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79–540 PDF 2002

S. HRG. 107–441

NOMINATIONS OF: ROGER W. FERGUSON, JR.

ANGELA M. ANTONELLI, RONALD A. ROSENFELD

JENNIFER L. DORN, AND DONALD E. POWELL

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

NOMINATIONS OF:

ROGER W. FERGUSON, JR., OF MASSACHUSETTS, TO BE A MEMBER OF

THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ANGELA M. ANTONELLI, OF VIRGINIA, TO BE CHIEF FINANCIAL

OFFICER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

RONALD A. ROSENFELD, OF OKLAHOMA, TO BE PRESIDENT

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

JENNIFER L. DORN, OF NEBRASKA, TO BE FEDERAL TRANSIT

ADMINISTRATOR, U.S. DEPARTMENT OF TRANSPORTATION

DONALD E. POWELL, OF TEXAS, TO BE A MEMBER AND

CHAIRMAN OF THE BOARD OF DIRECTORS OF THE

FEDERAL DEPOSIT INSURANCE CORPORATION

JUNE 13, 21 AND 26, 2001

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

JOHN EDWARDS, North Carolina

ZELL MILLER, Georgia

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

DON NICKLES, Oklahoma

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

MARTIN J. GRUENBERG, Senior Counsel

SARAH A. KLINE, Counsel

JONATHAN MILLER, Professional Staff

JENNIFER FOGEL-BUBLICK, Counsel

BRIAN J. GROSS, Republican Deputy Staff Director and Counsel

MELODY H. FENNEL, Republican Professional Staff Member

SHERRY E. LITTLE, Republican Legislative Assistant

MADELYN SIMMONS, Republican Professional Staff Member

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

WEDNESDAY, JUNE 13, 2001

Page

Opening statement of Chairman Sarbanes ........................................................... 1

Prepared statement .......................................................................................... 29

Opening statements, comments, or prepared statements of:

Senator Bunning ............................................................................................... 4

Senator Corzine ................................................................................................ 5

Senator Stabenow ............................................................................................. 5

Senator Gramm ................................................................................................ 6

Senator Bennett ................................................................................................ 7

Senator Schumer .............................................................................................. 17

NOMINEE

Roger W. Ferguson, Jr., of Massachusetts, to be a Member of the Board

of Governors of the Federal Reserve System ..................................................... 8

Biographical sketch of nominee ....................................................................... 31

Response to written questions of Senator Sarbanes ...................................... 39

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Senator Paul S. Sarbanes from Eight Members of the House of

Representatives, dated June 12, 2001 ................................................................ 47

Response to questions of Eight Members of the House of Representatives

from Roger W. Ferguson, Jr., dated June 12, 2001 ........................................... 54

THURSDAY, JUNE 21, 2001

Opening statement of Chairman Sarbanes ........................................................... 59

Opening statements, comments, or prepared statements of:

Senator Nickles ................................................................................................. 61

Senator Stabenow ............................................................................................. 63

Senator Carper ................................................................................................. 63

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

Prepared statement ................................................................................... 92

Senator Reed ..................................................................................................... 72

WITNESSES

George Allen, a U.S. Senator from the State of Virginia ..................................... 61

Ron Wyden, a U.S. Senator from the State of Oregon ......................................... 62

Gordon Smith, a U.S. Senator from the State of Oregon ..................................... 71

NOMINEES

Angela M. Antonelli, of Virginia, to be Chief Financial Officer, U.S. Department of Housing and Urban Development ......................................................... 64

Biographical sketch of nominee ....................................................................... 93

Ronald A. Rosenfeld, of Oklahoma, to be President, Government National

Mortgage Association (Ginnie Mae), U.S. Department of Housing and

Urban Development ............................................................................................. 66

Biographical sketch of nominee ....................................................................... 110

Response to written questions of Senator Carper .......................................... 127

Page

IV

Jennifer L. Dorn, of Nebraska, to be Federal Transit Administrator, U.S.

Department of Transportation ............................................................................ 80

Prepared statement .......................................................................................... 118

Biographical sketch of nominee ....................................................................... 120

Response to written questions of Senator Carper .......................................... 128

TUESDAY, JUNE 26, 2001

Opening statement of Chairman Sarbanes ........................................................... 129

Prepared statement .......................................................................................... 145

Opening statements, comments, or prepared statements of:

Senator Gramm ................................................................................................ 131

Senator Johnson ............................................................................................... 132

Senator Enzi ..................................................................................................... 133

Senator Miller ................................................................................................... 133

Senator Corzine ................................................................................................ 134

Senator Bennett ................................................................................................ 134

Senator Dodd .................................................................................................... 141

Senator Bunning ............................................................................................... 145

WITNESSES

Kay Bailey Hutchison, a U.S. Senator from the State of Texas .......................... 129

Larry Combest, a U.S. Representative in Congress from the State of Texas ..... 134

William ‘‘Mac’’ Thornberry, a U.S. Representative in Congress from the State

of Texas ................................................................................................................. 135

NOMINEE

Donald E. Powell, of Texas, to be a Member and Chairman of the Board

of Directors of the Federal Deposit Insurance Corporation .............................. 136

Biographical sketch of nominee ....................................................................... 146

Response to written questions of:

Senator Sarbanes ...................................................................................... 159

Senator Miller ............................................................................................ 160

(1)

NOMINATION OF:

ROGER W. FERGUSON, JR.

OF MASSACHUSETTS, TO BE A MEMBER OF

THE BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

WEDNESDAY, JUNE 13, 2001

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10:40 a.m., in room SD–538 of the Dirksen Senate Office Building, Senator Paul S. Sarbanes (Chairman of

the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The Committee will come to order.

Before we turn to Governor Ferguson, I would like to take just

a couple of moments to talk about the agenda of the Committee in

the coming weeks.

First of all, let me say that I am appreciative to Senator Gramm

for the cooperative way in which he has ensured a smooth transition. We tried to work together when things were reversed and I

look forward to continuing to try to do that.

I also want to note that we reached a Memorandum of Understanding at the beginning of this Congress that we would not alter

the staff or the funding ratios over the term of this Congress. And

so, that will continue. We did that agreement in part I think to

give the staff some sense of security as they looked ahead, I think

it was wise to do it then and I continue to think it is wise. Obviously, we will adhere to that agreement.

Now, we have a short-term pressing agenda with a number of

items that need to be reauthorized, and that I see is the first order

of business. Let me just mention them very briefly.

First, we have to reauthorize the Export-Import Bank, which is

due to expire on September 30. I have asked Senator Bayh, the

Chairman of the International Trade and Finance Subcommittee to

take responsibility for holding the hearing. There will be a hearing

next Tuesday afternoon on reauthorizing the Export-Import Bank.

Mr. Robson, the new Chairman is now in place. Actually, I think

he was sworn in yesterday at the Ex-Im Bank. He will be available

to testify.

Second, we need to reauthorize the Multifamily Assisted Housing

Reform and Affordability Act, the so-called mark-to-market program for multifamily housing. That authority is due to expire on

2

September 30. Senator Reed, Chairman of the Housing and Transportation Subcommittee, has scheduled a hearing on that reauthorization for next Tuesday morning.

Third, the Defense Production Act expires on October 12. Senator

Schumer, Chairman of the Subcommittee on Economic Policy, will

assume the responsibility of holding that hearing. We are trying to

arrange a hearing before the end of the month.

The Iran-Libya Sanctions Act, which imposes sanctions on foreign companies which make investments directly and significantly

in contributing to the enhancement of the ability of Iran or Libya

to develop its petroleum resources, expires on August 5. Over 70

Members of the Senate have cosponsored its reauthorization and I

hope to hold a Full Committee hearing on that again before the recess. I would very much like to do that.

These are four measures whose authorization runs out. If we can

do the hearings, then we can turn to a markup sometime after the

4th of July recess. In other words, when we come back in July.

The Administration, as I understand it, is supportive of reauthorization in all four of these instances. I am not sure they have fully

developed their position in detail on each issue, but it is my understanding that they do support reauthorization.

So this would be consistent with that agenda.

I also want to note, as you will recall, we also reported out the

reauthorization of the Export Administration Act. That legislation

is now pending in the Senate. Both Senator Gramm and I have

talked to the leadership about it and we hope that there will be

some opportunity to get that back up and move ahead on that.

There was a 1 year temporary extension of that Act. We need to

address that question. That is the one we brought out 19 to 1, as

Members will recall.

Finally, last year we passed the Manufactured Housing Improvement Act. It desperately needs a technical correction, which is very

time sensitive, in order to be able to spend out the funds collected

under the program to run the program. I have consulted with the

Administration, with Senator Gramm, and with other Members of

the Committee on legislation. It is a very technical thing and we

hope that we can get legislation up by unanimous consent and

move that through and correct that situation.

Next Wednesday, the Committee will hold an oversight hearing

on the condition of the banking system. We are doing this really

as just kind of a survey of the situation. I am not prompted to do

it by any sense of crisis or looming problem, but I think it would

be helpful to get Alan Greenspan, Chairman of the Fed; Jerry

Hawke, Comptroller of the Currency; Donna Tanoue, Chair of the

FDIC; and Ellen Seidman, Director of the Office of Thrift Supervision, and have them in.

In addition, we will address nominations as they come to us and

as their papers are ready for hearings. We will try to do that in

an expeditious manner.

Now later in the summer, as Members know, I have some interest in the predatory lending and the financial privacy issues, and

I hope to have some hearings on those issues. Money laundering,

financial education, and literacy are other issues. Then, I hope we

3

can do a set of hearings on the state of metropolitan and rural

America, the broader jurisdiction of the Committee.

I have been talking to Members. I hope to complete that process

of consultation over the next couple of weeks, for any ideas they

have or directions they would like to go. I am anxious to hear from

them and we are very open to suggestions.

Now with that by way of preface, and if there are any questions,

I would be happy to respond in that area. We need to do these

reauthorizations. We were already working on doing that and we

just want to carry forward that process and try to bring it to completion.

With that as a preface, I would like to welcome Roger Ferguson

before the Committee this morning. He has been nominated by the

President for a full 14 year term as a Member of the Board of Governors of the Federal Reserve.

Governor Ferguson was originally appointed as a Member in

1997, to complete a term which expired on January 31, 2000. He

was nominated on September 14, 1999, by President Clinton for a

full term as a Member of the Federal Reserve Board, as well as to

be Vice Chairman. He was confirmed as Vice Chairman at the end

of September 1999, and that term expires on October 5, 2003. That

is a 4 year term as Vice Chairman. No action was taken in the last

Congress on his nomination to be a Member of the Board. So he

had the Vice Chairmanship while he continued to serve, but he had

not gotten another term as a Board Member.

President Bush nominated him for a full term on April 24. His

papers are all complete. They have been with the Committee now

for a number of weeks. Given the importance of the position, and

the period of time he has been awaiting action on his nomination,

I thought we should move his nomination, and Senator Gramm and

I have discussed that.

I just want to say that Governor Ferguson holds an undergraduate, a law degree, and a Ph.D. in economics, all from Harvard. After graduate school, he practiced law in New York with

Davis, Polk & Wardwell, one of the leading firms. He then joined

the consulting firm of McKinsey & Company, where he became a

Partner in 1992 and Director of Research and Information Systems.

As I said, he has served on the Federal Reserve Board since 1997.

By all accounts, Governor Ferguson has served with distinction

as a Member of the Federal Reserve Board. I have a public statement that Alan Greenspan issued today:

Roger Ferguson has been a distinguished and respected Member of the Federal

Reserve Board, exercising sound judgment and benefiting our work on a wide range

of domestic and international policy matters. I welcome his nomination to another

term on the Board.

Governor Ferguson has chaired a working group of the Federal

Open Market Committee to review its disclosure practices. Acting

on a working group recommendation, the Federal Open Market

Committee altered its disclosure practices, including deciding to

issue a statement after every FOMC meeting announcing any action taken by the Federal Open Market Committee and indicating

the balance of risks facing the economy.

I for one very much welcome this initiative. I think it is important for the Federal Open Market Committee to make its decisions

4

known and to try to give the country some of the rationale that lies

behind its decision. I think that increases economic understanding

and that is a very important objective.

Governor Ferguson oversaw the Fed’s preparations for the Year

2000 computer challenge. I think Senator Bennett worked with him

on that, when Senator Bennett and Senator Dodd were heading up

the Special Committee. He also served as Chairman of the Joint

Year 2000 Council, sponsored by the Bank for International Settlements, to provide guidance to the global financial supervisory community. He recently completed service as Chairman of the Group

of Ten Working Party on Financial Sector Consolidation, which

examined the causes and potential effects of consolidation in the

financial sector worldwide.

As Vice Chairman, he has served as the Federal Reserve’s Chief

Administrative Officer. He is currently Co-Chairman of the Federal

Reserve’s Payments System Development Committee, which addresses public policy issues arising in connection with developments in the Nation’s payments infrastructure.

Governor Ferguson has also been a careful observer of the economy, and has focused particularly on the role of information technology in productivity growth.

Actually, I think it is a commentary on the high professional

standards he has set during his service on the Federal Reserve

Board that he was nominated for a full term on the Board by both

President Clinton and President Bush. At the time of his first confirmation, and I was taken with this, I recall that he mentioned

that the appointment of Andrew Brimmer to the Federal Reserve

served as an inspiration to him as a youth and focused his attention on serving on the Federal Reserve as a possible career goal.

Perhaps his own service on the Federal Reserve now will serve as

an inspiration to other young people to pursue public service in

their careers.

I am very pleased to welcome Governor Ferguson before the

Banking Committee. And Governor, before we turn to you, I will

yield to any of my colleagues who may want to make a statement.

Senator BUNNING. I have a short opening statement I would like

to make.

Chairman SARBANES. Indeed. Senator Bunning.

COMMENTS OF SENATOR JIM BUNNING

Senator BUNNING. Mr. Chairman, I would like to thank you for

holding this hearing, and I want to thank Mr. Ferguson for testifying today.

Mr. Ferguson, I appreciate you coming to see me last week. I

think we covered a lot of ground. At that time, I expressed my

strong concerns with the Fed talking about the financial markets.

Obviously, every time the Chairman speaks, the market listens.

But I am concerned that the Fed has tried to influence market levels. That is not the Fed’s job. I am very much heartened by the fact

that you agreed with me that it is not the Fed’s job to jawbone the

equity markets.

You obviously have had a very distinguished career and I look

forward to hearing your answers to the questions posed by my colleagues and myself today.

5

Thank you very much, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Bunning.

Senator Corzine.

COMMENTS OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman. It is an honor for

me to be here today with you in your first hearing as Chairman.

Like my colleagues, I look forward to working with you on ensuring financial institutions and markets in America stay on the same

supreme role that they play today. Those efforts were the hallmark

of the outstanding leadership provided by Senator Gramm as well

in his stewardship of this Committee and I look forward to them

continuing.

I am particularly pleased to hear you outline the issues that are

on the agenda. Issues like predatory lending, financial privacy,

housing affordability, urban economic development, and financial

literacy are things that I think really can make a difference in improving the quality of life for individuals and their families. I think

it is terrific that we will have this agenda.

I also want to say welcome to Vice Chairman Ferguson, who is

an individual who has a sterling reputation in the financial markets. His work on all of a host of things that often are unseen is

terrific testimony to his talent and wisdom and it is a pleasure to

have him here today and I look forward to his testimony.

Chairman SARBANES. Senator Stabenow.

COMMENTS OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman.

I too want to indicate my pleasure at seeing you in the Chair and

also appreciate Senator Gramm’s leadership of the Committee. It

has been a pleasure to work with both of you and I look forward

to the opportunity for us to be working together on both sides of

the aisle.

I am very appreciative of the agenda that you have put forward

for the Committee and am anxious to work with you on so many

things that directly affect my Michigan residents.

In terms of today, I would like to indicate that, as we know, our

economy has experienced a great deal of uncertainty over the last

several months. We have gone from a period of exuberant optimism

to a dot com bust.

The 1990’s were an unprecedented period of growth and economic

expansion in our Nation. Today, however, energy prices are soaring. Many stocks have reached shocking new lows. And unemployment continues to rise.

This is not the economy of the recent past, but a new time of uncertainty and nervousness. Whether we are talking about the iron

ore miners in the upper peninsula of Michigan or the high-tech

executives in Oakland County, Michigan’s automation alley, everybody in Michigan and everybody in the country is affected by the

decisions of the Federal Reserve.

As we make the transition into the new economy, it has become

all the more imperative that the Federal Reserve act aggressively

to keep our economy in strong shape. Combating inflation and

6

fighting unemployment are critical to our country’s well-being, as

I know that you are aware.

The Federal Reserve has taken several steps over the last year

to address the troubling economic signs. I hope that they will remain vigilant in promoting sound monetary policy, particularly

with the recent massive and, I believe, ill-advised, changes in our

Nation’s fiscal policy.

I welcome Mr. Ferguson and I look forward to hearing your

thoughts today on the state of the economy, and your work at the

Federal Reserve. And we appreciate your being here.

Thank you.

Chairman SARBANES. Senator Gramm.

STATEMENT OF SENATOR PHIL GRAMM

Senator GRAMM. Mr. Chairman, thank you. I had to run out to

speak to a bishop who had returned my call. I depend on the Lord’s

help in so many ways. When his messengers call, I don’t keep them

holding.

First of all, Mr. Chairman, I want to congratulate you on being

the new Chairman of this Committee, and I want to thank you for

your kindness in working with me over the period of time that I

was Chairman. I would like to also thank Members on the Republican side for their support. I had the great good fortune of being

Chairman when a lot of good things happened, and your support

was critical. I want to personally thank you for your kindness to

me. I want to also thank Members on the Democrat side, especially

the new Members for their kindness to me at the beginning of this

term. I look forward to working with all of you.

Mr. Chairman, I think you have set an example as to what a

good Ranking Minority Member should be, and one that I hope to

emulate. There are obviously areas where you and I will not be in

total agreement, but I want to assure you that when in doubt, I

intend to try to be supportive.

The outline that you have presented—a reauthorization of the

Ex-Im Bank, multifamily housing, the Defense Production Act, the

Iran-Libya Sanctions Act—these represent bills that have broad

support, and I have no doubt that we can pass legislation fairly

rapidly in reauthorizing them.

I have a few concerns about the Defense Production Act, not that

I don’t think the President ought to have these extraordinary powers, but I do believe in the past that they have been abused when

we were not dealing with periods of national emergency. This is

something I want to ask the Committee to look at, so that we

might set a little higher standard and threshold for using the Defense Production Act. President Nixon used it to impose price controls in a period when we were not facing a national emergency

from a conflict somewhere in the world. We have used it to allocate

resources from time to time when there were no defense implications. And so, not that I believe this President would ever abuse

the power, but these laws should be based on not knowing who

might be President someday.

Let me also say that I think our correction on manufactured

housing is something that we can do very quickly. Maybe we could

7

get the Committee to do it by unanimous consent on the floor, if

you wanted to do it that way.

I look forward to working with you, and again, I congratulate you

on your Chairmanship.

I want to congratulate Roger Ferguson. When you have Alan

Greenspan on your side, you have the right man on your side. I

supported confirming you as Vice Chairman, and I intend to support confirming you to a new term. I appreciate your willingness

to serve. I understand that given your excellent credentials, you

could make a lot more money doing something else, and I appreciate that you are willing to give that up to serve at the Federal

Reserve.

I am proud of the fact that under my tenure as Chairman we

raised pay for members of the Federal Reserve Board, but we did

not raise it enough so that I can get the presidents of regional

banks interested in being on the Board. So, I think we still have

a major problem. But I appreciate your willingness to make the

sacrifice to serve. It is a very important position. It is hard to overstate the importance of the Federal Reserve, and the role it has

come to play in American society.

I congratulate you.

I am going to run to a Medicare meeting, but you can certainly

count on my support.

Chairman SARBANES. Senator Bennett.

COMMENTS OF SENATOR ROBERT F. BENNETT

Senator BENNETT. I don’t want my silence to be misinterpreted.

I want to join everyone in extending my congratulations to you

upon assuming this position.

You will not recall it, but I remember when Senator Riegle, who

was the first Chairman of this Committee under whom I served,

announced his retirement. I went over to Senator Riegle on the

Senate floor to wish him well in his retirement and he was talking

to you, Mr. Chairman. He said to me, meet the new Chairman of

the Senate Banking Committee. And at that time, I said, actually,

my preference would be Al D’Amato.

[Laughter.]

And it now turns out I got both.

[Laughter.]

My congratulations to you and I am looking forward to working

with you in the same spirit as the other Senators have commented.

Chairman SARBANES. Thank you very much. I appreciate that.

Governor Ferguson, it is a standard procedure in this Committee

to ask the nominees to take the oath with respect to their testimony. So if you would stand, I would like to administer it to you.

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

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

help you God?

Mr. FERGUSON. I do.

Chairman SARBANES. Do you agree to appear and testify before

any duly-constituted committee of the U.S. Senate?

Mr. FERGUSON. I agree to that, yes, sir.

Chairman SARBANES. Thank you very much. We would be very

pleased to hear your statement.

8

STATEMENT OF ROGER W. FERGUSON, JR.

OF MASSACHUSETTS, TO BE A MEMBER OF

THE BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

Mr. FERGUSON. Thank you, Chairman Sarbanes.

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

joined me here.

Chairman SARBANES. We are pleased to have you. We welcome

her to the Committee.

Mr. FERGUSON. Thank you.

Chairman Sarbanes, Senator Gramm, and Members of the Committee, I am pleased to appear before you today as President

Bush’s nominee to serve on the Board of Governors of the Federal

Reserve System. I am honored that the President has nominated

me to serve a full term as a Member of the Board.

As a Governor, I am particularly mindful that the policy decisions of the Federal Reserve influence the economic well-being of

all Americans. It has been my privilege to serve our fellow citizens

in this capacity since 1997, giving this role my undivided attention,

and I hope to be able to continue in that service.

During my tenure, we have faced a rapidly changing environment in many of our areas of responsibility, and I would like to review briefly some of those developments and our responses to them.

Congress has given the Federal Reserve three monetary policy

objectives: Maximum employment, stable prices, and moderate

long-term interest rates. We have viewed these objectives as congruent with a goal of maximum sustainable growth, which can

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

in recent years. The most important developments have been a

step-up in the advance of technology—both in terms of the production of new goods and services and the more effective harnessing

of past innovations—and a rapid accumulation of physical capital.

These developments have made workers increasingly more productive. But faster productivity growth fed back on the demand for

goods and services in ways that complicated the calibration of monetary policy. Faster growth in productivity and the reactions of

businesses and households to this acceleration of productivity have

combined with other forces—particularly those associated with the

growing interconnectedness of the global economy—to require substantial adjustments in the Federal Reserve’s policy interest rate in

recent years. But those adjustments in our policy instrument have

been in the service of our objective of promoting maximum sustainable growth.

Making monetary policy has been only part of the challenge.

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

diligently to communicate to the public what we are doing with policy and why. Transparency in policymaking is a key part of the

democratic process, as well as being helpful in fostering efficient

decision making in the private sector. Becoming more transparent

has been a goal of the central bank in recent years, keeping in

mind that we must balance the need to be open and accountable

with the need to maintain an effective process of decision making

9

by the Federal Open Market Committee. Transparency requires

that we periodically review our procedures, as we did in 1999, to

ensure that they appropriately balance these considerations. I do

not know what future changes, if any, might be called for in how

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

continue to look for ways to communicate clearly our policies and

our supporting rationales.

While macroeconomic conditions are of overriding importance,

the role of the Federal Reserve is broader than monetary policy.

Financial stability is an essential precondition for maintaining a

strong economy, and the Federal Reserve has important supervisory and regulatory responsibilities for our Nation’s banking system. The Federal Reserve, and other regulators, must continue to

foster a competitive environment that will benefit the users of

financial services, while also promoting safety and soundness. I believe that we must achieve these goals with a minimum of regulatory burden and without leaving the impression that any institution is too big to fail. To minimize regulatory burden and achieve

our other objectives, we should encourage what to my mind are the

best regulators, namely, market discipline and management accountability. Of late, our challenge has been to meet these goals as

we implement the financial modernization law. In my opinion, Congress wisely removed several antiquated barriers to a modern financial structure in the United States, and we now need to design

regulatory and supervisory policies that reflect the will of Congress

and deal effectively with a changing financial services industry.

Technology and deregulation, forces for change that I have just

mentioned, have encouraged consolidation in the financial sector.

With central bank and treasury officials from 12 other major industrial economies, I have reviewed the likely effect of the global trend

toward consolidation and its implication for central banks and

regulators. Because financial systems will continue to consolidate,

as the forces that motivate that evolution are unabated, the regulatory community needs to monitor developments closely. But our

study also found that existing policies appear adequate to allow

regulators to maintain safe and sound financial industries now and

in the intermediate term and for monetary policy to work through

many of the same mechanisms as in the past.

More than the structure of the financial industry has changed of

late. That sector has found uses for consumer information and created an array of financial products and services unimagined even

a few years ago. These developments, in turn, raise some new concerns, and have re-ignited some existing ones, among consumers

and legislators. Congress grappled with one of these issues, privacy, in the financial modernization law. Concerns about abusive

lending practices have also reemerged of late. In all areas, but particularly in areas as sensitive as these, regulators should faithfully

administer consumer protection laws as written. Any necessary

regulations should adequately inform consumers and protect them

against abusive practices while also not discouraging legitimate extensions of credit, especially to those who might previously have

been denied access to such credit. Financial literacy will certainly

play an important role in avoiding the growth of abusive or deceptive financial practices and in allowing consumers to protect their

10

interests. I believe legislation, careful regulation, and education are

all components of the response to these emerging consumer concerns. I also hope, however, that businesses recognize that it is in

their long-term interest to maintain the confidence of consumers by

avoiding deceptive and abusive practices and by respecting the privacy of their customers.

Finally, our payment system affects every consumer and business. This system too has been, and will continue to be, changed

greatly by emerging technologies. From the time of its very founding, the Federal Reserve has had the responsibility to foster an efficient, safe and accessible payment system. During much of 1998

and 1999, our primary objective in this regard was to help banks

and other participants in the payment system maintain smooth

operations as the century date change passed. Domestically, we

achieved this goal by working directly with the banking sector.

Internationally, I was privileged to work through multilateral

groups to raise the awareness of the international regulatory community of the nature of the Y2K challenge. Now, we can take a

longer-term perspective and consider how we might facilitate innovation in the payment system.

As an overseer and as a regulator, the Federal Reserve needs to

approach payment system innovations with an open mind and a

willingness to adapt. In a dynamic economy, markets need to play

a key role in guiding the development of infrastructure. This means

that innovation and competition will be central to the future development of the payment system—as they are in other areas of the

economy. Regulators should strive to remove barriers to innovations when we can do so without sacrificing important public policies. We should take every opportunity to foster competition and

maintain the integrity of the payment system, but public policy

should not be built on a single vision or prediction in the future.

Consumers and businesses, as well as service providers will determine the range of payment services that best meet their needs.

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

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

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

serve the Nation as a Member of the Board of Governors. Thank

you for your attention and for considering my nomination. I would

be pleased to respond to questions.

Chairman SARBANES. Thank you very much for your thoughtful

statement. I think we will take 5 minute rounds and then we can

do a second round if Members want to have further questioning.

In the June 4 American Banker, former Federal Reserve Board

Vice Chairman Alan Blinder was quoted saying: ‘‘Everybody knows

that there are institutions that are so large and interlinked with

each other, that it is out of the question to let them fail.’’ This

statement contrasts with official Board policy and it contrasts with

a statement you made recently before the Consumer Bankers Conference that: ‘‘No institution is too big to fail.’’

I think this is a subject that probably needs further exploration.

But I would like to get your perspective on it, just to sharpen it

up, how the Board continues to adhere to this policy in light of its

11

role in organizing a private-sector bail-out of the Long-Term Capital Management Hedge Fund in 1998.

There have been some proposals of ways to address the too big

to fail issue, subordinated capital and so forth. Could you please

address that?

Mr. FERGUSON. Certainly. I will address your question. It had

many components. I will try to respond to each one.

First, on the principle, the philosophical question of too big to

fail, as I have said, and you quoted me correctly, I believe that

there is no institution that is too big to fail. I think it is important

to remind all participants in the financial system that any institution can fail in the sense of having management changed, in the

sense of being forced to divest some of its activities or cease some

activities. Clearly, there is a risk to shareholders of any institution

and there is a risk to uninsured depositors and other creditors of

any institution.

I believe that this is an important message to continue to put out

because, indeed, as you observed, there are even former officials

who believe that other things are true.

Now one of the questions I should address is the activities with

respect to Long-Term Capital. I think, sir, that was a prime example of what the public would expect a central bank to do. In that

case, the Federal Reserve Bank of New York, which has access to

information about the markets broadly and many market participants, saw that one of the major participants in the markets, LongTerm Capital, was clearly starting to have financial difficulties.

