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25–307—PDF 2005

S. HRG. 109–219

NOMINATIONS OF ROBERT M. KIMMITT,

RANDAL QUARLES, SANDRA L. PACK, AND

KEVIN I. FROMER

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON THE

NOMINATIONS OF

ROBERT M. KIMMITT, TO BE DEPUTY SECRETARY OF THE TREASURY;

RANDAL QUARLES, TO BE UNDER SECRETARY OF THE TREASURY,

DOMESTIC FINANCE; SANDRA L. PACK, TO BE ASSISTANT SECRETARY

OF THE TREASURY, MANAGEMENT; AND KEVIN I. FROMER, TO BE

DEPUTY UNDER SECRETARY OF THE TREASURY, LEGISLATIVE

AFFAIRS

JULY 20, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 2

Bunning, Hon. Jim, a U.S. Senator from Kentucky ............................................. 5

ADMINISTRATION NOMINEES

Kimmitt, Robert M., to be Deputy Secretary of the Treasury, U.S. Department

of the Treasury, Washington, DC ....................................................................... 6

Quarles, Randal, to be Under Secretary of the Treasury, Domestic Finance,

U.S. Department of the Treasury, Washington, DC ......................................... 7

Pack, Sandra L., to be Assistant Secretary of the Treasury, Management,

U.S. Department of the Treasury, Washington, DC ......................................... 8

Fromer, Kevin I., to be Deputy Under Secretary of the Treasury, Legislative

Affairs, U.S. Department of the Treasury, Washington, DC ............................ 9

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 2

Bunning, Hon. Jim:

Opening statement ........................................................................................... 5

Fromer, Kevin I.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 31

Biographical ...................................................................................................... 33

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Kimmitt, Robert M.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 40

Biographical ...................................................................................................... 42

Responses to questions from committee members ......................................... 53

Pack, Sandra L.:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 66

Biographical ...................................................................................................... 67

Responses to questions from committee members ......................................... 73

Quarles, Randal:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 79

Biographical ...................................................................................................... 81

Responses to questions from committee members ......................................... 92

(1)

NOMINATIONS OF ROBERT M. KIMMITT, TO

BE DEPUTY SECRETARY OF THE TREASURY;

RANDAL QUARLES, TO BE UNDER SECRETARY OF THE TREASURY, DOMESTIC FINANCE; SANDRA L. PACK, TO BE ASSISTANT

SECRETARY OF THE TREASURY, MANAGEMENT; AND KEVIN I. FROMER, TO BE DEPUTY UNDER SECRETARY OF THE TREASURY, LEGISLATIVE AFFAIRS

WEDNESDAY, JULY 20, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Present: Senators Lott, Smith, Bunning, Baucus, Bingaman, and

Wyden.

Also present: Republican staff: Dean Zerbe, tax counsel and senior counsel to the Chairman; Nick Wyatt, tax assistant; Democratic

staff: Bill Dauster, deputy staff director; Pat Heck, chief tax counsel; Jonathan Selib, tax counsel; and Mary Baker, detailee.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing is convened to consider four Presidential nominations to the Treasury.

First, we congratulate the nominees and, of course, we commend

them for a lifetime of devotion to public service, or for the public

service that they are now entering into.

All four nominees will appear on this single panel, as you can see

from their lining up there now.

Today, we will hear from Ambassador Robert Kimmitt, the Honorable Randal Quarles, the Honorable Sandra Pack, and Mr. Kevin

Fromer.

Ambassador Kimmitt is nominated as Deputy Secretary of the

Treasury. He has already had a very distinguished career that has

included an appointment as ambassador to Germany, along with

very good positions in the private sector.

The next nominee, Randal Quarles, nominated to be Under Secretary of Domestic Finance, is currently serving as Assistant SecVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
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retary for International Affairs. Mr. Quarles previously served as

U.S. Executive Director of the IMF, and has partnered his public

service with an extensive private-sector experience.

Our third nominee, Sandra Pack, is nominated to be Assistant

Secretary for Management. Ms. Pack previously served as Assistant Secretary for Financial Management and Comptroller at the

U.S. Army.

The last nominee is Kevin Fromer, to be Deputy Under Secretary

for Legislative Affairs. He is capping a career that is long and distinguished on Capitol Hill with his current appointment as Assistant to the Speaker for Policy, Budget, and Appropriations in Congressman Hastert’s office.

Senator Baucus? Then the Senator from Kentucky wants to

make a statement about one of the nominees.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. You have mentioned

the four nominees that we are considering today, and I very much

appreciate all four who are willing to serve. It is not easy. It is a

lot of work. I want to thank all of you for making this commitment,

and I welcome you to the committee.

As some may know, though, I am currently holding consideration

of nominees to certain significant Treasury Department positions

because of a Treasury rule change that makes it more difficult to

export American agricultural goods to Cuba.

In the year 2000, Congress passed the Trade Sanctions Reform

and Export Enhancement Act to encourage American agricultural

products to export to Cuba. That law expressly forbade the executive branch from changing the export rules. But Treasury ignored

that prohibition and the will of the Congress and changed the rule

in February of this year.

Treasury changed the rule to make it more difficult for American

farmers to export to Cuba. The previous rule had required cash in

advance of delivery, a requirement consistent with international

norms. The new rules require payment in cash in advance of shipment of the goods, and as a result of the change, American agricultural exports to Cuba have taken a nosedive.

In December of 2004, when Treasury first threatened to change

the rule on American agricultural sales to Cuba, I promised ranchers and farmers in Montana that I would not sit idly by.

I promised that if Treasury made the change, that is, the change

that they made, I would take whatever action was appropriate

until I felt sure that agricultural sales to Cuba would continue. I

feel strongly about protecting this market, for a lot of reasons,

mostly because these are farmers and ranchers.

It is tough enough to make a living, and it just does not make

sense to me why the U.S. Government should, contrary to the intent of the law, make administrative changes which have the effect

of making it more difficult for American farmers and ranchers to

export to Cuba.

Ambassador Kimmitt, I have great faith in your ability, especially in your ability to help us find a solution, given your experiVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
3

ence in diplomacy and international matters, and just the strength

of your intelligence and your experience.

Because of your Montana roots, I am also confident in your abilities to understand how this issue affects ranchers and farmers in

my home State.

I might say to my friends on the committee that Mr. Kimmitt is

a descendent of one of Montana’s greatest sons and a friend to

many of us, Stan Kimmitt, the former Secretary of the Senate

under Majority Leader Mike Mansfield.

I have known Bob for a long time, and he brings a resume of significant accomplishments to the table. I will not name them all, but

it is really amazing, all that he has done. Most recently, Bob has

served as general counsel at Time Warner.

I look forward, again, Bob, to hearing from you, if not in this

hearing, at a later date, on how we can solve the issue at hand,

because I do believe that it has to be resolved, and resolved in a

way that is consistent with the statute.

On another matter, as you may know, the Treasury Department

formerly provided strong leadership in an effort to investigate terrorism financing. But now the administration team is made up of

19 offices run by the NSC, and this does not seem like a recipe for

a winning strategy, frankly, all the different offices.

Many are saying that our effort to counter terrorism financing is

faltering. I will not go into great detail, but this is something that

this committee has looked at for some time. It is clear to many of

us in this committee that this needs to be shored up very significantly. I very much hope you will provide fresh leadership to the

Department.

I believe that the status at Treasury has to be strengthened. I

think the Treasury Department status, in world and financial affairs, has faltered. I think it needs to be strengthened. I do not

know why it has faltered.

My guess is, it is probably because the White House is controlling so much out of the White House compared with other administrations. If so, you are going to have to work very hard to restore

the status of the Treasury Department so there is more policy in

Treasury Department actions than politics.

I do not mean to denigrate the Department by saying much of

the decisions by the Department are political. That is not my intention at all. But it is my intention to try to help shore up the status

of the Department, because I think the Department must play a

much stronger role in world financial international affairs for

America’s best interests, and I hope that when you are confirmed—

and I expect at some date you will be—that you will help us accomplish that objective.

I will not, in great length, talk about the other nominees. Mr.

Quarles, I know, has a distinguished record. Thank you, Mr.

Quarles, for your willingness to serve.

Ms. Pack, I congratulate you on your position. As you know, the

IRS is of particular interest to this committee. That goes without

saying. And I have many concerns, frankly, about the agency, that

is, concerns about technology, about service, and about enforcement.

4

I say that because the IRS has spent billions of dollars over the

course of several years trying to modernize its 1960s technology.

Billions. Unfortunately, it has had only limited success in upgrading its systems.

Another example. After making improvements in taxpayer service, the IRS appears to be reversing its course. It recently announced plans to shut down about 70 taxpayer assistance centers.

