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37–558 PDF 2007

THE STATE OF THE INTERNATIONAL

FINANCIAL SYSTEM

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 20, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–42

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

June 20, 2007 .................................................................................................... 1

Appendix: 

June 20, 2007 .................................................................................................... 43

WITNESSES 

WEDNESDAY, JUNE 20, 2007

Paulson, Hon. Henry M., Jr., Secretary of the Treasury ...................................... 9

APPENDIX 

Prepared statements: 

Manzullo, Hon. Donald A. ................................................................................ 44

Waters, Hon. Maxine ........................................................................................ 46

Paulson, Hon. Henry M., Jr. ............................................................................ 56

(1)

THE STATE OF THE INTERNATIONAL 

FINANCIAL SYSTEM 

Wednesday, June 20, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Gutierrez, 

Watt, Ackerman, Sherman, Moore of Kansas, Hinojosa, Lynch, 

Scott, Green, Cleaver, Moore of Wisconsin, Davis of Tennessee, 

Hodes, Ellison, Perlmutter, Donnelly; Bachus, Pryce, Royce, Paul, 

Gillmor, Manzullo, Biggert, Shays, Capito, Feeney, Hensarling, 

Garrett, Neugebauer, Price, Davis of Kentucky, Campbell, 

Bachmann, and Marchant. 

The CHAIRMAN. The hearing of the Committee on Financial Services will come to order. This is our annual oversight hearing with 

the Secretary of the Treasury, and I am delighted to welcome Secretary Paulson. I think all members of the committee who have 

had dealings with him during his tenure will agree we have had 

a very constructive and cooperative relationship. We have made 

progress on a number of pieces of legislation in which the working 

relationship has been a good one. While there hasn’t been complete 

agreement on things ranging from the bill for foreign investment 

in the United States, to the GSE legislation, through focusing on 

how we can better help the FINCEN to work in ways that are best 

both for law enforcement and for the ease of, the ability of the financial community to work, we have cooperated and look forward 

to this. 

The Secretary obviously has major responsibilities, and the frustration all of us will have, of course, is that 5 minutes won’t be 

enough to get into all of the issues. But I want to begin with what 

I think is a central issue, and I want to congratulate Secretary 

Paulson for helping to engage in public education. 

Mr. Secretary, you said about a month ago, I read in the paper 

you were quoted as trying to explain to people for whom increased 

openness to the world economy and openness in trade was sort of 

obvious why there was resistance, and you noted, not personally as 

your view, but to report to people, that there is a degree of unhappiness that has become anger in many places among a lot of Americans about what they see as inequities in which growth goes forward aided greatly by globalization, but the average citizen does 

not get to participate. I believe that is one of our central problems. 

2

This is a strong and growing economy. My own view, by the way, 

is that the economy is much less subject to some of the policy 

changes we make here at the margins than people might think. We 

have had a strong economy under two very different Administrations, that have pursued many different policies. 

The American economy is a vigorous one. What has happened, 

however, is that there has been a growth in inequality. Inequality 

is, of course, not a bad thing, it is an essential element in a capitalist system, and the capitalist system is without question the best 

way ever stumbled upon, since no one specifically devised it, to promote the greater prosperity of the whole. 

But there have been in recent years increasing trends towards 

inequality. There is a debate about what causes that. Some of it 

is the obvious result of trends in the economy, of globalization of 

technology, of the great advantages that capital has in terms of its 

mobility. 

But we have in this country, from certainly the New Deal days 

forward, institutional mechanisms that retarded the growth in inequality. They were never aimed at doing away with inequality, 

but they were aimed at countering what could be tendencies for it 

to get out of hand. 

I believe that inequality has clearly reached a dysfunctional 

stage in America, not yet economically, although there is one related aspect I hear from many of my friends in the financial community, concerns that the savings rate is too low, that Americans 

don’t save enough. One prerequisite to be able to save is to have 

some money left over after paying your expenses so that you can 

save it. I believe that part of the problem we have seen is while 

people have not dropped their consumption yet, I think this is one 

of the reasons for the problems with the low savings rate on the 

part of the average citizen, which has consequences both for their 

retirements, but also for the economy’s ability to generate capital 

today. 

While it is not clear yet what the economic consequences are, it 

is clear what the political consequences are. I am in general agreement with the President’s approach to immigration. The bill, you 

would have said, okay, here is the deal, it is going to be President 

Bush and most of the Democratic leadership and a lot of the Republican leadership, and the business community; looks like a good 

chance to get a bill. 

Anger over increasing inequality, and I don’t believe they are directly correlated, but people when they are angry don’t always connect the dots in the straightest possible line. There is no question 

that the anger at a perceived unfairness in the distribution of our 

increased wealth is a contributing factor to the problems of the immigration bill. 

Here in the House, Chairman Rangel of the Ways and Means 

Committee, and Chairman Levin of the Trade Subcommittee, have 

been working with you and others, the USTR in particular, to come 

up with an approach to trade that would accommodate the concerns many of us had about the rights of working people and of the 

environment with trade. We are not completely there yet, but their 

efforts have gotten opposition from some people who say, oh, no, 

3

the inequality situation is so bad here that nothing you can do can 

fix trade. 

In area after area, we have a resistance to policies that I know 

you believe are in our overall economic interest. Many of them I 

agree with you on, some of them I would disagree, and we have to 

deal with the inequality. Now we have reached a point, and I appreciate your acknowledging it, when I think people understand we 

have more inequality than is necessary. Recent reports show the 

inequality by the common measure is greater than it has been 

since 1929. That means we are now back to being worse than it 

was under Hoover, not in absolute terms, but in inequality terms. 

The question is, what do we do about it? And there are some who 

say, nothing. There are some who say, well, education will take 

care of it. I think education is an important potential way of dealing with it, but can’t carry the weight people give. Part of it has 

to do with institution. One is government. And we are going to do 

20 minutes on each side, and I am going to apportion the time appropriately. 

One issue is government. I do not think it is possible for us to 

diminish the growth of inequality to an excessive point while simultaneously denouncing and demonizing government and always 

calling for it to shrink. Education is an example. Yes, I do believe 

that a better spread of education for the new kinds of work can 

help diminish inequality, but the way in which we finance particularly higher education in America today reinforces inequality. It 

does not undercut it. As State after State after State cuts funding 

for the public universities, we suffer. 

Community colleges. Mr. Greenspan always cited community colleges as one of the best ways to get people the job training that will 

help them get the kind of jobs that aren’t going to be outsourced, 

that are going to be good, solid, well-paying jobs. I have a community college in my district where we have a great need for nurses 

in the hospitals. A great nursing program, young people in the area 

who could do well as nurses, but they only have 42 slots, when 

they could use 3 or 4 times that many, because the funding has 

been cut. It is a State-funded institution. 

You cannot simultaneously diminish government at all levels and 

fund higher education in an equitable way. There are other things 

we have to do that help. 

So I do note that I very much agree with your emphasis on debt 

relief and on doing more to help the impoverished countries. But 

understand that in an era in which the budget is shrunk for the 

Department of Health and Human Services, in which we have to 

fight to get decent housing for older people, if you shrink all those 

programs in the United States, people shouldn’t be surprised when 

there is resistance to putting more money into our international obligations. You can’t shrink the pot and dip into it more deeply in 

some areas and not get that kind of resistance. 

The other area is labor unions. As long as many in the business 

community and on the Republican side have as their goal a constant shrinking of the role of labor unions, we will not get the kind 

of social peace in this country that we need if we are going to be 

able to come together in a progrowth approach that diminishes inequality. That is true both domestically and internationally. 

4

One of my problems is within the World Bank. For example, if 

you look at their rating systems on the way in which they allocate 

IDA funds, if you look at the World Bank and IFC, countries get 

credit for not treating the workers very well. They don’t say it explicitly, but the more social network there is for the workers, the 

more workers have protections against arbitrary firing, the more 

there are vacation days, etc., literally then people get downgraded. 

I want to continue to work together on this progrowth agenda. 

I think this committee on both sides has shown an understanding 

of the importance of the financial sector, in particular the intermediation function that the financial community performs of gathering up money from a large number of people and making it available for capital investment. But we have to do a better job of dealing with inequality. 

While we now have an agreement that is a problem, as long as 

there is a view that government is a bad thing and unions are 

worse, we will not make the kind of progress towards social cohesion in this country that will allow us to substantially diminish inequality and go forward. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman, and I thank the Secretary 

for being here with us this morning. Let me start by commending 

the job you have done. You have done a wonderful job, you are a 

credit to the Administration, and I think that this committee on 

both sides is very pleased with your performance and your initiatives. 

The chairman mentioned income and equity and worker rights 

and jobs, the quality of jobs. Let me say that we conservatives, or 

we Republicans or liberal Republicans, so I would say this side of 

the aisle, is also concerned about the income and equities. We are 

obviously concerned about worker rights, safety conditions on the 

job, and employment. 

The good news is that Americans are making more, they are 

earning more, and they have more, and they are able to buy more 

with what they earn. Good-paying jobs are being created at a tremendous pace, and workers’ safety is at historic rates, and most 

Americans face a choice of actually two or three jobs, choosing 

which job, not the fact they can’t find a job. So our economy, as you 

said in your report, is very strong. 

I want to address one thing, and that is China, and just ask you 

this: You said on page 3—and I am glad you said it, I wish the 

American people realized this when they talk about China and how 

the Chinese people save money—you said it is important to address 

the structural reasons why Chinese households save so much and 

consume so little. 

They don’t have Social Security, they don’t have Medicaid, they 

don’t have Medicare. They have to usually buy their children their 

first home, a lot of the middle class. Their educational costs, college 

educational costs, are tremendous. They have to save for that. So 

they have to save to simply exist. 

I believe that addressing exchange imbalances, trade imbalances, 

can be a key to the United States and China having a mutually 

beneficial relationship, which is actually going to be key for our 

children and grandchildren, for these two strong countries which 

5

account for 40 to 50 percent of the growth across the globe to have 

a beneficial relationship. 

In that regard I want to ask or just mention two or three things. 

The Industrial and Commercial Bank of China and other banks are 

wanting to do business here. They have approached the Federal 

regulators to allow them to open up. I see that as an occasion—you 

announced in your statement this morning that you have reached 

some financial agreements with the Chinese. I believe that you can 

use the occasion of Chinese banks wanting to set up here and operate here as a further opportunity for them to open their markets 

to U.S. banks. 

I don’t know what is going to happen, I don’t know if we are 

going to open our markets. We are in an open economy, and I think 

that is very good, but in opening our economy, I think it is an opportunity for us to ask that they open their economies. 

As I have said, the Chinese people have to save a lot of money. 

They have to try to provide for their retirement. Here in the United 

States we have something they don’t have: We have great investment opportunities. They don’t. That is why the Shanghai stock 

market today is—the P ratio is 46, 48 percent. You have heard the 

stories, you have been to China. I have talked to people in China 

where ordinary citizens are taking that nest egg, they are taking 

the money out of their mattresses and out of their bank accounts, 

and they are basically doing a crap shoot on their stock market. 

Now, if, which some people predict, that stock market tanks, you 

are going to have political and economic instability in China, which 

is very bad for the Chinese, and it is very bad for us. 

I would ask, and if you would like to comment this morning, why 

the Chinese people cannot invest in the United States. Now, the 

government recently took their reserves, and they are investing 

their reserves around the world. But an excellent opportunity, a 

win-win situation would see instead of the Chinese bank overvalued and limited opportunities on the Shanghai exchange, are 

there any serious discussions about letting the Chinese people buy 

in the American markets? 

Now, I am not talking about the Blackstone Group. We all read 

about how China is investing in the Blackstone Group. Those are 

not the Chinese people. That is not the middle-class Chinese. 

I believe one answer to the Chinese people being able to provide 

for their retirement, and save for the future is their ability to invest in the United States. It is a win for us, and a win for them. 

I would like your comments maybe on that later on. 

Let me conclude by saying this: We have all talked about their 

currency being undervalued to our currency; in fact, some government reports say 25 percent, other private reports say 28 percent, 

and I believe it is actually closer to 50 percent. 

But the one thing that I think the American people miss is that 

there are detriments. Our goods are not as competitive in China, 

but there are advantages. We can buy goods from them very cheaply, and my concern is that if that currency revalues too quickly, it 

causes inflation in the United States, and it also drives up the 

costs for American households. 

That is why, again, I believe a much more practical approach is 

for a gradual increase in their currency and at the same time alVerDate 0ct 09 2002 12:22 Sep 27, 2007 Jkt 037558 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\37558.TXT HFIN PsN: TERRIE
6

lowing them to invest what is a tremendously growing amount not 

only of savings, but of reserves as the country has invested in the 

United States. 

Thank you, Mr. Secretary. 

The CHAIRMAN. The gentleman from Illinois is recognized for 5 

minutes. 

Mr. GUTIERREZ. Good morning, and thank you, Chairman Frank, 

for holding this timely hearing on the state of the international financial system. I want to use my few minutes to discuss what I 

believe is an ongoing currency misalignment and manipulation by 

China, the effect this practice has on the American economy, and 

what I and others perceive to be the lack of an effective response. 

During my subcommittee hearing on the issue of Asia currency 

valuation in the Ways and Means Committee, Trade Subcommittee, together with the Energy and Commerce Committee, 

Trade and Consumer Protection Subcommittee, we framed this 

issue as one of Wall Street versus Main Street. To an economist on 

Wall Street, that may seem a little oversimplified, but I can tell 

you that for the American worker it certainly feels like they are 

being forced to battle Wall Street and both ends of Pennsylvania 

Avenue in addition to overseas competitors. 

