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81–142 PDF 2002

S. HRG. 107–606

THE CONDITION OF THE FINANCIAL MARKETS

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

THE CONDITION OF THE FINANCIAL MARKETS AND REGULATORY

RESPONSES FOLLOWING THE SEPTEMBER 11 TERRORIST ATTACKS

SEPTEMBER 20, 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

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

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

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

MARTIN J. GRUENBERG, Senior Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

THURSDAY, SEPTEMBER 20, 2001

Page

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

Prepared statement .......................................................................................... 63

Opening statements, comments, or prepared statements of:

Senator Gramm ................................................................................................ 3

Senator Dodd .................................................................................................... 4

Senator Allard ................................................................................................... 5

Senator Stabenow ............................................................................................. 6

Senator Enzi ..................................................................................................... 7

Prepared statement ................................................................................... 64

Senator Johnson ............................................................................................... 8

Senator Hagel ................................................................................................... 9

Senator Bayh .................................................................................................... 9

Senator Bunning ............................................................................................... 10

Senator Carper ................................................................................................. 11

Senator Santorum ............................................................................................ 64

WITNESSES

Paul H. O’Neill, Secretary, U.S. Department of the Treasury,

Washington, DC ................................................................................................... 12

Prepared statement .......................................................................................... 65

Alan Greenspan, Chairman, Board of Governors of the Federal Reserve

System, Washington, DC ..................................................................................... 16

Prepared statement .......................................................................................... 68

Harvey L. Pitt, Chairman, U.S. Securities and Exchange Commission,

Washington, DC ................................................................................................... 18

Prepared statement .......................................................................................... 69

Richard A. Grasso, Chairman and CEO, New York Stock Exchange,

New York, New York ........................................................................................... 45

Hardwick Simmons, Chairman, Nasdaq Stock Exchange,

New York, New York ........................................................................................... 49

Prepared statement .......................................................................................... 73

Robert Glauber, President and CEO, National Association of Securities

Dealers, Inc. (NASD) ........................................................................................... 52

Prepared statement .......................................................................................... 75

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted to Senator Sarbanes by Richard A. Grasso, Chairman and

CEO, New York Stock Exchange, dated September 24, 2001 .......................... 79

(III)

(1)

THE CONDITION OF

THE FINANCIAL MARKETS

THURSDAY, SEPTEMBER 20, 2001

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

The Committee met at 10:10 a.m., in room SH–216 of the Hart

Senate Office Building, Paul S. Sarbanes (Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The Committee will come to order. At the

very outset, I want to ask all in the room to observe a moment of

silence in remembrance of the many innocent people who have lost

their lives as a consequence of these terrorist attacks, and in the

hopes that the injured will fully recover.

[A moment of silence.]

Thank you very much.

We convene this hearing this morning in an atmosphere and

with a focus very different from that which had originally been

planned. Quite some time ago, this hearing was scheduled to begin

a series of hearings on financial literacy, a subject which, at least

in those days, we all regarded as of critical importance to Americans, and we were going to have it with the three principals in the

financial markets—the Secretary of the Treasury, the Chairman of

the Federal Reserve, and the Chairman of the Securities and Exchange Commission. The subject, of course, remains of importance

and we will return to it at an appropriate time. Today, however,

in the wake of last week’s unspeakably savage attacks, we focus on

the condition of the U.S. financial markets and the U.S. economy.

Nine days ago, we witnessed devastation that words are inadequate to convey. Someday, historians will catalogue, analyze, and

calculate the terrible losses inflicted by the terrorist attacks directed at New York and Washington. But some losses—families

torn apart, communities devastated—will remain forever beyond

calculation.

At the same time, in the wake of these attacks, we saw the immediate response of firefighters, police officers, emergency rescue

workers, and volunteers. It was a response of impressive resolution

and courage, giving the world, as The New York Times in an editorial put it, ‘‘a vision of the valor and selflessness that is the best

face of America.’’ None of us will ever forget their enormous contributions and I want to pay tribute to their steady courage and

sacrifice here this morning.

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It gave us an inspiring vision of calm determination, of steely resolve, and of unity in a common endeavor. Their example must

guide us as we turn to the challenge of rooting out terrorism. They

must also guide us as well, as we carry on with our fundamental

responsibilities—caring for our families, educating our children,

doing our jobs in a sustained and productive manner, reinforcing

the fundamental strength of our economy, and of the financial markets whose functioning is essential to it.

In New York, the center of the Nation and, indeed, the world’s

financial markets, we can see a phoenix rising from the ashes.

Given the wreckage in downtown Manhattan, many thought it possible that our markets would not be able to open for business as

quickly as they did. The fact that they did and that the infrastructure held, on record volume, is a tribute to thousands of committed

individuals in both the private and public sectors who went back

to work under very difficult circumstances, having lost friends, colleagues, neighbors, and, in some instances, family members.

Our capital markets are the most effective in the world and our

witnesses are to be commended, along with many others, for the

role they played in ensuring that the United States’ financial system continues to operate efficiently. New York remains the world’s

financial capital. The response of our witnesses here today and others to the crisis was coordinated, timely, and effective. They prevented a bad situation from becoming worse by taking decisive and

carefully considered action.

This morning, we will hear in our first panel from the Secretary

of the Treasury, Paul O’Neill. The Secretary has been detained, but

will be joining us shortly, the Chairman of the Federal Reserve

Board, Alan Greenspan and Harvey Pitt, the Chairman of the Securities and Exchange Commission. In the second panel, we will

hear from the Chairman and the CEO of the New York Stock Exchange, Richard Grasso, the CEO of the Nasdaq Stock Market,

Hardwick Simmons, and the CEO and President of the NASD,

Robert Glauber.

As Chairman of the President’s Working Group on Financial

Markets, Secretary O’Neill has led the interagency coordination of

the Government’s response to the attacks on our financial center.

Secretary O’Neill, the Administration’s point person on fiscal matters, has also been engaged in evaluating the potential effects of

last week’s events on the U.S. economy and, in particular, on the

airline and insurance industries. Under Chairman Greenspan’s

leadership, the Federal Reserve took several critical steps to ensure

that the financial community was able to meet its liquidity needs.

In addition, the Fed was in consultation with other central banks

throughout the world, including the European Central Bank, the

Bank of Canada, the Bank of England, and the Bank of Japan, and

helped to coordinate the bank regulatory process here at home,

along with other bank regulators. Securities and Exchange Commission Chairman Pitt has done, in my view, an outstanding job

over the past 10 days in coordinating industry efforts to reopen the

securities markets in the wake of last week’s tragic events. Once

the scope of damage to our financial community became clear, the

SEC quickly issued the relief necessary to enable issuers, exchanges, and securities firms to get back into business. I am lookVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
3

ing forward to hearing about the activities of the agencies under

the jurisdiction of our respective witnesses in detail as we move

forward to the testimony.

I will withhold the introduction of the second panel until we actually have them before us. But we look forward this morning to

hearing the assessment of our witnesses of the impact of last

week’s events on the condition of the financial markets, as well as

the impact of the economy, the adequacy of our response thus far,

and what more needs to be done.

And gentlemen, we welcome you before the Committee. I yield to

the Ranking Member, Senator Gramm of Texas.

STATEMENT OF SENATOR PHIL GRAMM

Senator GRAMM. Well, Mr. Chairman, let me begin by thanking

you for that wonderful statement and I would just like to identify

myself with it.

Last week, we had a terrorist assault on two very visible symbols

of America—American capitalism and American democracy. Terrorists obviously believe that by killing innocent people and destroying

buildings, they can destroy ideas. But capitalism and democracy

are the crowning achievements of man on this planet, and they are

ideas that are not going to be killed. In fact, under assault, they

become more powerful and more virulent.

I am proud of what we have done since that horrible event. It

has brought out the best in the Nation. I would, Mr. Chairman,

like to say just one thing about all the people who were killed in

the financial center in New York.

We have a strange way, I think, of measuring importance in our

society. If someone holds an office or is highly visible in some activity, we tend to attribute great importance to them. But the people

who were working at the World Trade Center, in the very heart of

American capitalism, through their activities, financially helped

create millions of jobs and made a contribution far beyond that

which most people are ever able to make during their lives. Our

society tends to value too much what is done in the public sector

and too little what is done in the private. Someone who creates a

hundred jobs has probably done more to promote mankind than

many who are often identified as great contributors to society.

I am proud of our fine financial markets. America is clearly not

operating if its financial markets are not open. When our financial

markets are open and our democratic government is functioning,

America is alive and well. A lot of effort went into getting our markets open again. I want to congratulate Harvey Pitt and to thank

Chairman Greenspan for his action in providing liquidity. I think,

overall, given what happened, our markets performed as they always do—remarkably well—and it is a great testament to our system and how well it works. I have no doubt that while this is a

setback in our current effort to get the economy moving ahead, it

is a very temporary setback financially, and the economy will again

be booming, and hopefully soon.

Chairman SARBANES. Thank you very much, Senator Gramm.

Senator Dodd.

4

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Thank you, Mr. Chairman. Let me begin also by

commending you for your opening statement and thank you for not

cancelling a hearing that was going to be held on a subject matter

that is not insignificant, but obviously, the importance of the

events of the last week or so demand that we spend some time and

attention on the subject matter that you have raised here today.

I am grateful as well to our witnesses who are taking some time

away to appear before us, and particularly those who are coming

up—I know Dick Grasso and Wick Simmons and others who will

be here to share their thoughts with us.

To those of you in the audience who may be watching this, this

does not look like there is a full attention of Members here. We

should note that a substantial number of our colleagues, I think

roughly half the U.S. Senate, is at this very hour on its way to New

York to meet up there with officials in the city and to take a firsthand look at the tragedy. I know Senator Schumer, in particular,

was torn about whether or not to be here this morning on a matter

that obviously is of deep importance to him. But obviously, having

been directly affected as he and Senator Clinton have, as our colleagues from the State of New York, have decided they should be

there in New York and not here this morning. But he will have,

I know, some comments that he would like to include in the record,

Mr. Chairman, regarding this subject matter.

Let me just spend a minute on a thought or two if I could and

echo Phil Gramm’s comments as well. I have no doubt in my mind

whatsoever this morning that our markets and our economy are

going to rebound very strongly. Terrorists may have decided that

they could destroy some buildings, but the idea, the naive thought

that by destroying lives and buildings, you were going to somehow

destroy the strength and vitality of U.S. financial markets is just

not the case.

So if nothing else happens here this morning, I hope we can reassure those here at home and around the world that acts of cowardice and evil cannot and will not erode the strength or the backbone of the U.S. economy and our Nation’s financial markets. The

losses we have suffered here, the financial losses and the loss of

these buildings are certainly of significance. But it is the obvious

loss of some 6,000 people, and the thousands more who have been

injured, not to mention the thousands more who will be injured not

just physically, but the families.

I spent a good part of the last 2 days calling families in my

State. We were not hit as hard as New York or Washington DC.

I do not know the total numbers yet, but I was on the phone with

about 40 different families in my State, many of them from CanterFitzgerald, who was particularly hard hit. Some of you may know

that I have just been fortunate enough to be a father a week ago

today. And to talk to some of these women who have children,

1, 2, maybe 4, or one woman who is about to give birth to a child,

how do you begin to calculate the sense of loss that these people

will feel for years and years to come. It is important that we talk

about the financial implications. But I think all of us need to

maybe state again here today and over and over again our deep,

5

deep concern for the human dimension of this as something that

will live with us forever.

Mr. Chairman, I have great confidence and wonderful respect for

the witnesses here. We could not be more fortunate to have Alan

Greenspan chairing the Federal Reserve. I have said that over and

over again. It has been important for a lot of reasons, probably

never more important than it is today. And Harvey Pitt, who is

new to this job, but certainly not new to the issues at all. We are

very fortunate to have him chairing the SEC.

I have great confidence in our financial leadership in the country,

as the Chairman has pointed out, and as Phil Gramm has. And we

are going to hear from others as well this morning who will offer

us some ideas of where things are. But, ultimately, for those who

have any concerns about whether or not this economy or this country are going to survive this, let there be no doubt from this moment forward that we will rebound and we will be stronger than

we were today. And so I thank you for being here.

Thank you.

Chairman SARBANES. Thank you, Senator Dodd.

Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman, I too would like to

thank you for holding this hearing on the condition of our financial

markets. Those of us from Colorado, our thoughts and prayers are

with those who are affected by last Tuesday’s tragic events, as we

continue to go about the people’s business.

As a free and open society, we will never be able to completely

eliminate the threat of terrorism. But America is strong and I do

not believe that any terrorist can undermine our country. There is

no casualty figure that will come from this that will make us lose

our fundamental purpose as a Nation and as a people. Despite

their best attempts, terrorists have not undermined America. One

clear example of this fact is the smooth functioning of our financial

markets. And here is what I saw.

The World Trade Center has a number of major financial institutions. Many of them suffered devastating losses. Yet, they continue

to do business. The New York Stock Exchange and the Nasdaq are

located only a few blocks away from the World Trade Center. Despite difficulties with power, water, and transportation, trading resumed in a calm and orderly manner less than a week later. Bond

markets and banks are also operating smoothly and the Federal

Reserve acted quickly to inject liquidity into the financial system.

The SEC also responded promptly and successfully.

Although markets are now functioning smoothly, I believe we can

learn from these events to better prepare for the future. Such preparation is vital, not only for a potential terrorist attack, but it will

also help ensure smooth market operation during natural disasters

and other unexpected disruptions.

America is united and our financial markets remain the strongest in the world. Our hearts may be breaking, but our spirit and

resolve is firmly intact. I am eager to hear from our witnesses

6

today and I thank you for being here during this difficult time. I

look forward to hearing your testimony.

Chairman SARBANES. Thank you very much, Senator Allard.

Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman. And again, as my

colleagues have stated, thank you for holding this hearing.

Chairman Greenspan and Chairman Pitt, thank you very much

for being here. We would all rather not be here under these circumstances. We appreciate your leadership and what you have

done in the last week.

The gravity of this hearing is as heavy as the grief that sweeps

our Nation. I have been from one end of Michigan to the other in

the last few days and while many of my friends and neighbors have

not directly been impacted, we all grieve in the most profound way

with what has happened. Many of us have friends and family who

are directly affected.

The attack on September 11 was not just an attack on innocent

Americans, it was also an attack on our financial institutions, and

the economy as well. And while, as my colleagues have said, our

first goal is to support the families and the victims, and to also find

those who are responsible and hold them accountable, we simply

cannot then shut down, or will not shut down. We must move forward and that is why it is important that we restore consumer and

investor confidence and the strength and the resiliency of our financial institutions. And that is why we are here today and we

thank the others that will be speaking today as well.

I found so many inspiring stories that have unfolded in the last

week. And one of those was the story of Canter-Fitzgerald, who, despite having lost an astounding 700 of their coworkers in the attack on the World Trade Center, threw themselves into restoring

their computer networks and communications and were back in

business within 48 hours. If that is not the American spirit, I do

not know what is. They went back to work, not because they were

not devastated, but to honor their friends and their coworkers.

While we have had a string of bad economic news following the

attack, I think it is important that we emphasize and reemphasize

that the underpinnings of our economy are strong and functioning

following this tragedy. Our banking system weathered this storm

with little disruption or panic and I commend Chairman Greenspan for your quick decisions to reassert the discount window, that

the discount window was available to meet liquidity needs and to

lower interest rates before the market opened. We commend you

very strongly for that.

I also appreciate the Federal financial regulators’ swift work that

helped maintain order and stability in our financial system. I also

want to commend the many firms like Verizon and their employees

who worked so hard on tight deadlines to restore the communications infrastructure that was crucial to getting our financial markets up and running again.

Despite the destruction, bond trading resumed last Thursday, as

we know, and the stock market reopened on Monday, thanks to the

7

hard work of so many people, both within the Government and outside of the Government.

And now as we gear up against terrorism, and we know that this

could last for years, we have to focus also on our economy because

its strength is what gives muscle to our might. We must bring all

the tools of fiscal and monetary policy to bear on getting the economy moving and easing the doubts of the business community and

consumers. I work on the assumption that our system is fundamentally strong and that we will become even stronger, and I know our

witnesses will bolster that sentiment today.

I would just say that as citizens of Michigan have asked me what

they can do to help, in addition to the prayers that they are giving

continually for the victims and their families and all those involved, I have said to them, when you finish giving blood, when you

have given your donation to help the victims, go buy American.

And from Michigan, we would like it to be an American-made car.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Stabenow.

Senator Enzi.

STATEMENT OF SENATOR MICHAEL B. ENZI

Senator ENZI. Thank you, Mr. Chairman. And I do want to thank

you for the rapid change of focus that you had so that we could

hold this hearing and make it even more pertinent to the events

that we just had.

I would also like to commend all of the witnesses today for the

leadership that they have shown during the last 9 days. I do not

think any of us can truly appreciate the monumental task it was

to open the markets Monday morning. I would also like to commend the entire financial services industry for the commitment

they have shown in working with regulators and each other during

this trying experience. Their reassuring tone about the stability of

our markets has been much needed to calm the fears of those who

invest in America’s financial systems.

If the stability and security of America’s markets was ever in

doubt, I do not believe anyone could doubt their stability after the

September 11 experience. Few financial systems could have sustained the losses of New York City, the financial capital of the

world, and after only 5 days, been back and running without any

major glitches in the system. The quick responses by our market

leaders are a major reason why systems have been phased so little.

Also, as an accountant, I am certain that the financial institutions of this country and following the money will be a key to

digging out the terrorists and the activities that have happened,

and that will play a key role.

I would also ask that my full statement be included in the

record.

Chairman SARBANES. It will be included in the record.

Senator ENZI. Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much.

Senator Johnson.

8

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Thank you, Mr. Chairman, for your leadership

over this past week.

It was just last Tuesday that Chairman Sarbanes and I sat together upstairs in the Banking Committee hearing room where my

colleague had convened a hearing into the failure of the Superior

Bank. I walked over from my office in the Hart Building just before

10:00 a.m., where I had just witnessed on television the unspeakable horror of the collapse of the first of the World Trade Center

towers.

Despite that tragic backdrop, Senator Sarbanes insisted that we

move forward with the hearing. The Chairman was defiant that the

terrorists would not interrupt our work of overseeing the institutions that support the greatest economy in the world. Today, we

continue that work.

Chairman SARBANES. I might add that the police came around

and terminated our hearing.

Senator JOHNSON. Prudence won over defiance at that particular

time.

Chairman SARBANES. Yes. It was designed to send a strong message that we were not going to let the terrorists bring the Government to a complete halt.

Senator JOHNSON. But today we continue that work, and we will

hear from a distinguished panel about the condition of the financial

markets following the events of last week. I expect that we will

hear a great deal that will make us proud of our financial system.

As we all know, our Nation’s financial players deserve our respect and thanks for what has been an around-the-clock effort to

make sure that our markets have functioned as smoothly as possible. We will also, I expect, learn more about the critical role our

financial regulators play in keeping our system strong.

Today, I hope that we can reserve some time to thank our regulators for the hard work they do every day to make sure that our

system can withstand attacks in whatever form.

As Chairman of the Financial Institutions Subcommittee, I intend to spend a great deal of time over the coming months taking

a look at our Nation’s banks and financial institutions. And while

we have so much to be proud of, our system is strong because of

our constant vigilance.

We have a responsibility to learn as much as we can from the

lessons of this past week to make our system even stronger. We

should identify areas where we can do better, and have an open

discussion between industry and Government to determine how we

can work together on these issues.

I am proud of the way that our Government has responded to

last Tuesday’s attacks. And while nothing we can do in any way

compares to the heroism we have seen in our firefighters, police officers, and rescue workers, we have had an important role to play

in responding to this terrible crisis.

I want to take just one moment to mention my Unity Bonds proposal, which the Senate passed last night. As we in Congress know,

many of the best ideas come from our constituents. I am pleased

to give credit to a citizen from my State of South Dakota who

called my office to ask if he could buy bonds to show his unity with

9

the victims of terrorists and to support our struggle against those

terrorists. Based on this constituent’s idea, I introduced legislation

which directs the Treasury Department to issue Unity Bonds. The

revenue raised from these bonds is to be used to fund our recovery

efforts from last week’s attacks and also to fight our ongoing war

against terrorism.

I am pleased that the Senate passed this measure last night, just

3 days after I introduced it, and I intend to continue working closely with my Democratic and Republican colleagues to make sure

that this legislation is in fact enacted into law.

I have received an overwhelming response from constituents who

want to know when they can invest in America through Unity

Bonds. One county commissioner from New York even called to

find out whether Unity Bonds would be available in time for a

drive they are having this week to encourage people to invest in

America through Savings Bonds. And just yesterday, I would note

that a major credit card bank announced its intention to purchase

$10 million of these bonds as soon as they become available. America deserves leadership that can work together, and leadership that

can work quickly.

Mr. Chairman, this hearing will allow the Senate Banking Committee to identify ways that we can respond to the needs of our financial institutions and the markets. I look forward to hearing

from our witnesses and to working with my colleagues in a bipartisan fashion to respond to the issues that we can identify today.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Johnson.

Senator Hagel.

COMMENTS OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you. I want to thank the

private and public leadership of our country, including our witnesses this morning. That leadership represents the strength and

goodness of this country.

Mr. Chairman, thank you for allowing us an opportunity to have

this leadership representing the dynamics and the strength of our

country to come before us today, and I look forward to their testimony.

Thank you.

Chairman SARBANES. Thank you very much, Senator Hagel.

Senator Bayh.

STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. Thank you, Mr. Chairman. I know I speak for myself and everybody else in the room when I say we are looking forward to hearing from our distinguished guests today, so I will

make three very brief points.

First, to echo the words of my colleagues, I want to thank the

gentlemen who are with us for your leadership during this difficult

time. Consumer and investor confidence is Topic A right now and

I cannot think of a greater source of reassurance for the American

people than to have men of your stature and experience in the positions that you currently hold. So I want to thank you for your service to our country.

10

Second, the events of the past week should remind all of us of

the resiliency of the financial markets and the economy of this

country, but also of the global interdependence and possibly some

of the vulnerabilities of our systems. And I know that we will go

forward from here to focus on those to make sure that we are prepared to meet any future contingencies of this unfortunate type.

Finally, I would just like to say, once again speaking to the confidence of the public, the long history of this country should give

all of us optimism about the future. We have overcome civil war,

world war, periods of great depression, social instability, even the

assassination of some of our country’s leaders, and yet, the American economy and people have thrived and overcome. And I am confident when the history is written about the events of the past

week, this will be another episode in the resiliency of the American

people as we move forward to an even more prosperous and secure

society. And again, I want to thank you for your leadership during

these difficult times.

Chairman SARBANES. Thank you very much, Senator Bayh.

Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman.

I would like to thank you for holding this very important hearing

today. And I would also like to thank our witnesses for testifying

today and for their leadership in reopening our markets. The Nation and the world owe you a debt of gratitude.

I cannot put into words the sorrow that I and the people of Kentucky feel. We are sad, confused, frightened and angry. Our deepest sympathies go out to the victims, their families, friends, and

everyone who has been affected by this tragedy. But I also cannot

put into words the pride we all feel.

Our Nation has responded. The overwhelming generosity and patriotism both at ground zero and all over this country have moved

me in a way that I cannot articulate. I commend all of you for your

Herculean efforts to reopen our markets on Monday. It was very

important to show that we have the will to open the markets in

spite of the threats and attacks.

I would like to start by commending Dick Grasso, not just for the

leadership he has shown in getting his market open, but for giving

the Amex space in his building to operate their market. I am not

sure the American people are aware of that fact. By allowing the

Amex to compete in the facilities shows the cooperation that we

have on Wall Street and our Nation’s commitment to free and open

markets.

I would also like to thank Mr. Simmons and Mr. Glauber for

their hard work and for all the assistance they have given. I cannot

say enough about Harvey Pitt. We knew we had the right man for

the job when President Bush sent your nomination up here to the

Congress. But if anyone had any doubts before, surely they have

been erased. Now, just knowing that you were on the watch last

week made me and countless others in the financial community

feel better.

I would also like to thank Secretary O’Neill and the Department

of Treasury for their swift response and decisive action, both in the

11

extensive law enforcement actions and also in the smaller moves,

such as the tax relief steps the IRS has taken. The last things that

the victims or their families should have to worry about right now

are taxes.

Finally, it is no secret that I am probably the biggest critic of

Chairman Greenspan on this Committee, and maybe in the entire

Congress. But I must commend the Fed’s action, starting last Tuesday. Opening the discount window, stabilizing currencies, and the

50 basis-point rate cut were bold and necessary moves that you

should be commended for.

I should like to note that our other markets were open last week,

also. The Chicago Board of Trade and the Chicago Mercantile Exchange were both open last week and the bond market also did a

fantastic job in getting back to business last Thursday. Thank you,

Mr. Chairman, and thank you for holding the hearing.

Chairman SARBANES. Thank you, Senator Bunning.

Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you, Mr. Chairman.

Mr. Secretary, I know you have missed most of the opening

statements. We are glad that you are able to join us here.