These centers provide face-to-face service for a lot of people, especially in rural parts of our country. They help poor people. They

help elderly taxpayers who may not be able to use alternative

sources of service, like the Internet. Not everybody is Internet-proficient. We need to make it easier for people to pay their taxes in

the right way, not more difficult.

It also concerns me that the IRS is unable to accurately assess

its productivity. A GAO report just released yesterday points out

that the IRS needs to do more, and must have more sophisticated

techniques to measure results in order to better plan the use of its

resources, improve efficiency, and identify budget needs. It has to

be brought up to date.

Perhaps most disturbing is the tax gap. The difference between

what taxpayers should pay and what they do pay now has grown

to be an estimated $350 billion a year. Three hundred and fifty billion dollars a year.

Do you know what it has cost to finance the war in Afghanistan

and Iraq since 9/11?

Ms. PACK. Not offhand, no, sir.

Senator BAUCUS. Less than that. I mean, I could give you all kinds of comparisons to dramatize why $350 billion is such an

alarming figure, let alone, people are just not paying their income

taxes.

Yet, the IRS has conducted only limited studies to find out why

the gap has grown and has no concrete plans for regular studies

to keep track of the gap in the future.

Mr. Chairman, I have asked questions and pushed the Service

many, many times on this point. I must say, it is astounding. It

is absolutely astounding. We do not get any answers that give us

any confidence that the Service is really actually trying to do something about it.

We get lots of words, like, well, the Tax Code is complicated. Yes,

it is complicated. Lots of words like, Congress is part of the problem. Well, we are part of the problem. We get a lot of words.

We do not ever get a solid plan, strategic plan with benchmarks

and dates to assess how well we are doing, how well we are not

doing, and that kind of thing. It just does not happen. It is quite

disturbing.

So, I would like to know what the IRS is going to do about this

and how it is going to go about doing it, and how long it is going

to take to do it, just a business plan.

Now, Mr. Kimmitt over there worked in the private sector. They

have business plans in the private sector. We need a business plan

in the public sector. I hope that Mr. Kimmitt at Treasury, and you,

Ms. Pack, at IRS, can maybe get your heads together, or whoever

it is that appropriately should get their heads together, to finally

do something about this.

5

And Mr. Fromer, I look forward to working with you. I wish you

very well. Your predecessor, John Duncan, is a great guy. We all

know him quite well. We have the highest regard for him. Congratulations on your appointment.

Thank you, Mr. Chairman.

The CHAIRMAN. Yes.

Now, Senator Bunning.

OPENING STATEMENT OF HON. JIM BUNNING,

A U.S. SENATOR FROM KENTUCKY

Senator BUNNING. Thank you, Mr. Chairman.

We are here today to hear from a number of individuals that the

President has nominated to serve in various senior positions at the

Treasury Department.

You are a distinguished panel, and I look forward to considering

your nominations. It goes without saying that the positions to

which you have been nominated are vitally important to this Nation and its economy.

I particularly would like to welcome Kevin Fromer to the committee today. I have known Kevin for a number of years. In fact,

he has been working for Congress longer than I have been here.

I got to know him when he was the Chief of Staff for Hal Rogers,

my Fifth District Congressional colleague.

He was a great asset to Hal, and he has been a great asset to

Speaker Hastert in his current position. I am confident he will be

a meaningful addition to the Department of the Treasury as well,

and I hope this committee will look favorably upon his nomination.

Again, I wish to welcome all of the President’s nominees before

this committee today and thank all of our panelists for their willingness to serve. Your experience and dedication will be needed in

the years to come. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Bingaman had asked to speak. When he

comes back, I will call on him then.

We will go now to several things we do here, and give you an

opportunity to make an opening statement and to introduce family

and friends who are proud of you. This is a unique occasion for you,

and we welcome that. If you have a longer statement than the time

that was allotted, that will be put in the record.

So, why do we not go in the order of having each of you introduce

your family, and then we will go back to you, Mr. Kimmitt, to make

a statement.

Mr. KIMMITT. All right. Thank you, Mr. Chairman. I am pleased

today to be joined by my wife Holly and four of our five children:

Kathleen, Robert, William, and Mac, each of whom has served either as a page or an intern in the Senate.

Also here are my brother Jay and my sister Judy, who between

them have over 45 years of service in the Senate. If I could ask

them maybe to stand up.

The CHAIRMAN. Yes. Please stand. Yes. Thank you. Thank you.

Now, Mr. Quarles?

Mr. QUARLES. Thank you, Mr. Chairman. I am very pleased

today to have with me my wife, Hope Eccles, and my parents,

Ralph and Beverly Quarles.

The CHAIRMAN. Would you folks stand, please? Congratulations.

6

Now, Ms. Pack?

Ms. PACK. Yes. Mr. Chairman, I would be pleased to introduce

my husband, Randall.

The CHAIRMAN. All right. Congratulations.

Mr. Fromer?

Mr. FROMER. Thank you, Mr. Chairman. My family is far flung

around the country and my parents are taking a well-deserved vacation right now, so they could not be with us. I do have some

friends and colleagues who joined me, and I appreciate them taking

time out of their busy days to be here today.

The CHAIRMAN. All right. Thank you.

Now, Mr. Kimmitt, back to you.

STATEMENT OF ROBERT M. KIMMITT, TO BE DEPUTY SECRETARY OF THE TREASURY, U.S. DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Mr. KIMMITT. Mr. Chairman, Senator Baucus, Senator Bunning,

and members of the committee, thank you for this opportunity to

appear before you today. I am honored to be President Bush’s

nominee to serve as Deputy Secretary of the Treasury Department,

and I am grateful to Secretary Snow for his confidence and support.

If I could, just following up on what Senator Baucus said, I only

regret that my late father, the former Secretary of the Senate and

Secretary for the Majority, Stan Kimmitt, from the great State of

Montana, is not with us today, for it was he who inspired all seven

of his children, and now his grandchildren, to the noble cause of

public service and a particular respect for the institution of the

U.S. Senate.

It was 20 years ago this summer that I appeared before this committee as President Ronald Reagan’s nominee for the position of

General Counsel of the Treasury Department under Secretary Jim

Baker. I had previously served as an Army paratrooper in combat

in Vietnam, and later as a senior member of the National Security

Council staff at the White House.

After my service at Treasury, I was Under Secretary of State for

Political Affairs, and later, as you mentioned, Mr. Chairman,

American Ambassador to Germany. In the 12 years since returning

from Germany, I have worked as a banker, lawyer, and business

executive.

If confirmed by the Senate, I look forward to bringing the perspective of these decades of public and private sector experience to

my work at the Treasury.

The world and the Treasury Department are very different

places than they were during my service in the Department 20

years ago, but the central role played by the Treasury Department

as the administration’s senior economic and financial department

has only been brought into even sharper relief in the ensuing decades.

In addition to its internal responsibilities for tax administration

and enforcement, financial management, and domestic finance, the

Treasury Department plays a critical role in all three major interagency bodies of the executive branch: the National Security CounVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
7

cil, the National Economic Council, and the Homeland Security

Council.

Whether the issue is Social Security, economic policy, or tax reform; international debt or foreign direct investment; terrorist financing or economic sanctions, the Treasury Department has an

essential responsibility to ensure that these issues are carefully

considered and coordinated within the Department and the interagency process prior to engagement with key external counterparts,

beginning with the Congress.

If confirmed by the Senate, I look forward to helping ensure that

the Treasury Department performs these essential tasks with the

diligence and skill that are the hallmarks of the Department.

In that effort, Secretary Snow and I, and our colleagues, will be

assisted not only by strong presidential appointees represented by

the colleagues who appear with me today, but also by the dedicated

and highly professional career civil servants who are, and always

have been, the backbone of the Department.

Mr. Chairman, Senator Baucus, Senator Bunning, thank you

again for this opportunity. If confirmed, I look forward to further

such opportunities to interact with you. I would be pleased, of

course, to answer any questions that you may have.

The CHAIRMAN. Thank you, Mr. Kimmitt.

[The prepared statement of Mr. Kimmitt appears in the appendix.]

The CHAIRMAN. Mr. Quarles?

STATEMENT OF RANDAL QUARLES, TO BE UNDER SECRETARY

OF THE TREASURY, DOMESTIC FINANCE, U.S. DEPARTMENT

OF THE TREASURY, WASHINGTON, DC

Mr. QUARLES. Thank you, Mr. Chairman, Senator Baucus, Senator Bunning, for the opportunity to appear before you today. I am

honored that President Bush has nominated me to serve as the

Under Secretary of the Treasury for Domestic Finance. I am grateful to have the privilege of your consideration today.

The role of the Under Secretary of the Treasury for Domestic Finance is to advise the Secretary on issues related to capital markets and financial institutions, government fiscal policy and operations, governmental assets and liabilities, and related economic

and financial matters.