For the American economy, the American worker, currency 

undervaluation by China, in particular, is reaching critical mass. 

For over 10 years, China has fixed its exchange rate by intervening 

in currency markets. Economists estimate that the one is undervalued by at least 9.5 percent, and by as much as 54 percent. Many 

economists, including Federal Reserve Chairman Bernanke, characterize this undervaluation as a subsidy for exports from China. 

Suffice it to say, we cannot compete with this kind of ongoing 

government subsidy, and we cannot continue down the current 

path with our second largest trading partner, because the imbalance hurts U.S. workers and businesses and threatens the longterm stability of our economy. 

In 2006, the U.S. goods trade deficit with China rose by almost 

15 percent in 1 year to nearly $233 billion. That is a record high. 

Meanwhile, because the Chinese Government must buy U.S. dollars to keep the value of their yuan low, China holds more in foreign currency reserve than any country in the world, or in history, 

for that matter. 

Although there are other factors at play, the Chinese Government’s daily intervention in the currency markets plays a key role 

in expanding U.S. trade deficits. It is not exclusive to that. That 

is why I was extremely disappointed last week when the Treasury 

Department, in its semiannual report to this committee on exchange rates, once again declined to find that China is engaging in 

currency manipulation. 

I understand that under the current standards, the issue of intent may be an impediment to a finding of manipulation, and for 

that reason I believe that Congress should take a serious look at 

removing the intent requirement from the currency manipulation 

standard. 

I would like to take this opportunity to applaud Secretary 

Paulson for making our economic relationship with China a priority 

and for launching the strategic economic dialogue between the two 

7

countries. I believe the dialogue will help make inroads when it 

comes to U.S. financial services firms gaining access to the Chinese 

market. 

I am less confident, however, that the dialogue will help in getting the Chinese to allow their currency to fluctuate, and I think 

the difference is a matter of priorities from our side of the negotiating table. 

I am looking forward to hearing from Secretary Paulson today on 

the issue of China currency valuation in general, the reasoning behind the Treasury Department’s latest currency report on China, 

and its thoughts on the prospects of SED yielding any success on 

this issue. 

In addition, several bills addressing currency valuation have 

been introduced in this Congress, and I would like to hear Mr. 

Paulson’s thoughts on those bills, and in particular the idea of removing intent from the manipulation standard. 

I thank you again, Mr. Chairman, and I thank Secretary Paulson 

for joining us this morning. 

The CHAIRMAN. The gentleman from Texas, the ranking member 

of the Domestic and International Monetary Policy, Trade, and 

Technology Subcommittee, is recognized for 5 minutes. 

Dr. PAUL. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

The recent sharp rise in interest rates may well be signaling the 

end to the painless, easy money decade that has allowed us to finance our extravagant welfare spending with minimal productive 

effort and no savings. Monetary inflation and foreign borrowing 

have allowed us to live far beyond our means, a type of monetary 

arrangement that always comes to a painful end. As our problems 

worsen, the blame game will certainly accelerate, claiming it is all 

due to China’s manipulation of its currency, and demanding protectionist measures while unfortunately continuing to gain considerable attention. 

Unfortunately, there is little concern for how our own policies, 

monetary, tax, and regulatory, have contributed to the problems we 

face. Too often officials ignore, and even distort, important economic information that could be beneficial in making market decisions. 

Accurate money supply rates are vital in anticipating future 

price levels to the degree of malinvestment and the chances for financial bubbles to form. Since March of 2006, M3 reports have 

been discontinued. Private sources now report that M3 is increasing at a significantly high 13 percent rate. It is said that the CPI 

is now increasing at a rate of 2.5 percent, yet if we use the original 

method of calculation, we find that the CPI is growing at a rate of 

over 10 percent. 

Since money growth statistics are key to calculating currency depreciation, it is interesting to note that in this era of global financial markets, in a world engulfed with fiat currencies, what the 

total world money supply is doing. Since 1997, the world money 

supply has doubled, and money growth is inflation, which is the 

enemy of the poor and the middle class, but a friend to the banks 

and Wall Street. 

8

Monetary depreciation is clearly a sinister tax placed on the 

unsuspecting poor. Too many well-meaning individuals falsely believe that deficit finance assistance programs can help the poor, 

while instead the results are the opposite. 

Welfare and warfare, guns and butter philosophy always leads to 

harmful inflation. We had severe problems in the 1960’s and the 

1970’s, and we are doing the same thing once again. We have only 

started to pay for the extravagance of financing the current war 

and rapidly expanding the entitlement system by foreign borrowing 

and creating money and credit out of thin air. 

There are reasons to believe that the conditions we have created 

will be much worse than they were in 1979 when interest rates of 

21 percent were required to settle the markets and reverse the 

stagflation process. Congress, and especially the Financial Services 

Committee, must insist on total transparency and accuracy of all 

government financial statistics. Any market interference by government agencies must be done in full public view. 

All meetings, decisions, and actions by the President’s Working 

Group on Financial Markets must be open to public scrutiny. If our 

government is artificially propping up the dollar by directly manipulating gold prices or colluding with other central banks, it is information that belongs in the public domain. 

The same is true about any interference in the stock, bond, or 

commodity markets. A free-market economy requires the government keeps its hands off and allows the consumers to exert their 

rightful control over the economy. 

A strong case can be made that our economy is not nearly as robust as our government statistics claim. Unemployment numbers, 

inflation rates, tax revenues, and GDP growth all indicate that 

there is little to worry about, but in my estimation we should be 

much more concerned about the reality of the situation we face. 

I yield back. 

The CHAIRMAN. The Chair wants to apologize. I had forgotten 

there is a rule that says when a Cabinet officer or the Chairman 

of the Fed testifies, that we limit opening statements to the chairman and the ranking member of the committee. So I apologize to 

other members, but we are going to abide by the rule. 

I am going to call on the chairwoman of the Financial Institutions Subcommittee for an introduction of the witness, since he is 

her constituent. 

Mrs. MALONEY. I join my colleagues in welcoming you to the 

committee, and we thank you for your decision to serve our country 

as Secretary of the Treasury. 

Secretary Paulson brings a lifetime of experience and leadership 

in financial institutions, capital markets, the head of Goldman 

Sachs, which is located in the district that I am honored to represent. He has been a leader not only at this fine institution, but 

a recognized and respected leader nationally and internationally in 

finance. His decision—although there were many offers for him to 

lead many organizations, he made the decision to serve our country, and we are very grateful. 

As a New Yorker, Mr. Chairman, I have to thank him for recognizing that homeland security is part of financial security, and his 

leadership on TRIA and CFIUS are very greatly appreciated. 

9

We look forward to your comments on how to keep America competing and winning, and keeping our competitive advantage. We 

thank you for your decision to be our Secretary of the Treasury. 

Thank you for being here. 

The CHAIRMAN. Mr. Secretary, please go ahead. 

STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., 

SECRETARY OF THE TREASURY 

Secretary PAULSON. Thank you for, first of all, for making me 

feel so welcome. I thank you, Mr. Chairman, Ranking Member 

Bachus, Congressman Gutierrez, Congressman Paul, and Congressman Maloney, for that introduction. Thank you all very much. I am 

delighted to be here today to discuss the state of the international 

economy and financial system. 

As you know, the Bush Administration is committed to strengthening U.S. and global economies by promoting domestic and international growth. Our policies encourage openness, competition, financial stability, and development, both at home and abroad. 

As countries around the world have reformed and opened their 

economies, global integration has provided businesses with greater 

access to markets around the world, provided more choices for consumers, and reduced the prices of goods and services, which is a 

real benefit, especially to those with lower incomes in the United 

States and abroad. 

Our aim is to help ensure that more people share in the benefits 

created by economic growth and trade opportunities, to help every 

nation reduce poverty, and to build a strong middle class. 

A strong U.S. economy benefits the international economy, and 

the U.S. economy is strong. Most recent data showed that employers are hiring more than 100,000 people per month, businesses are 

starting to invest again, and consumers are spending at a healthy 

pace. 

Additionally, strong growth helped reduce the fiscal year 2006 

fiscal deficit to 1.9 percent of GDP, from 3.6 percent of GDP in 

2004. This is considerable progress, and we are on track to further 

reduce that deficit figure in 2007. 

A strong international economy benefits the U.S. economy, and 

we see economic growth in nearly every corner of the world. It is 

especially positive that the world economy is growing significantly 

faster than in either the 1980’s or the 1990’s, and that developing 

economies are growing twice as fast as their recent 10-year average. I might also say they are growing 3 times as fast as industrial 

economies. 

Growth in Europe and Japan has also accelerated, giving the 

global economy greater balance and more stability. However, Europe and Japan each need further structural reform and further, 

faster domestic-based growth on a sustained basis. 

Rapid growth in China has helped power the global economy, 

and as a major global economic participant, China must also address the need for structural reform. China is taking the steps to 

transition from a planned economy to a market-driven one, and 

this process will continue for a number of years. While we agree 

with the Chinese on the direction of change in their economic reforms, we differ over pace. I believe there is more danger for the 

10

Chinese in moving too slowly than in moving too quickly, and I advocate an increased pace of reform at every opportunity. 

Our relationship with China is multifaceted, and we welcome 

China’s growth and integration into the world economy. As our relationship with China matures, tensions will naturally emerge. 

Less than 1 year ago, President Bush and President Hu established 

the Strategic Economic Dialogue, which is a focused and effective 

framework for addressing issues of mutual concern. The first SED 

meeting was held in Beijing in December, and the second one was 

held last month here in Washington. 

We have tangible results to show for our work so far, such as 

agreements in civil aviation, energy, the environment, and financial services. Through the SED, which allows us to speak to senior 

Chinese officials with one voice, avoiding the stovepiping that 

sometimes characterized past discussions, we can work to strengthen the U.S.-China economic relationship. It is very important to 

both of our countries that we get this right. 

We have pressed China to move beyond the minimal requirements of the WTO commitments, and to continue to open their 

economy to competition from foreign goods and services, and to 

move more quickly towards a market-determined currency. 

You recently received a foreign exchange report which emphasizes the need for stronger action from China. Additionally, the 

Chinese need to accelerate the structural reform necessary to increase domestic consumption and reduce the reliance on investment and exports to drive growth. 

I share your frustration about the pace of change in China. I 

have been, and will continue to be, an outspoken advocate for 

maintaining and extending open trade. This is fundamental to the 

long-term competitiveness of the U.S. economy. As the world opens 

its doors, we must resist the sentiment that favors economic isolationism. This is not the time to retreat from the principles which 

have made America so strong and so competitive. I share the 

Chairman’s comments on this at the beginning. 

In May, the President reaffirmed our commitment to an open 

economy and that our Nation welcomes direct foreign investment. 

Foreign investment strengthens the U.S. economy, improves productivity, creates jobs, and spurs healthy competition. It is a vote 

of confidence in our economy when other nations invest here. 

I appreciate this committee’s efforts to improve and strengthen 

the CFIUS process. Your legislation will contribute to this rigorous 

process for the assessment of national security risk in the very limited investment cases where it may arise. We have worked hard to 

open markets and liberalize trade in order to promote economic 

growth and development worldwide. The Administration is working 

hard to complete the Doha Round, which has the potential to lift 

hundreds of millions of people out of poverty. 

Last month, congressional leaders and the Administration 

reached bipartisan agreement on labor, environmental, and other 

issues related to pending free trade agreements with Peru, Panama, Colombia, and Korea. We are hopeful that congressional approval of these agreements will unlock their important benefits. 

We also have a strong stake in maintaining the relevance and 

the legitimacy of the international financial institutions including 

11

the IMF. The IFIs are indispensable to global prosperity, which is 

more effectively pursued through multilateral means. 

The IMF is undergoing significant reforms, and we believe that 

successfully completing the reform process is critical to the IMF’s 

future credibility. The Administration has pursued a proactive reform agenda on development. As you know, the President has nominated Ambassador Robert Zoellick to be World Bank president. 

Positive feedback from my extensive consultation with foreign ministers around the world reinforced our confidence in Ambassador 

Zoellick’s ability to lead the Bank’s vital mission of economic 

growth. I believe he will rightly keep Africa at the center of the 

Bank’s focus and continue the vital campaign to fight corruption 

and reduce poverty. 

The United States seeks to preserve the gains made under recent 

historic debt relief initiatives and to end the lend-and-forgive cycle 

that has plagued many of the poorest countries in recent decades. 

Lifting unsustainable debt burdens from these countries allows a 

greater focus on economic growth and frees up resources that can 

be spent on poverty-reduction priorities. 

Taken together, policies to embrace openness, promote trade, and 

assist developing economies will enhance economic security and 

prosperity for the American people and people around the world. 

These goals reflect what is best in the American people, and I look 

forward to working with you to achieve them. 

Thank you, and, Mr. Chairman, I now welcome your questions, 

and questions from your committee. 

The CHAIRMAN. Thank you, Mr. Secretary. 

[The prepared statement of Secretary Paulson can be found on 

page 56 of the appendix.] 

The CHAIRMAN. The first question I want to address, I know we 

are going to be talking about this more, the Presidential Working 

Group will be coming to testify, but it deals in part with hedge 

funds, but the particular ownership form is not the issue, but I 

think what many, many of us agree is there was some concern 

about whether or not people are able to keep adequate track of the 

derivatives and the liabilities there. 

