have moved away from fractional trading to trading

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18

terested more in speed of execution rather than necessarily having

a better price by a fraction of a cent.

Chairman SHELBY. Transparency and speed; right?

Mr. ATKINS. Yes, sir.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Mr. Atkins, at your first confirmation hearing

back in July of last year, I indicated a concern about the pay and

benefits parity issue at the Commission with respect to the employees. Congress, of course, had passed legislation that said the SEC

shall seek to maintain comparability with such banking agencies

regarding compensation and benefits. It is my understanding that

we still have not fully achieved that.

Could you tell me where we are on that issue and your own view

toward it?

Mr. ATKINS. Yes, sir. From my understanding, the Chairman is

working hard on this issue and has been working with the National

Treasury Employees Union to try to get this into place. From my

understanding, progress has been made. He now has a person in

his office specifically designated to deal with management and employee issues, and I think that person has been doing a very good

job in trying to review the overall situation at the SEC. It seems

that morale is up among the employees, and I think our retention

and recruitment are better.

I believe that these things will get phased in, and where they

stand exactly, it is really in the Chairman’s bailiwick. That is my

understanding at this point.

Senator SARBANES. Are the Commissioners available to the union

representatives to discuss issues affecting the employees at the

SEC?

Mr. ATKINS. Yes and, in fact, I have met with both union and

nonunion employees. Since I was a former staff member 10 years

ago, I also have an obvious deep affinity to what goes on with the

staff, and I believe the management issue is a critical one at the

SEC to make sure we can best perform our functions.

Senator SARBANES. Would you say that you have what one might

describe as an open door policy toward such meetings by union or

nonunion representatives of SEC employees to meet with you and

discuss matters that are on their agenda?

Mr. ATKINS. Oh, absolutely, and I have been doing that, as I

have said, in the last year. Without an open door and without

reaching out also—more than just having an open door, reaching

out and trying to find out what people’s concerns are—I do not

think it can be a very effectively managed place.

Senator SARBANES. The Congress provided significant additional

funds to the Commission, and we are now on track to further up

the amounts in the coming year’s budget. How is the Commission

using these extra funds?

Mr. ATKINS. As you know, we have hired something like 300 new

people already. We did not use the entire allocated amount from

last fiscal year, mainly because it was appropriated late in the

year, and then also, we were waiting for the new authorization as

to accountants and other nonlawyers to be able to hire them on an

expedited track.

19

I think that you will see in this fiscal year things, from my understanding, really start to come into place.

Senator SARBANES. When we provided the extra money, we set

out three areas in which it was to be used, in which we thought

a response was necessary on the part of the Commission and for

which these resources were being provided. One is what you just

mentioned—the addition of further personnel. And as you point

out, we also enacted legislation to make that process easier for the

Commission in terms of taking those people on.

Second was the pay and benefits parity issue, which as I understand from your response and from what Chairman Donaldson said

at an earlier hearing not very long ago, has not yet fully been

worked out, although everyone keeps assuring me that it is going

to be worked out, and it seems to me a matter of some importance

as far as your staff morale and retention issues are concerned.

Third was a significant upgrade in the technology at the Commission. What has happened in that regard?

Mr. ATKINS. From what I understand, we have been working to

upgrade our technology capabilities, especially in our Enforcement

Division, where people there are always undermanned and basically going up against people who have huge resources. That is a

critical area, and from what I understand, the Chairman has been

focusing on that.

You will probably have to ask the Chairman as to precisely

where it all stands now, but again, I know that we have been focusing on——

Senator SARBANES. All of these items, of course, affect the ability

of the SEC to function and the level at which it functions, and I

have been listening carefully to your answers. Let me ask you this

question. The other four commissioners other than the Chairman—

to what extent are you involved or cognizant or do you review or

become engaged with this whole question of the functioning of the

Commission—the treatment of the employees, the technology, et

cetera—or do you all say, ‘‘Well, that is the Chairman’s job; we do

not have anything to do with that?’’

Mr. ATKINS. I can only speak for myself, not necessarily my colleagues, but as I said, I am very concerned about it.

Senator SARBANES. Let me just interject. I think at the Fed, you

assign out some of these various functions, do you not, amongst the

Members of the Board of Governors?

Mr. FERGUSON. Yes. The Fed operates in many of its day-to-day

activities through a committee structure. Each committee includes

three Governors, one of whom is the chairman of the committee

and then there are two other members. The Board has committees

for a number of these internal activities and other things that we

are responsible for.

Senator SARBANES. On these various issues involving, in effect,

its internal operations.

Mr. FERGUSON. Yes. We have one committee for internal operations, a committee for regulation, and a committee on payment

systems, and other things.

Senator SARBANES. I am sorry. Please go ahead.

Mr. ATKINS. I guess we are under a little bit of a different statutory framework, because back in the 1950’s, Congress passed what

20

was called ‘‘Reorganization Plan Number 10’’—I do not know how

they came up with that name—but basically, it assigns at the SEC

staffing and budgetary matters to the Chairman’s office. So, as far

as the Chairman’s prerogatives go, I know, at least looking at past

Chairmen, those prerogatives tend to be husbanded carefully, especially vis-a ́-vis the other Commissioners.

So, I think there is a deference to the Chairman to allow him to

manage the agency, because obviously, Congress thought that

things would run more efficiently if done that way. Back in the old

days, if you look especially at Joel Seligman’s book on ‘‘The Transformation of Wall Street,’’ basically, all five Commissioners met to

approve the hiring of every employee.

Senator SARBANES. I am not trying to get you to that stage, but

it does seem to me that you have a Chairman who has indicated

he is, as I understand it, quite collegial; is that correct—Chairman

Donaldson——

Mr. ATKINS. Yes, sir.

Senator SARBANES. —which seems to me is a desirable trait

when you are dealing with a multimember commission, and it

would seem to me that an expression of interest and some involvement by the other Commissioners on some of these issues, which

after all, properly resolved, would enhance the ability of the Securities and Exchange Commission to do its job, and it seems to me

that is called for.

I will cease, Mr. Chairman.

Chairman SHELBY. Thank you.

Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

I want to go back to something that Governor Bernanke said

about China and the banking system in China. There are quite a

few of us—12, to be exact—in the U.S. Senate who strongly disagree with your assessment on the Chinese banking system and

the ability of the Chinese banking system to tie its currency, the

yuan, to a fixed rate of exchange with the U.S. dollar, building in

about a 28 percent advantage for the Chinese in all trade with the

United States of America.

We are trying our best to get legislation to enact that will allow

the yuan to float. You have just stated in your testimony that you

think that would be a catastrophe or a disaster or whatever word

you used, that it would be not in the best interest of the United

States or China. I would like to explore that a little more.

Do you think that the Chinese should be able to tell our Secretary of the Treasury to take off—‘‘We do not want to hear from

you about this problem’’—when he goes there to talk specifically

about trade and about the disadvantage that the United States has

with trade in the yuan being tied to a fixed rate of exchange with

the dollar?

Mr. BERNANKE. My comment was a technical one, Senator. I do

think that a purely floating exchange rate would provide some dangers in the current financial system in China. In particular, one

risk which one might face is that if there were significant capital

outflows as Chinese citizens tried to make investments abroad, the

yuan might actually depreciate and worsen the competitive situation.

21

I do not disagree that there are serious issues that you have

properly identified in terms of the trade relationship that we have

with China. I would think an alternative approach would be twopronged. One would be to discuss and consider the possibility of revaluation, which means to keep the exchange rate fixed but at a

different parity, that is, at a different value; and the other strategy

which I would suggest is to the extent that it is believed that the

Chinese are improperly blocking their markets, for example, or in

other ways not living up to their WTO commitments would be to

proceed through the World Trade Organization and launch complaints that could then be adjudicated.

