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81–589 PDF 2003

S. HRG. 107–643

NOMINATION HEARING FOR PHYLLIS K. FONG,

WALTER LUKKEN, SHARON BROWN–HRUSKA

AND DOUGLAS L. FLORY

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 25, 2002

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

Available via the World Wide Web: http://www.agriculture.senate.gov

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

TOM HARKIN, Iowa, Chairman

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

BLANCHE L. LINCOLN, Arkansas

ZELL MILLER, Georgia

DEBBIE A. STABENOW, Michigan

BEN NELSON, Nebraska

MARK DAYTON, Minnesota

PAUL DAVID WELLSTONE, Minnesota

RICHARD G. LUGAR, Indiana

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CRAIG THOMAS, Wyoming

WAYNE ALLARD, Colorado

TIM HUTCHINSON, Arkansas

MICHEAL D. CRAPO, Idaho

MARK HALVERSON, Staff Director/Chief Counsel

DAVID L. JOHNSON, Chief Counsel for the Minority

ROBERT E. STURM, Chief Clerk

KEITH LUSE, Staff Director for the Minority

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(III)

C O N T E N T S

Page

HEARING(S):

Nomination Hearing for Phyllis K. Fong, Walter Lukken, Sharon Brown–

Hruska and Douglas L. Flory .............................................................................. 01

Tuesday, June 25, 2002

STATEMENTS PRESENTED BY SENATORS

Harkin, Hon. Tom, a U.S. Senator from Iowa, Chairman, Committee on

Agriculture, Nutrition, and Forestry .................................................................. 01

Allen, Hon. George, a U.S. Senator from Virginia ................................................ 15

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Ranking Member,

Committee on Agriculture, Nutrition, and Forestry ......................................... 09

WITNESSES

Brown–Hruska, Sharon, Burke, Virginia, Nominated to be a Member of the

Farm Credit Administration Board .................................................................... 06

Flory, Douglas L., McLean, Virginia, Nominated to be a Member of the

Farm Credit Administration Board .................................................................... 08

Fong, Phyllis K., Bethesda, Maryland, Nominated to be Inspector General

for the United States Department of Agriculture ............................................. 03

Lukken, Walter, Washington, DC, Nominated to be a Commissioner of the

Commodity Trading Commission ........................................................................ 04

APPENDIX

PREPARED STATEMENTS:

Harkin, Hon. Tom ............................................................................................ 30

Brown–Hruska, Sharon ................................................................................... 37

Flory, Douglas L. .............................................................................................. 39

Fong, Phyllis K. ................................................................................................ 32

Lukken, Walter ................................................................................................. 35

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Baucus, Hon. Max ............................................................................................ 49

Cochran, Hon. Thad ......................................................................................... 47

Warner, Hon. John ........................................................................................... 44

Brown–Hruska, Sharon, Biography ................................................................ 79

Flory, Douglas L., Biography ........................................................................... 98

Fong, Phyllis K., Biography ............................................................................. 50

Lukken, Walter, Biography ............................................................................. 64

QUESTIONS AND ANSWERS:

Harkin, Hon. Tom to Sharon Brown-Hruska ................................................. 124

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NOMINATION HEARING

TUESDAY, JUNE 25, 2002

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, Washington, DC.

The committee met, pursuant to notice, at 10:02 p.m., in room

SR–328A Russell Senate Office Building, Hon. Tom Harkin, [Chairman of the Committee], presiding.

Senate Present: Senators Harkin, Allen, Dayton, and Lugar.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, CHAIRMAN, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

The CHAIRMAN. Good morning, the Senate Agriculture, Nutrition,

and Forestry Committee will come to order. This morning, I wish

to welcome to the committee four nominees: Ms. Phyllis Fong, Mr.

Walter Lukken, Ms. Sharon Brown-Hruska, and Mr. Doug Flory. If

I could ask them all to come up and just go ahead and take the

table right here where your names are. I do not know if the names

are on the back, also, there, but I would sure appreciate it.

I know that Senator Allen and Senator Warner wanted to be

here. I expect them to come sometime, but they are engaged in a

meeting right now, which they cannot leave, as well as Senator

Lugar, but they have advised me to go ahead with the hearing. I

will recognize them, when they arrive, for introductions, and comments and statements that they might have.

Ms. Fong is nominated to be Inspector General for the United

States Department of Agriculture. The Office of Inspector General

was established legislatively in 1978 to perform independent and

objective audits and investigations within USDA, not an easy job,

but it is critically important for ensuring the efficiency and effectiveness of programs so that the American public and the U.S. Congress can feel confident in the third largest civilian department in

the U.S. Government. Since 1983, Ms. Fong has been employed in

various positions at the U.S. Small Business Administration, including Inspector General, a position she has held since being appointed by President Clinton in 1999.

Also, before the committee today are the nominations of Mr.

Lukken and Ms. Brown-Hruska to be commissioners at the Commodity Futures Trading Commission, the CFTC. The CFTC is an

independent agency that regulates commodity futures and options

markets with the goal of protecting market participants against

manipulation, abuse of trade practices and fraud, and to protect

the integrity of markets that are vitally important to the agriculVerDate 11-MAY-2000 15:27 Jan 22, 2003 Jkt 081589 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 81589.TXT SAG1 PsN: SAG1
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tural and financial sectors of our economy. It is a very important

agency, and its activities are of serious interest to this committee.

As most of us at this hearing know, Mr. Lukken has served on

the staff of Senator Lugar for the past nine years, first, as a member of his personal staff, and most recently as a member of the full

Agriculture Committee staff. This room is not strange to you, Walt.

Ms. Brown-Hruska is currently an assistant professor of Finance

at George Mason University School of Management. From 1990 to

1995, she served as an economist at CFTC.

Finally, the committee welcomes Doug Flory as nominee for the

board of directors for the Farm Credit Administration. The Farm

Credit Administration is extremely important to the financial

soundness and the integrity of the agricultural credit system.

As an independent agency in the executive branch of the U.S.

Government, FCA is responsible for the regulation and examination of the banks, associations, and related entities, such as the

Farm Credit Banks and Co-Bank, that collectively make up the

Farm Credit System, plus the Federal Agricultural Mortgage Corporation, otherwise known as Farmer Mac. These institutions serve

critical components of agriculture, and thus this committee has

every interest in assuring effective oversight. Furthermore, if these

institutions fail, it is likely that the organizations will look to this

committee and the taxpayers of the country for help. We take this

nomination very seriously, Mr. Flory.

Mr. Flory has a long history with the farm credit institutions.

Most recently, he served as a member of the boards of both the

AgFirst Farm Credit Bank and the Farm Credit of the Virginias.

Again, I welcome all of the nominees to the committee and look

forward to hearing all of your testimony. I will leave the record

open at this time for any statements and introductions to be made

by any Senators who may arrive shortly.

I am required to swear in all nominees, please stand and be

sworn in. If I could ask you all to please stand.

[Nominees sworn en masse.]

The CHAIRMAN. I will ask each of you in order, starting with Ms.

Fong, do you agree that if confirmed, you will appear before any

duly constituted committee of Congress if asked to appear, Ms.

Fong?

Ms. FONG. Yes, I do.

The CHAIRMAN. Mr. Lukken?

Mr. LUKKEN. I will.

The CHAIRMAN. Ms. Brown–Hruska?

Ms. BROWN–HRUSKA. Yes, sir.

The CHAIRMAN. Mr. Flory?

Mr. FLORY. I will.

The CHAIRMAN. Thank you very much.

Now I would just turn in order for your statements, and in the

order in which I have them here. We have, first, Ms. Fong, nominated to be Inspector General for the United States Department of

Agriculture. You all have statements. I appreciate the fact that you

submitted them. I was able to go over them. Your statements will

be made a part of the record in their entirety. If you would like to

sum them up, I would appreciate that.

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Also, if you have family members that are here that you would

like to introduce for the committee, we would like to recognize

them, and we will do that in order as we introduce each member

or each of the candidates who are here. Before we start, I would

like to recognize my fellow Senator, Senator Nelson, from Nebraska. If you have an opening statement or anything like that, we

just introduced the candidates for the various positions, and we are

just going to start with the testimony of Ms. Fong.

Senator NELSON. Thank you, Mr. Chairman. I do not have an

opening statement. I am very anxious to hear what the nominees

have to say, so I prefer to listen to them at this point.

Thank you.

The CHAIRMAN. Thank you, Senator Nelson.

Ms. Fong, welcome to the committee. Congratulations on your

nomination, and please proceed.