Recently Assistant Secretary Ryan made a speech which surprised me a little bit because it seemed to express a little bit more 

concern about the potential systemic problems that we weren’t fully 

on top of in that area before. Is there some greater concern than 

there was, say, 6 months ago? 

Secretary PAULSON. No. Our thinking, Mr. Chairman, hasn’t 

changed, but let me address this. As you know, our principles of 

regulation revolve around two primary tenets, investor protection 

and systemic risk. This is going to be very important as— 

The CHAIRMAN. Let me say that I don’t think investor protection 

is a great concern at this point. It is more the systemic risk potential. 

Secretary PAULSON. I think it is. 

Let me get then to hedge funds, because what we said at the 

President’s Working Group is, looking at hedge funds and looking 

at derivatives, that by and large they have made the financial markets more competitive, more liquid, and more efficient. They have 

helped disperse risk. 

12

The CHAIRMAN. We do have limited time, and I know you said 

that, but my question is whether Mr. Ryan’s speech was somewhat 

of a move off that because it seemed somewhat different in tone. 

Secretary PAULSON. No, because what Assistant Secretary Ryan’s 

speech said is that we have never said there is no reason to have 

concerns, and we have never said that the guidelines and the 

frameworks that came out of the President’s Working Group was 

an endorsement of the status quo. What we attempted to do there 

was to say we had all the regulators come together and speak with 

one voice and call for heightened vigilance, and what we said is 

that there are four groups that really need to be very vigilant. First 

of all, the regulators are looking very carefully at the risk, and 

looking at the relationships between the regulated entities and 

these private pools of capital, the managers of these private pools, 

looking at it from the investor side and from the prime broker side. 

And so there has been a real focus on transparency, but transparency between the regulated entities, the big banks that provide 

credit to them. 

The CHAIRMAN. Clearly we have an historic situation where securities transactions were regulated in the country in which they occurred by the country in which they occurred. That is decreasingly 

a description of reality. We are not sure now. The rapidity of movement, the hedge funds have increased. 

Are we on an adequate path so that 10 years from now we will 

have in place a regulatory system that is adequate to this really 

much more transactional approach? 

Secretary PAULSON. I think that is a great question because what 

we have seen is global financial flows that have dwarfed the trade 

in goods and services, and they are increasing at a very quick rate; 

that the global financial flows in 2005 were on a net basis over $6 

trillion, and as a percentage of GDP they doubled since 2000. As 

part of that, we have seen global financial institutions—it used to 

be if you go back to 1995, we had roughly $20 trillion managed by 

institutions. It is now around $50 trillion, and it is managed very 

much on a global basis with diversity of investments from around 

the world. 

The CHAIRMAN. My time is expiring. 

Secretary PAULSON. So given that, I do think the way we need 

to think about these private pools of capital, hedge funds and so 

on, is to think about them increasingly on a global basis, and we 

are talking actively with regulators—the members of the President’s Working Group are talking actively with regulators in Europe, in the U.K., and around the world, as to how to deal with 

these issues. 

The CHAIRMAN. I appreciate it. Whatever dangers there are of 

not having a handle on it multiply almost geometrically when they 

are international. 

I do mean to change to one other question, Mr. Secretary. I appreciate what you are doing on China. Now, some of the concerns 

have been here, well, the Chinese have been penetrating our economy too much, and we have to sort of defend against that, they 

have unfair advantages, some of which I agree with. But we had 

a hearing the other day on the reverse situation, the severe restrictions the Chinese continue to have on American financial instituVerDate 0ct 09 2002 12:22 Sep 27, 2007 Jkt 037558 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\37558.TXT HFIN PsN: TERRIE
13

tions to prevent them from penetrating the Chinese economy on 

the grounds that we would be better at it. 

To some extent it seems to me that the Chinese performed a 

great engineering feat and made the Pacific Ocean one way; that 

when they have a competitive advantage, the argument is let them 

benefit, but in areas where our financial institutions can have a 

competitive advantage, there are restrictions. 

I would certainly think there would be strong sentiment here 

that the time has come for reciprocity. This is a pretty mature 

economy. And when Chinese financial institutions now come looking to be able to operate in the United States, if there are not reciprocal rights for Americans to do the same over there, I would 

hope we would be resistant. 

Secretary PAULSON. Let me say that I agree with you on the 

need to open up their financial system. I actually went to Shanghai 

and gave a speech. By coincidence, it was about a week or 10 days 

after there was shakiness and volatility in their market. 

I have argued that this is not only right out of fairness, but will 

be very important to them and to us because their economy is not 

going to develop the way they need it to develop in a balanced, 

structured way where there is domestic consumption. They are not 

going to be able to get to the point where they have a currency that 

is market determined unless they have competitive capital markets. And they won’t have competitive capital markets unless they 

open up to competition. 

The example I use, which I think is getting some traction in 

China, is that they have $2 trillion in savings in banks getting a 

21⁄2 percent return in China, which is a negative return after adjusting for inflation. 

The CHAIRMAN. Can we do anything about it, more than just 

talk? 

Secretary PAULSON. I think we are making progress. They have 

taken some steps. I think they are going to keep taking additional 

steps, and we are going to be leaning on them because it is in their 

best interest as well as ours. 

The CHAIRMAN. Thank you. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

I have discussed with the Chinese delegation, and I know the 

Secretary has, I believe, that the Chinese are beginning to realize 

that it is a win-win situation, and when we say open their markets, 

it is to their benefit, and their middle class desperately needs the 

investments that are open to America. 

The ranking member of the subcommittee, Mr. Paul, and others 

have expressed concerns about leverage and about liquidity. We 

have tremendous liquidity and leverage in the international markets today, which can actually be a good thing, but they can be like 

a rubber band, and with the currency imbalances, and our trade 

deficits, it is a cause of concern. 

With the markets becoming more international, and our ability 

to regulate those markets becoming more compromised, I will use 

that word, or ineffective in many cases, what can we do? Is there 

anything we can do we are not doing? 

14

Secretary PAULSON. I think there is, because one of the things 

that we have emphasized is the need for competitive, transparent 

capital markets around the world. So when the concern about capital markets’ competitiveness came up, I have always been very 

careful how I have defined it. I believe we should welcome strong, 

liquid, transparent, well-regulated capital markets everywhere in 

the world because they have a multiplier effect on economies. If our 

trading partners have stronger economies, we will do better, and 

there will be less risk. 

My focus is on how do we make our markets stronger and better, 

and applaud the progress that others make. I do believe strong, efficient, competitive capital markets make a big difference in terms 

of economic growth and development. Also, Congressman, we will 

always have financial shocks from time to time. There is nothing 

we can do to make financial shocks go away. 

Today we have a strong global economy. Inflation is relatively 

low. This is as strong an economy as I have ever seen globally. But 

there is always some risk that there will be financial shocks. We 

need to be prepared to deal with financial shocks by having good 

relationships with our counterparts around the world, and also by 

having a global financial system that is efficient, modern, and functions well. 

I think that was part of what the chairman was also getting at 

with his question on dealing with hedge funds and private pools. 

Mr. BACHUS. Let me go to a much smaller question as far as a 

very specific question. You are going to meet with FINCEN on Friday, I think it is. This committee has bipartisanly overwhelmingly 

passed legislation to reduce the cost of CTRs on seasoned customers, regular ordinary customers. Bill Fox, when he was 

FINCEN Director, embraced that, and the new Director is again 

taking a look at it. 

The largest cost of regulation to the financial industry, banking 

industry, is the Bank Secrecy Act. It is a necessary act, but a lot 

of the regulation, quite frankly, is burdensome and unnecessary. 

How can we reduce the cost to both the customer, bank customers, 

and to the institutions by really taking a serious step on some of 

these unnecessary CTRs? 

Secretary PAULSON. Well, thank you for that question. 

First of all, one of my big focuses has been on keeping our financial system not just safe and sound, but secure and free of abuse, 

and we are also looking at regulatory burdens. Now, in many instances when we look at regulatory burdens, we say, how do we 

balance keeping the integrity of our markets versus having unnecessary burdens? 

I do believe that in this particular area there may be ways in 

which we can make changes that will accomplish both, which will 

have us do a better job, and a more effective and more efficient job 

of law enforcement, while at the same time reducing some of the 

regulatory burdens. 

And so our emphasis here is on how can we be more effective and 

efficient and do a better job of getting the bad guys and getting at 

abuse. In doing that, I think we may naturally drive toward some 

things that make a positive difference on the regulatory side. 

15

Mr. BACHUS. I can tell you that the legislation this House passed 

by over 400 votes will reduce cost, and it will actually make things 

more clearly relevant to the law enforcement. It will basically assist them by eliminating millions of CTRs that have no law enforcement value whatsoever. 

The CHAIRMAN. The gentleman from Illinois, chairman of the 

subcommittee. 

Mr. GUTIERREZ. Thank you very much. 

Secretary Paulson, could you talk to us a little bit about why you 

didn’t find China manipulating its currency last week in your report? 

Secretary PAULSON. First of all, thank you for the question. 

We clearly found that the currency is undervalued. It doesn’t reflect economic reality. We have been quite clear on that point, not 

only in the report, but also very clear publicly and privately with 

the Chinese. 

Now, you need to recognize that in July of 2005, the Chinese 

began to reform their currency. They revalued the currency, and 

since then it has been appreciating. The currency has now appreciated about 8.6 percent, and over the last year, the pace of appreciation has accelerated. The Chinese have publicly said that they 

are going to continue to allow the currency to appreciate, and they 

have cited the reason for not moving quicker as the need to have 

stability. 

Now, we disagree with the assessment. I think there is more risk 

in them moving too slowly, and it is dangerous for their own economy and for the world economy. But in terms of manipulation, that 

gets to intent. As a matter of fact, the way the law reads is if we 

had found them guilty of manipulation, what we would be asked 

to do would be to negotiate directly with them and press the case 

and work with them, through the IMF and on a multilateral basis. 

We have also been negotiating directly with the Chinese and 

making the case as to why it is in their best interest. In terms of 

the IMF, I have personally, and the U.S. Government has worked 

very hard to get the IMF to come into the modern world, to recognize that the days of Bretton Woods have long since gone. I am 

very encouraged by what the IMF has just put in place, and I commend Director Rodrigo de Rato for the job that he has done. 

Mr. GUTIERREZ. So we all agree, how undervalued is their currency, in your opinion? 

Secretary PAULSON. I am not going to give you an opinion. Because, do I know? No. You gave a big range. I think the important 

thing is to have more appreciation in the short term and get to a 

point where we have a market-determined currency so we are not 

debating it anymore, and so therefore a big part of what we are 

doing is pushing for structural reforms, opening up their capital 

markets so they can in the intermediate term have their currency 

determined in a competitive marketplace. 

Mr. GUTIERREZ. I understand. But, Mr. Secretary, you said that 

it is undervalued. You have a responsibility, Treasury has a responsibility. So if it is undervalued, you are saying yes, but, Congressman, they are moving to correct the imbalance. You said they 

are moving to correct it. 

Secretary PAULSON. I said they are not moving quickly enough. 

16

Mr. GUTIERREZ. Not moving quickly enough, but they are moving. So you are cognizant, I am cognizant, we are all realizing it 

is undervalued. Why don’t we just say that they are manipulating 

it? 

Secretary PAULSON. Because manipulation, as I said, gets to intent, and they have a clear policy, and they are moving. But, again, 

rather than focus on the term, what I would focus us on is what 

do we do about it? 

Mr. GUTIERREZ. So you think it is accidental, the disparity? Either they did it intentionally, or it is accidental. Tell me how it 

happened or how you believe it happened. 

Secretary PAULSON. Let me begin by saying that there are many, 

many countries in the world that don’t have market-determined 

currencies. China just happens to be by far the biggest one. To me, 

it is an unnatural act to be as integrated as they are in terms of 

goods and services and not in terms of capital markets and currency. 

Now, what I have said is that they made a decision to reform 

their currency. They said they were going to allow the currency to 

appreciate gradually, that they recognize the principle, but that 

they also place a big premium on stability. 

Mr. GUTIERREZ. The chairman has been very kind, but I just 

want to suggest two things. Look, it hurts our workers, and the 

trade imbalance between our country is affected because of the 

very nature of this inequity in our currency, and we need to do 

more to fix it. It is not fair to American workers and our American 

economy. 

Secretary PAULSON. We are in agreement on that. But the one 

thing I would just say very quickly: it is very important to deal 

with the currency, but even if the currency were dealt with, we 

would still have a very large trade deficit because there need to be 

major structural changes. A big part of our focus is then on those 

structural changes in addition to the currency. 

The CHAIRMAN. Thank you. 

I would say, Mr. Secretary, when you said the question was intent, and you said they agreed to raise it, but they decided to do 

it at a slow pace for stability, that sounds like intent to me. 

The gentleman from Alabama has a request. 

Mr. BACHUS. I have a unanimous consent request to introduce 

two studies on undervaluation and overvaluation. One is all the 

countries of the world. In fact, Iceland and Sweden are greatly 

overvalued. So we do have imbalances. I would introduce those two 

studies. One is a recent study. 

The CHAIRMAN. Without objection they will be introduced. We 

could also pass them out during the hearing. 

Mr. BACHUS. One is 26 percent undervalued, another is 55 percent. 

The CHAIRMAN. 26 and 55 percent regarding China? 

Mr. BACHUS. In China. The Chinese currency. 

The CHAIRMAN. If there is no objection, they will be put in the 

record, and the gentleman from Texas is now recognized. 