So, I am not claiming that there is nothing that can be done, and

I am not claiming that it is not a problem. I am simply pointing

out that the immediate flotation of the yuan might raise some technical difficulties that other strategies might not have.

Senator BUNNING. But do you agree that there is a built-in advantage by the fixed rate of exchange that is now in existence with

the yuan and the dollar?

I believe it is an 8-to-1 ratio right now.

Mr. BERNANKE. To the extent that that value is artificially low,

that would provide an advantage to trade to the Chinese. There are

some offsetting factors to the extent that the Chinese Government

accumulates reserves, and that expands the money supply, there

will be more inflation in China, which will partly offset that effect.

But clearly that is an issue that should be—can be—discussed between the Chinese and the Secretary.

Senator BUNNING. My biggest problem is that they did not pay

any attention to the Secretary when he went over there. They just

kind of sloughed him off and said, ‘‘We are going to do it our way

or the highway.’’ We think that is not in the best interest of the

United States of America, and we do not think that is a very good

way to treat the Secretary of the Treasury.

Mr. BERNANKE. I have no inside information about those negotiations, Senator, and I do not want to create any problems in the exchange markets by making untoward comments, but the President

is visiting Japan, I understand, and I assume there will be continued discussion of these matters as we go forward.

Senator BUNNING. Vice Chairman Ferguson, Mr. Bernanke gave

us his current perspective on the economy and job creation. Do you

have a different opinion than he does about the economy and job

creation? Are we headed down the right path?

Mr. FERGUSON. I think we are headed down the right path. I

think the issue is the time frame in which we can start to see more

job creation. Certainly we have seen in some of the more recent

data what I would describe as early indicators that the labor market is at least stabilizing. I think as we get an economy that continues to grow above its potential what we will find indeed is that

this pool of underutilized resources will gradually be closed and

that will create more jobs.

Having said that, I expect that the unemployment rate will come

down only gradually over the next year or so, but I do expect to

see a pickup in job creation as the economy grows above potential,

and there are some early signs that the labor market is starting

to stabilize.

22

Senator BUNNING. I do not mean to go over, but when productivity of the American worker outstrips the growth in the gross domestic product, we have a heck of a time adding jobs. In other

words, if the productivity of the American worker increases by 5

percent, and we are growing at 4 percent, where is the need to add

new jobs? So we have to get our GDP growing faster than the productivity increase in our American workers.

Mr. FERGUSON. Right; that is correct.

Senator BUNNING. And I think we are starting to see that dual

line kind of cross.

Mr. FERGUSON. I agree with that. You have the analysis about

right. Productivity in the long-run is a very positive thing, and

there should be no mistake about it. You and I agree on that. As

you point out, in the short-run, if you have an economy whose potential output is growing relatively rapidly, then you obviously

need to have demand growing even more rapidly—you and I are

using the same physical symbol with the hands crossing—and we

are starting, I think, to see some of that occur. As that occurs, then

in fact you will find that more jobs are being created and that will

gradually eat into the pool of individuals who are currently underutilized.

Senator BUNNING. Thank you very much.

Chairman SHELBY. Senator Sarbanes, you have another question.

Senator SARBANES. Yes. I wanted to ask a question to the two

nominees for the Board of Governors at the Fed.

Over 2 million of the unemployed workers today are categorized

as long-term unemployed—unemployed for more than 26 weeks.

Twenty-three-point-two percent of all unemployed workers are

long-term unemployed currently. This figure has been above 21

percent for 8 consecutive months now. That is the first time that

has happened in 20 years, since 1983, that we have had such a

high percentage of the unemployed long-term unemployed over this

period of time.

The Center on Budget and Policy Priorities estimates that over

one million American workers have been unemployed for more than

39 weeks and therefore have exhausted even their extended unemployment insurance benefits but are still unable to find work.

We have actually had a rather long bipartisan history of extending unemployment insurance benefits during periods of prolonged

weakness in the labor market. We have extended benefits following

every recession since World War II, and in a number of instances

for a longer period—a longer period and greater benefits than is

the case today.

Given the current economic situation, shouldn’t we again ease

these restraints on the unemployment insurance system and provide a further extension of benefits in order to meet this problem?

Mr. BERNANKE. Senator, I think in a situation as we have now,

with very long-term unemployment and very slow job creation, extending unemployment insurance benefits is a reasonable policy.

I would make the additional suggestion that we take, I guess I

would call it, a caseworker approach to the extent that individuals

have exhausted 39 weeks of benefits. We should do more than send

them a check; we should try to do what we can to assist them in

finding new work.

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I think there are some very successful programs involving, for example, helping workers learn how to write resumes and do other

things that can get them back into the job market. One might do

further things like considering vouchers for retraining or assistance

in relocating.

I agree that under the current circumstances, it is not the workers’ fault that they are unemployed for a long period of time, but

I think that assistance could take the form not only of a check but

also perhaps of other more direct counseling or training.

Mr. FERGUSON. I would agree with the latter points Governor

Bernanke was making. I think one of the things that is interesting

about this slowdown—and we saw it in the earlier 1991–1992 experience—is that we are getting both a cyclical impact here just from

an economy that is growing below potential. There has also been

some research that has shown that we are getting a longer-term

effect as well, that some of the state and nature of the unemployment in this particular slowdown reflects productivity as we have

discussed already, but it also reflects the fact that we are at a period of great business restructuring where businesses, in an effort

to increase productivity, also are finding ways to do more with

fewer workers, and we find that jobs that existed in one industry

no longer exist, et cetera.

So, I would argue that one of the issues that one has to focus on

is how to help the transition of labor from jobs that no longer exist

and may not come back—some certainly will come back, obviously,

but some will not—into jobs that are likely to be created, perhaps

in new locations, perhaps in different industries. So that some of

the issues that Governor Bernanke has touched on, I think I would

also commend to you, in particular a recognition that some of what

we are dealing with is a long-term secular pattern that also has to

be responded to in addition to trying to make sure the economy returns to sustainable growth and indeed has a period where it is

growing above trend to start to close some of this gap of resource

utilization.

I think society is being confronted with some of these secular

trends as well as the cyclical ups and downs of the economy that

we have talked about.

Senator SARBANES. Well, I appreciate those comments, but of

course, the people who are unemployed and have run out of their

benefit checks and cannot find a job face an immediate crisis. I

think it was Harry Hopkins who said, ‘‘People do not eat in the

long-run, they eat in the short-run,’’ and that is staring them right

in the face.

Furthermore, as an economic matter, the loss of purchasing

power by no longer providing unemployment benefits to workers

out of work is going to have a macroeconomic impact as well, would

it not? Wouldn’t it make it more difficult to move back out of the

economic downturn?

Mr. FERGUSON. Well, Senator, it is certainly true that the forecasts—and they are just that—of growth going through not just the

third quarter but the fourth quarter of this year and in 2004 build

in a number of assumptions, and one of them is an increase in

wage and salary income, which is to say more people going back

to work. So without a doubt, your economic analysis of the interVerDate 11-MAY-2000 16:31 May 24, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 20216.TXT SBANK4 PsN: SBANK4
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action between wages and salaries on the one hand and macroeconomic impacts on the other is true. That analysis is part of what

is built into the blue chip forecast and almost every other forecast

that includes an increase or expectation of an increase in real disposable income, an expectation of an increase in personal consumption expenditures, much of that predicated on some increases in

wages and salaries. Obviously, your economic analysis is consistent

with that of the economics profession broadly.

Senator SARBANES. Long-term interest rates dropped by more

than half a point between the FOMC meetings in early May and

in late June. This gave a sizeable boost to mortgage activity, both

for new homes and refinancing old mortgages. Then, long-term interest rates rose by more than a percentage point in the weeks following the late June meeting, which of course caused refinancing

to fall by more than 80 percent.