Senator GRAMM. We could repeat them.

[Laughter.]

Senator CARPER. I was thinking of doing that myself.

[Laughter.]

But I will not. A lot of eloquence here at this table and a lot of

excellence at the table of witnesses. Just to sum up, and then we

are anxious to hear from you, I think there are really four daunting

tasks that face us as a Nation coming out of the tragedies of the

last week.

One of those is one that Senator Dodd has alluded to. I have

been comforting, seeking to comfort the families in my little State

who have lost loved ones and to help them begin the difficult task

of rebuilding their lives. The President will talk tonight about the

efforts underway to track down and to ferret out those who have

perpetrated these crimes and to bring them and those who harbor

them to justice. Down the road, we will begin rebuilding the physical structures that have been destroyed in Northern Virginia and

New York City. And last week, we began, literally within hours of

the destruction of the World Trade Centers and the loss of all those

lives, the hard work of revitalizing an economy that was already

on tenterhooks. As important as the President’s comments are this

evening, and I look forward to hearing those comments as he addresses a joint session of the Congress, your comments today are

equally important.

We are, as Senator Bayh has said, fortunate indeed to have a

team, not just as highly regarded as the one that is assembled before us, but a team that is as able to work effectively as you have

and the leadership that you have provided in the last week. Thank

you for joining us today. Thank you again for the stewardship that

you have provided for our Nation.

Chairman SARBANES. Thank you very much, Senator Carper.

12

I want to underscore for the record the comment that Senator

Dodd made, and that is that there is a Senate delegation that went

to New York today. And many of the Members of this Committee

who are not here for this hearing are on that delegation trip. And

I just wanted to make sure that that was understood.

Secretary O’Neill, we are very pleased you are able to join us. I

know you were detained by an important meeting. We are pleased

to have you and Chairman Greenspan and Chairman Pitt here

with us. Mr. Secretary, I think we will start with your statement

and then move right across the table to Chairman Greenspan and

Chairman Pitt. We will be happy to hear from you.

STATEMENT OF PAUL H. O’NEILL, SECRETARY

U.S. DEPARTMENT OF THE TREASURY

Secretary O’NEILL. Thank you very much, Mr. Chairman, and

Members of the Committee. I am sorry I was detained. I was in a

National Security Council meeting, which we are having quite a

few of these days as we assemble information and make plans for

actions that need to be taken. So I hope you will forgive me for

being a few minutes late.

Chairman SARBANES. Certainly.

Secretary O’NEILL. I understand your opening statement was

really quite good and touching, and I thank you and other Members for the things that you have said. For myself, I do have a prepared statement and with your permission, I will simply submit it

for the record.

Chairman SARBANES. It will be included in full in the record.

Secretary O’NEILL. And then I think maybe I will open myself up

for questions.

But at the beginning, I would like to say to you how proud I am

of my organization and Alan’s organization and Harvey’s organization. And you all mentioned Dick Grasso and the people at the New

York Stock Exchange, and Wick Simmons of Nasdaq, and Sal

Sodano at American. And I do not know whether anyone mentioned

before I came, but all of the firms that make up the markets that

were involved in this restart effort.

The communications companies, Verizon. The police and the fire

people who were working, especially in downtown New York, were

all part of this fabulous recovery process that allowed us to demonstrate to the world that while we took a direct hit in our financial district, we were able to reopen the symbol of America’s economy in very short order. And frankly, I think we did it in just the

right time. There were some voices who were clamoring for opening

on Wednesday or Thursday or even Friday. I think the right set of

judgments were made. We made sure that we would not have a

false start.

I must tell you, if I had known on Monday morning that we

would have the largest day of trading in the New York Stock Exchange as measured by volume that we ever had, I would have had

a bigger lump in my throat than I already did. But we did it. And

I say that in the fullest sense—we, the American people, did it.

And I think we should be proud that we have gotten restarted and

we have demonstrated we can do it. It is awfully hard not to also

say one additional thing. Monday morning, when Harvey and I

13

were in New York for the restart, it was a very emotional, touching

time, and those of you who saw it on television probably got a

sense of the emotion radiating out of those faces that were on the

floor. But when we went down on the floor after the restart, people

just wanted to reach out and touch and say, thank you and God

bless you, and tell the President he has our prayers.

It is difficult that tragic events bring us together. For sure, they

have done that. And not just those of us in the United States, or

those of us who were privileged to have been on the floor Monday

morning. But every communication from countries around the

world has been not only comforting and reassuring and indicating

every possible support, but ready to move into action as soon as we

tell them what we want them to do. So, I think off of this terrible

tragedy, we are seeing the best of society around the world, coming

together with a determination that we will persevere and we will

prevail.

Thank you, Mr. Chairman.

Chairman SARBANES. Well, thank you, Mr. Secretary.

Mr. Secretary, I am going to impose on you to just take a moment or two. I think it would be helpful if you would on the public

record—if you would do the parts of your statement concerning the

Government securities and the fixed-income markets, and the part

on the Treasury response with respect to the IRS. I think there are

a lot of people watching this hearing this morning and I think if

we can just lay that out for the public record.

Now you also reviewed what the other regulatory agencies could

do. I think we can forego that because, presumably, we will be

hearing from both Chairman Greenspan and Chairman Pitt about

the activities of their respective agencies. But I think we want people to understand what is being done and how concerns and needs

are being addressed. If you could take an extra moment to do that,

I think it would be helpful.

Secretary O’NEILL. All right. Mr. Chairman, would you say

again? Government securities and which other areas?

Chairman SARBANES. Then the Treasury response over on page

four, your IRS tax guidance.

Secretary O’NEILL. Okay.

Chairman SARBANES. And your enforcement things. I think that

that would be important. And you might want to say just a word

or two about economic recovery and impact, although I am sure we

will get into that in the question period.

Secretary O’NEILL. Thank you. The Treasury has successfully adjusted its financing needs in the face of the recent market disruptions. The Treasury and the other regulatory agencies worked

closely with the Bond Market Association to reestablish an active

and orderly fixed-income market.

Following a recommendation by the Bond Market Association to

close the market on Wednesday, September 12, trading resumed in

all fixed-income markets on Thursday, September 13. Further,

Treasury was able to execute a successful action of 3- and 6-month

Treasury bills on Monday, September 17, with 24 of the 25 primary

dealers participating.

And I would say we see going forward no concern at all with

being able to do appropriate and necessary Government financing.

14

The markets are there. They are deep. And so we are up and running and we will continue to do so.

With regard to the Treasury response and specifically IRS tax

guidance, the IRS and Treasury are providing relief to all taxpayers directly affected by the terrorist attacks. This relief includes

extending the time for filing tax returns and extending the time

for making estimated tax payments. The victims of the airplane

crashes—on the ground and in the air—taxpayers whose workplace

or whose records are in a disaster area, relief workers, and taxpayers in all five boroughs of New York City, and in Arlington

County, Virginia, the location of the Pentagon, are among those

who qualify for this relief. In addition, the IRS and Treasury are

providing relief to taxpayers unable to meet tax deposit obligations

because of damage or injury inflicted by the terrorist attacks.

Furthermore, for all taxpayers, the IRS has postponed until September 24, the due date for all Federal tax obligations other than

deposits of Federal taxes, that otherwise would be due between

September 10 and September 24. This postponement includes, for

example, the filing of returns and the payment of estimated taxes.

In the enforcement area, Treasury has established an interagency team dedicated to the disruption of terrorist fundraising.

The team is designed to increase our ability to identify foreign terrorist groups—and I would further say, individuals—assess their

sources and methods of fundraising, and provide information that

will make clear to law enforcement officials how terrorist funds are

moved. This team will ultimately be transformed into a permanent

Foreign Terrorist Asset Tracking Center in the Treasury Department’s Office of Foreign Asset Control. This is an extraordinary

effort that illustrates the Treasury Department’s creativity in developing new ways to combat terrorists. And I would offer one

other thing for the record on this subject.

We have resolved that we are going to take an intensive effort

to deal with terrorist fundraising like it is never been done before.

We have assembled, and will continue to add to a list of known

terrorists and suspected terrorists of individuals and fundraising

organization who, through intelligence activities, we know have

provided financial support. And we for the first time will systematically use all the information, intelligence assets, that are at the

disposal, not only of our Government, but cooperating governments

around the world, to begin a closing down of bank accounts, asking

other governments to block accounts, and where there is enough

evidence to do it quickly, to confiscate amounts that are in these

accounts so that rather than deal at a high level of abstraction, we

are going to go after individuals’ individual accounts, and we are

going to begin today.

On the subject of economic impact, my prepared testimony has

quite a bit here. And I would summarize my view this way. There

is no doubt that we have had and are having economic dislocations.

Some of them are very obvious.

Closing down the Nation’s airways for a period of time has a severe impact, not only on that industry, but on industries that depend on air service to move parts and supplies and communications. And that is an important dislocation and there are collateral

dislocations that flow from that that we all know about.

15

There are obvious questions about the terrorist-inflicted financial

damage that will be reflected back into insurance company and reinsurance company processes. And I think we need to look at those

very carefully.

If you step back, if it is possible to step back, and look at our

economy in a broader sense, going back to September 10, and then

looking at the prospects going forward, I believe this. I do believe

that we were beginning to see the encouraging signs we were all

looking for and hoping for that our economy was going to start

growing at a better rate in the days and maybe few weeks before

September 10.

I have heard so many times in the last few days, America The

Beautiful. And I think about the amber waves of grain. And I remind myself that the amber waves of grain did not stop growing

on September 11. And it is a metaphor for saying that there are

a lot of strengths in the American economy. I think we all have a

sense of a damaged personal spirit and maybe a hole in our heart

that is never going to get repaired. There is still a great strength

and resilience in this American economy. And I think, as I understand Chairman Greenspan counseled some Members of Congress

yesterday, that we need to be sensitive to needs that may develop

for additional Federal stimulus in one way or another. We should

give ourselves 10 days or 2 weeks to assess what is going on.

Yesterday I talked to one of the major credit card companies and

they told me that on a year-to-year basis, their credit card activity

was off 20 percent in the period since a week ago Tuesday. I think

that is clearly to be expected because people stayed home and

looked at their television. They were heartbroken. But we will recover. We need to be, on the one hand, deliberate. Where necessary, we need to act with speed. I think there is no doubt that

the airline industry has a cash liquidity squeeze and we need to

respond to that. But I think it makes very good sense that we respond with deliberate speed to items that are emergent and that

we give ourselves a consolidation period to think carefully about

what we should do.

And then my own view is this, and I know this is very difficult

because our process has an endless list of things that people would

like to do that have been paraded through the weeks, months, and

years and they are kind of the favorite chestnuts. I believe that

this situation and these events are sufficiently serious, that we

should be really careful and deliberate in assessing what the needs

are, and then responding to the real needs, not to the off-the-shelf

political things that have been paraded around and we have all debated and argued about. And I think it is possible to do that. I

hope it is possible to do that because it will demonstrate that we

are really together, and that we are focused on the things that

should bring America together. And to the degree that we need to

provide additional things, it should be first about what is good for

America, not what is good for some group or some interest that is

always there waiting.

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

glad we were able to draw you out a little bit with, in effect, a supplementary statement, which I think was enormously helpful to the

Committee.

16

We will take the other two statements before we go to the question period.

So, Chairman Greenspan.

STATEMENT OF ALAN GREENSPAN,

CHAIRMAN, BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

Chairman GREENSPAN. First, let me associate myself with the remarks of the Secretary. And I agree that he is raising some very

fundamentally important questions which relate to how this Government functions and should function.

I would also like to associate myself with everything that has

been said by you and the Committee. This is an extraordinary time

and I think we are all deeply touched. Indeed, I would like to begin

my remarks this morning by noting how deeply saddened I and my

Federal Reserve System colleagues are that so many talented and

productive people from so many walks of life were lost or irreparably harmed last week. Although we are here today to discuss

some of the immediate economic and financial implications of that

tragedy, we are all too aware that the topic we discuss will be a

mere footnote.

The terrorism of September 11 will, doubtless, have significant

effects on the U.S. economy over the short term. An enormous effort will be required on the part of many to cope with the human

and physical destruction. But as we struggle to make sense of our

profound loss and its immediate consequences for the economy, we

must not lose sight of our longer-run prospects, which have not

been significantly diminished by those terrible events.

Over the past couple of decades, the American economy has become increasingly resilient to shocks. Deregulated financial markets, far more flexible labor markets, and, more recently, the major

advances in information technology have enhanced our ability to

absorb disruptions and recover.

In the past, our economy has quickly regained its previous levels

following the devastation of hurricanes, earthquakes, floods, and

myriad other natural disasters that periodically better various regions of our country. Although the trauma of September 11 shares

some characteristics with such disruptions, the differences are important. In contrast to natural disasters, last week’s events are of

far greater concern because they strike at the roots of our free society, one aspect of which is our market-driven economy. All modern

economies require the confidence that free-market institutions are

firmly in place and that commitments made today by market participants will be honored not only tomorrow, but for years into the

future. The greater the degree of confidence in the state of future

markets, the greater the level of long-term investment. The shock

of September 11, by markedly raising the degree of uncertainty

about the future, has the potential to result, for a time, in a pronounced disengagement from future commitments. And that, in the

short run, would imply a lessened current level of activity. Indeed,

much economic activity ground to a halt last week.

But the foundations of our free society remain sound, and I am

confident that we will recover and prosper as we have in the past.

As a consequence of the spontaneous and almost universal support

17

that we received from around the world, an agreement on a new

round of multilateral trade negotiations now seems more feasible.

Such an outcome would lead to a stronger global market system.

A successful round would not only significantly enhance world economic growth, but also answer terrorism with a firm reaffirmation

of our commitment to open and free societies.

But before the recovery process gets under way, stability will

need to be restored to the American economy and to others around

the world. Arguably, that stability was only barely becoming evident in the United States in the period immediately preceding the

acts of terrorism. Aggregate measures of production, employment,

and business spending continued to be weak.

That said, consumer spending moved higher in August and appeared to be reasonably well maintained in the first part of September. Industry analysts suggest that motor vehicle sales were

running close to August levels, and chain store sales were only

modestly lower. Purchasing managers had noted an improvement

in the orders picture in August. Moreover, the dramatic rate of decline in profits was slowing. To be sure, these signs were tentative,

but, on the whole, encouraging.

During the past week, of course, the level of activity has declined. The shock is most evident in consumer markets where

many potential purchasers stayed riveted to their televisions and

away from shopping malls. Both motor vehicle sales and sales at

major chain stores, some of our most current information on consumer spending, appear to have fallen off noticeably. And, the airline and travel industries have suffered severe cutbacks.

The unprecedented shutdown of American air travel and tightened border restrictions have induced dramatic curtailments of productions at some establishments with tight just-in-time supply

chain practices. Automakers, for example, are reported to have

pared production and even closed some plants in the past week,

largely owing to supply shortages, though, doubtless, short-term

demand uncertainties have also played a part.

The effect on financial markets of the devastating attack on the

World Trade Center was pronounced, as telecommunications and

trading capacities were severely impaired. But the markets are

mostly functioning now, albeit in some cases using contingency arrangements, and, as in the past, the infrastructure will be rapidly

restored.

For a brief time, the terrorist attack markedly disrupted payment transfers that are usually measured in terms of trillions of

dollars each day. Many obligators temporarily lost their technical

ability to pay on time, leaving those counting on receiving payments caught short. The pressures ultimately ended up concentrated in banks. Those needs were met by the Federal Reserve,

both through record lending at the discount window and through

an extraordinary infusion of funds through open market operations.

To facilitate the channeling of dollar liquidity to foreign financial

institutions operating in the United States, 30 day currency swap

lines were arranged with major central banks, again in record volumes. It was essential in such an environment to meet all appropriate demands for dollar liquidity. As the financial markets and

payment infrastructure return to normal, loans are being repaid,

18

and the temporarily bloated balance sheet of the Federal Reserve

is now shrinking back to normal.

Nobody has the capacity to fathom fully how the tragedy of September 11 will play out. But in the weeks ahead, as the shock

wears off, we should be able to better gauge how the ongoing

dynamics of these events are shaping the immediate economic outlook.

For the longer term, prospects for continued rapid technological

advance and associated faster productivity growth are scarcely diminished. Those prospects, born of the ingenuity of our people and

the strength of our system, fortify a promising future for our free

Nation.

Thank you very much, Mr. Chairman.

Chairman SARBANES. Thank you, Chairman Greenspan, for a

very thoughtful statement.

Chairman Pitt.

STATEMENT OF HARVEY L. PITT, CHAIRMAN

SECURITIES AND EXCHANGE COMMISSION

Chairman PITT. Thank you, Chairman Sarbanes.

Chairman Sarbanes, Senator Gramm, Members of this Committee, I very much appreciate the opportunity to offer the perspectives of the Commission on the condition of our financial markets

following the terrorist attacks of September 11.

I would like to say before I begin how very important and very

reassuring it is to have had the support of this Committee. I spoke

with many of the Members of the Committee and I have had the

insights of many of the Members of this Committee, which were invaluable. And I would like to compliment Secretary O’Neill for the

leadership that he and the Department of Treasury have provided.

And Chairman Greenspan and Vice Chairman Ferguson for their

wisdom and their insight into the markets.

The attacks that we are here to discuss caused irreparable loss

of life and untold physical damage. Like many of you, I lost people

I cared deeply about and had known for decades. But these attacks

did not destroy or diminish our strength, courage, or resolve.

We grieve for lost friends and relatives. But we also should be

proud of the Nation’s extraordinary responses to these events because they demonstrate that our capital markets are the world’s

strongest and most resilient and, above all, they reflect enormously

well on our national character.

These attacks did not arise in a vacuum. So we at the SEC coordinated our efforts with the larger Federal Government, of which

we are but a part, and we work cooperatively with the industry

that we oversee. This Committee has the ability to pass upon the

public leaders. The leaders of our private markets are not selected

by this Committee or by the Government. I do want to say that the

esteem and respect that I have for Dick Grasso, Wick Simmons,

Frank Zarb, Bob Glauber, is enormous. These people rose to the occasion and they truly epitomized what is great about America.

At the Commission, we embrace two critical roles. First, to assist

in implementing national policy. And second, to evaluate and then

facilitate the industry’s planned responses, while ensuring fidelity

to the protection of investors and national interests.

19

We, along with our colleagues from Treasury, traveled to New

York on Wednesday to meet directly with the leadership of major

markets, securities firms, banks, and clearing agencies, representatives of the New York governor and New York mayor, as well as

Con Edison, Verizon, and the New York Fed. We assessed the industry’s readiness to reopen the markets. Despite the broad powers

that this Committee had given our agency, we did not dictate a result. Rather, we facilitated an appropriate market solution. The decision when to reopen the markets was made by the private sector,

in consultation with us and subject to our review. But it was a private-sector decision.

On Thursday, the fixed-income and futures markets successfully

resumed trading. That same day, industry representatives unanimously decided to reopen equity and options markets on Monday,

not Friday. Deferring the resumption of trading until Monday permitted extensive testing of systems operability and connectivity.

Throughout the weekend, our staff worked with market and industry participants, verifying that systems were sound and operational. We reached out to major market participants to formulate

appropriate temporary regulatory relief, to facilitate the reopening

of fair and orderly markets. For the first time we invoked the

emergency powers that you bestowed upon us and we issued several orders and an interpretive release to ensure an orderly market

under these extraordinary circumstances.

Government is and must be a service industry. So we made certain we were accessible both to investors and to market participants. We placed additional information for investors and market

participants on our website and we established telephone and

Internet hotlines for both. I believe this is the first time that we

provided hotlines for industry participants. We have done this in

the past for investors. And we assured industry participants that

they could bring us their problems and that we would work with

them to find solutions without recrimination, except in cases of venality, and of course, there were none. The result of these efforts

was evidenced on Monday when all of the U.S. securities markets

resumed trading without incident. Investors once again relied on

the strength and the soundness of our markets.

All market and investor protection systems were squarely in

place. The markets did not give way to panic-selling and the extra

time taken before resuming trading gave investors an opportunity

to reflect and to speak out about the strength of America’s markets.

And the world heard them loud and clear.

I appreciate this opportunity to present our views and in closing

would like to recognize again the leadership and wisdom that my

colleagues here provided for us, to make special reference to the

other Commissioners at the Commission who were very supportive

and helpful in all of this, and to a very wonderful, knowledgeable,

and dedicated staff that worked all the way through the weekend,

giving of themselves time and time again to help us work with the

private sector to get our markets in full operation.

Thank you, Mr. Chairman.

Chairman SARBANES. Well, thank you very much, Chairman Pitt.

I say to the Members of the Committee, given the large number

of Senators that are present, we will have 5 minute rounds.

20

First, I want to again commend the Treasury, the Federal Reserve, and the SEC for their response to this situation. All of your

agencies have highly skilled, expert people, and that talent was

brought to bear. That, in the end, is really the basic strength of our

country, in both the public and the private sector. And we know

that people worked all night, over the weekend, and everything

else in order to try to address this situation. I want to underscore

our appreciation to them.

Second, I want to commend all of you for your consultation with

the Congress, which was immediate and continuous, and I think is

very helpful in enabling us to make sure that we have a unified

view on matters, which I think was important in these days in

helping to restore matters.

Now I am reminded a bit of the advice, the medical advice—do

no harm—as the first guiding principle. I think my colleague, Senator Gramm, has used that advice.

Senator GRAMM. I have not lived in vain here.

[Laughter.]

I have not lived in vain here. The Lord’s name be praised.

[Laughter.]

Chairman SARBANES. And Secretary O’Neill, in your supplementary statement, you indicated your sort of view about being

careful—prudent, I think, would be the right word—prudent now

with how we move with respect to one or another of the economic

proposals that are before the Congress.

Chairman Greenspan, you came up yesterday and participated in

a meeting with the Congressional leadership in which you addressed that subject. And it is reported in the morning paper, but

I would invite you to take a few moments now to give us your view

on that matter as well, if you would.

Chairman GREENSPAN. Mr. Chairman, What we know about a

situation such as this is that there are a combination of forces impinging on the American economy which we cannot at this particular stage disentangle. Most importantly, we know that there is

a combination of infrastructure problems and technical and physical breakdowns that have occurred. And until we can see what the

economy looks like without them, appropriate policy initiatives, in

my judgment, are premature.

We have a very complex, sophisticated economy and even the

slightest aberration ricochets throughout the system. And when

you have a devastating impact on the financial system such as we

have been discussing here today, until it works its way through the

system, until all institutions are up and functioning, until we find

that the just-in-time supply problems which have been occurring as

a consequence of the air traffic problems and the border closings,

which are not irrelevant to this issue, we will not be able to separate what the underlying demand and supply factors are. And it is

they to which we must adjust policy.

We know that the infrastructure problems will all be restored,

and balance, insofar as the mechanism of the economy is concerned, will be rapidly back in place. But we cannot tell at this

stage which is a physical problem which will be reversed in a manner similar to a hurricane or a flood, and which is a more deepseated, underlying problem.

21

And it is the latter, as I indicated, that we have to address. And

what I said to your colleagues yesterday essentially is that we will

know in a reasonably short period of time—the Secretary has said

10 days, a week to 10 days, a little longer. It may be a little longer,

but not much longer. And I would strongly suggest that while there

is obviously, a very strongly desired sense to move rapidly, that it

is far more important to be right than quick.

Chairman SARBANES. I think we ought to underscore that there

have been a number of policy measures taken over the course of

this year, the Fed in successive reductions of the interest rates, the

tax rebate that is now going out, and now there is going to be a

fiscal stimulus from investment programs to recover—I mean

spending programs. Some of those policies I do not think have had

a full chance to work their way through. Presumably, they are providing, or were providing, and will continue to provide, some lift to

the economy. So it is not as though those policies had fully worked

their way out—well, let me ask you.

Can we reasonably look at the situation and say that the impact

of those policies may well still be working its way through the

economy in terms of giving it a lift in this context?

Why don’t we hear from both Secretary O’Neill and Chairman

Greenspan on that?

Secretary O’NEILL. I would say that there is no doubt that as a

consequence of the actions that the Federal Reserve already took

before September 10, and the coordinated action taken by the Congress to enact the tax program, including the rebate program, have

left the economy in much better shape and more than there would

have been without these coordinated fiscal and monetary policy actions. So I think what you say is very wise. We need to remember

what was already in place as we assess what else we might and

should do.

Chairman SARBANES. Yes.

Chairman GREENSPAN. I might just add, Chairman Sarbanes,

that that does not mean that future actions are not going to be required, nor does it suggest that some of the immediate actions, for

example, focused on the airline industry, are not appropriate. Indeed, they are, because as I indicated earlier, one of the remarkably sensitive problems we ran into was the extent to which essentially shutting down the American air space bottled up a huge

amount of economic activity all over the country.

This was not strictly a New York City issue. I think that bringing the airlines back—I must say air freight has now come back

quite considerably but there is a whole structure of this economy

which rests on air travel which is important that we bring back as

quickly as possible.