Dr. PAUL. Thank you, Mr. Chairman. There is a lot of concern 

in the Congress for the trade imbalances, and we talk about some 

currency problems, but I don’t think we ever get to the bottom of 

17

that issue. There is a great deal of discussion about what China 

should do or shouldn’t do, and I would like to concentrate more on 

what we should do for ourselves, because that is where our responsibilities are. 

So often I think about how we have monetary problems here, we 

have tax problems here, and tax policy, regulatory policies, and 

also some of the things that we could do even in trade policies that 

could help. So I don’t see how putting all the blame on China is 

necessarily helpful when so many are now calling for a solution 

such as putting tariffs on them. I think sometimes they forget a 

tariff is nothing more than a tax, and most likely a tax that would 

be borne by the poor who now are able to buy goods at a cheaper 

rate. So there is no easy solution there. 

In the beginning of your statement, you mentioned that our policies are to encourage openness. I want to address that a little bit, 

and I have a question that has to do with the President’s Working 

Group on Financial Markets. We have a program called the FDIC. 

It is not a free-market insurance program, but everybody knows 

about it, and there is reassurance, and so far the moral hazard has 

not been so bad that it hasn’t been helpful at least to keep the oldfashioned run on banks from occurring. 

In some ways I see the President’s group as some type of an insurance program to look at the unruly markets that may or may 

not come, and yet we don’t know a whole lot about it. I am interested in knowing more about this particular group and the meetings, whether there are minutes held, what are the discussions, 

have actions ever been taken; because if the group is truly an activist group, we as legislators and Members of Congress should have 

full knowledge of this because the four major departments and individuals who make up this group have a lot of influence over stock 

markets and bond markets and commodity markets and currency 

markets. And if we don’t know what it does, it creates some speculation, and we do read articles in the paper about the speculation 

of what this group may or may not be able to do, and I think that 

that speculation can be harmful. 

So could you let us know a little bit more about how this group 

works, and have you taken any precise actions to interfere in the 

market? 

Secretary PAULSON. Well, thank you for your question. We have, 

I think, always tried to be very open about what this group is. I 

chair the President’s Working Group on Financial Markets and its 

members consist of the Chairman of the Fed, the Chairman of the 

SEC, and the Chairman of the CFTC, and we have been asked on 

a number of occasions to come up with a study. There is a study 

on TRIA for Congress, I think it actually may have been for this 

committee. 

But we talk about issues that are primarily related to the markets, and one of the things that we spend a fair amount of time 

on is looking at a systemic risk. There have been a lot of changes 

in the market, the markets continue to evolve, the global economy 

continues to evolve. One of the things we have said is that none 

of us is predicting a financial shock anytime soon. As a matter of 

fact, economic conditions would seem to indicate that it is not particularly likely, except financial shocks often come when they are 

18

not expected. They come from time to time, and the next time we 

do have a financial shock, it will be interesting because the United 

States is even more integrated into the global economy. 

There has been an increase in derivatives and private pools of 

capital are playing a bigger role. So we have thought about it and 

are planning along those lines. The most recent thing we have done 

is to come out with guidelines and principles and a framework for 

dealing with some of the challenges posed by hedge funds and 

other private pools of capital. 

And so this had the benefit. This was a forum where you could 

have the regulators come together and speak with one voice. 

The CHAIRMAN. The gentlelady from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. Mr. Secretary, I thank you for being here today. And I would like very 

much to talk with you about the IMF or Bolter Funds or China, 

but I am not going to do that. I have decided that my work over 

the next few years will be focused on doing everything that I can 

to protect American citizens, to be a real advocate to correct the ills 

of government, or the private sector as it relates to schemes and 

rip-offs that our people have to endure in this Nation. 

There are many people who are already forgetting Katrina, for 

example; we have just thousands upon thousands of people who 

were harmed, and still have not been made whole. But today while 

you are here, I am going to focus on Enron because you have a role 

to play in Enron. I have been following for some time now, after 

the biggest corporate crime in America was perpetrated on the people of this country and on the workers, what has happened to the 

victims. And I am very, very surprised to find out that our government, this Administration, and you have decided that you are more 

interested in protecting those with third party liability as relates 

to Enron and some other cases than you are in protecting the citizens who got ripped off with this corporate crime. 

I was very disappointed to read that the solicitor general did not 

file an amicus brief in support of the defrauded investors in the 

Stoneridge investment part of this case currently pending before 

the Supreme Court. This is important because this would decide 

what happens to those Enron victims. Those Enron victims lost 

about $40 billion; about $7.3 billion of that has been recovered by 

the attorneys and lawyers. 

However, I understand—and maybe you can answer this question. Why is it an apparent policy position of the Bush Administration to favor public enforcement of a private enforcement at all relevant to a case involving the interpretation of an SEC rule that 

governs both public and private litigation? The issue before the Supreme Court in Stoneridge involves who may be sued for participating in a scheme to defraud under Rule 10(b).5, not whether the 

private right of action should be scaled back. Why should the Administration view that our—as you have called it—overly litigious 

society is harming U.S. financial markets, whether valid or not, 

have any bearing on the correct interpretation of scheme liability 

in Rule 10(b).5 of the securities law? Isn’t that a question for Congress, not the courts? 

Now, I understand that Mr. Cox sides with the victims of Enron 

and that the SEC voted that they should be able to be sued and 

19

that they should be able to recover. And again, some of these banks 

have been forced to pay up. But you and the Administration are 

standing in the way. Can you explain that? Why would the government be against the people of Enron who were defrauded and those 

banks that literally were in collusion with Enron? Should banks be 

let off and not have to pay? 

Secretary PAULSON. Thank you very much for that question. Let 

me begin by saying that I think you are referring to the Stoneridge 

case, and that is what you mentioned. The Stoneridge case is about 

a cable company, Charter Communications, and a couple of suppliers, one of which was Motorola. So that is what that case is 

about, Charter Communications and a couple of suppliers. Let me 

step back, before addressing that case and say that I am a strong 

advocate of the protections against security fraud. I think the SEC 

and the Justice Department have been particularly vigilant, and 

the hundreds of millions of dollars of fines that have been paid and 

recovered are very significant. 

Now, I asked the Treasury Department to send a letter to the solicitor general on the Stoneridge case, which involves Charter Communications and Motorola, and some other suppliers. I did this because I thought it had enormous implications for the U.S. economy. 

And here’s the reason, that when you are looking at the uncertainty of primary liability which could go to third parties—and as 

far as I am concerned this would create a very uncertain legal environment for all of the individuals and all of the public companies 

that deal with public companies, all of the parties that deal with 

public companies in the United States—I think that is ultimately 

harmful to our economy and to the— 

Ms. WATERS. I am reclaiming my time for just one second, Mr. 

Secretary. Is it not true that the lawyers were able to recover $7.3 

billion from three big banks—those banks are Citi, JP Morgan, and 

the Canadian bank—in the Enron case? 

Secretary PAULSON. As I said, you are talking about Enron and 

the investors in those cases. I am talking about Stoneridge. 

Ms. WATERS. No, but the relevance of Stoneridge to Enron raised 

in the Stoneridge case is whether those who participate in a 

scheme to defraud investors under Section 10(b) and Rule 10(b).5 

of the U.S. securities laws can be held liable where the participants 

knowingly engaged in fraudulent financial transactions with the 

public cooperation to falsify its financial statements even though 

they did not themselves make a public statement. Isn’t that the 

case? 

Secretary PAULSON. I was going to say that the principle is important to me in terms of competitiveness and is important to people on both sides of the aisle. Senator Schumer and Mike 

Bloomberg did a study that looked at our capital markets and the 

impact on our economy. What did they cite? Excessive litigation 

risk is a big issue. I had a panel who looked at this, and Bob Rubin 

saw this as a big issue. My concern is that by exposing all sorts 

of third parties that happen to do business with a public company 

to primary liability, without clear lines is a risk to our economy, 

to our competitiveness, and to jobs. And as I said, I asked the 

Treasury to write a letter to the solicitor general on the Stoneridge 

case. 

20

The CHAIRMAN. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. I guess we are looking at 

some of the practical effects in the market today in terms of decisions that we have made in the past, but we have the outflow of 

capital from the U.S. markets, to London and to Hong Kong—Hong 

Kong, China, and it appears to be occurring at a pretty heavy pace. 

Only 2 of the 20 initial public offerings last year went public here 

in the United States, and if we looked back to 2000, there were 9, 

and there were 12 in 2001. So we have a trend that I think is a 

serious problem. And there is this argument that the current status of our legal system and the impact on an overly litigious society 

has been a factor in driving these decisions from entrepreneurs and 

investors not to take advantage of the capital markets of the 

United States. 

You referenced the Bloomberg-Schumer report, and the conclusion of that report is that the prevalence, they say, of meritless securities lawsuits and settlements of the United States has driven 

up the apparent and the actual cost of business and driven away 

potential investors. It is not the only report that comes to that conclusion. But Mr. Secretary, with some recent developments regarding third party liability, it appears that this problem may only get 

worse. 

And I would also just like to touch on Sarbanes-Oxley. Section 

404 has frequently been cited as a likely cause of the outflow of 

capital. I would like to ask if you see a need to redress the burdensome regulatory environment facing our public companies on that 

front. And I would also just like your thoughts. 

You mentioned the case of Stoneridge v. Scientific Atlanta concerning secondary liability. The question seems to be whether attorneys can sue not just a company that engages in wrongdoing, 

but any company that has done business with a wrongdoer. And if 

we went back to the 1996 case of Central Bank, the Court at that 

time said Congress never intended this language to cover secondary companies. At that point, the Court argued, trying to determine just who is liable in a civil setting is problematic here. And 

they warned of the excessive litigation that would come and the 

difficulties in costs that would be experienced by client companies 

and investors, the cost to investors under a case like that, the Central Bank case. 

Do you think it is precisely that sort of case that could cause 

even more companies to decide that they are better off listing their 

shares over in London or in China? That is what I would like to 

ask you. 

Secretary PAULSON. Well, I thank you very much for the question. Yes, there is no doubt that when you go around the world, 

and even here in the United States, one of the impediments to listing in the public capital markets in the United States is the question of executive litigation risk. And as I said, in the Stoneridge 

case what concerned me was exposing a wide range of individuals 

and businesses in the United States that happen to do business in 

some way with public companies to primary liability without bright 

lines. And so that was the case. Reasonable people disagree on this, 

but there are plenty of people on both sides of the aisle that share 

my concern there. And so that is a concern. 

21

Now, in terms of your Sarbanes-Oxley question, I believe that 

Sarbanes-Oxley is by and large good legislation, and that the principles are all the right principles. Some of the issues have had to 

do with implementation. The biggest issue had to do with, as you 

said, Section 404. I think that there have already been major steps 

taken by Chairman Olson of the PCAOB and Chairman Cox to rewrite the auditing guidelines, and I am optimistic that you are 

going to see that we have to remain vigilant, but we are going to 

see that implemented in a more efficient and effective manner. 

Mr. ROYCE. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. The gentlelady from New York. 

Mrs. MALONEY. Thank you. First, I would like to thank the Secretary for working with this committee on the anti-terrorism risk 

insurance which we will be bringing up later on this week, and also 

for working with us on the legislation to strengthen the CFIUS 

process that reviews foreign direct investment for national security 

concerns. In the wake of the Dubai Ports World crisis, it occurred 

to us that we needed to strengthen the process and that we needed 

a certain and fair process to encourage safe foreign direct investment. 

One of the first bills reported out of this committee was a CFIUS 

reform bill, and it passed the House 423 to 0. You don’t see that 

with many pieces of legislation. I believe that this bipartisan bill 

really strikes that balance. It was reintroduced in the Senate this 

year and it followed most of the House versions on all the key 

points. One area where it differs from the Senate version is that 

it allows for the delegation of sign-off to the Assistant Secretary 

level, where the House had no official sign-off lower than the 

Under Secretary. It was the Secretary, the Deputy Secretary, then 

at the urging of Treasury we lowered it to the Under Secretary. 

And I am concerned about returning to the level of the Assistant 

Secretary. I want to note that it wasn’t an Assistant Secretary who 

signed off on the Dubai Ports World transaction. 

And my question is, do you support the Senate language to allow 

for sign-off at the Assistant Secretary level? 

Secretary PAULSON. Thank you very much for that question. Let 

me begin by saying that I appreciate your leadership and the work 

of this committee, and that your bill is a strong bill. The Senate 

bill is a strong bill. You have highlighted one difference. I was not 

here at the time of Dubai Ports. I have heard various comments 

and I am not going to comment. I don’t know where the sign-off 

occurred, but I will say to you that I have a strong, clear preference 

for sign-off at the Assistant Secretary level. It is a Senate confirmed level, and I believe this for a couple of reasons: 

First of all, I think that this bill will give us a lot of changes and 

that it is going to make a big difference. And we are focused on national security in a very significant way. But the signal it sends to 

the rest of the world, which says that we are open for investment, 

but that it takes an Under Secretary or above to sign off on a 

CFIUS case, to me there is a bit of a disconnect there. And also, 

as someone who is trying to run a business, at the Department of 

the Treasury, we have one Under Secretary for International Affairs, and we have one Assistant Secretary for International Affairs, and just in terms of getting things done, it is not very effiVerDate 0ct 09 2002 12:22 Sep 27, 2007 Jkt 037558 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\37558.TXT HFIN PsN: TERRIE
22

cient. I have talked about this before. There weren’t very many 

areas we had of disagreement, but this is one of them, and on this 

I just respectfully disagree. 