STATEMENT OF PHYLLIS K. FONG, BETHESDA, MARYLAND, TO

BE INSPECTOR GENERAL FOR THE UNITED STATES

DEPARTMENT OF AGRICULTURE

Ms. FONG. Thank you, Mr. Chairman, and good morning, Senator

Nelson. I am honored to appear today as President Bush’s nominee

to serve as IG at the Department of Agriculture.

I was raised in Honolulu, Hawaii, and I am a descendent of immigrants from China. My great-grandparents came to Hawaii to

work in the sugar cane and pineapple fields and to provide opportunities for their children. While those industries no longer thrive,

the love of the land and its fruit is still in our blood.

After attending college in California and law school in Tennessee,

I embarked on a career in public service with the Federal Government over 23 years ago. I am a career member of the Senior Executive Service and, in 1999, I was nominated by President Clinton

and confirmed by the Senate to serve as the IG at the Small Business Administration. My tenure at SBA has been challenging and

rewarding, and I trust that those experiences have prepared me for

the challenges that lie ahead.

SBA’s mission is to help small businesses grow and thrive. SBA

does this by providing financial assistance, business development

and Government contracting opportunities. SBA also provides disaster assistance to individuals and businesses who are harmed by

natural disasters.

Over the past three years, during my tenure at SBA, I believe

the IG’s office has been very successful in accomplishing its dual

mission of promoting the effective delivery of SBA programs and in

addressing fraud. I am proud of the efforts of the IG’s professional staff, which have resulted in more than $155 million in dollar results for the Government and over 100 audit and inspection reports. Our investigations have led to 163 indictments and 134 convictions of persons who have sought to defraud the Government.

This has been accomplished with an appropriation level of about

$11.5 million and a staff level of about 107 people.

Numbers alone do not tell the whole story, however. Over the

past three years at SBA, we have undertaken a number of projects

that will ultimately make the SBA IG’s office even more effective.

Briefly, these are:

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Focusing IG efforts, through regular strategic planning, on a few

key things, rather than solely reacting to external events;

We have moved beyond fraud detection to fraud prevention to

root out fraud before it occurs, to the extent that we can;

We have increased the use of interdisciplinary approaches and

projects that cut across the traditional audit and investigative

lines;

We have developed different types of approaches and products

that will help Agency managers address the issues that are before

them;

We have created an atmosphere of openness and communication

with the Hill and within the Agency;

Most important, we have fostered a tradition of personal integrity, excellence, professionalism and respect for the individual.

These approaches have worked well at SBA.

If I am confirmed as the IG at USDA, I will bring to that job

these lessons and skills. I will work very closely with you and your

staff, and with Secretary Veneman, to ensure that USDA’s programs are delivered effectively to those who are their intended

beneficiaries and that fraud is aggressively investigated and addressed.

I look forward to working on these issues with the experts, with

you, your staff, the Department’s program managers, and the Department’s OIG professional staff. I will bring to the table an open

and independent mind and a desire to help find solutions to the

challenging problems facing the Department. I will also bring my

experience as an IG to address those issues that are common to all

Federal entities; namely, program and employee integrity, human

capital management, accountability, program performance and financial management.

Before I finish, I would like to introduce my spouse, Paul Tellier,

who has been very supportive of all of my efforts throughout my

career. I could not do this without him.

The CHAIRMAN. Welcome, Mr. Tellier.

Ms. FONG. That concludes my statement, Mr. Chairman.

Thank you.

[The prepared statement of Ms. Fong can be found in the appendix on page 32.]

The CHAIRMAN. Thank you very much, Mrs. Fong.

Now we will turn to Walter Lukken, who is no stranger to this

room, nominated to be a commissioner of the CFTC.

STATEMENT OF WALTER LUKKEN, WASHINGTON, DC, TO BE A

COMMISSIONER OF THE COMMODITY FUTURES TRADING

COMMISSION

Mr. LUKKEN. Thank you, Chairman Harkin.

Chairman Harkin, Senator Nelson, I am honored to appear before you as President Bush’s nominee to be a commissioner at the

Commodity Futures Trading Commission. I greatly appreciate the

President offering me this opportunity to serve the public. In particular, I want to express my deep admiration to Senator Lugar, for

whom I have worked for almost nine years. I would not have this

opportunity, but for his support and guidance.

5

I would like to take this opportunity, first, to introduce my wife,

Dana; my parents, Wayne and Carol Lukken, which I shamelessly

mention are from Council Bluffs, Iowa, for the chairman— [Laughter.]

Mr. LUKKEN [continuing]. My wife’s parents, Jerry and Denise

Bostic, from Morgan City, Louisiana, as well as other colleagues

and friends in the audience today. I truly value their support

throughout this nomination process.

The CHAIRMAN. Welcome, all of you.

In 1993, I began my career in Government service with Senator

Lugar as a legislative assistant handling financial and tax matters.

In the Lugar office, I learned not only the Senate process, but also

how fairness, integrity, and Midwestern sensibilities can shape important policy decisions. Throughout the years, I have tried to emulate these decisionmaking qualities in my work, and I promise to

bring such values with me to the Commission.

In 1997, I began to cover issues relating to the futures and derivative markets for Chairman Lugar on the Senate Agriculture Committee. I was drawn to the futures industry because of my educational background in law and finance, because of the industry’s

growing importance to the U.S. economy, and because of the

thoughtful policy debates surrounding it.

In 2000, I was one of the staff assigned to the Commodity Futures Modernization Act, which was the most significant reform of

futures regulation in 25 years. My approach to advancing this legislation involved openly engaging staff, both Democrats and Republicans, as well as regulators and industry members in an attempt

to build a consensus among them. I believe that this ‘‘open door’’ approach left those involved with this legislation, even those opposed to it, with the belief that the final product was developed in

a fair manner. If confirmed, I would use such an approach to assist

the Commission with its implementation of the act.

Despite several revisions of its statute throughout the years, the

primary mission of the Commodity Futures Trading Commission

has remained constant. The CFTC is charged with protecting the

public from fraud, preventing commodity price manipulation, providing a price discovery mechanism for certain commodities, and

fostering open, competitive and financially sound futures and options markets.

This mission remains as vital today as when the CFTC was created. With the crisis of confidence in our financial markets caused

by corporate misdeeds and our global war on terrorism, it is imperative that the commission be a diligent, but calming force.

Like any good Hoosier, I like basketball analogies. Every fan

knows that a good referee can raise the level of competition in a

basketball game. The referee’s presence reassures both teams that

the outcome of the game has been reached in a just and fair manner. Likewise, appropriate regulatory oversight and enforcement,

especially during times of economic stress, serve to revitalize markets by reassuring the public and market participants that the

rules of the game are being followed.

However, it is equally important to understand that when fouls

are not being committed, referees and regulators should allow the

competition itself to determine the outcome. Participants in our

6

markets must have the freedom to compete, to innovate, to take

risks if our U.S. economy is to grow and prosper. Free markets

must determine winners and losers, not regulators.

This is a difficult, but necessary, balance to achieve. If confirmed,

I will work closely with the other members of the Commission to

prevent and prosecute illegal activities while understanding the

need to minimize the regulatory footprint on market innovation

and competition.

Mr. Chairman, thank you for offering me this opportunity to testify, and I welcome any questions.

[The prepared statement of Mr. Lukken can be found in the appendix on page 35.]

The CHAIRMAN. Thank you very much. I like that analogy. That

is a great analogy, but why do you always beat Iowa all of the

time?

[Laughter.]

The CHAIRMAN. Now we turn to Sharon Brown–Hruska, Burke,

Virginia, nominated to be a commissioner of the Commodity Futures Trading Commission.

Welcome.

STATEMENT OF SHARON BROWN–HRUSKA, BURKE, VIRGINIA,

NOMINATED TO BE A COMMISSIONER OF THE COMMODITY

FUTURES TRADING COMMISSION

Ms. BROWN–HRUSKA. Thank you, Chairman Harkin, Senator

Nelson.

I am grateful and honored to be here before you today as a nominee to the Commodity Futures Trading Commission. I thank President Bush for giving me the opportunity to put my credentials and

experience before you for your consideration.

With me today are my husband, Donald Hruska——

The CHAIRMAN. Welcome, Donald.

Ms. BROWN–HRUSKA [continuing]. My mom, Mae Brown, my

brother and his wife, David and Susan Brown——

The CHAIRMAN. Stand up so we can recognize you.

[Laughter.]

Ms. BROWN–HRUSKA [continuing]. My niece, Danielle Brown. Our

little boy, Jacob, is at home today. He is four.