What the Federal Reserve Bank of New York did was to address

their counter-parties, Long-Term Capital’s counter-parties, brought

them all together, explained the situation as they saw it in the

Federal Reserve in New York, and left it to the private sector to

determine how they wanted to respond to those challenges. They

did not suggest, either directly or indirectly, any sort of potential

regulatory quid pro quo. There was no Government money at stake.

The private-sector participants thought that it was in their interest

to help do what ended up being an important activity, which was,

frankly, a very smooth wind down of Long-Term Capital.

So what we saw in that case, I believe, is an important lesson,

which is, indeed, no institution is too big to fail. The management

of Long-Term Capital and many of their shareholders lost money.

The institutions positions were unwound, but unwound in a way

that was not destabilizing to markets. There was no Federal Reserve quid pro quo of any sort express or implied.

And so I think it is important to be quite clear about that case

because it strikes me as a case where an institution was large and,

in fact, did get wound down in an orderly fashion.

I think it is also important to understand that there are a number of methods that are being used in the markets these days, or

that are being discussed and encouraged or thought about, to try

to minimize the moral hazard of this concept of too big to fail.

You have touched on one that I think is very important, which

is the question of greater transparency and disclosure.

Through the Basel Capital Accord we also are considering more

risk-based approaches to capital, to make the capital more risk-sensitive. And the Federal Reserve and other regulators have been

12

working on risk-based supervision that allows us to focus much

more on the risk-management capabilities of institutions in order

to reduce the probability of any institution failing.

I should finally end up by saying that, by definition, we know

that in good times and in bad times, there may be institutions that

are poorly managed. We are not a guarantor that no institution

will ever fail. So these risk approaches that we are taking really

are attempting to make the entire approach of this activity much

more risk-based.

But all of these things I think are in the context of no institution

being too big to fail. There are institutions that are large and complex. Their winding down could be very disorderly and has to be

managed carefully. But any institution could fail in the sense of

management being changed, shareholders losing money, activities

being contracted, activities being sold off to others, potentially the

whole institution being sold to others, and uninsured depositors

and creditors potentially facing some sort of haircut.

Chairman SARBANES. Thank you. This may be a subject that the

Committee may want to pursue with the regulators, particularly in

ways of building more mechanisms into the market structure to

control this. But my time is expired.

Senator Bennett.

Senator BENNETT. Thank you, Mr. Chairman.

Governor Ferguson, you made reference in your statement to the

charge that the Congress has given to the Federal Reserve System,

primarily that that comes out of the Humphrey-Hawkins Act— maximum employment, stable prices, and moderate long-term interest rates.

When Senator Mack was a Member of this Committee, he and

I joined in saying that the Fed should concentrate exclusively—we

indeed introduced legislation that would have repealed HumphreyHawkins—on stable prices. And if we got price stability in this

country, the other things would follow, and having the Fed try to

chase the unemployment numbers and try to solve unemployment

problems with monetary policy was a nice dream out of the days

when the Humphrey-Hawkins Act was passed. That practicality

said you could not do it with monetary policy, and that if we got

price stability, then moderate interest rates would be a natural byproduct. So, we sponsored legislation to have you focus primarily

on price stability.

Now, Senator Mack is gone. I don’t have quite the same zeal for

that that he had, even though I still believe it, cosponsored his bill,

and will still pump for it.

But I would like you to respond to that and talk about the goals

of Humphrey-Hawkins and if you have a sense of prioritizing, that

price stability is more important than the others. In your personal

view, or if you are going to say, no, I have to stick to the Humphrey-Hawkins Act regardless of how I may feel because that is

what the Congress has said, just simply respond to what I am saying here and give me your views.

Mr. FERGUSON. I will give you my personal view. My personal

view is that the various goals laid out in Humphrey-Hawkins can

best be achieved if we do it in the context of long-run price stability. I want to be clear about that.

13

I would be cautious about modifying the law in any way, however, because I do think that it is important for all central banks

to recognize that another way to express their goal is the goal of

what is called maximum sustainable growth. That can be achieved

through long-term price stability, without question. But I think it

is also quite important to recognize that there are costs to an economy going above potential and there are costs to an economy going

too far below potential.

I think the way we best serve the economy and best serve our

fellow citizens is by using our instrument to do the best we can to

match aggregate demand and aggregate supply and create conditions that foster maximum sustainable growth, I want to be mindful of the cost on both sides of maximum sustainable growth.

In that sense, I am quite comfortable with the goals laid out in

the Humphrey-Hawkins law. I am quite comfortable with our ability to keep our eye on the ball in terms of the underlying strength

or importance of long-run price stability.

But I think it is also important to recognize that the other way

of saying this is this concept of maximum sustainable growth and

there are costs either above or below.

And I don’t want to lose track of the costs that come from either

growth that is above, and therefore, risks inflation, or growth that

is below potential, and therefore risks the obvious costs that

emerge in the economy when resources are underutilized.

Senator BENNETT. Thank you. We are not as far apart as some

might want to make us.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Bennett.

Senator Corzine.

Senator CORZINE. Thank you, Mr. Chairman.

Governor Ferguson, Chairman Greenspan said before the Budget

Committee in January that the outlook for budget surpluses rests

fundamentally on expectations of long-term trends in productivity.

I think that gets at that concept of maximum sustainable growth

that is built into those formulations.

At that point in time, we were looking at 2.5, 2.7 percent kinds

of growth numbers. We have had actually, shockingly, negative

numbers in the first quarter of 2001. It is hard to identify trends

off of one quarter, but a lot of our assumptions that are built into

budget surplus projections are dramatically impacted by small

changes in these numbers, let alone dramatic changes that might

be 3 or 4 percent, if those were to be sustained. Hopefully not.

Given your background, particularly with regard to technology

and understanding of how that has impacted productivity growth,

do you have comments or could we ask for your comments with regard to that, and particularly its implications for budget surpluses.

Mr. FERGUSON. I will comment on both the short-run and the

longer-term perspective.

In the context of an economy that is growing as far below potential as ours currently is, it would not be surprising, and was not

surprising, to see that the productivity number was negative in the

first quarter.

14

To answer your broader question, I believe there are new things

in the way of technology that will allow potential growth to return

in the long run.

I think that I would put myself in the camp of being cautiously

optimistic that we have not seen the end of the increases in productivity that we have experienced and benefited from.

As I talk to technologists in the world of semiconductors, for example, they point out that there is now technical capability to build

larger chips. There is technical capability to etch in smaller lines— again, this is largely technical talk. We are at about 0.25 microns

and there is room to make them even smaller. There is obviously

a limit.

They think that will allow for potentially 30 percent reductions

in the price of semiconductors. Given the fact that semiconductors

are in many ways the building blocks of this high-tech revolution,

recognizing that potential increase in the capability of semiconductors is important.

All of this is summarized in the shorthand called ‘‘Moore’s Law’’ or ‘‘Moore’s Curve.’’ And what I hear basically is that the semiconductor manufacturers still believe that Moore’s Law is in effect and

they will continue to see increasing capabilities and decreasing

prices in the world of semiconductors, which should drive some ongoing productivity.

The second part of this, however, is that it is not sufficient to

have the technical capability. You need businesses to adopt these

technologies.

My understanding from talking to businesses is that they believe

there is still more to do in terms of becoming more productive.

Some would argue that some of the low-hanging fruit has already

been captured, if you will. But they are quick to say that they

thought that a few years ago as well.

This productivity increase that we have benefited from, though

we are in a bit of a pause now, I am cautiously optimistic will return and we will continue to see very solid productivity numbers.

I should also tell you, by the way, that if one looks at the productivity numbers, from quarter to quarter, they move around quite a

bit. So it is not going to be a smooth trend. It never has been.

I think what that might imply in terms of the long-run is I can

imagine a potential growth in the economy that is still in the range

of around 31⁄2 percent, maybe a bit more, maybe a bit less, but in

that range.

Now, you have talked about——

Senator CORZINE. Maximum sustainable growth.

Mr. FERGUSON. Maximum sustainable growth. You have talked,

however, about issues of long-term forecasts and other things.

Obviously, economists have been surprised, as others have, with

respect to the ups and downs of the economy. I think if one looks

at any of the forecasts from just a few years ago, you would find

that they were far off. There is always some danger that these forecasts will again miss. I am always very cautious about a long-term

forecast, even though I would describe myself as cautiously optimistic about the potential of the U.S. economy in the long run.

Senator CORZINE. What would be an early warning sign that you

would be looking for that these productivity numbers were not

15

going to achieve the kinds of growth targets that would be built

into the kind of projections we have, again, tying it back to the projected budget surpluses, its impact being such an important driver

of those.

Mr. FERGUSON. Economists at the Fed and also in the private

sector who have looked at the drivers of this productivity increase

have pointed to two things.

One is just simply an increase in the productivity in the hightech sector. The other is a concept called capital deepening, which

is to say more capital per worker, which shows up in both equipment and software expenditures and what is called business-fixed

investment.

Their third component is, in all honesty, what is called a residual

multifactor productivity, which is the use of technology working together with individuals and changing manufacturing approaches.

Another thing that I would look for in terms of this question of

are we likely to continue to have a positive trend with respect to

productivity increases, is the question of do we continue to see

businesses investing in equipment and software? Do we continue to

see what is called capital deepening?

If it turns out over the long term that this slows down, then that

I think would be a sign that perhaps productivity is not continuing

to increase and that some of the forecasts for the long run may not

come true. And so, there are really fundamental business activities

that one can look at.

The other one obviously is the question of whether or not these

comments that I made earlier about what I hear from the semiconductor industry turns out to be true.

If they cannot continue to stay on Moore’s Law and, indeed, we

don’t get productivity increases in the manufacturing of high-tech

equipment itself, then that is a second element.

The third element, frankly, would be whether or not businesses

continue to restructure to take advantage of some of these new

technologies.

There are at least two or three things that I would look at and

many of them are what I would describe as the microeconomic

underpinnings of the macroeconomic forces that we have dealt with

thus far.

Senator CORZINE. Thank you.

Thank you, Mr. Chairman.

Chairman SARBANES. Senator Bunning.

Senator BUNNING. Thank you.

Governor Ferguson, hindsight being 20/20, do you think that the

Fed waited too long to reduce the targeted Fed fund rate?

Mr. FERGUSON. No, sir. Even with 20/20 hindsight, I do not believe that to be the case. With the information we had at hand, we

obviously, during the course of 2000, stopped and waited to see how

the economy was evolving. We saw in the late fall, in particular,

and going into the December meeting, that the economy was indeed

slowing.

There was a legitimate question as to whether or not this was

simply a very shallow slowing that was going to pick up quickly or

was it something more serious?

16

We were quite clear as we came out of the December meeting

that we would be monitoring the incoming data very closely because there was a question as to exactly what this slowing was

that we were looking at, and how severe it was going to be.

The data became clearer, post the December FOMC meeting. Anecdotal data, the purchasing managers report, and some other hard

data came in. We returned and moved fairly aggressively on January 3. And we have continued. We have had four other aggressive

moves and we have lowered our Federal funds target rate by 250

basis points.

Even with hindsight, knowing what I knew, knowing the information was on the table, I would say we still did the right thing.

You should be mindful, as I know you are, that there are a number of forces that led to this sharp reduction and they surprised

almost all economic observers.

Even in January of this year, the consensus forecasts, the socalled Blue Chip, was for growth this year of 2.7 percent. This was

in January, once we had recognized that the slowing was perhaps

a little deeper than others had expected.

So a number of forces came to play and many observers were

surprised by the depth of the slowing that was experienced.

Senator BUNNING. I think we are pretty much familiar with that.

Some of us strongly disagree with you about the Fed and the reaction to the Fed’s lowering in direct relation to the Fed’s tightening.

But that is neither here nor there. You have given me the answer

I wanted.

Do you believe that the Fed’s forecasting models are up-to-date,

or do you think that they need more work?

Mr. FERGUSON. I believe with all models that there is always

room for improvement, by definition. I think we have some of the

best models in the country for sure, and our forecasting record has

been as good as others’.

I will also say that it is important to supplement the modelbased forecasts with a variety of other data. Anecdotal information

is important. That is one of the reasons, for example, to have the

Federal Reserve Bank Presidents come and act as voting members,

some of them, on the FOMC, because they bring very good realtime anecdotal information. We also look at surveys that come from

a number of private-sector sources.

Personally, as I travel around, I am eager to hear from bankers,

from industrialists, from farmers. I was just in Illinois recently

talking to some farmers about how conditions look.

I think it is important to say that it is good to have a model. A

model has rigor. It has some scientific basis to it. But models are

built on past regularities and you need to update them periodically.

And I think we need to supplement them, as we do, with anecdotal

information and real-time information.

I will also say that, particularly now, there are a number of individuals who have come and said, ‘‘Well, this particular piece of

data would have given you a better sense of what was going on.’’

My perspective is always, tell me the data that one has seen. Let’s

put it into a broader context to see if it is really a good predictor

over a long period of time or happens to get it right this one time.

Senator BUNNING. I only have one more minute.

17

Mr. FERGUSON. Yes.

Senator BUNNING. I have a bunch of questions, but I want to

make sure that I get this one in.

Mr. FERGUSON. Fine.

Senator BUNNING. Do you believe that the Fed should look at the

stock market when deciding monetary policy, either as an indicator

of an inflationary wealth effect or as an indicator that the economy

may be heading south?

Mr. FERGUSON. My view on the stock market is, as you know, because I have said it publicly and said it to you, that we should not

target the stock market. However, I do believe that the stock market is an important element in creating aggregate demand in the

U.S. economy and therefore we should be mindful of what is happening in the stock market.

The stock market creates wealth for individuals, which can

translate into consumption over a 2 to 3 year period. It also for a

number of businesses is a source of capital. And so, we should be

mindful of what is occurring in the stock market, as we are with

a number of indicators that indicate what might be happening to

aggregate demand. But we should not target it.

Senator BUNNING. Do you believe the Fed monetary policy should

react to market gains or losses?

Mr. FERGUSON. I will repeat the answer I just gave, which is we

should be mindful of what is happening in the stock market because it is a source of wealth.

Senator BUNNING. Should the wealth effect or the reverse of the

wealth effect, which was front page in The Wall Street Journal not

too long ago, not effect Fed policy?

Mr. FERGUSON. What I have said, sir, is that we should be mindful of what is happening in the stock market because, in fact, it

does create wealth and wealth can translate into consumption.

This has been an economic regularity that has been picked up in

econometric models. And I still believe that there is evidence that

there is a wealth effect. Obviously, it is controversial. I sense that

you may not agree with us on this. But most economists would say

that there is a wealth effect. The numbers around the wealth effect

some put in the range of 3 to 5, 3 to 6, 2 to 6 percent of incremental wealth is eventually consumed. So, in that sense, we should

be aware of what is happening in the market because it does play

into aggregate demand.

You have heard us talk about both the positive wealth effect and

also a negative wealth effect, a concern that consumers may gradually pull back on consumption because wealth has, in fact, been

destroyed by events in the stock market. And so, I think we should

be mindful of what is happening in the market because it plays

through to consumption, to the cost of capital, and eventually, to

aggregate demand.

Senator BUNNING. Thank you.

Chairman SARBANES. Thank you, Senator Bunning.

Senator Schumer.

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman.

18

First, let me congratulate you, Mr. Chairman, on your sitting in

this Chair, not for the first time. The 17 days you were Chairman

you handled the Chairmanship with intelligence, clarity, and

grace—your usual attributes. I know that you will continue to do

it. It is great to have you there.

Chairman SARBANES. Thank you.

Senator SCHUMER. I would also like to thank Vice Chairman

Ferguson for his service at the Fed. I know both he and his wife

are exemplary public servants. You are a Washington financial

power couple—financial power public service couple.

That is what I want to say.

You have both done a great job. Our country needs people to go

into public service. Not enough highly qualified people do these

days. And the fact that you are here I think is good news for our

country.

I have a bunch of questions on productivity, but I know my colleague from New Jersey has touched on those and we discussed

those privately yesterday, although I am troubled by the decline in

the productivity number, let the record show that the Vice Chair

believes that there is still plenty of oomph left for productivity.

I know the Chairman has the same view because I have talked

to him about that.

I would like to ask about consumer confidence.

With the increase in layoffs we see almost weekly, with the fact

that the economy seems to have slowed down, with the decline in

productivity which eventually does have an effect, even if it is

short-term, but mainly with the layoffs, it seems to me that consumer confidence is at a pretty good level, considering everything

that is swirling around and is probably the linchpin of the economy

right now, preventing it from going further down.

What is your view as to how important consumer confidence is

at this juncture in time and where do you think that it might be

headed, given the fact that over the last quarter I think we have

seen more layoffs than we did in previous quarters? How much of

an effect do the layoffs have on consumer confidence?

Mr. FERGUSON. I believe the following. We are in a period where

the economy is, indeed, growing quite slowly. As the FOMC said,

and I believe is still the case, the risks are, as we say in central

banking language, the risks are to the downside around this slow

growth period.

One of the reasons that I am quite mindful of the downside risks

to the economy is the point that you just made, Senator Schumer.

At this stage, consumption has held up reasonably well. Even the

most recent numbers suggest that. However, there is a risk that,

as you indicate, with what I describe as a drum beat of layoff announcements and unemployment gradually rising, that consumers

may decide that they want to pull in their horns a bit. And given

the fact that much of the forward momentum in the economy is

coming from consumption expenditures, that is a source of the

downside risk. I think you are right to point to this.

I would say that many people have recognized that there has

been a bit of a disconnect between consumer confidence figures as

measured through surveys, which have been going down during the

course of the year and have stabilized a bit now. Who knows what

19

the next survey will be? There has been a slight disconnect with

consumer spending behavior, which has held up reasonably well.

At some point perhaps those two things will come into closer

alignment and it is one of the things that we must monitor closely

as we think about the state of aggregate demand.

But your concern with respect to consumers, consumer confidence

and consumer spending is one of the things that underpins the

statement that I have made and others that the economy is growing slowly and the risks in that slow growth are primarily to the

downside.

Senator SCHUMER. Have there been times in recent economic history, where layoffs and unemployment did not affect consumer confidence and consumer spending? Or is there a pretty direct link in

the past? Given your comment to Senator Bunning on models, what

do you think it bodes for the future? Do you think that we can use

the past as a predictor of the future on this issue?

Mr. FERGUSON. One of the things that we note and, again, back

to the econometrics, there are some elements of the consumer confidence survey that do have what we describe as a little bit of information content in them. One of those is the element concerning

expected employment going forward. That has actually ended up

being, not a heavy predictor at all, but having some information

content with respect to future consumption behavior.

History has generally shown that, as unemployment goes up,

consumers tend to pull in their horns. And so, we do have to again

be mindful that there are some risks to the downside here and I

think we have been clear to the public about that, and you have

obviously picked up on that concern.

Senator SCHUMER. Thank you, Mr. Vice Chairman.

Thank you, Mr. Chairman.

Mr. FERGUSON. Thank you.

Senator SARBANES. I have an issue I want to take up with the

Governor that will probably take longer than the 5 minutes. But

I will defer my round and recognize my colleagues and then pick

up after the second round on this matter I have to discuss.

Senator Corzine.

Senator CORZINE. Mr. Vice Chairman, I have two questions I

would love to hear your observations on.

We have seen almost an unprecedented rapid decline in shortterm rates. Five 50-basis point moves in 4 or 5 months is relatively

unprecedented. But we have not seen the impact in long-term rates

that we have obviously seen in short-term rates and in fact, they

have risen. We have a sharp upward rise in yield curve. I would

love to hear your views on what information one might derive from

that. And I will just get the other question out and you can think

about how you might want to deal with that.

We just recently passed a tax cut which has immediate stimulus

in it in the current fiscal year and in subsequent years.

I wonder if the Fed has had an opportunity to check out what

kind of thrust those immediate impacts and efforts on rebates and

changes in rates will have with regard to the overall growth in the

economy.

Mr. FERGUSON. Okay. Let me first address your question on longterm rates.

20

You are right to recognize that as the short-term rate has been

coming down, more recently the long-term rate has gone up. In the

beginning part of the year, it indeed was coming down and now it

has started to go up.

The question of information content I think is an important one.

The longer-term rates could be reflecting two or three different

things. First, particularly in the corporate sector, it may reflect

some optimism or expectation that the future will turn out to be

relatively attractive for businesses. The economy will start to grow

again, getting back to potential relatively quickly. So some think

that the information content is a positive one, that the economy

may have reached bottom and may be shortly turning.

There are others who think that——

Senator CORZINE. In contrast to what your weight of evidence

would be with respect to how you are reading the economy.

Mr. FERGUSON. Well, as I said, I expect a period of some weakness. I have not been very explicit about how long. But certainly,

you are right. This sense of turnaround that might be coming from

the long-term rates is slightly different from my sense that we

have not yet reached bottom, or are too early to declare that we

have reached bottom.

The second piece of information content that some have taken

out of these long-term rates is a concern that inflation may pick up

in the intermediate term.

On this one I think there is information from surveys that suggests that inflation expectations are relatively well contained. They

may have crept up just a little bit.

I think it is important, as I said to another question, that we not

leave an impression that we don’t have an eye on the price stability

issues, even as we talk about weakness in the economy.

The third element of this, I should say, is that this has been a

period in which businesses, particularly investment-grade businesses, have been issuing bonds at a relatively large pace. In May,

there were over $650 billion of bonds issued at an annual rate. You

have supply and demand considerations going into these rates as

well. So, you have two or three different activities that are being

signaled through the rates.

As I have said, it will be interesting to see if the turnaround is

as the bond market seems to be expecting. It will be important for

us to continue to have one eye on inflation in case that should start

to become a problem. I do not currently expect it given the weakness in the economy. But one should never be complacent about it.

And then you have these basic supply and demand concerns.

As to your question about the tax cut, knowing that I was coming

here, I actually talked to our staff this morning. They have not yet

developed a full perspective on this. But obviously, I want to give

you a responsive answer.

I think the question of how much stimulus is going to emerge

from this tax cut is open to a simple, but unanswerable at this

stage, question of how consumers view it and respond to it. Economic history has shown that if you have a tax rebate that is perceived to be short-term, then consumers spend somewhere around

30, 40, maybe 50 percent of that, but spend it relatively quickly.

21

On the other hand, if it is perceived to be just the front edge of

a longer-term tax cut, not just simply a one-time rebate, then what

economists describe as a marginal propensity to consume out of

that is much higher, eventually hitting something close to 100 percent, but starting probably around 70 percent or so.

The question of how this plays through depends first on how consumers perceive it and how much of this rebate they spend early

versus holding onto.

The second question is, once we see what is called PCE, personal

consumption expenditure, the question then becomes, are the goods

that the consumers purchase going to be ones that are coming out

of inventory or are they going to come from new production or is

it going to come from imports?

Because each of those three different things have a different

impact on GDP as we measure it in the United States.

Now having said that, I did look to see, since I know our staff

is still working on it, what the private sector forecasters are saying.

And there is a range of views. There are some who are saying that

much of this will be spent and that it will go, this personal consumption expenditure will go directly to GDP, not come out of inventory, not come out of increased imports.

I saw one forecasting house that said they expect the marginal

increase or the marginal impact of this to be about 6/10ths of 1 percent of GDP in the fourth quarter. I have seen others that have

used numbers that are slightly smaller.

You should be aware that this will be stimulative. The exact

magnitude is something that is still being discussed in the economics profession. But it depends on how consumers respond to it, in

terms of how much of it they spend, and whether that spending ultimately comes out of inventory, new production, or imports.

Senator CORZINE. Ultimately, will the Federal Reserve models reflect what your perspectives are?

Mr. FERGUSON. I think, ultimately, what will happen is that the

model will have the relationships built in and then there will have

to be a judgmental adjustment based on other information that

comes in. So the model will give a baseline answer, but it will probably need to be adjusted somewhat.

Chairman SARBANES. Thank you, Senator Corzine.

Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

In April of this year, you delivered a speech on the subject of

transparencies in central banking in which you detailed recent

trends in this area. What future trends do you envision in this

area, since you have a 14 year term? Don’t go out that long.

Mr. FERGUSON. It is hard to go out that long. What I said——

Senator BUNNING. Just give me a general, short-term.

Mr. FERGUSON. This is an area that I have spent a fair amount

of time on. I am glad you raised the question.

What I said in that speech was that it is unclear exactly what

changes are next, and I truly meant that. But I also said that the

Federal Reserve, I think, will continue to look for ways to make

clear to the public and to the markets what our rationale was and

what our perspective is going forward.

22

The reason I say it is unclear is literally, I am not sure, having

spent much of 1999 working with my colleagues to find a consensus

and having built that, I personally want to see how this works.

I also think that it is an important part of our accountability

that we can communicate to you and others what it is that we are

doing and it is important for us to think about newer and different

approaches to doing this.

We have obviously put out statements. We have adjusted them

to reflect what we call the balance of risks. We are using the Internet as a great way to communicate and become more transparent.

We will continue to come and respond to questions here.

But I don’t know exactly what is next. I will simply commit to

you that during my 14 years on the Board, I will continue to be

a strong voice for transparency because I think it is part of what

we should do in a democracy and it is an important way that we

can help the markets and others understand what we are doing.

I will also say, however, that there is always a balancing in this

world of transparency. You want to be as transparent as you conceivably can be without being destabilizing in any way and without

undermining the ability of the FOMC to reach good decisions and

to have a good and open discussion.

And so, as I go forward with a personal commitment to continue

to focus on transparency, I am mindful that there will be a balancing that must go on because there are issues on both sides that

have to be looked after.

Senator BUNNING. Obviously, the Fed’s job is looking to see if

there is inflation—current, immediate, present, and future. That is

one of the main tasks you have as far as monetary policy. And I

ask Chairman Greenspan this question every time he comes here

and I am going to ask it to you. Do you see any short-term, intermediate inflation anywhere in the current economy?

Mr. FERGUSON. The most recent statistics over the last several

months, some of the measures, the CPI, for example, have shown

a little bit of an uptick in inflation. Other measures have not

shown that kind of uptick in inflation.

I think much of what we saw in the CPI reflected a pass-through

from oil prices, for example. Some of it reflected perhaps that the

economy as we know was indeed during 1999 and 2000 growing

above potential. And so some of that may have been a spill-over

from a period when the economy was growing above potential.

Going forward, as I answered to Senator Corzine, some think

that the markets are signaling a potential pick-up in inflation

sometime out in the future.

My perspective is that, in the context of an economy that is growing below potential, and in which resource utilization is likely to

ease, and pressures in resource markets are likely to ease, I do not

think that inflation is likely to be the short- to intermediate-term

challenge that we have to deal with. However, as I have already

said, this is all in the context of an unchanged, long-term mission

as you point out, to maintain long-term price stability.

So an expectation that inflation will be well contained for the

short- to intermediate-term because the economy is growing below

potential and resource utilization is easing, should not be taken as

any sense of complacency.

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Senator BUNNING. Well, I look forward to seeing Fed policy and

the transparency of Fed policy in the immediate future, not only

in your June meeting, but also in your meetings that come after

the June meeting.

Thank you.

Mr. FERGUSON. Thank you.

Chairman SARBANES. Thank you very much, Senator Bunning.

In view of some of the questions, I would just like to note that

the charge that has been given to the Fed by Congress, and the

Fed after all is a creation of the Congress, and I quote:

As the Board of Governors of the Federal Reserve System and the Federal Open

Market Committee shall maintain long-run growth of monetary and credit aggregates commensurate with the economy’s long-run potential, to increase production

so as to promote effectively the goals of maximum employment, stable prices, and

moderate long-term interest rates.

I think you have reflected an awareness of the statutory framework in which you are operating in your testimony here today.

I also should note, when Humphrey-Hawkins was passed and

they had a 4 percent unemployment goal, everyone said it could

never be achieved. It was just pie in the sky. The fact of the matter

is that we did achieve it. The Fed in the overall—I mean, you had

some dissonant voices—rejected the notion that there was a higher

level of unemployment, that if you went below it, you would automatically get inflation. The Fed kept testing that and we are now

at 41⁄2 percent unemployment without a significant inflationary

problem. That is not to say we don’t remain on alert or cautious.

But I do think it is an interesting commentary about recent economic history.

Now the issue I wanted to discuss with you is that yesterday I

received a letter from eight members of the House of Representatives. Copies were sent to all of my colleagues. The letter was sent

by members of the Congressional Black Caucus and the Hispanic

Caucus. In that letter—well, let me quote parts of it because they

are raising the question of diversity in the Federal Reserve System.

They say:

The only statistics available indicate that although minorities and women have

increased their presence in the lower-paying administrative positions, they continue

to be underrepresented in the professional and technical job groups.

Further on they say:

The lack of information outlining the Federal Reserve’s efforts to diversify its staff

for ‘‘pipeline’’ positions that could develop into the senior officer level jobs is of great

concern. It is particularly disturbing when considered in light of recent allegations

by several Board employees regarding a hostile work environment, and intentional

discrimination in the hiring and promotion of minorities at the Federal Reserve. If

there is any truth to any of these allegations, we want to send a very clear message

that this behavior is unlawful, unacceptable, and that it must end immediately.