Mrs. MALONEY. But in your Department, you can structure it to 

the number of Under Secretaries who are there and the number of 

Assistant Secretaries. And considering the fact that the Dubai 

Ports World transaction was signed off at the Assistant Secretary 

level, aren’t you concerned, as some of us are, that Assistant Secretaries don’t reliably have the political and substantive judgment 

necessary to make these decisions? The biggest criticism of Dubai 

Ports World was the fact that no one of stature or great leadership 

in the Treasury Department signed off on it. It was a criticism of 

the level of sign-off, and to lower it to a lower level of sign-off really 

depletes the purpose of the bill to strengthen accountability in the 

process. 

Secretary PAULSON. I think that would be a gross oversimplification of the Dubai Ports World case. And again, I can just tell you 

that I would be most comfortable having an Assistant Secretary be 

able to sign off. I take responsibility for my role in CFIUS and the 

Department does. And I think in terms of letting us operate efficiently and sending the right signal to the rest of the world an Assistant Secretary is a better route. You and I respectfully disagree. 

We agree on most things on this issue, and, I guess, why don’t we 

just leave it at that. 

Mrs. MALONEY. How many Assistant Secretaries are there at 

Treasury now? 

Secretary PAULSON. We have one Assistant Secretary for International Affairs and we have one Under Secretary, and the idea of 

saying you could have— 

The CHAIRMAN. We only have 5 minutes. That was a fairly simple question. How many Assistant Secretaries are there? It probably ought to be able to be answered fairly quickly. 

Secretary PAULSON. Well, we have multiple Assistant Secretaries, but they— 

The CHAIRMAN. I understand that. But again, we only have 5 

minutes. 

Secretary PAULSON. We have one Assistant Secretary in the 

international area. 

Mrs. MALONEY. That is the total number? 

Secretary PAULSON. Yes. 

The CHAIRMAN. The gentleman from Connecticut. 

Mr. SHAYS. Thank you, Mr. Chairman. I would think it would be 

a pretty exciting time to be a Secretary, and given how well the 

world economy is doing and the U.S. economy it would be a pretty 

heady business. Yet I get the sense from the American people that 

they don’t feel the economic security that the indicators would 

seem to say they should feel. My sense is they don’t feel that sense 

of comfort because the world is extraordinarily competitive and so 

they don’t have a sense of job security. But when you talk about 

this among your colleagues, what is your conclusion for why public 

confidence doesn’t match the statistics? 

Secretary PAULSON. In terms of the way— 

Mr. SHAYS. The strength of the economy, the fact that unemployment has gone down, very real growth in GDP. And yet there isn’t 

23

this sense among the American people that their life is secure and 

their economy is doing well. 

Secretary PAULSON. I think this is a feeling in the United States 

and in a number of other places around the world. I think part of 

it may be related to the point that the chairman made earlier on 

the widening income gap. Part of it may be related to the pace of 

change, part of it is related to the technological advancements 

which are continuing to force people to change and giving more of 

an advantage to those who know how to use technology. 

Mr. SHAYS. So the future of our being able to compete is going 

to be based on how well our populace is educated and how willing 

we are to allow people with technical skills to immigrate into this 

country. Do you as Secretary of the Treasury get involved in those 

issues or are those issues that you have to punt to someone else? 

Secretary PAULSON. Get involved in immigration issues? 

Mr. SHAYS. Immigration and technology and making sure that 

Americans are keeping pace. 

Secretary PAULSON. Those fall in other people’s areas. 

Mr. SHAYS. Let me ask you, with regard to what you refer to as 

a historic debt relief initiative, how are you able to make sure that 

it is not lend and forgive as you talk about this cycle? 

Secretary PAULSON. Well, I have to say that is always a challenge. I think there is much more buy-in when you talk to people 

at the World Bank and to my counterparts from around the world 

at the G–7. I think there is a growing consensus and a structure 

for reducing the likelihood. 

Mr. SHAYS. But is there anything concrete that your people talk 

about that say this is going to be different because we are going 

to not only—the debt relief is historic. It is larger than any time 

in past history and it is global. I mean, there is great participation. 

But is there anything that the United States is doing in a concrete 

way to make sure that we are not going to just see a repeat of this 

in a few years? 

Secretary PAULSON. I think that is a good comment. I think a lot 

of this is not just going to be the structure that is put in place in 

the highly indebted countries—the poorer countries. There is going 

to have to be restraint and discipline from those that lend. There 

has been a lot of discussion about making sure that the developed 

countries and the multilateral institutions act in concert. 

Mr. SHAYS. Let me put it in my own words. Is your basic point 

that whereas we have lent in the past, that countries are in a unified way going to be a lot stricter on how we give out credit? 

Secretary PAULSON. Yes, and that there is a big focus on debt 

sustainability when we look at new lending. And there is a big 

focus on trying to discourage other nations from coming in and 

free-riding and following this forgiveness by making new loans. 

Mr. SHAYS. Thank you. 

Ms. WATERS. [presiding] Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Madam Chairwoman. Welcome, Mr. 

Secretary. Good to see you. I want to thank you first for the good 

work that you are doing, and especially including the section in 

your prepared comments, the issue of strengthening the international framework against illicit finance and how important your 

role is and the role of the Treasury in fighting terrorism. You posVerDate 0ct 09 2002 12:22 Sep 27, 2007 Jkt 037558 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\37558.TXT HFIN PsN: TERRIE
24

sess tools that are very, very important to winning this war on terrorism and providing whatever transparency we can in the international community where people, players, companies, and sometimes countries are helping to finance terrorism and terrorist activities. Thank you for the good work that you are doing in the 

areas of nuclear proliferation, etc., specifically with regard to North 

Korea and Iran. 

I have basically one question this morning, and that goes to the 

issue of the Iran Sanctions Act. This Act has been on the books. 

Unfortunately and regrettably, not one entity was sanctioned during the whole duration of the existence of this bill during the time 

of the Clinton presidency, and that wasn’t a good thing. And in addition to that we have seen the same exact thing throughout the 

Bush presidency, which was greatly heralded, that if you harbor 

terrorists, it is just as bad as if you are a terrorist kind of approach, yet the Administration has not sanctioned anybody. And 

we know who some of these people are. We know what some of 

them are doing, and yet there are no sanctions. 

It may be above your pay grade because you don’t do the sanctioning; the President does that. So you may feel uncomfortable 

commenting on that as it might be above your pay grade. 

Secretary PAULSON. Let me make a couple of comments. First of 

all, we have been, the Administration has been, and Treasury has 

been very active in terms of taking financial measures against a 

number of Iranian entities, including Bank Saderat, which has 

been active in financing terrorists, and then with Bank Sepah, 

which has been a big financer of proliferation and missiles, and 

weapon systems acquisitions. So we have been quite active there, 

and we have been quite active in engaging private sector banks 

from around the world. 

Mr. ACKERMAN. I know indeed that— 

Secretary PAULSON. To answer your question, I think that engaging in secondary boycotts, sanctioning companies in other nations, 

I think it is our collective judgment that this would work against 

what we are doing right now, which has the potential to be quite 

successful, building a multilateral consensus. 

Mr. ACKERMAN. I understand that is your opinion. 

Secretary PAULSON. Yes. 

Mr. ACKERMAN. But you also, as we, are sworn to uphold your 

constitutional responsibilities and the Constitution and the laws. 

We passed a law and nobody is enforcing that law. Nobody has put 

anybody on this list. And whether you consider it a secondary or 

a tertiary or quaduciary boycott of a company that is participating 

in something that is going to result in destruction in the United 

States and want to observe the niceties of not doing that or not, 

that is your opinion. But I would suggest that the President should 

be, a President could and should have, this is a nonpartisan comment, should have some countries and some companies on that list. 

We do not. 

But something that I think you can comment on, because indeed 

with both Bank Saderat and Bank Sepah you have been doing 

some good work, and you do have people from Treasury and different places in the world trying to convince them not to do business. Could you give us the names? That is something you can do. 

25

Give us the names of some companies that are not cooperating with 

Treasury on this. 

Secretary PAULSON. In terms of— 

Mr. ACKERMAN. Which is the number one company that is not cooperating? 

Secretary PAULSON. Well, in terms of—I will tell you this— 

Mr. ACKERMAN. That is investing in Iran. 

Secretary PAULSON. I would say in terms of the financial sector 

around the world— 

Mr. ACKERMAN. Mr. Secretary, with all due respect, we each 

have only 5 minutes. 

Secretary PAULSON. Right. 

Mr. ACKERMAN. And you can run the clock on each of us if you 

would like. I would like you to give me three names, Mr. Chairman, if I might, I would like you to give me three names of companies anywhere in the world that you like that are not cooperating. 

You can do that. I know you can. 

Secretary PAULSON. That are not cooperating? 

Mr. ACKERMAN. Do you want me to repeat the whole thing? I 

know you understand me, so let’s not run the clock and repeat the 

question again. Give me three companies that are not cooperating 

with us. 

Secretary PAULSON. I am not prepared to single out three companies. 

Mr. ACKERMAN. Would you get back to us in writing on that or 

you just don’t want to? 

Secretary PAULSON. I will get back to your question in writing, 

but I doubt, just to be very direct with you, that you will get a list 

from the Treasury Department of companies that aren’t cooperating. If we find companies that are violating the law, we are going 

to take action against them. 

Mr. ACKERMAN. And you have a reluctance to cooperate with the 

Congress and providing the companies that are not cooperating 

with U.S. law. 

Secretary PAULSON. There are a variety of nations that we would 

like to get more support from, but we are getting support and we 

are building support. 

Mr. ACKERMAN. We would like to help you with that, but— 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. Mr. Secretary, I 

don’t think I have heard a discussion today about the patterns of 

entitlement spending within the Federal budget. Recently Chairman Bernanke of the Fed said that without early and meaningful 

action to address the rapid growth of entitlements the U.S. economy could be seriously weakened with future generations bearing 

much of the cost. He said that at a House Budget Committee hearing. 

Recently Controller General Walker of GAO said that the rising 

cost of government entitlements are a fiscal cancer that threatens 

catastrophic consequences for our country and could bankrupt 

America. Most of the models I have seen from OMB and CBO and 

others, who slice and dice the numbers here, have us on a collision 

course over the next several decades of either having a Federal 

26

Government consisting of a little more than Medicare, Medicaid, 

and Social Security or a doubling of taxes on the next generation 

just to balance the budget. So far I have seen no evidence in this 

Congress that there is an interest in attempting to reform these entitlement programs. 

My question is, do you concur with the assessment of Controller 

General Walker and Chairman Bernanke and, if so, what could be 

the long-term implications for America’s competitiveness in the 

international economy? 

Secretary PAULSON. I do concur and I do believe that perhaps the 

two biggest intermediate to long-term structural economic issues 

we have are the need for entitlement reform and energy—those 

would be the two that I would cite. In the entitlement area we 

have a fiscal situation in the short term which is manageable and 

getting better. But if you look out a number of years, we have an 

entitlement issue which is driven by two factors—demographics 

and rising health care costs going up much quicker than the economy overall. This is frustrating because the sooner we deal with 

these as a country, the more flexibility we will have and the less 

onerous the penalty will be. Also, the price paid by the younger 

generation will be less. 

So this is something—and I would tend to leave it with one positive comment—that I believe is a bipartisan issue. I do believe that 

people on both sides of the aisle understand it. I really do hope that 

sometime over the next several years we will all get together to 

solve it, because it is not going to go away, and the longer we wait, 

the more expensive it is going to be to solve the problem. 

Mr. HENSARLING. Returning to the issue of Chinese currency, 

possible Chinese currency manipulation, I rarely have an opportunity to quote my mother at these hearings, but my mother once 

said that life is often full of lousy options, and it appears to me we 

may have a lousy option in dealing with Chinese currency. Isn’t it 

true whether through market forces or through currency manipulation or through acts of divinity there will be winners or losers every 

time there are adjustments in the currency exchange rates? If you 

are in the export business or the import business, depending on 

which way the currency fluctuates there will be winners and losers. 

For those who are advocating various tariffs and sanctions won’t 

that simply drive up the cost of many of our manufactured goods 

that could have a detrimental impact on the disposable income and 

the standard of living for low- and middle-income Americans? 

Secretary PAULSON. If your question is do low-income American 

consumers benefit from low prices from cheaper imports, I think 

the answer to that is yes. As China moves toward a market determined currency, the winner will be the global system the world 

overall. It will benefit the United States and China. I believe we 

have a responsibility of fairness to press the Chinese toward getting to the point where they are not just partway integrated into 

the global system. The global system is not going to work over time 

unless those that play such a big role selling goods and services are 

truly integrated in terms of the financial markets and their currencies. 

Mr. HENSARLING. Thank you. 

The CHAIRMAN. Thank you. The gentleman from California. 

27

Mr. SHERMAN. Thank you, Mr. Chairman. First I would like to 

thank you for the clarity of your answer to Mr. Ackerman. He 

asked you about the Iran Sanctions Act and why it did not apply 

to a single company, and your response was you thought it was bad 

public policy to sanction foreign companies. And I think that clarifies really the Administration view toward Congress, which is the 

laws that we pass are advisory and when they constitute bad public policy they will be ignored. Other than that you think it is terrible public policy, is there any reason at all legally, if you were 

just going to follow this statute, not opine on whether it is good 

public policy, that this Administration has not identified a single 

oil company that has invested more than $20 million in Iran? 