So what the Secretary and I have been saying does not preclude

fairly expeditious action on certain issues. I think the point the

Secretary is making, and which I concur in fully, is that it is very

easy in a period such as this, in haste, to do things that, in retrospect, are not right. I do not think that waiting a short while really

materially alters the impact of whatever is done on the economy’s

pattern of growth over the next several quarters.

Chairman SARBANES. Thank you very much. My time is expired.

Senator Gramm.

22

Senator GRAMM. Thank you, Mr. Chairman.

Let me just pick up where the Chairman left off. The way I look

at our situation is that Tuesday, a week ago, things happened that

made all 285 million Americans poorer, whether we are talking

about human suffering or about the decline in the value of somebody’s teacher retirement program, or whether it was a salesman

who found a dramatic restriction on their ability to travel for business purposes. The plain truth is all 285 million people in America,

and really, everybody in the world, is poorer.

The problem we face is that since any assistance we give to anybody comes from the same 285 million people, we are incapable of

indemnifying everybody. And for everybody we indemnify, we make

everybody else poorer than they were before the indemnification.

So the question is, what is the cut-off point?

With the airlines, there is no doubt that the smartest decision

made Tuesday a week ago was to bring every plane down at the

nearest airport—that was a very smart decision. The disruption,

the cost, imposed on airlines was immediate. But the question is,

when you get beyond those very narrowly defined costs, if you go

too far, then how do you justify not providing assistance to Boeing,

or to hotels, or to restaurants, or to people who lost in teacher retirement? The point is, where do we draw the line?

Now as I look at the Administration’s proposal for the airlines

today, if you look at actual losses to this point, you proposed assistance at roughly twice that amount, now knowing that there are

going to be losses in the future. I want to pose a question, but I

want to ask everybody if they agree with the thesis.

This idea that we could somehow settle into a new equilibrium

where there is 80 percent of air traffic as compared to before, is

very dangerous. If I knew that we were going to end up a year from

now with 80 percent air traffic, I would know we were going to

have a recession. The 1 percent of the people who engage in business travel probably create 20 percent of the gross domestic product of America. So that idea is unthinkable. Rather than bailing

out airlines in the future, we need to get them flying. We need to

invest in safety. We need to rebuild public confidence, and I believe

it will come back.

Now, given where we are with the $5 billion that was proposed

in the insurance indemnification, Secretary O’Neill, do you believe

that we need a loan guarantee, or do you believe that the direct

cash assistance is enough so that the airlines that could have made

it, will find that they are now capable of getting loans?

Secretary O’NEILL. Well, Senator, as I said earlier, I think in this

extraordinary time, we should be very direct about what we are

going to do and what we think we need to do.

A loan is in fact a financial instrument that has an economic

value. I personally favor during these extraordinary times not dealing with veils and third-order derivatives, if you will, for people

who know what that means. I favor—if we are going to give people

money, we ought to give them money. And to the degree that there

is a belief that we should give the airlines more money for some

other reason, I think we should give it to them directly. Now, if

you do not mind, I will tell you what I think we should do for the

airlines.

23

First of all, to this point of analysis, we need to understand what

the problems are and what it is that we need to do to get back to

a market-determined rate of activity in the airline business. I

would submit to you there is a liquidity problem. We need to give

$5 billion or so in liquidity assistance to the airlines. We have

talked about devices for doing that and I think we are coming to

agreement.

Second, I believe that we need to socialize the cost of air safety.

By that I mean the Federal taxpayers need to pay for the safety

that will assure the public that when they get on an airplane, they

are going to go where they paid to go, without risk of life and limb.

It seems to me it is a very straightforward proposition and we

should have probably gotten to it earlier.

And finally, in order for the airline companies individually to be

economic enterprises, they need to be in a position that they are

responsible for things gone wrong that are within their control.

And to the degree that that means we have to socialize the cost of

insuring against terrorism, we need to do that. But as we do that,

we should be the back-up guarantor. We should not interfere in the

regular process of commerce. I think if we provide necessary liquidity and if we assure the safety of people who travel by air, that

companies that are truly viable will have no problem getting capital infusions from ordinary capital markets.

So my counsel would be, as we work on these problems that have

come from this tragedy, that we separate out the things that need

to be done that are directly associated with this crisis and that we

not in the process of caring so much, make the mistake of federalizing industries like the airline industry.

Senator GRAMM. If I could just get a yes or no from Secretary

O’Neill and Chairman Greenspan. I assume that both of you would

strongly agree with the thesis that, if we did loan guarantees, we

ought to have a board that has the responsibility of not making

loans they believe cannot be paid back, and that we should guarantee only a portion of the loan so that the lender has some due

diligence and something at risk.

Do you both agree with that and agree with it strongly?

Secretary O’NEILL. Certainly, I do. The idea of a loan guarantee

suggests that there is a need for a supplemental back-up because

there is doubt about the borrower being able to discharge their contractual responsibility. And I would say to you—this is personal experience talking now—for companies that are not viable, if you

want to give them a loan guarantee, in spite of the fact that they

are not economically viable, 80 percent will not do. You need to

give them 115 percent loan guarantee because only a fool would

give a failing company money if you are only going to get 80 percent of your principle back.

So, the idea of loan guarantees make no sense. If we take care

of the essential clarity of not putting the airlines at risk for safety

things beyond their capability and we take care of the imposition

of the cost of shutting down the airways for 4 or 5 days, viable airline companies will be able to get money from intelligent investors

because that is what intelligent investors do, is give money to people who give them a good return.

Chairman SARBANES. Chairman Greenspan.

24

Chairman GREENSPAN. I agree with what the Secretary said.

Chairman SARBANES. I am going to turn to Senator Dodd. As I

do, let me just make this observation.

The Congress in the past had loan guarantees for Chrysler, Lockheed, and New York City. All of those loans were paid back. In

fact, we, in a sense, came out ahead.

So, obviously, we have to look at the facts of this circumstance.

But that program was structured in such a way that it responded

to the crisis that confronted us. But it did it in a way that it

worked out, so that there was no cost to the taxpayer.

Senator Dodd.

Senator DODD. Thank you, Mr. Chairman. Let me first of all, say

to the panel again how much we all appreciate your statements.

Secretary O’Neill, your opening comments, if nothing else out of

this hearing, I hope people listen to what you had to say regarding

the notion of caution and what Chairman Greenspan has said

about better to have it right than fast. There has been the sense

of urgency and it is understandable. People want to respond. They

want to do something. And in our desire to do something we can

do some harm in the process. And your wise counsel here to those

of us in Congress who want to respond to our constituencies, who

want to help. And it is hard when you are in the mood to help, to

sit back and wait while things sort out a bit. So I am deeply impressed with your statements, all of you. Chairman Pitt, you made

the same points and that is extremely worthwhile.

I wanted to say at the opening remarks how deeply impressed I

was with the work of Dick Grasso, the exchanges, the working

groups, and all of you here. And I think you were right about the

Monday decision. Boy, what a difference we would have had if we

started on Thursday or Friday and there had been a disruption.

And I think that visual of those of you who were there ringing that

opening bell on Monday was tremendously important. I know the

market has been bouncing around in the last couple of days. But

I think those have been very important decisions and I just wanted

to restate them again.

I would like to raise a couple of questions. First of all, just to follow up on the line of questioning that Phil had started. I think it

is an important one on the airline industry. I would hope in your

assessment of this, whether you talk about direct investments—let

me put a question mark at the end of this rather than try to give

you sort of an editorial comment. As you are looking at this, you

are going to be looking at events beginning on Tuesday, September

11 because, frankly, there were problems, in my view, with the airline industry that existed prior to September 11. And I would hope

that as we try to do things to assess or to correct problems, we are

not reaching back further, in a sense, beyond that.

That is a difficult thing to do. I am not suggesting that that is

an easy task. But it is going to be extremely important because

your job gets a little bit easier in the point you are making. When

you talked about Lockheed, and I agree with Chairman Sarbanes

about this, having been here with Phil and others when we went

through the New York City, Chrysler, and so forth. There you were

dealing with single entities and it was easier to get your hands

around.

25

Here you are dealing with multiples, where there are varying degrees of good management and success. Some airlines, if we walked

in and said, we need help, based on who they are and who is running them, you would not need much more than that. There are

others, you might not give a nickel to based on who is running

them. So I would hope that as you are looking at that, you will

keep in mind, we are talking about September 11 forward as a result of what has happened.

I wonder if you might as well, since we talked about the airline

industry and where you are in that. In my State obviously, the insurance industry is a major factor. We have received calls from the

industry themselves as to where things are. They seem fairly confident and optimistic that they can handle the situation. But I wonder, Mr. Secretary, if you would give us your assessment of the implications to the insurance industry.

Let me point out, by the way, I should have done this. We got

a letter this morning, and I am sure all of us are going to be getting letters similar to this one. This letter was from a car livery

service in my State, the point again that Phil was making. This car

livery service is going to lose, according to Susan Garino in my

State, 75 to 90 percent of sales already. This is a little company.

This is a small business. I understand we are going to come in and

airlines are going to be asking for help but what are we going to

do for Susan Garino and her business and the 5, 10, 15 employees.

Again, I am not suggesting you can do something for everybody.

But you have 11,000 people at U.S. Air who lost their jobs and

30,000 at Boeing.

I would like to hear, if I could some comments about what suggestions you would make in terms of unemployment assistance to

people who also have suffered here. And I realize there may be

some limits. But it seems to me people who are working hard and

doing this—the people in the industry, people at Canter-Fitzgerald,

I have talked to some of these people and they are worried. They

had limited partnerships. They have four or five kids in these situations.

Now you had a huge loss there, and this may get a little bit beyond your range of ability. But I think expressing some thoughts

about this to the industry leaders as to what might be done could

be helpful. So I wonder if you might just make some comments on

those three or four items.

Secretary O’NEILL. Thank you, Senator. I am really impressed

with your analysis of the situation.

With regard to unemployment insurance, I saw in the newspaper

this morning that there is a question about New York State. I

think we should respond, and we will respond as we have on other

occasions where we have had strains in the unemployment insurance system. There is no doubt, together, we will work that out.

I want to go back, before I talk directly about insurance companies, to this question of the industries that are affected and the activities that are affected by this airline crisis, because I have heard

from some important hotel people who are dramatically affected by

the consequence of this. And if we are going to fix their problem,

we have to get people back in the air. And the way to do that is

the things we talked about earlier.

26

Again, we need to focus very clearly on where the lever points

in our economy are and make sure we are not treating the secondary or tertiary consequences, but we are fixing the hole in the

system that will make everything else work. And airlines are really

important to that because it will put the possibility of conventions

and the like back in place, many of which are being cancelled now

because people are fearful and the rest of that. So I think we need

to work on the clear problem and the successful ones will then

begin to take care of themselves.

On the question of the insurance companies, I honestly do not

think we have enough data yet. But I think again we should follow

a principled approach. Where insurance companies are being called

on to fulfill their contractual obligations that they knowingly and

freely took, I think we should expect them to fulfill their obligations. If insurance means anything, it means the mutualization of

risk and the delivery of payment when certain events take place.

So I think we should be clear about that principle.

Senator DODD. My indication is that that is happening.

Secretary O’NEILL. I think absolutely, Senator. I am really proud

of a lot of people I know in American business because they are

stepping up to the plate and they are saying, this is the effect—

Sandy Weil said the other day—this is the effect that it is going

to have on our company. We contracted for it. We are going to pay

it. We are not asking for somebody to, in quotes, bail us out. Again,

it is testimony to how wonderful people are in this country.

There are another set of risks and I think they are more attentive to going forward than going backward in this sense. I believe

for those individuals and businesses that were at ground zero, we

have already, you have already taken some action. You all took the

initiative in taking some action to give us resources to deal with

some of those things very directly for the human beings that have

been hurt or killed and for the businesses in the direct impact area.

But going forward, we are going to have to, for example, back to

the airline example, we are going to have to figure out how we can

mutualize, I think on a societal basis, the risk that is associated

with terrorism because no insurance company in their right mind

is going to leave an opening in policies they write going forward

that exposes them to that risk. And I think we need to fix that.

Senator DODD. Phil and I have already been having private conversations about what we might—some suggestions, and we will be

in touch with your shop about it.

Secretary O’NEILL. But I think this is the way we should think

about it, Senator.

Senator GRAMM. I would just like to say that, one of the problems we have had in the past is that the insurance companies had

wanted to put reserves together for a cataclysmic event.

It seems to me that one of the things we ought to look at now—

I know it is after the horse is already out of the barn—is allowing

insurance companies to put together this pool of their own money

to deal with cataclysmic events in the future. I think that the lesson here might move us toward that solution. That is something I

believe we ought to do as a good Government reform follow up.

Senator DODD. We have talked about it over the years. In fact,

Dan Inouye, Ted Stevens, among others, on the west coast, we have

27

had a lot of huge natural disasters that have provoked this discussion. But we have entered a new world here on this. I have used

up my time and I will come back. I appreciate it. I have some questions for you. I do not want you to feel alone over here, Harvey.

We have some questions for you.

Chairman PITT. I am learning.

Chairman SARBANES. Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman. Again, I would like

to commend the witnesses for their quick and thorough response to

the terrorist attacks.

You all exercised a good deal of authority in order to speed recovery and to get our markets back functioning smoothly. And particularly, I would say the Fed’s quick response in injecting liquidity. It

is a critical component I think of our economic stability. Do you believe that the authority at your disposal is sufficient from which

you have experienced to this point? Or do you think in some way,

some of that authority needs to be modified or expanded in some

way? And I would like to have you each respond if you have any

response to that?

Chairman GREENSPAN. I think our statutory basis is fully consistent with our needs.

Senator ALLARD. Okay.

Chairman PITT. I would just say I think we were given emergency powers after the 1987 market crash. And this is the first

time we have used them. The only possibility that I can see for additional authority for us is that we have a 10 business day limitation on our ability to provide extraordinary relief. My judgment is

that that is probably sound and it will in all likelihood be enough.

But if it is not, then we would like the opportunity to at least let

this Committee know that we think we might need the ability to

expand beyond 10 business days.

Secretary O’NEILL. We are going to be coming forward quickly.

As a matter of fact, I have been so tied up today, we already may

have presented the Congress with some proposals for amendments

of some existing laws that will give us the ability that we need to

share information across all government intelligence agencies and

be able to take blocking action on financial accounts. But with regard to our ability to work directly on the issues related to the

market, I think we found that we had the authorities we needed

on this occasion.

Senator ALLARD. There has been some news reports that terrorists may have used the stock market to profit financially from

these attacks. I am curious to know what is being done to investigate these reports. And are there any thoughts that you have in

regard, if this is happening, how you might address it?

Chairman PITT. Let me say, we are aware of those reports. There

is a multiagency effort underway under the leadership of the Federal Bureau of Investigation. But my agency is actively investigating reports of possible terrorist activity. The difficulty, of

course, is in going through a lot of records and dealing with foreign

transactions as well. But I think our enforcement division, along

with the Federal Bureau of Investigation, is proceeding with alacrity to try and find out whether there are any violations of law.

Secretary O’NEILL. We are working with Harvey.

28

Senator ALLARD. Mr. Chairman, I am finished. Thank you.

Chairman SARBANES. Good. Thanks very much, Senator Allard.

Senator Stabenow.

Senator STABENOW. Thank you, Mr. Chairman. And again, thank

you all for being here.

Yesterday in Detroit, we had an excellent meeting with Secretary

Evans and Secretary Chao and leaders from the automobile industry, other manufacturing CEO’s, and top levels of organized labor.

It was an excellent chance to talk about the manufacturing sector,

what the concerns are, the needs are. And there were two issues

in particular that were raised of great concern that I would appreciate your responding to.

One relates to the issue of credit. And while we know that there

will be a fine line between being cautious in terms of loans to troubled industries, there is a great concern that there not be an overreaction in terms of reclassification of credit or access to credit

when in fact that is not warranted. So there is a deep concern

about balancing what happens to credit availability.

And then the second thing relates to Chairman Greenspan, what

you talked about in terms of the borders and the border crossings.

Our industries are very much involved with just-in-time supply

processes. We have hours of delays now at the border in terms of

the security inspections of trucks.

And while we know that security is the top priority right now,

we are deeply concerned. And Secretary O’Neill, I would welcome

your thoughts regarding how the customs service is going to address this challenge. We certainly understand about the need for

security. But this is becoming just a critical issue that has directly

involved lay-offs of workers and very difficult challenges for our

businesses.

Secretary O’NEILL. Well, thank you very much, Senator.

I have a five-page report anticipating that someone would care

to ask about this question. It is up to date. It is through yesterday

morning’s peak hour of activity.

When this issue was first brought to my attention last Friday,

the claims were that there were lines as long as 18 miles backed

up at the Windsor Tunnel in Detroit, and at Port Huron in Buffalo

that are the main line alternative routes into the country from

Canada for the automobile companies, especially for General Motors. I was astounded that these queues had formed.

But as I investigated, what I found is that we, the Customs Service and the Treasury, had immediately on the passing of these

events gone into what is called a level-one alert. That means that

the intensity of investigating every vehicle that comes across the

border is raised enormously from normal practice. And indeed, we

had not at that point gotten to the stage of trying to balance traffic

that was coming at us by letting the manufacturing companies

know the length of the queues between these alternative routes.

Well, I am happy to report, and you probably know this, yesterday morning, the longest queue and the longest delay was at the

Windsor Tunnel, where it was still 60 minutes and one mile. But

it was the longest delay in the northern border crossings between

the United States and Canada.

29

I think we put more resources on the issue. I think we are doing

this more cleverly as we understand how to work with this heightened security concern. And as I look down the list at Port Huron

yesterday morning, during the peak hours, there was a 10 minute

delay with—it is interesting how precise these things are—a 300

foot queue. I wonder if somebody really measured it.

But in any event, I think we understand the problem. As a

former manufacturing person, believe me, I understand just in

time. It is one of the ideas that has created the huge productivity

that we have had. We understand it. We are going to do everything

we can to drive these numbers back to very small minute delays.

But we are not going to reduce security. We feel we must make

sure that we are not letting components for bombs and explosive

materials come into the country. That is got to be our first priority.

But we understand and are working with the automobile companies and I guarantee you, we will get these levels down so that we

are not the probable cause of any person being out of work or any

manufacturing process being stopped.

Senator STABENOW. I appreciate that very much and look forward to working with you on that. We are very concerned, first,

that we do focus on security, both Customs and INS. We are concerned that there has not been enough focus at the Canadian border. The focus has been at the Mexican border rather than at the

Canadian border.

Secretary O’NEILL. That is true.

Senator STABENOW. But we are just very concerned that this be

a sustained effort as we know that we have to sustain our security

efforts, that the increased staff that is necessary to guarantee that

the improvements that you have already talked about, and I am

very pleased to hear that. We want to make sure that people are

continuing to focus on that because this is a tremendous entree to

the country in terms of commerce and critical to so many of our

industries.

Secretary O’NEILL. Thank you.

Chairman SARBANES. Thank you very much, Senator Stabenow.

I would just make the observation, we can have very intense security, no lines, if we have sufficient personnel and clearing points.

Now I know you cannot ramp up to that immediately, but in the

long run, we can have much tighter security at our airports and at

the border, a much more thorough check, not create a back-up

problem, if we are just willing to make the investment in terms of

increasing the number of clearance points at the facility. It seems

to me sort of simple. I hope I am not missing something. I know

that ramping up, getting the people is something of a problem. But

other than that, there is a fairly clear solution to this problem, is

there not?

Secretary O’NEILL. I think, Senator, there is an immediate need.

There is no doubt that—as long as the system is designed the way

it is, more people is the answer to reducing the length of the

queues.

But, again, I think, as we go forward, we should not freeze in

place what I would hope are temporary solutions, where, with the

use of technology, for example, working with, say, Rick Wagner at

General Motors, and figuring out a way that we can bond shipVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
30

ments at the plant before they are even shipped so that we can

scan them electronically and have electronic interlocks so that we

know they were not opened in transit. They could go sailing

through border points without further inspection.

So I think that we need to leave ourselves open to ingenuity and

innovation and not simply fix the problem that we have today as

though that were a permanent fix.

Chairman SARBANES. I think that is a good observation.

Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman. Building a bit on what

Senator Gramm said earlier about everybody, all 285 million people

in the country were affected. I want to concentrate for just a

minute on some of the small businesses that were affected because

I am from Wyoming and under a Federal definition of small business, there is not a single big business headquartered in Wyoming.

Those small businesses are facing a lot problems as a result of

last week. Some of them are regional airlines. Some of them are

charter services. Some of them are crop-spraying companies. But it

gets into the peripheral businesses as well, the ones that provide

meals, the ones that run little shops in airports. And even with big

business, what economic incentives do you think need to be provided to avert further weakness in the economy? And that is in recognition, too, that small business is about 90 percent of the businesses of the country. And they do not have nearly the flexibility

in the money market that the big companies do.

They are very limited and do not have as many sources. So are

there any incentives, economic incentives, that could be provided to

avert further weakness in the economy?

Secretary O’NEILL. Chairman Sarbanes has decided that I should

go first.

I understand your concerns, Senator. It was really brought home

to me in the impact area by seeing this story—I forget which channel it was on—and showing the effect on a deli in the shadow of

where the towers had been and the impact that this has right there

on the site where this person has relied on 20,000 people and the

workforce there, coming in and getting pastrami on rye, and both

the physical damage and the lack of business is a real thing. For

many small businesses that live on pretty thin cashflow, this is a

crisis of substantial proportions. I think you cannot help but, for

them and for the people you are talking about in Wyoming, you

cannot help but have an ache in your heart for what this means

to everyone around the country, including small businesses.

My first prescription would be that we get as close back to normal as we can and as fast as we can by dealing with some of the

direct things. We have discussed at length the airline industry and

I think that that has a ripple effect into other kinds of businesses.

We need as best we can, even though it is never going to be the

same, to return to a sense of normalcy in American society.

And then I guess I would say, honestly, I think we need to do

this diagnosis that underlies what both Chairman Greenspan and

I have said about what, if anything, we could do that would not be

a grant of relief, which we are going to have to take away from others. It is really a redistribution function to be given to somebody

else. It does not really create much economic value.

31

We need to think hard about what is the problem. I am not so

sure yet what is the problem. I was really sure before September

10 that the problem we had in our economy was related to the investment side of the equation. The consumers were quite strong.

And many industry sectors were operating at close to record rates.

I went into my friendly clothing store in Pittsburgh before this

and said to him, how is your business? He said, well, it is not very

good. And I said, compared to what? And he said, last year was a

record year and we are only running at last year’s rate.

And there was a lot of that in our economy. But if you look at

why we were running slow, we were running slow because the investment rates that had been in our economy in technology, particularly in telecommunications and computer technology, were off

by 50 and 75 and in some cases of individual firms, off 100 percent

from the year before. And so, if we had the same economic circumstances today that we had on September 10 and you said, what

should we do, I would say then, and I did say then, that I think

we are going through a normal correction and we should stand by.

Circumstances have changed since then and I think we need to

have a period of time to assess, if we are going to make an intervention, where do we make it?

Consumers have been strong, and I think consumers will be

strong again when they get their feet underneath them and they

start going out to dinner at night again and doing the normal

amount of travel and do not spend so much time looking at the

tragedy that we keep seeing over and over again. And I am not yet

ready to tell you as a final judgment.

But I think if we are going to do something, one thing that would

be helpful to do is some intervention perhaps that would provide

some support for the market value of American enterprise. What

I mean by that is this.

If you want to know what establishes the value for an individual

company or for all the companies in America, we now have a very

refined capital investment process. And the judgments that investors are making are judgments about the future free cashflow and

what the value is of that future free cashflow. That is what determines market capitalization.

And what we are seeing right now in this move from—let me use

the Dow Jones Industrials as an indicator—movement down from

11,000 or 10,500 to yesterday’s close I think was 8,600, is a judgment that the future values of the discounted cashflows are 20 percent lower than they were. Now, how can we intervene to create

the prospect of higher future free cashflows?

Well, one way to do it is to reduce the pressure that companies

have from paying taxes. That is not my answer at this point. But

as I analyze the problem of how do we create some stability for

market capitalization that represents our economy, that is where

I look for that purpose.

And then the second issue is what action can we take that will

more quickly than would otherwise happen, restore confidence and

expectations so that consumers go back to buying houses, cars,

clothes, and all those other things they have an ability to do, rather

than retrenching and holding back, they proceed with confidence

about the future. And again, we need 10 days or 2 weeks to think

32

deeply about these things and not just fire the shots that we happen to have on the shelf from past thoughts about these things.

Senator ENZI. Thank you. My time has expired.

Chairman PITT. Senator, if I could just add one comment to that.

Chairman SARBANES. Chairman Pitt.

Chairman PITT. I think that the need of smaller size companies

and particularly with a large local following, also requires us to

think in terms of what impediments we impose on those companies

to be able to raise capital in a more efficient way from people who

have a better idea of what the nature of the business is, those in

their locality.