Now to their credit, these members of the House went on to say:

We would like to give Vice Chairman Ferguson the opportunity to address and

correct these issues in the future. We have provided several questions that we would

like you to raise during the confirmation hearing. Because our goal is simply to have

these issues addressed, you are welcome to share these questions with Vice Chairman Ferguson in advance. We are excited to work with you on this matter and hope

to rely on the Vice Chairman to tackle the issue of diversity at the Federal Reserve.

We thought this letter was of sufficient import that we sent it

down to you as soon as we received it. I think what I would like

to do is get a response from you now on the issue and generally.

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The specific questions they submitted, I think you should have

an opportunity to submit a response in writing to the Committee

after you and the others at the Fed have had a chance to address

them and prepare well-considered answers because I assume it will

require some survey of what your situation is. Could you respond

to the points made in the letter—describe the Fed’s efforts to improve diversity?

Mr. FERGUSON. While I was not expecting the letter, I am

pleased to respond to it because it is an issue that I take extremely

seriously.

First, let’s put a few facts on the table.

In the time that I have been at the Board since 1997, we have,

through turn-over, retirement, et cetera, appointed 10 division and

office directors. These are our highest staff positions. Half of those

people have been women. There has been one African-American

and one Hispanic.

We have appointed 38 new officers during my time at the Board.

Nineteen have been female, 19 have been male. Six of those 38 appointments have been minorities.

I am extremely aware of this issue. As the Administrative Governor, one of the things I have done is put into every manager’s

four management objectives—one of those objectives is with respect

to EEO. And I will just read very briefly. ‘‘It is to demonstrate and

promote equal employment opportunity and compliance with Federal laws, and Board policies pertaining to recruitment, development and promotion.’’ So each of our managers is going to be evaluated in part on how

well they have done with respect to meeting the laws and Board

policy because Board policy is congruent with the law and the

world of equal employment opportunities.

I meet with each of our division directors every 6 months to determine how well they are doing against these objectives and to

give them my personal sense that this is extremely important to

me and to the Board.

I would also point out quite clearly that we have diversity training and EEO training. That is mandatory for all Board staff.

I have asked the Board—and this predates this letter by many

months—to review all the policies and procedures that we have and

find out if we are at the upper end of what we can and should be

doing. I am asking them to compare what we do to what is being

done in the private sector. And if there is anything that the private

sector is doing, or the Government agencies are doing, that we are

not, I want to know about it.

In the world of recruiting, we are participating in and recruit

from a number of minority organizations—such as the National Society of Hispanic Engineers, Hispanic MBA’s, and the National

Black MBA Association.

We have worked hard. I personally and others have worked hard

to raise in the minority community awareness of what the Federal

Reserve has done. I have met personally with the MBA students

and the Ph.D. candidates in economics at Howard University here

in Washington.

I have accepted an invitation—again, months ago—to go to Florida A&M University in Tallahassee, one of the leading historical

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black colleges, to teach a class and to speak very clearly about

what we are doing.

So no one should have any doubt about my personal commitment

and the Federal Reserve’s commitment to comply with the laws

and to create a workplace in which everyone is expected to and

able to contribute their fullest.

I would like to see as much diversity as we can consistent with

maintaining the obviously high standards that we already have,

and I have myself been heavily involved in this, and I think I am

representing, broadly speaking, the interest of the Board and the

desires of the Board.

I will be working with the staff to respond to the specific questions. But I am pleased to be on the record here so that there is

no question in anyone’s mind of my personal commitment, or the

Board’s commitment, in this area of diversity and EEO.

One other point I would make because I know this from personal

experience. In many of the areas in which we recruit, particularly

among Ph.D. economists, the representation of minorities is relatively low, disproportionately low.

We are competing for this small pool with private-sector firms.

We think that we have many things to offer in terms of impact on

policy, interaction with other high-caliber economists, and an important public policy role, and I want the Fed to attract as many

people as we possibly can. But we should be mindful that for all

of the efforts that we put in, we still are dealing with a relatively

small pool. This is, I think, an important, long-term commitment

with respect to the Board.

Chairman SARBANES. The Federal Reserve Board, as I understand it, monitors and evaluates the reserve bank’s affirmative action plans and EEO goals. Is that correct?

Mr. FERGUSON. Yes.

Chairman SARBANES. Now is that part of your mandate?

Mr. FERGUSON. It is part of our general oversight role, yes.

Chairman SARBANES. What is your view of what is happening in

the 12 reserve banks on this issue?

Mr. FERGUSON. My view is that, with any 12 organizations, there

are areas of strength and areas where we have to continue to work.

I don’t doubt the commitment of any of these institutions. Many

of them have engaged in various outreach efforts similar to ones

that I have identified. Some of them, because of where they are located, are finding that their pool is not as broad and rich as one

would like. But they are being relatively creative in this area.

Again, as I said, in other areas, this is not a place in which we

can be complacent, though, and we have to continue to watch and

make sure we are doing the best that we can.

Chairman SARBANES. Of course, as the monitoring agent, it is

very important for the Board itself to establish a standard and set

practices that can be pointed to in terms of being emulated. This

effort within the Board to address its own practices is extremely

important. Then I would hope that it could be carried out into the

12 reserve banks across the country.

I think this is a matter of consequence. The members who wrote

to us cited a report that was issued by Chairman Gonzalez of the

House Committee in the early 1990’s, about 8 years ago, that found

26

this underrepresentation and urged that it be closely monitored,

and various measures in order to try to improve it.

In fact, the Chairman himself at the time, Chairman Greenspan,

was not satisfied with the progress that has been made. And then

on occasion, he has cited improvements in the policy.

I think the concern now is that there has been improvement at

the lower levels, but whether it carries through—of course, you are

responsible and the divisional heads goes right to that point.

Mr. FERGUSON. Not just the divisional heads, Mr. Chairman, but

also the officers.

Chairman SARBANES. Yes.

Mr. FERGUSON. Those are the leading staff members.

Chairman SARBANES. Well, if you could take the various detailed

questions they attached to their letter that we forwarded to you

and give us a response for the record, we will include their letter

in the record and your response to it.

Obviously, this is a matter that we will continue to pay attention

to in the future. It is important. I am pleased to hear of your own

strong commitment to it. And the members who wrote it, as I said

before, in their letter said: ‘‘We hope to rely on the Vice Chairman

to tackle the issue of diversity at the Federal Reserve.’’

I don’t think you should come away from this hearing without

some charge, and we would be happy to give you this one.

Mr. FERGUSON. As I have tried to indicate, it is a charge that I

have already taken up, and I will continue to work in this area.

Chairman SARBANES. Now, I wanted to just ask a couple of other

quick questions.

There are academic and trade publications that have suggested

that substantially reducing the number of checks written in the

country would result in substantial cost savings. The Federal Government now requires most of its payments to be made electronically. What is the Fed’s view about steps that might encourage a

more efficient payment system?

And in the course of perhaps moving toward increased electronic

transactions, what impact would that have on small community

banks? Would they be able to acquire and officially use any new

technology? Where is the Fed on this issue?

Mr. FERGUSON. As you mentioned, I Co-Chair one of the committees, an ad hoc committee that looks at the future with respect to

payment systems. I agree that there would be some benefit to moving from a heavily check-based, paper-intensive system to a more

electronic system. About 70 percent of our noncash payments now

are done with check. That has come down from about 80 percent

10 years ago or so.

As I said, there would be some savings. Fed staff has estimated

over the last 10 years that some numbers show 1 percent of GDP,

some numbers show 2 to 3 percent of GDP being spent, as a societal cost, with respect to the check payment operations.

Certainly, there are a couple of things that we can do and we

have done.

First, we have to make sure that our regulations do not stand

in the way of experimentation in the world of electronic payments.

And we recently have issued, for example, staff commentary to

Regulation E, which implements the Electronic Funds Transfer

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Act, to help businesses understand what can and cannot be done

under the EFT Act.

To answer your question with respect to small businesses—small

banks in particular—they will be capable of continuing to participate in the payment system even as it becomes more electronic.

Most EFT networks—the vast majority of them—have very open

rules that allow a lot of members and nonmembers to fully participate. There are also service bureaus that are specialized in working

with smaller institutions to help them build the kind of technical

capabilities that are required in this world of electronics.

I think, ultimately, the biggest challenge about moving from a

paper-based system to an electronic system has very much to do

with helping consumers to understand that many of the benefits

that they get out of a paper-based system, they could expect in an

electronic system, and some of the concerns they have with respect

to electronics I think can be overcome.

Whether we move from paper to electronics will depend not so

much on regulators and what we do, although there are some

things we can do. It will depend very much on the private sector

and market acceptance in the private sector.

Chairman SARBANES. Well, as we move in this direction, I am encouraged to hear that you are sensitive to this concern about the

small community banks and making sure that they still find a

place within the system and it is not structured disadvantageously

to them.

Actually, your final comment brings up the last question I want

to ask, and that goes back to this issue of financial literacy and

education, which you touched upon in your statement and which

Chairman Greenspan has spoken about on a number of occasions.

Senator Corzine has left, but this is an issue that he has raised

and I think it is a very important issue and it is one that we intend

to hold some hearings on later in the year to see what measures

can be developed to increase financial literacy and education.

I agree with you. It is not in lieu of or in place of appropriate

legislation or appropriate regulation. But it does seem to me that

there is a clear need for it out there. This was something Secretary

Summers had been working on at the Treasury Department during

his tenure there and I know that it is something that the Fed has

been addressing.

I don’t know if you have specific ideas now, but we would be interested in continuing to work with you. Is there anything that you

think should be placed on the agenda now with respect to financial

education?

Mr. FERGUSON. No. I think you are right to raise this as an important issue. Obviously, I think the Federal Reserve and others

can have a role in raising the awareness in our communities and

the importance of this matter. The Federal Reserve banks, the 12

of them, have very active outreach efforts.

I believe I can speak for myself since I am speaking in a personal

capacity here, and I would be happy to continue to interact with

you and the staff as we together think through what we can do in

the way of financial literacy. It can be very important in dealing

with a number of the consumer concerns that I know are on your

mind.

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Chairman SARBANES. Governor Ferguson, thank you very much.

It has been a very interesting hearing.

I have talked to Senator Gramm. We intend to schedule your

nomination for markup next week, on the 20th, when we are holding our hearing with the regulators to oversee the condition of the

financial system. It would be my intention in the course of that

hearing when we have a quorum and it is appropriate, to bring

your nomination up. Hopefully, if we can move on that agenda, we

can perhaps complete action in the Senate with respect to your

nomination before the 4th of July recess, although we don’t control

the Senate floor.

Mr. FERGUSON. I appreciate that.

Chairman SARBANES. We will try to move you out of the Committee promptly and get you into place. We know that Governor

Kelly is intending to resign, as I understand it. There are already,

what, two vacancies, I guess, at the Fed, without the vacancy that

would be created by his resignation.

We appreciate that Chairman Greenspan, although the country

thinks so, does not make these decisions all by himself, that he has

a Board that also participates in making the decisions. We hope to

give him some colleagues to help him out.

Thank you very much for coming today.

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

Chairman SARBANES. The hearing is adjourned.

[Whereupon, at 12:15 p.m., the hearing was adjourned.]

[Prepared statements, biographical sketch of the nominee, response to written questions, and additional material supplied for

the record follow:]

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PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

Before I introduce Governor Ferguson, I would like to take a moment to discuss

the agenda of the Banking, Housing, and Urban Affairs Committee in the coming

weeks.

The Banking Committee has a significant and pressing agenda of legislative matters that it will have to address in relatively short order. I have asked Senator

Bayh, the Chairman of the International Trade and Finance Subcommittee, to take

responsibility for the reauthorization of the Export-Import Bank, which expires on

September 30. A Subcommittee hearing on the reauthorization has been scheduled

for next Tuesday afternoon, June 19.

I have asked Senator Reed, the Chairman of the Housing and Transportation Subcommittee, to oversee the reauthorization of the Multifamily Assisted Housing Reform and Affordability Act, the so-called mark-to-market program for multifamily

housing, which also expires on September 30. A Subcommittee hearing on that legislation has been scheduled for next Tuesday morning.

I asked Senator Schumer, the Chairman of the Economic Policy Subcommittee, to

take responsibility for the reauthorization of the Defense Production Act, which expires on October 12. A Subcommittee hearing on that legislation may be scheduled

for later this month.

The Iran-Libya Sanctions Act (ILSA), which falls under the jurisdiction of the

Banking Committee, expires on August 5. I hope to hold a full Committee hearing

on that legislation in the last week of June. If the appropriate oversight hearings

on these expiring laws can be held this month, I would hope the Committee could

move to a markup of them after the July 4 recess.

In addition, the Committee reported out earlier this year a reauthorization of the

Export Administration Act by a 19–1 vote. That legislation has been strongly endorsed by the Administration and we hope to take it up on the Senate floor as soon

as the floor schedule permits. The Committee also reported out by voice vote earlier

this year a bill dealing with SEC fees and pay parity for SEC employees. The bill

was passed by the Senate and we are now awaiting action by the House on the bill.

I am hopeful the Congress will be able to complete action on this legislation.

Finally, last year the Committee passed the Manufactured Housing Improvement

Act. A technical correction, which is time sensitive, is needed to allow funds collected to run the program to be spent. I have consulted with the Administration,

Senator Gramm, and others on legislation that would make the technical fix. I hope

we can pass that legislation by unanimous consent on the Senate floor, perhaps this

evening, and that the House will then take it up and pass it as well.

Next Wednesday, June 20, the Committee will hold an oversight hearing on the

condition of the banking system. The witnesses will be Alan Greenspan, Chairman

of the Federal Reserve; Jerry Hawke, Comptroller of the Currency; Donna Tanoue,

Chair of the FDIC; and Ellen Seidman, Director of the Office of Thrift Supervision.

In addition, I expect the Committee to hold hearings this month on nominations

pending before the Committee.

Next month I anticipate the Committee will hold hearings on predatory lending,

the state of metropolitan and rural America, and financial privacy. Later this year

I expect the Committee to review, among other issues, money laundering, and financial education and literacy.

With that as a preface, I would now like to welcome before the Banking Committee this morning Roger Ferguson, who has been nominated by the President for

a full 14 year term as a Member of the Board of Governors of the Federal Reserve.

Governor Ferguson was originally appointed as a Member of the Federal Reserve

in 1997 to complete a term which expired on January 31, 2000. He was nominated

on September 14, 1999, by President Clinton for a full term as a Member of the

Federal Reserve Board, as well as Vice Chairman of the Federal Reserve. He was

confirmed by the Senate to be Vice Chairman of the Federal Reserve on September

29, 1999, and his term as Vice Chairman expires on October 5, 2003. No action was

taken in the last Congress on his nomination to be a Member of the Federal Reserve

Board.

Governor Ferguson was nominated by President Bush for a full term as a Member

of the Federal Reserve on April 24. Given the importance of his position, and the

period of time he has been awaiting action on his nomination, I thought it appropriate to schedule this nomination hearing today.

Governor Ferguson has both a law degree and a Ph.D. in economics from Harvard. After graduate school, he practiced law in New York from 1981–1984 with the

firm of Davis, Polk & Wardwell. He then joined the consulting firm of McKinsey &

Company, where he became a partner in 1992 and Director of Research and InforVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00033 Fmt 6621 Sfmt 6621 79540.TXT SBANK4 PsN: SBANK4
30

mation Systems. As I mentioned, he has served as a Member of the Board of Governors of the Federal Reserve since 1997, and as Vice Chairman since 1999.

By all accounts, Governor Ferguson has served with great distinction as a Member of the Federal Reserve. He chaired a working group of the Federal Open Market

Committee (FOMC) to review the FOMC’s disclosure practices. Acting on a working

group recommendation, the FOMC altered its disclosure practices, including deciding to issue a statement after every FOMC meeting announcing any action taken

by the FOMC and indicating the balance of risks facing the economy.

He oversaw the Fed’s preparations for the Year 2000 computer challenge. He also

served as Chairman of the Joint Year 2000 Council, sponsored by the Bank for

International Settlements, to provide guidance to the global financial supervisory

community as it prepared for the Year 2000. He recently completed service as

Chairman of the Group of Ten Working Party on Financial Sector Consolidation,

which examined the causes and potential effects of consolidation in the financial sector worldwide.

As Vice Chairman, he has served as the Federal Reserve’s Chief Administrative

Officer. He is currently Co-Chairman of the Federal Reserve’s Payments System Development Committee, which addresses public policy issues arising in connection

with developments in the Nation’s payments infrastructure.

Governor Ferguson has also been a careful observer of the economy, and he has

focused particularly on the role of information technology in productivity growth.

It is a commentary on the high professional standards he has set during his service on the Federal Reserve that he was nominated for a full term on the Board by

both President Clinton and President Bush. He mentioned at the time of his first

confirmation that the appointment of Andrew Brimmer to the Federal Reserve

served as an inspiration to him as a youth and focused his attention on serving on

the Federal Reserve as a career goal. Perhaps his service on the Federal Reserve

now will serve as an inspiration to other young people to pursue public service in

their careers.

I am pleased to welcome Governor Ferguson before the Banking Committee today.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM ROGER W. FERGUSON, JR.

Decline in Personal Saving Rate

Q.1. In a speech before the American Bankers Association, Federal

Reserve Board of Governors Member Edward Gramlich said that,

‘‘Higher rates of national savings are among the unsung heroes of

the good U.S. economic performance in the late 1990’s.’’ However,

the most recent data from the White House shows a substantial decline in personal savings from over 5 percent in 1996 to minus 0.9

percent today. Do you think that this is a serious problem, and if

so, what can we do to ameliorate it? What position does this place

Americans in if the economic slowdown worsens? Finally, what are

the effects of this decline with respect to national investment levels

and GDP growth?

A.1. In considering the decline in the personal saving rate, it is important to remember that it is national saving, not personal saving,

that provides the source of funds for investment spending in the

United States. Over the past several years, the national saving rate

has risen fairly steadily, increasing from about 15.6 percent of GDP

in 1993 to 18.3 percent of GDP in 2000. This increase in national

saving helped to fuel a boom in investment that raised productivity

and boosted GDP. The increase in national saving occurred despite

a steeply declining personal saving rate, as increases in Federal

and business saving more than offset declines in personal saving.

Foreign investment in the United States also increased significantly during the past decade, providing further support to domestic investment. The experience of the past several years shows that

national saving and investment can increase even when personal

saving is falling.

From a microeconomic perspective, the decline in the personal

saving rate, rather than reflecting a problem in the household sector, primarily reflects improving household balance sheets. The

boom in the U.S. stock market led households to increase personal

consumption more rapidly than income, and thereby lower personal

saving. The recent weakness in the stock market has reduced

household net worth relative to income, though this ratio remains

elevated. Moreover, household credit quality remains fairly good.

Thus, although there are risks, households entered this period of

economic slowing in a reasonably good financial position.

Japan

According to the Japanese banking industry’s own publicly disclosed numbers, about 30 percent of bank assets are classified by

examiners as having problems, which range from minor to serious.

Experience in the United States and other industrialized countries

indicates that if a bank has classified assets of 10 percent to 15

percent of total assets, it is in danger of becoming insolvent and

needs immediate supervisory action. The Finance Minister of

Japan is reported to have said a few months ago that ‘‘Japan’s fiscal situation is at the verge of collapse.’’ Data from various official

and academic sources indicate Japan’s government debt is well

over 100 percent of GDP and growing rapidly, and some experts believe Japan is reaching its financing limits.

40

Q.2.a. What is your assessment of the Japanese banking system?

A.2.a. As is widely recognized, Japanese banks have sizable asset

quality problems. These include high levels of disclosed nonperforming loans. The most recent figures indicate that ‘‘problem’’

loans, defined as nonperforming loans plus loans considered to be

at risk of becoming nonperforming, account for approximately 22

percent of Japanese GDP. The Japanese government has set aside

the equivalent of about $580 billion to help banks (14 percent of

2000 GDP). By contrast, the cost to U.S. taxpayers of the savings

and loan crisis amounted to $124 billion in 1989 dollars, or 2.2 percent of 1989 GDP. I have said in the past that the weakness of the

Japanese banking system creates a unique policy challenge for Japanese policymakers as they work to address the current condition

of their economy.

Q.2.b. What risk, if any, does the situation in Japan pose to both

U.S. financial institutions and the U.S. economy?

A.2.b. U.S. banks are aware of the asset quality problems at Japanese banks and manage their exposures accordingly. According to

Federal Reserve statistical releases, the cross-border exposure of

U.S. banks to Japanese entities has been reduced from 36 percent

of U.S. bank capital in December 1990 to 9 percent of U.S. bank

capital in December 2000. U.S. supervisory authorities are paying

careful attention to possible problems created by the activities of

Japanese banks that operate in U.S. markets.

Q.2.c. What actions should be taken to improve it?

A.2.c. The Japanese government has recently announced a plan to

reduce nonperforming loans at banks and lower bank exposure to

swings in equity prices. This program accords with the approach

that authorities have taken to date. This plan may have the potential to contribute to improving the soundness of the Japanese financial system. However, it is critically important that the implementation of the plan, or any similar proposals, be pursued very

aggressively.

Remittances

Q.3. It has recently come to my attention that approximately $24

billion leaves America on an annual basis in the form of remittances, sent mostly by Hispanics back to their countries of origin

which are mainly in Central and South America. However, only

around $20 billion arrives in these countries, meaning that $4 billion—over 16 percent—is absorbed in transaction costs. What are

the economic ramifications, in terms of efficiency and equity, of

such high transaction costs, and what do you believe should be

done, if anything, to reduce these transaction costs?

A.3. Both banks and nonbanks in the United States currently provide cross-border money transfer services to residents of the United

States. These services include traditional electronic wire transfers

between a U.S. bank and its overseas correspondent using telecommunications networks such as SWIFT; electronic money transfer services provided by nonbanks such as MoneyGram or Western

Union; ATM withdrawals overseas using international EFT netVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00044 Fmt 6602 Sfmt 6602 79540.TXT SBANK4 PsN: SBANK4
41

1 Examples of emerging networks are the International Remittance Network (IRnet) of the

World Council of Credit Unions, the City National Bank of New Jersey/Fonkoze system, and

RapidMoney. 2Manuel Orozco, ‘‘Family Remittances to Latin America: The Marketplace and Its Changing

Dynamics,’’ InterAmerican Dialogue, Washington, DC, May 2001.

works to debit the cardholders’ U.S. bank accounts; and other

emerging networks.

The fees associated with cross-border money transfers may include charges for initiating the transfer itself, charges to convert

U.S. dollars to a foreign currency, and possibly fees for the receipt

of funds by beneficiaries. Fees may also vary based on the service

provider and service selected, the point of origin, the point of destination, the amount of money being sent, and the method of funding the payment. Additional charges also may be imposed on beneficiaries by the receiving bank for delivery of funds. Charges will

vary depending on the amount of manual work required by the

bank as some wire transfers can involve significant, labor intensive

handling costs for banks. In the cross-border context, bank charges

for both consumer and corporate wire transfers tend to be higher

than the fees charged by nonbank money transmitters due to lower

volumes of activity, additional handling costs, and correspondent

banking fees.

The Federal Reserve Board has been working to explore further

whether general improvements could be made in handling crossborder funds transfers using the automated clearing house (ACH),

which is a system through which many U.S. consumers receive

electronic payroll deposits and Government benefits. The Federal

Reserve will launch in July a service for sending cross-border payments to Canada through the ACH and, then later this year, will

be investigating the feasibility of cross-border ACH payments with

Mexico and other countries. In addition, the National Automated

Clearing House Association (NACHA), through its Cross-Border

Council, is working on a global effort to improve cross-border ACH

payments, known as WATCH (Worldwide Automated Transaction

Clearing House).

The Federal Reserve has also discussed the issue of the cost, timing, and transparency of cross-border transfers with other central

banks, most recently through the G–10 central banks’ Committee

on Payment and Settlement Systems. The European Central Bank,

for example, is carefully monitoring this issue in the European context and has adopted policies to encourage greater private-sector

efficiency in cross-border retail transfers within Europe in advance

of the introduction of Euro notes and coins in 2002.

In general, consumers can choose from a variety of competing

alternatives for making cross-border money transfers, including

traditional bank wire transfer, nonbank money transmitters, international ATM/EFT networks, and other emerging electronic payment transfer services, as well as non-electronic methods such as

checks and money orders.1 Several of the cross-border remittance

services available to consumers appear to be accessible, easy to use,

and provide for rapid and efficient transfer services. As a result of

increasing competition, fees for making cross-border consumer

transfers also appear to be decreasing, although costs still vary significantly across companies and countries.2 Looking ahead, the proVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00045 Fmt 6602 Sfmt 6602 79540.TXT SBANK4 PsN: SBANK4
42

jected strong growth of overseas remittances is likely to continue

to increase competition and the number of alternatives for making

cross-border transfers.

Both technological change and increasing market demand for remittance services should have the effect of increasing competition

and lowering fees. The Federal Reserve, therefore, sees no need for

new legislation in this area at this time. Particularly in the crossborder cases, it would be all too easy for institutions to adjust to

additional regulatory burdens by reducing cross-border services

and raising exchange and other implicit charges to the disadvantage of U.S. residents. Instead, policies should aim to encourage

competition and new alternatives commensurate with growing market demand.

Consolidation

Q.4.a. Why have we not seen more mergers between banks and insurers after passage of the Financial Services Modernization Act?

Are you surprised that there have not been more mergers in the

financial services sector since the passage of this bill and do you

expect an acceleration of this pace over the next few years?

A.4.a. The provisions of the Financial Services Modernization Act

allowing broader financial powers and affiliations for financial

holding companies (FHC’s) have been effective for only a little more

than 1 year. During that time, more than 500 bank holding companies have elected FHC status. While there have been a few affiliations between these banking organizations and insurers during

the past year, many companies have chosen FHC status under the

Act in order to be able to engage in general insurance agency activities, which, prior to passage of the Act, were severely limited.

This use of the broader powers achieves one of the primary purposes of the Act, which is to increase competition in the provision

of financial services and allow more efficient delivery of a broad

range of financial products and services to customers.

The decision to merge with another company is a complex management decision that ultimately must be made by each company

based on its own consideration of the business advantages and

costs of the affiliation. Many companies appear to be still evaluating whether the affiliations enabled by the Act will enhance their

business plan and build on their core skills. Beginning insurance

agency activities while considering affiliation with an insurer represents a cautious approach that seems to reflect a testing by the

banking industry of the costs and benefits of conducting full insurance activities. As companies become more familiar and more comfortable with the risks of these new activities, it is possible that

broader affiliations will become more prevalent. In this regard,

there are a number of added complexities resulting from the

multistate regulatory regime applicable to insurance underwriting.

It is also noteworthy that many insurance underwriters are in

mutual form or in the process of demutualizing. Acquisitions involving mutual companies are very complex and the constraints

inherent in the mutual form typically limit the number and size of

potential partners.

There has been more affiliation activity between the banking and

securities industries. Five of the 10 largest and 11 of the 20 largest

43

securities broker-dealers are affiliated with banks. And with the

passage of the Financial Services Modernization Act, these securities firms are permitted to engage in full securities underwriting,

dealing and brokerage activities without the revenue and other

constraints previously applied under the Glass-Steagall Act to securities firms affiliated with banks.

Q.4.b. You have argued that consolidation in the financial services

sector has not caused significant efficiency gains or losses. Specifically, you have stated that overall operating efficiency gains from

consolidation are weak. If there are limited operating efficiencies to

be gained by consolidation, what are the benefits and the potential

risks of consolidation?

A.4.b. Studies that examine the effects of mergers and acquisitions

(M&A’s) on the operating efficiency of financial services providers

have generally found these effects to be quite weak. At the same

time, a desire to improve efficiency is one of the most frequently

cited motives for consolidation. These seemingly contradictory findings may reflect the differences between the past and the present,

between average experiences and individual firms’ experiences, between expected outcomes and realized outcomes, or between measured accounting costs and economic costs.

Most of the studies that find little or no evidence of efficiency

gains associated with M&A’s in the financial services sector predate the most recent wave of financial consolidation. Financial consolidation in the future may be quite different from that which has

taken place in the past, because of the effects of the Financial Services Modernization Act. Thus, even if the types of M&A’s that were

permissible prior to 1999 did not result in any significant efficiency

gains, future transactions could produce substantial gains as firms

take advantage of economies of scope that were not previously

available to them.

Even if mergers and acquisitions do not lead to significant improvements in operating efficiency, there may be other potential

benefits associated with these transactions. Consolidation, for example, can lead to a reduction in firm risk through geographic or

product diversification. M&A’s also may allow firms to increase

their size and/or scope quickly, which may enable them to better

serve the needs of their customers. At the retail level, however,

there is some evidence of loss of customers to smaller rivals in the

early post-merger years.