Secretary PAULSON. Again, I take your point. 

Mr. SHERMAN. Thank you. Sir, I am going to go on to the next 

question. 

Secretary PAULSON. I will advise other people within the Administration. But the point that I was respectfully trying to make— 

Mr. SHERMAN. Sir, I will reclaim my time. I think your answer 

is very clear. 

Second, I would just like to clarify for the record the exchange 

of correspondence that I had with the Treasury Department over 

whether there should be an emergency plan for dealing with a 20 

percent decline in the value of the dollar in any week or similar 

catastrophe or a 40 percent decline in a single month. The response 

from your Department has been that we don’t need to worry about 

that. 

I would urge you to work with my office if there is any legislation 

that you think would give you the tools necessary to deal with such 

a catastrophe, and I urge you again to work with the other Agencies of the Administration to put together an emergency plan. If, 

however, you don’t think it is worth your time, that is fine. It is 

entirely up to you. 

It has been widely reported the extraordinary efforts the Administration made to save Mr. Wolfowitz’s job. You, yourself, made 

phone calls. When it comes to keeping the World Bank from making disbursements to Iran, the Administration voted against those 

loans, as you are required to by law, and in this case you actually 

followed the law. But how hard—can you describe, compare the extraordinary efforts that you made to save Mr. Wolfowitz’s job with 

energy expended to try to prevent the World Bank from disbursing 

loans to Iran. Actually, I will ask that as a more specific question. 

Have you made any phone calls at the ministerial level urging that 

we stop making disbursements on the $1.3 billion of World Bank 

loans headed for Iran? 

Secretary PAULSON. I have not made any personal phone calls on 

that. 

Mr. SHERMAN. Did you make any personal phone calls to help 

keep Mr. Wolfowitz’s job? 

Secretary PAULSON. I made personal phone calls with regard to 

Mr. Wolfowitz to make sure that there was a fair process. 

Mr. SHERMAN. I am glad that this is how we have allocated our 

chits in power in the World Bank. But let me move on to another 

question. 

28

We have had two Iranian banks that you have prevented from 

doing business. 

Mr. BACHUS. Mr. Chairman. 

The CHAIRMAN. Yes. 

Mr. BACHUS. I would ask in fairness— 

The CHAIRMAN. We will stop the clock during this conversation. 

Mr. BACHUS. I would ask in fairness that the Secretary, if he is 

asked a question, that he does have a chance to answer. 

The CHAIRMAN. I would say the general rule is that the member 

controls the time. If the Secretary at the end wants to add something he can. I would say that I think the Secretary is having trouble adjusting to the 5-minute rule. In several cases, people have 

asked questions and the answers have been, it seems to be, more 

discursive. 

Mr. BACHUS. Mr. Chairman. 

The CHAIRMAN. I am sorry. It is not my time. I recognize the 

gentleman and I am trying to explain what is going on. The Secretary has on occasion been more discursive and has frankly repeated stuff that everybody knew. But if at the end he feels, the 

members control the time, that he wants to add, I would be glad 

to recognize him for that. 

Mr. BACHUS. I thank the chairman. I think that in this case, the 

Secretary was asked a question, and after two words he was cut 

off. 

The CHAIRMAN. Well, members control the time. And members do 

have a right, it seems to me, to ask a specific question and try to 

get a specific answer, particularly under the 5-minute rule. 

The gentleman from California is recognized. 

Mr. SHERMAN. Thank you. It is only in the Senate where you are 

allowed to filibuster. You have prohibited two Iranian banks from 

doing business with the U.S. Fed and U.S. banking system. Why 

not all of them? 

Secretary PAULSON. We have a general prohibition against them 

doing business in the United States. We took action against the 

two banks because we had very hard intelligence and very strong 

evidence of clear wrongdoing. As a result, it was possible to go 

around the world, and with this conduct of clear misbehavior build 

a multilateral consensus. So we are looking at all of our options. 

Mr. SHERMAN. I am reclaiming my time. You do need cooperation 

from the rest of the world on some things, but you could stop every 

bank that is of assistance to the Islamic Republic of Iran and is located in the Islamic Republic of Iran from doing business with the 

Fed without seeking international consensus. 

Secretary PAULSON. They are excluded from the United States. 

Mr. SHERMAN. They got the U-turn transactions. 

Secretary PAULSON. They got the U-turn. 

Mr. SHERMAN. And we could stop the U-turn without this lobbying effort? 

Secretary PAULSON. That is one thing that we are considering. 

But as I said, and I spent a lot of time on this, Congressman, I believe that when we can show people that we have hard evidence, 

it is a lot easier to get the kind of support that we are currently 

getting from around the world, which I think is isolating Iran from 

the global financial system. 

29

Mr. SHERMAN. Let me just point out that the centrifuges in Iran 

continue to turn and I wish we were as willing to inconvenience 

international corporations as we have inconvenienced American 

soldiers fighting in Iraq, and I yield back. 

Secretary PAULSON. I have spent a lot of my time on this issue. 

It is very important to me, and we share the same objective here. 

The CHAIRMAN. The gentleman from California, Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. And thank you very 

much, Mr. Secretary. A few kind of relatively broad questions, unlike some of what you have been getting. What do you see as the 

greatest risks to business and capital formation in the United 

States? I mean some people will say Sarbanes-Oxley is a big one. 

I suspect from your previous answer you don’t agree with that. 

Litigation risk perhaps. What do you see as the biggest impediments to people forming companies and capital in the capital markets in the United States? 

Secretary PAULSON. Congressman, when people say SarbanesOxley, I think they are using that as code for a lot of things. Not 

just the Sarbanes-Oxley Act, but the way it is implemented, all of 

the new listing rules that have come into place, the different 

changes in the boardroom, and the changes to the accounting system. Because the business scandals in this country were largely accounting scandals, and that is what Congresswoman Waters commented on with respect to Enron and others, there were big 

changes in accounting. And some of the secondary, and tertiary effects of those changes have not all been positive. We had, for instance, around 1,500 restatements last year in the accounting area. 

I believe that all of these changes taken together have been a deterrent to public listing in the United States. At the Treasury Department, we focused on three things: First, the accounting industry and how that works and how the accountants relate to boards 

and to managements and to shareholders and how to deal with the 

restatements and the time and effort and money that is spent in 

that area, number one. 

Second we are focused on regulatory structure. We have a regulatory system that has been built up in this country over many 

years. And so how we resolve some of those issues. And then the 

enforcement, legal system and getting at, again, the issues that we 

had an opportunity to discuss earlier with Stoneridge. And so I 

would say those are the three areas we focused on. 

Mr. CAMPBELL. Okay. And litigation risk is kind of that third? 

Secretary PAULSON. Yes. 

Mr. CAMPBELL. There is a lot of talk around here about raising 

the tax rate on capital gains and dividends, either straight up or 

through on the higher income taxpayers, let us say, through the 

modifications in the Alternative Minimum Tax. What effect would 

that have, do you believe, on growth, capital formation, and job formation? 

Secretary PAULSON. Well, I think it would be a negative. I think 

that the tax reform reducing the capital gains rate, equalizing it 

with dividends, was a major improvement. It was not only a reduction in taxes, but also a major reform that eliminated some of the 

biases that we have in our tax system. It has also helped drive jobs 

and growth, and I think it has been very positive. And, given 

30

where we are in our business expansion today, I wouldn’t recommend increasing the dividend and capital gains rates. 

Mr. CAMPBELL. And as a final question, we have a lot of angst 

about our savings rate, but yet globally there is a lot of global liquidity. Chairman Bernanke has called it a global savings glut. 

What does that mean for us, what does that mean for the economy, 

what does that mean going forward in this global savings glut? 

Secretary PAULSON. What has happened is that there has been 

a wall of money from around the world. Asia, Germany, Russia, 

something like $450 billion last year from the 10 oil exporting nations, $6 trillion in capital flows. Now, that money needs to find a 

home, and the U.S. economy is very attractive relative to other 

places, looked at historically or going forward. To me the key is to 

continue to keep our economy strong, to have policies that enhance 

confidence in our economy, to be open for investment, and to encourage foreign investment because we have attracted a lot. The 

U.S. economy is 25 percent of global GDP, but we have 40 percent 

of global financial assets here in this country, and that is very important. 

Mr. CAMPBELL. Thank you, Mr. Secretary. 

The CHAIRMAN. Mr. Secretary, we have a vote that is probably 

going to take about 30 minutes. We have some members here. Is 

it possible for you to take a break and come back at about say 

12:40 and stay for another 40 minutes or so. 

Secretary PAULSON. Okay. 

The CHAIRMAN. I have to accommodate the members who are 

here. I will not allow any members who have not already been 

here. 

Secretary PAULSON. I have a lunch and then I am supposed to 

speak to a group of international students at 1:45. 

The CHAIRMAN. Where is that going to be? 

Secretary PAULSON. That is going to be at the Executive Office 

Building. I am supposed to chair an economic principles lunch at 

1:00, so the idea would be that I would come back at 12:45 and be 

here until 1:15. 

The CHAIRMAN. If we can. We will try to accommodate as many 

members as possible. I appreciate it. We will finish some more 

questions now. 

Secretary PAULSON. Could we do whatever we can to get me out 

of here by 1:15? 

The CHAIRMAN. Yes. 

The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Secretary, for being 

here. Mr. Secretary, international currency policies, and particularly China’s exchange rate policy, are a concern for American 

manufacturers and other folks as well. I would like to stay on the 

topic of currency policy, but I would like to draw focus to another 

side of the issue. 

According to the most recent Treasury statistics, today foreign nations hold over $2.2 trillion, or 44 percent, of all publicly held 

U.S. debt, with China alone holding over $400 billion of our public 

debt. This makes China the largest foreign lender of the United 

States Government. I am concerned that we may be too reliant on 

foreign countries as creditors, some of whom may not have our best 

31

interests at heart. Add to this the Wall Street Journal and others 

have reported that China may be considering riskier investment 

strategies with its foreign currency reserves which could result in 

fewer purchases of investments like U.S. Treasury bonds and more 

buying of investments that are riskier but have better long-term 

returns. 

Mr. Secretary, do you have any concerns, or are you concerned 

that China may be leaning towards a more aggressive investment 

strategy with our foreign reserves and what dangers, if any, does 

this pose to our country as a result of China’s holding a substantial 

portion of our public debt? 

Secretary PAULSON. Thank you very much, Congressman. I have 

spent a lot of time over my career looking at government bond markets, and I would begin by saying that roughly 50 percent of our 

treasury debt is held globally outside of the United States. That is 

very similar to many other governments. And in my judgment it 

is good to have a diversity of holders and to have people want to 

invest here. The Chinese, as you point out, own roughly $400 billion of our treasury debt. The Japanese own more than that, maybe 

another $200 billion. 

U.S. treasuries trading volume is about $500 billion a day, so the 

Chinese own less than one day’s trading volume. I believe they own 

our securities and invest in this country because it is in their best 

interest. They do so because they get the best return on a risk adjusted basis. In terms of what they are doing with their sovereign 

wealth funds, this is a trend we see around the world, and it is one 

you expect to see with countries that have a substantial amount of 

reserves, countries are going to want to invest their reserves in the 

way that makes the most sense for them. I see that as an opportunity, too, because I do believe they are going to want to make investments in the United States, foreign direct investments, which 

I think will be a good thing. But again, I am not alarmed by holdings of U.S. treasuries, whether they be in China, Japan, the Middle East or wherever. I think this is good for our country and it 

is not unusual. 

Mr. MOORE OF KANSAS. Thank you, Mr. Secretary. What would 

you expect the result would be if for whatever reason China decided to sell off or not hold any more our debt? What would be the 

impact on interest rates in this country? 

Secretary PAULSON. Interest rates are lower by virtue of the fact 

that U.S. treasuries are held around the world. If China decided to 

sell off U.S. treasuries slowly over time, which I don’t expect because I am not quite sure where else they would want to invest 

their money, I don’t think it would have a big impact. Because as 

I said, it is less than one day’s trading volume. 

Mr. MOORE OF KANSAS. If it wasn’t sold off slowly what would 

be the impact, if it happened over just say a period of months? 

Secretary PAULSON. I wouldn’t speculate about that. I don’t think 

it is a major concern or a major risk. 

Mr. MOORE OF KANSAS. I hope you are right. Thank you. 

The CHAIRMAN. The gentleman from New Jersey will be the last 

questioner in this period and we will resume at 12:45. The gentleman from New Jersey. 

32

Mr. GARRETT. Thank you, Mr. Chairman. And my colleague from 

Texas, as he very rarely gets to quote his mother at these hearings, 

and I have never quoted his mother, but I am sure she has said 

to him at one time, son, always obey the rules. When it comes to 

small businesses in this country, specifically Sarbanes-Oxley, the 

rules that are about to be imposed upon them are pretty large and 

monumental. With regard to the entire Sarbanes-Oxley, some people have described it as being use of a sledgehammer to try to fix 

a problem when maybe just a little tap would have been more appropriate. We all agree accountability, transparency, they are laudable goals, but we are wondering whether we could have done it 

in a more competitive fashion. As you said before, and we all know 

we are in a global economy, but I often think that the burden we 

put on these companies, $4 million to $6 million per accelerated 

filer, 50 times what the original SEC estimates cost, are burdensome, but even more so on the small companies. The big ones we 

know what the outcome of Sarbanes-Oxley is. Some of the studies 

show that only 1 of 24 listings, over $1 billion, have been in the 

United States as opposed to foreign exchanges. I think the studies 

will show if we do go forward with some of these implementations 

on the small companies it is going to be even more detrimental. 