The Treasury Department is currently addressing some of the

most crucial issues facing our country in each of these areas, and

if confirmed for this post I would look forward to working closely

with this committee and the Congress across this full range of topics.

My professional career over 2 decades, in both the public and private sector, has given me in-depth experience with the issues facing the increasingly global banking and capital markets, as well as

the challenges of sovereign finance.

For nearly 4 years, I have served as the Assistant Secretary of

the Treasury for International Affairs, where my responsibilities

have included, among other things, advising on international aspects of financial regulation, the structure of sovereign funding

markets, as well as macroeconomic policy, exchange rate policy,

8

trade and investment, and our participation in the IMF and the

World Bank.

Before that, I began my service in this administration as U.S.

Executive Director at the IMF, representing the United States on

the IMF’s board during a time of stress for the international financial system.

In the private sector, I was a practicing Wall Street lawyer for

nearly 17 years, focusing on banking and financial matters. During

that time I helped some of the world’s premier financial institutions think through their approach to an increasingly integrated financial system, to take practical steps to prepare for that integration, and to create legal structures that increased the efficiency of

financial intermediation.

Finally, this is not my first stint at Domestic Finance in the

Treasury. I was also privileged to serve in the Treasury Department from 1991 to 1993 during the administration of the first

President Bush, working with the team that proposed the modern

statutory framework for this ongoing transformation of the financial system.

If confirmed for this position, I believe my service in the role of

Under Secretary would benefit from all of these experiences. I also

want to note how much it will benefit from the extremely able

Treasury staff that it has been my great honor to serve with now

in both the international and domestic areas under three different

Treasury Secretaries.

I want to thank you again for the privilege of appearing before

this committee. I want to thank Secretary Snow for the confidence

that he has displayed in me by supporting me for this position, and

I look forward to answering any questions you may have.

The CHAIRMAN. Thank you, Mr. Quarles.

[The prepared statement of Mr. Quarles appears in the appendix.]

The CHAIRMAN. Now, Ms. Pack?

STATEMENT OF SANDRA L. PACK, TO BE ASSISTANT SECRETARY OF THE TREASURY, MANAGEMENT, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Ms. PACK. Yes, sir. Chairman Grassley, Ranking Member Baucus, Senator Bunning, members of the Senate Finance Committee,

thank you so much for taking the time to consider my nomination.

I am honored that President Bush has nominated me to serve in

this position. I also thank Secretary Snow for his leadership and

support.

I would like to tell you a little bit about my background and why

I believe that I am qualified for this position.

I am a certified public accountant. Throughout my professional

career, including 12 years in public accounting, 2 years as Assistant Secretary of the Army for Financial Management and Comptroller, and 2 terms as chief financial officer for the Bush-Cheney

Presidential Campaign Committees, I have demonstrated a commitment to the principles of sound financial management.

I understand the need for the principles and practices espoused

by my profession, such as strong internal controls, segregation of

duties, planning, budgeting, and reliable accounting and financial

9

reporting systems. These principles enable sound management and

resource decisions.

If confirmed, while I will be serving in a new environment with

the U.S. Treasury Department, I believe that my technical training

and my previous work experience will provide the foundation needed for the challenge.

I look forward to learning about the U.S. Treasury Department

and determining how the principles with which I am familiar may

be applied.

Mr. Chairman, thank you again for bringing me before this committee.

The CHAIRMAN. Thank you, Ms. Pack.

[The prepared statement of Ms. Pack appears in the appendix.]

The CHAIRMAN. Now, Mr. Fromer?

STATEMENT OF KEVIN I. FROMER, TO BE DEPUTY UNDER SECRETARY OF THE TREASURY, LEGISLATIVE AFFAIRS, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Mr. FROMER. Thank you, Mr. Chairman. Mr. Chairman, Senator

Baucus, and members of the committee, I, too, am very honored to

be appearing before this committee and want to thank you for

scheduling today’s hearing.

At the outset, and as you have mentioned, I want you to know

that the last person to hold this position, a gentlemen that you

know well, John Duncan, has impressed upon me the tradition of

collegiality and consensus that applies to this committee on a daily

basis. If confirmed, I will approach my work with you and your

staffs in that spirit, and with a goal of continuing that tradition.

After nearly 23 years of working with members of Congress and

staff, I certainly understand and value the importance of an open

and regular dialogue between the Congress and the executive

branch. I further believe you cannot operate in this business without a good understanding of each other’s objectives and constraints.

If confirmed, the job, as I see it, is to bridge those gaps in a

straightforward fashion. I will obviously maintain fidelity to the

policies of the Department and the administration, but I will work

very hard to ensure that your views, priorities, and concerns are

accurately conveyed and fully considered.

I pledge to be always available to you and your staffs, and to ensure that the right people within the Department of Treasury are

responsive to your questions and interests.

I would not be here, of course, without the support of President

Bush and Secretary Snow, to whom I am very grateful.

I also want to thank the two members of Congress with whom

I have worked the closest over my career, Congressman Hal Rogers

of Kentucky, and the Speaker of the House, both of whom have

made it possible for me to participate in significant, memorable

ways in the legislative process.

I want to thank the staff of the committee. They have been generous with their time and their courtesies to me in preparing for

this process, particularly in the midst of other pressing business

before the committee.

Senator Bunning, thank you for your kind words. I have enjoyed

working with you over the years. You have done a tremendous job

10

for the State, and I look forward to working with you in this capacity, if confirmed.

With that, thank you for the opportunity to testify today. I look

forward to any questions you may have.

The CHAIRMAN. Thank you, Mr. Fromer.

[The prepared statement of Mr. Fromer appears in the appendix.]

The CHAIRMAN. Now we go to the three standard questions we

ask every nominee that comes before the committee. So I will read

the question, and then I would ask, in order, for each of you to say

how you stand on it.

First, is there anything that you are aware of in your background

that might present a conflict of interest with the duties of the office

to which you have been nominated? Mr. Kimmitt?

Mr. KIMMITT. No, Mr. Chairman.

The CHAIRMAN. Mr. Quarles?

Mr. QUARLES. No, sir.

The CHAIRMAN. Ms. Pack?

Ms. PACK. No, sir.

The CHAIRMAN. Mr. Fromer?

Mr. FROMER. No, Mr. Chairman.

The CHAIRMAN. Do you know of any reason, personal or otherwise, that would in any way prevent you from fully and honorably

discharging the responsibilities of the office to which you have been

nominated? Mr. Kimmitt?

Mr. KIMMITT. No, Mr. Chairman, I do not.

The CHAIRMAN. Ms. Pack?

Ms. PACK. No, sir.

The CHAIRMAN. Mr. Fromer?

Mr. FROMER. No, Mr. Chairman.

The CHAIRMAN. Mr. Quarles?

Mr. QUARLES. No, Mr. Chairman.

The CHAIRMAN. And lastly, do you agree, without reservation, to

respond to any reasonable summons to appear and testify before

any duly constituted committee of Congress, if confirmed? Mr.

Kimmitt?

Mr. KIMMITT. I do, Mr. Chairman.

The CHAIRMAN. All right.

Mr. QUARLES. I do.

The CHAIRMAN. All right.

Ms. PACK. Yes, sir.

The CHAIRMAN. Yes.

Mr. FROMER. Yes, sir. I do.

The CHAIRMAN. And without your having to respond, I would like

to add a personal addendum to the last question. One of the things

that I find very difficult is to get letters answered or questions answered outside of a formal hearing. We just occasionally write a

letter here or there.

I spend a lot of time on oversight, and maybe more often than

not, getting answers is getting complete answers and not having to

go back to the well several times to get the information that we

need to do our constitutional job of oversight.

So, anything that you can do along that line not only within your

area, but to promote an understanding within your respective deVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
11

partment or other departments you might interact with, I would

appreciate it.

I am going to start my round of questioning with Robert

Kimmitt. Last week, Senator Baucus and I wrote to the President

regarding the bid by China National Offshore Oil Corporation for

Unocal.

As you know, CNOOC Limited is a subsidiary of China National

Offshore Oil Corporation, which is owned by the Chinese government. Much of the funding for the bid is based upon governmentsubsidized loans by the government of China.

I understand from today’s press report that the Unocal board of

directors has endorsed the revised Chevron offer, which is set for

final vote August 10.

However, I would still like to get your views on whether it is appropriate for state-owned enterprises to subsidize investment

transactions to acquire scarce natural resources that are in high

demand.

I would also appreciate any comments you might have about how

you would approach such issues, should you be confirmed as Deputy Secretary.

Mr. Kimmitt?

Mr. KIMMITT. Thank you, Mr. Chairman. As a general matter, I

think the international economy rests on three principles: free

trade, free capital flows, and flexible currencies set in open, competitive markets.