Ultimately, it is the responsibility of shareholders to determine

whether the potential and resultant benefits of consolidation are

real or imaginary. The regulators are responsible for monitoring

and managing potential social and economic risks. One risk is that

consolidation could lead to increased monopoly power, resulting in

harm to consumers of financial services. Bank regulators and the

Department of Justice examine the competitive effects of proposed

bank mergers and acquisitions, requiring divestitures as needed, in

order to minimize this risk. Consolidation could also result in the

formation of financial institutions that are so large and complex

that if they became troubled they might pose a risk to the safety

and soundness of the entire banking system. Bank regulators review proposed bank mergers and acquisitions for their effects of the

44

safety and soundness of the firms involved and monitor the financial condition of banking organizations. However, the regulators do

not have the authority to reject a merger or acquisition that meets

both competitive and safety and soundness standards just because

of the scale of the resulting organization.

General Economics/Budget/Tax Cut

Q.5. In your opinion, what is the impact of fiscal policy on longterm interest rates? Specifically, if we return to the era of deficit

spending, what will be the result on interest rates, private investment, and employment? What consequences will the tax cut have

for the Fed’s conduct of monetary policy?

A.5. Fiscal policy, the associated stance of the Federal Government

in credit markets, and the effect of fiscal policy on national saving

can have a significant effect on interest rates and the volume of

credit available to households and businesses. The decline of the

deficit and emergence of budget surpluses in the 1990’s very likely

relieved pressures on financial markets and freed up savings to be

used by households to finance new houses, autos, and other durable

goods and by businesses to acquire capital equipment. A reemergence of large and of persistent Federal budget deficits would be

likely to keep interest rates higher than they otherwise would be,

constrain the build-up of the capital stock, and hence impinge on

increases in productivity.

The Federal Reserve does not respond directly to tax cuts, or fiscal policy in general. Our goal is to maintain, as best we can, a

growth rate in aggregate demand that matches the economy’s ability to increase aggregate supply. Many factors, including developments with respect to fiscal policy, can potentially influence aggregate demand and should be factored into our judgment about the

likely course of the economy.

The Effect of Productivity on Long-Term

Economic Projections

Q.6. I have been told that productivity gains as little as one-tenth

of 1 percent below the projected 10 year rate would result in a reduction of CBO’s projected surplus by $250 billion over the 10 year

period. Thus, you can imagine my concern when it was reported

that productivity fell by –1.2 percent in the first quarter of 2001.

What are the implications of this with respect to the CBO budget

surplus projections?

A.6. The drop in nonfarm business sector output per hour in the

first quarter of 2001 that was reported recently by the Bureau of

Labor Statistics, comes on the heels of gains averaging nearly 3

percent (annual rate) over the preceding 5 years. The first quarter

decline reflected a 1 percent rate of increase in output for the sector that was more than matched by a 2.2 percent rate of increase

in hours worked. It should be noted that the rise in hours worked

last quarter reflected, in part, a surge in the volatile component for

self-employed workers (about 15 percent at an annual rate) that

clearly is not sustainable; excluding the hours of self-employed

workers (about 10 percent of the total), productivity was about flat

in the first quarter. In any event, a step down in productivity

45

growth is quite common when output growth slows, as it has since

the middle of last year.

The pattern of productivity performance in the second half of

2000 suggests that the underlying, or structural, rate of productivity growth is still quite robust. Strong growth of structural productivity would also be consistent with the anecdotal reports from

business leaders, who still see a sizable untapped reservoir of potential efficiency gains to be had from recent advances in information technology. In that context, it is worth noting that survey

results from the National Association of Purchasing Management

indicate that most firms feel they are far from fully achieving the

potential efficiencies that could ultimately be gained from applying

technology to their supply chain management.

I am cautiously optimistic that the rate of structural productivity

growth will be reasonably well maintained, and, if it is, the drop

in measured output per hour in the first quarter will not have significant implications for CBO’s long-run budget outlook.

Distributive Effects of the Economic Expansion

(and Slowdown)

Q.7. I am pleased to note that the current expansion has benefited

people who have traditionally been left out, such as minorities,

women, and youth. In May of 1992, the unemployment rate for African-Americans was 14.7 percent, today it is down to 8.0 percent;

the rate for those between 16 and 19 years of age was 20.1 percent,

now it is 13.6 percent; and the unemployment rate for women has

fallen from 7.1 percent to 4.3 percent. Do you believe that these

groups will be the first to suffer and feel the effects from the economic slowdown the hardest?

A.7. As you indicate, the current economic expansion has benefited

all segments of the population, including minorities, women, and

youth. Indeed, in 2000, the unemployment rates for African-Americans and Hispanics were at the lowest levels since unemployment

statistics for these minority groups were first collected in the early

1970’s. Similarly, the average unemployment rates last year for

women and teenagers were the lowest seen since the 1950’s. For

women, the unemployment rate in 2000 was roughly the same as

for men. For each of the other groups, however, unemployment

rates continue to run well above the unemployment rate for the

U.S. workforce as a whole, with the differential in 2000 ranging

from 13⁄4 percentage points for Hispanics to 31⁄2 percentage points

for African-Americans and 9 percentage points for teenagers.

Moreover, it unfortunately seems to be the case that minority

and youth unemployment rates tend to be more sensitive to cyclical

changes in the economy than unemployment in general. Economists point to a variety of reasons for this disparity, including

lower average levels of education and work experience for these

groups, as well as differences in the geographic proximity of jobs

to different segments of the population. Indeed, in the current situation, it does appear that unemployment rates for minorities and

teenagers have moved up a bit more quickly than for white nonHispanics, although it is difficult to get a clear picture of the relative changes in unemployment rates since the beginning of this

year because of the sampling variability in the monthly statistics

46

published by the Bureau of Labor Statistics. In particular, comparing the latest 2 month average for April and May of this year

with the fourth quarter of last year, the unemployment rate has

risen a bit less than 2 percentage point for white non-Hispanics,

and between 2 and 1 percentage point for African-Americans, Hispanics, and teenagers.

47

48

49

50

51

52

53

54

RESPONSE TO QUESTIONS OF EIGHT MEMBERS OF THE

HOUSE OF REPRESENTATIVES IN A LETTER DATED JUNE 12

FROM ROGER W. FERGUSON, JR.

Concerning Diversity in the Federal Reserve System

Questions are numbered according to their sequence in the letter.

Q.1.a. What has the Federal Reserve Board done in the past 8

years to address this problem? If no formal program or policy is in

place now, do you plan to implement one? When?

A.1.a. Even before the 1993 Report, the Federal Reserve Board had

programs in place to address diversity issues in the workplace.

Since the Report, the Board has taken a number of concrete steps

to strengthen our EEO and employment-diversity programs and

policies including:

• Instituting biannual EEO briefings to the Board.

• Holding officers, managers, and supervisors responsible through

an EEO component in performance objectives.

• Providing senior management with information on EEO trends

in each division during quarterly meetings.

• Conducting diversity training for all Board employees. Officers,

managers, and supervisors also receive mandatory EEO training.

• Expanding outreach programs to both inform minorities about

the Federal Reserve and to build a diverse pool of candidates for

positions.

• Reviewing our EEO and employment practices and evaluating

our programs against other public- and private-sector programs.

As to recent appointments, during my tenure the Board has appointed 10 division/office directors (the Board has 14 division/office

directors, and those staff positions are the most senior at the

Board). Five of these 10 director appointees are women, including

1 African-American and 1 Hispanic. In addition, we appointed 38

other officers, of whom 19 are women and 6 are minorities.

I am personally committed to achieving as diverse a workforce as

possible, recognizing that the Board faces challenges in reaching

that goal. Due to the highly technical nature of most of our professional positions—economist, financial analyst, computer specialist,

and attorney—the Board is often in competition with the private

sector for the most highly qualified job candidates. Because of salary constraints, the Board is often at a competitive disadvantage.

In spite of the challenges the Board faces in realizing our aspirations, the representation of women and minorities in our officer positions is roughly comparable to that for other Federal Government

agencies. We will continue our efforts to attract the most qualified

and diverse staff possible.

Q.1.b. Does the Federal Reserve continually evaluate the diversity

representation of its workforce, particularly in professional and/or

technical positions? If so, who is responsible for such an evaluation

and to whom does he/she report the results?

A.1.b. The EEO Programs Office, under the guidance of the EEO

Programs Director, continually evaluates the Board’s workforce.

55

The results are discussed with directors or senior staff members

during quarterly meetings.

The EEO Programs Director briefs the Board twice a year on

EEO matters and briefs the Committee on Board Affairs (which I

Chair) and the Senior Management Council (which consists of the

Directors of the Boards divisions and offices) as appropriate on

such matters.

Q.1.c. What are the current diversity statistics for the Federal Reserve System?

A.1.c. See the following Table.

For data on Federal Reserve System Officers, please see Table 2,

in the answer to question 2.c.

Q.1.d. Where and how does the Federal Reserve recruit minorities

and women for senior officer level positions?

A.1.d. Board official staff positions are generally filled internally,

although for the most senior staff positions we also consider external candidates. These individuals have generally come from within

the Board from grades 29 and 28, the highest staff grade levels.

Ongoing efforts attempt to increase the diversity of the pool of candidates to be appointed to the official staff.

Q.1.e. Does the Federal Reserve evaluate its methods of promoting

minorities and women, and if so, what have you found?

A.1.e. The Board monitors the results of its promotions with regard

to women and minorities. Progress has been made at the division

director and officer levels. As previously mentioned, during my tenure on the Board, 10 division/office directors have been appointed,

of whom 5 are women, including 1 African-American and 1 Hispanic. I believe this is a positive step.

Q.2.a. To your knowledge, have any of the Report’s recommendations been implemented? Why or why not?

A.2.a. In response to the Report, the Board strengthened its existing program in the following ways:

• The EEO evaluation for Federal Reserve Banks was changed to

require EEO performance reports by the Banks (which are evaluated by the Board).

• Annual meetings are held at each Reserve Bank with executive

Bank staff and Board staff to discuss the evaluation of EEO performance.

56

• All Federal Reserve Banks have EEO officers reporting directly

to the Bank’s first vice president or president.

• A conference is held annually at the Board for the Federal Reserve Bank EEO officers to address EEO performance evaluations and issues of common concern.

Campus recruitment by the Board for professional and for intern

positions has been expanded at predominately minority colleges

and universities. We also recruit more extensively at minority professional organizations and diversity job fairs. The Board also advertises in minority publications such as the Black Collegiate and

the HISPANIC magazine and on numerous diversity employment

Internet sites.

Among the schools and associations at which we conduct recruitment and outreach activities are Howard University, Morehouse,

Tuskegee, Florida A&M, University of Miami, Spelman, ClarkAtlanta, Xavier, Dillard, Southern at Baton Rouge, Florida International University, University of New Mexico, University of

Texas, Hispanic Association of Colleges and Universities, National

Black and Hispanic MBA Associations, National Association of

Urban Bankers, Society of Hispanic Engineers, and Society of

Mexican American Engineers and Scientists.

In conjunction with the Board’s summer intern program, minority candidates are solicited from INROADS and the Hispanic Association of Colleges and Universities.

Q.2.b. Does the Federal Reserve Board have a diversity recruitment, retention, and promotion strategy? If so, how do you explain

the decreasing numbers of professional and technical positions held

by Hispanics and Native Americans between 1990 and 2000?

A.2.b. Between 1990 and 2000, Hispanic representation in the professional and technical categories has increased slightly. Native

American representation in professional categories has also increased slightly. The Board is continually reviewing recruitment,

retention, and promotion to assess which initiatives are succeeding

and where improvement is needed. Moreover, the Board reviews

the EEO practices of other Government and private organizations

to obtain ideas for enhancing its programs.

Q.2.c. Should a follow-up investigation or study be conducted to investigate why women and minorities remain significantly underrepresented at the highest levels of the Federal Reserve and the

Federal Reserve Banks, and are almost completely excluded from

high salaries and promotions to senior level positions at the Federal Reserve?

A.2.c. We do not believe that any group is ‘‘almost completely excluded from high salaries and promotions.’’ Since 1992, the Board

and the Federal Reserve Banks have made progress in developing

and in promoting women and minorities to senior-level positions

and the Federal Reserve is committed to continue doing so (see the

following Table).

57

Q.3.a. Has that recommendation been implemented?

A.3.a. Yes. The Board continues to enhance its college recruitment

activities. We have made efforts such as hosting guest speakers;

working with deans of economic, computer science, math, and graduate programs; and participating in college fairs. The Board has

sponsored a Symposium for Historical Black Colleges and Hispanic

Association of Colleges and Universities. The agenda for the symposiums included presentations by the Board’s economic divisions

to make participants aware of employment opportunities at the

central bank. See the answer to question 2.a. for a more detailed

discussion of our minority recruitment and outreach activities.

Q.3.b. If so, how long has the Federal Reserve Board had this program in place and how effective has it been in recruiting and in

retaining minorities?

A.3.b. The Federal Reserve Board had such programs in place before 1993, and since then it has enhanced them. As a result of

these programs, minorities are well represented among summer interns, but our programs aimed at recruiting minorities for full-time

positions have had limited success to date. The success in recruiting summer interns is significant because summer interns are a

source of applicants for full-time positions. We will continue to pursue these programs. I recognize from my personal experience and

observation that it will likely be a multiyear effort before we see

results.

The Board also recruits qualified minority candidates through

advertising, referrals, unsolicited resumes, general college recruiting, web sites, and other recruitment techniques.

Q.4.a. How can the Federal Reserve be a credible ‘‘cop’’ if its own

practices of recruiting and promoting women and minorities into

top positions at the Federal Reserve are suspect?

58

A.4.a. I do not believe that our practices are suspect, and I am personally committed to ensuring that all employees of the Board are

fairly treated in all aspects of their employment. The Board has

credible recruitment and promotion practices, and we constantly review them to determine how they can be improved.

Q.4.b. I have heard rumors of a hostile work environment and of

intentional discrimination in the hiring and promotion of minorities

at the Federal Reserve. To your knowledge, is the work environment at the Federal Reserve hostile and if so, what steps have you

taken to address these problems?

A.4.b. I do not believe we have a hostile work environment at the

Federal Reserve Board. We would not tolerate it, and we have

strong policies with which to address violations. Should any indications of a hostile work environment come to my attention, I would

consult with experts, both internally and externally, to determine

the best course of action, and I would expect the Board to implement fully measures to respond to such allegations. I am strongly

opposed to a hostile work environment. I believe that all Federal

Reserve employees should be allowed to contribute fully to our mission, and they are expected to do so.

(59)

NOMINATIONS OF:

ANGELA M. ANTONELLI, OF VIRGINIA

TO BE CHIEF FINANCIAL OFFICER

U.S. DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

RONALD A. ROSENFELD, OF OKLAHOMA

TO BE PRESIDENT, GOVERNMENT NATIONAL

MORTGAGE ASSOCIATION (GINNIE MAE)

U.S. DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

AND

JENNIFER L. DORN, OF NEBRASKA

TO BE FEDERAL TRANSIT ADMINISTRATOR

U.S. DEPARTMENT OF TRANSPORTATION

THURSDAY, JUNE 21, 2001

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

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

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. I call our Committee hearing to order.

We just finished a vote, so we were delayed a little bit. We will

now move ahead.

This morning, the Senate Committee on Banking, Housing, and

Urban Affairs will be considering three nominations, the nominations of Angela Antonelli, to be the Chief Financial Officer of HUD,

Ronald Rosenfeld, to be President of Ginnie Mae, and Jennifer

Dorn, to be the Federal Transit Administrator.

We will consider the nominees in two panels. On the first panel,

we will take the HUD nominees, Ms. Antonelli and Mr. Rosenfeld.

And on the second panel, we will consider Jennifer Dorn to be the

Federal Transit Administrator.

I want to welcome these nominees. We are pleased they are able

to appear before us today. We understand the importance to the

60

Administration of filling its top positions. This Committee has

sought to move promptly on nominations as they are sent to us.

Often, the President announces an intent to nominate. There

seems to be something of an assumption, then, by the press and

the public that the nomination is before the Senate. But that is not

the case. The nomination is not before us until we actually get the

papers completed and that, regrettably, often seems to take quite

a period of time.

Ms. Antonelli, nominated to be HUD’s CFO, is the Director of

The Thomas A. Roe Institute for Economic Policy Studies of The

Heritage Foundation, where she has been overseeing the Foundation’s research on budget, tax, regulatory, labor, technology, and

environmental policy, a rather extensive brief, if I may say so.

She has worked at the General Accounting Office, as well as

worked 3 years for the Office of Management and Budget.

Ms. Antonelli is a Phi Beta Kappa graduate from Cornell University and received a Master’s in Public Administration from Princeton University, my alma mater, I might note.

The old school tie, I guess, here, Ms. Antonelli, so to speak.

[Laughter.]

Ronald Rosenfeld, nominated to be President of Ginnie Mae, has

spent much of his career on housing and real estate issues, as a

private developer and in HUD’s Office of Housing. Most recently,

he was Secretary of Commerce for the State of Oklahoma. He too

has an impressive educational background, having graduated with

a degree in economics from the University of Pennsylvania and a

law degree from Harvard, also an alma mater of mine.

We are covering all the bases here today.

[Laughter.]

Mr. Rosenfeld and Ms. Antonelli will be working on issues that

will be of great importance. Housing and urban affairs are issues

that I hope to explore further in this Committee. It is critical that

HUD have the needed resources and staffing, including qualified

people, to head the offices of HUD. Both the CFO of HUD and the

President of Ginnie Mae play very important roles in housing lowincome Americans.

The President of Ginnie Mae directs and provides oversight for

all of Ginnie Mae’s activities. Ginnie Mae guarantees more than

$11⁄2 trillion in mortgage-backed securities and has securitized 95

percent of all FHA and VA mortgages.

The Chief Financial Officer of HUD is responsible for overseeing a budget of over $30 billion and the performance of an agency that

works on issues ranging from public housing to homelessness to

community revitalization. In order to effectively serve people in

need, HUD obviously must have adequate financial systems, as

well as resources.

As CFO, Ms. Antonelli, I hope you will work to ensure that HUD

has the resources it needs to run its programs.

We have expressed some disappointment in this year’s HUD

budget and hope that HUD fights for additional resources next

year, and I am sure we will be communicating with the Secretary

and the Department about those issues.

We have Senators here to introduce the nominees and I am going

to turn to them.

61

Senator Nickles, we will turn to you to introduce Mr. Rosenfeld

and then we will turn to Senator Allen to introduce Ms. Antonelli.

STATEMENT OF SENATOR DON NICKLES

Senator NICKLES. Mr. Chairman, thank you very much.

I am delighted to be with you and Senator Stabenow to introduce

to the Committee my friend, Ron Rosenfeld, for the position to be

President of Ginnie Mae.

I have had the pleasure of knowing Ron Rosenfeld and his wife

Patty for the last 10 years. I got to know him when he worked in

the Bush Administration at the Department of Housing. He worked

in that capacity and two or three different capacities, as well as the

Department of Treasury. He did an outstanding job in that Administration.

Then I had the pleasure of getting to know Ron even better when

for the last few years he served as Secretary of Commerce for my

State, the State of Oklahoma, and did a fantastic job for Governor

Keating and did a fantastic job for our State.

As you mentioned, he has enormous experience in real estate and

finance. He has the background, the expertise, and the talent to do

an outstanding job as the President of Ginnie Mae.

I would urge the Committee to move expeditiously on his nomination. I thank you for his consideration and I think he will be a

real complement, not only to the Bush Administration, but, frankly,

to the country as well.

Chairman SARBANES. Thank you very much, Senator Nickles, for

those kind words.

I must say that one of the things that leaped out as I reviewed

Mr. Rosenfeld’s biography is how he ended up in Oklahoma. But

we will put that question to him.

[Laughter.]

Senator NICKLES. That was our gain.

Chairman SARBANES. Senator Allen.

STATEMENT OF GEORGE ALLEN

A U.S. SENATOR FROM THE STATE OF VIRGINIA

Senator ALLEN. Thank you, Mr. Chairman.

I appreciate your leadership in having this hearing. It is good to

see Senator Stabenow as well.

It is my pleasure to introduce to you a resident of the Commonwealth of Virginia, Angela Antonelli, as you stated earlier, who has

been nominated to be the CFO, Chief Financial Officer, for the U.S.

Department of Housing and Urban Development.

Angela has a distinguished record of public service and background in financial policy and management. You mentioned her

education. She obviously had a good education and made the right

decision by moving to the Commonwealth of Virginia in Fairfax.

So, I guess the Princeton education, Cornell education, do make

sure that those students learn the good places to live and we are

glad she chose Virginia.

In the business of HUD, being a CFO, one would look for someone’s background and where their experience is in the private sector, as well as in the Government sector. And having worked at the

OMB in the first Bush Presidency, I think will be very helpful. The

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fact that she worked for Lewin-VHI, Inc., which is a well respected

independent analysis group, as a senior consultant, matters.

Angela has worked as a Presidential Management Intern within

the GAO and obviously also with the Department of Labor, for the

U.S. Senate Committee on Labor and Human Resources, and the

Department of Education in New Jersey. Recently, in the last 5 or

6 years, she served as the Director for The Thomas A. Roe Institute

for Economic Policy Studies at The Heritage Foundation.

She has the qualifications, I submit, Mr. Chairman and Members

of the Committee, to handle the task, which is a very important

task—the responsibility for the development of the Department’s

budget, a $30 billion budget, financial management, the presentation of accurate financial information, management integrity, so

that when appropriations are being made, we understand that

there is credibility to that and whatever resources are appropriated

are handled in a way that is strategically meeting their plans, but

also serving the customers, the citizens.

Secretary Martinez has made it his number one priority to get

HUD’s house in order. And clearly, the CFO of HUD will be a leading role-player in addressing the weaknesses of the agency that

have been identified by the General Accounting Office, as well as

HUD’s own Inspector General.

So, Mr. Chairman and Members of the Committee, it is my sincere pleasure to present to you, and support the nomination of an

individual with integrity, character, and capabilities that will serve

as CFO of HUD. And Angela Antonelli surely does have the experience and the capabilities of getting HUD’s house in order.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Allen. It is

very helpful to the Committee to have your comments before us. I

know you have a busy schedule and we will certainly excuse you.

Now, I see Senator Wyden here. We are going to take Ms. Dorn

on the second panel. But Ron, you may want to come forward and

just introduce her right now. Our memories are long enough that

we will remember it when she comes up on the second panel.

STATEMENT OF RON WYDEN

A U.S. SENATOR FROM THE STATE OF OREGON

Senator WYDEN. Mr. Chairman, thank you very much for your

thoughtfulness and I will try to enhance Ms. Dorn’s candidacy with

brevity here.

First, I think that we all remember with great fondness Senator

Mark Hatfield. That is where I met Jenna Dorn. She was on Senator Hatfield’s staff for more than 5 years. And to get a sense of

her appreciation of humor, she just reminded me that the first 3

years really did not count because she was too green to know what

she was doing.

Chairman SARBANES. I thought everyone in Oregon was green.

[Laughter.]

Senator WYDEN. We are. Nicely put. Nicely put.

[Laughter.]

But she brings great savvy and expertise to her candidacy to

head the Federal Transit Administration. In addition to working

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with Senator Hatfield, she was in the Executive Branch. She was

also with the Red Cross.

What I like about Jenna so much is that she just embodies the

approach that you and I and so many have tried to have, and that

is that she is a problem-solver. She is not an ideologue. She is

somebody who gets people together of disparate views and solves

problems. And I think we all know how important infrastructure

issues are.

Jenna has been a long-time supporter of our pioneering efforts in

Oregon with what we call the Banfield Light Rail. I think that she

understands the needs of rural communities, as well as urban communities.

I would just wrap up by saying that rarely do I think somebody

is as well qualified as Jenna Dorn for a position like this. You see

it in her breadth of experience, in her ability to work with people,

and I am very hopeful that you and our colleagues on the Committee will report her out expeditiously.

Chairman SARBANES. Thank you very much. We appreciate it.

Senator WYDEN. Thank you.

Chairman SARBANES. We have been joined by Senator Stabenow

and Senator Carper. I would yield to them if they have an opening

statement that they would like to make.

COMMENTS OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman.

I would only say that I appreciate your holding this hearing and

I want to thank you for your leadership in moving ahead on important nominations to fill vacancies. I think it is a real credit to you

and your leadership that we have started the new Committee as

quickly as possible. I want to thank you for your leadership in

doing that and welcome the nominees and I look forward to hearing from them.

Chairman SARBANES. Senator Carper.

COMMENTS OF SENATOR THOMAS R. CARPER

Senator CARPER. I would only add to that, welcome to the families of the nominees, some of whom are obviously gathered here

today. It is a day of family pride, I am sure, and we are anxious

to begin their confirmation hearing. We welcome you all warmly to

the hearing.

I just want to say to those in the room who might have actually

been part of raising or steering the people who are the nominees

before us today, thank you for embedding in them the kind of values that would lead to public service. And to those of you who have

gone through the process of filling out all the disclosure forms that

have enabled you to sit at this table today, a special thank you.

I like to say for people who go through this process, just to go

through the disclosures alone, for you no purgatory. Straight to

heaven. So thank you. Welcome.

[Laughter.]

Chairman SARBANES. I want to just comment on something that

Senator Stabenow said.

We have been moving ahead with the hearings on the nominees

because we are anxious to help the Administration put its people

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into place. But the Committee has not yet been fully and properly

constituted, I regret to say. There has been a hang-up on the floor

in clearing the resolution.

So, we are not going to be able to move to the next step, which

would be the actual business of reporting out the nominees and

then getting them out to the Senate floor until that is resolved. But

we are obviously keeping a close eye on that and we are trying to

line things up as best we can.

We had originally hoped to markup Mr. Ferguson yesterday, for

the Federal Reserve Board. In fact, I announced the previous week

we were going to do that. That was on the assumption that the

Committee would be fully and properly constituted by that time.

That did not occur. So, we had to put that over. Hopefully, that will

happen in the near future and we will then move ahead with these

various nominees that are pending from the Administration.

I would like to say to the nominees, it is a standard procedure

of this Committee at the nomination hearings to swear in the

nominees. Therefore, I would like to ask you both to stand and I

will proceed to do that now.

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

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

help you God?

Ms. ANTONELLI. I do.

Mr. ROSENFELD. I do.

Chairman SARBANES. Do you agree to appear and testify before

any duly-constituted committee of the U.S. Senate?

Ms. ANTONELLI. Yes.

Mr. ROSENFELD. Yes.

Chairman SARBANES. Thank you very much.

Ms. Antonelli, we always give preference to the Chief Financial

Officers. So why don’t we hear from you first, and then we will go

to Mr. Rosenfeld. We will hear their opening statements, and then

we will go to the questions.

STATEMENT OF ANGELA M. ANTONELLI, OF VIRGINIA

TO BE CHIEF FINANCIAL OFFICER

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Ms. ANTONELLI. Thank you very much.

Chairman SARBANES. And if either of you has family here and

want to introduce them, we certainly invite you to do so.

Ms. ANTONELLI. Chairman Sarbanes, distinguished Members of

the Committee, my name is Angela Antonelli and I would like to

thank you for inviting me to appear before you today.

I would also like to thank Senator Allen for his time and his kind

words of introduction.

I am truly humbled and honored to be the choice of President

Bush and Secretary Mel Martinez to serve as the Chief Financial

Officer for the U.S. Department of Housing and Urban Development. If confirmed, I look forward to being part of the outstanding

team at HUD that will work with you and your staffs to address

the housing and economic development needs in our Nation’s communities.

As the daughter of Italian immigrants, I cannot fully convey to

you what it means for me to be here today. A day like today fills

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me with gratitude and love for this country and the freedom and

opportunity that it provides. But you cannot begin to imagine what

it means to my mother, Anna Savini, who is here with me today.

She is sitting right behind me.

To her, I am the reason she came to the United States and sacrificed so much and started all over. Also, my husband Michael,

who is also sitting behind me, is here with me today.

When I told her I was asked by the President to serve, she simply said, ‘‘It is the Dream.’’ If you are born poor, you do not have

to remain poor; your life’s work preordained. No, in the United

States—a land where freedom and opportunity flourish—you can

dream and through hard work and strength of character achieve

those dreams. My career in public service is based on a sincere desire to make sure that future generations always see the United

States as a land where freedom and opportunity flourish and

dreams for a better life can come true.

An important part of the American Dream is a home to call your

own and a community of caring people of which you can be a part.

I look forward to being a part of HUD’s mission to preserve the

Dream—to empower communities and their residents to improve

themselves by reducing homelessness, creating opportunities for

homeownership, and encouraging economic development.

As Secretary Martinez has stated repeatedly, the first priority

will be to put HUD’s own house in order. The CFO has responsibility for the development of the Department’s budget and for

financial management, the presentation of accurate financial information, management integrity and departmental strategic planning. If confirmed as CFO, I intend to work closely with my colleagues at HUD to address the institutional weaknesses identified

by the U.S. General Accounting Office and HUD’s Inspector General. These weaknesses diminish the ability of the Department to

achieve its mission.

To the position of Chief Financial Officer, I bring 15 years of policy, budget and management experience. I have worked with and

for many of the organizations I will be working closely with to

carry out my responsibilities as CFO, including Congress, the GAO

and the Office of Management and Budget. I will be able to bring

my experiences working for the Federal Government and State government, as well as the private and nonprofit sectors, to contribute

to the effective management and leadership of HUD.