Now, I will say this also, that I commend the SEC and the 

PCAOB, the work they are doing to try to revise this system, and 

the rules and what have you are good, but I think it may be a little 

unfair to the small guys because they being right in the middle of 

the year, calendar year so to speak, with the rules just coming forward and being enacted and implemented or asked to be implemented may be a burden on them. 

So my first question is this: I just dropped in a piece of legislation, it is a bipartisan piece of legislation, that would extend for another year the current exemption for the small guys, for the smaller businesses, because the burden is greater on them. One study 

says, out of Nasdaq, it indicates that the burden of compliance as 

a percentage of revenues is 11 times greater for small companies, 

and there is probably a good reason for that. Again, in light of the 

fact that we are sort of in the middle of the game here and we are 

trying to throw that on to them, I want to know what your 

thoughts are of that idea of just giving a 1-year extension to allow 

them some breathing room. 

Secretary PAULSON. I share your concern about small business, 

and it is very important that Sarbanes-Oxley be implemented in a 

much more efficient way that looks at the—section 404 should look 

at the costs versus benefits. Now, with regard to small businesses, 

they have a need also, if they are public, to have good control systems. And right now my understanding is that the earliest that 

these regulations would go into effect for the smallest businesses 

would be 2008. 

Mr. GARRETT. Let’s have a clarification for my benefit. That 

would mean for the filing of that period of time, correct? 

Secretary PAULSON. Well, it would be for the filing which would, 

I think, be at the end of 2008. And so given the changes that have 

been made to section 404, and the changes that are being made, 

and given the fact that there is a delay, that I have been comfortable with the way— 

33

Mr. GARRETT. For my benefit here, if that is the case, in which 

case the filing would be for 2009 or 2008, I would be in agreement 

with you. 

Secretary PAULSON. I thought it is was going to go into effect for 

the 2008 year. 

Mr. GARRETT. But if it is not, if it is for the filing— 

Secretary PAULSON. If that would be the case, they would be filing the statement whenever they did, which would be early 2009. 

They would be living with the rules in 2008. 

Mr. GARRETT. It is just for section B for that period of time, but 

for the others the management reports would be still for 2008 looking back towards where we are now? 

Secretary PAULSON. That is right. 

Mr. GARRETT. Which is the problem, that they would be looking 

for—basically we are right in the middle of 2007 with the regs still 

coming down and they will be looking to implement them. It is not 

as bad for the large guys who have already been basically implementing some system and we are just asking them to change it as 

we are going along, but for the small guys, isn’t it an added burden 

because they haven’t done it so far? 

Secretary PAULSON. You and I are discussing something we are 

in agreement on. I wanted the burden to be less and less for the 

smaller firms. The large firms have been dealing with it for a number of years now, and as I understand it, the regulations have been 

greatly modified. Through the conversations I have had with the 

PCAOB and with Chairman Cox, I am comfortable with the current 

path, but I understand your point of view. 

Mr. GARRETT. But are you comfortable with them having to implement it for the other provisions in filing 2008 or 2007 for regulations that are just now being implemented. 

Secretary PAULSON. I think they will have time to transition, yes. 

Mr. GARRETT. Okay. 

Secretary PAULSON. I am sorry, I understand your concern but— 

Mr. GARRETT. If the Chair lets me, where is their transition period if they are really just being thrown the regulations right now, 

because it is not just a filing in 2009, it is a filing in 2008? 

Secretary PAULSON. The larger companies have been dealing 

with this now for a couple of years. 

Mr. GARRETT. But the small guys haven’t. 

Secretary PAULSON. The small companies haven’t and so there 

has been a modification. They have had a chance to look at what 

is going on. The rules are being modified. So, again, I would be 

happy to have some of our people talk with you about this off-line 

and I am sure that Chairman Cox would also. 

Mr. GARRETT. Thanks. 

The CHAIRMAN. We will recess. I thank the Secretary. We will 

start promptly at 12:45 p.m.. 

Mr. BACHUS. Mr. Chairman, I would like, and this is my personal 

opinion, but I would like to express to the Secretary my compliments. I think you were badgered, and your patience under fire 

was commendable. 

Secretary PAULSON. I didn’t look at it as badgering. It is my job 

to come up here and to respond. Thank you. 

Mr. BACHUS. I did not mean Mr. Garrett. I meant earlier. 

34

[Recess] 

The CHAIRMAN. The committee will reconvene. 

Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Secretary, for your patience and your 

generosity of time and staying with us for this session. 

Let me first start off, Mr. Secretary, with a few questions. In 

your testimony you were very positive about the economy and our 

policies of international financial security around the world. Let me 

ask you, first of all, do you know the unemployment rate in the African American community? 

Secretary PAULSON. Too high. 

Mr. SCOTT. Do you know what it is? 

Secretary PAULSON. I don’t know the exact number. I have seen 

numbers getting way up there. 

Mr. SCOTT. And specifically not just in the African American 

community but among African American males. 

Secretary PAULSON. Yes. 

Mr. SCOTT. It is catastrophic—over 40 percent, and in some areas 

even higher than that. That is not a good sign certainly for that 

community. I would like to ask you to take a close look at that. 

As our top economist, as our Secretary of the Treasury, to have 

a segment of our constituency hovering at 40 or 50 percent unemployment is intolerable, and I would like to see us address that, 

find some reasons for that, particularly when you are so glowing 

with the soaring aspects of the economy otherwise, but for the African American community it is a serious case of extreme depression. 

The other point I wanted to discuss with you is the squeeze on 

the middle class, another great area of concern. And if we look at 

how the middle class has contributed and has downsized, so to 

speak, we can almost see it in direct proportion to the loss of manufacturing jobs in this country. 

So when we look at this economy I think, and the sector of African Americans especially and the squeeze on the middle class, the 

squeeze of middle class jobs, which are basically manufacturing 

jobs, and the loss of this has been directly tied to what I see as a 

very warped trade policy that in effect rewards companies and 

gives tax incentives for our companies to move overseas, to set up 

manufacturing plants overseas, and then if they make profits and 

keep those profits overseas, they are not taxed in our system. That 

is another area that we have to address. 

And I agree with you, the world is too short, globalization is too 

important, the world economy is too important. We are so involved 

in it that isolationism is certainly not the answer. But perhaps 

some protectionism, something to realize now that we have to come 

home in so many measures, because America is suffering, America 

is not satisfied. 

The polls for the President of the United States are devastatingly 

low, and for us in Congress, it is even lower: something in the area 

of 18 or 19 percent dissatisfaction of us in Congress, and around 

20 percent as far as the President of the United States. 

So America is upset about a few things. But there is no trade 

policy that exemplifies what is wrong with our trade policy, what 

is wrong with this country than the Korean Free Trade Agreement 

that is impending. Are you familiar with that, Mr. Secretary? 

35

Secretary PAULSON. Yes, I am. 

Mr. SCOTT. If you look at that, it shows what is wrong with our 

trade policies. Here we are with a country like South Korea. Are 

you aware, for example, that last year 700,000 automobiles were 

imported into this country from Korea and yet less than 5,000 

United States automobiles were imported into Korea. Within this 

agreement, that is one thing, their tariffs, their complexities of 

them all are arranged in such a way to give this a terribly bad deal 

for the United States. 

But the other point is as a part of these agreements they have 

what is known as these sort of economic industrial zones that are 

created— 

The CHAIRMAN. If he is going to have time to answer. 

Mr. SCOTT. My point is on that point—that are created basically 

to employ North Koreans who come in and work and take the 

money back into the North Korean economy. My bottom line is I 

would like to get your response on this agreement, your thoughts 

on it, would you, please? 

Secretary PAULSON. Congressman, thank you for your comments. 

I very much share your concern with unemployment among young 

African Americans and males. Now with regard to the Korean Free 

Trade Agreement, I will pass on your comments to Ambassador 

Schwab and ask her to get back to you. But in terms of the auto 

sector, that is one that was focused on, so I am aware of the numbers you cited. I also am aware that Ambassador Schwab believes 

that there were a number of breakthroughs on this agreement that 

are going to make it much easier to import automobiles to Korea 

in the future. 

Also with regard to manufacturing I would just have this to say 

to you, and it is very interesting. In 1950, we had 14 million manufacturing jobs in the U.S. economy; that was 30 percent of the employment. Today we have 14 million manufacturing jobs; that is 10 

percent. Manufacturing has shrunk as a percentage of the U.S. 

economy. We have 7 times as much output as we did in 1950 and 

we are still the largest manufacturer in the world, 21⁄2 times greater than China, bigger than Japan, a couple times bigger than Germany, but it has been automation. 

I would just simply say to you, and I am not debating it, I understand the issue, but that there are many other industries that have 

taken their place, and that of the top industries, many are in service industries right now—engineering, computer sciences, we can 

just go through that long list. 

But I think the name of the game is transitioning people from 

manufacturing jobs to other good jobs and finding good jobs, so we 

agree on that. I am not disagreeing with you, I am just saying that 

there have been changes all over the world that have been driven 

by automation. 

The CHAIRMAN. The gentlewoman from Minnesota. 

Mrs. BACHMANN. Thank you, Mr. Paulson, for your willingness to 

come back to this committee and speak to us this afternoon. I am 

the lone Republican holdout on this side. But thank you, Mr. Secretary, for coming back to this committee. I appreciate your time. 

The question was asked of you earlier regarding entitlement 

spending, and that is an area of deep concern of mine as well. The 

36

untold story that so many Americans aren’t talking about is really 

the great prosperity that we are enjoying right now, low unemployment, the markets are doing great, and the stock market is doing 

great. We have a great success story, but it is a very short window 

that we have before the great drawdown on entitlements will begin 

to occur, and I know members in this room may disagree on how 

we should address this situation, but I think there would be very 

little disagreement on the fact that we can’t sustain what we are 

doing now. 

I wonder if perhaps, and I have several questions I would like 

to ask you, but I first wonder if you would answer what would be 

your first suggestion for what at a minimum Congress should begin 

to do this session to address the entitlement looming crisis that we 

are looking at. 

Secretary PAULSON. Okay. I think you are wise to say that the 

time to address these problems is during a time of economic 

strength. Now I don’t want to sound like Don Quixote here, and 

even though I think it is unlikely, I still believe there is always a 

possibility we could get people on both sides of the aisle to come 

to the table and come with open minds to put forward their best 

ideas and come up with solutions. 

There have also been budget proposals put forward by the Administration, including in the Medicare area, to slow down the rate 

of growth of spending and the trajectory of growth as it relates to 

things like program efficiency. 

Mrs. BACHMANN. Reclaiming my time, the Federal budget is very 

misleading, and this is something I wonder if you can comment on. 

It encourages Congress to over commit to future entitlement spending because the true long-term costs are not properly accounted for. 

This is something that I am concerned about. It seems that we 

could benefit from a process that would incorporate present value 

calculations of our overall commitments under current law and not 

just over a limited time horizon, like maybe 75 years, an estimate 

of all future sources of revenues and outlays, then split into major 

spending categories, Medicare, Social Security, and the rest of government. 

I am just wondering, Mr. Secretary, if you agree that that would 

be helpful or do you think that Treasury’s annual financial report 

to the Federal Government would be a good place to include such 

an estimate? Because having good data to work off of helps us. 

Secretary PAULSON. I agree with you, good data to work off of 

helps, but there are so many different reports and analyses. But as 

I talk to people, I don’t find disagreement as to the problem. I don’t 

have a lot of people in either party standing up saying there is no 

problem. 

Mrs. BACHMANN. Right, I agree with that. 

Secretary PAULSON. So I really do think it is more about political 

will than it is about economic analysis. 

Mrs. BACHMANN. I agree absolutely. Mr. Secretary, that is why 

I am wondering, what would be your minimum goal for Congress 

this term in beginning to address this problem? If we agree there 

is a problem, what would be the minimum goal, in your estimation? 

Secretary PAULSON. A minimum goal I had was to talk about this 

issue with as many people as I could, and depoliticize it in order 

37

to get agreement on both sides that there is a problem, so it would 

be easier whenever that time comes to come together to solve it. 

Mrs. BACHMANN. I think we can get there. But what I am wondering is, on the solution side of the equation, Mr. Secretary, what 

would be your minimum goal on the solution side of the equation? 

Secretary PAULSON. Other than what I have just suggested, 

which is to make progress toward understanding the problem and 

agreeing that it needs to be solved, the minimum would be to have 

people on both sides agree to come together and sit down with an 

eye towards solving the problem. 

Mrs. BACHMANN. I guess we will end with that, Mr. Chairman. 

The CHAIRMAN. I thank the ‘‘Lone Ranger’’ for her comments. 

And now the gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank you for the ocularity that you provided at the genesis of 

this hearing. You made some most important comments about 

equality and inequality, and I would like to just for a moment 

make a few additional comments and thank the Secretary of for 

being here today. 

Mr. Secretary, you have indicated that you have concern for reducing poverty, building a strong middle class, and that you want 

to see people around the world, I suppose, share in the benefits of 

this economic growth. In this country, we have persons who work 

full time and live below the poverty line. We are the richest country in the world—1 out of every 110 persons is a millionaire—yet 

we still have people working full time and living in poverty. 