The CHAIRMAN. Well, welcome to you all. Thanks for being here.

Ms. BROWN–HRUSKA. It is a particular honor for me to be before

the Agriculture, Nutrition, and Forestry Committee. As a farm kid

from White Hall, Virginia—surrounded by cornfields, apple orchards, Herefords and Holsteins—the first vehicle I drove was a

tractor, my best friends were fellow 4–H Club members, and my

first job was in the local farm market. This background was a gift

of my father—my late father—who continued to pursue farming,

despite its lack of profitability at the time, and my mother, whose

parents homesteaded in Saskatchewan, Canada.

When it came time to go to college, I received a scholarship given

by the Frank V. Armstrong Foundation. He was the founder of the

White House apple products. It is a business local to my hometown

of Winchester, Virginia. I followed my older brother, whose FFA

leadership had won him a scholarship to Virginia Tech. In short,

7

agriculture nurtured and supported me and my family and contributes mightily to the well-being of us all.

The Agriculture Committee’s dedication and commitment to the

agricultural sector of the economy are so important and are part

of the reason I am so proud to be here before this committee.

As an undergrad at Virginia Tech, I majored in economics and

international studies. After working for three years as a public

school teacher in the same county schools I had attended as a

child, I returned to graduate school to pursue a Ph.D. in economics.

This time, I followed my husband, who was completing his degree,

to Virginia Tech.

Futures markets had always been of great interest to me, and I

was fortunate that my dissertation chairman, Professor Robert

Mackay, encouraged me to focus my research on derivatives markets and the relationship to the asset and commodity markets that

underlie them. That research interest led me to the Commodity Futures Trading Commission, where I worked in the Division of Economic Analysis for five years. While in Government service, I found

that contributing to the study and analysis of futures markets and

policy issues was rewarding to me, and it was valued by the Commission and the industry.

As a finance professor in the business schools of Virginia Tech,

Tulane University, and most recently, George Mason University, I

have taught courses on derivatives, risk management, financial

market innovation, investments, venture capital, and international

financial management. It is rewarding to teach individuals and

businesses about the workings of financial markets and the uses

and benefits of financial instruments like futures, options, and

other derivatives.

I have published papers on futures volume and volatility, market

liquidity, hedging and financial market information. Much of my

work has highlighted how well these markets function, how vital

they are to the business and the economy, and how regulation can,

and has, contributed to ensuring that these markets continue to

perform their important functions of price discovery and risk management.

As a finance professor and as an economist at the Commission,

I have seen firsthand how innovative and beneficial the derivative

markets are and how they can increase the efficiency and performance of business and the economy. While at the Commission, I

spent much of my time employing economic reasoning and investigation to evaluate rules and trading practices to make certain

that they were not anticompetitive, fraudulent or manipulative. It

was apparent to me then, as it is now, that the Commission plays

an important role in fostering market integrity, financial integrity,

and consumer protection.

If confirmed by this committee and the Senate, I would work

hard to ensure that the Commission continues as a strong and effective regulator, fulfilling its mission to guard the public interest

and making sure that the markets are efficient, transparent and financially sound.

Thank you very much. I look forward to your questions.

[The prepared statement of Ms. Brown–Hruska can be found in

the appendix on page 37.]

8

The CHAIRMAN. Thank you very much, Ms. Brown–Hruska.

Now we turn to Mr. Doug Flory, of McLean, Virginia, nominated

to be a member of the Farm Credit Administration Board.

Mr. Flory.

STATEMENT OF DOUGLAS L. FLORY, McLEAN, VIRGINIA,

NOMINATED TO BE A MEMBER OF THE FARM CREDIT

ADMINISTRATION BOARD

Mr. FLORY. Thank you, Mr. Chairman and Senator Nelson.

This may be an unusual day to have two Hokies sitting beside

each other.

[Laughter.]

Mr. FLORY. Both of us are Virginia Tech graduates.

My name is Douglas Flory, of Grottoes, Virginia, in the heart of

the Shenandoah Valley.

I am honored to be before you today, and on May the 9th, President George Bush nominated me to serve as Director of the Farm

Credit Administration. This is a position of great importance to

those who live and work in rural America, and I am humbled by

the nomination, as well as the support, for this position by my Senators, John Warner and George Allen, of the Commonwealth of Virginia, and I am also honored and pleased with the strong support

of my representative, Bob Goodlatte, and many other Senators,

Congressmen, Virginia legislators and agriculture commodity

groups who have been very helpful to me as a candidate for this

nomination.

I especially want to mention the strong support of the American

Farm Bureau Federation, the National Cattlemen’s Beef Association, and the National Council of Farmer Cooperatives. I have a

few brief remarks, and then I would like to take any questions that

you might have.

As a seventh-generation Augusta County Virginian, I continue a

long family tradition of involvement in production agriculture. My

farm operation, Bunker Hill Farm, produces some 120,000 tom turkeys a year. I am also a 50-percent owner of a general livestock

grain and farm operation of approximately 1,300 acres, with 250

brood cows. As a part of this operation, we run a performance bulltesting station for purebred Angus breeders.

In my other nonfarm business life, I have been active in a variety

of businesses which were involved in agriculture in rural Virginia.

During my almost 40-year career, I was assistant general manager

of Rockingham Cooperative Farm Bureau, a farm supply cooperative. I was vice president of Dominion Bank of the Shenandoah

Valley, which at the time was among the largest agricultural banks

in the United States. I served as executive vice president, and chief

operating officer and board member of WRL Foods, a publicly traded poultry food company.

During the past eight years, I was appointed by the 26th Judicial

Court of Virginia as receiver custodian for agriculture and rural

businesses. Additionally, I have served as an elected farmer director of my local Farm Credit Association for seven years and a director of AgFirst Farm Credit Bank since 1994.

I have also enjoyed many important affiliations with agriculture

and financial institutions that have provided me with very imporVerDate 11-MAY-2000 15:27 Jan 22, 2003 Jkt 081589 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 81589.TXT SAG1 PsN: SAG1
9

tant insights and experiences. I have served on both the American

Bankers Association and the Virginia Bankers’ Association Agricultural Committees, I have been appointed by four Virginia Governors to serve on Virginia’s Agriculture Credit Committee, Virginia’s Agricultural Development Authority and the Virginia Agricultural Council.

Mr. Chairman, I believe this background and experience provided me with a very solid foundation to tackle the range of issues

required by a Farm Credit Administration director.

In preparing for this hearing, I reviewed earlier nomination

hearing transcripts for FCA board members. I was struck by the

comments of Senator Kent Conrad of North Dakota during the confirmation hearing of the late FCA chairwoman, Marsha Martin, in

September 1994. At that hearing, Senator Conrad stated, and I

quote, ‘‘The Number One priority for the FCA board member is the

safety and soundness of the Farm Credit System, and that is the

absolute responsibility of the Farm Credit Administration.’’

I want to assure this committee I take that admonition very seriously, and I could not agree more wholeheartedly with Senator

Conrad. FCA has an enormous responsibility ensuring that our

farmers and ranchers, their cooperatives in rural America, have access to constructive, competitively priced credit. One way to ensure

that credit availability is building confidence with this committee,

the House Ag Committee, the executive branch and the farmers

and ranchers of the Farm Credit System, as well as those who purchase farm credit securities on Wall Street. FCA must be a focused,

arm’s length regulator, and I pledge to this committee that I will

be that kind of director if the Senate should confirm me for this

directorship.

Mr. Chairman, this concludes my remarks. However, I also want

to thank the committee staff who were very professional and helpful, and I very much appreciated their help as I prepared for this

hearing.

I look forward to your questions, but I would like to introduce my

family—my wife, Avery, who has been extremely supportive, and

my daughter, Beth.

[The prepared statement of Mr. Flory can be found in the appendix on page 39.]

The CHAIRMAN. Welcome to the committee. Thank you, Mr.

Flory.

My good friend and the ranking member of the Senate Agriculture Committee has arrived. I know he was tied up in a meeting

and could not be here at the beginning, but I would recognize Senator Lugar.

STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR

FROM INDIANA, RANKING MEMBER, COMMITTEE ON

AGRICULTURE, NUTRITION, AND FORESTRY

Senator LUGAR. Thank you very much, Mr. Chairman. I apologize for my tardiness. The Republicans in the Senate have been

having a long caucus this morning.

[Laughter.]

10

Senator LUGAR. We have concluded our work. It had to do with

the length of time people can serve as chairman and ranking members.

The CHAIRMAN. Are you OK? I do not want to lose you.