I believe that there is a fair amount that the SEC can do to try

to streamline the process, without obviously jeopardizing investors,

but that would give smaller companies a lot more immediate access

to sources of capital based on their record of performance and their

prospects.

Senator ENZI. Thank you. And thanks for the concentration on

small business.

Chairman SARBANES. Thanks very much, Senator Enzi.

Senator Bayh.

Senator BAYH. Thank you, Mr. Chairman.

Gentlemen, I have three questions. My first attempts to look

down the road a little bit after we are through this initial period

of, as Chairman Greenspan mentioned, the physical disruptions

and anticipate what are the risks maybe out there for the economy

and the global economy.

In particular, I would like to ask a question about Argentina and

the risks of contagion in the developing world. As I understand it,

the recent action by the IMF has gotten a window of opportunity

for Argentina to attempt to implement its austerity program. They

have an election campaign coming up and we all know how those

things can be. It might not take more than an ill-advised remark

on the part of one of the leading candidates to cause a run on their

banks.

In any event, as I am informed, possibly as soon as 2 or 3

months, we may see what their prospects are. So my question is,

if at some point in the not-too-distant future it becomes apparent

that they may not be succeeding—we obviously hope that they do,

but they are facing either a potential default or a devaluation—

what are the risks to the global economy from such an event?

Will it be limited to Argentina, Brazil, possibly Hong Kong, that

also has a peg? Or will it go beyond that? And what, if anything,

should we be thinking about in terms of what action, if anything,

can be done? So what are the risks and what can we do?

Secretary O’NEILL. You do not want to even think about this, do

you, Alan?

[Laughter.]

This is a subject that, aside from the tragedy of last Tuesday,

was on the top of our work list. And it is obviously not at the top,

certainly not in the same sense that it was a week ago. But we are

paying close attention because as a consequence of what happened

here and the recalibration of capital markets all over the world, the

Argentinean premium to U.S. Treasuries has moved back up again

33

to something over 1,500 basis points; over where we were on September 10.

Now I have to say at the same time that it was 1,800 basis

points until the IMF intervention of a few weeks ago. And I am

sure you must know, Senator, because of the depth of your question, that we in the U.S. Treasury have been working very hard

with the IMF to see how we can be helpful in situations like Argentina’s and like Turkey’s, for that matter, and the other places that

you have mentioned that are in some sense problematic, to see if

there is not a way that we can invent new devices that work better

and that do not result in, in effect, socializing to the world a process of bad decisions by sovereign governments. It makes a lot of

sense to me.

I think we should be prepared to help and we in the United

States should help developing countries around the world. But I do

not think we should ask our taxpayers to pay for a continuation of

obviously bad decisions by a sovereign government.

Now, one of the things that we have encountered in working with

the IMF is this—that the securities that have been issued by the

sovereign government in Argentina have provisions in them that

make it very difficult to use leverage as a way to solve the Argentinean problem instead of tranches of $30 billion or $40 billion or

$50 billion worth of taxpayers’ money from here and other places

around the world.

And so, one of the lessons that we are learning out of this process

is the need to work with governments around the world to make

sure that they do not create blocking actions in their issuance of

securities so that when they get into this kind of situation, it is

possible to segregate the debt obligations they have and in effect

take part of their debt obligations to, let me say, a AAA balance

sheet, so that the IMF can use its ability to raise money at 3 percent to help a government get out of a very difficult situation, instead of giving them money to support their ability to pay 18 or

20 percent interest rates.

And as recently as Monday morning, I had breakfast with Horst

Kohler from the IMF and said to him, I think now is the time that

we need to take the action that has been talked about for years

that has never been done. We need an agreement on an international bankruptcy law, so that we can work with governments

that in effect need to go through a Chapter 11 reorganization instead of socializing the cost of bad decisions.

So, on the one hand, yes, we are paying close attention to Argentina. There may be some additional necessary action. We are working to see if we cannot create the circumstances of using leverage

rather than huge amounts of additional money. And we are going

to work hard and, hopefully, successfully, to put in place things

that people who follow these things have known for decades we

should have done. Maybe one of the consequences of this tragedy

is we will finally take action on some of these things that we know

we need to do.

Senator BAYH. Thank you, Mr. Secretary. You have raised a

number of interesting issues. I would love to follow up on it some

other time.

34

Chairman Sarbanes, I see my time is expired. I only got to one

question.

Chairman SARBANES. Let me say this. I know you staked out

three questions. That has been done in the past, of course. That

does not mean you get to use all the extra time you want in order

to get your three questions in.

Senator BAYH. I am new, but I am resorting to using the old

tricks.

[Laughter.]

Chairman SARBANES. Why don’t we do this. We will give you another question. The time has expired.

Senator BAYH. I will be very brief.

Chairman SARBANES. I want to ask Members to be brief on their

questions and the panel brief in their responses. And let me outline

for Members what we intend to do.

We want to complete this panel. We will go through a round.

Hopefully, we will not use a second round. I will try to forebear.

I know others have questions. Because I intend to go on and do the

next panel continuously, not to recess and go over after lunch. So

we intend to have the exchange people who have come down, some

from New York to be with us, and follow right on the heels of this

panel.

Senator BAYH. Thank you, Mr. Chairman.

Chairman SARBANES. Evan, why don’t you ask one more question

and then I will come to Senator Hagel.

Senator BAYH. Thank you, Mr. Chairman. I will be very brief.

Mr. Secretary, I look forward to following up with you at some

appropriate point. It occurs to me that these are important issues

that have been with us for some time. This is a most inopportune

time for further shock to the global system, and so they may come

to the forefront in the next couple of months.

Chairman Greenspan, if I could just look down the road again in

a few weeks. And I agree with everything that you said and the

Secretary said about the need for patience. It is better to act wisely

than to act quickly, as I believe you said.

Looking down the road, if we are confronted—my question gets

to one of economic policy and the possibility of fiscal stimulus beyond that required to respond to the immediate tragedy, both the

defense aspects and the reconstruction aspects. And here’s my

question.

In some of the press it is been reported that in the last couple

of days, long-term interest rates have begun to rise a little bit in

the anticipation of the Federal budget surplus not being as large

as had been expected. And I would like to ask your opinion about,

from an economic policy standpoint, the risks to the economy in the

short-run, the benefits of fiscal stimulus and the potential that

they would be offset by higher interest rates and the effect that

that would have on capital expenditures.

So my question very directly is, is there not some short-run risk

to the economy to completely abandoning fiscal discipline? And we

may be confronted with some of these issues in the next several

weeks.

Chairman GREENSPAN. Indeed, there is, Senator, and it is an

issue which I did discuss with your colleagues in the leadership

35

yesterday. It is apparent, at least to some of us, that the extent to

which capital gains, both realized and unrealized, on homes has

contributed to consumption expenditures this year, it has been a

major prop that has offset, at least in part, some of the very major

contractions that we have seen in the capital goods area.

The cause of that is two-fold. One, of course, we have had a fairly

extensive increase in prices of homes. But more importantly, and

this is relevant to the issue of house turnover and realized capital

gains in homes, which is a major factor in extraction of equity for

personal consumption expenditures, that has occurred largely because mortgage interest rates have been low.

One of the elements that you point out which I found disturbing

is that, in recent days, we have seen average corporate rates, BAA

corporates, for example, rising fairly significantly, and while we do

not have as current data on mortgage interest rates, they lock in

fairly closely to the 10 year yields. This suggests to me that we

have to be quite careful because until we find out whether the rise

in long-term rates is merely a reversal of the fairly pronounced decline in rates that occurred in the weeks previously and, hence, is

not a significant issue, or whether, as you suggest, it might be a

fiscal problem, until we find that out, we are not going to know

what the appropriate balance of fiscal policy, monetary policy and,

indeed, all policies concerned is, because, as I indicated yesterday,

we have to distinguish between gross and net stimulus.

Gross stimulus is relatively easy to calculate. We can just look

at the extent to which we are expanding Federal expenditures or

cutting taxes and make reasonable judgments as to what that impact is. But until we can determine what the secondary effects on

long-term interest rates are and, hence, the negative effects on personal consumption expenditures and, as you point out, presumably

on capital investment, we cannot make a judgment as to whether

in fact a particular package of stimulus is indeed a stimulus.

And one of the reasons why I have cautioned about waiting until

we can truly segregate the strictly infrastructure problems which

we know are temporary as they impact on economic activity and

underlying demand, we are not going to be able to get a good judgment on this particular question either.

And therefore, I would hope that within 10 days, it may be a little longer—it usually tends to turn out to be longer than we expect,

but not a substantially longer period—at that point, we should be

able to make the judgments as to what is equivalent to flood damage, if I may use that category and what is real economics.

And in the real economics, the crucial question is to what extent

is the most recent pattern of rise in long-term corporate rates and,

presumably, mortgage rates, a factor?

Senator BAYH. Thank you, Chairman Sarbanes.

Chairman SARBANES. I might note, I think that that was a very

important question. I think this is a very important issue that we

have to address.

Senator Hagel.

Senator HAGEL. Mr. Chairman, thank you.

Secretary O’Neill, as you have ranged out this morning, over

these unknowns as to where we go from here, what action should

we take and consider, as Chairman Greenspan just noted, refVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
36

erencing your comments and your testimony regarding a 10 or 14

day window, and probably beyond, before we will fully be in a position to accurately assess what we need to do, with that in mind,

can you tell this Committee if the Administration is considering

any proposals regarding capital gains tax cuts or any other additional tax cuts?

Secretary O’NEILL. Senator, I would say that we are looking at

every instrument that is ever been used before, and some that have

not been used, but have been proposed.

In the spirit of what I said earlier of wanting to make sure that

we do not leave anything out, but that we fit the solution to a careful diagnosis of what the real problem is. And as the Chairman

said very clearly, to make sure that in the name of trying to do

right, we do not actually cause damage.

And I must say to you, I do think there are instruments that

have been used in the past and some that are suggested that are

of dubious value. But I do not think that we should rush to judgment about that. I think, in the spirit of what you did yesterday,

some in the leadership had a meeting yesterday and you reached

out to Bob Rubin.

I thought that was wonderful. We need to take advantage of

every smart mind that we can bring to bear on these problems, and

we need to proceed in good faith without a predilection toward we

already have this tool and we already know the answer, and now

is an opportunity when we can go ahead and put it in place, without careful consideration of what are the consequences and does it

have lasting value to the economy.

Senator HAGEL. Does that mean that that is a yes as far as the

Administration is considering capital gains tax cuts?

Secretary O’NEILL. We are looking at every single one of the

things that you mentioned as possible things that one might do.

Plus, there are many ideas about minimum wages and the supplements for nontaxpayers. And I only offer you in the sense I want

to be really clear in backing up what I said to you—we are not excluding anything.

Senator HAGEL. Thank you. Chairman Greenspan, I was very interested in the section in your testimony regarding trade. And if I

might read back a couple of sentences here to frame the question.

In your testimony, you said, ‘‘As a consequence of the spontaneous and almost universal support that we have received from the

world, an agreement on a new round of multilateral trade negotiations now seems more feasible. Such an outcome would lead to a

stronger global market system. A successful round would not only

significantly enhance world economic growth, but also answer terrorism with a firm reaffirmation to our commitment to open and

free societies.’’ You noted, I am sure, that our U.S. trade representative, Ambassador Zoellick, had a very direct, thoughtful piece in the Washington Post op-ed section today which I happen to agree with.

Would you care to reflect on this statement in a more defined way

and connect, if you will, a little more of the aspect of the terrorist

reference—stability in the world, economic growth, why that is

good, why that might have some impact on what occurred on September 11, if we can move on beyond where we are?

37

Chairman GREENSPAN. Senator, I have not had a chance to read

Bob Zoellick’s piece, but I suspect that I could probably write it, so

it may not be necessary.

[Laughter.]

Chairman SARBANES. You are assuring us that you did not write

it, though, I take it.

Chairman GREENSPAN. Hardly, Senator.

Senator HAGEL. Ambassador Zoellick would be flattered.

Chairman GREENSPAN. We have developed a really major and, in

many respects, extraordinary economic system on a global basis in

the last 10, 15 years, resting on technology and the free movement

of people, and capital goods. And most interestingly enough, during

the period, we have seen increasing evidence that the interaction

between economies has enhanced global growth and, indeed, the

growth of everybody.

And I thought that an item I read today or yesterday, which indicated that despite the fact that we have had all of this major increase in telecommunications capabilities, airline travel has gone

up very markedly, the implication being that you really still have

to deal with persons face to face. It is sort of the way the human

species functions.

The openness of societies, the openness of economies are very

crucial for economic growth and they can be open only if they are

not hampered by violence. Violence is complete destruction of the

institutions of free markets and of global economic systems. Our

system is based on voluntary trade by free individuals. And to the

extent that we engage in that, we expand the living standards of

everybody.

One thing that I was very impressed with, and I must say, if

there is ever even remotely a silver lining in such an extraordinarily horrible tragedy that we confronted last week, it is the

really quite surprising coming together of everybody. I have gotten

letters from central bankers, finance ministers from all over the

world, and I might add, Arab nations as well, all expressing concerns about what has happened and wishing us well. And I was

deeply touched by these letters.

I do not know whether or not it means that when you get into

a negotiating situation, that that goodwill tends to spill over. I

think it does. And if it does, it means that we can make further

progress in an area which I think has done so much to enhance

human welfare worldwide since the end of World War II.

Senator HAGEL. Please convey to your people our appreciation.

And thank you very much for your leadership and commitment to

this country.

Thank you.

Chairman SARBANES. Thank you very much, Senator Hagel.

Senator Carper.

Senator CARPER. Thank you, Chairman Sarbanes.

Like Senator Bayh a few minutes ago, I had three questions. He

asked one of mine.

I had wanted to delve into why long-term rates are trending up,

even at the time that we are seeing short-term rates continue to

trend down. I am not going to go there. He has already gone there

38

and we will wait a couple of weeks and we will come back and reexamine that issue.

I would like to go back to the points that at least two of you

made earlier in your testimony with respect to what was going on

in this economy in this country in the month of August, and the

very beginning, the early part, the first 10 days of September.

Could you just revisit that for us? And I only want to take a

minute or two on this.

Chairman GREENSPAN. We were still weak. In other words, we

were still essentially flat, as we had been since the beginning of the

year. But the elements of expansion and contraction were suggesting that at least the early stages of coming out of it were there.

One of the major elements was that the rate of inventory liquidation was very high and had not slowed. Now what we do know

about inventory liquidation is if you keep going long enough, you

will run inventories down to the point where you cannot continue

to liquidate at that rate. And merely slowing the rate of liquidation

will, of necessity, assuming consumption holds up, raise production

and employment and begin the virtuous cycle which gets us out of

these types of problems.

I do not want to suggest that we were about to turn and everything for the fourth quarter was going to be a major plus. That was

not our view. But our view was that the elements were there.

Clearly, retail sales were really surprisingly good considering the

fact that this major contraction in asset values outside of the home

equity area was still creating what we have called, as you know,

the wealth effect in a negative form.

But the system was holding up, as I put it here I think previously in this Committee, that the American economy just kept

getting battered and battered and battered and it was still standing. And indeed, as of September 10, it was still standing.

Senator CARPER. Secretary O’Neill, do you want to add or take

away from that?

Secretary O’NEILL. No.

Senator CARPER. Good. All right. Chairman Pitt?

Chairman PITT. No.

Senator CARPER. Okay. All right. My second question—we seem

to only focus on the need for an energy policy when we are sitting

in lines to buy gasoline for our cars, when they are having rolling

black-outs in California and other parts of the country.

Your views—given the events, the tragic events of last Tuesday,

is the need for a comprehensive energy policy for our country, is

the need diminished or enhanced?

Chairman GREENSPAN. Senator, I have always thought that it

has been a very important long-term issue of this country. Our infrastructure is clearly in difficulty in the electric area, in gas pipelines, and a variety of other types of problems that we have.

What we do know is the fact that owing to technology, natural

gas, which is becoming the fuel of preference pretty much around

the country, because of the technology, we are draining our existing

reserves at a fairly rapid pace, which means that in order just to

keep the level of production at approximately 23 trillion cubic feet,

we have to get ever increasing levels of drilling and expansion or

find ways of importing increased amounts of natural gas, which, as

39

you know at the moment, is largely only Canada, and there is limits there, but there are innumerable possibilities. There is now, as

you know, discussions on a pipeline coming out of Alaska, whether

it is Mackenzie River or whether it is going down Alaska.

But we have to focus on looking at the longer term because these

take years to do. And if we only address long-term energy infrastructure problems 3 weeks before we need an answer, we are

never going to get there. At the moment, the demand for power is

pretty soft because the economy is soft. That is going to change.

And when it changes, unless we have a longer-term focus on how

we put our infrastructure together, how we set incentives and rules

to, one, maintain energy security while protecting the environment,

we are going to run into trouble.

And I think unless we give it very considerable thought now, projecting 5, 6, 7 years out in the future, we are going to get sub-optimal solutions.

Senator CARPER. Other comments?

Secretary O’NEILL. I agree with what Alan said.

Senator CARPER. Thank you. Thank you very much.

Chairman SARBANES. Thank you very much, Senator Carper.

Senator Bunning.

Senator BUNNING. Thank you. I have eight questions that I

would like to ask.

[Laughter.]

Most of my questions have been asked, but I have some additional ones.

Senator Allard hinted at this, but I think it needs exploring even

more. There have been rumors of international short sales on the

day preceding the attack on the United States by terrorists. I

would like any one of you to comment. I do not want to jeopardize

any investigation you might be making right now, but Secretary

O’Neill or Chairman Pitt, maybe you could comment on that.

Secretary O’NEILL. As Chairman Pitt said earlier, we have a fullfledged investigation looking at the transactions that took place

and we will pursue those investigations until we are satisfied one

way or another that there is something to the rumors that have

been about, or that in fact these were normal market transactions.

I saw in one of the papers of record in the last couple of days,

someone had done an analysis and said, well, if you look at the

change in the ratio of puts to calls for American Airlines 2 weeks

before the event, and then a change in those ratios moving toward

September 11, that you have to factor in the fact that American

Airlines had a press conference or issued a press release saying

that our quarterly results are going to be substantially worse than

we thought. And they basically alerted the market that they were

not going to produce what the market was expecting and therefore,

if the share price does not move, it is not illogical for puts to significantly outnumber the calls.

The volumes that I saw were 3,000 contracts or something like

that. And while there is no doubt that there was a major shift in

the ratios between puts and calls, it is not clear to me yet from the

analysis that is being done that there was a huge amount of money

at risk. And the question I have asked is whether these contracts

have been completed. I do not yet have an answer to that.

40

To the degree they are not completed, I would like to make sure

that they do not get completed until we can satisfy ourselves that

these were not done on the basis of preknowledge.

Senator BUNNING. Obviously, we know who the people are that

are doing that.

Secretary O’NEILL. Well, it is not as easy as you would think

because——

Senator BUNNING. In other words, you would have to go through

the firm.

Secretary O’NEILL. You would start with the firm and then you

start trying to trace back for whom the firm placed an order. And

then, because these are very sophisticated things, you find in many

cases that you have to go through 10 veils before you get to a real

source. So this is tedious, complex work. Believe me, we are pursuing it.

Senator BUNNING. Chairman Pitt.

Chairman PITT. I just want to assure you, Senator, we have

heard the same rumors and we have devoted, as has the FBI, substantial resources to tracking down every rumor. If there is any

possibility that any nefarious activity took place in our markets,

you and the American public can be sure that we are going to pursue it and bring anyone who is involved in it to justice.

Senator BUNNING. Thank you. You talked about the airlines at

length and the possibility or the potential of some kind of a financial assistance. Could we also include in that financial assistance

your representation of the Bush Administration’s solution to some

of the security problems that go with it, like carry-on baggage, like

air safety security for the pilots’ cabin and the $5 doors that separate them from the passengers on the aircraft?

It is so essential for our American people to know that they are

going to be safe now in reaching the destination that they took a

ticket for. And so, I would insist before I ever voted for assistance

for the airlines of any kind that there be in place the Administration’s thoughts also on those type of security measures.

Secretary O’NEILL. Let me say maybe the simplest answer is absolutely. And you should not be concerned. You are going to see all

of that. It may have even arrived this morning on Capitol Hill.

I know over the last few days, we have been working hard on

this and we were solid with what we were going to propose last

night. And I honestly do not know whether we have now transmitted to you what we propose to do. But all the concerns you are

talking about are addressed by what we want to do.

Senator BUNNING. There is a report today on money laundering

and the ability of the Federal Government to track money laundering in the support of terrorist acts. The Attorney General is

quoted here.

Is there in fact a relationship between money laundering and the

fact that terrorists and those who support terrorism move money

illegally? And are we looking into that? At least that is what the

Attorney General is saying.

Secretary O’NEILL. Well, we are looking into it. The terrorist organizations that we know about are, as they have demonstrated,

clever and adroit.

41

I think as we chase these individuals and organizations, we are

going to find that their assets would not have been caught in the

general web on the work on money laundering because the money

laundering tends to be a function of drug trade and other illegal

activities that produce very large amounts of cash and then institutions are needed to convert large amounts of cash into book entries

at banks and the rest because it is just not practical to do business

or to buy other services for an illicit activity with 10 million one

dollar bills. And so, that kind of activity is focused there.

I want to be careful not to reveal the intelligence information.

But it appears that terrorist organizations have been funded from

legitimate sources, what otherwise one would call legitimate

sources.

Senator BUNNING. In other words, money-raising and all those

types of things.

Secretary O’NEILL. Absolutely. And so, I think, frankly, not to

get diverted, I honestly think that we can do much better on the

money laundering question than we have done over the last 25

years.

Senator Levin and I have had substantial exchanges about that

in another committee setting. I am determined that we are going

to begin getting value from money. I do not think we have done

that. I think the way we can get value from money is by, frankly,

using all of the intelligence assets that we have that have been

separated in our ability to use them by statute.

In the Federal Government, we need to take our own handcuffs

off so that we can go after individuals. At the end of the day, for

money laundering and for terrorist organizations, it is not like

going after a company that does business in a legitimate way.

These are very sophisticated operations. But at the end of the day,

all of the money laundering activity and all of the terrorist activity

goes back to individuals.

And I am convinced that the spinal column of our work needs to

be identifying individuals that we suspect of doing illicit or illegal

activities or being associated with terrorist activities and going

after individuals in a dedicated, determined way and either putting

them in jail or sending them some place where they never see the

light of day again.

Senator BUNNING. First of all, I want to thank all of you for coming and giving your testimony today. And I would like to urge the

Chairman, when the FOMC meets in October, that you continue

your reduction in the Fed rate so that we can get our economy back

on its feet.

Thank you.

Chairman SARBANES. Thank you very much, Senator Bunning.

I would note that this Committee had a hearing scheduled on

money laundering for September 12. In fact, we were going to hear

from the Under Secretary of the Treasury, Gurule as the lead witness. Obviously, it was not possible to carry through that hearing.

But it is now scheduled for next Wednesday. This was a hearing

scheduled well before all of this happened. But we will have that

issue before the Committee next Wednesday. I want to thank the

panel. Obviously, we could go on at some length, but we have another panel to follow on.

42

I do want to say that—— Senator DODD. Mr. Chairman, before you close out.

Chairman SARBANES. Let me just withhold, then, my final remarks. Are there any further comments that Members of the Committee want to make? Or maybe questions they want to leave with

the members of the panel?

Senator DODD. I will make a comment and submit some questions because we have to get to the second panel. Just very briefly,

Mr. Chairman.

I raised the issue of the unemployment compensation issues and

I raised it in the context of several questions. Mr. Secretary, you

are nodding your head and I take that to mean that that is going

to be part of the array of issues you look at on how we can help.

These are the people—we talk about airlines. We need to obviously

concentrate on people there. That is one. Small business obviously

is part of that.

I received a notice in the middle of the hearing here that a major

business in my State, one I know you are all familiar with, United

Technologies Corporation, received word today from their insurance

underwriters that they intend to pull their insurance they provided

to United Technologies on aircraft, at least as to various domestic

and international airlines. Their plans are, if that is the case, then

they are going to notify these airlines not to fly. So you can begin

to see the ripple effects of all of this.

I do not know, presumably when you are looking at the airline

industry, that is an immediate issue that would require some attention. I do not expect you to necessarily answer it for me here

today, but it adds one more wrinkle as we look at these questions.

Chairman Pitt, I just wanted to raise this, and I will submit

these questions in writing. These actions that you have taken,

many of them are temporary actions, ones that raise the easing of

company buy-backs, the accounting firms, their ability to assist

their clients to put together books and records, obviously things

you had to do.

I do not disagree with any of the steps. But the question of how

long those actions will be taken, what period of time, and what

other actions you may be planning on taking and who is taking advantage of them. The Committee, particularly the Subcommittee,

might be interested, and Senator Enzi and I on that Subcommittee

on Securities might be very interested in getting more detail with

you about some of those things that have occurred.

