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[Senate Hearing 107-606]
[From the U.S. Government Publishing Office]

                                                        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

81-142              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut     PHIL GRAMM, Texas
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia                 CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware           RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan            JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey           MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii              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)

                            C O N T E N T S

                              ----------                              

                      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)

 
                           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.
    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 looking 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.

            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 first-hand 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 
Canter-Fitzgerald, 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, 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 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 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.

                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 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.
     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 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.
    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 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. 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.
    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.
    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 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, 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.
    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.
    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 deep-seated, underlying problem.
    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.
    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.
    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.
    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.
    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.
    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 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.
    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.
    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 shipments 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.
    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 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 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.
    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 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, 
referencing 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?
    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 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 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 
full-fledged 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.
    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.
    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.
    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 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 obviously, 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.
    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 
minutes 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.
    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 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 
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.
    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 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 start-up 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.
    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 broker-dealers 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 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.
    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.
    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.
    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 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--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 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 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 dimensions 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:]

             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 
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 Pennsylvania, 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.
    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.

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 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 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 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 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 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.
    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, [email protected]. 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. Commission 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.

                 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. 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 non-Nasdaq 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 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 provided 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 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.

  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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