[Laughter.]

Senator LUGAR. I am fine. I have already served well beyond the

limits that have been set up for others, but nevertheless, it is a

pleasure to greet each of the nominees. I have enjoyed reading your

statements prior to your giving them today. Likewise, we have had

the FBI checks and visited with them as a part of our responsibilities.

I take special pleasure in mentioning one of the nominees. I am

very proud to recognize Walt Lukken, who has been nominated to

be a commissioner of the Commodity Futures Trading Commission.

He has been a valued part of our office for almost nine years, and

during the past five years has specialized in the futures and derivatives markets for this committee.

I greatly trust his advice and counsel on these matters and so

many others. In this capacity, for this committee, he was at the

center of the passage of the Commodity Futures Modernization Act

of 2000, which modernized the regulation of futures and derivatives

markets. His leadership and integrity during this debate greatly

improved the final product.

During the 2-year legislative process that led to its passage, Walt

helped build a bipartisan coalition of Senate offices, industry members and agencies in support of enactment of these reforms. As a

result of his efforts, he was nominated by Wall Street Letter for

Washington Impact Player of the Year 2000.

Walt would be a tremendous addition, in my judgment, to the

CFTC. I am inordinately proud to introduce him to the committee

and to commend him today.

I thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Lugar.

I recognized Senator Nelson earlier.

Senator Dayton, welcome to the committee. If you just had an

opening statement or something, then we are going to go into the

questions.

Senator DAYTON. I would just say I worked for Senator Fritz

Mondale for two years. I spent about six months trying to get one

sentence out of him favorably toward me. I am impressed that you

receive that kind of praise.

[Laughter.]

Senator DAYTON. I also made note here, Mr. Flory, that anybody

who can get appointed by four different Governors of any State is

commendable.

[Laughter.]

The CHAIRMAN. Thank you.

I have a few questions for each of you, and we will go in order

here just for five minutes or so each.

Ms. Fong, the IG’s office is one that was established by Congress

in the 1970’s to be an independent watchdog on the departments

to which they are attached. It is an interesting position. I have

often said the IG does not work for the Secretary of any departVerDate 11-MAY-2000 15:27 Jan 22, 2003 Jkt 081589 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 81589.TXT SAG1 PsN: SAG1
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ment, whether it is Health and Human Services or the Department

of Defense.

They are there, of course, appointed by the President, but in an

independent capacity, to advise both. This is where it gets tricky,

to advise both the department head, the Secretary in this case, and

us here in Congress as to their insights, their evaluations of what

is happening within that department and to give us forewarnings

of any problem areas that the Inspector General might see, through

audits and investigations. You can issue subpoenas, indictments,

fines, administrative penalties. You have got a broad array of different actions—since you have been an Inspector General before— available.

I am a firm believer in an independent office and also an office

where the Inspector General is not a passive player, but where the

Inspector General is actively involved in ensuring that taxpayers’ dollars are not wasted, making sure that we do not have abuse, to

make sure that different agencies under the department are fulfilling their legal requirements of what they are supposed to do.

With that, I would just ask you, again, your vision of the Inspector General’s Office, and do you envision playing an activist role in

that regard, in terms of the audits, and in terms of investigations,

and informing us here, especially in the Senator Agriculture Committee, of keeping us advised and informed of any problem areas

or suggestions and advice that you might have for us to do things

that would, A, protect the taxpayers’ dollar; B, make sure that the

laws that we have passed here are adequately carried out?

Ms. FONG. Mr. Chairman, you have hit the nail on the head.

That is the challenge of the IG’s job, to fulfill the mandate under

the IG Act to keep both the Congress and the Administrator or the

Secretary, as it may be, fully informed of the challenges and the

issues before the Department. That is a very tough part of the job.

I commit to you that I will be an active IG. I have been an active

IG at SBA, and it is my view that, in order to carry out the IG Act,

an IG must proactively be on the front lines of the issues. We must

be out there identifying the issues as they emerge, as they come

to the surface. We must notify the Congress, and the Secretary and

her program managers, as to what we are finding. We must be, a

vigilant neighborhood watchdog.

Some have characterized IGs as junkyard dogs, others have characterized them as lapdogs. I view our role as being the aggressive,

assertive watchdog that protects the American taxpayers’ property

and enhances the safety of the American taxpayers’ investment. If

we see crime about to happen, we must aggressively go after it. We

must look for proactive ways to deal with systemic issues that

could prevent crime. When we see management issues that are

coming up, we must talk to all of the interested parties so that we

can work to achieve a solution.

That is my vision for the IG’s Office.

The CHAIRMAN. Ms. Fong, I appreciate that because there is a serious concern that I have about the resignation of the last Inspector General at USDA. From what I have learned, and I do not

know all of the details, but this committee is going to followup, it

may well be that he was asked to resign or even forced to resign

because he expressed concerns on behalf of the public that did not

12

sit well with the Secretary or the administration related to the inspection of imported foreign meat products. No one in the Congress

cares more about the protection of the public as it relates to food

safety than I and the members of this committee. As I said, I do

not know all of the details of this, but this committee will followup

on that.

I just want to have your assurance that you will be independent

and willing to stand up to the Secretary or to Congress. Sometimes

you have to stand up against us, too.

Ms. FONG. You are right.

The CHAIRMAN. Anyone else to say what you believe and what

your audits, investigations, your team feels needs to be said on this

or any other issue. I just want your assurance that you are willing

to stand up, even though it may be where someone may ask for

your resignation.

Ms. FONG. All of us IGs who are appointed by the President understand that those are the conditions of the job, that we serve at

the pleasure of the President. Of course, he must notify you if he

wishes to remove one of us, but that aside, I am willing to stand

up, as you say, and bring to your attention issues that I feel need

to come to your attention. My role is to bring to the table my independent, objective, professional take on what is coming up.

The CHAIRMAN. I appreciate that very much, Ms. Fong.

Thank you, Ms. Fong.

I would recognize Senator Lugar.

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

Ms. Fong, the IG at USDA is responsible for auditing and investigating activities of more than 110,000 employees, with an annual

budget of $76 billion. Now this is in contrast to the responsibility

that you have had with 4,400 employees and $645 million, and

while this type of transition is not unprecedented, it is a significant

undertaking.

I have asked this in the context of the fact that in June 1998,

GAO issued a report that was critical, prior to your tenure,—of

SBA’s Office of the Inspector General for conducting very few audits of guaranteed vendors which may have offered the opportunity

for fraud in the view of the GAO.

Again, in your statement, you have recited, at least for the

record, some activities in which you have been involved, but obviously you came into a situation in which the GAO report had criticized lack of activity. Give us some idea of your grasp of the enormity of this new responsibility.

Ms. FONG. That is a very good question, Senator Lugar.

I believe that I am ready, and I will tell you why. There are

three main reasons why my SBA experience has prepared me for

this job.

First of all, many significant substantive and programmatic

issues at SBA also exist at the Department of Agriculture and

SBA. SBA is a lending agency. We make guaranteed loans, we

make venture capital available to small businesses, and we provide

disaster assistance to nonfarm persons and businesses. In these

program areas, I believe that the issues in SBA and USDA programs would be similar, and I will be prepared to deal with them

at the Department of Agriculture.

13

Second, there are a number of issues that cut across all Federal

agencies. These are the management issues, the ‘‘boiler room’’ issues that affect how a Government agency runs. Key examples

include financial management, information technology and cyber

security, human capital resource management, (which has become

such a big issue for every agency), and accountability and performance—do programs deliver to the taxpayer what Congress included

them to deliver. I have done a lot of work on these issues at SBA,

and I will bring my experience and expertise to the Department of

Agriculture, which faces similar challenges.

Third, as you pointed out, the Department is much bigger than

SBA, and the Department’s IG Office is much bigger than SBA’s

IG Office. I believe, however, that my experience at SBA in managing a work force of over 100 people with a multi-million dollar

budget and a mission that includes projects in multiple disciplines

investigations, audits, and inspections—has prepared me for the

management challenges that I will face at USDA, and I am confident that I can lead the organization and make it even more productive and effective than it already is.

Senator LUGAR. I would just followup with one question. The

Chairman has cited the previous Inspector General and the meat

inspection issues. Indeed, he came before the committee on more

than one occasion with regard to this and other issues. Have you

examined the issues the last Inspector General faced, as well as

other issues that may be out there in USDA that his investigations,

at least if not uncovering, have gone into in a substantial way? In

other words, do you have some idea of the agenda that is there

now, quite apart from things that you and your staff may uncover?