And last, Mr. Chairman, I thank you for allowing me to make

these points. On the capital gains tax, I was going to raise this

with Chairman Greenspan and Secretary O’Neill. I would be concerned about exacerbating any selling off, obviously, the obvious

concerns that we have without providing any kind of real stimulation to the economy as a result of any kind of capital gains tax cut.

I think a case can be made for some sort of credit for payroll taxes,

getting back to that small business that may be affected.

If we are looking at some things that might be done, I hope you

would consider something like that in the alternative, in my view.

But then, again, I want to subscribe to the point that you made at

the very outset of these hearings, and that is, take some time and

look at all of these matters. I know you will stay in touch with us

43

up here, all of us who care about these issues. But, again, I thank

you immensely for your testimony, all of you today.

Chairman SARBANES. Secretary O’Neill, I think your observation

at the outset that this crisis not be used in an effort to take off the

shelf matters that had sort of been held up or stymied or that were

highly controversial, in which there were strong arguments on both

sides, is very good advice.

I am moved to make that remark in view of Senator Dodd’s comments about the capital gains. It seems to me at the moment we

have developed a very good consensus way of working here in the

Congress, and between the Congress and the Executive Branch. It

seems clear to me that we want to sustain that until we move out

of this period. Then, obviously, we will resume differences over

what policies should be. That, after all, is what a democracy is all

about. We are certainly not going to close that out altogether.

The other is, Chairman Pitt, I understand that you are monitoring very closely to see that no abuses take place with respect to

the special rules you have instituted for a limited period of time.

We obviously urge you to continue that.

Gentlemen, we thank you very much. I want to say that we hope

at some opportune time to resume or take up the hearing on financial literacy. I have talked about that with all of you and we all

agree it is an important matter in the long run and we want to

come back and visit on that.

But, again, thank you very much for coming, and again our appreciation to all of the people who work with you, your staffs, who

have just mounted a very dedicated effort, and the response under

pressure I think has been very impressive.

Thank you very much.

Senator DODD. Thank you.

Chairman SARBANES. We will now go to our next panel, and we

are very appreciative of your patience.

[Pause.]

The Committee will now turn to our second panel. I think our

witnesses are very well known to the Members of the Committee,

but we are very pleased that they have come to be with us on relatively short notice. I will be very quick so that we can move to

their statements.

On this panel will be Richard Grasso, the Chairman and CEO of

the New York Stock Exchange. I think it is clear over the last 2

weeks that he was the right man at the right time for the job he

was in. In fact, former Treasury Secretary Bob Rubin was quoted

in The New York Times this week as saying ‘‘Dick is exactly what

they need now. He’s ideally suited to this.’’ And I would agree with

that assessment.

Wick Simmons is relatively new as the CEO of the Nasdaq Stock

Market, having been appointed to that position on February 1 of

this year. But he’s done an excellent job of helping to coordinate

the industry’s response.

And of course, few people bring more experience to market disturbances than Bob Glauber, who authored the Reagan Administration’s recommendations in the aftermath of the October, 1987

market break. Many of his recommendations, which were adopted

by the Congress, have come into play in this situation. So obviVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
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ously, that was a very significant contribution. I want to say just

one word and to try to put a little bit of this into perspective.

First of all, the New York Stock Exchange on Monday handled

a record 2.37 billion shares, as I understand it, up from the previous high of 2.09 billion shares, which was back on January 4. The

Nasdaq volume was a hefty 2.23 billion shares, but that is shy of

its 3.1 billion share record. And I gather that the exchange yesterday exceeded the previous record, the 2.09, by a slight margin.

The point I want to make there is that it is an exceedingly impressive accomplishment, that having experienced what took place,

you are able to put the markets back into shape to handle these

record volumes. And our congratulations and commendations go

out to you and your colleagues.

The other thing I want to point out and I think it is important,

is the drop in the Dow on Monday is 14 amongst the average worst

percentage declines, well short of the 23 percent plunge that we

had on Monday, October 19, 1987.

Now I do not say that to minimize it because it is still significant. But just to get it into some perspective so that people can understand, that the bottom is not simply dropping out of everything.

And in the course of your remarks, I think it would be helpful

if we could get some of that perspective. I think the same thing is

true of the Nasdaq. I think its drop was the 11 or 12 worst percentage drop. So it is not even in the top 10.

Again, I do not want to minimize it. On the other hand, I think

it is important for people to understand that in the picture, the

overall picture, this is not at the very end of the spectrum in terms

of what is being experienced.

Senator Allard, do you have any comment?

Senator ALLARD. No, Mr. Chairman. I am anxious to hear from

the witnesses.

Chairman SARBANES. Senator Dodd.

Senator DODD. Well, just to further your comments, and to all of

you, you have done a fabulous job in the last 8 or 9 days. And we

have held you up here a bit this morning. We apologize to the second panel. But you can understand the tremendous interest in the

questions and obviously, we have some for you as well.

Other than that, Mr. Chairman, I just wanted to commend Wick

Simmons for the vision that Nasdaq has had in locating its offices

in Connecticut and Maryland.

This is a very smart, wise, and thoughtful decision on the part

of this organization.

[Laughter.]

I did not want to miss the opportunity to commend you for that.

We thank you. It is a good job that you people have done.

Chairman SARBANES. It is not my intention to embark on a controversial matter like that.

[Laughter.]

It will not be necessary for you to answer that, Mr. Grasso.

Senator Enzi.

Senator ENZI. I included my comments in my opening statement.

Thank you.

45

Chairman SARBANES. Thank you very much. Gentlemen, we

would be happy to hear from you. Why don’t we start with you,

Dick, and we will go straight across the panel.

STATEMENT OF RICHARD A. GRASSO

CHAIRMAN AND CEO, NEW YORK STOCK EXCHANGE

Mr. GRASSO. Thank you, Chairman Sarbanes, and Senators

Dodd, Allard and Enzi. And thank you, particularly, Mr. Chairman,

for those very kind words. This is a collective effort, and that I am

very proud of what you will hear from this panel.

I want to thank this Committee, and particularly you, Mr. Chairman, and Senators Dodd and Enzi, whom we communicated with

during the middle of these discussions which led to the resumption

of trading. And most importantly, to all of the Members of the

Committee who I know were very supportive of the efforts, the collective efforts, I might add, of the markets and those in Government who oversee the markets.

I would be remiss, Mr. Chairman, if I did not at the outset say

that all that was accomplished since the great tragedy of last Tuesday could not have taken place without the wonderful stewardship

that we in the private sector had from this Committee, from you,

Mr. Chairman, but also from Secretary O’Neill, Chairman Pitt, Bill

McDonough, president of the New York Fed, and so many others

in Government who really were inspirational.

And I would be terribly remiss if I did not say that without the

incredible visit of our President, and the Herculean efforts of our

mayor, the lower tip of Manhattan would today still be in chaos

and I am afraid that we would not be in a position to, as we did

this past Monday, resume trading.

Mr. Chairman, the attacks of September 11 will be ingrained in

our national memory forever. The NYSE was not spared. Three of

our members, hundreds of our member firms’ employees, and a

number of my partners were either killed or at risk. Thousands of

others were displaced.

Everyone in our community has lost a family member, a friend,

or a cherished coworker. We are all, some almost 300 million

strong, impacted by this heinous act committed against our way of

life. Our thoughts and prayers are with the victims of the horrific

crimes that were perpetrated not only in New York City, but here

in Washington at the Pentagon, and certainly over the skies in

Pennsylvania.

The attack on the World Trade Center hit particularly close to

home, since, as I mentioned, Mr. Chairman, 143 of my employee

partners at the NYSE were housed in the twin towers.

Thank God all escaped safely.

But one thing is certain—the United States remains the greatest

democracy and economic power in the history of the world, and all

of us are committed to ensuring that this remains the case. Our

capital markets are privileged to be a part of that tremendous economic engine. I am very proud of the resiliency that our markets

have demonstrated in the face of this heinous crime committed

against America and all Americans.

Never, Mr. Chairman, in my 34 years at the Exchange have I

witnessed such a truly remarkable partnership evolve within minVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
46

utes between government and industry with the sole purpose of

bringing back order to our Nation and, importantly, economic stability to our capital markets.

The three principal equities markets, the senior management of

financial institutions, our three principal government overseers, all

came together to achieve, as never before in our history, the objectives restoring our markets, maintaining the confidence of the investing public, some 85 million strong in this great Nation and,

most importantly, reassuring the general public, doing all that we

could to send the message to the terrorists, to those murderers,

that our Nation was unified, our economy strong, our market functional, and that they, the criminals, had indeed lost.

Last Wednesday, a meeting convened in midtown Manhattan. In

attendance were SEC Chairman Harvey Pitt, who I might add,

demonstrated incredible judgment and skill in making certain that

the private sector, not the Government, restored the markets as

quickly as possibly, consistent with our objective of providing the

best markets in the world.

At that meeting, Treasury was represented by Under Secretary

Peter Fisher. Each of the CEO’s of the major markets, Wick Simmons, Sal Sadano, the CEO of the American Stock Exchange, were

all in attendance, as were the CEO’s of the major financial services

firms. Representatives of the Federal Government’s FEMA team,

the State Government, our great Governor George Pataki’s team on

the scene, and of course, our wonderful mayor and all of the ancillary services of the city government played a major role.

The subject, very simply, Mr. Chairman, was reopening our markets in the face of incredible carnage. Anyone who has been to the

financial district since the tragedy can attest to the enormity of the

challenge that was faced. And I would say to those who have only

seen it on the film clips, nothing can be more horrific than being

there in person to understand what those wonderful people, those

innocent Americans, were subjected to.

If the business of my market, Mr. Chairman——

Senator DODD. Just one point on that, and I apologize for interrupting. I am told there were people from 62 other nations who lost

their lives that day.

Mr. GRASSO. I believe, that is correct, Senator.

Senator DODD. I repeat that often enough because it is important

that there were Americans, but there were a lot of other people.

Mr. GRASSO. A message well delivered, Senator. This is not just

the loss of American lives. Sixty-two nations from around the world

had representatives in that building, or the series of buildings.

If the business of my Exchange resulted solely from the convention of 3,000 people on the trading floor, Mr. Chairman trading

could have resumed immediately, since the Exchange and its technology sites, one in lower Manhattan, one in an outer borough,

were unhurt by the attack.

But our business today depends on interconnectivity. Some 300

broker-dealers introduce the orders of some 85 million Americans

from around the country, and certainly many more from around

the world. Thus, a complex communications and data-delivery network that spans the globe and is hubbed in several sites in lower

Manhattan, was faced with the challenges of restoration.

47

The decision to restore trading on Monday gave our telecommunications providers critical time to establish the connectivity

necessary to deliver that network of services. Brokerage houses and

their customers around the country depend upon multiple points of

access to the world’s largest and most liquid marketplace.

However, Mr. Chairman, Members of the Committee, I should

add and underscore that resumption of trading on Monday, September 17, or the prior Friday or, indeed, that Thursday, would not

have taken place until and unless we were all confident that the

most important objective of the recovery exercise, which was the

search for those who may have survived and the recovery effort for

those who had perished, would in no way be compromised by the

restoration of our infrastructure.

Mr. Chairman, I need not say it, but I will for the record—it is

life first, stock trading second. I know, that every American shares

that perspective. Mr. Chairman, the attack was a declaration of

war upon America, that in my view, has united us as in no time

since World War II. Judged in the light of what we have been subjected to, I believe the temporary interruption of our capital markets, will be judged by history to be insignificant.

Our prayers and heartfelt thanks must go to the brave heroes of

New York City’s fire and police departments, the Port Authority

police and emergency medical services personnel, and so many here

in the Capitol area and in Pennsylvania who put themselves at

risk in the pursuit of saving lives. Their heroism was matched time

and again, Mr. Chairman, by those who are now crawling through

the rubble to hopefully bring another person out alive. Nothing in

our business could be permitted to divert or in any way impede

that effort.

Once the issues of rescue and recovery of human life were dealt

with, the focus obviously became restoring and resuming the finest

markets the world has ever known. Our goal was to return the

market as quickly and as efficiently as possible to the historical

levels of deep liquidity and investor protection that are the hallmark of America’s free market system. Stated differently, our

measure was to be in a position to serve the American investor

with the same level of excellence they have come to expect for the

past 200 years.

Together with our partners from the SEC, the Treasury and the

Fed, we all knew the public’s confidence in our capital markets

would in part depend upon the prompt reopening of our equities

markets. Unnecessary delay would mark a concession of defeat to

the enemy, who sought to disrupt our ordinary course of conduct.

In the six days following the attack, Mr. Chairman, the NYSE,

in a partnership with the other markets and in a truly Herculean

partnership, with the city and State, FEMA officials, our central

technology provider, Securities Industry Automation Corporation,

Con Edison, and, most importantly, Verizon, the major communications provider for that portion of lower Manhattan, worked continuously to restore the connectivity of America’s markets, those who

introduce business to those markets, and those firms to their customers.

There was extensive testing literally from the moment the system went down until the moment trading resumed. Virtually every

48

aspect of that interconnected network, markets to firms, firms to

customers, and the clearance, comparison and settlement process

were indeed verified to be functioning as we would all want.

I am very proud, Mr. Chairman, of the hard work and determination of the public and private sectors, coming together in an

unprecedented partnership that resulted in a resumption of trading. As you quite rightly point out, Mr. Chairman, the volume of

trading during these first 3 days of the trading week has been the

most active in the history of the New York Stock Exchange and approach the most active in the history of Nasdaq. The best evidence

of our success in this wonderful collective effort is, as you point out

Monday’s most active day in our history.

Reopening of our equity markets, again, Mr. Chairman, as you

point out, while down some 7 percent on Monday, was one-third

the level of the decline experienced on October 19, 1987. Our equity

markets are strong. They returned with strength. And while prices

are down, I think the important message we have sent, Mr. Chairman, is that the platform of economic freedom in this country, the

markets that we have crafted over the course of 200 years, are intact.

And those, the criminals who attacked our people and our property, while they took the lives of so many and destroyed the property of so many, they were completely unsuccessful in taking the

spirit and idealism of this great country. They failed, Mr. Chairman, miserably.

Their failure was poignantly delivered to the world at about 9:33

a.m. on Monday. At that moment, after two minutes of silence and

the singing of ‘‘God Bless America,’’ less than a week following this

heinous crime, representatives of New York City’s fire, police,

emergency medical services departments, the Port Authority police,

flanked by Mayor Guliani, Governor Pataki, Senators Schumer and

Clinton, Treasury Secretary O’Neill, SEC Chairman Pitt, New York

Comptroller Carl McCall, and my market colleagues—Wick Simmons, Sal Sadano—so many others, watched those four brave heroes ring the opening bell and send a message to the criminals who

declared war on this country that they failed.

The decline in markets continues, Mr. Chairman, and some may

be concerned. But as we heard this morning from the first panel,

America is strong. Our economy, while at levels perhaps not of a

year or 2 years ago, is still intact and strong and will indeed provide the necessary platform for economic growth to resume at the

traditional levels. I would caution those who believe the downturn

to be long-term or to be a permanent phenomenon.

Eleven years ago, when Iraq moved into Kuwait, the Dow Jones

declined to the 2,400 level. Some 9 years later, it was at 11,000,

Mr. Chairman. Anyone who bets against this great Nation of ours

is flat wrong.

The foundations of our equity market are strong, the will of our

people unified. The Government has come together as never before

in a common pursuit—victory. Victory will be celebrated by our

people, by our economy, and ultimately, by those in the markets,

Mr. Chairman.

Again, I want to thank you, Mr. Chairman, for the wonderful

leadership and support that you have given as this Committee

49

oversees our markets. All of the Members I have either spoken

with or heard from sent expressions of support to those of us in the

very critical task of restoring the public and the investor confidence

levels to what we have now indeed been able to accomplish.

Mr. Chairman, I want to say that all America is shining brightly

and our equity markets will one day reflect that.

Thank you very much.

Chairman SARBANES. Thank you very much.

Wick.

STATEMENT OF HARDWICK SIMMONS

CHIEF EXECUTIVE OFFICER, NASDAQ STOCK MARKET

Mr. SIMMONS. Thank you, Mr. Chairman, Senator Dodd, Senator

Allard, Senator Enzi.

For those of us who were unfortunate enough to witness the

tragedy, nothing that I describe today will approach the ultimate

sacrifice of thousands of Americans in New York’s financial district

and in Washington on September 11. We honor those who fell that

day and convey our deepest sympathies to their families and their

friends.

If destroying the U.S. financial markets was a mission of our

enemy on September 11, that mission failed. The enormous efforts

of the past week demonstrate the vitality of the U.S. capital markets. I have been part of this industry for over 35 years and I have

never been prouder of my colleagues or my city than I have in the

last 10 days.

As was true throughout the financial community, the men and

women of Nasdaq rose to the occasion. Our New York City office

at One Liberty Plaza is the worldwide headquarters of Nasdaq and

sits directly across Church Street from the World Trade Center.

When the tragedy struck, our first responsibility, like Dick’s, was

to ensure the safety of our employees. Once they were safely evacuated, we assured ourselves that our critical technology facilities

were undamaged. In coordination with the SEC, and Dick, we then

determined that trading in the equity markets should not open

until the attack’s impact was fully understood.

We then began the process of evaluating the extent of any damage to Nasdaq and our market participants in determining the necessary steps to reopen the market.

We were guided by several principles. First, we would do nothing

that impeded the rescue effort. Second, we would closely coordinate

all our activities with the city and with the SEC. Third, we would

open our market only when the other markets and major market

participants were fully prepared. Finally, we would be as open and

transparent in reaching out to and assisting our members and

issuers in crisis as we are any other day.

As to Nasdaq’s technology, at no time during this disaster were

Nasdaq’s systems inoperative. At the time of the attacks, trading

was suspended but Nasdaq’s systems and network continued to operate. Because our primary and backup technology centers are outside Manhattan, our primary concern was our ability to connect, as

Dick said, with the firms that are active in our marketplace and

provide our liquidity and order flow.

50

Nasdaq’s geographically decentralized network has several levels

of redundancy designed to withstand singular-point failures. Virtually all firms are connected to Nasdaq through a set of several

Nasdaq servers on their sites and through their backup centers.

Each of the servers in the Nasdaq network is connected to two distinct Nasdaq connection centers.

There are more than 20 Nasdaq connection centers located

throughout the United States, four in the metropolitan area alone.

Each of these centers is connected to both our primary and our

backup data centers.

While this may be a lengthy description, it is critical to understand that disasters such as these, and we have never seen a disaster quite like this, are not averted by hardening any single point

of failure. Rather, they are avoided by having resilience built into

the network through backup connections and backup vendors. This

is a key learning from this tragedy.

While many of our 393 market-makers and ECN’s were not physically impacted by the disaster, many others face great challenges

in terms of personnel, technology, and connectivity.

That said, firms representing over 60 percent of the daily volume

of Nasdaq confirmed their operational readiness by noon on

Wednesday. We also reached out to the 4,300 companies that list

their shares on Nasdaq. To enhance prospective liquidity, we recommended that they look at buy back programs and get board approval if necessary. And I might say here that the SEC’s speedy action to ease these rules was critical to us at that point in time.

We reached out to the SEC and other Government agencies as

they reached out to us. The unprecedented cooperation between all

market centers with local and National Governmental authorities

was continuous and excellent throughout this period.

I want to commend the Federal, State and local governments for

their willingness to use their vast resources and regulatory powers

to assist the markets at this time of crisis. The SEC and the City

of New York were particularly instrumental in helping us open the

markets as quickly and smoothly as we did. All hands were truly

on deck.

In my view, the decision process to reopen the markets was a

textbook example of effective cooperation among the market, Government and private industry. Telecommunication, power and employee access problems created enormous complications and risks

in reopening the market. In addition, there was total unanimity

among all participants that the equity markets should open as

quickly as possible, but only when we could ensure that they could

operate efficiently with proper liquidity available, without additional constraints and with universal access for all investors. We

also believe that given the uncertainties, it was important for investor confidence that all markets open simultaneously.

After two all-hands meetings, and Dick described one of those before, and with the strong leadership and resolve of Chairman Pitt

and the full support of the SEC, the Department of the Treasury

and the Federal Reserve Board, the decision was made that trading

should resume no later than Monday, September 17.

This decision was based on three factors. First, through the efforts of Verizon and MCI WorldCom and the affected financial

51

firms and markets, there was a geometric improvement of telecommunications connectivity each day. Second, the critical importance of the continuing rescue operation at the World Trade Center

site made provisions for widespread physical access to financial

firms and the New York Stock Exchange floor and an earlier startup inappropriate. No one wanted to get in the way. Third, there

was complete consensus that the market should not resume without widespread system connectivity testing, which could most effectively occur over the weekend.

Nasdaq employees also facilitated communication between the

markets and governmental authorities. Beginning on September

12, and every day until markets reopened, we hosted frequent conference calls with all the major national market and exchange participants, including the SEC, other regulators, FEMA, the equities,

futures, and options markets, and all related clearing agencies.

These calls were critical to the speedy progress we made in restoring our markets.

Nasdaq employees provided technological support to over 800

Nasdaq and non-Nasdaq participants, including market makers,

order entry firms, ECN’s, other markets, and even some foreign

markets seeking to establish their local connectivity. Many firms

had to activate their disaster recovery sites, which presented special technological needs.

The testing of the systems that occurred over the last weekend

played a critical role in our confidence on Monday’s opening. On

Saturday, from 9:30 a.m., like Dick and the other exchanges,

Nasdaq brought up our trading systems as we would on a normal

trading day. The testing included firms representing nearly 98 percent of a normal day’s volume and was a great success. In fact,

everybody took it so seriously, we literally did 20 percent of an average day’s volume in the test and that is unheard of. Monday was

obviously a go.

To achieve the successful reopening of the markets, Nasdaq, the

Government, and the financial services industry all worked in concert. The strength of the U.S. financial markets today reflects the

cumulative efforts of far-sighted leadership many years ago and it

continues. It was this effort of cooperation that saw us all through

those 8 days and restored the markets as we have them today.

Thank you.

Chairman SARBANES. Thank you very much.

Bob, we would be happy to hear from you.

STATEMENT OF ROBERT R. GLAUBER, PRESIDENT AND CEO

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

Mr. GLAUBER. Mr. Chairman, Senator Dodd, Senator Allard, Senator Enzi, first, Mr. Chairman, thank you for your kind comments

at the outset.

On behalf of the NASD, I want to thank the Committee for inviting us to appear here on what is clearly a very vital subject.

It is vital because the barbaric acts of September 11 were an assault not only on our country, but on our financial markets. I am

here to tell you how the broker-dealer industry has responded to

these attacks and to describe its condition in their aftermath.

52

Under Federal law, the NASD is a self-regulatory organization

for every one of the more than 680,000 registered representatives

in the U.S. securities industry, and all 5,600 brokerage firms that

are the pipeline connecting investors to the markets. We also monitor all trading on the Nasdaq stock market.

All of which has given us a graphically detailed perspective on

how the industry was affected by the horrific events of September

11, and how firms are getting back on their feet. The picture we

see is both inspiring and daunting.

We have found stories of heroism and humanity. One key firm,

as was discussed earlier, lost 700 of its 1,000 employees, took a

vote to stay open, and worked through the night to do so. Countless

markets and firms, ordinarily the fiercest of competitors, have cooperated like the closest of friends. There are some telling numbers. There were 31 main offices and 30 branch offices of brokerdealers located in the World Trade Center. We have been able to

communicate with almost every one of them. Much of our work in

this crisis has been to fashion reasonable regulatory relief wherever and whenever appropriate.

We are also working closely with the SEC and others to ensure

that the rules governing our markets and members are applied

with appropriate flexibility and we are answering a great number

and variety of investor concerns.

I hasten to add that in every step we have taken, we have continued to put investor protection and market integrity first. And I

can report that there has not been one minute since the attacks

when our ability to monitor trading on the Nasdaq stock market

has been compromised. At this time we have received no reports

from customers unable to locate information about their accounts.

This is largely due to the existence of duplicate records located at

clearing firms, service bureaus, and backup site. We have posted

on our web site contact information for every one of the firms so

that they can be accessed by customers.

So that has been our bread and butter. But some of what the

NASD has been doing has been terribly far from routine. Some 500

floors of office space in Manhattan have been knocked out. So we

have created an electronic clearinghouse where firms that now

need office space are finding firms with space available.

Other firms have suffered losses so catastrophic, they have decided to become branch offices of other brokerage houses. We are

smoothing the path as those firms seek to find suitable partners.

And we have undertaken one service which is truly heart-rending. NASD records are often the best source of fingerprint images

for those lost in this tragedy. With appropriate safeguards, we are

providing thousands of images for identification purposes to member firms, law enforcement, rescue, and recovery authorities and,

of course, to the victims’ families.

Senior NASD officials have spoken already to hundreds of brokerage firms in lower Manhattan. We hope soon to get through to

every one of the 350 additional firms south of 14th Street. By and

large, the firms are all full of courage and resolve.