That free flow of capital, meaning investment policies both in the

U.S. and abroad that are open and reciprocal, I think, is a crucial

element of our country’s economic success and the success of the

world economy, and it will be a particular priority for me if I am

confirmed for this position.

Interestingly, Mr. Chairman, it was 30 years ago that the Committee on Foreign Investment in the United States was first set up.

This was a full 10 years before the Exon-Florio amendment. You

may recall that CFIUS was created out of a concern about

petrodollars coming into the U.S. and being recycled. In the 1980s,

we had concern about Japanese investment. Exon-Florio was

passed.

I think that we have a good system in place now to look at investments by foreign companies into the United States. If, indeed,

those national security concerns are raised, including some of the

factors that you have put on the table, I think there is an interagency process, led by the Treasury, that will take those into account.

I would note, just from my personal experience, that it is not just

China that both owns and subsidizes some of their major companies, both for critical resources and also for critical infrastructure.

A large part of the German telephone company, Deutsche

Telekom, is still owned by the German government, even though

they bought VoiceStream in the United States. There were announcements just this week about the final privatization of the

German postal system, which is also quite active here.

I think those factors need to be taken into account, and I think

the points that you raised in your question would be taken into acVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
12

count on an interagency basis if, in fact, a transaction of the sort

that you described were to go forward.

But I think the key thing is that, when you are dealing in the

national security area, when you are dealing with investments like

this, it has to be looked at on a broad, interagency basis. Treasury

has the lead on that, and I think it is a responsibility that we take

quite seriously.

The CHAIRMAN. Also for you, I want to ask a question about the

New Markets Tax Credit. I am concerned that that credit was

passed by Congress to assist economically distressed areas.

As I review the Department’s award of the credit, it appears to

be going overwhelmingly to metropolitan areas, with only a small

percentage to help rural America. In fact, I would note that Iowa

has only received one grant, and Montana has not received a single

grant.

I would ask for you to answer why rural areas have been forgotten by the New Markets Tax Credit, and more importantly, what

steps can Treasury take now to make sure that rural areas are on

an even playing field in terms of receiving the credit.

I appreciate your answering to the extent you can today, but I

would like to have a complete answer in writing.

Mr. KIMMITT. Mr. Chairman, I will follow up with some detail.

[The information appears in the appendix.]

Mr. KIMMITT. I was able to look into this briefly. As you know,

it was just last Friday that the fourth round of the New Markets

Tax Credit competition was opened.

Information that came to me suggests that there have been

grants into 38 States, but the grants play out in 48 of the 50

States. But it is quite clear that this is a program that is aimed

at low-income areas both in rural and in urban areas.

I think that they need to be given an equal opportunity to compete for grants under this particular program, or I should say tax

credits. It is certainly something I would be glad to look into and

get back to you with some detail, Mr. Chairman.

The CHAIRMAN. Thank you.

Before I go to Senator Baucus, then kind of a question of priorities. You can list several priorities if you want to for you as Deputy Secretary, but I would especially ask you where terrorism financing fits in in terms of your work, because I think it is unfortunate that you need only look at the headlines to realize how dealing with terrorism financing still is a very major problem.

Mr. KIMMITT. Mr. Chairman, I see the role of a Deputy Secretary—which, as you know, is not laid out in any detail in any

law—fundamentally as being to support the Secretary in carrying

out the President’s agenda. I think that means to work to help to

make sure that the Department is operating well, and to back up

the Secretary and his priorities.

But Secretary Snow has made clear to me that, if confirmed, he

would like me to take particular interest in a number of areas, and

I can assure you that terrorism financing will be one of those.

I have actually reached the point in my life that I bring a little

bit of perspective to this hearing, in that, when I was General

Counsel of the Treasury, in 1985 was when we really started to

focus on terrorism from a financial perspective. And you may recall

13

the murders at the Rome and Vienna airports carried out by agents

of Moammar Khaddafi.

We put in place full-scope economic sanctions and an asset freeze

basically to try to keep him from getting the money that we froze,

both in the United States and abroad, and we got our first real

glimpse into the terrorism financing network. I am not sure in the

ensuing years we did perhaps as much as we could have to have

emphasized that element of the fight against terrorism.

I think with the new structure of the Department, having both

an Under Secretary and two Assistant Secretaries dedicated to this

task, Treasury will play its important role in the interagency process, and I personally intend to give a real priority to this issue.

The CHAIRMAN. Thank you, Mr. Kimmitt.

Now, Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Bob, how can I explain to American farmers and ranchers that

we have suddenly decided, at a time when farmers are facing pressures from the budget axe and the shrinking agricultural trade surplus, that their government is now going to restrict their access to

a promising new market and create new hurdles?

Mr. KIMMITT. Well, Senator, as you said, I am the grandson of

a Montana rancher and farmer, and therefore I understand very

much the point that you are making.

I think, fundamentally, when it comes to economic sanctions generally—we are talking Cuba here in particular—the idea is to put

as much pressure as possible on the intended target, in this case

Castro, while minimizing the effect on U.S. farmers, ranchers, or

other business people.

I think Treasury is trying very hard to balance those two in light

of both the policy on the one side and legislation on the other. We

had a good conversation about this yesterday. I think we may have

some differences on the policy.

I think what I would say to those farmers and ranchers is, the

government will work with you, both the legislative and executive

branches, to make sure that any adverse effects on you that derive

from this policy are minimized, if not eliminated.

Again, as I said to you in our earlier conversations, I think we

could debate the policies. As you know, we are part of an interagency team that is involved in the policy formulation process.

Senator BAUCUS. Right.

Mr. KIMMITT. But in this regard, we execute the policy. I think

what I would like to focus on is a way, again, to discharge the policy, but not have the effects visited on the farmers.

Senator BAUCUS. As I know you know, Montana farmers and

ranchers come back and say, well, Senator, we are the only country

that is not allowing agricultural sales to Cuba, virtually, now, with

this new change. No other country has this prohibition. While we

cannot ship our goods to Cuba, other countries can.

That is what I hear. So, it is hard telling them that we have a

policy that says no to American farmers, whereas other country’s

farmers can go ahead and ship their agricultural products to Cuba.

I would like to ask you a little bit about terrorism financing,

based on your experience. As you know, with the creation of the

Department of Homeland Security, it seems that law enforcement

14

apparatus to detect and combat various financial crimes has now

been disassembled and scattered.

When you take over this job, whenever you do, I urge you to take

a good, hard look at that and try to help bring that back into focus

so that we can get the job done. Now, everything is scattered.

There is also a sense that, over at OFAC, we have lots of people

over there looking at Cuba. They are not looking at terrorism financing around the world.

Is there terrorism financing in Cuba? I do not think so. I have

asked questions, and without revealing confidences, it is my opinion, very strongly held, that there are no signs of terrorism financing through Cuba, although a large portion of OFAC’s resources

are currently dedicated to that subject. But I urge you, for our

country, to take a good look at that when you are confirmed.

Competitiveness. What do we do here? No country in the sweep

of history is always at the top of the heap—Greeks, Romans, U.K.

Our country is what, 200-some years old? There is no assurance

that we are always going to be number one economically.

We know the threat from China and from a lot of other countries.

We know the world is becoming virtually flat, with advances in

technologies and communications technologies.

You mentioned capital, free flowing, free trade, et cetera. But the

victory goes to the swift. I have forgotten the exact proverb. I do

not know if you have read the book, The World is Flat, by Thomas

Friedman. I would urge you to read it. He, in that book, explains

this phenomenon.

It quotes a proverb, which is translated into Chinese. It is on the

door of a Chinese factory. Essentially, it is the effect of, the gazelle

knows it has to run fast in Africa. If it does not run fast, it could

get eaten by a lion. The lion knows that if it does not run fast, it

is going to starve. So, we have all got to run fast so we do not get

eaten up, and so we can eat.

So what do we do in our country? I sense that this country, and

our administration specifically, is not really focused on this. We are

too focused on the short term. I am not going to draw this out too

much, but there is another book that has made a big difference to

me.

Paul Kennedy wrote a book about civilizations and countries,

pointing out that generally civilizations and countries falter and

are defeated not from advancing armies from without, but rather

internal decay from within.

The Chinese, you know as well as I, are extremely aggressive

and entrepreneurial. They are loaded for bear. The Japanese are

a little bit different culture. Other countries, such as India, are

working very aggressively. The Finns. There are lots of different

peoples around the world that are very aggressive.

I do not know if you saw the article in the paper a few days ago.

I think the OECD rates Finland as the most competitive country

in Europe. Finland took the bull by the horns about 15, 20 years

ago.

They were faltering because, after the Cold War, they had problems in their economy with the Soviet Union’s collapse. So, they got

down to business, made some sacrifices. I do not need to explain

to you the degree to which Ireland has turned its economy around.