Ms. FONG. I believe that I am familiar with the key, substantive

issues that are facing the Department of Agriculture. I have read

many of the IG Office’s reports. I have been briefed by the Acting

Inspector General as to the big issues that are currently before the

Office. I understand that there is are a number of significant issues

facing the Department such as homeland security, meat safety inspections, crop insurance, the HACCP system, as well as departmental administration, financial management, civil rights, and a

number of other issues.

Senator LUGAR. Thank you very much.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Dayton.

Senator DAYTON. Thank you, Mr. Chairman.

I have some questions. Maybe I will alternately go with you, Mr.

Lukken, and then ask the same of you Ms. Brown–Hruska.

The CHAIRMAN. If you do not mind, I was going to go each person

separately.

Senator DAYTON. Oh, I am sorry. I see. I am sorry. I missed that

part of it. All right.

Ms. Fong, what is the most, without violating obviously any

issues of confidentiality, what is the most controversial, going back

to what the chairman said, and I agree with him, too, and you did

as well, what is the most controversial or most difficult decision

you had to make in SBA, in terms of coming forward with something or not?

14

Ms. FONG. I would say one of the most significant issues that we

worked on in the past two years involved the Small Disadvantaged

Business Certification and Eligibility Program, which is a Government procurement certification program. Congress authorized SBA

to certify small businesses to participate in this program.

Just to give you a general sense of it, we had a number of whistle-blower complaints that were involved. Our people also felt that

the program was perhaps not running as efficiently as it should

have been. It involved 20 other departments and agencies in the

Federal Government, and funding from those departments and

agencies to the tune of multi millions of dollars a year. Our office

went in and did a number of audits and investigations on different

aspects of the program and at the end of our effort, which took

about a year, we came out with some very hard-hitting reports that

pointed out that the program really was overstaffed and overfunded.

The other departments and agencies were being charged much,

much more than they should have been charged to participate in

this program. We projected that over the course of the next 5 to

10 years, if SBA implemented all of our recommendations, there

would be savings in the $12-million range per year, stretching out

for a long period of time.

There were also some personnel issues and some potential criminal issues that we had to work with the Department of Justice on

for prosecution consideration. We also coordinated with the Office

of Special Counsel on the whistle-blower issues and handled that

very successfully, I believe. We were able to protect individual

rights, while still carrying out our audit and investigative responsibilities.

Senator DAYTON. Thank you.

One request, we clearly need a strong leader for the IG office in

the USDA. I had an experience just a couple of months ago, Mr.

Chairman, requesting information from the Department, which

presumably would have required the involvement of the Inspector

General, and after 10 weeks had lapsed, received, well, indirectly

through the chairman, a response that basically said that nothing

had been done in response to the request.

I guess what I am looking from you as a commitment, not that

you will, as the chairman said, accede to every request of Members

of Congress, but that you will respond in a timely fashion with

what you intend to do or not do.

Ms. FONG. I will. It is my practice to respond to congressional

committee requests and individual member requests very quickly,

to at least let you know what we are doing—that we are evaluating

it, that we are taking it into consideration—and to have a conversation with you about what it is you need so that we can respond more effectively.

Senator DAYTON. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Dayton.

We have been graced with the presence of our Senator from Virginia, Senator Allen, and we welcome you here to the committee,

Senator Allen. I know you are here for the purposes of an introducVerDate 11-MAY-2000 15:27 Jan 22, 2003 Jkt 081589 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 81589.TXT SAG1 PsN: SAG1
15

tion, and I know you have a busy schedule, so we would recognize

you at this time for purposes of introduction.

Thank you, Senator Allen.

STATEMENT OF HON. GEORGE ALLEN, A U.S. SENATOR FROM

VIRGINIA

Senator ALLEN. Thank you, Mr. Chairman, I appreciate that

courtesy, and thank you, Senator Lugar, Senator Dayton, and I

want to thank you all for scheduling this important hearing today.

President Bush, Mr. Chairman and members of the committee,

has wisely nominated Doug Flory of Grottoes, Virginia, to serve on

the Farm Credit Administration board, and I am delighted to be

here with Doug and endorse him wholeheartedly.

Doug brings—and I am sure you have already read through it— a wealth of experience which is important in this role. His experience is in farming, as well as in banking and financing. He has

been involved in farming his entire life. He continues to be involved

in poultry, livestock and grain operations in the Shenandoah Valley

of Virginia. In addition, he has served in a variety of roles, senior

officer with Dominion Bank, also executive vice president for WLR

Foods for four years. He has served as a director on several important Farm Credit institutions over the years, including one in Virginia. He is involved in poultry associations, banking, farm managers, rural appraisers, all. This is exactly the type of person you

would want to have overseeing the Farm Credit Administration.

I wholeheartedly endorse his nomination. Hopefully, you will be

able, before the July 4th recess, to vote on this fine individual.

I will also say that Senator Warner would love to be here. I am

not sure if he will make it or not. He is managing the defense authorization bill on the floor at this time, but I know that he would

want me also to relate to you his strong endorsement of Doug

Flory, and I thank you all for this brief interlude and opportunity

to introduce a fine Virginian.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Allen, thank you very much for gracing

us again with your presence and for your strong support of Mr.

Flory.

You are right. He has a big resume, and he has been very active,

and I do not think we will have any problems at all. He is the type

of person that we do need on that board, and I thank you for being

here, Senator Allen.

Senator DAYTON. Mr. Chairman, I would just observe that Mr.

Flory, in his remarks today, he had been appointed by four different Governors of Virginia. I thought that was a commendable

ability to get along with a variety of different perspectives—four

points of view.

Senator ALLEN. Yes, and he——

Senator DAYTON. I assume you were one of the four. I just wanted to check on that.

[Laughter.]

Senator ALLEN. Thank you very much.

The CHAIRMAN. Thank you.

This is for both Mr. Lukken and for Ms. Brown–Hruska. The agriculture futures and options markets now make up a smaller

16

share of the CFTC’s fear of oversight than in the past. When this

first started back in the 1970’s, when I first got here, it was almost

all agriculture. Now it is becoming a smaller and smaller part.

However, the honesty and integrity of those markets are extremely

important to the farmers, and ranchers, and agricultural businesses in the United States.

I guess I just want both your assurances that you will make certain that the CFTC devotes adequate resources and attention to agriculture under its jurisdiction.

Mr. Lukken.

Mr. LUKKEN. Well, having worked on this committee, I guess I

know where my bread is buttered.

[Laughter.]

Mr. LUKKEN. Once I get down there at the CFTC, if confirmed,

I would be very diligent in making sure that agriculture is looked

after. I know the CFTC is doing a pretty good job at that right now,

in fact. There were recent allegations regarding cattle futures manipulation, and the CFTC did an excellent job, a thorough job of

looking into those allegations and providing a report on that, and

they continue to oversee and monitor those markets to give assurances to those businesses and farmers who have to use those markets. I fully understand the importance of these markets and will

be sure to look after them.

The CHAIRMAN. I appreciate that very much, Mr. Lukken.

Ms. Brown–Hruska.

Ms. BROWN–HRUSKA. Thank you very much.

I have studied crop yield, insurance futures, and cattle futures,

and looked at a number of markets, agricultural markets, in my research and when I was at the CFTC, and that is where the rubber

hits the road when it comes to price discovery, and the importance

of price discovery to the underlying markets, to the underlying agricultural markets.

It is so important because the futures markets are the most liquid market. It is where a lot of us look to find where the prices

are being determined, and so it is important to monitor those markets, to put every resource that you have to surveil and enforce the

rules to make sure that there is no fraudulent or anticompetitive

activities taking place there. It is a top priority for me.

Thank you very much.

The CHAIRMAN. I appreciate both your answers. Thank you very

much.

Senator Lugar.

Senator LUGAR. Thank you, Mr. Chairman.

One of the major factors in the Commodity Future Trading Act

that was passed two years ago was the provision for swaps, to give

legal certainty, and we had lots of testimony over two years about

that issue.

Now, since the passage of that act, many questions have arisen

with regard to the amount of coverage, metals and energy and

many critics, given the crisis of energy prices and the scandal surrounding Enron cite specifically the omission of energy. Likewise a

considerable debate occurs in academic circles at over.

I would like the opinion of both of you as to what we ought to

do with regard to energy and metals legislatively. Administratively,

17

you can only deal with what Congress has provided, but given your

broad experience in this field can you give us at least some pointers

as to what ought to be good public policy?

Mr. Lukken, do you have a view on this?