What is your analysis of why we had these swings in long-term

interest rates in May, June, and July, and have statements by the

FOMC and by Fed officials contributed in any way to these swings?

Mr. FERGUSON. I will start, and Governor Bernanke will, I am

sure, give his views on this.

Senator SARBANES. There are some analysts, I understand, who

think that the bond market participants felt that somehow they

had been misled by the Fed and that this contributed to these

swings. I would like you to address that criticism.

Mr. FERGUSON. I would be happy to address it. I think the movements that we saw during this period in long-term interest rates

reflect a number of factors. I would say some of it has to do with

an understanding of the real economy and its likely trajectory;

some, I will admit, has to do with issues of understanding or misunderstanding of Federal Reserve intentions.

During that period, there was quite a bit of focus on an economy

that was growing very slowly, growing below potential. There was

quite a bit of focus on disinflationary pressures, and there was

some concern at that time that those disinflationary pressures

might start to accumulate and mount and become more severe.

During that period, certainly, there were also some speeches and

statements by the Federal Reserve that reflected that those risks

existed, but it was clear that those risks were, in the minds of the

individuals speaking and in the mind of the Federal Open Market

Committee, I think, quite remote.

I think there may have been perhaps some misperceptions in the

market that the statement that these risks were remote, and that

indeed there were things that we could do to offset those risks

should they increase, were perceived by some people in the market

as perhaps more a statement of imminent action on our part to

take nontraditional measures with respect to monetary policy than

in fact was true.

The other things that happened were not just that there was a

greater clarification about the Federal Reserve’s intentions as time

passed, but also the data came in, and there was greater evidence

that the economy appeared to be getting its footing, shall we say,

and there was some evidence that things were starting to turn.

You have a couple of things going on—economic data that started

to show that the worst outcome seemed less and less likely, and

25

there was a greater understanding that the statement that a disinflationary or a deflationary environment was remote but that we

could use nontraditional methodologies to counteract it turned out

in fact to be true. Those forces were indeed remote, and there was

no need to use any of these nontraditional or unconventional methodologies.

I would say it was certainly a period of time in which there were

a number of different factors that came into play, and I would not

say that there was a miscommunication on the part of the Federal

Reserve so much as perhaps some individuals in the markets overinterpreted the fact that a number of people said something was

remote and assumed that that meant it was less remote. In fact,

it was just simply a restatement that these outcomes seemed very

remote and that there were tools that could be used, but the condition precedent of a remote outcome becoming probable never

emerged.

Mr. BERNANKE. I agree with most of what Vice Chairman Ferguson said.

At the May meeting, the statement was the first to break up the

risks to output and inflation and made the explicit statement that

we considered the risk to inflation to be downward. This was a new

situation. The Fed has always been fighting inflation rather than

worrying about inflation going too low.

The purpose of signaling that inflation had a downward risk was

in a way to try to convey the idea that the Fed would remain accommodative in order to make sure that disinflation did not proceed and at the same time support the recovery in the economy.

It would have been appropriate in fact for bond rates to fall, reflecting the view that the Fed was going to keep interest rates low

for a period of time.

It does appear to be the case that some bond market participants

overinterpreted that statement to say that the Fed was involved or

planning to take much more dramatic actions such as purchasing

long-term Treasury bonds in an attempt to bring down long-term

yields directly.

Again, we did try to emphasize throughout the process that we

were doing our fiduciary duty in preparing and thinking about such

contingencies but that we felt that those contingencies were quite

remote, and therefore, I think that interpretation was not really a

fair one.

The fluctuations that we have seen in bond yields, besides responding to genuine news in the economy, have been exaggerated

to some extent by mortgage hedging activity, including by the Government Sponsored Enterprises, which tend to create an unstable

dynamic. As interest rates rise, there is a tendency for mortgage

hedgers to sell bonds, which then causes interest rates to rise further. That clearly added to the volatility during this period as interest rates were moving up and down.

In short, I think that we tried to convey to the bond markets that

we did intend to keep policy easy, and that should have lowered

interest rates. There was an overreaction to that. The lesson we

have learned from that is that we need to be even better and more

clear in our communication. As I mentioned earlier, one of my particular interests and concerns about monetary policy is how we

26

should improve the transparency of the Fed and make it more clear

to markets and to the public exactly what we are trying to do and

what our objectives are.

That episode, I hope, will not create any significant problems

with the ongoing recovery, but it does teach us some valuable lessons about communication.

Senator SARBANES. So that kind of volatility is an undesirable

factor, is it not?

Mr. BERNANKE. It is indeed.

Mr. FERGUSON. Actually, we have to be careful. One expects interest rates to move based on changing expectations of monetary

policy, and based on incoming information about the economy. Extreme volatility by definition, one has to be wary of, but on the

other hand, you do expect long-term interest rates to reflect a variety of forces and, by definition, move.

I think the question that has to be asked is whether or not both

that sudden, relatively dramatic drop in long-term interest rates,

and then the reversal is likely to have a detrimental long-term impact on the recovery of the U.S. economy. My judgment is that, although it is a very interesting period and one that we can learn

from—all of us—it is not inconsistent with the kind of turnaround

that we expect to see and that is built into the forecast.

So, I agree with you. One wants to be careful about having too

much volatility in markets; on the other hand, the opposite of that

is interest rates that do not reflect incoming data, and you do want

to see that, for sure.

Senator SARBANES. Yes, but these interest rates, wouldn’t you

say the swing was beyond what the incoming data would reasonably have justified?

Mr. FERGUSON. Yes, I think it was, for reasons that we pointed

out. One was a misunderstanding on their part of what interest

rate policy and the use of these unconventional tools might have

been, and the second is the so-called convexity hedging issue.

Chairman SHELBY. Do you have any other questions?

Senator SARBANES. No, Mr. Chairman.

Chairman SHELBY. Gentlemen, we thank all of you for your appearance today, and we will try to move your nominations as soon

as possible so you can continue to do the work that you are doing.

Thank you. The hearing is adjourned.

[Whereupon, at 11:28 a.m., the hearing was adjourned.]

[Prepared statements and biographical sketches of the nominees

supplied for the record follow:]

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PREPARED STATEMENT OF ROGER W. FERGUSON, JR.

VICE CHAIRMAN-DESIGNATE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

OCTOBER 14, 2003

Chairman Shelby, Senator Sarbanes, and Members of the Committee, I am

pleased to appear before you today as President Bush’s nominee to serve as Vice

Chairman of the Board of Governors of the Federal Reserve System. I am honored

that the President has nominated me to serve a second term in that capacity. I

thank you for holding this hearing.

It has been my privilege to serve our fellow citizens as a Member of the Federal

Reserve Board since 1997 and as Vice Chairman since 1999. I have given this role

my undivided attention, and I hope to be able to continue in that service. The policy

decisions of the Federal Reserve influence the economic well-being of all Americans.

During my tenure, we have faced challenges in many of our areas of responsibility,

and I would like to review briefly some of those developments and our responses

to them.

Congress has given the Federal Reserve three monetary policy objectives: Maximum employment, stable prices,and moderate long-term interest rates. We have

viewed these objectives as congruent with a goal of maximum sustainable growth

that can occur only in the context of long-run price stability. Fostering financial conditions in which Americans can realize their full potential has presented a number

of challenges in recent years. The impressive step-up in the advance of technological

and organizational efficiencies and a rapid accumulation of physical capital in the

late 1990’s have been the key factors affecting our economy’s performance in the

past decade. These developments have made workers increasingly productive. But

faster productivity growth, despite its long-term benefits, has not insulated the

economy from cyclical swings. The sharp reevaluation that occurred in equity markets and the retrenchment in business investment and spending that occurred over

the past several years—together with the effects of terrorist attacks, wars, and corporate scandals—battered the confidence of households and businesses. In response,

the Federal Reserve made substantial adjustments to its policy interest rate in

order to cushion the effects of these developments on the broader economy. Other

forces—particularly the growing interconnectedness of the global economy—have

been important background factors in setting monetary policy. Of late, policymakers

have been mindful of the virtual eradication of inflation and their need to set policy

so that the economy remains in the zone of price stability. But all of our policy

changes have been undertaken in pursuit of maximum sustainable growth and stable prices.