15

So, what do we do in this country? What should we do?

Mr. KIMMITT. Well, I think I would agree with every point you

made, Senator, except the fact that the administration, perhaps, is

not paying attention or given a priority to competitiveness.

In preparation for the hearing, I had a chance to read speeches,

starting with the President’s speech last November, through a

number that Secretary Snow has given, and then most recently

some of the statements made by the President and others at the

G–8 summit, which Randy Quarles participated in just recently in

Scotland. I think competitiveness is a very high priority for the administration, both the White House and across a range of the Departments.

I think the answer is, number one, you have to get your house

in order at home. That is, we have to address the issues in front

of us, ranging from deficits, through education, tax reform, and Social Security reform, to make sure that we remain the beacon that

we are today for economic hope and opportunity.

But at the same time—and we cannot do these serially, we have

to do them together—we have to strive for those open markets,

those free capital flows, those flexible currencies that I discussed

further. Many of those we do on a bilateral basis.

Quite a number we do in smaller, but important groups like the

G–7 and G–8. But then more broadly, I think in the World Trade

Organization and elsewhere, we have to make sure that there are

rules set that level the playing field to the greatest extent possible

for both our economy, and the economies elsewhere in the world.

So, again, I think it is a combination both of making sure that

we are strong at home in order to be strong abroad.

Senator BAUCUS. Right. That is the goal. I do not think there is

much disagreement there. That is the goal. Maybe various people

in the administration have given those speeches, but there is not

a lot of action.

There is not a lot of action. For example, with enforcement of

trade laws, intellectual property violations. You know that other

countries are ripping us off. There is a lot of talk about enforcing

the trade laws, but not a lot done about it. I do not know the reason, but not a lot is being done.

There is very little effort on the part of the U.S. Government, the

USTR’s office, to enforce trade laws and prevent other countries

from taking advantage of the United States in trade agreements

that are currently on the books. That is pretty clear.

There are other areas. For example, I think we are not competitive, in part, because we have such high health care costs. It is

very hard for GM and other companies to compete when they have

such high legacy costs.

The average GM worker gets paid 55 bucks an hour. In China,

car manufacturers are putting cars onto boats in Hong Kong, Chinese cars. Chinese cars are going to Europe. They get paid $1.50,

$2.00 an hour.

Part of that high $55 an hour is because their health care costs

are so high. We pay twice as much on health care per capita in

America as does the next highest country. Twice as much. Are we

twice as healthy? Doubtful. But we have unnecessarily high health

16

care costs in this country, and that is not being addressed. I know

it is difficult. I know it is very difficult. It is not easy.

But I would just urge you, in your new position, whenever you

finally get the job, to keep this in the back of your mind so that

you get this administration to do something—not just talk, not just

speeches, but do something about competitiveness. It is for the

sake of our kids and our grandkids.

Stan Kimmitt, today, would really be worried about this. Really

worried, your father, whom I knew very well. You are right. He instilled such a sense of public service in your whole family, it is

wonderful. All of you, your whole family. I do not know a family

like it.

I just think it is that kind of sense of public service and dedication to what is best for the United States’ people that is going to

have to be more widely felt and shared, with more leadership than

currently exists.

Mr. KIMMITT. I appreciate those comments, Senator, especially

about my dad. I guess I would just pick up on one point. This

comes from, as the Chairman said, my service at Time Warner.

I think the administration not only has talked, but also acted, in

the area of intellectual property protection. Not only are there very

significant intellectual property protection provisions in the recent

Free Trade Agreements—Singapore, Chile, and Australia—but

moreso than perhaps any other government, we have recognized

that good law is only a starting point, that you have to commit the

enforcement resources to this effort. The Justice Department, over

the last 18 months, working with industry and others, has taken

some real steps.

As you know, both Ambassador Portman and Secretary Gutierrez

were in China just last week and met with the Vice Premier, the

former Commerce minister who has the lead on intellectual property protection.

The Chinese, for the first time, really put out some metrics

against which to judge how they are doing in this particular area.

So, I think that the rhetoric has been followed by action in this regard.

IPR is a funny business. I would actually tell you that the film

studios would probably suggest that one of the countries where

they have the biggest problems on intellectual property protection

is Germany.

Germany has very weak laws, no enforcement resources committed against the pirates there, and it is a huge market, where

the companies are losing tens of millions of dollars.

China and Russia, where a lot of the fabrication takes place, are

fairly small markets by comparison. You need the law enforcement

there, but you also need it in the developed countries.

I think the administration has recognized this, and working with

the Congress, including with this committee last year on the FSC/

ETI bill and so forth, is trying, I think, to get a handle on that.

Some of the other points you raised, I cannot disagree with. Certainly in terms of health care costs, in terms of enforcement of

trade agreements, I would let Ambassador Portman answer that.

But having worked with Rob Portman for 12 years, I cannot imagine that he would not faithfully discharge his obligations.

17

Senator BAUCUS. My time is up. I am not talking about Rob

Portman, I am talking about the U.S. Government. Rob Portman

is told what to do. I mean, he gets his orders from higher up much

of the time.

You are going to be one of those higher-ups he is going to be talking about, and there are going to be other higher-ups that you are

going to be talking with. Karl Rove, for example, makes a lot of

these decisions, in my judgment, because it is political. I would just

urge you, very, very strongly, as part of the team, to make sure the

team is working together so we can do something about all this.

Thank you.

The CHAIRMAN. The Senator from Kentucky?

Senator BUNNING. Thank you, Mr. Chairman.

Mr. Kimmitt, as I listen to the discussion taking place here

today, I might conclude that Cuba is a great place to do business.

But I have researched the issue a bit, and I find that others across

the world have not found that to be the case.

Castro cannot be trusted. He cannot be trusted to treat his people with dignity and respect, and he cannot be trusted to make

good on his obligations. Perhaps some of my colleagues would like

to ask the French, Spanish, the Japanese, South African, Chilean,

and the Canadian governments about how good a credit risk Mr.

Castro really is.

Only 3 years ago, according to The Economist, Fidel Castro’s government defaulted on some $500 million in trade credits. The truth

is, Cuba is not just a bad place for individual freedoms, it is a very

risky place to do business.

Presidents from both parties have seen the wisdom in not allowing American businesses to be scammed by Fidel Castro, who has

defaulted on payments, brutalized and mistreated his own people,

and finds his country listed on the State Department’s list of countries that sponsor terrorism.

Mr. Kimmitt, with these facts and more in mind, can you please

explain to me why the Treasury Department feels it is wise to insist on payments in advance from the Cubans?

Mr. KIMMITT. Senator Bunning, I think you just laid out quite a

number of the points that undergird the policy position that is

taken by this administration, and as you indicated, has been a fairly consistent bipartisan position over the decades that sanctions

have been in place.

I think, with regard to payment in advance, the Treasury Department, when asked the question by a number of banks who

were involved in the process, took a very close look at this issue

and decided that payment in advance meant that in the normal

course of commercial trade, that payment should be received before

the grain or other products were shipped.

I do not know, because I was not in the government at the time,

how many of the factors that you mentioned about Castro’s creditworthiness, or lack thereof, factored into that decisionmaking, but

I think the legal analysis, they felt, was pretty straightforward.

I have had a chance to look at the Congressional Research Service piece that Senator Baucus has referred to. They take a different

position on that legal interpretation. I cannot say that theirs is unVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
18

reasonable, but neither did they say that there was anything illegal

in the position being taken by the Treasury Department.

Again, while I do not yet speak for the Treasury Department and

cannot until I am confirmed, I think the Treasury Department is

doing its best to implement the policy consistent with the legislation that was passed in 2000 around agricultural exports, and felt

that that interpretation of payment in advance was the one most

consistent with international practice.

Senator BUNNING. Thank you.

Ms. Pack, how do you feel about the budget development process

at the Department? Is it currently working? Do you have any suggestions for ways to streamline that process?

Ms. PACK. Senator Bunning, I really do not know a lot about the

budget process at the Department as yet. If confirmed, obviously,

that will be a priority because that is the key component of my future responsibilities. I pledge to you to give it my best in terms of

determining where we can make improvements and streamlining it

and making it more effective.

Senator BUNNING. Well, if you use general accounting principles

and stick to it, I am sure that we will do fine.

Ms. PACK. That will go a long way.

Senator BUNNING. Yes.

Kevin, you have obviously worked over the years with the previous occupants of the position that you have been nominated for.

What do you anticipate will be your biggest challenge, if you are

confirmed for this position?

Mr. FROMER. Senator, I anticipate a number of challenges in

order to do this job effectively. I have devoted my professional career to working for the Congress, and in particular in the House.