But make no mistake—September 11 brought an undeniably

heavy blow. We pray for all the friends and colleagues we have lost

and all the families who grieve. That is why we must celebrate the

53

miracle which we have discussed over and over again today, and

which we should never take for granted, that the most liquid,

transparent and trusted markets in the world are back in business,

and remember all the heroes who made that possible.

Thank you.

Chairman SARBANES. Thank you very much. We thank all the

witnesses for extremely thoughtful statements.

Again, I want to commend the extraordinary cooperative effort

that was undertaken within the private sector and between the private sector and the public sector. The resolve, the determination,

and the judgment which were shown, I think merit the praise of

all of us. You had difficult judgments to make, difficult calls, and

I think you made them right. And we are back in operation.

How close to normal are the operations in terms of how effectively it is working?

Mr. GRASSO. Well, Mr. Chairman, I would say from a systemic

standpoint, the best and most visible way of answering is to simply

look to the volume levels we have processed. It is clearly indicative

that our system is strong and the capacity that we have all invested in, which is many times the average utilization rate—in my

own case, we have approximately five times our daily capacity demand embedded in our network—so the technology investments of

the last dozen years have paid dividends for all markets.

I do think we would be remiss if we did not recognize, Mr. Chairman, that markets function based on the performance of technology

and people, not just people in lower Manhattan, not just people on

trading floors, but those in the distribution network. And it is clear

that it will be an adjustment period for all Americans, and certainly for those who are in the traditional financial district, before

they are able to focus as they did prior to September 11.

I believe that this effort that Bob and Wick and I have described,

to bring back the marketplace, to bring back our people and our

technology and focus on being the world’s admired capital market

that we have been, will be part of the healing process.

Mr. SIMMONS. I would only add that, the Exchanges, as you see

us up here, are in better shape than many of our members, and

that we still have four or five major members who had their facilities located either in the Trade Center or the World Financial Center, right next door, who are now either operating out of 650 rooms

at the Sheraton uptown, or out of disaster recovery sites in Connecticut or in New Jersey. So, for them, it is not business as usual

yet. For us, it is much more that way.

Chairman SARBANES. Yes.

Mr. GLAUBER. Mr. Chairman, you mentioned the 1987 stock market crash. And just as a point of comparison, in that event, 600

million shares proved more than the exchange could operate.

As you pointed out, on Monday, the New York Stock Exchange,

did 2.4 billion shares. What is clear is that the lesson from 1987

was well learned by Nasdaq and by the New York Stock Exchange

that capacity has to be in place so that the markets can function

and investors have confidence. And it was well learned, voluntarily

put in place, and served us so magnificently on that Monday.

Chairman SARBANES. I think that is an important observation.

54

I take it that you have taken in the Amex and they are working

off of your floor. Is that correct?

Mr. GRASSO. Correct, Mr. Chairman. We took a page from the

tragedy back in 1989 when the earthquake hit San Francisco,

where the equity markets and the options markets, almost overnight, invited the professionals from the Pacific Stock Exchange

who were based in San Francisco, it was their options business, to

relocate to other markets.

Ours included—we built a floor for them. We took that basic

model and immediately after the tragedy, the top management of

the American Stock Exchange came to see me. I showed them some

open space and they said that they wanted it. And we literally built

them a trading floor between Wednesday and Saturday, which was

tested and fully functional. We trade all of their equities and their

exchange-traded funds products, and we relocated their options

business to Philadelphia.

Mr. GLAUBER. Mr. Chairman, we are actually the owners of the

Amex, that is, the NASD. And I just want to thank Dick for all the

efforts he undertook. It really was in the finest traditions of commitment to each other in these times of crisis.

Chairman SARBANES. And I understood from a comment you

made before that you have not, up to this point at least, encountered a difficulty in terms of the destruction of records because of

the backup systems that exist. Is that correct?

Mr. GLAUBER. That is correct. Most certainly large firms have

disaster recovery facilities, as has been discussed. Other firms clear

through third parties, either service bureaus or clearing firms. And

it is only the very smallest firms and those that have very little

business with the public, where there would be any question. And

to our knowledge, there have been no lost records.

Chairman SARBANES. Senator Enzi.

Senator ENZI. I would yield to Senator Dodd.

Chairman SARBANES. Senator Dodd.

Senator DODD. Thank you very much, Mr. Chairman, and I

thank my colleague for doing that.

Chairman SARBANES. Senators Dodd and Enzi are the Chairman

and Ranking Member of our Subcommittee on Securities.

Senator DODD. It just deserves being repeated of just the tremendous job that all of you have done. Dick, we all watched all week

up there through this and it was—I love the way you put this this

morning to us. Obviously, the human dimension comes first. And

the fact that you made a decision that there was about all that

could be done on that level and that that was going to trump any

decision about opening the markets, as important as that was.

I know that was said before, but I appreciate your stating it and

restating it here this morning. It is tremendously important. It just

really is. What Senator Sarbanes has said, to think you have had

both the largest and second-largest day in the history of the New

York Stock Exchange in the last 3 days in terms of volume, and

the fact that under these circumstances, you have been able to handle that volume, is a great tribute to you and your staff and to the

brokers and dealers and specialists and so forth on the floor up

there.

55

As I say, I made these calls to folks in my State, very difficult

calls. I did not know what else to do except to—you know, we are

down here talking about things that we are going to do legislatively. But in the meantime, I am sitting here and so I decided to

make the calls to some families. I did not reach everybody in my

State. I do not have numbers for everybody. But I talked to about

40 different families over a space of some 12 or 14 hours. The overwhelming majority, of course, were working for these firms that

you are talking about here today. That is where they were.

There are a couple of tragic stories. A 24 year old girl down for

a job interview. All excited about that new job she is going to have

up there for that interview that morning. Just pure fate.

A young kid out of Columbia, from Ridgefield, Connecticut. Just

so excited about his new job in the financial services sector, 23

years old. Absolutely beloved kid in his community. And at Columbia, his classmates are out with his picture up all over the city,

hoping beyond hope that they might find him. Just one tale after

another.

Just one point. You are here, and so I want to raise it with you

here, but it is really not your jurisdiction in a legal sense. And I

know these firms want to get back going, get the technology up and

get the money going. But I hope in your positions of leadership you

will be talking to these folks too about these families.

You talk about people who have given tremendously, their entire

professional lives, in some cases here, to these firms, usually limited partnerships in some ways, something put aside there, but

hardly what you would consider adequate to be raising families of

four and five kids down the road. And I do not know how you do

it. But for those of us sitting here who kind of want to watch, they

know we have an obligation to get the business going and they

have to serve their customer base, and so forth. And obviously, if

there are ways that we can help in that regard, we want to.

But I hope you would convey, as I am sure you have, and they

have, too, publicly, I know you have been talking about it. But you

know what happens over a period of weeks and months. Memories

fade a little bit and people are back and trying to get things going.

And sometimes, that mother or wife out there who has four or five

kids and only met anybody at a social setting, annual dinners and

the like, becomes a secondary and a tertiary thought.

I just hope that they are going to remain very paramount in the

minds of all of this. That human dimension, Dick, that you talked

about, that as important as it is been over the last 10 days, will

remain paramount in the thinking that goes on.

The only real question I have for you, other than for you to respond to that particular point, is just if you might share with us,

and you do not have sort of a floor, Wick, but nonetheless, but on

the floor, Dick, I always say that the last thing you want to do is

be talked about on the floor of the New York Stock Exchange. You

are in trouble if you are being talked about. There is always a chatter that goes on.

Try and share with us, if you would, just the mood of the people

on the floor, for the last 2 or 3 days, if you can sort of capture that

for us a bit here.

56

Mr. GRASSO. Well, Senator, you and the Committee Members will

be, Mr. Chairman, very happy to learn that a large part of the discussion is about people, and not just about those in the financial

community, who have suffered a loss. Many are still missing, loved

ones or colleagues, and what can be done to help, as you say, Senator long after the, shall we say, glare of the camera has gone.

Although I would say to you, at least in my business, this is

something that will never lose its glare. They are talking about the

cops and the firemen. They are talking about the people who were

running up the stairs as well as the people who were running down

the stairs. They are talking about how we as a community, can

wrap our arms around those who will need our strength, both in

guidance and prayer and, as you say, Senator, financially.

The mood of the market on the floor is truly secondary to the

concern about the human factor. Everyone is concerned about the

psychological impact that has been suffered. Anyone who was in

the middle of that horrific day, and certainly anyone who was in

the street, to see the streets of lower Manhattan turn black, literally, at 10:30 a.m., will never forget that. And so we have to provide adequate counseling, the blanket, as my colleagues and I have

called it, of human support.

As far as the market, in my closing comments, Senator, I think

there is an observation that is important. As we faced the conversion of Desert Shield to Desert Storm, the market was falling from

peak to trough, about 20 percent over the course of 7 months. No

one was concerned about the market as much as they were concerned about the troops and the effort and the success.

And I believe that people today on the floor, to your question,

and many of your constituents, of course, I see each day, they are

concerned about our effort to never let this happen again. Not just

to do something that is an immediate feel-good, but to find where

the roots are and kill both the plant and the root, to make certain

that we win in the most universal of senses.

You noted that wonderful recognition, 62 nations lost citizens,

not just America. And this is about making the freest market and

the freest society take global action in partnership with all of those

nations to make certain that this never happens again.

The market, as we heard from the first panel, the economy will

recover. It is the greatest experience on earth. It is the human factor and the safety factor.

And I am very pleased, Senator, to where you started your observations, I am very pleased that no one has ever for the moment lost

sight of people first, commerce second.

You take care of the people, commerce will take care of itself.

Senator DODD. Wick or Bob, do you want to add any comment

to that at all?

Mr. SIMMONS. I would only add one thing. And that is that what

Dick is talking about is something we have to extend for a number

of months now because what happened in New York was a physical

tragedy, but it has left an emotional wound. And it is an emotional

wound not simply for the people of New York, but for all people at

the moment who somehow feel their security has been threatened.

When they feel their security has been threatened, they pull

their hands and arms in and turn into themselves and to close

57

friends, what have you. And I think it is going to have, unless we

speak to it, a profound effect on economic behavior for a few

months.

So this very wrap-your-arms-around-people approach which Dick

was talking about is something we have to think about in terms

of the solutions that we provide from Washington and/or other

places in the next few months because we have to repair a wound

which will be difficult to do. You see that wound in the markets

right now. Markets at times like this are one part reason, two or

three parts emotion.

Senator DODD. Yes.

Mr. SIMMONS. And you have to let that come out. So, we have

to speak to that emotion, not just simply to the facts. That in turn

I think will provide the kind of equilibrium necessary for markets

to start to really regain their footing.

Senator DODD. That is important. And you might, with Senator

Enzi and I here, if either of you or any of you have some thoughts

and ideas on what we can do as a Subcommittee obviously in conjunction with Senator Sarbanes, the Chairman of the Committee,

to work at this or to come up with some ideas and thoughts on how

we can play a constructive role, we would be very interested. I

know I speak for both of us here in doing that.

Bob, do you have any quick comment on this at all?

Mr. GLAUBER. Just simply to say, I expect to take you up on your

invitation and talk to you about things that can be done.

We have spent, as you can imagine, a lot of time talking to the

leaders of a number of firms in the business. And inevitably, the

talk starts about what we can do and what they are doing to continue running. And it inevitably turns to colleagues they have lost.

And it reminds you over and over again that this is a human tragedy before it is a business tragedy.

Senator DODD. I thank you, too, we have done it all the way

along, Senator Sarbanes, Paul Sarbanes, did it and you have done

it in your opening and these comments, too, Dick, and that is those

policemen, those firemen, and those EMS service people.

I know a number of people from around Stanford, Connecticut,

went in to New York, as they did I know from New Jersey and

elsewhere. And the thought, how many times I have heard those

stories of those firemen charging up the stairs of that World Trade

Center, at the 30th and 40th floor, trying to get up to deal with

that immediate crisis, as people are coming down. And to know

that 400 or 500 of these people, whatever the numbers are, is just

incredible.

We saw the tragedy in Wooster, Massachusetts, when six firefighters lost their lives and the outpouring people felt then. And

the dimension of this is just—the human aspect of this is so hard

to grasp, that I do not think—in fact, I am glad we do not in some

ways. The human mind is not capable in the short term of understanding the magnitude of a tragedy like this, and we are protected

in a sense from that as a result of it. It will take time for us to

really understand how profound an event this was.

And I think, Wick, your comments are so appropriate, that we

have really got to work at this. We talk about children reacting at

this. Adults need to, too. And boy, if we do not do that very well—

58

as you say, the wounds will heal in that sense. But the deeper aspects of this—and I hear folks today, some of our colleagues flying

back here, they were the only person on the plane coming back

from their respective States. An eerie feeling coming across the

country.

So our confidence has been damaged, but it is coming back. And

an awful lot of the reason it is coming back is because of what you

three have done and as you would say very quickly, there are literally hundreds and hundreds of people that you work with every

day that are restoring some confidence and faith in these markets.

And Senator Sarbanes, I thank you immensely for holding the

hearing. I would have liked to have gone on that trip up to New

York today to be with our other colleagues, but I thought and I

think we thought here, this is maybe our most important job, to be

here this day and to provide a forum so that you can tell us what

is going on and what had happened, what steps are being taken,

and to tell Americans out there, and people throughout the globe,

we are back, we are still a little damaged, but we are getting

stronger every hour. And we are going to be more vital than we

ever were before as a result.

I thank all three of you.

Chairman SARBANES. Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman. I too want to extend

my thanks for your taking time out of what is the fourth open day

of the markets to come down here and spend some time with us

and with the American people. It is our hope and my belief that

your appearance here today makes a difference in the market and

with the country. It is reassuring to have you personally tell what

has happened and what is being done.

I really appreciate the leadership that you have shown through

this. The American ingenuity of putting everything back together.

And because of your testimony, we have a little better idea of the

complexity of what had to be done. And that miraculous testing

that went on over the weekend in light of all of the things that people would have rather have done because of the tragedy. And the

cool way in which you counseled each other and talked about when

the appropriate time would be for opening and the way that you

communicated with us on the opening so that we also could communicate to the country that it was a normal process in light of

what had happened, and could give what reassurance was possible

there. Without your leadership, your preparation, that would not

have happened. But also, without the people that worked with you,

and again, I appreciate all the communication that your staff provided to me and people that work with me.

One of the things that this tragedy has shown, I think, is the importance of every single person. It does not matter what the job is.

We have learned that we are dependent on all of those other people, regardless of what their specific talent is. They are all part of

a major puzzle for this country. And no place else could it come together like it did here.

I heard a pilot on a plane yesterday doing his little speech at the

beginning and encouraged everybody to visit with their neighbor a

little bit because they were going to be family for a few hours. If

it is one thing that has come out of this tragedy, we are all finding

59

out that we are family and we are going back to a retail atmosphere in this country.

We have been at kind of a wholesale situation where we look at

people as groups of people. And now we are looking again at them

as individuals and in some instances, meeting them for the first

time. So I do appreciate all you did to keep everything running and

then to get it back up to full speed on Monday.

Something I am curious about is some of the costs that were involved in this to the Exchanges themselves, both the cost of being

closed down and the cost of starting up.

Have any of those been put together yet? And if they have, can

you give us some kind of an idea of the range of that?

Mr. GRASSO. I must say, in all candor, Senator, and I thank you

for those wonderful comments, costs were never a factor. It was

restoration.

If I begin to quantify at least my own market, we turn on an average day about $46 billion which produce, an average day of about

1.2 billion shares. Our yield on that as an engine or, if you will,

as a source of revenue for the Exchange, is roughly $109,000 per

year for each average daily million shares traded.

But that was never a focus. And to the credit of everyone, not

just the New York Stock Exchange, but the Nasdaq, the American

Stock Exchange, and all of the firms who basically opened their

doors to one another, cost was never an issue.

The focus was on the American people, 85 million investors

amongst them, directly using the markets, let us get them back up

and running. And we will worry about the costs later on. I think

that the real cost here was in human life and in human suffering.

And no one can attach a financial statement to that.

Mr. SIMMONS. I would only add that, to us, it was more important, as Dick said, to get the markets up and going because, ultimately, if people lose faith in our ability to operate markets and

they cannot vote financially at times like this, then we will pay a

far, far greater price down the road than we pay today. So there

really was no concern for that whatsoever, on member firms’ part

or on our parts.

I think our objective was simply to get up what it is we do, which

is to provide a field of play, if you will, with complete integrity that

people can trust and vote economically in.

Mr. GLAUBER. I would just echo what Wick said. The cost will be

very large, both in interrupted business and in damaged and lost

facilities. But people have not been thinking about that. They have

been thinking about getting the markets up and running and taking care of each other and taking care of those who have been

killed.

Senator ENZI. In light of this kind of a situation, another thing

that is extremely easy is hindsight. I want to congratulate you for

the foresight of having the off-site backups that you had that definitely aided in getting this going. In light of the tragedy, will you

be looking at additional backup sites for the respective exchanges?

Mr. GRASSO. Well, Senator, I will speak to my market.

We have a distributed technology network. Prior to the tragedy,

we had three pieces of real estate on which we could trade. We

happened to trade only on one. We now, as a result of our new

60

partnership with the American Stock Exchange, have a fourth. And

I think we have already had the two of us, the thought that we

might take on additional alternative sites, so that, to the extent

that several physical facilities are in some way damaged or incapacitated, that we never lose the ability to bring the market up.

I should point out, however, as I think you will recall from your

visit to the campus recently, 92 percent of our orders, which

produce about 53 percent of our daily volume, are done on our electronic commerce platform. They do not need physical convention.

So, at a minimum, we could jump-start the market on that basis.

But with sites in lower Manhattan, the American Stock Exchange, and one in an outer borough, we think we have moved in

the right direction, looking forward. But we do not preclude perhaps one or two more.

Mr. SIMMONS. Nasdaq has no floors, as you know. It is all electronic. But that does not mean that we do not have facilities that

we have to be sure have the ability to migrate whatever it is that

we process on those facilities to another facility.

Primarily, we need redundant hardware and the ability to move

our software and our connectivity, our network connectivity, to different sites. And you can bet that we will put extra emphasis going

forward into making sure that those sites are regularly tested, not

just backup sites in name only.

Senator ENZI. Thank you. If I could just do one more quick one

for Mr. Glauber.

Chairman SARBANES. Sure.

Senator ENZI. On September 14, you issued a telemarketing

fraud alert. I am not sure whether the country is aware that that

is a role that you play.

What has been happening in that fraud area?

Mr. GLAUBER. We did, as you say, Senator, put an alert up on

our website to investors, as we have done on other issues from time

to time.

What I can tell you, right now is that we have had no direct evidence specifically of that going on. But we have seen media reports

regarding potential charitable scams in the wake of the tragedy. So

we considered it to be a great danger and wanted to alert the investing public to it. We will just keep our eyes wide open on that

issue as the days unfold.

Senator ENZI. Thank you for that role and everything else that

you do and, again, thanks to the leadership of all of you.

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you very much, Senator Enzi.

Well, gentlemen, we thank you very much for coming and for

your patience. I think it was important for you to be here. We know

it was on a short notice that you responded to the Committee. But

we thought it important to have both this panel and the previous

one in terms of giving people a better understanding of what has

transpired and what is going on right now.

I do want to say again that I think you and your colleagues certainly rose to the challenge. The competency and judgment that

were reflected I think you can take a great measure of satisfaction

in. I was very much struck by the priorities that were reflected

here today in your testimony, your concern for the human dimenVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 81142.TXT SBANK4 PsN: SBANK4
61

sions of this tragedy. It is enough to make you weep when you

think of the talent and the dedication of the many men and

women, young and old, that were caught up in this and whose lives

have been taken from us, and the loss that that represents.

You are self-regulatory organizations and as I indicated to the

Chairman of the SEC, we desperately hope that no one will seek

to take advantage of this situation in some way. And I know you

will be monitoring that very closely, as will the SEC. Hopefully,

anyone inclined in that direction can put it to one side at this moment of challenge.

We look forward, as Senator Dodd indicated, in working with you

and with Senator Enzi and any suggestions you have as to further

measures that might be taken to strengthen the system, make it

more ready and more prepared. I am struck by the fact that, as I

indicated at the outset, that many of the recommendations that

Bob Glauber put forward after the 1987 occurrence, came into play

now and were of importance. So if there are lessons to be learned

here, we stand here ready of course to work closely with you in a

cooperative fashion to implement that.

Finally, I am going to impose on people for just a moment because I want to read actually into the record this very fine statement, in my view, that the New York Stock Exchange printed in

Monday’s The New York Times, which I think reflects what you all

said here today, and out all across the country. And I thought it

was a very sensitive and perceptive statement.

As we close, I am going to impose on people, it is not very long,

but I am going to impose on people for a moment or to to actually

read it into the record:

At 9:30 this morning, a bell will be rung on the floor of the New York

Stock Exchange and trading will resume as it has for 209 years.

Today, that bell means more to us than just business. It will also be

sounding out our deepest thanks for the bravery and sacrifice of so many

who unhesitatingly came forward to give so much in this difficult time.

It will ring out our heartfelt prayers for those we have lost, their families

and loved ones.

It will steel our collective determination to never let cowardice, intolerance and evil sway this great and free society from its strong and sure

course toward a better tomorrow.

We will go forward from here, stronger in spirit and purpose, knowing

that history has proven the ability of our financial system to survive the

darkest challenges time and again.

We will do our utmost to preserve the bedrock foundations of worldwide

prosperity and well-being.

And we will sound that bell and let freedom ring.

Thank you for coming today. The hearing is adjourned.

[Whereas, at 2:00 p.m., the hearing was adjourned]

[Prepared statements, response to written questions, and additional material for the record follow:]

62

PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

We convene this hearing in an atmosphere and with a focus very different from

that which we had planned. Our original intention was to begin a series of hearings

on financial literacy, a critical subject for all Americans, with three principals of the

financial markets—the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the Securities and Exchange Commission—to open the

discussion. That subject remains a matter of great importance, and we will return

to it at an appropriate time. Today, however, in the wake of last week’s unspeakably

savage attacks, we focus on the condition of the U.S. financial markets.

Ten days ago, we witnessed devastation that words remain inadequate to convey.

Someday, perhaps, economic historians will catalog, analyze, and calculate the terrible losses inflicted by the terrorist attacks directed at New York and Washington.

But some losses—families torn apart, communities devastated—will remain forever

beyond calculation.

At the same time, in the wake of the attacks whose magnitude Americans could

only begin to discern, we saw the immediate response of our firefighters, police officers, emergency workers, and volunteers. It was a response of astounding resolution

and courage, giving the world, as a New York Times editorial put it, ‘‘a vision of

the valor and selflessness that is the best face of America.’’ None of us will ever

forget them, and I want to pay tribute to their steady courage today.

It gave us, in addition, an inspiring vision of calm determination, of steely resolve,

and of unity in a common endeavor. Their example must guide us as we turn to

the challenge of rooting out terrorism. They must guide us as we carry on with our

fundamental responsibilities—caring for our families, educating our children, doing

our jobs in a sustained, productive manner, reinforcing the fundamental strength

of our economy and the financial markets whose functioning is essential to it.

In New York, the center of the Nation’s and indeed the world’s financial markets,

we can see a phoenix rising from the ashes. Given the wreckage in downtown Manhattan, few thought it possible that our markets would open for business on Monday. The fact that they did, and the infrastructure held—on record volume—is a

tribute to thousands of committed individuals in both the private and the public sectors who went back to work under very difficult circumstances, having lost friends,

colleagues, neighbors, and in some instances, family members.

Our capital markets are the most effective in the world and our witnesses are to

be commended, along with so many others, for the role they played in ensuring that

the United States’ financial system continues to operate efficiently. New York remains the world’s financial capital. The response of our witnesses to the crisis was

coordinated, timely, and effective. They prevented the situation from becoming

worse by taking decisive and carefully considered action.

This morning we will hear from the Secretary of the Treasury, Paul O’Neill,

Chairman of the Federal Reserve Board, Alan Greenspan, Chairman of the Securities and Exchange Commission, Harvey Pitt, as well as from Chairman and CEO

of the New York Stock Exchange, Richard Grasso, CEO of the Nasdaq Stock Market, Hardwick Simmons, and CEO and President of the NASD, Robert Glauber.

As Chairman of the President’s Working Group on financial markets, Secretary

O’Neill has led the interagency coordination of the Government’s response to the attacks on our financial center. Secretary O’Neill, as the Administration’s point person

on both fiscal and economic matters, has also been engaged in evaluating the potential effects of last week’s events on the U.S. economy and in particular, on the airline and insurance industries. Under Chairman Greenspan’s leadership, the Federal

Reserve took several critical steps to ensure that the financial community was able

to meet its liquidity needs. In addition, the Fed coordinated policy with other central

banks throughout the world including the European Central Bank, the Bank of Canada and the Bank of England, and helped coordinate the bank regulatory process

here at home along with the other bank regulators. Securities and Exchange Commission Chairman Pitt has done an outstanding job in coordinating industry efforts

to reopen our securities markets in the wake of last week’s tragic events. Once the

scope of the damage to our financial community became clear, the SEC quickly

issued the relief necessary to enable issuers, exchanges and securities firms to get

back into business. I look forward to hearing about our witnesses’ activities in more

detail shortly, when we turn to our first panel.