Making monetary policy has been only part of the challenge. During my tenure

at the Federal Reserve, we have also worked diligently to communicate to the public

what we are doing and why. Transparency in policymaking is a key part of the

democratic process and fosters efficient decisionmaking in the private sector. Becoming more transparent has been an important goal of the central bank in recent

years, keeping in mind that we must balance being open and accountable with the

need to maintain an effective process of decisionmaking by the Federal Open Market Committee. Transparency requires that we periodically review our procedures,

as we did in 1999 and again last month, to ensure that they appropriately balance

these considerations. I do not know what future changes, if any, might be called for

in how we communicate, but I am confident that the Federal Reserve will continue

to look for ways to communicate and explain our policies clearly.

While macroeconomic conditions are of central importance, the role of the Federal

Reserve is broader than monetary policy. Financial stability is an essential precondition for maintaining a strong economy, and the Federal Reserve played a key

role in maintaining financial and economic stability in the aftermath of the terrorist

attacks on September 11, 2001. As the only Board member in Washington, DC, on

that day, I had responsibility for overseeing the Federal Reserve System’s response

to the terrorist attacks. Working with many able colleagues in the System, the U.S.

Government, and the private sector, we at the Federal Reserve responded effectively

to the attacks. By providing ample liquidity and reassuring the public and the banking community, we helped our financial markets and the supporting infrastructure

recover very quickly. Since that terrible day, I have done all in my power to enhance

the resilience of the financial system of the United States, and I pledge to continue

to work on these issues in the years ahead.

The Federal Reserve executes its important financial stability responsibilities in

less stressful times through its role in supervising and regulating our Nation’s

banking system. The Federal Reserve and other regulators must foster a competitive

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environment that will benefit the users of financial services, while also promoting

safety and soundness. I believe that we should achieve these objectives with a minimum of regulatory burden and without leaving the impression that any institution

is too big to fail. Currently, we face the challenge of meeting these goals by developing a new capital accord to apply to the largest, most complex internationally active institutions. As I have testified before this Committee, the existing accord no

longer suffices for these institutions. Now we need to work with our financial institutions and other regulators to replace the existing accord with a new one that is

more risk-sensitive, builds on advances in risk measurement and management, and

provides proper incentives. And we must do so without unnecessary complexity and

without creating undesirable competitive imbalances or other unintended consequences.

Technology and deregulation have encouraged consolidation in the financial sector. With central bank and treasury officials from twelve other major industrial

economies, I have reviewed the likely effects of the global trend toward consolidation

and its implications for central banks and regulators. Because financial systems will

continue to consolidate, the regulatory community needs to monitor developments

closely. But our study also found that existing policies appear adequate to allow regulators to maintain safe and sound financial industries now and in the intermediate

term. This is true both for financial stability and for the maintenance of markets

through which monetary policy can continue to work using the same mechanisms

as in the past.

Last, our payment system is a real presence in the economic lives of every consumer and business. This system too has been, and will continue to be, changed

greatly by emerging technologies. From its very founding, the Federal Reserve has

had the responsibility to foster an efficient, safe, and accessible payment system. In

a dynamic economy, markets appropriately play the key role in guiding the development of the payments infrastructure. This means that innovation and competition

will be central to the future development of the payment system—as they are in

other areas of the economy. Regulators and Congress should strive to remove barriers to innovation when we can do so without sacrificing important public policy

objectives. I have been privileged to work with this Committee on one such initiative, the Check Truncation Act, or Check 21. This legislation removes a legal

impediment and should, over time, foster greater use of electronics in the checkclearing process while also preserving the right of consumers and banks to receive

paper checks. Ultimately, Check 21 should allow depository institutions to provide

new and beneficial services to their customers. I look forward, as I know you do,

to its prompt enactment. And I thank the Committee and its staff for the strong

support you have provided.

Mr. Chairman and Members of the Committee, during my years on the Board of

Governors, I have done my best to contribute positively to all aspects of the Federal

Reserve’s many responsibilities. I look forward to the opportunity to continue to

work with you and serve the Nation as Vice Chairman of the Board of Governors.

Thank you for your attention and for considering my nomination. I would be pleased

to answer any questions.

—————

PREPARED STATEMENT OF PAUL S. ATKINS

MEMBER-DESIGNATE, U.S. SECURITIES AND EXCHANGE COMMISSION

OCTOBER 14, 2003

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, it

is a very great honor for me to appear for the second time before this Committee.

I am deeply grateful for the confidence that President Bush has again shown in me

by nominating me for a second time to be a Commissioner. I appreciate your courtesy in calling me before you today.

I would also like to note that it has been a pleasure to work with Chairman Bill

Donaldson and my other colleagues on the Commission, Cynthia Glassman, Harvey

Goldschmid, and Roel Campos. I salute the leadership that Chairman Donaldson

has provided us and the SEC staff. If confirmed once again by the Senate, I look

forward to continuing to work with Chairman Donaldson and my fellow Commissioners to address the very weighty issues that are before the SEC.

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. In fact, I should note that I now

have had the privilege of working closely with four SEC Chairmen: Richard

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Breeden, Arthur Levitt, Harvey Pitt, and Bill Donaldson. I have learned much from

each of these men and am happy to count them as friends and advisors.

As the Members of this Committee well know, in the past few years investors

have been confronted with spectacular failures of large and small corporations because of bad accounting practices and outright fraud. The instances of corporate

managers engaging in theft and reckless mismanagement of corporate funds are

shocking, outrageous, and completely unacceptable. The revelations of corporate

malfeasance undermined our capital markets in a profound way. ‘‘Corporate Responsibility’’ rightfully became a national issue for the first time in perhaps 70 years.

In response to this crisis, this Committee and the Congress acted forcefully and the

President signed into law the Sarbanes-Oxley Act of 2002, the most important piece

of corporate governance and securities legislation in the last 70 years.

For many Americans, the SEC until the last couple of years may have been just

another Federal agency in Washington, DC, with an alphabet-soup acronym. As

Enron, MCI, and a host of other corporate scandals—along with the severe downturn in the marketplace—showed, the times have radically changed. Millions of

Americans look to the SEC more than ever as the defender of their financial hopes

and dreams, as it should and must be. Investors rightfully demand a tough cop to

fight those who steal their hard-earned savings and investment.

These are unique and demanding times at the SEC. It would be a privilege for

me to continue to respond to this call and to give my best efforts to advance the

Commission’s mandate on behalf of the investing public.

In my relatively short tenure as an SEC Commissioner, I have had the privilege

of serving at the agency as we attempted to fulfill the high expectations of Congress

in implementing the Sarbanes-Oxley legislation. As the Commission considered this

important legislation, I tried to be mindful that investors need to have confidence

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. Investors need

to know that auditors of public companies are unconflicted, ethical, and acting in

the best interests of investors. They need to know that their representatives on corporate boards are actively guarding their interests. And, last, but certainly not least,

investors must 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.

If confirmed, I will continue to make decisions based on these bedrock principles.

We at the SEC have heard the calls from the investing public, and we are working hard to be more vigilant, more aggressive, and more faithful defenders of the

public trust. We have, I believe, made significant steps to restore confidence in our

financial system. If confirmed, I will continue to work toward achieving these critical objectives.

As I said the last time that I was before you, the SEC is a vital line of defense

in protecting investors and the integrity of our financial markets. If confirmed, I will

continue to dedicate my energy, experience, integrity, and independent judgment to

achieving that goal. I look forward to the opportunity to return to my position at

the SEC to serve with Chairman Donaldson and my fellow Commissioners.