During that time I have had the opportunity to work closely and

develop friendships, in fact, with a number of individuals on both

sides on a variety of issues I have worked on that are relevant to

much of the work that the Treasury Department undertakes, and

its broad portfolio.

I believe it is my obligation to be responsive to the Congress, to

this committee, to each and every member here in receiving and

solving problems, taking requests, taking ideas and making sure

that they are fully considered and managed properly. I know that

will be a full-time job in view of the number of priorities.

Senator BUNNING. With all those good guys and gals up on this

committee, it will be an easy job.

Mr. FROMER. I fully anticipate that will be the case, if you say

so. [Laughter.]

Senator BUNNING. Mr. Quarles, as you know, the cost of regulatory compliance is becoming a bigger and bigger issue for banks,

especially small banks who have a much harder time absorbing the

cost than larger banks.

Senator Crapo, my partner who is missing today, has been a

leader on this issue in the Banking Committee and is trying to put

together legislation to provide regulatory relief for financial institutions. Do you have any suggestions how we can lessen the regulatory cost on small banks?

Mr. QUARLES. Well, I think that the issue of regulatory burden

is one that the Department, as a policy matter, needs to be very

19

sensitive to. It is something that I have worked at in my previous

position in Domestic Finance.

While in my current responsibility in the Treasury it has not

been something that I have worked on, I am looking forward to

working with this committee to address exactly that issue. I think

that regulatory compliance costs are something that need to be an

integral part of the thinking in determining an appropriate regulatory framework.

Senator BUNNING. We have a problem. When we have money center banks and we have the $300 million bank, the community

bank that sits right down the street from where I live, the regulations do not vary much for those kinds of banks. The cost of doing

business for that smaller bank is really out of bounds to comply

with the same paperwork that the money market banks can do

with so much more ease.

Mr. QUARLES. Yes. Obviously, we need to be sure that the goals

of regulation are being achieved, and the goals of regulation will

apply to small, as well as large banks. But I definitely think that

we need to be sensitive to the cost and to take that into account

as regulatory frameworks are created.

Senator BUNNING. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Now we go to Senator Wyden, then Senator Smith.

Senator WYDEN. Thank you very much, Mr. Chairman.

I want to begin with you, Mr. Quarles. I think you are aware

that when Secretary Snow came to the committee to discuss China,

I asked him about the matter of reviewing the CNOOC deal and

essentially made the argument that, for those of us who consider

ourselves free traders, I think it is a no-brainer: you use the tools

that are out there. Certainly, to not examine this transaction raises

a question in my mind about whether Exon-Florio is meaningless.

So, what I want to ask you first—and this will not be the last

of these kinds of transactions; I think when you look at China and

what is ahead, my guess is, this will be the first of many such proposals. I would like to ask you, for purposes of this question, to set

aside this proposal altogether, set aside everything about Unocal

and Chevron, and the like, and give me what you think ought to

be a set of principles, a set of approaches that you think are appropriate in terms of dealing with these state-owned kind of operations.

I want you to set aside this particular deal and I want to see if

all of you, and particularly given the fact that you are going to

chair this group and you are going to get a lot of these transactions, if you have done some thinking with respect to what kind

of principles ought to be applied when you have all of these proposed transactions come in front of you.

Mr. QUARLES. Well, I think that the general principles that

apply, the importance of free trade and free capital flows, the importance of those principles to our own economic growth and economic security that Mr. Kimmitt identified in response to a similar

question, are where we begin.

I believe that it is possible to preserve and to prosecute those

principles at the same time as protecting our National security in

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20

ments in the United States, as it operates under the Exon-Florio

amendment, is able to do that because it brings to bear on any particular case that is brought before it all the various areas of expertise of the executive branch and the various equities of the executive branch.

So, in the context of any of these transactions, if there is a concern to our security—and I would define that in the broadest sense,

and the committee operates with it in the broadest sense, then the

committee is well placed to consider those concerns and to develop

ways to address them.

With respect to state-owned companies, your specific question, I

do think that there is reason for looking particularly closely when

it is a state-owned company that is making an acquisition, because

they operate under different conditions than a company that does

not have access to the resources of a state.

But again, the framework that the Congress has created through

the Exon-Florio amendments and the way that CFIUS operates

under the Exon-Florio amendments, allows the Federal Government to consider those issues as well in the context of any future

transaction and address them appropriately.

Senator WYDEN. That is some statement. It is going to take me

a while to dissect it. Suffice it to say, this is something I am going

to ask you all about again, because I think we are going to have

a lot of these transactions. We are going to need to have some set

of core principles that are going to guide us. I understand it is coming at you cold.

Let me ask you, now, some questions particularly with respect to

what you are dealing with on this particular issue. Now, Unocal

currently has a stake in Colonial Pipeline, which delivers fuel to

terminals in 12 southern U.S. States and feeds the Strategic Petroleum Reserve.

If the Chevron bid falls through and CNOOC renews its bid for

Unocal, what would be the national security implications of this

transaction, in your view, with respect to the Strategic Petroleum

Reserve?

Mr. QUARLES. Senator, as you know, the Congress, in establishing the legal framework under which these transactions are reviewed, included extremely strict confidentiality provisions that

limit the ability of anyone in the executive branch or the government to publicly discuss any of the details of a transaction that

may or may not be before the committee.

Those confidentiality provisions have criminal penalties attached

to them, and as a consequence, it is not possible for me to address

the specific transaction.

Senator WYDEN. What are the national security implications? I

am not asking you to get into the terms of the transaction. What

are the national security implications of it? That is a policy question. Strategic Petroleum Reserve. That is our country’s insurance

policy.

Mr. QUARLES. I think that, again, in the context of a specific

transaction, it is not practicable or possible to really address that

question in a way that is meaningful under the confidentiality limitations of the Exon-Florio Act.

21

What I would want to stress is, that if a transaction were ever

to become ripe and come before the committee and be considered,

we have in the past, and it is consistent with the confidentiality

provisions for us to come up and provide briefings to members of

Congress about the thinking that has gone into the decisions of the

committee. We have done that in the past, and we will certainly

do that in the future. Those briefings can be classified if necessary,

depending on the nature of the information.

Senator WYDEN. It is not a classified question. It is about the implications to the country’s insurance policy. I am not asking for

anything proprietary or confidential.

I am going to try one other area and we will see how you deal

with this. If for some reason Unocal does not consummate the deal

with Chevron, do you believe the Committee on Foreign Investment

in the United States can conduct a thorough review and reach a

conclusion on the national security implications of the CNOOC bid

for Unocal within 30 days, or do you think the proposed transaction

is going to require 45 days or longer?

Mr. QUARLES. Again, I just think that it would be inappropriate

for me to address the specifics of a particular transaction. But I can

say that if a transaction comes before the committee, the committee can, in the timeframe that is allotted under the statute, including both the 30-day review and a 45-day investigation period

if the review determines that that is necessary, that it can address

the national security questions that would be presented by a transaction.

Senator WYDEN. I am just going to say the same thing to you

that I did to Secretary Snow. I think, for those of us that are free

traders, you make our job tougher by not being responsive to these

questions. What I am interested in is making sure that we use the

tools on the books.

I started off by asking you the most general possible question. In

fact, I said I was not even going to relate this to the deal in question. I just do not think the answer was very responsive and forthcoming, and I think your positions do damage to the cause of those

of us who want to prosecute the cause of free trade. I believe to

have any credibility with our constituents, we have got to show the

government is using the tools it has. I hope we will see more clarity

on this in the days ahead.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Smith? Just in case Senator Smith gets

done and I am not at the desk, would you please stay at the table?

I have a couple of more questions I want to ask, but I have got to

take a phone call, hopefully from another member, in just a few

minutes.

Senator Smith?

Senator SMITH. Thank you, Mr. Chairman. I came here to ask a

few questions, but specifically to speak on behalf of Kevin Fromer.

I think I have had dealings with most of the nominees, and I could

speak well of each of them, and think well of each of them.

But I want to give a special endorsement to Kevin, because I

have known him since I first came to Capitol Hill, but, frankly,

even before that, because, while Kevin is a Virginian, he has many

friends in Oregon. We claim him as an honorary Oregonian. His

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best friend, I believe, is an Oregonian, who happens to be my State

Director, Gary Timchuck.

Kevin is highly qualified to work in Legislative Affairs. I first

met him when he was the Chief of Staff to Hal Rogers, and, later,

when he was Senior Policy Advisor to Speaker Hastert, he was

very helpful to me in understanding that side of the Hill. So,

Kevin, I heartily endorse your nomination and look forward to casting affirmative votes on your behalf.

But a question on the issue of trade. It is my own feeling, with

respect to China—and frankly, my observation since being here—

that the more the markets work between China and America, the

more unlikely there are to be military confrontations.