Congress and the public are aware of the problems that have

plagued HUD. Although GAO has removed the Department as a

whole from its ‘‘high-risk’’ list, there are still many activities that

remain at risk. Under the leadership of Secretary Mel Martinez, I

look forward to working with Congress in a bipartisan manner to

address these issues, restore credibility, and do a better job with

the tax dollars that hard-working Americans trust to us.

I am deeply grateful for the confidence President Bush and Secretary Martinez have placed in me. I take the responsibilities and

the challenges ahead very seriously.

Mr. Chairman and Members of the Committee, thank you for

your consideration of my nomination and the opportunity to appear

before you today. I would be pleased to answer any questions that

you may have.

66

Thank you very much.

Chairman SARBANES. Thank you very much, Ms. Antonelli.

Mr. Rosenfeld.

STATEMENT OF RONALD A. ROSENFELD, OF OKLAHOMA

TO BE PRESIDENT, GOVERNMENT NATIONAL

MORTGAGE ASSOCIATION (GINNIE MAE)

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Mr. ROSENFELD. Mr. Chairman, first, I would like to introduce

my wife Patty, who is sitting right behind me. Patty, would you

stand up, please?

I would also like to thank Senator Nickles for his kind words of

introduction.

Mr. Chairman and distinguished Members of the Committee,

thank you for the opportunity to appear before you today. I would

also like to express my deep appreciation to President George W.

Bush for his confidence in me, as evidenced by his nominating me

to be the President of Ginnie Mae, the Government National Mortgage Association. In addition, I would like to indicate my gratitude

to Secretary Mel Martinez for selecting me to serve in a strategic

position on his team.

Upon learning of the President’s intent to nominate me, I called

my father, who is 92 years old, to share the good news. His response was, ‘‘Not bad for an immigrant’s son.’’ If the truth be

known, he was an illegal immigrant who managed to elude our immigration officers for a few years, but was ultimately caught and

deported. His incredible good fortune was that he was deported to

Canada rather than to Eastern Europe from where he came. He

subsequently met my mother, who had legally immigrated from

Eastern Europe, and they were married in 1935. At the time of

their marriage they had a net worth of $100. The success of our

family cannot be explained by ‘‘compound interest.’’ But rather,

that success is attributable to hard work, opportunity, and giving

their only child the educational opportunities they never had.

The story of my family is wonderful, but it is not unique. With

slight variations, it is the story of the Martinez family, the Jackson

family, and the Bernardi family. Each of these family names is now

preceded by the title of Secretary, Deputy Secretary, and Assistant

Secretary. These people, together with John Weicher, Dick Hauser,

and myself, if confirmed, and others yet to be selected, will be the

people to whom President George W. Bush has entrusted the leadership of the Department of Housing and Urban Development.

Only in America!

I am honored to be chosen by President George W. Bush and Secretary Martinez to be the President of Ginnie Mae. If I am confirmed, I will strive with all my energies and abilities to meet their

every expectation. I am sure that like most every other Presidential

appointee who has appeared before this distinguished body, I never

dreamed of having the privilege of serving our country in this way.

But having said that, I believe I bring to this opportunity a background and a level of experience that is most appropriate.

Upon graduating from law school, I chose not to practice law but

rather, to become an undercapitalized homebuilder. Actually, being

undercapitalized was not a choice but just a reality. There is simVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00070 Fmt 6601 Sfmt 6601 79540.TXT SBANK4 PsN: SBANK4
67

ply no better way to learn about the importance of credit than by

not having it, and there is no better way to understand the significance of the continuity of credit than by having your customers not

be able to purchase your product.

After 15 years in the real estate development business, which

had expanded into multifamily and commercial development, I became a partner in a regional investment banking firm. This was

my introduction to capital markets and to the world of Wall Street.

With the backdrop of the oil bust and the savings and loan crisis,

I joined HUD in 1989, as Deputy Assistant Secretary for Single

Family Housing. This historically obscure post had the challenge of

disposing of 70,000 single-family foreclosed houses—a daunting

task in traumatic times. I then moved on to become the General

Deputy Assistant Secretary of Housing—FHA Commissioner.

Subsequent to that, I was asked to represent the Administration

in its relations with the real estate industry while serving at the

Department of the Treasury. Throughout this entire period, markets were not functioning and our real estate credit system was in

shambles. Fortunately, time and prudent stewardship have a way

of resolving problems and after a few years, order was restored.

Thereafter, my wife and I went to Oklahoma to help a friend who

had just been elected governor. We intended to stay about 4

months and we actually wound up staying 4 years as a result of

the Oklahoma City bombing. After that horrific event, Governor

Keating asked if I would help him enhance the economic viability

of the State as the Secretary of Commerce. In that capacity, I

learned about the challenges of living in small towns, rural areas,

and underserved markets.

One might reasonably ask—what does that background and

those experiences have to do with Ginnie Mae? The answer is everything. Ginnie Mae’s mission is to help provide affordable homeownership opportunities for all Americans by facilitating efficient

secondary market activities for Federally issued or guaranteed

mortgages, thus linking the capital and Federal housing markets.

In somewhat clearer terms, Ginnie Mae is about credit, capital, and

providing resources to underserved areas.

Historically, Ginnie Mae has been a very well-run organization.

As President, I will be guided by the old medical adage, ‘‘Do No

Harm,’’ as well as my own desire to do good. Most of us in this

chamber know the thrill and the significance of owning our first

home yet there are many Americans who have not yet had that experience. They deserve a chance and it is the role of Ginnie Mae

to help make that possible.

Secretary Martinez has made it a cornerstone of his administration to expand homeownership for low- and moderate-income families. I believe that Ginnie Mae, together with its partners in the

private sector, as well as FHA, the Veterans Administration, and

the Rural Housing Service, can do exactly that. I welcome the

chance to be a participant in this very worthwhile endeavor.

Thank you for your consideration.

Chairman SARBANES. I thank both of you for very thoughtful

statements.

Senator Allard is with us and I yield to him if he wants to make

a statement at the outset before we go to questions.

68

COMMENTS OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman.

I have an opening statement I want to submit for the record.

Chairman SARBANES. It will certainly be included in the record.

First of all, let me say that both of your statements resonated

with me since I am also the child of immigrant parents. Otherwise,

I am not sure that I would be entitled to preside at this hearing

here today.

[Laughter.]

Ms. Antonelli, let me put a couple of questions to you first.

In 1998, you wrote an article—actually, you have written quite

a number of articles—in which you stated that HUD had problems

with management, waste, and abuse.

As I think you all probably know, HUD has made significant

progress in overcoming the problems of its past. In 1999, the GAO

reported that HUD had made credible progress in overhauling its

operations under the HUD 2020 Management Reform Plan implemented by then-Secretary Cuomo. Two years later, GAO found that

HUD had continued to make progress in addressing these problems

and at that time, GAO took HUD off its list of high-risk agencies.

One area that the GAO found marked improvements in was its

information and financial management systems. They reported:

‘‘HUD has taken actions to improve and strengthen the selection,

control and evaluation of information technology projects. In addition, HUD has reduced the number of financial management systems that are not in compliance with Federal regulations.’’

In October of last year, GAO found that HUD’s strategy should

help HUD continue to make progress in resolving its remaining

material weaknesses.

Now these reports do not suggest that there are not still problems and we recognize that there are still problems. But it does appear that HUD is on the right track in improving its management

and its systems.

As the CFO, you will oversee many of the systems that the GAO

report addressed. What is your intention with respect to following

the General Accounting Office’s recommendations in continuing

with the HUD 2020 Management Reform Plan that are helping to

strengthen the Department?

Ms. ANTONELLI. Senator, addressing the remaining management

weaknesses that have been identified by the U.S. General Accounting Office is a top priority for Secretary Martinez and it is a top

priority for me if confirmed as CFO.

There has been a tremendous amount of progress and I know

that in the short time that I have been meeting with the team at

HUD, there are a lot of outstanding people who have been doing

tremendous work to significantly improve the quality of the financial systems that exist at the Department.

It is true that GAO has removed the Department as a whole

from the high-risk list. But as you know, there are still a number

of activities that remain at risk. Those material weaknesses will

again remain a high priority. We will continue to track the recommendations of the General Accounting Office and of HUD’s Inspector General.

69

Again, in this Administration, and under Secretary Martinez, it

is among the highest priorities to continue to address the remaining weaknesses.

Chairman SARBANES. My time is running down here. I am going

to yield here in a moment to Senator Allard.

Let me put a question to you, Mr. Rosenfeld. Later, I will come

back. I have some other follow-up questions that I want to ask Ms.

Antonelli.

First, let me just note for the record your extensive experience

in the housing and finance field in general, and the time you spent

at HUD in particular. You have really held nearly every position

at the Federal Housing Administration, aside from Commissioner— Deputy Assistant Secretary for Single Family Housing, Acting Deputy Assistant Secretary for Multifamily Housing, and the Acting

General Deputy.

I think given the close relationship of Ginnie Mae to FHA, this

kind of intimate knowledge that you gained from your previous

service at HUD should certainly help you in carrying forward your

responsibilities in this position.

You state in your questionnaire talking about the late 1980’s and

early 1990’s: ‘‘During a period of significant decline in real estate

values, many private sector participants in the mortgage business

decided, quite appropriately from their standpoint, not to continue

their primary business activity. This created a downward spiral in

values and further exacerbated the problem. During this entire period, Ginnie Mae conducted business as usual and was a strong

barricade against even greater credit problems.’’ Am I to draw from this statement belief on your part that there

is a strong role for Ginnie Mae to play in the marketplace?

Mr. ROSENFELD. Mr. Chairman, I believe there is. I believe that

a lender of last resort is an imperative phenomenon in our credit

system. And I think that, certainly in the area of housing, the Government housing program, as well as Ginnie Mae, serve that role,

which is very significant.

I remember as a young man not being able to believe the stories

of the Depression in terms of how values could decline.

Quite frankly, it has been an enormously educational experience,

not necessarily a pleasant one, but certainly educational, to be a

participant in the credit problems in the late 1980’s and the early

1990’s. It certainly has enhanced my belief that a lender of last resort is a critical component of our economic system.

Chairman SARBANES. Thank you.

Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

I want to first recognize the statements where both of you indicated that you came from very humble roots. I think that speaks

loads for freedom. It speaks a lot for what we have here in America, and obviously, both of you hold that very dear. It is good to

hear that refreshing type of testimony.

Ms. Antonelli, I want to follow up a little on the material weaknesses and internal controls that were alluded to by the Chairman.

Do you have plans to shore up some of these internal controls?

Ms. ANTONELLI. Senator Allard, absolutely. At this point, I have

been briefed on a number of these issues and I am learning about

70

these issues. But, clearly, there are several management challenges

that the Department does continue to face. Some of these challenges include issues relating to trying to reduce subsidy overpayments, improve the utilization of funds, and generally make sure

that the financial systems that are in place are complying with

statutory standards that have been established. And also, to just

make sure that staff resources are allocated effectively, not only

within the Chief Financial Officer’s office, but also throughout the

Department.

So, I will, again, if confirmed as CFO, be working very closely

with the senior team at HUD, as well as the outstanding staff in

the Chief Financial Officer’s office to address many of these management weaknesses that exist. And the types that I just described

are some that most directly affect the responsibilities of the Chief

Financial Officer.

Senator ALLARD. Congress passed the General Results and Performance Act and I hope that you can follow wherever we asked

that we set up specific objectives within the departments and then

measure results in measurable terms. I believe you have had some

experience with that type of management approach. Would you

comment further on that?

Ms. ANTONELLI. The Government Performance and Results Act,

which was passed in 1993, the implementation began in 1997, and

so we are about 4 years into the implementation, I think the concept of asking a very fundamental question about the extent to

which Federal programs are producing results and holding them

accountable for producing results is a very reasonable thing to do.

The Department of Housing and Urban Development has a strategic plan, like all agencies do, under the requirements of the Act,

and an annual performance plan that they issue.

This is something that again, in my role as CFO, if confirmed,

I will be reviewing the strategic plan and the performance plan,

and in the context of the budget development process, continuing

the efforts to link more closely the budget and funding to performance and identifying effective performance measures and ways that

we can effectively measure performance and report on that in the

context of our annual budgets.

Senator ALLARD. Now the General Accounting Office has found that HUD has enormous unspent balances. More than $108 billion

remain unspent.

Ms. ANTONELLI. Right.

Senator ALLARD. Of that amount, more than $12 billion is not

even allocated. What do you plan to do to reverse this trend?

Ms. ANTONELLI. Well, at this point, you are absolutely right. The

unspent balance issue is a significant one. It does constitute a significant amount of money. Some of those unspent balances are

long-standing issues. And these are weaknesses that have been

identified by GAO, IG, and others. It definitely is a priority of the

Secretary, as I understand it, to address the issue of the unexpended balances.

Currently, my understanding is that the Department is in the

process of reviewing specific programs that have these types of unexpended balances to better understand why they exist and what,

in fact, can be done under existing law and regulation to perhaps

71

address this problem, make sure the funds can be more effectively

allocated to serve people who currently cannot be served for a variety of reasons, including this particular problem.

Obviously, to the extent this problem exists, it to some degree

does undermine the credibility in terms of budget justifications to

ask perhaps in some cases for increases of funds for programs

where these types of unexpended balances remain a problem. It is

a material weakness. It is a problem that is considered very serious

and it is a priority of the Secretary’s to address it. And as CFO,

I would certainly do everything to be able to support that effort.

Senator ALLARD. Mr. Chairman, I see my time is coming to a

close here. I have a couple more questions for Mr. Rosenfeld. Will

there be another opportunity to ask questions?

Chairman SARBANES. Yes, we are going to do another round.

Senator ALLARD. Very good. Thank you.

Chairman SARBANES. Senator Reed, I notice that Senator Smith

has come, and I know he wants to make a statement of introduction for Ms. Dorn, who is on the next panel.

Gordon, why don’t you come on up and do that now. I know you

have other engagements.

STATEMENT OF GORDON SMITH

A U.S. SENATOR FROM THE STATE OF OREGON

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

courtesy. I am helping Joe Biden with all these nominations down

in Foreign Relations and we miss your presence there, but know

you are Chairing this great Committee as well.

Mr. Chairman, colleagues of the Banking Committee, I regard it

as a high privilege and pleasure to be here to introduce a friend

and a fellow Oregonian, Jenna Dorn, whom President Bush has

nominated to be the head of the Federal Transit Administration.

She is joined by her two wonderful sons, Ben and Jon.

Chairman SARBANES. It is a excuse to get out of school. Or is

school over for those guys?

[Laughter.]

Senator SMITH. I know Ben and Jon very well and they look for

that excuse, I think.

Chairman SARBANES. Yes.

[Laughter.]

Senator SMITH. Jenna and I share something in common. She

began her career working for Mark Hatfield. Like her, I have

learned abundantly from Mark Hatfield and am given the privilege

of trying to fill his place in the U.S. Senate. Both of us maintain

a strong commitment to his ideals and friendship with him.

But Jenna has since that time broadened her professional experience in remarkable ways. She has served in the Government as an

Associate Deputy Secretary of the U.S. Department of Transportation under President Reagan and Assistant Secretary for Policy

for the U.S. Department of Labor under President Bush. After that,

she worked with Elizabeth Dole at the American Red Cross as its

Senior Vice President, and then as President of The National

Health Museum. So, she has served with distinction wherever she

has gone. And she has a broad knowledge of Capitol Hill that will

serve the country, the Administration, and the Congress well.

72

I have no reservation in heartily recommending her to you and

to encourage that she be passed to the floor and confirmed in this

responsibility.

So it is with pride and appreciation that I am here in her behalf.

Mr. Chairman, I thank you for your courtesy.

Chairman SARBANES. Thank you very much, Senator Smith. We

appreciate your coming and we certainly value the kind remarks

you have made about Ms. Dorn.

Senator Reed.

COMMENTS OF SENATOR JACK REED

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

Let me welcome the nominees. I have had the chance to meet

with them. They are extraordinarily talented, experienced, and patriotic, and we thank them for their willingness to serve.

Mr. Rosenfeld, if I can jump right into the details of your job. But

given your experience previously with FHA, you bring a lot of perspective to your proposed job at Ginnie Mae.

The President’s budget for fiscal year 2002 will call for an increase in premiums for FHA multifamily insurance. This increase

will raise the cost of using the program, reduce affordability and

may, in fact, preempt some projects which would be deemed economically infeasible.

In general, the new FHA apartments are affordable to working

people at about 100 percent of median income. I wonder if you have

any thoughts on this proposal.

Mr. ROSENFELD. Well, quite frankly, Senator Reed, my reaction

to the proposal relates to its effect on Ginnie Mae. And if I am confirmed, that will, of course, become an issue that will be relevant

to me. My sense is that to the extent that apartment construction

is decreased, that would suggest there will be less securitization by

Ginnie Mae of those kinds of insured loans.

But I am sure the President has his reasons and the Secretary.

So, I would defer the policy issue in the consideration of that to the

President and the Secretary.

Senator REED. But as the head of Ginnie Mae, you have at least

the opportunity to try to react to that policy and still continue to

fund multifamily developments that will reach moderate-income

Americans. Would you try to respond in an affirmative way to continue the construction of these projects?

Mr. ROSENFELD. If I were asked, and I indicate that I have not

been asked at this point, but if I were asked, I am clearly in favor

of enhancing opportunities to create apartments for low- and moderate-income people.

However, I also understand the significance of running a prudent

enterprise in a fiscally responsible manner. And to the extent that

premiums need to be raised to ensure the fiscal responsibility of an

enterprise, that may have to occur.

Senator REED. Thank you, Mr. Rosenfeld.

Ms. Antonelli, the budget that is being presented for HUD this

year has, in my view, some critical gaps. There is a 25 percent cut

to the Public Housing Capital Fund, termination of both the Public

Housing Drug Elimination Program and the Rural Housing and

Economic Development Program. This inhibits HUD’s ability to

73

perform its work and significantly inhibits the quality of life of

many residents of HUD projects. You will have a critical role as the

CFO. Can you give us some assurances that you will try to reverse

these cuts and try to provide for adequate funding for some of the

core programs at HUD?

Ms. ANTONELLI. Senator, obviously this budget proposal that has

been put forward by the Department, I have not been involved in

a significant way. But I will emphasize to you that, if confirmed as

CFO, I will uphold the policies of the President of the United

States, President George Bush, and Secretary Mel Martinez, in the

context of the development of the budget each year.

These are the proposals that have been put forward and we look

forward, the team at HUD, as we go through the finalization of this

year’s appropriation process and the budget process each and every

year, to work very closely with you and the other Members of Congress and your staffs to engage in a dialogue on these types of programs and come to agreement, hopefully at the end of the day,

about what are the right things for the Department of Housing and

Urban Development to be doing and what are the most important

priorities.

But certainly I support the President and I support Secretary

Martinez. But as a team, we will work closely with Congress on

these types of budget issues.

Senator REED. I guess we all assume, appropriately so, that once

a decision has been made, that of course you will be supportive of

the leadership. But within the context of forming those decisions,

you will have a very critical voice. And one would hope that you

would look carefully at these programs and advocate strenuously

for programs that you believe are important which might otherwise, for reasons unrelated to the needs of clients of HUD, be sacrificed. I would hope that you do that.

Ms. ANTONELLI. I will do the best I can. Thank you.

Senator REED. Thank you, Mr. Chairman.

Chairman SARBANES. I would like to follow up on the very question Senator Reed was asking because I think it is important.

Looking over your writings, I don’t think it would be unreasonable for one to have some concern that you would seek to cut the

HUD programs, that you would come in with a mindset toward reducing these programs.

I am really prompted in part by something Senator Wyden said

about Ms. Dorn when he said that she was a problem-solver, not

an ideologue. And I would like to pursue that very point with you.

How fixed are you in your own view, not now, coming within the

cocoon of the President or the Secretary’s decision, how fixed are

you in your own view about these HUD programs?

HUD has been given a mission and needs resources to carry out

that mission. How do you square that?

Ms. ANTONELLI. Well, Senator, in the context of the work and the

research that I have done, and previous positions that I have held,

I would like to suggest to you that while some might be considered

to be, and one might be considered an ideologue, I would argue

that in many respects, much of the work that I have done is, in

fact, with very much the intention of stimulating a public policy

74

debate, in an attempt to try to help solve problems, to identify

problems and to solve problems.

So in the context of HUD’s programs, I will not present myself

as a detailed expert on these programs. But I certainly believe in

looking at these programs very carefully and assessing.

Secretary Martinez has said on numerous occasions that HUD

consists of several hundred programs. We should look at those programs. We should look at each and every one of them very carefully and make sure that we are accomplishing effectively HUD’s

core mission. And to the extent that there are areas where there

is duplication or inefficiencies, that we could work better with other

agencies to deliver services more effectively, and that consolidation

can occur.

I think one should be open to the possibility that things can be

done more efficiently, more effectively, and that in some cases big

is not always better and more is not always better.

You can do a better job by taking what you have and trying to,

again, make it work more efficiently and effectively.

Chairman SARBANES. Well, now, you have written two executive

summaries, one entitled, ‘‘Five Good Reasons to Close Down the

Department of Commerce,’’ and another one called, ‘‘Five Reasons

to Pull the Plug on the Department of Energy.’’ I gather you like

to think in terms of five.

[Laughter.]

Senator REED. She should be in the Defense Department, then,

the Pentagon.

[Laughter.]

Chairman SARBANES. Now, fortunately for you, this did not get

to the Department of Housing and Urban Development, I guess.

[Laughter.]

So you do not find yourself in the awkward position which our

former colleague, Senator Spencer Abraham’s found himself when

he was nominated to be the Secretary of the Department of Energy,

since he had earlier, while he was here on the Hill, called for the

abolition of the Department of Energy.

That all seems to have faded from his mind now, I might note.

[Laughter.]

But this again leads me to put the question perhaps in a different way, whether you come into this job with a kind of mission

in your own mind to reduce the Department. I want to distinguish

that from trying to gain efficiencies, to eliminate this waste and

mismanagement to which you referred back in 1988 and to which

I made reference, and with which we have all been struggling and

trying to do.

I am trying to get some sense of what your mission is and how

open you are in your thinking, how practical and pragmatic you are

going to be in your thinking as you approach these problems.

Ms. ANTONELLI. Senator, I can assure you that I am very openminded and willing to consider all perspectives and I think I do in

the context of the work that I have done.

In both of those pieces that you cited, much of what is discussed

in those pieces really highlight many of the concerns at the time

that piece was written, at the early stages of the implementation

of the Results Act, the departments’ strategic plans, their first anVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 79540.TXT SBANK4 PsN: SBANK4
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nual performance plans, which were rated by Congress to be extremely poor.

There was also legislative proposals from, I believe, the House

Budget Committee, Chairman John Kasich, to look at perhaps closing down these departments.

But in the context of what was written there, much of what is

encompassed in those papers really reflect very harsh criticisms

that have been put forward on numerous occasions by many oversight departments like GAO or by the departments’ own Inspector

General, expressing serious concerns about continued wasteful

spending and management deficiencies, inability to determine

whether or not results are being achieved for the money that is

being spent in those departments.

These pieces were meant to, again, contribute to the debate that

was being held at the time and I think still continues today and

is embodied in a statute like the Government Performance and Results Act that we need to take a critical look at these programs and

in all honesty assess really whether they are working, as well as

they should and what are the options to try to improve these programs or address these problems.

And look not only within an agency, but also across the entire

Government, to the extent that there is significant duplication and

overlap of programs across departments, to evaluate whether there

are opportunities for consolidation.

In the conclusion of my Department of Commerce paper, I state

very clearly that while one might think about a situation where

there would not be a Department of Commerce, that in and of itself

does not suggest that every program within Commerce is not

worthwhile. It simply suggests that maybe there is some restructuring that one might want to consider and there are programs

within that Department that are very valuable, that are certainly

justifiable, and should be funded.

It is just a question of how Government ultimately is going to be

organized most effectively to deliver those services.

Chairman SARBANES. Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

Well, I hope, Mr. Chairman, we have not gotten to the point

where if we advocate anything other than bigger bureaucracy and

more power in Washington, somehow we are an ideologue.

I think that we need to continue to look at these programs and

make sure the taxpayer dollars are being well spent and that whoever the clients are for those programs are being well served.

I hope that we continue to search out ways in which we continually can improve the programs so that they do a better job of serving those clientele. And if there is a way to save taxpayer dollars

in doing that, I hope that we seek out those solutions.

Mr. Rosenfeld, during your tenure in this appointed position, I

think there needs to be some key performance goals on what you

want to accomplish. How will the Congress know whether or not

you have accomplished them?

Mr. ROSENFELD. Senator Allard, in the case of Ginnie Mae, the

performance goals that may exist or that we may establish are relatively easy to determine because they are almost numerical in nature. We operate—I should say, if I am confirmed, we will operate

76

an enterprise that has a relatively small product line. Namely, the

securitization of Federally insured mortgages.

We hope to, again, if confirmed, look at other opportunities to

perhaps modestly expand that product line if, in fact, it is prudent

and can be done in a business-like fashion, and will, in fact, become

a significant benefit to the public.

I think that—again, if confirmed—we will set forth the goals that

we have and they will be pretty transparent because there is really

no way to hide from the numbers.

Senator ALLARD. Unlike Fannie Mae and Freddie Mac, Ginnie

Mae securities are backed by the full faith and credit of the U.S.

Government. I think this represents, at least potentially, an enormous liability to the taxpayers. As President of Ginnie Mae, what

would you do to help safeguard the taxpayer dollars?

Mr. ROSENFELD. Well, as Ginnie Mae is currently structured, the

risk component of our enterprise I think is well managed in that

about 80 percent of the business that Ginnie Mae does is FHAinsured and in that category, the risk for Ginnie Mae is very, very

slight, perhaps 1 percent. About 20 percent of our business is related to the VA programs. And there, we do have somewhat greater

risk in the way of catastrophic decline in housing prices.

I think the important thing, in response to your question, is that

we continue to be cognizant of the fact that the granting of the full

faith and credit as a credit enhancement to any indebtedness is an

enormously serious matter and should be guarded with great zeal.

I recall the past where we in this country guaranteed deposits

in savings and loans. One need only live through that experience

to realize the significance of a full faith and credit guarantee on an

indebtedness.

Let me assure you, Senator, that I will treat with the utmost degree of seriousness, if confirmed, the extension of any sort of guarantee of full faith and credit.

Senator ALLARD. Mr. Chairman, I am finished. Thank you.

Chairman SARBANES. Thank you, Senator Allard.

Senator Reed.

Senator REED. Thank you, Mr. Chairman.

Mr. Rosenfeld, the previous Administration initiated a targeted

lending initiative which gives a price break of up to 50 percent on

Ginnie Mae’s guarantee fee on home loans made in central cities,

empowerment zones, enterprise communities, Indian lands, and

other underserved areas. It has resulted in $15.5 billion in securities, representing over 160,000 mortgages.

I wonder if you are committed to continuing this effort in a very

particular sense, and also in a broader sense, increased efforts to

ensure that in these areas, central cities, minority neighborhoods,

et cetera, that there is more homeownership.

Mr. ROSENFELD. Senator Reed, let me assure you that we have

every expectation of continuing the targeted lending program. To

the extent we can enhance it and improve it in a prudent manner,

we would intend to do so.

Senator REED. Thank you very much.

Ms. Antonelli, let me just go back to the context of the questions

that were posed by Senator Sarbanes and just ask specifically,

what do you believe the mission of HUD is?

77

Ms. ANTONELLI. I believe that the mission of the Department is

to make the lives of Americans better. What does that more specifically mean? That means to increase homeownership, which I very

strongly believe is such a critical part of the American Dream. As

I said in my statement, reducing homelessness and really empowering communities to enhance their economic development.

Senator REED. Do you believe that HUD is achieving that mission today?

Ms. ANTONELLI. I think that there are a lot of very good things

that HUD programs accomplish to make people’s lives better.

If it is wrong of me, I am frustrated where I see that programs

that we have in place are not working the way they should be

working and that there is money that hard-working Americans give

to us in terms of their tax dollars that is not being spent to help

improve people’s lives. There are a lot of people who are eligible for

services that today are not receiving services. And we need to understand why that is happening.

I would suggest that there are certainly problems, the nature of

those material weaknesses have been highlighted and have existed

for some time with HUD programs that we need to become very

serious about addressing and making sure that we understand why

programs are not working and how we can make them better and

to make them better and to make sure, if confirmed as CFO, that

we are doing the best job we can providing information to policymakers within the Administration, but also, very importantly, to

Members of Congress to be able to understand what is happening

with these programs, if they are achieving their intended objectives, and if they are not, what do we have to do about it?

I think there are problems that exist. And everything that has

motivated me in terms of my career in public service is very much

driven by a desire to make people’s lives better, that they can

achieve the American Dream. I am frustrated when I don’t see that

happening.