Thank you very much and I would be happy to answer any questions that you

might have.

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(65)

NOMINATIONS OF:

APRIL H. FOLEY, OF NEW YORK

TO BE FIRST VICE PRESIDENT OF

AND

JOSEPH MAX CLELAND, OF GEORGIA

TO BE A BOARD MEMBER OF

THE EXPORT-IMPORT BANK OF THE UNITED STATES

TUESDAY, DECEMBER 9, 2003

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 9:30 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

The purpose of this hearing is to review the nomination of April

Foley to be First Vice President of the Export-Import Bank of the

United States—Ms. Foley already serves as a member of the

Bank’s Board of Directors—and the nomination of Max Cleland to

the Board of Directors of the same institution.

The Export-Import Bank is the principal U.S. Government entity

for financing the export of U.S. goods and services. As the United

States becomes more economically interdependent with a growing

number of trade partners, the Bank’s role in leveling the playing

field for American companies seeking to market their goods and

services overseas continues to grow. In fact, an agency that just a

few short years ago was the target of serious efforts aimed at its

dissolution has not only survived but has also seen its mission expand. Especially with the increase in emphasis over the past decade on the Bank’s loan guarantee and risk insurance programs, the

opening of new markets in developing countries will almost certainly tax its energy and resources more than ever before.

It is for this reason that the importance of the role of the ExportImport Bank’s Board of Directors should not be underestimated.

The positions for which these two highly respected individuals have

been nominated oversee an organization with an annual budget of

$600 million and which supports billions of dollars in U.S. exports

every year. Ms. Foley, of course, is an incumbent member of the

Bank’s Board. Our former colleague and friend Max Cleland, howVerDate 11-MAY-2000 16:31 May 24, 2005 Jkt 000000 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 20216.TXT SBANK4 PsN: SBANK4
66

ever, will be new to the Bank, and I firmly believe will make an

admirable addition.

Prior to assuming her position as a member of the Ex-Im’s Board

of Directors, April Foley was a member of the Board of Directors

and President of the United Way of Northern Westchester, New

York. She has been Director of Business Planning for Corporate

Strategy for PepsiCo and served as Director of Strategy for Reader’s Digest Association. She carries with her the battle scars from

having cast the deciding vote against Ex-Im Bank support for the

natural gas extraction, pipeline, and processing facilities the Government of Peru intends to build in sensitive rainforest and marine

preserves. Given the stakes involved in that project for U.S. companies, Ms. Foley has already demonstrated her independence and

her integrity.

The second nominee, of course, is Max Cleland, a former U.S.

Senator from Georgia. Senator Cleland is currently a member of

the National Commission on Terrorist Attacks Upon the United

States. Prior to his election to the Senate, he served in the Administration of President Carter as Secretary of Veterans Affairs, and

has also served in the Georgia State Senate and as that State’s

Secretary of State. I am pleased that he is here with us today.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman.

I am pleased to welcome before the Committee on Banking,

Housing, and Urban Affairs former Senator Max Cleland, who has

been nominated to be a member of the Board of Directors of the

Export-Import Bank, and Ms. April Foley, who has been nominated

to be the First Vice President of the Export-Import Bank.

I would like to begin by thanking Chairman Shelby for holding

this confirmation hearing today. Both of these nominations were

received by the Senate on November 24, so there was no opportunity to hold a hearing on them before the Senate recessed on November 25. I should also note that Senator Miller was unable to

be here this morning but asked that his statement of strong support for Senator Cleland’s nomination be inserted in the record of

the hearing.

Senator Cleland has given extraordinary service to our country

for nearly 40 years. I am very pleased that he will be able to continue that career of public service as a member of the Board of the

Export-Import Bank.

Senator Cleland received his undergraduate degree from Stetson

University in 1964 and a master’s degree from Emory University

in 1968. He served in the United States Army from 1965 to 1969,

at which time he retired with the rank of captain. During his service, he received the Soldiers’ Medal for Heroism, the Bronze Star

for Meritorious Service, and the Silver Star for Gallantry in Action.

Senator Cleland served as a Senator in the Georgia legislature

from 1971 to 1975 and as a staff member of the U.S. Senate Veterans’ Affairs Committee from 1975 to 1977.

President Carter appointed Senator Cleland to be Administrator

of the Veterans Administration in 1977, a position he held until

1981. From 1983 to 1996, Senator Cleland served as Secretary of

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State of Georgia. From 1997 to 2003, he served as U.S. Senator

from Georgia. He is currently a member of the Independent

Commission on Terrorist Attacks on the United States and Distinguished Adjunct Professor and Member of the Center for Presidential and Congressional Studies at American University.

April Foley received her undergraduate degree from Smith College in 1969 and an MBA from Harvard Business School in 1975.

She worked in senior management positions for Wilson Sporting

Goods from 1976 to 1981. From 1981 to 1993, she served as Director of Business Planning for PepsiCo Company. From 1994 to 1995,

she was Director of Strategy for Reader’s Digest.

I should note that Ms. Foley had been previously nominated to

be a member of the Ex-Im Bank Board on April 11. However, she

received a recess appointment on May 14 and has been serving on

the Board since then. Her nomination to be a member of the ExIm Bank Board was withdrawn by the White House on November

21, prior to the submission of her nomination to be First Vice

President of the Ex-Im Bank.

I believe that both of these nominees are well-qualified for these

positions, and I intend to support their nominations. Senator

Cleland, of course, will bring a perhaps unprecedented dimension

of stature and weight to the Board of the Ex-Im Bank. I think it

is fair to say that calls from him on behalf of the Ex-Im Bank to

U.S. exporters and commercial banks, foreign companies and governments, and indeed, Members of Congress and other executive

branch agencies, will be returned with greater haste than your average Ex-Im Bank Board member.

I also know that he brings a passionate commitment to the promotion of U.S. exports and the creation of American jobs, the principal mission of the Export-Import Bank. His service on the Senate

Commerce and Small Business Committees as well as the assistance he provided to exporters from Georgia provide him with substantial background for his new position.

By all reports, Ms. Foley has performed with great distinction

during her brief service on the Board of the Export-Import Bank.

Her significant background in senior management positions in the

private sector will serve her well. The Charter of the Ex-Im Bank

provides that the First Vice President shall serve as Vice Chairman

of the Board of the Export-Import Bank.

Mr. Chairman, I want to enter in the record a letter sent to us

from the Coalition for Employment Through Exports, a businesslabor group which has been very interested in the export issue and

has been a source of good advice, I think, to the Committee, signed

by its president, Edmund B. Rice, and I am going to take a moment

just to quote from it.

In the 8 months since she was appointed to the Bank’s Board, April Foley has

quickly distinguished herself as a hard-working, dedicated director. She has demonstrated a keen understanding of the fierce competition that U.S. exporters confront in global markets and the key role that the Bank plays to help level the playing field against foreign companies that have the active financial support of their

governments in financing transactions and projects.

This sharp focus on increasing U.S. exports and export-related jobs is complemented by her prior private sector management experience, which makes her an

excellent choice to be First Vice President of the Bank with that position’s added

responsibilities.

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And with respect to Senator Cleland, Mr. Rice says: ‘‘Former

Senator Cleland’s distinguished public service in the military and

in the Senate needs no further elaboration. He would bring to the

Bank’s Board a well-honed ability to determine public policy in a

wide range of areas, and we are confident that he would add an

important dimension to the Board’s governance of the Bank.’’

Mr. Chairman, I would close by just saying that I believe that

both of these nominees are very well-qualified for these positions.

I intend to support their nominations.

Chairman SHELBY. Senator Allard.

COMMENTS OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, thank you.

I wanted to be here this morning specifically so that I could welcome my good friend Senator Cleland to the Committee.