It seems to me that the free market on Unocal is in operation,

and that the military calculation is a different one, that we simply

need to be prepared to defend our interests and our allies in that

area.

I wonder if any of you would have a comment. Is that strategy

appropriate? How would you advise me on considering the Unocal

issue?

Mr. KIMMITT. Well, Senator, I would just say that the concept of

national security, I think, is a broad-gauged one. In my view, it is

the summation of our foreign, defense, and international economic

policies, resting on a strong intelligence base. When you deal with

a relationship as important and as complex as China, I think it is

very difficult to look at any issue in isolation.

I think it has to be looked at in that composite that I just described. As Randy Quarles mentioned, in investment terms, whether it be China or elsewhere, there is a 30-year-old process and a

20-year-old statute that lays out specific criteria that we have to

look at at the Treasury Department on an interagency basis to

make a determination of whether the national security interests of

the U.S. are implicated by a particular investment.

But I think, stepping back, I said before you came in, whether

it is China or anywhere else, at the end of the day, we all benefit

from free trade, free flow of capital, and flexible currencies.

I think that my own view is that we should come to investments,

foreign direct investment in the United States, leaning forward,

seeing that that kind of investment is beneficial to our National interests, except in those limited cases where the national security

is implicated, and we have a process to take that into account.

Senator SMITH. I guess the basis of my feelings, the predicate of

my question, stems out of the incident that occurred when President Bush was first in office, and one of our surveillance planes

was knocked down.

I remember then serving on the Foreign Relations Committee,

and Colin Powell coming to us in, I think it was, a closed session.

He pleaded with us to watch our words, not escalate the problem

rhetorically, because what was happening in China was a great debate between their industrialists and their militarists, and that if

we were a little bit patient, the industrialists would win the debate.

In fact, I think he even represented to us, we already have a deal

to bring the plane out, but just do not complicate it. Ultimately, it

was an 11-day stand-off. The people and plane came back, and a

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very dangerous situation was defused. But in my own view, if I am

interpreting it correctly, it was the need of the Chinese of America

that ultimately allowed their military to accede to their commercial

interests.

Is that a fair interpretation of that incident?

Mr. KIMMITT. I was not in government at that time, was not

watching it as closely as you. I would certainly defer to Secretary

Powell—or his successor now, Secretary Rice—with regard to a diplomatic strategy toward China.

My own feeling, however, is that China is going through a truly

historic transition, and even transformation: leadership, economy,

society. We need to be very closely engaged with them across the

breadth of the relationship.

I think that there are times when things are better said in private, whether that be in the privacy of a committee meeting room

or a meeting room at the State Department. There are other times

when it is very appropriate to be public.

I think weighing those two is something that does require precisely what seemed to happen in this case, and that is, at a moment of crisis with an important country like China, the Secretary

of State reached out, in this case, to the Foreign Relations Committee.

I think that is an example of good government, especially when

it comes to a country like China, because we have to send a consistent message to them and that has to be a message of consistency within the administration and between the administration

and the Congress to the extent that we can.

Senator SMITH. I do have, as I think the record will reflect, a

record of voting for trade agreements and believing in the power

of markets to improve lives for all parties.

But I do have to say that one of the things that disturbs me

when I go abroad, whether it is to Russia, to Morocco, recently, and

certainly to China in the past, is the wholesale theft of American

intellectual property.

I have voted against the duty measures that are just arbitrarily

pulled out to impose on China, thinking those counterproductive.

But I wonder if any of you would care to comment on an idea, and

frankly even some legislation I am drafting, that would simply

quantify what is being stolen, and the sum of that would then be

the duty, so that we can get them more engaged in enforcing the

commitments they have made to protect American private property, and intellectual property, in particular. It does seem to me

that it is hard to argue against that.

I mean, they have promised to protect our intellectual property.

It is not happening. There has to be some mechanism by which

they have an interest in holding and keeping their agreements. It

seems to me that a duty that was equal to the amount of theft

would soon transform their conduct into being consistent with their

treaty agreements. Any of you care to comment? A bill soon to follow. [Laughter.]

Mr. KIMMITT. Well, if confirmed, obviously, I will participate with

both those on the panel and others in coming up with a response

to any bill of that sort. I guess my comment on IPR protection, a

subject that you and I have discussed many times in my Time WarVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
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ner capacity, is that I think this is a crucial element to American

competitiveness and success abroad. You have to signal to your

young entrepreneurs that you are going to protect their ideas, that

you are going to protect their work product.

You are right, there has been greater attention paid to this. We

are seeing it in more and more bilateral free trade agreements, in

the Doha Round. Both Bob Zoellick, and now Rob Portman, have

made this a very clear priority.

Therefore, we have to get it institutionalized bilaterally and multilaterally, but then people have to commit the enforcement resources against the problem. It was just last week in China that

Ambassador Portman, Secretary Gutierrez, and Madam Wu, the

former Minister of Trade who is now the Vice Premier and has the

brief on IPR, came out with what sounded to me like the most specific things the Chinese had said in terms of measuring them

against their commitment to shutting down IPR, whether it be

filmed entertainment products, music, counterfeit goods, or counterfeit pharmaceuticals. It is a major problem.

By the way, it is a problem for them. A company like Time Warner does its overseas investment primarily in countries that respect

the laws. Why would we put money into a country where the product that we are producing is going to be ripped off right away?

Therefore, if you take a look at the investment that filmed entertainment companies make, it tracks very closely with countries’ respect for intellectual property rights. They make ‘‘Lord of the

Rings’’ in New Zealand and ‘‘The Matrix’’ in Australia; ‘‘Harry Potter’’ in the U.K.

There is a reason for that, because those countries have good

laws and they enforce them. I think the message to the Chinese,

the Russians, and others is, this enforcement is not just to our benefit, but it is to yours.

In terms of measuring the loss and the cost, as you know, the

Motion Picture Association does quite a bit of that, has quite a bit

of data on that. They come out with their annual report. They can

give you that at any particular point.

I guess what I would want to look at very carefully, if a law were

thrown into the hopper, is to make sure that we do not spend more

time analyzing than solving the problem. Very often, when you ask

for reports and analyses and the rest, inside government, that is

where people focus their attention.

I think most of what we need to do is external, and that is a combination of the private and the public sectors explaining to these

people that it is in their interests, as well as ours, for them to respect these laws.

Senator SMITH. Well, thank you, Mr. Chairman. Thank you for

your responses. To all the nominees, welcome. We are anxious to

support you.

Kevin, I am particularly gratified to see this well-deserved promotion. So, thank you, sir.

Mr. FROMER. Thank you.

The CHAIRMAN. I would tell the staff, if the Senator calls me that

I was hoping would call back, do not interrupt me right now.

First of all, commentary on sensitivities about China. I am not

going to ask any questions about this, but I think we are too conVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
25

cerned about these sensitivities. China brags about being a 5,000-

year-old society, but somehow they do not like to be criticized at

all or asked questions at all.

The example of a mature society is the United States, and we are

only 200 years old. My gosh, we welcome the opportunity to be

questioned. We welcome the opportunity to defend any public policy

we have. We are so sensitive about that.

The more things we get out in the open, the better off we are.

They become a member of the World Trade Organization. That is

admission to the world community of nations. If they are part of

the world community of nations, they have got to act like an adult

society, not some newborn baby.

I will give you an example of something that is a perfect example

of how they are so sensitive about stuff that does not mean anything. Every other year since 1986, I invite embassies’ personnel—

and most often the ambassador—to visit Iowa. This year, it is August 15 to 19. Seventy-five countries are coming this year to tour

18 communities in my State.

We always invite China, and we always invite Taiwan. I have

called this, for 20 years, the Ambassadors Tour. I could call it anything I want to, but it just sounded reasonable. You take people

from the embassies, it is an ambassador’s tour.

Well, somehow, China will not come if Taiwan is involved because Taiwan’s representative is a representative and not an ambassador. Now, understand, this is not an official mission of the

U.S. Government. This is an idea of one Senator to promote international trade for my State. Taiwan trades with Iowa. China

trades with Iowa.

They cannot be mature enough to sit on the same bus with somebody from Taiwan because I might call it an ambassador’s tour,

and somebody from Taiwan cannot be an ambassador. So, to heck

with China. If they do not want to come, do not come. But do not

act like a bunch of babies in the process.

We are too concerned about the sensitivities of a mature nation,

5,000 years old. Are they going to grow up and be a member of the

world community of nations or not? I think we ought to show the

lead of what a mature nation is all about. I think we lend credence

to their position by being too sensitive about their position.

I would like to ask about whistle-blowers, Mr. Kimmitt. Several

months ago, I wrote to Secretary Snow about the need to make the

whistle-blower reward program at the Internal Revenue Service

really work.