Senator REED. Assuming that you can work out these identified

management problems, can HUD achieve its stated mission with

the resources it has today?

Ms. ANTONELLI. Senator, there is still a lot that I will need to

do in terms of getting in-depth into many of these programs. So it

would be hard for me to say exactly to you what is an appropriate

HUD budget.

But rather than the amount of the budget, I think, again, in the

context of being results-oriented, are we accomplishing HUD’s mission? Are we doing those things? Are we reducing homelessness?

Are we increasing homeownership and helping people achieve the

American Dream? Are our communities prospering? To me, if we

are able to achieve those types of results and measure that concretely, then at the end of the day, that is what is most important.

And I cannot tell you what right amount of money should reflect

it. It might be more than what the current budget is. It might be

exactly what it is today. It might be something less. I cannot answer that for you right now.

Senator REED. It seems, though, that your response suggests that

you are very clear that management issues have to be addressed.

You are very clear that information issues have to be addressed.

78

But you have formed no conclusion, assuming you accomplish those

things, whether the present resources and projected resources of

HUD can deal with the mission, which is, as you put out, making

the lives of all Americans better.

That is a pretty broad mission if that is the mission. And I guess

my instincts are that, and I commend you and wish you well in fixing the management, it has to be done, but even a perfectly organized and efficient system to put every American in a safe and decent home, is going to require some more resources.

Thank you.

Chairman SARBANES. We want to draw this panel to a close so

that we can go on to our next nominee.

Ms. Antonelli, the Committee is still waiting for answers to written questions sent to the Department from the budget hearing, the

oversight hearing that Senator Allard held a while back. Could you

ask the Department to get those answers to the Committee? We

think enough time has intervened that we should have responses

by now.

Mr. Rosenfeld, we appreciate your coming before us today and we

appreciate your willingness to come back into Government and to

bring your experience to bear on some of these problems.

Ms. Antonelli, I think the best way to close with you would be

simply to ask you to read to us again the last paragraph on the

first page of your prepared testimony. Do you still have it there in

front of you, the statement you gave at the outset?

Ms. ANTONELLI. I am sorry. Which paragraph, Senator?

Chairman SARBANES. The last paragraph on the first page.

Ms. ANTONELLI. On the first page. As the daughter?

Chairman SARBANES. No, no, last paragraph. It is the one that

begins: ‘‘An important part.’’

Ms. ANTONELLI. An important part of the American Dream is a

home to call your own and a community of caring people of which

you can be a part. I look forward to being a part of HUD’s mission

to preserve the American Dream—to empower communities and

their residents to improve themselves by reducing homelessness,

creating opportunities for homeownership, and encouraging economic development.

Chairman SARBANES. Let me say that I am taken by that paragraph. And as you are going to move ahead here in this process,

let me say that that statement on your part given to us in your

opening testimony, weighs heavily with me and we hope as time

progresses we will be able to work together in order to implement

those objectives.

We thank you very much for being here. We are honored that

your mother was able to be present with us, and your husband. Mr.

Rosenfeld, we are delighted your wife was present with us today.

We will now adjourn this panel and move on to the next one.

Thank you all very much.

Ms. ANTONELLI. Thank you, Senator.

[Pause.]

Chairman SARBANES. We will now turn to our third nominee this

morning, Jennifer Dorn, who is being considered for the position of

Federal Transit Administrator. I want to welcome her before the

Committee this morning. We look forward to working closely with

79

her in her new position, as I believe that transit is a vital component of our national transportation infrastructure.

We very much appreciate the two Oregon Senators coming this

morning to introduce her.

I am pleased to observe that America’s transit systems have experienced tremendous growth in recent years. The Washington Post

recently ran a story entitled, ‘‘Mass Transit Rules The Roads’’—this

was just in April—which noted that Americans took over 9.4 billion

trips in transit in the year 2000, the highest level in 40 years.

In fact, transit ridership has increased by 21 percent over the

past 5 years, growing faster than the U.S. population, 4.8 percent,

faster than highway use, 11 percent, faster even than domestic air

travel, 19 percent.

However, this success brings new challenges. Communities

across the country are realizing that transit offers a solution to

many of the difficult problems facing them—moving people from

welfare to work, alleviating congestion, reducing energy consumption, and safeguarding the environment. These communities are

looking to the Federal Government for assistance in getting their

transit systems started. These are communities that want to come

into transit.

At the same time, we must protect the existing Federal investment in transit by ensuring adequate support for cities and States

that are already running successful systems.

Many existing systems are reaching their capacity, as ridership

has grown far beyond what the systems were originally designed

to handle. This capacity crisis will become a significant problem on

even more of the Nation’s transit systems in the near future.

In my view, it is becoming increasingly clear that we will have

to significantly increase Federal support for transit to help communities make the investments in infrastructure and system preservation that will be required to move America into the 21st Century.

This is the context in which Ms. Dorn will assume the role of

Federal Transit Administrator, the Nation’s lead spokesman for

transit.

Ms. Dorn has an impressive background, having served in top positions in both the public and private sector, at the U.S. Departments of Transportation and Labor and at the American Red Cross

and at the National Health Museum.

I am looking forward to working with her on addressing these

challenges and ensuring the continued success of America’s transit

systems.

We are pleased to welcome her to the Committee this morning.

Ms. Dorn, if you could stand, I will give you the oath and then

we can proceed to your testimony.

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

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

help you God?

Ms. DORN. I do.

Chairman SARBANES. Do you agree to appear and testify before

any duly-constituted committee of the U.S. Senate?

Ms. DORN. I do.

Chairman SARBANES. Thank you very much.

80

We would be happy to hear your statement. If you want to introduce your young men to the Committee, we would be happy for

that to happen as well.

STATEMENT OF JENNIFER L. DORN, OF NEBRASKA

TO BE FEDERAL TRANSIT ADMINISTRATOR

U.S. DEPARTMENT OF TRANSPORTATION

Ms. DORN. Thank you, Mr. Chairman.

I will take the mother’s prerogative, even though Senator Smith

graciously introduced my two sons. Jonathan is 11—would you

stand Jonathan? Benjamin is 9 today, as a matter of fact.

Chairman SARBANES. Good. Happy birthday.

[Applause.]

Ms. DORN. Mr. Chairman, I certainly agree with the thrust of

your statement about the transit components of our transportation

structure being so vital.

I also appreciate very much the fact that both Senator Smith and

Senator Wyden would agree to come before your distinguished

Committee today. I think both of them represent the hallmark of

public service and have set a fine example that is in the Oregon

tradition of bipartisanship.

I am very proud of that. I think it represents how working together is important in all aspects of our Government, but perhaps

particularly so as we debate the issues revolving around transportation and transit.

So, I am honored to have been introduced by them and hope to

live up to that kind of tradition. If I am fortunate enough to be confirmed, then that is the kind of hallmark I hope to bring to my job.

Indeed, it is an honor for me to be nominated by President Bush

and a privilege to be here before you, Mr. Chairman, and this distinguished Committee.

I was very impressed and humbled by my fellow nominees’ statements and reminded yet again of the importance of the opportunity

to serve the public.

I was also reminded how wonderful it is to be able to have two

young boys who are learning about the Government process by

being here today. Ben, my younger boy, leaned over to me after one

of the statements and he said, ‘‘Mommy, if they lower the tax dollars, will they lower it just for America or for the whole world?’’

[Laughter.]

And so I realize how beneficial it is for our young people to know

more and more about Government.

Fundamental to so much of our economic strength and the quality of life is our transportation system in this country. And an increasing component of that success is transit. If it is planned carefully and executed well, it is indeed vital to our future even more

than it was in the past.

As well it should be. As you so well articulated, Mr. Chairman,

transit provides economic development. It ensures livability in communities. And it also provides for the public good. That is a very

important Federal role, providing for those who have no other

choice but to use a transit system. It needs to be there.

81

I am very passionate about a number of things, Mr. Chairman,

most importantly about public service, as I think my experience

will attest.

I am humbled to serve President Bush and the Administration

if confirmed by this body, and to serve under two outstanding

transportation leaders who are far more expert than I. I have long

admired Secretary Mineta and his work in the transportation field,

as well as Deputy Secretary Jackson. So it would be my privilege

to work with a fine team, if confirmed.

If I might, I would just take a couple of moments to indicate to

you at this preliminary stage the priorities that I see for the Federal Transit Administration.

First among them, I believe, is meeting the increasing demands

for transit across this country.

Second, I believe improved oversight is very critical and it also

fulfills the purpose of the first goal. We need to have credible programs in order to meet that increasing need.

Third, I think the employment issue is critical for not only our

FTA workforce but also our transit industry workforce. We face

many challenges in terms of attracting the right kind of experts

who need to understand issues of complexity when building large

projects or meeting the needs of various constituent groups.

If I could just elaborate a bit on the first two.

We have seen dramatic changes in a number of our largest communities across the country, as you indicated in your opening

statement, Mr. Chairman. There is a widespread recognition that

transit can play an important role in the largest of communities.

As you noted, ridership is at record levels and local investment

has never been higher. And that is important to all of us.

At the same time, in much of America, transit plays a supporting

role in local transportation as well, providing a safety net for lowincome persons, for the elderly, and for those with disabilities. And

in these instances, it is my firm conviction that the Federal program is important.

Reauthorization is a critical point at which we begin to focus on

these things. And if I am confirmed, I believe it is an important

role that I and my team would have in terms of making sure that

we bring the relevant data to the policy table.

We have had certain levels of programs and program matches

and shares, and while history is an important guide, it should not

be a stranglehold.

I think that one of my main tasks will be to ensure that Congress, OMB, the President, and the Secretary, get the kind of information that will allow them to make timely and relevant decisions

which respond to today’s and future needs. I consider transit as

being a very important need.

Knowing, however, there is never enough money to do all that

we wish in transit or almost in any type of Government activity,

I would be eager to explore with the Committee, ways that we can

better leverage our Federal tax dollars. I think there are a number

of opportunities that have already been initiated in previous administrations and that need to be continued.

Innovative finance is an important arena, as are service innovations, increased intermodal cooperation, more effective implementaVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 79540.TXT SBANK4 PsN: SBANK4
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tion of technology, communicating best practices, and the effective

use of the private-sector where it makes sense and where it can

provide efficiencies.

I certainly intend to learn more about the factors that make

some transit investments more successful than others. And that

leads me to my second priority, and that is improved oversight.

GAO has indicated that perhaps the most significant management challenge for the FTA is to manage a growing number of

transit projects nationwide. And the President’s budget provides for

an increase in that regard.

We are also engaged in planning oversight and it was through

the wisdom of Congress and TEA–21 that Congress was very explicit about a rigorous review process for new starts.

I think that serves the Nation and the individual projects well.

We have learned a great deal. It is my understanding that over the

decades, or two decades, that these projects have been undertaken

and many improvements have been made.

But I think we can always place more emphasis on a number of

oversight arenas to give the public the confidence that localities

have the information they need to make effective decisions.

Sometimes, from what I have been reading, the cart may come

before the horse. And that is that communities may tend to define

the solution, whether that solution be rail system, road, bus, rapid

transit, or some other approach, before they have adequately defined the problem and identified all the alternatives.

I feel very strongly that there is an important Federal role in

transit, but that the local decision is imperative and should guide

us. That local decision should have transparency so that all of the

alternatives are indeed addressed.

As I mentioned, the third priority, I believe like many of the Federal agencies, that the FTA faces a serious workforce challenge.

And I believe that FTA, from the data that I have been given, has

the oldest workforce of all of the agencies in the Department of

Transportation. Nearly half of the FTA’s workforce is eligible to retire in the next 4 years. The transit industry faces similar challenges in recruiting and retaining individuals of specialized skills.

I know the difficult job that many of our transit operators face

in trying to meet the needs of the public in a complex environment.

With that, Mr. Chairman, I am very pleased to be able to answer

any questions, or attempt to answer questions that you might have.

Thank you.

Chairman SARBANES. Thank you very much, Ms. Dorn. We very

much appreciate your statement.

Actually, let me just pick right away on one of the points you

made involving the local level.

FTA has joint responsibility with the Federal Highway Administration for issuing regulations to implement the planning provisions of TEA–21. In part, those planning provisions are designed

to increase and clarify the role of local communities, in effect, the

citizens in the development of transportation policy.

For example, there is a provision in TEA–21 which I was intimately involved with, which requires metropolitan planning organizations to provide to the public an annual listing of transportation

projects which have received Federal funds. This is an effort at

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transparency, of making more information available to the public

so that they are in a better position to comment.

We receive reports that without guidance from the Department

of Transportation, local planning bodies are uncertain how to comply with the public participation requirements of TEA–21, leading

to incomplete and inconsistent compliance. Prompt issuance of final

rules would obviously help transportation planners and community

organizations to have access to the information they need to fully

participate in the transportation planning process.

I really bring this to your attention, because I think this question

of these regulations is an important question. I also think FTA

could take steps to assist transit agencies in complying with the

planning requirements of TEA–21, even in the absence of the implementing regulations. Are you familiar with this problem or have

any awareness of it?

Ms. DORN. Yes, Mr. Chairman. In my brief tenure, that has been

brought to my attention.

If confirmed, I would certainly see what kinds of assistance we

might be able to give even in the absence of regulations to help

provide this transparency. I am in total accord with the need of the

local community understanding fully what the Federal Government

programs mean for them locally, and I know this is an important

matter.

I am very eager to work with the Federal Highway Administrator when he or she is appointed because I know that they have

a significant responsibility in promulgating these regulations.

I do understand that they have been quite contentious and it

may take a bit of time to work that out. You have my commitment,

that if confirmed, I will do everything I can to move this expeditiously and to try to achieve the outcome you have suggested.

Chairman SARBANES. Thank you very much. I mean, obviously,

we would like to get the regulations for the planning provisions of

TEA–21 in place before we turn to the next authorization, which

will be in the next Congress. Thus, we will then have a building

block to work with.

Federal law requires that transit grant recipients spend a portion of their money on transit security projects, such as increased

lighting, increased camera surveillance, emergency telephone lines

to contact law enforcement or security personnel. Obviously, this is

important to the users of transit and it is also important to the employees of the transit system.

The law gives grant recipients the option to certify to FTA that

the required security expenditure is unnecessary. And I am curious

as to what your view is of the steps that FTA should perhaps take

to ensure that transit agencies are making adequate investments

in systems security. There is some concern that it is being overlooked to some extent.

Ms. DORN. Mr. Chairman, it certainly is an important issue, particularly given the number of circumstances which have occurred

locally, and I know, to a degree, in other parts of the country.

I am not fully informed about all aspects of this issue. I do know

that the Federal Transit Administration has the authority, when a

transit operating agency requests it, to perform a security audit.

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The FTA will do its very best to accommodate the request and help

ensure that those security measures are adequate.

Whether that is a sufficient authority, I am not versed enough

to know, but if I am confirmed, I will certainly look into that matter. I think that security and safety are absolutely vital to continuing an increase in ridership. If people are not confident that

they will be safe in transit, they will not use it, and we need them

to use it.

Chairman SARBANES. I think that is a very important point. People almost sense it, or there is a word of mouth that spreads that

this is a safe system to use, and obviously that attracts users, or

that this system has security problems associated with it, which of

course drives away users.

One very quick question, because I see that my time has now expired. As the debate begins on a new transit-highway reauthorization bill, which we are going to be leading into, will the Department or FTA, more narrowly, be conducting any listening sessions

to hear more about what is needed in Federal legislation to address

transit issues?

We would like you to, in a sense, make some commitment to do

these listening sessions across the country. Obviously, you have to

be selective. You don’t have an infinite amount of time. But we

think that could be very helpful, to get the input from the local authorities and others in terms of what they think ought to be in the

next authorization.

Ms. DORN. I wholeheartedly agree, Mr. Chairman. It is my understanding that Secretary Mineta has indicated his desire to hold

those listening sessions throughout the country. And I can assure

you that, from my vantage point, it is important to not only participate in those formal sessions, but also I view a large part of my

job to be a listener, informally as well, to members of the transit

community, to the labor community, and to the community leaders

who have responsibility for transit. I think it is an important job,

especially in light of the upcoming reauthorization.

Chairman SARBANES. Good.

Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

I would like to welcome Ms. Dorn.

Ms. DORN. Thank you.

Senator ALLARD. We appreciate your willingness to take on the

responsibilities as FTA Administrator. More specifically, I would

like to know what you will do to promote opportunities for the private sector, to be involved in transit service.

I am particularly interested in whether or not you would support

reestablishing the Office of Private Sector Initiatives within the

Department of Transportation.

Ms. DORN. Thank you, Senator Allard.

Few things are more important outside of delivering service to

the public in an effective manner than that we do so in a cost effective manner, as well. And I think in certain instances, and perhaps

in more instances than we actually practice, utilization of the private sector is very important.

It would be premature for me to say to what degree or in what

programs we should enhance that participation. I am fully aware

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that the law requires us to do that in the Federal Transit Administration. And if I am confirmed, that will be one of my first areas

of endeavor, to see how is it that we can improve the service

through efficiencies that I think have been demonstrated where

private-sector contracting, for example, is utilized. Where it makes

sense, it works well. And so I would be eager to work with the

Committee on that, if confirmed.

With respect to the organization of the Federal Transit Administration, I have not yet had an opportunity to look at the boxes, so

to speak. I can tell you from my experience in Government and my

personal perspective in leadership that even if a box is not created

for a certain endeavor, if it has the priority of the Administrator

and the Secretary and his or her team, and that is well known,

that this can be as effective a tool as any kind of organizational

structure.

So, I would just not want to be tied into that structural piece.

But you would have my firm assurance that I will do everything

I can to make sure that we can make our systems even more cost

effective.

Senator ALLARD. I would certainly appreciate that. I have been

concerned for some time about the mass transit funding formulas.

It goes clear back to when Senator Alfonse D’Amato was actually

Chairman of the Committee here, representing a large metropolitan area. I represent a State that is a rapidly growing State, and

there are many parts of the country that find themselves in rapidly

growing areas where they want to look at mass transit as an alternative kind of way of getting to work and getting around in their

communities and find that the formula has made that difficult for

them to even get started. I worked with Senator D’Amato on the

last transportation bill to get some more money available for these

new systems.

I think we want to be sensitive to these areas of the country that

already have existing systems. I don’t think we want to cut into

their maintenance and operation and what they need.

But I am disturbed when I see how much goes just to a few cities

and it seems like the rest of the country gets left out. And many

times, that is where the new revenue is coming in, from these other

parts where there is more growth and whatnot.

I would hope that you would be willing to work with me on trying to find fair and more equitable ways to distribute some of those

mass transit dollars.

Ms. DORN. Absolutely, Senator Allard. I know that this will be

an issue of hot contention, as we proceed in reauthorization.

From the perspective of the Federal Transit Administration, I

recognize very clearly that there are various ways to define need,

and in fact, need is the basis on which the formulas have been established in statute.

I certainly recognize, as you and I have discussed previously,

that maintaining the existing systems in urban areas is a critical

need, as is addressing those kinds of needs in new and rapidly

growing areas, such as in the Southwest. Rural needs are equally

as important.

So working with Congress to see how we can equitably meet all

of those needs is a priority.

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I recognize that in this case, equity is really in the eye of the beholder. That means that we will have to do a certain amount of

compromising, recognizing that we don’t have all of the funds that

we may need. But my goal would be as yours is, to make sure that

we have an equitable distribution so that transit throughout the

Nation can continue to be successful.

Senator ALLARD. All I ask is that you look through the eye of this

beholder.

[Laughter.]

Thank you, Mr. Chairman.

Chairman SARBANES. Now, we will turn to the eye of another

beholder.

[Laughter.]

Senator Reed.

Senator REED. Thank you, Mr. Chairman.

Let me first say, Ms. Dorn, that if the Federal Transit Administration behaves under your tenure, as well as your sons, we will

be in good shape.

[Laughter.]

This is even worse than church—there is no music.

[Laughter.]

Ms. DORN. It is the promise of McDonald’s afterwards.

Senator REED. Well, promise us lots of transit projects and we

will all get along great.

[Laughter.]

Let me just ask initially two basic questions. Currently, under

TEA–21, there is an 80–20 split between highways and transit.

And as we go forward with the reauthorization, would you suggest

or advise that this split be maintained or that there be any

changes made?

Ms. DORN. Mr. Chairman, I believe that it would be premature

to comment definitely. However, if I could just give you my philosophical perspective.

Historically, as you have rightly point out, the 80–20 share has

been established in law and guaranteed, in fact, under the highway

trust fund.

Certainly, as in the allocation formula that Senator Allard just

mentioned, the issue of the share will be of significant debate, as

it has been in the past.

I am a firm believer that history should be a guide, but history

should not be a stranglehold. I believe it is very important that if

I am confirmed as the Federal Transit Administrator, I make sure

as much data are available for decisionmakers to determine this

issue based on need, rather than strength of an ideology or

strength of a lobbying group.

And I wholeheartedly believe that the highway industry, as well

as the transit industry, is interested in having an adequate transportation program. So it will remain to be seen whether that match

or that share continues as it is. But my job, I believe, is to provide

the information so a useful debate can occur and decisions made

on the merits.

Senator REED. Thank you.

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Another aspect of this issue of allocation is that within the transit programs, the Administration has proposed a 50–50 split on

funding a share between the States, localities, and the Federal

Government. This is in contrast to the highway projects in which

they are still suggesting an 80–20 split.

First, this raises an obvious issue of those projects which States

will not undertake because they cannot come up with a 50–50

match.

Second, it is a philosophical issue. At a time when everyone, and

my colleague, Senator Allard, who I concur with in terms of trying

to encourage mass transit, seeing out in Denver where they can

build highways, but that doesn’t help them in their environmental

quality and, indeed, moving people around.

And yet, if we adopt this approach where States are penalized

more, effectively, for transit projects than highway projects, I think

it would be indeed a mistake. I wonder if you might respond to that

as best you can.

Ms. DORN. Thank you, Senator. I would be happy to.

I certainly support the President’s proposal for a 50–50 match at

this point. As you are well aware, it commences in the year 2004.

The purpose was to give the States and the localities an opportunity to plan. I would point out a couple of things, however, with

regard to that.

First of all, the current legislation permits a Federal 80–20

match. However, in practice, it is my understanding that the average share is about 50 or 53 percent, Federal-local. The purpose of

this 50–50 split, as I understand it, is to accomplish two goals. One

is to encourage greater local transportation investment and involvement. Two, and perhaps even more compelling, is to provide

a better leverage for limited Federal funds.

The reality of this situation, as I understand it, is that we have

192 projects that are authorized and in the pipeline. And of the

$9.6 billion, we have only $435 million remaining to be committed,

through the end of the authorization.

This is of concern to the Administration. So that is why we gave

the heads-up for the year 2004.

I would, however, be eager to work with the Committee because

I believe there are a variety of ways, of means that we can accomplish these goals. I know that we can work with the State and local

leaders in the interim to explore alternative funding as well.

I think this issue will be terribly critical as we approach reauthorization and the timing of reauthorization is commensurate with

the timing of the 50–50 proposal.

Senator REED. Thank you very much. Again, one way to deal

with the dilemma is to put more resources in so that we can fully

fund at an appropriate 80–20 or whatever the share is, without resorting to this 50–50 arrangement.

Again, I don’t think I am alone, but my governor and my highway department and my transit departments complain bitterly now

about making the 20 percent match for highway projects, and

whatever match there is in terms of saying, they just don’t have

the resources, but they have the real demands to fix highways and

improve transit.

We look forward to working with you, Ms. Dorn.

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Ms. DORN. Thank you very much, Senator. I do, too.

Chairman SARBANES. I just want to pick up on that. I think this

is an extremely important issue. It won’t come to a head until we

do the next reauthorization.

It is one policy issue if the Federal Government says, or the Administration says, we want to give only 50 percent on these transportation projects, transit and highways. And we want the States

and localities to come up with more money.

Now that raises, obviously, certain issues that have to be addressed. An argument for it is the Federal money will go further.

An argument against is the States and localities say, where is the

money going to come from? But at least that approach keeps transit and highways in the same parallel position.

It is another thing if the Administration says, we want to cap the

transit share at 50 percent, but we are going to continue the highway share at 80 percent.

One of the things that we have worked very hard at over the

years is to try to put them, highways and transit, in an equivalent

position and certainly to eliminate tipping the scale in a way that

a locality would decide how to meet their transportation needs, not

on the basis of all of the factors that go into transportation, environment, how you move people and so forth, but the fact that

they get 80 percent Federal money if they go in one direction, and

under the proposal, would get only 50 percent if they go in a different direction.

So, I think as a transit administrator, you have to be very sensitive to the difference in those two approaches because if we go to

50 percent transit while we stay with 80 percent highway—I might

want to stay with 80 percent with both. Or you could go to 70 percent with both. You can work that, but you would keep it even.

You have another situation, if you change the dynamics of choice

that the local people are confronted with. We have worked very

hard to try to get them on a parallel basis so that the decisions can

be made on transportation-related criteria, and not on the basis of

which approach gives us the most Federal money.

Ms. DORN. May I respond?

Chairman SARBANES. Yes.

Ms. DORN. Mr. Chairman, I agree substantively with your point

and the disparity is in fact a puzzle to me. But I have not had the

opportunity to hear the highway perspective. I think we will probably, if I am confirmed, have some interesting discussions. I think

that this is an advantage of Secretary Mineta’s strong feeling about

the ‘‘one D.O.T.’’ We cannot afford, for the benefit of all of the local communities

which the Federal Government serves, to look at these issues in

silos and to perhaps unintentionally skew the local choices.

I look forward to working with you and I hope that we can come

to some accommodation. I believe we share the goal to increase

effective transit programs and that is an important thing for the

future of this Nation. I pledge to you that I will work very hard

on that issue.

Chairman SARBANES. Ms. Dorn, the fact that in practice it is not

always at 80 percent, in my view, is not decisive because the fact

that it could be at 80 percent, on occasion, it is used in order to

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make the localities able to move with the project. And the fact that

it can be used at 80 percent does keep some parity with the highway money.

I do know that in practice, the localities have been willing to

come up with more money in order to move transit projects, which

gives some indication of the importance that they attach to these

transit projects.

I have just a couple of questions.

Many in the transit industry credit TEA–21’s funding guarantees

with reinvigorating the transit program in America. The guarantees have given transit planners a measure of certainty that the

Federal Government will stand by promises made in TEA–21. In

an industry where capital improvements often require years to

complete, some level of certainty about the funding stream is essential. What is your view on a guaranteed funding stream and its

importance for transit?

Ms. DORN. My view, Mr. Chairman, is that this mechanism has

been terribly important to States and localities in terms of their assurance that there is some level of stability in terms of the funding.

It allows the States and the localities to, in fact, plan. I think that

in turn provides an effective leverage of Federal funds.

Under reauthorization, I know that I, like the Secretary, will

work with OMB and the Congress to do everything we can to ensure that we provide the necessary funding levels.

I would also note that the President has indicated that all of the

revenue generated by the Federal gas tax should be used for transportation purposes. And it seems that the funding mechanism has

been an excellent way to help ensure that that comes about.

Chairman SARBANES. Finally, as I think you are aware, many of

our national parks and other public lands are experiencing greatly

increased visitation. In 1975, the total number of visitors to America’s national parks was 190 million. By 1999, that number had

risen to 287 million. And it is climbing. This record number of visitors, which has brought a record number of cars, has resulted in

increasing stress on our national parks. Obviously, congestion detracts from the visitor’s experience, contributes to the degradation

of the natural and historical and cultural resources.

There are reports of people waiting in their car, inching along,

5, 6 hours, in order to get into a national park—Yosemite or Grand

Canyon or whatever it may be.

I want to work with you. I have the intention of introducing legislation, Transit in the Parks, designed to help our parks and our

public lands address these problems. And it would undertake to

provide Federal assistance to support the development of alternative transportation in these sensitive areas.

In other words, people would drive to a marshaling area outside

of the national park and then leave their automobile or trailer or

whatever there and then be transported into the national park

through some form of mass transit.

There are lots of possibilities. Some of the national parks are already experimenting with this. We will be in touch with you as the

Administrator to involve you in that effort. It is not right at the

core of what you do, but I think it is becoming an increasingly imVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00093 Fmt 6601 Sfmt 6601 79540.TXT SBANK4 PsN: SBANK4
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portant challenge. And there is a lot of receptivity to it, including,

interestingly enough, there are a number of States who don’t have

the kind of urban population that calls for a transit system to move

people back and forth to work. But they do have within those

States some of these major national parks, which are increasingly

confronted with this problem.

Actually, I have talked to some of my colleagues who normally

do not focus on mass transit at all because they do not see it as

relevant to their State, who now see that this would offer an opportunity to enhance this park experience and to enhance the economic development that is associated with those national parks.

I just want to say, we look forward to trying to work with you

on that problem. I think, if I were going to be an Administrator of

the FTA, it would be an initiative I would be interested in because,

in a sense, it would be sort of historic. It would be a new breakthrough and it would give you a wonderful reason to take your two

young men and visit these national parks across the country. So it

could be a good summertime experience there.