Senator Cleland and I worked together on the Armed Services

Committee and worked on some pretty sensitive issues, and I think

at the time we were working together, a lot of the export-import

issues as far as defense products were concerned were something

that received a lot of discussion. And obviously, his experience on

the Small Business Committee is something I have appreciated.

Being a small businessman myself, I put a lot of importance on

small business, and I think if there is an area where we need to

have emphasis and help, it is in the small business area and working on the exports and imports of this country. It seems like larger

corporations have the personnel to do it, but those that probably

need assistance at least to get started are in the small business

community and helping out small business entrepreneurs.

And he has had experience on Commerce, Science, and Transportation Committee—that covers most bases. I think he will do a

great job on the Board of Directors of the Export-Import Bank, and

I wanted to be here just to specifically say hello to him and wish

him well, and I plan on supporting him for this position.

I would also like to welcome April Foley to the Committee. Her

extensive experience in financial planning and strategy development will make her a valuable asset on the Board of the ExportImport Bank, and further, her previous employment experiences

allowed her to interact with many different people on many different levels, and I think that is important. This will be key as she

works to create relationships internationally, working to keep the

U.S. economy strong and growing.

So, Mr. Chairman, thank you for giving me the time to welcome

these nominees, and I suppose Senator Daschle has a word or two

that he wants to say, too, so I will yield over the rest of my time.

Thank you.

Chairman SHELBY. I will call on Senator Daschle, our former Majority Leader, the Democratic leader, a friend and colleague of all

of us, for any remarks he wishes to make.

COMMENTS OF THOMAS A. DASCHLE

A U.S. SENATOR FROM THE STATE OF SOUTH DAKOTA

Senator DASCHLE. Mr. Chairman, I would begin by thanking you,

the Members of the Committee, and your staff for rearranging your

schedules to hold this hearing. It means a great deal to many of

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us, and this would not have happened were it not for your willingness to do so. So I am grateful to you for that.

You have spoken so eloquently and articulately about the qualifications of each of our candidates. I congratulate our nominees,

and I simply wanted to come before the Committee this morning

to say just a word about our dear friend Max Cleland.

Max went to Vietnam at six-foot-four and came back having sustained injuries that most of us could never have tolerated or endured. But I think he stands even taller than that today in this

country and in the Senate in large measure because of the man he

is. With his integrity, his willingness to work hard, his sense of

fairness and bipartisanship, he has become an inspiration to us all.

Max has written two books—‘‘Going for the Max’’ and ‘‘Strong at

the Broken Places.’’ This man is strong in broken places, and he

serves as an inspiration, not only to those who have also endured

tragedy and hardship, but also to those of us who have had the

good fortune to work with him. He is a dedicated public servant.

You have articulated well his qualifications, as well as his experience, so I could do no more than to commend him to the Committee, thank him for his willingness to continue in public service

today, and wish him well as he begins a new chapter in his life.

I thank the Committee.

Chairman SHELBY. Senator Daschle, thank you for your remarks.

Chairman SHELBY. Will both of you raise your right hand, or

raise your hand and affirm?

Do you swear or affirm that the testimony that you are about to

give is the truth, the whole truth, and nothing but the truth, so

help you God?

Ms. FOLEY. I do.

Senator CLELAND. I do.

Chairman SHELBY. Do you agree to appear and testify before any

duly-constituted committee of the Senate?

Ms. FOLEY. I do.

Senator CLELAND. I do.

Chairman SHELBY. Welcome, Ms. Foley and Senator Cleland.

I understand you might want to introduce any family members

that you have here, and Ms. Foley, we will start with you.

STATEMENT OF APRIL H. FOLEY, OF NEW YORK

TO BE FIRST VICE PRESIDENT OF

THE EXPORT-IMPORT BANK OF THE UNITED STATES

Ms. FOLEY. Mr. Chairman, Senator Sarbanes, esteemed Members

of the Committee, I am honored to come before you as you consider

my nomination to be First Vice President and Vice Chair of the Export-Import Bank of the United States.

Many thanks to you and your fine staffs for scheduling this hearing. I also want to say happy birthday to Senator Daschle.

Senator SARBANES. He left the room. We forgot to do that.

Ms. FOLEY. I did not get that in soon enough.

I am deeply appreciative of President Bush for the faith and

trust he has placed in me. His nomination provides me with an exceptional opportunity to serve my country. We are all proud citizens of the finest country in the world. It is a rare gift to have the

chance to serve it in such a significant way.

70

I would like to recognize a family member who is here today.

Ellen James, who is the sister of my late husband, Gifford Foley.

I would also like to recognize my colleagues here who have been

enormously supportive of me.

I fully endorse the mission of the Ex-Im Bank, and I will strive

to successfully fulfill it. If confirmed, I will work diligently to support U.S. exports, create jobs for deserving Americans, and level

the playing field with foreign competitors. I will act to protect the

fiduciary interests of the American taxpayer. I will actively seek

creative enhancements to Ex-Im’s products and programs to better

respond to the changing needs of the marketplace. I will work with

the organization to identify new approaches tailored specifically to

the requirements of small business. I will back Ex-Im’s efforts to

be a relentless competitor. I will strive to foster a positive working

environment of honesty, openness, personal recognition, and respect. I will commit myself to serving this country with integrity,

balance, and vigor.

It would be a great honor and privilege to serve under the extraordinary leadership of Chairman Philip Merrill, and with such

accomplished colleagues as Director Joe Grandmaison and Senator

Max Cleland.

Mr. Chairman, Senator Sarbanes, Members of the Committee, I

respectfully ask for your favorable consideration of my nomination.

I am pleased to respond to your questions.

Chairman SHELBY. Thank you, Ms. Foley.

Senator Cleland.

STATEMENT OF JOSEPH MAX CLELAND, OF GEORGIA

A FORMER U.S. SENATOR FROM THE STATE OF GEORGIA

TO BE A BOARD MEMBER OF

THE EXPORT-IMPORT BANK OF THE UNITED STATES

Senator CLELAND. Thank you very much, Mr. Chairman. It is an

honor to be here with my potential colleague, Ms. Foley, and I

would like to say a special word of thanks to all of you for the wonderful words of welcome and the wonderful words of praise that I

have heard today. I have them on tape and will play them late at

the midnight hour.

[Laughter.]

I would like to recognize some people who have meant a lot to

me and do mean a lot to me—Ms. Nancy Ross, the woman I am

in love with and my fiancee; Bob Vaughn—we served together in

Vietnam; Gamin Michael, we served together in the Veterans Administration; Lynn Kimmerly, who was on my staff here in the

Senate; Andy Van Landingham, who was also on my staff here;

Mashio Cameron, a distinguished member of my former staff; and

two people who have made it possible for me to survive here this

year in Washington and whom I hope to bring to the Bank with

me—Elaine Iler and Adil Durrani. Also, I would like to thank Mr.

Peter Cohen and Jeri Thompson for their wonderful support.

May I just say, Mr. Chairman, Senator Sarbanes, and distinguished Members of the Committee, it is good to be back home in

the U.S. Senate. Senator Byrd used to say that people come to the

Senate to make an impact on it and find out that the Senate makes

an impact on them. So for the last 6 years of my life, it has made

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an impact on me, a positive impact, and I have enjoyed serving the

people of Georgia and the United States.

I wanted to have this new opportunity, if this Committee so decides, to have a new home at the Export-Import Bank. I would like

to thank the Minority Leader, Senator Tom Daschle, for his

unstinting support and his wonderful words today, and President

Bush for the opportunity to continue my service in public life. As

a former Chairman of the Ex-Im Bank, Mr. John Robson once declared before this Committee: ‘‘I relish this new challenge because

I have never found a canvas as big to paint on as public service

offers.’’ Those are my feelings exactly, Mr. Chairman.