Mr. LUKKEN. Obviously, Senator Feinstein has offered an amendment on the floor to take care of this problem. The intention behind

the Feinstein amendment is a very good one. One of the public policies that we aim to prevent down at the Commission is commodity

manipulation, and that is what possibly was happening out in California. There were allegations that several companies were moving

energy around to manipulate the price and that California residents may have suffered as a result.

The CFMA did reserve for the CFTC authority to, use their

antimanipulation authorities to go after these type of abuses. Last

week, in fact, they issued three subpoenas to energy companies trying to find documents, and they will prosecute these violators, if

that is what they find. I guess the question is do we need more,

and that is something that is going to come out with investigations

that agencies are having, with the hearing that this comittee is

probably going to have in a couple of weeks. It is good process to

let this sort of work its way through and to understand a little

clearer what exactly the problem is to allow regulators to come to

us and say, ‘‘This is the information we need, this is the information we do not need’’, and to solve these manipulation problems.

The beauty of the Commodity Futures Modernization Act was we

created a flexible, tiered structure for regulating. If we determine

that the tier is too low for energy, that they are not being regulated

enough, well, we have the option, as policymakers, to increase that

regulation, and the outline is there to do that. If policymakers

make that decision, we will certainly abide by that.

Senator LUGAR. Ms. Brown–Hruska.

Ms. BROWN–HRUSKA. I would like to second everything he said.

[Laughter.]

Senator LUGAR. That was a pretty good answer.

Ms. BROWN–HRUSKA. Yes, I thought it was great.

I am not yet familiar with all of the specifics of the CFTC authority with regard to enforcing these provisions on manipulation

and antifraud in the energy and metal markets. I know that there

were some exemptions provided for them, but there were also some

parts of the regulation that remains.

More generally, though, I do believe regulators can, and should

vigorously investigate, collect evidence, build a solid case and prosecute without reserve those who would commit fraud or manipulation.

If you confirm me to serve on the CFTC, I would work diligently

to assist and support the individuals responsible for surveillance

and enforcement, to vigorously investigate and prosecute those who

would attempt to operate outside of the rules.

With respect to the CFTC’s authority in the OTC markets, I believe that this is a crucial and important matter for Congress to be

considering. As I understand it, there are multiple regulatory authorities who have responsibility to oversee the participants in

these markets.

18

The CFTC is the agency which has overseen the exchange-traded

derivatives markets for 28 years. It has a wealth of expertise. They

understand derivatives and the vital functions of hedging and risk

management, as do I. It is appropriate and good that Congress is

looking at this issue and working with the regulatory agencies involved in their deliberations. For my own part, I am looking forward to serving with Chairman Newsome, drawing from his wisdom and leadership, the perspective and experience of Commissioner Tom Erickson and Commissioner Holum-Peterson. These are

resources that I would rely upon if I were confirmed to join them.

I look forward to working with the CFTC staff, Walt Lukken, assisting Congress in making whatever determination you do as regards jurisdiction and issues associated with these markets.

Senator LUGAR. I thank you. I have one question that follows, on

Chairman Harkin’s question with regard to agriculture. I found,

with regard to my own modest farm operation, that knowledge

about the markets, about options and futures, forward sales, plus

utilization of risk management crop insurance legislation that this

committee has passed is absolutely essential for getting some rate

of return out of my investment on that farm. That is probably true

for most farmers in America and probably, in many cases, makes

the difference as to whether they have a reasonably small profit or

none at all or losses.

The risk management aspect is one thing that I stressed during

our farm bill debate, and I do not want to revisit all of that debate,

but it appeared to me that one of the ways that we could be most

helpful to farmers in the commodity title would be through enhancing the risk management safety net aspects so that many more

farmers would participate, and the safety net, in fact, would be

more certain.

I am just curious about the CFTC as you see it of attempting to

help producers of all sizes in this country understand the markets

that you regulate, understand the possibilities, as well as the dangers that are there. It appears to me that this is one of the broad

gaps in American agriculture, among those who know and those

who do not, and that knowledge is power, and in this case the

power to make a profit, as opposed to a loss.

This is not entirely your responsibility. We all have that responsibility, this committee, as candidates for election, whatever fora

we have. What do you foresee the CFTC might do to enhance some

knowledge in respect for these markets?

Mr. Lukken, do you have a view on that?

Mr. LUKKEN. I have always wondered about the disconnect between trying to help—you have a useful tool for farmers and the

futures markets, that as we have struggled throughout the years,

we could never figure out why these were not either more user

friendly for farmers or why they could not use these products to

help manage risk, and just very few farmers seem to do that.

It is one of my goals, when I get to the CFTC, is explore this,

whether it is a marketing issue, are we not presenting the products

correctly to them? Is it a regulation issue? Do they not have the

tools that they need? I don’t know. I mean, it is something that I

will have to look into, but the CFTC has an Ag Advisory Committee there that occasionally gathers, and it is ag leaders, it includes

19

USDA, the Risk Management Division down at USDA, and so it

has some pretty good thinkers that can sort of think through these

issues and try to come up with ways to help farmers manage risk

because, as you said, this is something we struggled for a long time

and hopefully we can improve upon.

Senator LUGAR. Ms. Brown–Hruska.

Ms. BROWN–HRUSKA. Thank you.

Education is very important. It is something that I have spent

my life doing, and it is important for us to try to make derivatives

like futures and options and other things that are available to

farmers accessible, in terms of how they work and how they can

be used, and that is a job that the Commission can perform in their

public relations, and in their pamphlets, and in their speaking opportunities. It is something that I would certainly like to contribute

to.

Senator LUGAR. Thank you.

The CHAIRMAN. Senator Dayton.

Senator DAYTON. Thank you, Mr. Chairman.

Mr. Lukken, Senator Lugar alluded to the decision made some

time ago regarding energy, taking energy out of the oversight of

the Commission. Given your experience over the last several years,

are there any commodities that you believe are included now in the

Commission’s oversight that should not be or are there any that

are not that you believe should be included in the oversight.

Mr. LUKKEN. The approach, when Congress looked at the CFMA,

was to try to really look at the public policies that back the CFTC:

manipulation, consumer protection and overseeing, the retail public. Those markets that didn’t deal with a product that could be

manipulated or didn’t deal with retail customers, we tried to have

less regulatory structure for them. That included financial swaps

that large banks use, that the financial instruments are so numerous they couldn’t be manipulated. It was the agreement of the

President’s working group to exclude those from the CFTC’s jurisdiction, although there are many other banking regulators that

may have jurisdiction over them.

As you sort of think about that structure, and you could sort of

think of agricultural products and say, ‘‘Here is something that can

be manipulated that farmers use, the retail public is served, those

deserve the highest level of regulation we have,’’ and you could

think about energy somewhere in between. Where we position that

is the thing that policymakers will be struggling with.

Congress looked at the energy exemption when it was struggling

with this back in 2000. It worked with the CFTC. They wanted to

add additional safeguards to the energy provisions, and we provided those safeguards that were ultimately enacted into the act.

Now there have been subsequent events. We may need to add

more safeguards, and that will hopefully come out in the hearings

and the investigations that we are having. It is just a matter of

where on that spectrum between the highly manipulatable products and the ones that you can’t manipulate do you place these

other types of products. Energies and metals are the ones that are

mainly named.

Senator DAYTON. You mentioned before deferring to policymakers, presumably Congress, in terms of some of these decisions,

20

this is an area where, frankly, we are going to have extremely limited expertise and time to focus, and you are going to have, hopefully, your entire pursuit will be this. Given the complexity of them

and the proliferation of them, I hope that you will take an aggressive and active role in bringing to our attention areas of deficiency,

rather than waiting for something to appear, as you say, in the

headlines of the paper.

Ms. Brown–Hruska, I notice that you were with the Division of

Economic Analysis for several years, and it says here that—and

this is back from 1990 to 1995—we are looking at some of these

areas, such as the anticompetitive nature of derivative markets

and the like. I am impressed that the Commission at that stage

was on the, I would say, the cutting edge or front edge of some of

these new financial instruments.

My question is, given the ingenuity with which these instruments seem to be newly devised or varied, and often with the intent, in part, at least, to have an instrument that circumvents or

avoids any kind of regulatory oversight. How do you think the

Commission can stay abreast of, stay current, with these kind of

cutting-edge developments, and again will you be willing to bring

to us areas where you think the Commission should be involved

that it is not at that time?