We mentioned saving. Many times, much of the time what persons who are full-time workers are doing is not saving, they are 

postponing consumption, and there is a difference between saving 

and postponing consumption. They literally have things that they 

could consume that they forego so as to have some semblance of 

savings. 

There is also the inequality of opportunity that the chairman 

talked about very briefly, and it has to do with, in my comment, 

earnings. We have CEOs who are making much, much more than 

the average worker, 500 times and even more in terms of increases 

in their salaries. 

And then we have the inequality of the opportunity to learn. In 

my opinion, we are not putting enough into the institutions of higher education so that all persons can have equal access to education. 

With that said, I now go to your statement wherein you indicate 

that you want to end the policy of lend and forgive, the policy that 

has to some extent benefited many of the nations of Africa. Given 

our history as it relates to Africa, our history in this country, it 

seems to me that we have a moral imperative to do more than anyone else on the planet when it comes to Africa. 

My concern with ending the lend and forgive policy is in which 

direction will it take us if you do this? Will we cease to lend, or 

will we accord more grants? There are many directions that we can 

go in, and the phrase ‘‘end lend and forgive’’ causes me some degree of concern. 

So I would like for you, if you would, to tell me, will we continue 

to lend? Is that a yes or no? If you would, I would beg you to begin 

38

by saying yes or no, because sometimes when people finish, I don’t 

know whether they have said yes or no. If you could. 

Secretary PAULSON. Congressman, you took a while to ask the 

question, and I would like just a minute or two to answer. 

Mr. GREEN. I agree that you should say all that you desire, Mr. 

Secretary, after you just tell me whether you think we will continue to lend— 

Secretary PAULSON. Obviously. 

Mr. GREEN. I take that as a yes. 

Secretary PAULSON. In terms of this Administration, I can’t think 

of any Administration that has ever worked so hard or done so 

much to make a difference in Africa, and we could just tick off all 

of the various things in terms of what has been— 

Mr. GREEN. Without ticking them off, let me mention one other 

thing. You indicated in your comment that you have made a call 

on behalf of Mr. Wolfowitz because you wanted to make sure there 

was a fair process. You did say this. My concern is this: Given that 

there has never been a female to head the World Bank, never in 

the history of World Bank, have you made any calls to indicate 

that it may be time for a capable, competent, qualified female to 

head the World Bank? 

Secretary PAULSON. The last time I was asked the question, I 

was asked whether I made a call on lending to Iran. Now, there 

haven’t been any votes to lend to Iran since I have been Secretary. 

With regard to this situation, I worked to make sure the proper 

governance process was in place as it related to Paul Wolfowitz. 

Once that was done, I called around the world to listen to what 

leaders around the world wanted, and what I heard was they wanted someone— 

Mr. GREEN. Do you agree that there are capable, competent, 

qualified females? Did you make any phone calls to assist any female, any female who is capable, competent, and qualified to hold 

this position? 

Secretary PAULSON. I did not, and I think it would be a great day 

when a woman runs the World Bank. 

Mr. GREEN. What have you done to accelerate the movement toward that great day? Things don’t happen by accident; they usually 

happen by design. What have you done by design to assist in the 

process, since you were willing to assist Mr. Wolfowitz? 

Secretary PAULSON. What I was doing with regard to Mr. 

Wolfowitz was working to assure a fair process, and then what I 

did after that was to make sure that we would get someone who 

was very well regarded and considered an expert around the world 

to lead the efforts for development and for lending to poor countries, and someone who has a big— 

Mr. GREEN. Thank you, Mr. Chairman. I yield back the balance 

of my time. 

Thank you, Mr. Secretary. 

The CHAIRMAN. Mr. Secretary, may I ask you, we have been 

joined by one member who was not here at the close. I think we 

can fit them both in if you can do that. 

Secretary PAULSON. I will be very brief. 

39

The CHAIRMAN. We may have to cut the gentleman to 3 or 4 minutes. The gentlelady from Wisconsin under our agreement will go 

first and then finish with the gentleman from Illinois. 

Ms. MOORE OF WISCONSIN. Thank you so much, Mr. Chairman, 

and thank you, Mr. Secretary, for sticking around. 

I do have a question about vulture funds. As you know, vulture 

funds are specialized asset management companies that buy the 

distressed commercial debt of the poorest and most indebted countries, most notably in Africa, and knowing that the multilateral 

debt relief has put the governments in these countries in a better 

position to pay. 

These companies are formed specifically to prey upon a particular country, and then they sort of disappear. They buy these 

debts at a deep discount and then go after them in courts of countries, particularly United States and Britain. We even have a couple of cases, the Elliott case, where they paid $11 million for the 

debt of Peru and recovered $55 million from a New York court. 

And, of course, the resident of Washington, D.C., Michael Sheehan, 

from Donagan International, which bought debt for $3.8 million 

from Zambia. I did that just as background information for those 

people who may be watching us here. 

A third of the countries receiving this debt relief have been targeted by lawsuits and 38 litigating creditors with judgments 

awarded in 26 of these cases. And I say all this to say that I am 

very, very concerned that vulture funds didn’t come up in the G8 

meeting. Your testimony has perhaps some vague reference to 

those vulture funds on page 6, paragraph 4. I am not even sure you 

are referring to them. 

You spent a lot of time answering questions of the gentleman 

from Texas Mr. Green, and Mr. Shays earlier, talking about placing 

more restraints on lenders, but you really didn’t talk about what 

we could do with these vulture funds. The Department of the 

Treasury has been briefed by NGOs like the Debt Relief International, which has given you really a thorough briefing on what 

you can do, but yet in your testimony you say, oh, we are working 

with various fora, thinking about what we might do, exploring 

what we might do. And what you could be doing right now is providing some technical assistance and legal assistance to these countries like Liberia where the predators are just waiting to prey on 

them. You could be giving them advice about what to do before 

they come, during these lawsuits, and the Treasury is missing in 

action on this. Why? 

Secretary PAULSON. I would just say to you, Congresswoman, 

that I have been asked not to overreact to some questions, but let 

me say when you say we could be doing more for Liberia, maybe 

we could always do more. But we have been so active and Treasury’s Office of Financial— 

Ms. MOORE OF WISCONSIN. Listen—reclaiming my time. Listen, 

I know that this Administration has done a lot for Africa. I want 

to stipulate to that, I want to acknowledge that. I am talking about 

why aren’t we giving technical assistance to these countries to 

stave off these vulture funds? 

Secretary PAULSON. I would say this: We are doing everything we 

can to help them, and I deplore what the vulture funds are doing, 

40

and we use moral solutions. But the vulture funds have the rule 

of law on their side. When countries enter into debt agreements, 

laws apply. And so the one thing I take some comfort in is that 

they haven’t been overly successful. The judgments they have realized at the end have not been as high as they might have been. 

But this is a problem, it is a difficult problem to deal with because of the way our legal system works, and it is one that we are 

focused on. 

Ms. MOORE OF WISCONSIN. Why aren’t you advising Congress 

about what we might do since these cases are being brought primarily in the United States? Why didn’t you bring it up in the G8 

where these nations could change their laws? 

Secretary PAULSON. I wouldn’t know how to change the law, because how could you change a law that says— 

Ms. MOORE OF WISCONSIN. There is no transparency. 

Secretary PAULSON. This is not about transparency. The law basically says if you borrow money, you have an obligation to pay it 

back. 

Ms. MOORE OF WISCONSIN. We could define ‘‘odious debt.’’ if 

there are illegitimate regimes that have changed, there are ways 

that we can define. You could use the forum of the G8 to define 

‘‘odious debt.’’ 

The CHAIRMAN. The gentlewoman’s time has expired. Now, 3 

minutes for the gentleman from Illinois, and 3 minutes for the gentleman from Tennessee. 

Mr. MANZULLO. Secretary Paulson, thank you for your service 

and your patience. I was disappointed that the Treasury Department once again did not label China as a currency manipulator—

not disappointed in you, but disappointed in the decision. I think 

you are doing a great job over there. 

In previous years, the excuse of Treasury was that China did not 

meet the two conditions required by law, that you needed a trade 

surplus with the United States, and with the rest of the world to 

be a currency manipulator. Now they have both, about $400 billion; 

177 billion with the rest of the world, the rest with us. 

In your prior testimony you said that we clearly found China has 

manipulated its currency. You also said it is an unnatural act. 

Then you also said you have to show intent. Well, I can’t see how 

intent could be shown any more clearly than every day the Chinese 

intervening in the market. 

I mean, we are just at the point now where we need Treasury 

to say, hey, we have given them enough rope, we are going to label 

them as a currency manipulator. Mr. Secretary, how much more 

evidence do you need before you find out that they are a currency 

manipulator? 

Secretary PAULSON. We are not arguing over how the currency 

is valued, and we don’t have a difference of opinion as to what 

China needs to do. And what the act in question says, that if we 

had found them a manipulator, which we didn’t, the remedy would 

have been to do what we are doing right now, which is work to 

press them directly through negotiations and work with the IMF. 

We have had big success with the IMF. Recently—I think it was 

on Friday—they had a successful vote which is going to allow them 

41

to approach their currency surveillance process in a different way, 

which I think will help us in our work to achieve— 

Mr. MANZULLO. But when you make the official designation, that 

goes a long way nationally and internationally as a currency manipulator. That encourages them more to clean up their act. 

Secretary PAULSON. There are many, many countries in the 

world that don’t have market-determined currencies. There are 

many— 

Mr. MANZULLO. But it is not killing our manufacturing base. 

Secretary PAULSON. Here we have a country that has recognized 

the principle and is moving its currency. So to say they are manipulating to gain an unfair advantage in trade gets to motive. 

Mr. MANZULLO. So it may be against their motive, but not 

against what they are doing, especially when you represent a highly industrialized manufacturing district and people that could compete, but they are getting killed because of the— 

Secretary PAULSON. I appreciate your comments. I am certainly 

not here to defend China’s currency practices. Any of the Chinese 

who have sat down across the table from me know that I am not 

patient. 

The CHAIRMAN. The gentleman will suspend. 

The gentleman from Tennessee. 

Mr. DAVIS OF TENNESSEE. Mr. Chairman, thank you very much. 

Secretary Paulson, it is good to see you here. I am glad that you 

spent the time that you have, and you certainly had several questions that have been asked of you, and I appreciate your engagement to answer some. And some I wonder if you have actually answered those, at least not to my satisfaction; others you may have. 

I live in Tennessee. I represent an area where low-wage, lowskilled jobs have been leaving almost at a rate of— 

Secretary PAULSON. I missed the industry. 

Mr. DAVIS OF TENNESSEE. Lower-skilled, lower-wage industries 

have been leaving almost as if it is a rabbit fleeing with hounds 

behind him. There is a saying we have is that you have to be careful; you can eat corn out of the crib, but not the seed corn, because 

you will be hungry the next year. 

My fear is that our economic policy is gradually chipping away 

at that sackful of seed corn, that we may ultimately destroy or at 

least have a significant impact on our industries in America. I look 

at China that has probably 20 percent of the world population and 

India with another 20 percent, being 40 percent from those two nations, and I would assume, and I believe I may be correct, that 

probably when you look at the production of those two countries, 

it is mainly for export, it appears to be. 

In our country probably 90 percent of the people can actually 

purchase what we produce in this country, maybe 10 percent can’t, 

but most, if it is a house, or an automobile. Most can afford clothing, things we can buy. But in India and China, 40 percent of the 

world’s population cannot purchase what is being produced in their 

own country. I think that is a bad—you talk about globalization. 

I don’t think that is a real plus to say we are in a globalized economy. 

Number two, I look at this trade policy that we have, and I look 

at our debts that we are adding up, and I heard someone today 

42

talk about entitlements, is that really going to destroy our economy. I wonder if they realize in the budget is $2 billion a year in 

Iraq to no-bid contractors, which seems to be an entitlement to 

them, is also having a tremendous impact on our economy in this 

country and our ability to invest in our own country. 

So we have had a lot of talk today that I believe tries to justify 

each person’s positions rather than look at America itself. 

The question I want to ask you—and there was an editorial in 

the New York Times today that discussed bipartisan legislation introduced in the Senate last week that calls for a gradual process 

of imposing economic and political pressure on China unless they 

move faster to increase the flexibility of their exchange rate. 

I am inclined to agree with the legislation itself, but what the 

editorial suggests is that maybe we need to look at other areas of 

globalization rather than just China opening up. 

The CHAIRMAN. If the gentleman wants an answer, we will have 

to wrap up that question soon. 

Mr. DAVIS OF TENNESSEE. I would like your opinion on the legislation, if you are familiar with 1607; if not, the economic pros and 

cons of threatening China mildly or strongly to take more action 

in the immediate future. 

Secretary PAULSON. Congressman, at the beginning of your statement you talked about the need for major structural reform in 

China, where most of their growth is exports, manufacturing for 

exports. We are going to have a big imbalance, a trade imbalance, 

until China engages in widespread structural reform, until they 

have the kinds of social safety nets where their citizens don’t have 

to have precautionary savings, savings at the 50 percent level. 

So I do believe that what it is going to take over time is direct 

engagement, but it is going to be more of a gradual process because 

it is difficult or impossible for us to mandate structural reform in 

China. So that would be my answer. Thank you. 

Mr. DAVIS OF TENNESSEE. So that safety net you are talking 

about is an entitlement? 

The CHAIRMAN. Mr. Secretary, thank you for coming. And the 

hearing is adjourned. 

[Whereupon, at 1:17 p.m., the hearing was adjourned.] 

(43)

A P P E N D I X

June 20, 2007

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