But what kind of picture shall we, working together, paint? The

picture I would like to paint over the course of my tenure on ExIm Bank’s Board is of an expanding economy that creates jobs. One

way to maximize the jobs created in this country is by an expansion of our exports. Ex-Im Bank is needed now more than ever to

create jobs here in this country. Since its creation by President

Franklin Roosevelt almost 70 years ago, this marvelous agency is

one of the tremendous tools we have at our disposal to reverse the

downturn in the job market.

In 2003, Ex-Im Bank created and sustained thousands of jobs in

America through supporting $14 billion in our Nation’s exports. In

my home State of Georgia over the last few years, the Bank has

supported over $600 million in exports for 126 different companies

in 45 separate communities. That is quite an impact just in my

State alone. This is a picture of job creation and support for our

exports that I would like to paint for my whole country were I to

be confirmed by the U.S. Senate.

Last, I think my service in this body—as Senator Allard has

pointed out, as the Chairman has pointed out, and Senator Sarbanes has pointed out—my experience on the Senate Commerce

Committee and on the Senate Small Business Committee for 6

years, especially gives me a chance to be a spokesperson for small

business, which is one of the things I would like to do at the Bank.

Thank you for your time, Mr. Chairman. Thank you for this

hearing. Senator Sarbanes, Senator Allard, thank you for coming.

I would like to especially thank Ms. Foley and Mr. Joe

Grandmaison for helping me prepare for today’s hearing and the

wonderful staff at Ex-Im Bank, and certainly want to thank Chairman Phil Merrill. It is just great to have the opportunity to potentially serve with them.

Thank you again, Mr. Chairman, and I would just like to ask you

and the Members of the Committee for your support as a Director

of the Ex-Im Bank.

Chairman SHELBY. Thank you, Senator.

Iraq is estimated to be in debt to foreign lenders to the tune of

$116 billion. Alongside that debt load is an estimated cost to rebuild Iraq of about $200 billion. As Iraq struggles to rebuild and

come to grips with the implications, including the state of the nation’s dilapidated infrastructure, with a history of autocratic rule

and war, it is clear that at least in the short-term, its only real

hope for generating meaningful revenue is its oil, the industry’s oil

reserves.

72

There have been a number of proposals for how to exploit Iraq’s

future oil revenues to facilitate economic reconstruction. The Export-Import Bank itself had floated a proposal to issue bonds

against Iraq’s oil revenue. Now it would obviously be unfair to

place too much of the burden for Iraq’s reconstruction on an agency

like the Export-Import Bank.

The scope of the Bank’s mission and its limited resources mean

it can only do so much, as we know. To the extent, though, that

the Bank has a seat at the table of the U.S. and foreign lending

agencies that make the decisions on how best to aid Iraq’s reconstruction, I would appreciate hearing from both of you your assessments of how Iraq’s future oil reserves factor into the Bank’s calculations of what can be achieved here.

I know this is very complicated, what I am asking you. I would

also like to hear from you about your views of the approach the

Bank would take to calculate the risk with regard to a country

with such an enormous debt load relative to the current state of

its economy and the estimated cost of rebuilding. Ms. Foley.

I hate to hit you all with this, but this is very important.

Ms. FOLEY. No. I think it is an excellent question, and I want

to first compliment Chairman Philip Merrill for taking a leadership

role in the area of Iraqi reconstruction and also compliment Peter

Saba, who is part of the Bank, who has worked very diligently with

the team there to get some financing products on the table.

At Ex-Im Bank, I think a top priority for us is to make a contribution to Iraq reconstruction.

Chairman SHELBY. And you will be at the table.

Ms. FOLEY. Definitely, we will be at the table—and in fact, we have just come forward with a $500 million line of credit to finance

short-term transactions with the CPA which is guaranteed by the

Development Fund of Iraq, which is basically where the oil revenues are collected.

This is a short-term facility. We took the leadership role in establishing this facility, and then we worked with 15 other countries

to have similar facilities so that now, instead of $500 million on the

table, there is $2 billion on the table.

We will be moving forward to put a medium-term product on the

table, and I am planning to go to Iraq in 2004 and try to move the

ball forward and see what more we can contribute.

Chairman SHELBY. You are very familiar with the fact that

President Bush has enlisted the help of former Secretary of State

James Baker to try to bring that debt load down.

Ms. FOLEY. Yes, he has, and we are fully supportive and feel that

it is a top priority because medium-term and long-term financing

really cannot occur before that debt is rescheduled or forgiven.

Chairman SHELBY. Max, do you have any comment?

Senator CLELAND. Yes, sir. Mr. Chairman, I have always thought

that this nation, Iraq, which has the second-largest oil reserves in

the world, has a tremendous natural asset that it can leverage and

that we can leverage in assisting it to rebuild.

I think the Bank has taken a very forward step already. They

have evaluated the risk, and I think they have approached it properly by in effect taking it one step at a time. Ms. Foley talked about

short-term debt, less than 180 days. I think that that is the proper

73

way to do it and that the Bank has backed some $500 million in

exports for U.S. companies who want to export there. This support

has now increased to 15 other nations and involves some $2 billion

in assets to back exports for Iraq reconstruction.

So, I would support the continued evaluation of Iraq and

leveraging the oil that they have. We will take it one step at a

time, and I think the Bank has already taken a good first step.

Chairman SHELBY. What about Russia? I will start with you, Ms.

Foley, since you are on the Board now. How do we secure the environment for U.S. investment in Russia, considering the history and

considering what is going on there? There is a lot of potential and

a lot of danger, is not there?

Ms. FOLEY. There is. There is both. I think some of the messages

that Senator Evans—excuse me—Secretary Evans and the Commerce Department——

Senator SARBANES. I am sure the Secretary does not mind being

promoted.

[Laughter.]

Ms. FOLEY. —good point—Secretary Evans is trying to get the

message of the importance of good corporate governance, ethical

conduct, and the rule of law. I think a lot of progress is being made

on all of those fronts in Russia. Even so, Ex-Im Bank has to be cautious in how it approaches each transaction. We have a well-developed risk assessment program for every country which evaluates a

complex array of economic, political, and credit factors. We feel

these evaluations provide us with adequate protection for the risks

that we take.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Mr. Chairman, I am going to forego questions, particularly in

view of the very strong statements of both Ms. Foley and Senator

Cleland. I thought they were an exceedingly strong, concise statement of their responsibilities on the Export-Import Bank Board.

I just want to mention a couple of points for their consideration.

First of all, as you indicate, I think this issue of Iraq reconstruction

is very complex. The Board needs to work through it very carefully.

Obviously, that challenge could consume all of the resources of the

Board that are available to us, leaving it with very little or nothing

to do elsewhere.

There is a matter of balance that has to be taken into account.

I do not quarrel with there being a role to play, but I think it needs

to be thought through very carefully so the Bank’s fundamental

role of helping exports and jobs all over the world is not markedly

circumscribed.

Second, Senator Allard took the lead in the Committee last year

with the support of many of us to increase the percentage of ExIm Bank financing that must go to small business. It has been increased from 15 to 20 percent. I think that does pose a challenge

to the Ex-Im Bank to move up to that level, and I was heartened

by the commitment on the part of both of you here this morning

to the small business challenge and particularly the experience

that Senator Cleland brings to that issue.

Finally, this Committee put the Tied Aid Credit War Chest into

the law, and we have been strongly supportive of it. I think it is

74

essential. We are trying to get agreements at OECD not to underwrite exports, so the competition is simply on the basis of price and

quality. But if other countries are not going to play by that rule

and are going to significantly underwrite their exporters, for us to

fail to provide support for our own exporters means they will not

be competing on a level playing field, and I think that needs to constantly be borne in mind.

But again, Mr. Chairman, I am excited by these two nominees.

I think they will add to the quality of the Ex-Im Bank with Chairman Merrill and Director Grandmaison and give us a very strong

team at the Ex-Im Bank.