Ms. BROWN–HRUSKA. Yes, It is very important. That is an excellent point. There is such complexity that has come forth from the

over-the-counter markets especially, and at times it appears that

some of the goals are not that honorable: some are developed to try

to avoid taxes, and some are developed to try to cook the books,

and that certainly is inappropriate, and it is something that I believe that the CFTC and other regulatory agencies and Congress

need to get to the bottom of. It is very important.

Senator DAYTON. Do you think the Commission is equipped in

terms of staffing and expertise, to apprise itself, apprise the members of the Commission on these new developments?

Ms. BROWN–HRUSKA. Well, I know when I was there, I was very

impressed with the skill and expertise of the Commodity Futures

Trading Commission staff and with the commissioners at the time.

There was a great awareness of the innovation, and especially a

great understanding on how these instruments could be used to

manage price risk and to actually lower price volatility that we

sometimes see from spikes in supply and demand in the underlying

markets.

There is an understanding, and also there were a lot of important cases, I recall, that came up where people were, institutions

were developing and using derivatives for ill gain, and the CFTC

went after them then, and the CFTC is prepared to go after them

now.

Senator DAYTON. This is my final question, Mr. Chairman.

Just briefly, from each of you, the people who are most interested

in the Commission and its dealings are those who are in the businesses, the industries that are being overseen. The cacophony of responses is always less regulation, deregulate, take Government

strictures off of us and let the markets dictate results and get out

of the way. Those who are perhaps exposed in those areas, although anybody who gets into those kind of tradings should be

21

well-advised that it is participant beware, are not going to be heard

from, and I am thinking particularly of, say, the Enron pensioners

and others who may even unwittingly be pulled in.

Can you just give me, briefly, your role of the regulatory responsibility of the Commission and what is appropriate regulation in an

era which emphasizes deregulation?

We will start with you, Ms. Brown–Hruska, please.

Ms. BROWN–HRUSKA. Sure. Thank you, Senator. That is a very

important question, and regulators have an obligation to ensure

the economic and financial integrity of the markets and to be accountable to the individuals and institutions who use the markets

and the citizens who pay their taxes.

I am sure that if I were confirmed by this committee and this

Senate, I would dedicate myself to upholding the values that include protection of the public interest, and that includes consumers, investors, hedgers. It is important to be accountable to these

individuals, and being accountable to the people who are at that

level and who pay their taxes means being accountable to this committee and to the Senate.

I would be committed to the committee and dedicate myself to

upholding the important functions of economic integrity of the market, and the financial integrity of the market, and investigating to

the full extent that is possible any violations of the laws that are

there.

Senator DAYTON. Thank you.

Mr. Lukken.

Mr.LUKKEN. Senator Dayton, as you mentioned, there are many

times when the market incentives work against the public’s mission, whether that is consumer protection or manipulation, and

that is the time when we have to be the most diligent and the most

present. There are certainly times recently that we have seen that,

where certain misdeeds in the corporate community have happened. Despite the claim that they were self-disciplining themselves and the markets were working, they obviously weren’t, and

so we have to be a diligent force now, especially during times of

economic stress, to be out there, to make sure that the community

knows that we are watching, we are reassuring folks, and that

when we find misconduct, to be diligent and go after that, be aggressive, and I promise to do that.

Senator DAYTON. Thank you, Mr. Chairman.

The CHAIRMAN. If I might just followup on that just briefly.

CFTC, you can use subpoenas, you can go after things after the

fact, but one of the things, and I do not want to put words in Senator Dayton’s mouth, one of the things I am concerned about is

making sure that CFTC uses whatever authority it has to prevent

these things in the first place. You mentioned, Mr. Lukken, this

committee probably within the next few days, after we get back

from the 4th of July recess, we will be having a hearing on derivatives, and especially what happened in the energy area. We are

gathering information on that right now, and so CFTC will be, of

course, part of that hearing process.

I guess I just want to know if you believe that the CFTC has the

adequate ability to get information prior to something happening;

in other words, to get the kind of information on an ongoing basis

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to sort of raise the red flag and say, wait a minute, if you continue

down this way, we are going to have some real problems and to

alert the public and to alert us here in the Congress.

I have no doubt that CFTC has the authority and the power to

get it after the fact, and to issue subpoenas and do the kind of

things you have to do, but I am more interested in the CFTC preventing the kinds of manipulations and lack of discovery, price discovery in the first place. I guess my question is do you think that

you have enough authority to do that in the CFTC?

Mr. LUKKEN. Well, it is a little difficult to know, before I get

down there, exactly what information they are currently receiving,

and so, for me, it is a little difficult to answer that question. I

promise that once I get down there, that is hopefully what is going

to come out of some of these investigations that are ongoing in

some of these hearings that you will be having is to find out that

type of information—are you receiving enough beforehand? Can

you prevent this type of activity? If not, then maybe we need to

change it. If so, then maybe we can keep it the same. I mean, those

are the types of questions that hopefully will come out during these

investigations.

The CHAIRMAN. Yes.

Mr. LUKKEN. Congress tried to, in the CFMA, provide some authority for the CFTC to do some beforehand in the energy markets,

especially for multilateral transactions, so Enron was a bilateral facility, their trading mechanism, but there are some multilateral energy derivative companies out there that have to register with the

CFTC, have to do certain reporting requirements, have to record

keep. There are all sorts of other requirements on them, so that is

going to have to be looked at to see whether that is proper level

or not.

The CHAIRMAN. Well, that is one of the things we are going to

be looking at when we go down this hearing.

Senator DAYTON. If I could just followup on that, Mr. Chairman.

I certainly agree with you. You can put words in my mouth any

time if you find—— [Laughter.]

Senator DAYTON. I do not expect you to identify ahead of time

that an Enron is proceeding in ways that it is. It would be great

if you could do so, but I mean there are just too many companies,

too many players. What you need to do is make sure that the staff

determines that these instruments are structurally sound. I remember reading once a couple of years ago some hotshot said to

his colleagues, ‘‘We don’t sell these instruments to the sophisticated

investors, we sell them to the unsophisticated investors.’’ In other

words, we contrive something and try to get people who think they

can make some money quickly and do not understand what they

are getting themselves into.

Everybody is going to be involved in these markets. In my view,

as I said, you should have a big warning sign, there is no gain

without risk involved. The instrument itself needs to be structurally sound and not a contrivance in such a way that, and if it

is being perpetrated on the public by some active sales people, that

is where you have to be really aggressive and step in with both

feet, and I hope you will consider that.

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Thank you.

The CHAIRMAN. Mr. Flory, the New York Times has written a series of stories concerning Farmer Mac, and I am sure you have

read those over, and they have been, if I might say, less than flattering. Specific concerns raised include the independence of Farmer

Mac’s board of members, the overcompensation of executives, insider control of stock, inadequate capital and reserves and questionable investment practices.

Now I understand that you have not had access to materials that

would allow you to specifically comment on this situation. I am not

asking this. I am just, nonetheless, these set of circumstances provides a timely hypothetical and I just, again, I want to know have

you looked at those articles, are you aware of them, and just, as

a new board member, how you might approach responding to those

concerns, and this committee will probably also be delving into

those at some point down the road.

Mr. FLORY. Yes, Senator Harkin, I am aware of the public exposure, the same as the rest of us around here who have read the

press. As you say, I have no access to current information at the

Board. I am very familiar with Farmer Mac’s mission, and it is extremely important, as it rounds out the credit needs of the American farmer and rancher in rural America.

However, I will pledge to you and the committee that as I become involved as a board member, if I am confirmed, that I will

move in that direction very fast and will have a great interest in

that.

The CHAIRMAN. Thank you, Mr. Flory.

Senator Lugar.

Senator LUGAR. Thank you, Mr. Chairman.

Mr. Flory, several years ago during the savings and loan crisis,

farm credit came to a crisis. Often the two were compared; the size

of the crisis in farm credit was substantially less but, nevertheless,

many of the problems very similar.

This committee likes to believe that our solution to the farm

credit crisis was a lot less expensive to the American taxpayer. It

was being suggested at the time that the liabilities might go to $10

billion—and we have roughly settled it for something less than

$1.3—but, still, this was a shock not only to farmers and bankers,

but to the public as a whole that all of this proceeded without either the proper oversight or reforms.

Now, subsequently, we have had fairly smooth going, and hopefully your tenure will be a part of that, but the Farm Mac situation

the chairman mentions is a warning signal on the horizon that

things are never particularly safe, and I appreciate the chairman’s

thoughts. We may even do some oversight during the waning

weeks and months of this year.