Our other witnesses are also well known to the Committee. It has been said that

Richard Grasso, the Chairman and CEO of the New York Stock Exchange, is the

right man at the right time for the job. Former Treasury Secretary Robert Rubin

was quoted in The New York Times this week as saying ‘‘Dick is exactly what they

need now. . . He is ideally suited to this.’’ I would agree with that assessment. Wick

Simmons is relatively new as the CEO of the Nasdaq Stock Market, having been

63

appointed to that position on February 1, 2001, but by all accounts he has been

doing an excellent job of helping to coordinate industry’s response. And few people

bring more experience to market disturbances than Robert Glauber, who authored

the Reagan Administration’s recommendations in the aftermath of the October 1987

market break.

This morning we will want to hear from our witnesses their assessment of the

impact of last week’s events on the condition of the financial markets as well as the

impact on the economy, the adequacy of our response thus far, and what more needs

to be done. I look forward to hearing their testimony.

—————

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman. First of all, I would like to commend all of our witnesses today for the leadership they have shown during the past 9 days. I do not

think any of us can truly appreciate the monumental task it was to open the markets Monday morning. I would also like to commend the entire financial services

industry for the commitment they have shown in working with regulators and each

other during this trying experience. Their reassuring tone about the stability of our

markets has been much needed to calm the fears of those who invest in America’s financial system.

If the stability and the security of America’s markets was ever in doubt before

September 11, I do not believe anyone could doubt their stability after this experience. Few financial systems could have sustained the losses of New York City, the

financial capital of the world, and after only 5 days been back and running without

any major glitches in the system. The quick responses by our market leaders are

a major reason why systems were phased so little.

The Federal Reserve’s, the SEC’s, and Treasury’s actions through this ordeal have

been nothing less than superb. The Fed’s coordination with the banking community

provided the liquidity needed to maintain public confidence in our banking system

and the SEC’s recognition to relax specific regulatory burdens, particularly Rule

10b–18, provided a much needed buy side to the market.

While we can all applaud the actions of industry and regulators alike, we should

also learn how to further prevent market fallout if, god forbid, future attacks occur

against our financial markets. We must ensure the industry has backup system

upon backup system in case of multiple attacks on the financial system itself. I look

forward to hearing from our witnesses today to learn what systems are used to ensure no loss of data would have occurred even, if the attack had taken place during

market hours.

I hope to hear the thoughts of our witnesses as how best to further strengthen

our markets. Between decimalization and a depressed stock market, a number of

brokerage houses and traders were already on shaky financial ground. A number

of large firms had announced widespread layoffs and profits had been reduced severely. I hope to have direction as to what we, as legislators, can do to sustain the

vibrancy in the industry.

I also have strong concerns with recent accounts that terrorists’ cells around the

world possibly gained financially by market manipulation on industries which were

affected. I am anxious to learn what leads the regulators are pursuing to investigate

potential illegalities. I also want to find out what can be done in the future to prevent terrorists from attempting to manipulate the market in this manner. This

should be a foremost priority. It is impossible to break the backs of these terrorists

organizations if they continue to be heavily funded—especially if that funding is

coming from manipulation of the U.S. stock markets.

Again, Mr. Chairman, I thank you for holding this most important hearing, and

I look forward to hearing from our panel.

—————

PREPARED STATEMENT OF SENATOR RICK SANTORUM

Chairman Sarbanes, I appreciate you holding this hearing today on the status of

our Nation’s financial markets. Clearly, this is an extremely important hearing

given the tragic terrorist events of last week which attempted to strike at the heart

of our Nation’s strengths: our national defense and our premiere financial systems.

Proudly, I can say, those responsible for the horrific attacks were not successful.

What we have seen over the course of a week is a Nation unified in ways never

imagined. From the charitable assistance across the United States to the heroic efforts of emergency and medical personnel in Washington, New York, and PennsylVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 81142.TXT SBANK4 PsN: SBANK4
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vania, to businesses successfully rebuilding and ready for work this past Monday.

The demands have been enormous but have been answered with overwhelming

charity and resolve.

We will explore in today’s hearing the status of our financial markets, but I believe it is first important to commend our Government officials and industry leaders

for their work in ensuring the continued strength and resilience of our markets. To

Treasury Secretary O’Neill, Federal Reserve Chairman Greenspan, and SEC Chairman Pitt—your level of cooperation and prompt action to provide regulatory relief

was essential to market participants and their subsequent reaction. To NYSE Chairman Grasso and Nasdaq Chairman Simmons—I commend you as well for ensuring

the market was technologically capable for Monday’s opening, but just as important,

that investors were confident in that extensive planning and preparation.

What we have seen over the past few days in terms of trading and market activity

has been relatively encouraging. While there were large point drops, record lows

were not realized in terms of overall market conditions. Without a doubt, there are

many challenges ahead. We must be vigilant in the short-term of daily market activities, as well investor response to interest rate cuts, and full implementation of

the tax refund. In order to ensure a firm financial footing in the long-term, Congress

must work with the Administration to develop an economic stimulus package that

will encourage businesses to invest in our economy, restore confidence, and stimulate spending. I look forward to hearing the opinions of our distinguished witnesses

this morning on what policy options they would consider to be beneficial for the

near- and long-term welfare of our economy.

There are two areas, in particular, that I believe will demand a strong response

from Congress: support for the airline industry, and a renewed commitment to our

domestic energy security. As we know, one of the hardest hit industries as a result

of last week’s events has been the airlines. Pennsylvania is the largest hub for U.S.

Airways employing 17,000 employees in two locations: Pittsburgh and Philadelphia.

While U.S. Airways was not one of the targeted, hijacked airlines, the losses have

been systemic. On Monday, the airline announced a layoff of 11,000 employees. And

other airlines have followed. Assistance to the airline industry has been discussed—

assistance that will certainly be needed to maintain solvency. We may also need to

explore, however, other policy options that will contribute to the extended health of

this industry outside of a purely financial remedy.

Finally, I am extremely concerned about lack of progress we have made on debating a national energy policy. This is vital to our domestic security, given uncertain

times ahead, as we are 60 percent reliant on foreign sources for our petroleum

needs. We can and should be committed to acting on this front—and acting soon.

Mr. Chairman, there are many factors that will contribute to the long-term health

of our economy, and it will require the collective strength of Congress, the Administration, and the private sector to make it happen. I look forward to hearing the testimony of our witnesses, and to working with them in the coming months on these

pressing matters.

—————

PREPARED STATEMENT OF PAUL H. O’NEILL

SECRETARY, U.S. DEPARTMENT OF THE TREASURY

SEPTEMBER 20, 2001

Mr. Chairman, Senator Gramm, and Members of the Committee, I am grateful

for this opportunity to appear before you today to discuss the effects of the recent

terrorist attacks on our Nation’s financial system and our economy.

I traveled to New York City on Monday, for the opening of the New York Stock

Exchange. What I saw was a testament to America’s determination and ingenuity.

The people who live and work in lower Manhattan took a horrible blow last week.

And yet, amid the rubble of broken buildings and the sorrow of lost friends and colleagues, the New York Stock Exchange not only opened and ran smoothly, but handled a record number of transactions on Monday. I can think of no better testament

to the resiliency of America and her economy. Among the countless heroes of the

past week are the workers in New York’s financial district—from the brokers and

traders to the police and firemen to the phone and water utility workers. In the face

of enormous personal and human losses, these professionals worked around the

clock to put our Nation’s financial center back into operation. I am grateful for their

efforts and for the cooperation with which they have worked with the Treasury Department and the Federal financial regulatory agencies.

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As noted by observers from Alexis de Tocqueville forward, the United States is

a Nation of commerce. While horrifying it is perhaps not surprising that unseen enemies seeking to strike at America’s very heart would choose to attack her most

visible financial center. It was surely their hope and intention that the economic engine of the world would be paralyzed as a result. We denied the terrorists any such

victory. Our economy—our prosperity—will not be destroyed.

The economy of the United States remains strong and resilient. And the Nation’s

financial markets, in spite of having sustained a terrible blow, continue to function.

Shares are being bought and sold on the stock markets, firms are able to borrow

funds for continued operation in the Nation’s debt markets. Of course this is not

to say that the events of September 11 have had no impact on our financial community. But thanks to careful planning and preparation for potential disaster, and

swift action by both the private and public sectors, the United States’ financial system is operating with only temporary disruption.

Private Sector Response

Private financial institutions and firms have long planned for the possibility of

disruption to the flow of information and damage to their operational facilities by

implementing programs of redundancy. Records, as required by both prudent business practice and by law, are routinely duplicated and stored off site. Contingency

plans enabled firms to restart their operations quickly from alternate locations. We

know from conversations with company representatives and press reports that firms

whose facilities were totally destroyed and who tragically lost many key staff in the

destruction of the World Trade Center were back in operation within days making

certain that the country’s financial markets continued to function.

Federal Regulatory Response

Federal regulatory agencies have also been swift to act. They have taken a number of steps to ensure the continued functioning of the Nation’s financial markets,

including measures to assist customers of financial institutions, ensure market liquidity, and stabilize securities and futures markets.

Customer Relief

The Federal Reserve Board (FRB), the Office of the Comptroller of the Currency

(OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) have issued

guidance to their regulated institutions requesting that they undertake prudent efforts to work with customers affected by Tuesday’s attacks, or by resulting delays

in mail delivery. These efforts include waiving late payment fees, extending loan

terms, restructuring debt obligations, and easing credit terms where a customer has

a demonstrable need resulting from the events of September 11.

Market Liquidity

To preserve market liquidity, the banking industry has provided hundreds of billions of dollars in liquidity to their customers, including credit extended under

standby letters of credit and credit commitments. As a result, banks’ balance sheets

have grown as these new loans have been made. In turn, financial regulators have

facilitated market liquidity in two important ways. First, the Federal Reserve has

met the demand for liquidity by banks through unprecedented credit extension involving the discount window, the repurchase market, and other tools available to

it. Second, the Federal banking agencies issued a joint statement to all banks that

recognizes the potential for these actions to inflate banks’ balance sheets and hence

erode banks’ capital ratios. The statement announces the agencies’ desire to work

with those banks for which such credit extension may lead to a temporary decline

in capital ratios.

Government Securities/Fixed Income Markets

The Treasury has successfully adjusted its financing needs in the face of the recent market disruptions. The Treasury and other regulatory agencies worked closely

with the Bond Market Association (BMA) to reestablish an active and orderly fixed

income market. Following a recommendation by the BMA to close the market on

Wednesday, September 12, trading resumed in all fixed income markets on Thursday, September 13. Further, Treasury was able to execute a successful auction of

3 and 6 month Treasury bills on Monday, September 17, with 24 of the 25 primary

dealers participating.

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Equity Markets

The Securities and Exchange Commission (SEC) undertook a number of regulatory relief measures in preparation for Monday’s reopening of the stock markets.

These included providing relief under Rule 10b–18 which provides a safe harbor

from liability for manipulation in connection with purchases by an issuer of its own

stock. The relief gives issuers greater latitude to provide buy side liquidity this

week. The SEC also announced limited relief under Section 16(b) to facilitate purchases this week by persons subject to that statute.

Futures Markets

The Commodity Futures Trading Commission (CFTC) worked closely with the

SEC and bank regulators to address intermarket coordination issues and facilitate

an orderly reopening of equity futures markets when the primary stock markets reopened. The CFTC continues to be in close communication with the New York futures exchanges to support their efforts toward safe, orderly resumption of trading

in contracts based on energy products, metals, agricultural, and other commodities.

Treasury Response

In addition to the steps taken through Treasury’s financial regulatory bureaus,

the Department has also responded to the events of September 11 on the tax and

law enforcement fronts.

IRS Tax Guidance

The IRS and Treasury are providing relief to all taxpayers directly affected by the

terrorist attacks. This relief includes extending the time for filing tax returns and

extending the time for making estimated tax payments. The victims of the airplane

crashes (on the ground and in the air), taxpayers whose workplace or whose records

are in a disaster area, relief workers, and taxpayers in all five boroughs of New

York City and in Arlington County, Virginia (the location of the Pentagon) are

among those who qualify for this relief. In addition, the IRS and Treasury are providing relief to taxpayers unable to meet tax deposit obligations because of damage

or injury inflicted by the terrorist attack.

Furthermore, for all taxpayers, the IRS has postponed until September 24 the due

date for all Federal tax obligations (other than deposits of Federal taxes) that otherwise would be due between September 10 and September 24. This postponement includes, for example, the filing of returns and the payment of estimated taxes.

Enforcement

Treasury has established an interagency team dedicated to the disruption of terrorist fundraising. The team is designed to increase our ability to identify foreign

terrorist groups, assess their sources and methods of fundraising, and provide information that will make clear to law enforcement officials how terrorist funds are

moved. This team will ultimately be transformed into a permanent Foreign Terrorist Asset Tracking Center in the Treasury Department’s Office of Foreign Asset

Control (OFAC). This is an extraordinary effort that illustrates the Treasury Department’s creativity in developing new ways to combat terrorists.

Economic Impact

The destruction of much of the Nation’s financial center in Manhattan may cause

short-term problems and uncertainty. And the personal toll has been staggering for

the companies and people in New York’s financial district.

We cannot say at this very preliminary stage exactly how these events will affect

the economy. We do not have sound estimates of the dollar amount of damage that

occurred in New York. Yet I would call on the Committee, and indeed all Americans,

to be cautious in assessing the forthcoming short-term economic reports. This past

week Americans have been making charitable donations, giving blood, gathering in

prayer, and otherwise demonstrating our national unity and our determination to

overcome threats facing our country. While these activities may not appear in any

economic report, they are a reminder of our humanity and strength as a country.

Consider our financial system. The markets will inevitably have ups and downs.

Americans should not react with fear that the stock market has declined but rather

marvel in that it is open, that for every seller there is a buyer. Financial firms that

suffered devastating losses are operating, serving customers, clearing transactions,

and ensuring that the financial lifeblood of our economy continues to flow.

On Sunday, the President called us back to work. While the country is back to

work, it still grieves. But in the long-term the economy remains sound. Although

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the financial sector has been damaged, it continues to function. Moreover, the economy’s productive capacity is fully intact, ready for whatever trials lie ahead.

Indeed, America’s dynamic economy is not located in any one place. Innovation

and productivity are found in every factory and farm, every laboratory, every financial institution, every small business, and every home office across America. That

spirit cannot be destroyed.

We at Treasury have been inundated with phone calls from people wanting to

know what they can do to help. Every American can make a contribution by helping

to keep our economy strong by getting back to work and going forward with the

spending plans they made before September 11. Each and every American should

know that by continuing to work and spend, they are doing their part to restore

our Nation and our economy in the wake of last week’s attack.

We have every reason to maintain our confidence in the U.S. economy. No evil,

no matter how unspeakable, can destroy America’s productive spirit. If anything,

this evil act strengthens our resolve to be the most free, most vibrant economy in

the world.

—————

PREPARED STATEMENT OF ALAN GREENSPAN

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

SEPTEMBER 20, 2001

I would like to begin my remarks this morning by noting how deeply saddened

I and my Federal Reserve colleagues are that so many talented and productive people from so many walks of life were lost or irreparably harmed last week. Although

we are here today to discuss some of the immediate economic and financial implications of that tragedy, we are all too aware that the topic we discuss will be a mere

footnote.

The terrorism of September 11 will, doubtless, have significant effects on the U.S.

economy over the short-term. An enormous effort will be required on the part of

many to cope with the human and physical destruction. But as we struggle to make

sense of our profound loss and its immediate consequences for the economy, we

must not lose sight of our longer-run prospects, which have not been significantly

diminished by these terrible events.

Over the past couple of decades, the American economy has become increasingly

resilient to shocks. Deregulated financial markets, far more flexible labor markets,

and, more recently, the major advances in information technology have enhanced

our ability to absorb disruptions and recover.

In the past, our economy has quickly regained its previous levels following the

devastation of hurricanes, earthquakes, floods, and myriad other natural disasters

that periodically batter various regions of our country. Although the trauma of September 11 shares some of the characteristics with such disruptions, the differences

are important. In contrast to natural disasters, last week’s events are of far greater

concern because they strike at the roots of our free society, one aspect of which is

our market-driven economy. All modern economies require the confidence that freemarket institutions are firmly in place and that commitments made today by market participants will be honored not only tomorrow, but for years into the future.

The greater the degree of confidence in the state of future markets, the greater the

level of long-term investment. The shock of September 11, by markedly raising the

degree of uncertainty about the future, has the potential to result, for a time, in

a pronounced disengagement from future commitments. And that, in the short run,

would imply a lessened current level of activity. Indeed, much economic activity

ground to a halt last week.

But the foundations of our free society remain sound, and I am confident that we

will recover and prosper as we have in the past. As a consequence of the spontaneous and almost universal support that we received from around the world, an

agreement on a new round of multilateral trade negotiations now seems more feasible. Such an outcome would lead to a stronger global market system. A successful

round would not only significantly enhance world economic growth but also answer

terrorism with a firm reaffirmation of our commitment to open and free societies.

But before the recovery process gets under way, stability will need to be restored

to the American economy and to others around the world. Arguably, that stability

was only barely becoming evident in the United States in the period immediately

preceding the acts of terrorism. Aggregate measures of production, employment, and

business spending continued to be weak.

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That said, consumer spending moved higher in August and appeared to be reasonably well maintained in the first part of September. Industry analysts suggest that

motor vehicle sales were running close to August levels, and chain store sales were

only modestly lower. Purchasing managers had noted an improvement in the orders

picture in August. Moreover, the dramatic rate of decline in profits was slowing. To

be sure, these signs were tentative but, on the whole, encouraging.

During the past week, of course, the level of activity has declined. The shock is

most evident in consumer markets where many potential purchasers stayed riveted

to their televisions and away from shopping malls. Both motor vehicle sales and

sales at major chain stores, some of our most current information on consumer

spending, appear to have fallen off noticeably. And, the airline and travel industries

have suffered severe cutbacks.

The unprecedented shutdown of American air travel and tightened border restrictions have induced dramatic curtailments of production at some establishments with

tight just-in-time supply chain practices. Automakers, for example, are reported to

have pared production and even closed some plants in the past week, largely owing

to supply shortages, though, doubtless, short-term demand uncertainties have also

played a part.

The effect of the devastating attack on the World Trade Center on financial markets was pronounced, as telecommunications and trading capacities were severely

impaired. But the markets are mostly functioning now, albeit in some cases using

contingency arrangements and the infrastructure will be rapidly restored.

For a brief time, the terrorist attack markedly disrupted payment transfers that

are usually measured in terms of trillions of dollars each day. Many obligators temporarily lost their technical ability to pay on time, leaving those counting on receiving payments caught short. The pressures ultimately ended up concentrated in

banks. Those needs were met by the Federal Reserve, both through record lending

at the discount window and through an extraordinary infusion of funds through

open market operations. To facilitate the channeling of dollar liquidity to foreign financial institutions operating in the United States, 30 day currency swap lines were

arranged with major central banks, again in record volumes. It was essential in

such an environment to meet all appropriate demands for dollar liquidity. As the

financial markets and payment infrastructure return to normal, loans are being repaid, and the temporarily bloated balance sheet of the Federal Reserve is now

shrinking back to normal.

Nobody has the capacity to fathom fully how the tragedy of September 11 will

play out. But in the weeks ahead, as the shock wears off, we should be able to better

gauge how the ongoing dynamics of these events are influencing the immediate economic outlook.

For the longer term, prospects for continued rapid technological advance and associated faster productivity growth are scarcely diminished. Those prospects, born of

the ingenuity of our people and the strength of our system, fortify a promising future for our free Nation.

—————

PREPARED STATEMENT OF HARVEY L. PITT

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION

SEPTEMBER 20, 2001

I appreciate the opportunity to offer the Securities and Exchange Commission’s

perspective on the condition of our financial markets in the aftermath of the recent

terrorist attacks in New York and Washington.

September 11 was a terrible, dark day. The terrorists who attacked our Nation’s

Capital and the World’s Financial Capital, inflicted irreparable losses of innocent

lives and caused untold physical damage; but they did not destroy or diminish our

Nation’s strength, courage or resolve. We grieve for our lost friends and relatives;

yet the Nation’s response to this catastrophe has been extraordinary. On Monday,

all the Nation’s securities markets resumed trading, a trenchant symbol to the perpetrators of the heinous attacks.

As the events of last week and this week demonstrate, our capital markets are

the strongest and most resilient in the world. They reflect the character of our great

Nation. When tragedy struck last week, our Nation responded by coming together.

Police, firefighters, emergency medical personnel, members of the military, and civilians participated in rescue efforts to save those injured in the attacks.

This same spirit of cooperation imbued the tremendous efforts by so many in the

private and public sectors to restore the vitality of all of our securities markets less

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than one week after the attacks. Over the past week and a half, we have been privileged to work with the major U.S. securities markets and securities firms, industry

associations, service providers, and Federal and State Government bodies—all of

whom have provided leadership and invincible perspicacity in this crisis.

An attack of this nature and magnitude cannot be viewed in a vacuum. Accordingly, we coordinated our efforts with the larger Federal Government of which we

are a part, and we worked cooperatively with the industry we oversee. We had two

critical roles: first, to assist in implementing national policy; and second, to facilitate

the responses planned by the securities industry, and ensure that those responses

were consistent with the protection of investors and the national interest.

Upon learning of the World Trade Center disaster, we established communications with the organized securities markets and participated in frequent telephonic

meetings of the President’s Working Group on Financial Markets. In addition, we

provided information to the White House and Members of our Senate and House

oversight committees. In times of crisis, we believe strongly that our obligation is

to keep all those with a role as fully informed as possible.

Although the Commission has broad power over the securities markets and the

professionals who operate in them, we viewed our role as ensuring that the markets

and market professionals acted in unison and in furtherance of the interests of public investors. Thus, we listened first and responded only when the industry reached

consensus. The overarching national goal was to have our securities markets up and

running as soon as practicable, but only if there was no threat to public investors.

All the major markets and market participants decided, as a safety precaution,

to remain closed for trading on Tuesday. We supported this decision as a responsible

approach, and immediately issued a press release to notify investors of the change

in normal trading patterns and to assure them this was a temporary phenomenon.

Concerned about safety and the well being of so many in the industry, we spoke

with heads of firms to extend sympathy and express our hope that their employees

would be accounted for, safe and sound. Sadly, many people employed in the securities industry are missing or dead, and we will mourn their loss. Fortunately, many

personnel miraculously were evacuated to safety and reunited with loved ones.

Thereafter, our staff and we continued monitoring developments and helped coordinate efforts to assess the situation and reopen the securities markets. Commission staff contacted broker-dealers located in lower Manhattan, as well as other

major broker-dealers, investment advisers, mutual funds, and service providers, to

determine their status and operational capability. We also remained in regular communication with the clearing agencies to assure they remained functional and to assess any connectivity problems with their participants. Virtually all securities firms

that suffered significant physical damage were able to relocate to alternative disaster recovery sites. We believe that much of the securities industry’s success in

meeting the demands of this unspeakable horror was due to the hard work and effort made to prepare for Y2K. Securities firms had contingency plans and emergency

procedures designed to manage the conversion to 2001, never imagining that these

plans and procedures would see them through the events of September 11.

We arranged to meet in Manhattan with the leadership of major markets, securities firms, banks, and clearing agencies, along with the offices of the Governor and

Mayor, Con Edison and Verizon, and the New York Fed, to assess the situation and

determine readiness for a reopening of the markets. Our role in arranging this

meeting was not to dictate a decision, but to facilitate a market solution. The decision on when to reopen the markets was made by the private sector—the markets

and major market participants—in consultation with the Commission. We held daily

joint press conferences to keep the public fully and timely advised.

At meetings beginning the afternoon of Wednesday, September 12, this group

unanimously agreed that, while every effort should be made to reopen the markets

as soon as possible, there should be no interference with rescue efforts or jeopardy

to securities industry personnel returning to work. Additional considerations included whether employees would have access to their workplaces and whether there

would be adequate and reliable electric power and telecommunications services.

Connectivity among various market participants was also a significant concern.

The industry representatives unanimously decided last Wednesday that the equities

and options markets should not reopen Thursday, but rather Friday or Monday at

the latest. Having participated in the discussions that produced that decision, our

agency was confident the right decision had been reached under the circumstances.

On Thursday, the fixed income markets and futures markets successfully resumed

trading. Although trading was relatively light and the number of market participants smaller than usual, no major problems were reported. When connectivity

problems with clearing banks affected the government securities clearing agency, we

closely monitored these problems in conjunction with the Federal Reserve.

70

We traveled to the financial district on Thursday morning to examine the facilities

of the New York Stock Exchange and to meet with service providers (Verizon and

Con Edison), as well as representatives of the Mayor’s Office involved with rescue

efforts, and representatives of the New York Fed. When industry representatives

met later that day, they unanimously decided to reopen equities and options markets on Monday, not Friday.