I know the President has one further appointment to make,

which I understand is in the works, so we will have a full complement there, but I have always felt that Ex-Im has a very important role to play in terms of the workings of our economy, and I

wish you both well.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

I would like to follow up a little bit on Senator Sarbanes’ small

business comments. As he mentioned, we had provisionally put in

the authorization bill to increase the role of small business in exports and imports, and as Senator Sarbanes pointed out, it is not

an easy issue to deal with. I was wondering—this is to both of

you—if you have any thoughts on what initiatives you might put

forward and might talk about that would meet the goals that were

laid out in that legislation.

Senator CLELAND. Let me take that if I can, Senator. About 98

percent of the jobs in America are created by small businesses, basically defined as 200 employees or less. As a matter of fact, during

the 1980’s and 1990’s, a massive growth period, most of the new

jobs created in America were by businesses with 19 employees or

less.

So, I think the whole evolution of small business in America is

a challenge to us all. One of the things I would like to specialize

in, given my interest in small business, is how the Bank can leverage its power and its financial support for exports for small business companies. I think that is a tremendous payoff there if we can

find good ways to do it. I appreciate your particular interest in this,

and it is something that I would like to personally tackle. I do not

have any great ideas right now, but it is something that I would

like to put right on the front burner when and if I am confirmed

by the Senate.

Ms. FOLEY. It is a good question, and it is a difficult question.

First of all, the Bank fully supports the 20 percent hurdle, and we

are trying to not only meet it but also exceed it. But because of the

limited resources that we have at the Bank, it really takes a different type of approach than we use for our normal large business

transactions. Increasingly what we are seeing is that to be effective

with small business, we have to have products designed for use by

financial institutions that work through their vast branch networks. They can provide access to a greater number of small businesses. So therefore, the financial institution acts as a multiplier

for our business.

75

So right now we are in the process of evaluating our product and

program lineup for financial institutions to make sure that our

products are tailored properly to meet the needs of small businesses. In cases where they are not, we are trying to adjust the

product line so that we have faster turnaround time, we have less

paperwork, we have an electronic application process, et cetera, et

cetera. Local currency is also an important small business-type feature to have.

We are looking at all of these, and I think that when we get

these programs into place, we will be much more effective in working through our multipliers to get the small business volume that

we want to pump through Ex-Im Bank.

Senator ALLARD. I think both of you have given good responses.

I might add that I think part of the problem with small business

is the communication problem and how you are going to get the

message out to them and help them. I think you need to seek out

those organizations that have a certain appeal to small business—

it might be the local chamber, it might be the NFIB, or any other

group of small business people—and let them know it is available.

And even that is a relatively small percentage of all the small businesses that we have out there. I think that is one of the challenges

considering some of the limited resources you might have dedicated, so you want to think of ways, while you get that message

out there, that you can help small businesses. The banks, as you

suggested, could be a good avenue, as well. Frequently, when small

businesses are expanding, they go to a bank and ask for a loan,

and I think this is a good opportunity for banks to help out a little

bit in that area.

The other question I have is a little more pointed, and I do not

mean it to reflect at all on what I think is happening now at the

Export-Import Bank, but I do think it is really important that we

have an inspector general there that is functioning. We put that

language in the Export-Import authorization bill, and I have noticed that in this last year, it was not requested, and I hope that—

in fact, I am going to ask for a commitment from each one of you

that you work as members of that Board to get in the President’s

budget a request for money for an inspector general. The inspector

is the eyes and ears—you can understand this, Senator Cleland; we

rely on them—they are the eyes and ears of the Members of the

Congress, and I think it adds to the credibility of the Export-Import Bank to have it there. I think it makes those of us who have

some oversight of the Bank feel more comfortable about what is

happening. And I hope, again, and I ask that each one of you will

work to fund the IG position in the next budget.

Senator CLELAND. May I take that one first?

Senator ALLARD. Yes.

Senator CLELAND. Thank you for mentioning that. It is a littleknown part of credible, honest, straightforward, accountable government, but the inspector general is a valuable tool for that to

happen in any agency.

When I was head of the Veterans Administration in the late

1970’s, I created the Office of Inspector General in the VA, and it

is still there today. The VA is right across the street, so I bring the

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same passion across the street now to Ex-Im Bank’s Board to create an Office of Inspector General.

Senator ALLARD. I appreciate your commitment to that.

Ms. Foley.

Ms. FOLEY. My understanding is that it was requested in fact in

the President’s budget but did not get through.

Senator ALLARD. At what level?

Ms. FOLEY. I do not know.

Senator ALLARD. Okay. But the Board actually made the request

from the Export-Import Bank, and when it went up for review, it

got taken out. Is that what happened?

Ms. FOLEY. That is my understanding.

Senator ALLARD. Okay. That is interesting. Well, continue your

efforts if you would, please——

Ms. FOLEY. Okay.

Senator ALLARD. —to track that down. Maybe we need an

amendment in the Senate.

Ms. FOLEY. Let me assure you in the meantime, as chair of the

Audit Committee, that we have a very rigorous audit and control

function at the Bank.

Senator ALLARD. Thank you.

Chairman SHELBY. I just want to tell both of you that I believe

both of you are exemplary nominees. Ms. Foley is already on there,

and we know Senator Cleland well; he is highly respected. We are

going to push both of these nominations as quickly and expeditiously as we can under the circumstances that we find ourselves

in. We are going to be working with the leadership on both sides,

Senator Daschle and Senator Frist, because these are important

positions; you know it.

So we thank you both, and we look forward to moving you as

soon as possible. You will have widespread support in the Senate.

Thank you.

Senator CLELAND. Thank you, Mr. Chairman.

Ms. FOLEY. Thank you.

Chairman SHELBY. The hearing is adjourned.

[Whereupon, at 10:11 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of the witnesses,

and additional material supplied for the record follow:]

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PREPARED STATEMENT OF SENATOR ZELL MILLER

Mr. Chairman, Members of the Committee, in all of my years in politics, I know

of no other person who has embodied leadership, service and sacrifice more than

Max Cleland.

On and off the battlefield Max’s story should serve as a continual inspiration to

us all.

When his Nation called in 1966, Max Cleland did not hesitate. He answered the

call to arms and went to battle. His answer was, ‘‘Count me in.’’

He volunteered for service, and he volunteered for Vietnam when he could have

stayed stateside and been safe and sound.

During his service in uniform, Max received the Silver Star Medal, one of the

highest awards that can be given for gallantry in action. Listen to this citation:

Captain Cleland distinguished himself by exceptionally valorous action on

4 April 1968 . . . during an enemy attack near Khe Sanh. When the battalion command post came under a heavy enemy rocket and mortar attack,

Captain Cleland, disregarding his own safety, exposed himself to the rocket

barrage as he left his covered position to administer first aid to his wounded comrades. He then assisted in moving the injured personnel to covered

positions. Continuing to expose himself, Captain Cleland organized his men

into a work party to repair the battalion communications equipment, which

had been damaged by enemy fire. His gallant action is in keeping with the

highest traditions of the military service, and reflects great credit upon

himself, his unit and the United States Army.

Those are not my words. That is Uncle Sam talking.

And 4 days after that incident that earned him the Silver Star came the grenade

explosion that so grievously wounded him. His would be a great story if you stopped

there. But Max Cleland did not stop there.

He continued to lead by courageously overcoming this tragedy and serving in the

Georgia state Senate. And he followed that up by distinguished tours of duty as

head of the Veterans Administration and as an esteemed member of this body.

I have known and respected and loved Max Cleland for over 30 years. His is an

American story; one of inspiration for us all. Mr. Chairman, I have no doubt that

the Export-Import Bank and the Nation will benefit by his appointment and service

on this board.

Thank you, Mr. Chairman.

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