As I read the press account, it reminded me of the testimony we

heard on long-term capital management a while back. That is extraordinary leverage. Now that extreme case of long-term capital

sets a parameter at the outside, and Farmer Mac, in its worst condition, could not be at least that leveraged, but the charge is being

made that the reserves behind various investments are inadequate,

substantially inadequate, and that is going to cause some problems

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in markets such as the ones we have now unless somebody does

something about it.

I appreciate that you are studying it. You have not been into the

private details and so forth. Hopefully, you and the other commissioners will be there very rapidly. This committee probably should

be there. We need to wrestle this one to the ground before it gets

out of hand, and I say that as somebody who was here at the beginning of Farmer Mac.

We saw the need in order to get to every small town, small county, remote place in America that said we are being left behind in

terms of farm credit, and we heard that call, and there is great

sympathy in this committee for saving every family farm, wherever

it may be. Farmer Mac was one of the responses to that call, but

it may have moved away from at least that initial purpose at least

as we envisioned it, and if so, perhaps we can help you in forming

remedies.

I do not have a further question, but I thought I would take the

advantage of this hearing to make a comment so that you will understand, the gravity the chairman and I feel about this and that

apparently you share.

Let me just state that in the Farm Credit Administration, from

time-to-time, without getting into all of the private comments the

board members make to any of us, there seems to be an occasional

lack of communication among some of the principals who are involved. I hope that you, as a person who has had some longevity

in Government, serving under four governors, may facilitate people

talking to each other in a better way. I just say this as an outside

comment, as one who has listened to a number of people and tried

to facilitate this dialog.

Clearly, it is important, that you all share the same data. You

may demarcate responsibilities, as the case may be, and organize

your affairs, but nevertheless the committee would like to have

confidence that everybody is on the same page, whether we are

talking about Farmer Mac or whatever else may come along the

trail, because ultimately all of you are responsible.

I thank you for indulging me on these editorial comments, but

they may be pertinent to your service.

Mr. FLORY. Thank you, Senator Lugar, and they are.

The CHAIRMAN. Thanks, Senator.

Senator Dayton.

Senator DAYTON. Thank you, Mr. Chairman.

Mr. Flory, you have a resume here that would seem to prepare

you extraordinarily well for this position because you have really

been on the operating side of agriculture, as well as the financial

side. Your farm itself, Bunker Hill, going from beef cattle, sheep,

hay, now to turkey, primarily, certainly, you have had to identify

the changing trends and fortunes and misfortunes involved in the

agriculture economy, and as Senator Lugar was referring, in terms

of the credit side as well.

Can you give, from your perspective, an assessment of where we

are today in terms of the whole structure of agriculture finance.

Are we relying too much on credit versus—well, a profit might be

nice, I am sure, but are we past the danger zone?

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Mr. FLORY. Senator Dayton, I believe this committee and others

that have dealt with, and most recently the Farm bill, in my view

too many farmers, and producers, and ranchers across the country

are too dependent on our Government programs and not dependent

enough on our markets and our market-driven economies in agriculture.

That is a concern to me, and as time goes on, it would appear

to me that there should be public policy and hopefully some market

arrangements that will at least remedy some of that. That, in

itself, leaves some concern to me, and I know others, that if, for

some reason, the support levels are not there, that we could have— and I certainly hope it would not be the kinds of things we had in

the 1980’s—but at least some stress in agriculture.

To further comment, all of those who provide credit to agriculture, be it Farm Credit System, be it commercial bankers of the

savings and loans and FSA. We all learned some good lessons out

of the 1980’s. We are better prepared, we are better capitalized, we

have insurance funds in place to assist us, but at the same time

we also need to remain very diligent as we move forward and look

at the risk points out there, and that is a big concern to me.

Senator DAYTON. I agree with your comment about the reliance

on the Government programs. Of course, Government programs

have also proliferated in their numbers and their complexities. I

just realized in the last couple of years, sitting on this committee

and going through this farm bill, how intricately aware and knowledgeable farmers have to be on just a whole variety of these programs.

Is there any way, and maybe this would be something that you

could come back to us in a year or two, but that we could consolidate and simplify some of these financing different entities? Do you

have any suggestions or words of wisdom on that account?

Mr. FLORY. That is a very tough question. Each financing entity,

whether it be Farm Credit or commercial bankers or FSA, all have

a mission—and Farmer Mac, also—they have a very definite mission in providing agricultural credit throughout the United States.

In some instances, they compete with each other. In other instances, and hopefully, as we go down the road, they will complement each other in working together to supply that credit that

is needed for agriculture, and most particularly, as we go through

the generational change of ownership of farms with young farmers

and beginning farms. That is the most important area we have.

Cooperation, and I am one that believes that we should work together, all of those both private and public institutions that are

providing credit need to work hand-in-hand in being certain that

we supply the family farmer and the commercial farmer adequate

credit.

Senator DAYTON. Thank you.

Thank you, Mr. Chairman. We have, in my opinion, four very

well-qualified nominees. Thank you.

The CHAIRMAN. I concur with that. We have four very well-qualified nominees.

We thank you for being here, for your testimony, for your service.

For the family members and others who are here, you should be

very proud of these nominees for their dedication to public service,

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and with Senator Lugar, I hope we can move these nominees at a

relatively rapid pace.

Senator LUGAR. Mr. Chairman, may I ask just one more question

in Mr. Flory’s presence? The temptation overwhelms me.

The CHAIRMAN. Sure.

Senator LUGAR. Getting back to my modest farm operation

again—— [Laughter.]

Senator LUGAR. I am delighted that the value of my acreage

seems to be rising each year, at least this is what people who are

involved in farmland surveys at Purdue University, quite apart

from the private market, tell me. I am pleased about that because

if the operating profit seems too small, the capital gain tends to

offer some returns, some future for me or for my heirs.

Now the problem with all of this comes back when occasionally

a country banker will say there is certain formation here of what

you might call a bubble effect. In other words, here you have a situation in which obviously you are not making a whole lot of money,

given the assets that you have and the net worth that you claim

for all of this. Yet, at the same time, your land keeps rising every

year, and as country bankers we get worried about this kind of collateral.

Just to make your point. If, for example, the Congress should

take a shift at some point and say, by and large, farm program

costs—we did not mean it this way—but somehow they just got out

of hand. Prices kept coming down because of oversupply, not only

in this country, but worldwide; therefore, the disparity, to keep everything afloat, got larger and larger, and finally people said

enough is enough, and so they began to shear off some of the funding.

Now, if you are a country banker sitting out there and that begins to happen, and you have already had some modest fears about

the rising land value and your collateral, why you might overreact.

In other words, you might say this is it, we are going to have to

batten down the hatches at this point. Whereupon, a lot of farmers

would find it very difficult to get the credit that they had been accustomed, and therefore what was a mildly disquieting situation

becomes really a rampant panic in that process.

What kind of guidance can Farm Credit Administration give not

to legislators, we have made our decisions with regard to the farm

programs for a while, but to farm owners, about the land value situation? Do you make comments from time-to-time about land values and how we stabilize the situation given the vagaries of political discussion about farm policy? I ask this in seriousness because

it appears to me, if there is one large cloud on the horizon of your

responsibilities, it might be this one. If there is enough of a shift,

in terms of sentiment with regard to farm payments, people may

begin to have some qualms about the collateral and therefore about

the credit they extend.

Mr. FLORY. Senator, there are several aspects that we need to always be very aware of. First of all, Farm Credit is one of the major

suppliers of credit throughout the United States, and they are a

single-industry lender. They have one mission, and that is to supply farmers, ranchers and rural America and farmer co-ops loans,

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and they have done it through good times and bad, with the caveat

that during the 1980’s there were some real stresses among folks,

and I hope we have learned some lessons.

Commercial bankers, particularly my experience with those that

are in very rural areas, have the same philosophy. That is their

bread and butter. They need that loan portfolio, they need those

farmers’ deposits in order to be a viable bank. I just think the land

values will always be something that we must be aware of and how

they are being affected publicly and privately, and they are the underpinning for the value of the farm assets out there, and we have

got to make certain that they stay valuable within reason.

I started in banking early on, and we were balance-sheet lenders.

During the 1970’s we had, out of necessity, became cash-flow lenders. If we continue to keep our eye on cash-flow and make certain

that we can pay the bills, then the farmer, and rancher and the

co-op will be very strong, and we will have less problems back at

the Agency.

Senator LUGAR. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Lugar.

I thank all of the nominees for being here. Again, I thank you

for your public service, and we hope that we can expedite getting

you on board as soon as possible.

The committee will stand adjourned.

[Whereupon, at 11:31 a.m., the committee was adjourned.]

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