Deferring the resumption of trading until Monday permitted extensive testing by

market participants of systems operability and connectivity. Throughout the weekend, Commission staff worked with market and industry participants to monitor

and coordinate extensive systems testing by the exchanges, clearing agencies, and

market participants. We offered assistance to every affected firm in New York City,

and provided staff where requested. The Commission also sent staff to the major

markets to monitor the testing. Participants in those tests included the New York

Stock Exchange, and its specialists, floor brokers, and member firms; Nasdaq and

its market makers and market participants, including ECNs; regional exchanges;

DTCC; and SIAC. Fortunately, only minor problems arose and those were readily

resolved. The tests ultimately verified that all systems were sound and operational.

We received invaluable assistance from FEMA, the Mayor’s Office of Emergency

Management, and New York State officials in assuring that market participants

needing electrical or communications services received appropriate priority. They

also kept us apprised of their assessment of the structural integrity of damaged

buildings in the financial district.

From a regulatory perspective, last week the Commission reached out to major

market participants, both directly and through industry groups such as the Securities Industry Association and the Bond Market Association, to determine whether

it could provide appropriate temporary regulatory relief to facilitate the reopening

of fair and orderly markets. The New York Stock Exchange, the NASD, Treasury

and other regulators undertook similar outreach efforts.

As a result, the Commission for the first time invoked its emergency powers

under Securities Exchange Act Section 12(k) and issued several orders and an interpretive release to ease certain regulatory restrictions temporarily.

A cornerstone of this relief was facilitating the ability of public companies to repurchase their own shares, thereby providing greater liquidity. Specifically, the

Commission, for 5 business days following the resumption of trading, has permitted

issuers to repurchase their securities without meeting the volume and timing restrictions that ordinarily would apply under our Rule 10b–18 safe harbor, and to

do so without adverse accounting consequences. Our efforts were aided by the announcements of major public companies of significant buy-back programs. We also

permitted brokerage firms to calculate net capital without considering the days the

markets were closed. We allowed mutual funds, to borrow from and lend to related

parties to facilitate liquidity.

We also responded to physical ramifications of the World Trade Center attacks.

We provided temporary relief permitting Amex specialists to function like floor brokers under certain conditions due to space limitations of the Amex’s relocated operations to the NYSE floor. We issued an interpretive release permitting accounting

firms to provide bookkeeping services to, and help recover records for, audit clients

with offices in and around the World Trade Center. To facilitate mutual fund board

meetings, we relaxed in person meeting requirements.

While we broadly solicited and considered suggestions for appropriate temporary

relief, we did not implement all suggestion we received, such as prohibiting all short

selling, moving to 10 cent quotation increments, and extending settlement cycles in

the equity and corporate debt markets. We did, however, take action—not intervention wherever we could to be responsive to industry concerns and to facilitate a

smooth reopening of the markets.

We also made ourselves accessible to investors and market participants. We believe that government is and must be a service industry. Last week, the SEC placed

additional information for investors and market participants on our website regarding market recovery efforts. Investors were invited to e-mail questions to our staff

at a new hotline, help@sec.gov. We established a special toll-free investor telephone

line. For the first time in our history, we also established dedicated telephone lines

for inquiries from market participants and for firms seeking additional relief. And,

we assured industry participants that if they came to us with their problems, we

would work with them to find solutions, without after-the-fact recriminations, except in cases of venal conduct.

Fortunately, on Monday, September 17, all U.S. securities markets resumed trading without incident. Our staff closely monitored the resumption of trading. We had

staff available at the markets to provide assistance where necessary and made staff

available on-site at each major broker-dealer that wanted our assistance. CommisVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 81142.TXT SBANK4 PsN: SBANK4
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sion staff remained in constant contact with major market participants throughout

the day, and was available to address any regulatory issues that arose. America’s

investors once again were able to rely upon the strength and soundness of our markets. All market and investor protections were squarely in place. The markets did

not give way to panic selling; delays in resuming trading gave investors time to reflect and to speak up about the strength of America’s markets. And, the world heard

them.

Over the last week and a half, we have witnessed an extraordinary level of cooperation among market participants in the face of this tragedy. For instance, the

New York Stock Exchange opened a portion of its floor to accommodate trading in

equities and exchange-traded funds by the Amex. In addition, the Philadelphia

Stock Exchange is permitting Amex options members to continue their livelihood by

temporarily trading in the Philadelphia Stock Exchange’s trading crowds. In less

than a week, the entire options business of the Amex was moved to the Phlx. People

worked day and night to ensure trading in those options opened on Monday without

a hitch and that all options series were once again available to America’s investors.

Brokerage firms that 2 weeks ago looked for every advantage over their competitors

are today providing space to competitors that suffered as a result of the attacks. The

most competitive markets in the world are also the most compassionate.

Our Northeast Regional Office at 7 World Trade Center was destroyed in the

aftermath of the attacks. First and foremost, we have been focused on the human

side of this tragedy and confirming the safety and well-being of all of our employees.

We are gratified to report that every one of our employees has been accounted for

and is safe. The staff of the office is convening offsite today to begin the healing

and emotional recovery process, and we are making sure that counseling is readily

available to anyone who wants it. As far as the work of the office is concerned, we

have moved quickly to get things back on track. We have already identified new office space and hope to begin occupancy as early as October 1. Until then, the United

States Attorney’s Office in Brooklyn has generously provided us with office space

for use by Northeast Regional Office supervisors to oversee the office’s recovery efforts. Within two days of the attack, we had retrieved all documents stored electronically and had commenced a review of every single investigation and case currently underway in the office with the twin aims of ensuring that we do not miss

any imminent deadlines and of developing a plan for completing our investigations

and cases in timely fashion. While our review has not been completed, we are optimistic that we will not lose any significant investigation or case as a result of the

loss of our building. No one whom we have sued or whose conduct we have been

investigating should for a single moment doubt our resolve to continue our pursuit

of justice in every such matter.

There also will not be any serious long-term impact on the Commission’s oversight

of securities firms located in the New York area. The Commission’s records related

to examinations of all securities firms are maintained electronically in a central

database, and were unaffected by the tragedy. Electronic copies of our examination

reports and deficiency letters are maintained off-site for investment advisers, investment companies, broker-dealers, and transfer agents. Records relating to open examinations will be reconstructed from records that exist at registrants’ offices and

from other sources. We are planning to utilize examination staff from other offices

(Boston, Philadelphia, and Washington, DC) and to work with self-regulatory organizations (the NYSE and NASDR) to ensure that examination cycles are fulfilled

and that appropriate examination oversight is maintained. We are very mindful of

the disruption to many firms’ operations and records, and are ensuring reasonable

accommodation to requests for extensions of time for on-site examinations or to

produce records and other information.

We can be justifiably proud of our market participants and the way they have performed. Everyone pulled together to overcome this disaster and successfully reopen

the U.S. equities and options markets. Americans demonstrated continued confidence in our markets. With the momentum built from this experience, we will

move forward to make our markets even stronger, more transparent, and more vibrant. As a Nation, and as an agency, we will not allow terrorists to destroy our

spirit or impede our mission.

On behalf of the Commission, I appreciate the opportunity to submit our views

on the current state of the markets in America. I am happy to try to respond to

any questions the Committee may have.

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PREPARED STATEMENT OF HARDWICK SIMMONS

CHIEF EXECUTIVE OFFICER, NASDAQ STOCK MARKET

SEPTEMBER 20, 2001

Thank you Mr. Chairman and Members of the Committee for inviting me here

today.

On behalf of the 1,228 employees of the Nasdaq Stock Market, and the thousand

of Nasdaq trading participants and Nasdaq issuers, I would like to review our response to the horrendous acts of September 11, 2001.

Nothing I describe today will approach the ultimate sacrifice of the thousands of

Americans in New York’s financial district and in Washington on that terrible day.

We honor those who fell that day, and convey our deepest sympathies to their families and friends.

If destroying the U.S. financial markets was a mission of our enemy on September

11, their mission failed. The enormous efforts of the past week demonstrate the vitality of the U.S. capital markets. I have been part of this industry for over 30

years, and I have never been prouder of all my colleagues or my city than in the

last 10 days.

I. Our Immediate Actions in Response to Events of September 11

As was true throughout the financial community, the men and women of Nasdaq

rose to the occasion. Our New York City office at One Liberty Plaza is the worldwide headquarters of Nasdaq and sits directly across the street from the World

Trade Center. When the tragedy struck, our first responsibility was to ensure the

safety of our employees. Once they were safely evacuated, we assured ourselves that

our critical technology facilities were undamaged. In coordination with the SEC and

the New York Stock Exchange, we then determined that trading in the equity markets should not open until the attack’s impacts were fully understood. Through

Nasdaq’s Crisis Management processes, Nasdaq senior management was in constant

contact with our primary operations centers—even as we evacuated ground zero and

set-up temporary operations in downtown and then Midtown Manhattan.

We then began the process of evaluating the extent of any damage to Nasdaq and

our market participants and determining the necessary steps to reopen the market.

We were guided by several principles: First, we would do nothing that impeded the

rescue effort. Second, we would closely coordinate all our activities with the SEC.

Third, we would open our market only when the other markets and major market

participants were fully prepared. Finally, we would be as open and transparent in

reaching out to and assisting our members and issuers in crisis as we are in our

every day operations.

As to Nasdaq’s technology, at no time during this disaster were Nasdaq’s systems

inoperative. At the time of the attacks, trading was suspended but Nasdaq’s systems

and network continued to operate. Because our primary and backup technology centers are outside Manhattan, our primary concern related to our ability to connect

with the firms that are active in our marketplace and bring liquidity and order flow.

In fact, Nasdaq continued to operate systems later than normal on Tuesday to allow

firms manual access for reconciliation and mutual fund pricing and related activities. Nasdaq’s systems operated virtually continuously throughout the rest of the

week to allow firms to test connectivity.

Nasdaq’s geographically decentralized network has several levels of redundancies,

which are specifically designed to withstand these types of catastrophic events. Virtually all firms are connected to Nasdaq through a set of several Nasdaq servers

on their sites and in their backup centers. Each of the servers in the Nasdaq network is connected to two distinct Nasdaq connection centers.

There are more than 20 Nasdaq connection centers located throughout the United

States—4 in the NY metropolitan area. Each of these centers is connected to both

our primary and backup data centers. Additionally, while WorldCom provides the

overall management of our network, each of our critical connections is backed up

by another vendor so as to offer resiliency against a systemic vendor failure.

While this may be a lengthy description, it is critical to understand that disasters

such as these are not averted by hardening any single point of failure, rather they

are avoided by having resilience built into the network through backup connections

and backup vendors. This is a key learning from this tragedy.

Therefore, one early priority was to reach out to the 393 market makers and

ECNs that are part of the Nasdaq market. We spoke to each of these firms. We

asked: Can you connect with our network? Can your employees get to the market

terminals? What problems do you foresee?

While many of our firms were not physically impacted by the disaster, many others faced great challenges, in terms of personnel, technology and connectivity.

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Nasdaq staff worked around the clock to provide whatever support we could. This

included providing alternative trading facilities, provisioning backup facilities with

new equipment, testing backup and new network connections, providing assistance

in acquiring emergency resources and gaining access to critical facilities in lower

Manhattan.

We also reached out to the 4,322 companies that list their shares on Nasdaq. We

asked: To enhance prospective liquidity, we recommended they look at buy back programs and get board approval if necessary.

We reached out to the SEC and other Government agencies, as they reached out

to us. The unprecedented cooperation between all market centers with local and national governmental authorities was continuous and excellent.

I want to commend the Federal, State and local governments for their willingness

to use their vast resources and regulatory powers to assist the markets in this time

of crisis. The SEC and the City of New York were particularly instrumental in helping us open the markets as quickly and as smoothly as we did. All hands were truly

‘‘on deck.’’

II. The Decision to Reopen on September 17

In my view, the decision process to reopen the markets was a textbook example

of effective cooperation among the Government, markets, and private industry. Telecommunication, power, and employee access problems created enormous complications and risks in reopening the market. In addition, there was total unanimity

among all participants that the equity markets should open as quickly as possible,

but only when we could ensure that they could operate efficiently with proper liquidity available, without additional constraints and with universal access for investors. We also believed that, given the uncertainties, it was important for investor

confidence that all equity markets open simultaneously.

After two all hands meetings, and with the strong leadership and resolve of

Chairman Pitt and the full support of the SEC, Department of Treasury and Federal Reserve Board, the decision was made that trading should resume no later than

Monday, September 17. This decision was based on three primary factors. First,

through the efforts of Verizon, MCI WorldCom, and the affected financial firms and

markets, there was a geometric improvement of telecommunications connectivity

each day. Second, the critical importance of the continuing rescue operation at the

World Trade Center site made provisions for widespread physical access to financial

firms and the New York Stock Exchange floor and an earlier startup inappropriate.

No one wanted to get in the way. Third, there was complete consensus that the markets should not resume without widespread system connectivity testing which could

most effectively occur over the weekend. The successful resumption of trading on

Monday would be an important signal to our citizens and the world. It was accomplished by extraordinary efforts by thousands of financial market and brokerage

firm employees who collectively are owed an enormous debt of gratitude.

The SEC reassured the markets, indicated appropriate relaxation of regulatory

constraints, and focused the markets on critical systems. The SEC’s speedy action

to ease the rules governing corporate stock repurchases was especially helpful and

responsive to the needs of Nasdaq-listed companies with which we were working.

III. The Nasdaq Response Team

Nasdaq employees also facilitated communication between the markets and governmental authorities. Beginning on September 12, and every day until the markets

reopened, we hosted frequent conference calls with all major national market and

exchange participants, including the SEC, other regulators, the Federal Emergency

Management Agency, the equity, futures, and options markets, and all related clearing agencies. These calls were critical to the speedy progress we made in restoring

our markets.

Nasdaq employees provided technological support to over 800 Nasdaq and nonNasdaq participants including market makers, order entry firms, ECNs, other markets, and even some foreign markets seeking to reestablish their local connectivity.

Many firms had to activate disaster recovery sites, which presented special technological needs.

The testing of systems that occurred over last weekend played a critical role in

our confidence in the opening on Monday. On Saturday, from 9:30 a.m. to 4 p.m.,

Nasdaq brought up our trading systems as we would on a normal trading day. The

testing included firms representing nearly 98 percent of a normal day’s volume. The

focus of the testing was on the ability of all market participants to connect to and

interact with one another. We also simulated a circuit breaker trading halt to ensure that it could be properly implemented if necessary. We kept a toll-free line

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open for members all day so that they could communicate with us and troubleshoot

problems.

We were extremely pleased that the testing was successful. Nearly all participants were connected to Nasdaq within the first two hours. Over 2,400 of the 2,700

Nasdaq servers at market maker locations were operational. Because most market

makers have multiple servers, Nasdaq was confident that it had a successful test

of virtually all market participants. On Sunday, Nasdaq trading systems also were

available from 9:30 a.m. to noon for follow-up testing to ensure that any outstanding

issues identified on Saturday were in fact resolved.

In the last 3 days we have traded almost 6 billion shares on the Nasdaq Stock

Market. We have maintained connectivity with all our market makers, 110 of which

are located in the New York City area. Everyone who wanted to be represented in

the market had access. Throughout this week, investors in New York City have simultaneously and instantaneously received the same trading information as investors in San Francisco, despite the heavy trading volumes. To make trading appear

ordinary, the effort behind the scenes was extraordinary.

IV. Conclusion

To achieve the successful reopening of the markets, Nasdaq, the Government and

the financial services industry all worked in concert. The strength of the U.S. financial markets today reflects the cumulative efforts of far-sighted leadership many

years ago. Of course, the Congress laid the foundation with the passage and careful

oversight of the U.S. securities laws.

Our markets are not static. They will and should continue to evolve. We should

not allow events of September 11 to delay or detract from this evolution, which is

critical to preserving the competitive position of U.S. markets in the global economy.

The U.S. financial industry has demonstrated it is resilience and resolve to maintain the most liquid and stable markets in the face of terrible challenges, and clearly Nasdaq’s trading network has demonstrated its unique value as a part of this

infrastructure.

Our work is not done. We will have new challenges in the coming months. I am

confident that the men and women of Nasdaq and the securities industry will act

with the same grace under pressure that characterized their performance since the

events of September 11.

—————

PREPARED STATEMENT OF ROBERT R. GLAUBER

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

SEPTEMBER 20, 2001

Introduction

Good morning, Mr. Chairman, Senator Gramm, Members of the Committee. On

behalf of the NASD, I want to thank the Committee for this opportunity to testify—

and to commend you for holding a timely hearing on a vital subject.

It is vital because the barbaric attacks of September 11 were an assault not only

on our country, but also on our financial markets. I am here to tell you how the

broker-dealer industry has responded to these attacks, and the condition we have

found it to be in in their aftermath.

As a self-regulatory organization, or SRO, the National Association of Securities

Dealers is not a trade association. Rather, under Federal law, our job for more than

6 decades has been to help write and administer the day-to-day rules that govern

the U.S. securities industry—and every one of the more than 5,600 registered

broker-dealers in the United States today. We also monitor every trade executed on

The Nasdaq Stock Market, the largest volume market in the world. And Mr. Chairman, I am proud to say that at no time during the past week and a half was our

ability to monitor Nasdaq trading or protect investors compromised.

This role has given us a graphically detailed perspective on how firms were affected by the horrific events of September 11, and how they are getting back on

their feet. The picture we have found is inspiring. It is also daunting.

The first time I testified before the Banking Committee was in 1988 and I was

here to present the Brady Commission Report on the market break of 1987. While

no one could foresee the current situation and the national tragedy we find ourselves discussing today, it is nonetheless significant that what we learned from the

crisis in 1987 made the markets stronger, in much the same way I am confident

this crisis will make the markets stronger. The lessons learned in 1987 have proVerDate 11-MAY-2000 12:58 Aug 13, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 81142.TXT SBANK4 PsN: SBANK4
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vided a solid foundation for what the industry has done in this crisis—and that has

enabled us to cope with the events of September 11 and their aftermath.

State of the Firms

There were 31 main offices of broker dealer firms located in the World Trade Center. There were 30 branch offices of firms located there as well. Over 350 additional

firms have offices in the affected area south of 14th Street in Manhattan. Many of

these firms have performed herculean tasks to get up and running. One key firm

lost 700 of its 1,000 employees; took a vote to stay open; and worked through the

night to do so. Countless markets and firms—ordinarily the fiercest of competitors— have cooperated like the closest of friends.

Over the last 9 days, we have focused on providing a range of critical services to

these firms. Our first and most immediate task last week was to do our best to contact the member firms with offices in the World Trade Center. From that first phone

call onward, we have offered these firms our support and assistance. Our senior

management staff has almost completed calls to every member firm in southern

Manhattan.

The cost of the week long business interruption and physical dislocation compounded with investors pulling back from the market will create a challenging set

of circumstances under which these firms will have to operate. We have talked to

hundreds of firms and they have serious concerns. Our job is to help them continue

operations while at the same time maintaining the safety of the markets.

Regulatory Relief

Last week, we gave firms relief from registration provisions and information barrier requirements that permitted firms in the affected area to staff their trading

desks in time for the markets’ reopening on Monday. We also granted regulatory

relief from certain technical rules, including the 3 quote rule, in recognition of the

overtaxed communications system in New York. While keeping investor protection

foremost, we coordinated with the SEC on many issues, including trading halts

while the market was closed.

We will grant 120 additional days to all registered representatives to fulfill continuing education requirements and will likewise extend test windows by 120 days.

Anyone reapplying to work in the industry that misses the 2 year window because

of this week’s events will be granted a waiver. We have negotiated fee refunds for

test no shows or cancellations with Prometric, our testing and continuing education

subcontractor. We are granting blanket extensions until October 1 on any regulatory

requests, and stand prepared to extend these as necessary.

Information Clearinghouse

In addition to providing this relief from regulations without compromising the

protection of investors, we have served as the focal point for reliable information for

firms and investors. We have worked to keep member firms informed about what

the rules are and what type of relief is available.

We created an office space clearinghouse network where the firms that need office

space because of the tragedy can find firms that have space available. Some firms,

as a result of their World Trade Center office destruction, seek to become branch

offices of other firms. We are assisting those offices in that endeavor.

One other service is done with a truly heavy heart. NASD maintains a vast database that contains fingerprint images for registered employees and the back office

employees if they have access to books and records or to funds or securities of customers. So we are providing such images for identification purposes to member

firms; law enforcement, rescue and recovery authorities; and families to aid in the

search for missing persons and in identifying victims.

In addition to providing aid to the firms, we are answering questions from investors unsure about the status of their brokers and portfolios. Especially important

are customers worried about their accounts with a broker in New York impacted

by the crisis. For these investors, we have posted the customer contact information

on the NASD website. Where no contact information is available, we have directed

customers to a NASD Call Center that can then provide them with individualized

research and assistance.

On September 14, we issued a telemarketing fraud alert that warns brokerage

firms and investors of the scams that, sadly, have already sprung up to take advantage of Americans’ urge to contribute to relief efforts.

Role of Clearing Firms In the Orderly Resumption of the Markets

Many of our members are clearing firms—companies that arrange for the settlement of securities transactions. Of the approximately 120 clearing firms we regulate, the substantial majority is located outside of lower Manhattan. As such, most

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NASD clearing firms were not directly affected by the World Trade Center attack.

Many of these firms were closed on Tuesday with their operations department staff

returning on Wednesday and working through Friday. In several instances, firms

reported that they used the time to stress-test accounts and contact customers about

account balances. The most frequent contacts were to customers with margin accounts whose equity appeared to be approaching the maintenance margin requirement, or customers with accounts that were anticipated to decline in value upon the

resumption of equity trading in the U.S. This latter group included investors whose

accounts, for example, contained airline stocks.

While the NASD cannot attest to these practices at all clearing firms, it is clear

from our contact with member firms that many of them instituted the policies and

procedures that I have just described. We believe that the widespread dispersal of

member firms across the United States, coupled with the firms’ implementation of

their risk management policies, substantially contributed to the orderly manner in

which trading resumed on Monday, September 17, 2001.

Continuing to Self Regulate

Through this entire crisis, NASD has continued to operate as a self-regulatory organization. We have continued to protect the integrity of the securities markets and

promote investor confidence. Our services are provided primarily through our subsidiaries—NASD Regulation, Inc., and NASD Dispute Resolution, Inc. The NASD

also owns the American Stock Exchange and holds a significant, though minority,

stake in the Nasdaq stock market.

We have over 1,500 employees devoted exclusively to carrying out our regulatory

and enforcement responsibilities. We carry out our mandate from our Washington

headquarters and 14 district offices located in major cities throughout the country.

Our New York District office, located at One Liberty Plaza, is our largest office and

has been closed temporarily. We have relocated examiners from our New York office

to our New Jersey, Long Island, and Philadelphia District Offices. By doing this we

were able to continuously support and serve our members and our markets. We are

working on reestablishing, as quickly as possible, our physical presence in New York

at an alternate location.

Conclusion

I want to thank the Committee for this opportunity to describe our industry’s efforts to help get the markets back into full operation. As the industry’s self-regulator of broker dealers, we think it is important to express pride and confidence in

the markets’ reopening; to express sorrow for those lost; and to remind investors,

our members and our markets that we are here to provide answers, information and

help.

Make no mistake, these attacks were an assault on our financial markets as well

as our Nation. We will ensure their ultimate failure by working together to maintain the most liquid, transparent, and trusted markets in the world.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR STABENOW

FROM ALAN GREENSPAN

Q.1. As we look ahead to the next few quarters, I know one thing

that will be on the minds of a lot of CEOs is the issue of corporate

credit. Financial institutions are going to have to walk a fine line

between being cautious on loans to troubled industries and turning

off access to credit too quickly. Would you please comment on this

challenge?

A.1. Despite recent increases in loan delinquencies and charge-offs,

commercial banks remain highly profitable and well capitalized

and thus have the capacity to lend. In making lending decisions,

however, banks must take account of the current and expected economic environment. In reaction to perceptions of a more uncertain

economy, significant fractions of banks have reported in surveys

tightening their lending standards, increasing fees and spreads of

loan rates over the cost of funds, and hiking nonprice loan terms

such as collateral requirements since the middle of 2000. The surveys suggest that banks have become particularly cautious about

lending to more risky borrowers.

Even though banks apparently have become less accommodative

lenders, they have continued to provide credit. For example, in the

immediate aftermath of the terrorist attacks, many companies

turned to banks when their ability to raise funds in the money and

capital markets was temporarily disrupted. In addition, in our most

recent surveys of lending officers, several banks indicated a willingness to work with customers that were affected adversely by the

atrocities of September 11.

More generally, it is in banks’ own interest to preserve the viability of their customers if at all possible, and thus they presumably

are willing to lend even to troubled industries if it can be done prudently. In a competitive banking industry such as ours, and one

that has a capacity to lend, there is good reason to expect that

credit will be available to all reasonable credit risks.

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