The Finance Committee has heard testimony, and my office has

received complaints from many individuals, that the whistle-blower

reward program at the IRS is not effective. It is clear from the

False Claims Act that encouraging whistle-blowers can bring real

benefits to the Federal Government.

The False Claims Act has brought in billions of dollars to the

Federal Government. While the False Claims Act does not apply to

taxes, the Internal Revenue Service already has very broad authority to implement a program that can give whistle-blowers a real incentive to assist the IRS in its work of going after tax shelter promoters.

26

I would like your commitment to personally ensure that the

Treasury puts into place a real and effective program to encourage

whistle-blowers to blow the whistle on big-time tax fraud. I would

like you to provide me a date-certain when that can be done.

Mr. KIMMITT. Mr. Chairman, if confirmed, I will certainly look

into this issue. I do know that in response both to your letter,

meetings, and conversations with your staff, a working group was

set up inside Treasury among the IRS, the Office of Tax Policy, and

the Office of Legislative Affairs to look at the current program to

see what additional administrative improvements could be made.

I do not have the details on that, but I will certainly pledge to

you to look into this and come back to you and your committee colleagues on this.

The CHAIRMAN. The success of the False Claims Act amendments

that I got passed in 1986 are so overwhelmingly positive and speak

for themselves, that I do not think we have to worry at all that it

would bring in lots of money to the Federal Treasury if we could

get a like program instituted, which the Treasury Department has

the authority to do.

I would like to ask Mr. Quarles: Section 312 of the PATRIOT Act

requires financial institutions in this country to exercise due diligence when opening and operating correspondent accounts for foreign financial institutions and private banking accounts for

wealthy, non-U.S. individuals.

It has been almost 4 years since passage of the PATRIOT Act,

and yet the due diligence regulations have never been issued. I

would like to know why the due diligence regulations have not

been issued. I would like to have you tell me when the final regulations would be issued.

In addition, I would seek your assurance that the final regulations will be comprehensive and strong enough to stop terrorists

and criminals from misusing our financial system.

Mr. QUARLES. Well, Senator, thank you. That is an important

issue. My understanding is that those proposed regulations have

been given now to the regulators in the process that has been set

up for the development and issuance of regulations, so that process

is moving forward, and moving forward in a deliberate fashion.

I have not been given to understand that there is a specific time.

I would be reluctant to say that there is a specific time when that

process will be complete, but it is definitely something that I know

that the Department is very aware of, very eager to move forward

on so that the regulation is complete, that it is now with the regulators for review.

If I am confirmed to this new post, it is something that would

be a very high priority of mine to ensure that the process is completed and that the regulation, when finished and final, is adequate.

The CHAIRMAN. A month after September 11—or maybe even 2

months, but shortly afterwards—one of the main points of our administration was that we were going to shut off the money line of

terrorism, and by that, shutting down terrorism.

We are still dealing with the details about doing more in that direction. It seems to me, if we would put the same effort into shutVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
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ting down the lifeline of terrorism, which is their money supply,

like we do militarily, we would be further ahead in this game.

I would like to ask my next question of Ms. Pack. A couple of

years ago, I highlighted the problems at the Army in terms of

abuse of credit cards. The Government Accountability Office found

that Army personnel were using the cards to buy personal items,

such as cars, racetrack betting, Elvis photos from Graceland, and

you can name a lot of other things.

Now, at the time, you were the Army’s Comptroller. You stated

that you believed it was your personal responsibility to correct this

problem. I would like you to state to the committee what you did

to correct the problem, whether the problem is fully corrected, and

finally, how you believe that that experience applies to your work

now at the Treasury Department.

Ms. PACK. Well, Senator, you and I worked together on that.

That effort was spearheaded by the DoD Comptroller. I do not

think that it would have gotten the focus without your being the

champion that you were. As you know, we worked with you, and

others, to get revised legislation which permitted better controls.

In the Army’s case, with the new legislation, we were able to

take away about 150,000 credit cards from people who did not use

them properly, and frankly, did not need them. But the other key

actions that were taken were the mandatory split disbursement

and the salary offset.

Then, finally, DoD put in a system, a data mining system, that

allowed better and quicker identification of misuse and abuse. So,

that experience was a positive one. I do not think the problem will

ever go away completely, but that example is something that could

be applied at any agency in the Federal Government, and I would

use that experience in my next position, if confirmed.

The CHAIRMAN. Senator?

Senator BUNNING. I have one more.

The CHAIRMAN. Please go ahead, Senator Bunning.

Senator BUNNING. Mr. Kimmitt, I just want to pose a question

to you. It has been about 4 or 5 years now that we have had a permanent most favored nation status for China that was voted on in

the Congress of the United States. We have had some good and

some very not-so-good results from that. Obviously, they used that

as a tool to get into the World Trade Organization.

My question to you is, in 1981 or 1982, if a permanent normal

trade relationship was proposed for the Communist government of

the Soviet Union, do you think this administration would have

been for it?

Mr. KIMMITT. Oh, boy. Senator, that is almost a historical hypothetical.

Senator BUNNING. Yes, it is.

Mr. KIMMITT. I am going back. I think at the time, the policy of

the Reagan administration was, with regard to the Soviet Union,

as I mentioned with regard to China, to look at what was then our

preeminent competitive relationship in as broad-gauged a fashion

as possible.

My recollection was that, although there were still, in effect, a

number of the sanctions that had been put in place after the Soviet

invasion of Afghanistan, and that frankly, you will recall, the SoviVerDate 11-MAY-2000 15:59 Jan 26, 2006 Jkt 095484 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 25307.000 SFINANC2 PsN: SFINANC2
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ets were just about to go from Brezhnev to Chernyenko to Andropov to Gorbachev in about a 31⁄2-year period, consistent with the

Jackson-Vanik amendment, we were looking for ways, without

helping their hard currency position, to use the economic and trade

levers as a way to put pressure on them. I do not recall MFN coming up in that context. Frankly, I think I would have to think a

little bit about it, hypothetically.

Senator BUNNING. Well, most favored nation status never came

up for the Soviet Union.

Mr. KIMMITT. Right.

Senator BUNNING. But MFN came up as soon as I got to the Congress in the House of Representatives in 1987.

Mr. KIMMITT. With regard to?

Senator BUNNING. Every year, you had to renew it.

Mr. KIMMITT. Right. Exactly.

I mean, it is hard for me to answer the hypothetical.

Senator BUNNING. I understand. What I am trying to say is, we

still do not have a free and open government in China. We are

trading. We have around a $165 billion trade deficit with China,

and that has come mostly since permanent most favored nation

status has been given to China.

My question is, is that good or is it not good?

Mr. KIMMITT. I think the improved trade relationship with China

is good. I think there are parts of it that are of concern. The one

issue that has been mentioned here that I know is a particular concern to this committee, and certainly to the administration, is the

question of Chinese currency.

Senator BUNNING. Well, we are going to do something about that,

since you are not.

Mr. KIMMITT. Well, the Chinese need to play by a fair set of

rules. But I would go back to what Chairman Grassley said, that

I think that as they get into situations where they are graded not

just by internal criteria, but also external criteria, including membership in the WTO and elsewhere, our hope would be that they

would move in the direction of being the kind of fair trading

partners——

Senator BUNNING. A good member of the WTO, someone who

abides by the rules.

Mr. KIMMITT. Yes. And obviously, at the same time, I do not

gainsay for a moment your concerns about their political system,

their governmental system. But I think at this particular point,

certainly from the point of view of the Treasury Department, trying

to focus on the free trade, the free flow of capital, the flexible currency components, I think, are the most important thing that we

can do.

Senator BUNNING. Well, I think those are probably very positive

aspects of trade with China. My question is, are we, as Mr.

Khruschev used to say, going to sell the rope to hang ourselves

with? He said it better than I did, I know.

Mr. KIMMITT. I think it was actually one of his predecessors, but

Khruschev——

Senator BUNNING. Well, he repeated it.

Mr. KIMMITT. Right.

Senator BUNNING. He used to bang on his——

29

Mr. KIMMITT. Right. He was a little more colorful in the way he

did it.

Senator BUNNING. Yes. All right.

But I am deeply concerned. I am deeply concerned when national

security is involved. We did not have, on the floor of the Senate

yesterday, an amendment that would deal with the Unocal situation. We were going to have one, but I thought that it was best not

to have it. The person who was going to propose it thought it was

best not to do it. We will be very happy if Exxon-Mobil, or the successors of Unocal, are able to complete that by August 10.

Thank you all for coming. We deeply appreciate your testimony,

and we hope that we get to have a vote on your confirmation. As

soon as you talk to our Ranking Member, Mr. Baucus, we will have

that.

Thank you very much, everybody, for coming. The hearing is adjourned.

[Whereupon, at 11:40 a.m., the hearing was concluded.]

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