[Laughter.]

Ms. DORN. I totally agree, Mr. Chairman. Notwithstanding even

that personal sort of benefit, as an Oregonian I have spent many

a weekend in national parks and national forests.

I commend you for your strong interest in this and I look forward

to working with you. It is my understanding that FTA has provided

technical assistance to different parks which are seeking to make

transit opportunities more available. I am proud that we have already done that. I know that you have mandated a study through

TEA–21, which I have not had the opportunity to read, but I believe that it is working its way through the Department and the

Administration. It is currently under review.

I am proud and personally delighted that the President also has

undertaken an initiative to upgrade and improve the maintenance

of these national treasures. I will be eager to work with you on that

matter. It is important.

Chairman SARBANES. Good. I will close with this observation.

Your career has been quite a distinguished one, including, of

course, the number three position in the Department of Transportation at an earlier time, when Mrs. Dole was the Secretary. But

you have also worked with, of course, Senator Hatfield. I don’t

know that you could come before the Members of the Senate with

a better connection, as it were, than to have been associated with

Mark Hatfield, for whom we have tremendous respect and affection

and who was such a distinguished and able member of this body.

And of course, you later worked with Elizabeth Dole, for whom we

also have very high respect.

Ms. DORN. I have been very fortunate in my career to have wonderful mentors.

Chairman SARBANES. Yes.

Ms. DORN. I feel privileged.

Chairman SARBANES. We are pleased to have you here before us.

We will try to move your nomination along.

I think you heard me earlier when I indicated we still have not

been able to fully constitute the Committee. So action is actually

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awaiting that, and once that is done we hope to move you along

and get you down to the Department of Transportation and get you

working.

Ms. DORN. That would be great. Thank you.

Chairman SARBANES. Thank you very much.

The hearing is adjourned.

[Whereupon, at 11:58 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of the nominees, and

response to written questions follow:]

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PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Chairman Sarbanes for holding this hearing. It is important

that we get vacant positions filled as quickly as possible, and I appreciate his expediency in scheduling hearings. It is my hope that this Committee can work with the

White House to quickly fill the remaining positions.

As the Ranking Republican on the Housing and Transportation Subcommittee, I

am particularly pleased that we will have a chance to hear from our witnesses

today. Although housing and transportation are sometimes the forgotten issues of

this Committee, I believe that they are some of the most important. Housing and

transportation matters touch the everyday life of every citizen, and our nominees

today understand that responsibility. I believe that they are all well qualified and

will be assets to the Department of Housing and Urban Development and the Federal Transit Administration.

It is especially important that we get very good people at HUD. Most of HUD’s

programs are still designated as ‘‘high-risk’’ by GAO, so HUD needs leaders who can

take the actions necessary to turn HUD around. There are also important responsibilities at the FTA. As more communities face a transportation crunch, the responsibilities of the FTA and its Administrator will increase.

I would like to conclude by saying welcome to our witnesses today. I look forward

to your testimony, and I look forward to working with you on matters important

to the people of Colorado.

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PREPARED STATEMENT OF JENNIFER L. DORN

ADMINISTRATOR-DESIGNATE, FEDERAL TRANSIT ADMINISTRATION

U.S. DEPARTMENT OF TRANSPORTATION

JUNE 21, 2001

Thank you, Mr. Chairman and Members of the Committee.

It is an honor to have been nominated by President Bush to be the Administrator

of the Federal Transit Administration and a privilege to appear before you this

morning. If confirmed by the Senate, I very much look forward to working closely

with Secretary Mineta and the Members of this Committee to ensure that America’s

transit systems serve the transportation needs of people across the Nation.

As you may know, I had the privilege to have been nominated by President

Reagan and confirmed by the Senate to serve as Associate Deputy Secretary of

Transportation in 1985 under Secretary Dole. Combined with my tenure as a Special Assistant to the Secretary and as the first Director of the Department’s Office

of Commercial Space Transportation, I had the opportunity to spend 5 years at the

Department of Transportation—years which reinforced my commitment to public

service and to the vital importance of an effective transportation system in ensuring

the vitality of communities everywhere. It is with great anticipation and enthusiasm

that I hope to return as the Administrator of the Federal Transit Administration.

I also had the privilege to serve at the pleasure of President Bush with the consent of the Senate as the Assistant Secretary of Labor for Policy in 1989. From that

vantage point, I developed an understanding of the importance of transit in providing access to jobs, as well as the importance of a ready and able workforce to

build and operate our transit systems.

My leadership and management experience has not been limited to Government.

At the American Red Cross, I saw how people working together could solve seemingly insurmountable problems. As Senior Vice President of the American Red

Cross, I managed a budget that reached $400 million and a workforce of over 400

people who helped mitigate the terrible effects of natural disasters and ensure the

provision of a safe and adequate blood supply. When hurricane winds or earthquakes destroy or incapacitate vital transportation facilities and routes, the economic effects of such disasters are magnified and getting relief services to those

affected is made even more difficult. It is in the midst of such disasters that one

can fully appreciate the role that our Nation’s transportation services play each and

every day in making our communities more livable, safe, and economically strong.

Mr. Chairman, I am an advocate for a Federal transit assistance program which

achieves some of our most important national transportation goals. If confirmed, I

will make full use of the Federal Transit Administrator’s office to work with communities and their leaders in four critical areas:

• Providing and enhancing mobility and accessibility for people in urbanized areas,

our suburbs and rural communities.

• Ensuring the safety and security of our Nation’s transit systems.

• Working to encourage the development of transit systems that promote economic

growth.

• Playing an active role in developing livable communities while protecting our

environment.

As you know, transit is not an end in itself. It is a means by which we accomplish

other goals, the principle one of which is providing mobility to people. Just as local

needs and problems differ, so must the transit programs that are designed to meet

those needs. It is self-evident, perhaps, to say that the needs of New York City are

fundamentally different from the needs of Omaha, Nebraska. What has not always

been so clear, however, is that we must have a Federal program that is adaptable

and responds to the needs of all.

In the largest metropolitan areas, where traffic congestion is a pressing concern,

transit is central to the transportation system, serving every element of the community. In the Washington, DC area, for example, the Metro system is now reporting

700,000 daily riders, making it difficult to imagine highway congestion levels without such a transit option. In other communities, transit serves primarily as a safety

net, providing mobility to people with few other options—the poor, the elderly, and

persons with disabilities. Our Federal programs should respond to each of these situations, as well as to the many variations that exist between these two examples.

The Federal role in transit began in the early 1960’s, in response to urgent needs

in many communities as private transit operations across the Nation failed. The

Federal Government partnered with local governments to maintain mass transit in

the face of widespread insolvency among private transportation providers. Early in

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the program’s history, the Federal Government focused on improving the physical

infrastructure of transit and on ensuring the financial viability of public transit

systems.

During the past two decades, more and more local communities began to recognize

that transit could and should play a larger role in the community transportation

system. The Federal program was critical in many regions that sought to better integrate transit into their plans for economic development and livable communities.

More recently, there has been dramatic growth in the number of communities—of

many different sizes—that recognize that transit can enhance the livability of the

community, promoting and responding to economic growth and development. It can

also serve as an important safety net for the 80 million Americans who do not drive

because of age, disability, or income.

The Federal role in surface transportation has been in support of State and local

government. The basic responsibility for making local decisions and meeting local

transportation needs has and should rest with State and local government. The Federal transit program, from the start, has played a supporting role in local transit

programs. That fundamental principle should remain and be enhanced.

Mr. Chairman, should I be confirmed, I will gratefully dedicate my energy, experience, and commitment to the vital mission of the Federal Transit Administration.

I am particularly mindful of the important discussions that will take place during

the upcoming reauthorization of the surface transportation program. And I pledge

to this Committee that I will vigorously pursue the mission of increasing transportation choices in local communities. I am eager to work with you, with the President, with Secretary Mineta, and with transportation colleagues throughout the

country to continue to improve transit in America.

Mr. Chairman, thank you again for the opportunity to address the Committee.

This concludes my testimony, and I would be pleased to answer any questions that

you may have for me this morning.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER

FROM RONALD A. ROSENFELD

Q.1. What are your thoughts on allowing Ginnie Mae to enter into

a public/private risk-sharing initiative that allows Ginnie Mae to

securitize conventional loans that are partially insured by the private market?

A.1. The issue raised by this question requires a response with two

separate components. The first is an inquiry as to whether Ginnie

Mae can execute such a program and more specifically can it execute such a program successfully. The second is whether from a

policy standpoint such a program would be prudent.

Given the 30 year history of Ginnie Mae, its innovations, its profitability, its record of minimal ‘‘findings and material weakness’’ by

the Inspector General and GAO, there is no question that such a

program could be operated by Ginnie Mae with the caveat that

such additional resources as may be needed would be provided.

The question of whether such a program could be operated successfully is more complex. Here the place of beginning is not to rely

on the generally benign description of a ‘‘public/private risk-sharing’’ but rather to inquire, in great detail, as to the specifics of the

arrangement. From Ginnie Mae’s standpoint, the critical issues include, but are not limited to, the nature and extent of the risks

being undertaken on behalf of the Government, the financial and

structural qualifications of the private sector participant, the fee

structure, etc.

It would seem that an arrangement as envisioned by the question could be successfully developed provided that the terms and

conditions of the relationship were determined by Ginnie Mae representing the interests of the Government rather than by having

the operative provisions being determined by the private sector

participant.

The issue of whether the concept is prudent should be addressed

by only one voice emanating from HUD and that voice should be

that of Secretary Martinez. In my opinion the framework in which

to formulate a position on the matter must include an evaluation

of the entire structure of our mortgage finance system including an

evaluation of the current merits of our system of GSE’s.

Q.2.a. Ginnie Mae’s single-family guaranty fee is scheduled by statute to increase from 6 basis points to 9 basis points in October

2004. This cost increase will likely be passed on to FHA and VA

borrowers. What is your position with regard to this change in

Ginnie Mae’s fee structure?

A.2.a. The imposition of fixed fees as determined by the Congress

is not conducive to the success of Ginnie Mae. We operate in a competitive marketplace and our clear mandate is to help families realize their dream of owning a home. An example is our Targeted

Lending Initiative where we help facilitate homeownership by reducing our guarantee by up to 3 basis points. The pending change

to a 9 basis point guarantee fee, without discretion, would eliminate this important program.

The process of buying a home is complicated and costly. As we

attempt to be innovative and creative with other participants in

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ited by a mandated fee structure. In addition, as we strive to encourage others to reduce costs it does not enhance our credibility

to raise our fee.

Q.2.b. Would you support a study to evaluate the impact of this increase on the homebuyers and on Ginnie Mae’s volume?

A.2.b. I would be in favor of such an impact study. The most likely

scenario is that the increased fee would be paid by the first-time

homebuyer at the time of closing rather than being absorbed by the

mortgage originator. Such an outcome is counterproductive to what

Ginnie Mae attempts to accomplish. To the extent that a study provides reliable data it would be helpful to all parties considering this

policy matter.

RESPONSE TO WRITTEN QUESTION OF SENATOR CARPER

FROM JENNIFER L. DORN

Q.1. Will you continue to support flexible funding that allows Federal Highway allocations to be used by States for transit infrastructure projects, that is, buying more buses, building capital facilities?

A.1. Since the advent of flexible funding in the Intermodal Surface

Transportation Efficiency Act of 1991 (ISTEA) and its continuation

in the Transportation Equity Act for the 21st Century (TEA–21),

local officials have had the flexibility to allocate Federal highway

and transit resources to solutions that best meet the needs of their

residents. In my view, local communities are in the best position

to know what their transportation needs are and should remain

responsible for managing those needs within the framework of national priorities. I support flexible funding because it is an important component of meeting the transportation infrastructure needs

in communities across the Nation.

(129)

NOMINATION OF:

DONALD E. POWELL, OF TEXAS

TO BE A MEMBER AND CHAIRMAN OF THE

BOARD OF DIRECTORS OF THE FEDERAL

DEPOSIT INSURANCE CORPORATION

TUESDAY, JUNE 26, 2001

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

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

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. Let me call today’s Committee hearing to

order. I want to welcome everyone.

We meet this morning to consider the nomination of Donald E.

Powell to be a Member of and Chairman of the Federal Deposit Insurance Corporation Board.

I think we will turn, because I know she has other pressing engagements, to our colleague, Senator Hutchison, to introduce Mr.

Powell.

Two Members of the House also wish to make statements. The

House is apparently voting at 10 a.m. So when they come over we

will give them an opportunity to speak as well.

But I think we will move forward with the hearing. And before

any of us makes any statements, we would be glad to hear from

you, Kay.

STATEMENT OF KAY BAILEY HUTCHISON

A U.S. SENATOR FROM THE STATE OF TEXAS

Senator HUTCHISON. Thank you, Senator Sarbanes.

I just want to say that Senator Gramm and I both know Don

Powell very well and have worked with him in the State of Texas

for a long number of years.

I cannot think of anyone that I would more highly recommend

for the office of Chairman of the FDIC than Don Powell.

He does have a background in banking. He’s the President and

CEO of First National Bank of Amarillo, Texas, and he certainly

has knowledge and experience in this area.

He has seen banking at its best and banking at its worst, having

gone through the 1980’s when Texas was going through a difficult

130

time. And I think that the Vice President of the American Banking

Association, Don Ogilvy, said it best—his background and expertise

makes him very qualified to head a Federal agency which provides

confidence for depositors and the U.S. banking system.

In addition to being one the premier bankers in Texas and being

active in the American Bankers Association, he has also dedicated

his life to public service.

He has served as Chairman of the Board of Regents of Texas

A&M University and he was a wonderful visionary leader for Texas

A&M during his term as Chairman, which has just recently ended.

He has helped build the university to one of the premier public universities in America and raised its academic standing and has

made it a real force for education in America.

I cannot think of anyone who would be better in this type of position and someone who will be dedicated to assuring that our banking system remains the safest and most secure in the world.

With that, I certainly recommend him to you and hope that you

can expedite his confirmation so that he can get to the job.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Hutchison.

We very much appreciate your coming and we certainly appreciate

your statement.

I know you have other engagements. So if you wish to excuse

yourself, we understand.

Senator HUTCHISON. Thank you, Mr. Chairman.

Chairman SARBANES. I want to welcome Donald E. Powell before

the Banking Committee this morning.

The President has nominated Mr. Powell to be a Member of the

Board of the Federal Deposit Insurance Corporation and to serve

as its Chairman. His nomination papers were completed as of June

11, 2001, and we scheduled this hearing promptly thereafter. Mr.

Powell earned a B.S. in Economics from West Texas State University and studied at the Southwestern Graduate School of Banking

at Southern Methodist University.

Mr. Powell spent his entire professional career in the community

banking industry in Texas, first as a General Loan Officer in the

First Federal Savings and Loan in Amarillo, and then subsequently

with the First National Bank of Amarillo. He became Chairman

and CEO of that bank in 1987, and managed the bank through financial difficulties that the banks were experiencing in the 1980’s,

and from all reports, did an outstanding job of bringing that institution through some difficult times. The First National Bank of

Amarillo was acquired in 1993 by Boatman’s Bancshares, which in

turn was acquired in 1997 by NationsBank.

Shortly thereafter, Mr. Powell purchased a small bank which he

renamed the First National Bank of Amarillo. That title seems to

stay with him as he moves through life here. He holds onto it tenaciously, I gather.

Senator GRAMM. It is a nice title.

[Laughter.]

Chairman SARBANES. That institution, for which he serves as

Chairman and CEO, operates six branch offices in Texas with over

$360 million in assets. The bank offers the traditional range of retail and commercial bank and trust services, so Mr. Powell brings

131

to this appointment a lifetime of experience in the banking industry, and that has been recognized by a number of comments that

we have received from different groups, of course from his home

State Texas bankers and from other banking associations, noting

his long-time experience.

I am also very much taken by Mr. Powell’s contributions to his

community. He has been Chairman of the Board of Regents of the

Texas A&M University system, which has over 90,000 students,

which at one point, I gather, for 12 years, was graced by the presence of Senator Gramm on its faculty.

Mr. Powell has also served on the boards of many other nonprofit, public, and community organizations, including the United

Way, the Harrington Regional Medical Center, the City of Amarillo

Housing Board, and a number of other educational institutions.

Mr. Powell, I respect your community involvement and I think

it reflects a sense of civil responsibility and obligation, which we

certainly welcome.

The Chairman of the FDIC plays a critical role in maintaining

the strength of the U.S. banking system. He or she makes important decisions on complex issues affecting the Federal deposit insurance system, the oversight of the safety and soundness of bank

operations, and many other aspects of the financial markets.

So it is a critical position in terms of the proper and effective

workings of our financial system and we welcome Mr. Powell here

today and look forward to hearing his testimony.

Before I turn to you, Mr. Powell, I will turn to Members of the

Committee for any comments they may wish to make.

First is Senator Gramm.

STATEMENT OF SENATOR PHIL GRAMM

Senator GRAMM. Mr. Chairman, first, let me thank you for your

very kind comments.

It is a great privilege for me to be here to welcome Don Powell.

There are so many things that I could say about this good man.

He is one of the most respected citizens of my State and he has

a long record in banking and finance.

He took over the First National Bank of Amarillo at a very troubled time for that bank. In fact, The New York Times wrote shortly

after he took over the bank: ‘‘For nearly a century now, the bank

has been the Rock of Gibraltar of the Texas panhandle. As the

largest bank in the area, its capital helped build the vast cattle,

farming, oil, and gas industries. Its leaders led the United Way and

other charities, and it bought the works of local artists.’’ The point

of The New York Times article was that this Rock of Gibraltar was

in very difficult financial straits. Under the leadership and steady

hand of Don Powell, however, that bank made a dramatic comeback and it is again the Rock of Gibraltar of the panhandle of

Texas. Obviously, there were many people who contributed to that,

but the leader of the effort was Don Powell.

I appreciate, Mr. Chairman, you recognizing his extensive commitment to public service. Don Powell has been very actively involved in promoting good works throughout the State of Texas, and

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try in the history of the world. It is very difficult to get good people

to undergo all of the rigors and strains of public service.

I just want to publicly say to Don Powell that I appreciate his

willingness to take on this job. This is a very important position.

In fact, nothing is more important to the strength of the American

economy then safe and sound financial institutions. With the dramatic change in law that has been adopted in the last 10 years, the

FDIC has become a far more important institution than it has ever

been. And quite frankly, it makes me feel comfortable, Mr. Chairman, to have someone who will be in that job who has had practical experience in trying to deal with exactly the kind of problems

that the FDIC is trying to help banks, large and small, deal with

all over the country.

I thank you, Mr. Chairman, for holding this timely hearing.

Chairman SARBANES. Thank you.

Senator Johnson.

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Thank you, Chairman Sarbanes and Ranking

Member Gramm.

Welcome, Mr. Powell. I extend congratulations to you. I am confident that you will follow on Donna Tanoue’s leadership at the

FDIC.

This has been a good year, Mr. Chairman, for the Powell family,

with Colin Powell as Secretary of State, Michael Powell at the

FCC, and now Don Powell as Chairman-to-be of the FDIC.

[Laughter.]

I am pleased to have this opportunity to succeed the Chairman

of the Financial Institutions Subcommittee and look forward to

working with Senator Bennett in that matter.

We heard from our banking regulators last week and we are fortunate to be witness to an extremely strong banking industry at

this day and time.

While we have to remain vigilant in monitoring warning signs of

a softening economy, we find ourselves with an important opportunity to take stock of our financial institutions.

I am committed to taking advantage of this opportunity to propose comprehensive reform of our deposit insurance system and I

hope to be able to introduce bipartisan consensus legislation sometime after the July 4 recess.

As I noted in our previous hearing, it is hard to argue with the

FDIC’s observation that the current deposit insurance system is

procyclical.

In good times, most institutions pay nothing for insurance coverage and in bad times, when they can least afford it, there is the

potential for them to be hit with large premiums.

Currently, over 92 percent of our banks and thrifts pay no deposit insurance premiums. And while it is not always popular to

say so, I think we need to examine together whether that, in fact,

makes sense.

We need to revisit our current system while our banks and

thrifts are healthy and really think through whether our institutions could sustain 23 basis point premiums under less favorable

conditions—or even now, if fast growth in insured deposits caused

133

the fund reserves to dip below the designated reserve ratio. At the

same time, I think it would be a mistake to allow the insurance

funds to grow beyond the size necessary to ensure the safety of our

institutions.

As many of my colleagues know, I have been concerned for some

time about our small banks and the troubles they increasingly have

in attracting core deposits. And any legislation we introduce should

in some manner address that funding problem. I look forward to

working with the FDIC on comprehensive deposit insurance reform

in the coming months.

One other issue that I will continue to monitor is the implementation of the Expanded Guidance for Subprime Lending Programs

that was issued jointly by the four banking agencies earlier this

year. As I have noted in a letter to the agencies, many have expressed concern to me that the guidance may have broader consequences than was originally intended.

As a general matter, I have been encouraged by the increasing

number of responsible lenders willing to extend credit to consumers

who in the past may have had to find sources of credit outside the

mainstream financial marketplace.

At the same time, I understand that often times, such lending

programs may present a higher risk to lenders and I appreciate the

regulators’ vigilance in taking steps to manage that risk.

It is my hope that the regulators, legislators, and the lending

community can work together to develop standards for subprime

lending that are clear, that are appropriate, and that are balanced.

I believe it is possible to manage risk and protect consumers,

while addressing abuses that may have taken place in the past,

without drying up credit to our communities.

I look forward to working with the FDIC to ensure that the exam

guidance is implemented in a way that is consistent with the intentions described by the agencies.

I thank you for your willingness to bear the scrutiny of this Committee and I look forward to hearing your thoughts on these and

other issues this morning.

Congratulations, Mr. Powell.

Chairman SARBANES. Thank you very much, Senator Johnson.

Senator Enzi.

COMMENTS OF SENATOR MICHAEL B. ENZI

Senator ENZI. I thank you, Mr. Chairman, for bringing this hearing to us at this time. I know that when the current Chairman

leaves on July 11, that we will have two vacancies on the Board.

So, I appreciate anything that you do to expedite this one.

Chairman SARBANES. Senator Miller.

COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. Thank you, Mr. Chairman.

Mr. Powell and I had a very good meeting a few days go and I

came away very highly impressed.

This is another great appointment by President Bush and I look

forward to working with you. I wish you well and as Senator

Gramm said, thank you for serving in this arena.

Chairman SARBANES. Senator Corzine.

134

COMMENTS OF SENATOR JON S. CORZINE

Senator CORZINE. I would concur. I enjoyed very much the meeting I had last week with Mr. Powell. I respect the work that you

had to do when you took over a troubled institution. It’s a real test

of leadership and I congratulate you on that and on your work in

your community.

I do think that there are some very important issues, particularly the deposit insurance reform issues that Senator Johnson

talked about. And also the potential merger of BIF and SAIF,

which I think are key issues. I have other questions over a period

of time about CRA and other issues, but I think this is a great appointment.

Chairman SARBANES. Thank you very much.

Senator Bennett.

COMMENTS OF SENATOR ROBERT F. BENNETT

Senator BENNETT. I have no statement, Mr. Chairman, other

than to welcome Mr. Powell and look forward to his service.

Chairman SARBANES. Good. We have been joined by our two colleagues from the House. We very much appreciate them coming

over. We understand they would like to make a few remarks about

Mr. Powell, and we are certainly happy to hear from them.

Congressman Combest, why don’t we go with you first, and then

Congressman Thornberry.

I gather you share the Town of Amarillo, so to speak.

[Laughter.]

Mr. Powell is somehow or other divided between these two Congressmen.

[Laughter.]

Congressman Combest.

STATEMENT OF LARRY COMBEST

A U.S. REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Representative COMBEST. Mr. Chairman, thank you for indulging

us with a vote and letting us arrive a few minutes late.

We both do proudly share Mr. Powell and Amarillo and we appreciate very much your letting us come over, knowing him as a

personal friend and fully in support, obviously, of his confirmation

as Chairman of the Federal Deposit Insurance Corporation.

All of you have before you information which I think will show

the qualifications that Mr. Powell has for the position. But what

you do not have before you I think is equally as important, and

that is something that we could speak to, and that is respect and

admiration that Don Powell has held in his hometown.

There is no one who is more respected in Amarillo, Texas, than

Don Powell. And he has earned this respect in his professional and

his personal and his charitable dealings throughout that community for many years.

He has done a great deal for his community and I think, more

importantly, he has done a great deal for the people in that community. And I think that shows the character and the personality

of Don Powell that probably might not come through in looking at

many of the things that you have relative to his qualifications.

135

I think he is amply qualified and as you will see in this hearing,

Mr. Chairman, Don Powell is just a really nice guy as well.

Thank you very much.

Chairman SARBANES. Thank you, Congressman Combest.

Congressman Thornberry.

STATEMENT OF WILLIAM ‘‘MAC’’ THORNBERRY

A U.S. REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Representative THORNBERRY. Thank you, Mr. Chairman, Senator

Gramm, and Members of the Committee.

I appreciate also the chance to just say a few words in support

and admiration really of Don Powell, recognizing, however, that his

success in life, as is often the case, is a result of team work. His

partner Twanna is a key part of why Don has been such a success.

I would like to make just a couple brief points.

One is that Don has worked his way from the bottom to the top

of the banking industry, starting as a loan officer in 1963, and he

has done it the old-fashioned way. As the commercial used to say,

he has earned it. He has earned it with his intellect, hard work,

and integrity, and I know he will carry those qualities forward.

I would also say from my perspective that he led the First National Bank of Amarillo during a very tough time in the 1980’s, as

many of you know.

Not only does coming through that time successfully speak well

of his credentials, but also I think it makes him better prepared

to be the Chairman of the FDIC.

Finally, I would just say that I know first-hand that he takes

community service very seriously. The reason that he has been

honored as man of the year in Amarillo or history-maker is not because he is President of the bank. It is because of what he has

given to the community, often dealing with young people.

I hope that maybe at some point you have a chance to get into

the details, for example, of the Ace Program, where every student

that goes to the at-risk high school in Amarillo has a chance to go

to college. It is because of Don’s leadership that that takes place.

Community and service are not just words. He lives them, and

I know he will take that spirit to the FDIC as well.

Chairman SARBANES. Thank you. We very much appreciate your

coming over and giving the Committee the benefit of your statements. We know you have pressing schedules, so if you wish to excuse yourselves, the Committee understands that, of course.

Mr. Powell, if you will stand, I would like to administer the oath.

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

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

help you God?

Mr. POWELL. I do.

Chairman SARBANES. Do you agree to appear and testify before

any duly-constituted committee of the U.S. Senate?

Mr. POWELL. Yes, sir.

Chairman SARBANES. Thank you very much. We would be happy

to hear your statement.

136

STATEMENT OF DONALD E. POWELL

OF TEXAS, TO BE A MEMBER AND CHAIRMAN

OF THE BOARD OF DIRECTORS OF THE

FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. POWELL. Thank you, Mr. Chairman.

Before I make my prepared remarks, if I might, I would like to

introduce a dear friend who is here today. I am sorry that my family is not here. I do have two boys and four wonderful grandchildren. My wife is away and she is here with me in spirit.

But part of my extended family is here and it is a gentleman

that I love very much and served with me at the Texas A&M University System Board of Regents, and I am delighted that he is

here today, and I would like to introduce him—Fred McClure.

Chairman SARBANES. Good. We are very pleased to have you

with us, sir.

Mr. POWELL. He is an attorney and from time to time, I kid him

about being my personal counsel. But, clearly, he is not that. He

is a dear friend.

Chairman Sarbanes, Ranking Member Gramm, and Members of

the Committee, it is a great pleasure for me to appear before you

today. I am humbled that President Bush has nominated me to

Chair the Federal Deposit Insurance Corporation. If I am confirmed by the U.S. Senate, I give to you my solemn pledge to work

closely with all Members of this Committee and the other financial

institutions regulatory agencies to maintain stability and public

confidence in the Nation’s banking and thrift systems.

While I am a newcomer to Washington, DC, I am no stranger to

the banking industry. For the past three decades, I have been involved in virtually every aspect of the banking business. In the

early 1960’s, I started out as a loan officer at a small savings and

loan in the Texas panhandle, and I eventually became President

and Chief Executive of the First National Bank of Amarillo. During

the severe economic downturn of the late 1980’s, I led, with the assistance of others, the difficult but ultimately successful efforts to

revive First National Bank. Indeed, by 1993, the restoration was

complete and I take great pride in the fact that our successful turnaround was recognized not only by our community and shareholders, but also by our Federal regulators.

Being nominated to this position has great personal significance

for me. As a long-time banker and a life-long resident of Amarillo,

I understand how important a strong and committed bank is to the

citizens of our Nation’s communities. When we were faced with the

challenges of restoring the First National Bank to financial health,

I understood the severe adverse consequences that failure would

have brought to all segments of our local community. In short, it

is from personal experience that I can speak directly to the importance of our Nation’s insured banks and thrifts—they are the financial lifelines for all the citizens of all our Nation’s communities.

Our Nation’s banking system today is the envy of the world. It

is vibrant. It is innovative. And it is now strong and secure. We

have the most professional regulatory and supervisory system in

the world. But globalization of financial services, innovative technologies, and legislatively expanded powers and authorities have

changed banking dramatically and forever. These changes will conVerDate 11-MAY-2000 15:18 May 15, 2002 Jkt 000000 PO 00000 Frm 00140 Fmt 6601 Sfmt 6601 79540.TXT SBANK4 PsN: SBANK4
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tinue, and they require us to deal with issues our predecessors

could not have dreamed of. I am confident that with its staff of

highly qualified and dedicated professionals, the FDIC is well

equipped to respond to these challenging and ever-accelerating developments.

In assessing the impact of recent developments on the financial

institutions industry, I am reminded of the immensely difficult

challenges the FDIC has faced and surmounted in the nearly seven

decades since its establishment in the midst of the Great Depression. Undoubtedly, as the financial markets evolve, unanticipated

policy questions and developments will continue to arise. In the

past, I know that the FDIC encouraged extensive and rigorous debate in addressing the difficult issues of the day. And it is with the

same spirit of open debate and discussion that I intend to approach

the many challenging new issues currently on the Agency’s agenda,

including the appropriateness of any structural reform of the overall deposit insurance program.

Let me shift gears for a moment and discuss briefly several

issues that I know are of great interest to the Members of the Committee, your constituents, and the financial institutions industry,

as expressed to me by Senators these past few weeks, namely, the

Community Reinvestment Act, ‘‘predatory’’ lending and privacy.

The Community Reinvestment Act has been the law of the land

since 1977. And the Federal Reserve Board recently found that the

CRA has contributed to the financial health of our Nation’s communities by bringing credit to localities that, in the past, have been

underserved. As a banker, I also well understand the significant

challenges all insured financial institutions face in complying with

the rigorous requirements of the CRA. As you may know, the regulatory agencies, including the FDIC, are about to embark on an extensive review of the CRA regulations. I am anxious to be part of

this process and to learn more from all interested parties, including

bankers and community groups, whether any changes are needed

to make the CRA more effective. I also look forward to exploring

with the staff of the FDIC and the other agencies how the changes

made to the CRA by Gramm–Leach–Bliley have affected insured financial institutions and the communities they serve.

Another issue about which I share the Committee’s deep concern

involves financial institutions engaging in what generally has been

referred to as ‘‘predatory’’ lending or ‘‘predatory’’ pricing. From my

perspective as a professional banker, I can say that the application

and enforcement of normal bank underwriting guidelines can go a

long way toward eliminating this practice. I look forward to working with the FDIC staff and other agencies to determine how we

might effectively bring an end to this abusive practice.

Finally, with the explosion of personal information maintained

on individuals coupled with the growth of the computerized storage

of such information, I recognize that privacy is becoming a critical

issue for many consumers. As you know, for the first time,

Gramm–Leach–Bliley imposed a set of privacy guidelines on financial institutions. I look forward to observing how well these provisions are working in practice. After time, if necessary, I will apprise the Committee of the necessity and appropriateness of any

statutory enhancement to existing protections.

138

Chairman Sarbanes, Ranking Member Gramm, and Members of

the Committee, obviously, I have just touched upon a few of the

most important issues facing the FDIC. Let me assure you that, in

addressing this formidable array of legislative and regulatory challenges, I will never lose sight of what I view to be the central mission of the FDIC: Protecting depositors, ensuring the safety, soundness, and financial integrity of America’s banks and thrifts, as well

as the ready availability of the essential financial services provided

by these institutions to all Americans.

Thank you for inviting me to appear before you today. I look forward to working with the Committee in the future.

I would be pleased to respond to your questions and concerns.

Chairman SARBANES. Thank you very much, Mr. Powell, for your

statement.

Last week, this Committee held an oversight hearing with the

bank regulators. I assume you have had a chance to be briefed on

that hearing.

But in any event, the FDIC, of course, has recently made recommendations with respect to the Nation’s deposit insurance system,

involving risk-based premiums, required reserve ratio, rebates,

merging the BIF and the SAIF funds, and the amount of insurance

coverage per account. Have you had a chance to think through your

reaction to these recommendations? Or how do you view them? I

am not pressing you. You may need some time in there as the

Chairman before you can make any definitive statement. But tentatively, at least, how do you view what they have laid out on the

table?

Mr. POWELL. Mr. Chairman, first of all, I compliment the FDIC

and its staff for their thorough review of this important mission

that they have just concluded. I believe they spent some 12 to 15

months analyzing this and had input from various communities.

I have read the recommendations. I am not sure that it would

be prudent for me to come with any definitive conclusions at this

time without making sure that, in fact, I have heard all voices that

had input into these important matters. I understand the recommendations and I think it is premature for me to come to some definitive conclusions without hearing from others.

Chairman SARBANES. Well, I think that is a prudent statement.

One of the things that came through, though, at the hearing was

the view that these recommendations were part of a package, that

really, to move on one, you should move on another and that you

ought to take them in their totality and not just pull one out of the

package. Do you tend to agree with that observation?

Mr. POWELL. I am not sure that I recognize the importance of

their recommendation. I am not sure that it is critical that we link

all of the recommendations together at one time.

Again, I would want to review and hear from those that had

input into it, but perhaps there are more important recommendations and we might rank those recommendations. I don’t think that

it is important that they all be linked together, per se.

Chairman SARBANES. Every time there is a change of command

at the FDIC, we get contacted by constituents who worry about a

reduction in force and that employees who have developed this expertise at the Agency may be let go.

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It seems to me that there are plenty of challenges for the FDIC,

so I start, I guess, from the premise that I don’t see a need for the

workforce to—it has been reduced in the past. I am not sure that

process needs to continue.

But in any event, it would seem to me that some premium

should be placed on reassigning employees within the FDIC to do

other types of work, if there are certain areas in which the Agency

undertakes some downsizing. And often, they can be reasonably

trained, I think, to pick up a different line of activity, which is

being done by outside attorneys or other professionals.

Now there is a bargaining agreement that the Agency has with

the representatives of the employees. Could you work with those

organizations in dealing with the staffing issues, particularly along

this path of cross-training people so that if the workload ebbs in

certain areas and flows in others, the people can move with the

workload?

Mr. POWELL. I would be very sensitive to the comments that you

have made, Senator. Yes.

Chairman SARBANES. I think our view is that, generally, a very

competent staff has been assembled at the FDIC, with a high level

of professionalism, a high level of expertise and, of course, we are

anxious to sustain and maintain that. Obviously, as Chairman, I

presume it would be one of your prime responsibilities.

Mr. POWELL. Yes, sir.

Chairman SARBANES. Senator Gramm.

Senator GRAMM. Thank you, Mr. Chairman.

The last thing I want to do, Don, is force you into discussing controversial issues. So, probably, the most logical thing for me to do,

instead of asking you where you stand on these issues, would be

simply to take the few moments I have to talk about these issues.

The first issue related to the FDIC, which is very much in debate

now, is whether the insurance limit should be raised.

The argument for is that it would help small banks attract deposits. The argument against is that anyone who remembers the

terrible days of the S&L crisis, when you had brokered deposits,

saw this incredible flow of deposits into banks that were clearly insolvent in $100,000 increments, greatly destabilizing the system.

We were in the terrible position of not having the money to close

these institutions down.

I remember sitting exactly where Senator Miller is now throughout this whole debate. So it had a profound effect on my thinking.

I think that experience is the primary reason that I am opposed

to raising the deposit limits.

Deposit insurance is very important for small depositors. But it

is important that large depositors look at the stability of banks and

that is part of the disciplining process for banks.

The second issue that you are going to run into is predatory lending. Even though I have thought about it as much as anybody in

the Senate, I am still not yet sure what this issue is about.

I have no doubt, with the huge numbers of lenders, that some

are abusive. And I don’t have any sympathy for crooks.

My concern, however, is that I am beginning to see a proliferation of lending where banks are using their improved marketing

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skills to find people with marginal credit who cannot get loans at

prime, but can get access to the credit market at subprime rates.

I guess I am sensitive to it because my momma borrowed money

from a finance company to buy a house. And she paid a 50 percent

premium to borrow that money. Some people might look at that as

predatory lending. But given the circumstances of my household,

banks were not going to make that loan.

The net result of that loan is that my mother was probably the

first person in her family since Adam and Eve ever to own the

house she lived in.

I would call that, from the point of view of family-building, about

as important a loan as you could make. I don’t remember the name

of the finance company, but they were public benefactors.

I want to be sure, in the name of combating predatory lending,

that we don’t deny access to credit for people who don’t have perfect credit ratings, don’t have stable jobs, and have difficult family

situations.

I would just ask you, in looking at this, to ferret out abuses. But

we don’t want to institute law or regulation that simply produces

a situation where the easiest thing to do is simply not to make

marginal loans.

The final issue which you are going to run into is privacy. You

mentioned it in your opening statement, and I would just like to

say that I am sensitive to privacy—I value my own privacy.

But I am very much moved by the fact that, as I look at economic

data, about 20 percent of the cost of anything we buy, on average,

is attributable to the cost of bringing buyers and sellers together.

And whatever we can do in using market information to eliminate

that cost, we can raise the standard of living for ordinary people

dramatically.

So, you have a real question of what it means to protect ‘‘privacy.’’ I get every gun magazine, every hunting magazine, every

dog food and dog medicine magazine, and catalogue—I guess because I subscribe to Gun Dog magazine. Is that a violation——

Senator DODD. You have dogs, don’t you?

Senator GRAMM. I have dogs.

Senator DODD. You had me worried there.

[Laughter.]

Senator GRAMM. Is that a violation of my privacy? Or am I better

off as a result of it?

I do not get a Neiman-Marcus catalogue. They probably have

looked at my consumption patterns and decided that I am not a

good candidate for a $14 catalogue.

Senator DODD. Bet you are going to get one now.

[Laughter.]

Chairman SARBANES. There is an open invitation for a NeimanMarcus catalogue.

[Laughter.]

Senator DODD. You are on C–SPAN here.

Senator GRAMM. Wait a minute.

[Laughter.]

I need to end because the red light is on. But I would say this— I have been using that analogy on this issue for 3 years. I have not

yet received a Neiman-Marcus catalogue, and I should not get one.

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It costs them, I understand, $14 to send, and it is not a good investment of their money to send one to me.

Now, is my privacy violated by the fact that Neiman-Marcus has

figured out that I am not a good potential customer, whereas, a

veterinary catalogue probably is?

I think that is a question we must come to grips with. It is not

that they are interested in my private life or any of that kind of

business. They want to know, am I buying dog food or am I buying

luxury items? And am I poorer by their knowing, or is my privacy

violated?

So, I just want you to pray hard over these things when you are

making decisions, because I think they are very, very important.

They may not be clear. They may not be black and white. But,

gosh, they are very important.

Thank you for your indulgence, Mr. Chairman.

Chairman SARBANES. Thank you very much.

Senator Miller.

Senator MILLER. I don’t have any questions, Mr. Chairman.

Chairman SARBANES. Senator Bennett.

Senator BENNETT. No thank you, Mr. Chairman.

Chairman SARBANES. Senator Dodd.

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. First of all, Mr. Powell, I want to congratulate

you for not responding to Senator Gramm.

[Laughter.]

You are one smart cookie. You are going to do fine.

[Laughter.]

Mr. POWELL. He is one of those important voices that I hear.

[Laughter.]

Senator DODD. I know. That is always a good test for me. This

compulsion to feel like you have to respond to everything that gets

said up here. That is a good indication that you are going to do fine

in this job.

Congratulations to you and welcome. You have a wonderful background and experience.

Just to follow up on Senator Sarbanes, you are taking over from

a wonderful individual that many of us have worked with. I told

a story the other day about her coming to my State. It literally took

a day for her to get there with the terrible weather. It may not

have been cosmic in scope, but there are 400 or 500 people up there

who dedicated a good part of their professional lives to help out in

dealing with these issues in Connecticut, and she came up and met

with them, and we are very grateful.

You cannot do that all the time, obviously, in terms of allocation

of your own time. But it is tremendously helpful.

Senator Gramm has mentioned his concerns about predatory

lending. And just for my purposes here, we are not interested in

putting undue restrictions on institutions. But for people, to take

the very example that the Senator from Texas talked about—people who are on the margins—and to be able to own their own home

and get started is tremendously important. And making it possible

for them to do it so that they don’t fall back.

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Many of our laws are not written for good people. They are written for that small, or relatively small, percentage that violates the

law and takes advantage of people.

We probably do need to look at it. It is more than just anecdotal,

I am afraid. And obviously, your advice and counsel on that is

something that we will be anxious to receive.

Privacy issues are very complicated, but very serious as well.

And again, I think that all of us appreciate the needs of businesses

to be able to market. We also know that there are those out there

who will take information and use it for less than just purely business purposes, and we are worried about that.

I can tell you, I don’t care which State you go to, this is right

under the surface with people. It is an explosive issue and it needs

to be handled well because there are unintended consequences of

well-intended legislation, whether it is in the area of health care

information or business and financial records of individuals.

It needs work, but it is serious and people are worried about it.

Just as an aside, it is been several years now, I told the story

of being with a friend of mine who was in the business of collecting

data and was trying to make a decision on whether or not to invest

in a company that literally had in the backseat of an automobile

a personal computer and a printer in which they could literally

read a license plate and take down that license plate, program it,

and provide about a foot and a half worth of public data, now.

This was public information that was available. I suspect that I

knew more about the owner of that automobile than he or she

knew about themselves in terms of what was available through

public information. And to the extent that this information is available and then gets used and shared in ways that could be harmful

to people, and a lot of it can be misinformation, false information,

as well it could be tremendously damaging to people.

Whether it is health care records or financial records, the kind

of information being collected from children, parents, and individuals who want to have a greater sense that they can be protected.

We need to work at that and obviously, your counsel and advice is

something that I would look forward to hearing.

These are two very important questions.

I again thank Senator Sarbanes for raising the issue about the

personnel of the FDIC. We have been very impressed with them

over the years.

We passed Gramm–Leach–Bliley about a year and a half ago. I

wonder, just as someone who has been in the banking field, how

you see this legislation. Have you seen any effects on small- and

medium-sized banks as a result of the passage of that bill, just in

the short time since its adoption?

Mr. POWELL. Senator, I think it is too early for us to assess the

consequences. I think that there are some great opportunities and

the legislation allowed banks to diversify the risk.

At the same time, I think there were some parts of it that we

just don’t know how effective it is going to be and time is going to

tell us more as we go forward.

I have not heard any strong voices from the banking community

that there is anything in there that is bad, per se, that they cannot

live with. But I think the voices have been rather mute. We don’t

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know yet. Several institutions are attempting to take advantage of

some of the new opportunities and we will just have to wait and

see what happens.

Senator DODD. Thank you very much. We wish you well. We look

forward to working with you.

This is probably a subject matter at some point, Mr. Chairman,

not now, but maybe in a year or so, that we might want to take

a look and see how the the Gramm–Leach–Bliley bill is doing.

Chairman SARBANES. Well, it was such a difficult struggle. Why

don’t we let it settle a bit?

[Laughter.]

Senator DODD. I said a year, year and a half or so.

[Laughter.]

Thank you very much, Mr. Chairman.

Thank you, Mr. Powell.

Mr. POWELL. Thank you, sir.

Chairman SARBANES. Let me just make this observation.

You are coming in, I think, at a very challenging time. I was just

looking at a review of some indicators.

First of all, after 5 very good years, the rate of nonperforming

commercial and industrial and personal loans increased by over 26

percent in the year 2000. While delinquency rates for credit card

and consumer loans are below the high levels that we experienced

during the last economic downturn back in 1992, they have risen

back to levels comparable to 1993.

Consumer leverage seems to be at an all-time high. Credit card

debt is rising rapidly. Debt service payments now constitute over

14 percent of disposable income.

The mortgage bankers tell us that 10 percent of the mortgages

backed by the Federal Housing Administration are now 30 or more

days delinquent. In fact, The New York Times said just a few days

ago, ‘‘that the mortgage problems underscore one main reason

many policymakers and economists are so concerned about whether

the United States will enter a recession this year.’’ We have had the percentage of commercial and industrial loans

that are noncurrent—that is, delinquent—there has been an increase in the amount held by large banks, not by small banks, apparently.

There are a lot of concerns out there, I think, as you take over.

Obviously, you will need to review all of that.

I think the FDIC may well have to consider intensifying its examination of these issues without at the same time cutting off the

appropriate flow of credit. That is always a problem and we are

very much aware of that.

We have contradictory objectives. We have a downturn. The Fed

has been cutting the rates, obviously, to stimulate economic activity. Presumably, they will cut them again tomorrow. The Open

Market Committee is meeting right now.

On the other hand, when you have a worsening economic situation, you have a deterioration in some of your credit standards.

So how do you make sure that they are not extending credit

where it shouldn’t go without cutting off economic activity?

I think that is going to be a very sort of first-item challenge on

your agenda.

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Now, we had the benefit of the four regulators last week before

the Committee. We just did a straight oversight committee. It was

not prompted by some crisis situation. We thought just as a standard practice, we should do that from time to time.

Of course, we had the current Chairman, your predecessor here.

Your coming in now, so you have a chance, one, to examine what

they told us and, two, to examine the Agency’s activities with a

fresh perspective, and we certainly invite you to do that.

Chairman Tanoue told us on this sub-prime lending issue that

the FDIC has intensified our supervisory attention to the roughly

150 banks and thrifts with sub-prime lending programs.

Senator Gramm made a reasonable point. We have a sub-prime

market. We are not trying to dry that up. We just want to get at

the excesses that are taking place.

In fact, I was struck in your statement by your reference that the

application and enforcement of normal bank underwriting guidelines could go a long way toward eliminating the practice. What

you have is these loans, in some instances being made unrelated

to the borrower’s ability to repay and solely based on the equity

and the collateral, which they then proceed to strip away from

them over time by the fees, refinancing, and all the rest of it. So,

they never relate it to their ability to pay it back. It is just whether

they are holding enough equity, that they can strip it away from

them.

I think there is something that the FDIC and other regulators

can do to monitor the sub-prime lending market. And the other

regulators are looking at this issue, as you know, and of course, we

invite the FDIC to do so as well.

We look forward to working with you. I think as you have stated

in your statement, it is a real challenge.

I understand that you are in a position and intend, if confirmed,

to abide by all the conflict requirements, which in your instance,

since you are coming right out of the banking industry, are quite

extensive.

But we understand you have undertaken that obligation or are

in a position to do that. And of course, that is part and parcel of

moving forward into this position.

With that, the Committee will conclude. Members may have

some questions that they will want to submit to you. I am not certain if they do. We hope you will answer them promptly and get

them back to us.

Mr. POWELL. Thank you, sir.

Chairman SARBANES. The Committee stands adjourned.

[Whereupon, at 10:55 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketch of the nominee, and

response to written questions follow:]

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PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

I would like to welcome Mr. Donald E. Powell before the Banking Committee this

morning.

The President has nominated Mr. Powell to be a Member of the Board of the Federal Deposit Insurance Corporation and to serve as its Chairman. His nomination

papers were completed as of June 11, 2001. I have scheduled this confirmation hearing as expeditiously as possible. Mr. Powell earned a B.S. in Economics from West

Texas State University and studied at the Southwestern Graduate School of Banking at Southern Methodist University.

Mr. Powell has spent his professional career in the community banking industry

in Texas. From 1971 to 1997, Mr. Powell worked for the First National Bank of

Amarillo, in which he became Chairman and CEO in 1987. He managed the bank

through the financial difficulties that banks experienced during the mid-1980’s. The

bank grew to $800 million in assets and was acquired in 1993 by Boatman’s Bancshares, which in turn was acquired in 1997 by NationsBank.

Shortly thereafter, Mr. Powell purchased a small bank which he renamed First

National Bank of Amarillo. That institution, for which he serves as Chairman and

Chief Executive Officer, operates six branch offices in Texas with over $360 million

in assets. The bank offers traditional retail and commercial bank and trust services,

as well as management services for farm, ranch, oil and gas assets.

Mr. Powell has been active in his community. He has been Chairman of the Board

of Regents of the Texas A&M University system, which has over 90,000 students.

Mr. Powell has also served on the boards of many other nonprofit, public, and community organizations, including the United Way, Harrington Regional Medical Center, High Plains Baptist Hospital, City of Amarillo Housing Board, Amarillo College,

and West Texas State University Foundation.

The Chairman of the FDIC plays a critical role in maintaining the strength of the

U.S. banking system. He makes important decisions on complex issues affecting the

Federal deposit insurance system, the oversight of the safety and soundness of bank

operations and many other aspects of the financial markets.

We look forward to hearing the testimony of Mr. Powell before the Committee.

—————

PREPARED STATEMENT OF SENATOR JIM BUNNING

Mr. Chairman, I would like to thank Don Powell for testifying today and I would

like to thank you for holding this hearing in such an expeditious fashion.

I think President Bush has once again demonstrated that he will continue to ask

outstanding people to serve in his Administration.

Obviously, Mr. Powell has a great deal of experience in the banking industry. I

think he will do a fine job at the FDIC.

I hope that the Committee will report this nomination, once we get our own organization settled, in an expeditious manner.

Once again, I urge all of my colleagues to accept Mr. Powell’s nomination.

Thank you, Mr. Chairman.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM DONALD E. POWELL

Supervision and Regulation

Q.1. In the 1990’s, the Federal Deposit Insurance Corporation established a Division of full-time examiners responsible for compliance and consumer affairs that is entirely separate from the Division of Supervision, which examines for bank safety and soundness.

Do you support this type of organizational structure and feel that

it promotes effective supervision?

A.1. The examination and supervision of financial institutions continues to become more and more complex. New products (including

products designed to serve low- and moderate-income individuals)

and services, competitive pressures, management and technology

issues, among others, all contribute to the complexities faced by

both financial institutions and their regulators. I do see some benefit to the existing FDIC structure for examination and supervision, which provides for a specialized examination workforce for

the compliance and consumer affairs and safety and soundness

areas. From the perspective of financial institutions, I believe it is

vitally important that two goals are met: That they are sent a clear

and uniform message about their financial and regulatory standing

and that the examination process is not unduly burdensome. Thus,

it is critical that the compliance and consumer affairs exam function is closely coordinated with the safety and soundness examination function. If confirmed as Chairman, I will work hard to ensure

those goals are met and that the FDIC provides the industry and

the public with a high level of service.

Liquidity and the Federal Home Loan Banks

Q.2. Over the last decade, core deposits have declined as a percentage of bank and thrift assets, as individuals have taken advantage

of new investment options. Declining deposits have forced banks to

look elsewhere for sources of liquidity. Small community banks,

which may have limited access to alternative funding sources, are

increasingly relying on advances from the Federal Home Loan

Banks as a way to meet their liquidity needs. What are your views

on this development and its implications, if any, for the financial

services industry?

A.2. As a community banker, I can fully appreciate that the competition for core deposits is intense. Depositors have many choices

about where to place their funds, both inside and outside the banking system, and the range of choices continues to grow. That is a

healthy trend, but it means that fewer banks can fund their loans

solely through deposits generated from within their communities.

The prudent use of Federal Home Loan Bank advances can be a

valuable source of liquidity; especially advances with intermediate

and longer terms. Of course, FHLB advances like any liability investment, can be misused. My expectation is that the inappropriate

use of advances, like other deficiencies in risk-management at individual banks can be addressed on a case-by-case basis through the

examination process.

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Too Big to Fail

Q.3. Former Federal Reserve Board Vice Chairman Alan Blinder

was quoted in the June 4 American Banker stating that ‘‘everybody

knows that there are institutions that are so large and interlinked

with each other that it is out of the question to let them fail.’’ Dr.

Blinder’s statement contrasts with official Federal Reserve Board

policy and Fed Vice Chairman Roger Ferguson’s recent declaration

that ‘‘no institution is too big to fail.’’ Vice Chairman Ferguson has

also observed that, ‘‘After consolidation some firms shift to riskier

asset portfolios, and consolidation may increase operating risks and

managerial complexities.’’ Please discuss your views as to whether

some institutions are too big to fail and how your views would impact the FDIC’s policies and practices regarding supervision and

insurance.

A.3. In 1991, in the Federal Deposit Insurance Corporation Improvement Act (FDICIA), Congress prohibited protection of uninsured depositors and unsecured creditors if protection would increase the cost to the FDIC. Congress allowed only one exception,

known as the systemic risk exception, to this general prohibition.

The exception was crafted to ensure that it would be rarely invoked, and, in fact, it has not been invoked.

The mere possibility of a systemic risk determination, however,

and full protection for all depositors and all creditors, may create

a public perception that some insured institutions are still too big

to fail. That perception, if it exists, likely exacerbates that misperception. I know from my own experience as a community banker

that many community banks also believe that the possibility of a

systemic risk determination gives very large institutions an unfair

competitive advantage. Nothing in the law, however, requires that

uninsured depositors and creditors be made whole even if a systemic risk determination is made. Blanket protection for all is not

and should not be guaranteed.

A systemic risk determination would also pose problems for the

deposit insurance funds, not merely because of the potential for

large losses. If a systemic risk determination is made, the FDICIA

requires that the extra costs be recovered through special assessments on the affected fund’s members based essentially on average

total liabilities minus subordinated debt. As the FDIC noted in its

Options Paper, the funding arrangements for systemic risk raise

several issues such as the procyclical nature of this special assessment, and the fact that small banks would still be required to pay

for a systemic risk determination even though they would never receive similar treatment if distressed. If confirmed as Chairman, I

would welcome the opportunity to work with Congress to address

this important public policy issue.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER

FROM DONALD E. POWELL

Q.1. Mr. Powell, as a banker, you experienced the financial difficulties of the 1980’s in Texas. What was your philosophy for dealing

with problem banks then and how has that experience played a

role in your approach to banking and resolving problem banks

today?

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A.1. As you know, my perspective is that of a banker who survived

the 1980’s and 1990’s, but had a problem bank at one point. I felt

the most effective way to return a troubled bank to health was to

address the bank’s problems directly and aggressively. I also found

it advantageous to work closely and honestly with regulators, who

had an interest in our success. While timely corrective action can

go a long way toward addressing a bank’s problems and reducing

the losses in the event of failure, I also believe that it is important

for supervisors, within reason, not to overreact and unduly limit

an institution’s ability to correct its problems. In short, a private

resolution that results in a viable bank is always better than receivership.

There is no formula that will tell regulators exactly what to do

in every situation. The correct response calls for sound judgment,

common sense, and measured steps. I believe that combining my

own experience at a troubled bank with the experience and expertise of the FDIC’s professional staff, we will be able to strike a

proper balance in the supervision of problem institutions. If confirmed, I also anticipate that I will continue to look for ways to improve the supervision program for all institutions, including those

not experiencing problems.

Q.2. As you know, the FDIC sits with the other banking regulators

on the Federal Financial Institutions Examination Committee

(FFIEC), the Capital Markets Working Group, and other interagency committees. What will be your approach to the FDIC’s participation on these committees?

A.2. The Federal Financial Institutions Examination Council and

related interagency working groups and committees provide a necessary venue for the regulators of the banking, thrift, and credit

union industries to coordinate the development of uniform supervisory standards and polices. Significant issues that affect all insured depository institutions, such as examination standards, capital adequacy, the CRA, money laundering, and the like, have been

addressed by the FFIEC in a coordinated fashion. The FFIEC also

serves as a focal point of coordination with State supervisors. Coordination of uniform supervisory policies across the financial services industry is critical to ensure a ‘‘level playing field’’ and aids

the development of the least burdensome, most effective response

to supervisory concerns. Participation in interagency committees

helps the regulators to achieve these goals. If confirmed, I would

expect that the FDIC will be an enthusiastic participant in the

FFIEC and the other interagency committees.

Q.3. The FDIC participates in the Basel Supervisors Committee, as

well as other international bilateral forums on deposit insurance

issues. What is your view as to the FDIC’s role in the international

financial community and dealing with countries that look to the

FDIC for their expertise in issues surrounding deposit insurance?

A.3. The FDIC is the world’s premier deposit insurance entity. Its

participation in international efforts to achieve financial stability

through bank supervision, deposit insurance, and failed bank resolution techniques is critical. As I mentioned in my testimony, one

of the challenges we face as regulators is the globalization of the

banking system. Banks today operate worldwide and coordination

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of the regulation and supervision of these institutions is exceedingly important. I would anticipate that the FDIC, along with the

other U.S. regulatory authorities, will continue to be active participants in these on-going efforts. More broadly, we live in a global

economy. Economic upheavals in Mexico, East Asia, and Russia

over the last decade have demonstrated that, however distant a financial crisis may appear, it can significantly impact this country’s

economy and its banking system. Consequently, the FDIC’s international activities can have a significant domestic benefit. In addition, I am certain that there are lessons that the FDIC can learn

from the experiences of other nations in administering their deposit

insurance systems and in bank supervision, more generally. If confirmed, I intend for the FDIC to continue its international role.