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S. HRG. 107–865

NOMINATIONS OF: HARVEY J. GOLDSCHMID

PAUL S. ATKINS, DONALD L. KOHN

BEN S. BERNANKE, AND PHILIP MERRILL

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

NOMINATIONS OF:

HARVEY J. GOLDSCHMID, OF NEW YORK, TO BE A MEMBER OF

THE U.S. SECURITIES AND EXCHANGE COMMISSION

PAUL S. ATKINS, OF VIRGINIA, TO BE A MEMBER OF

THE U.S. SECURITIES AND EXCHANGE COMMISSION

DONALD L. KOHN, OF VIRGINIA, TO BE A MEMBER OF THE BOARD

OF GOVERNORS OF THE FEDERAL REVERSE SYSTEM

BEN S. BERNANKE, OF NEW JERSEY, TO BE A MEMBER OF THE BOARD

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

PHILIP MERRILL, OF MARYLAND, TO BE THE PRESIDENT AND CHAIRMAN

OF THE EXPORT–IMPORT BANK OF THE UNITED STATES

JULY 18, 30, AND OCTOBER 4, 2002

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

STEVEN B. HARRIS, Staff Director and Chief Counsel

WAYNE A. ABERNATHY, Republican Staff Director

MARTIN J. GRUENBERG, Senior Counsel

DEAN SHAHINIAN, Counsel

THOMAS READMOND, Republican Professional Staff Member

JOSPEH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

THURSDAY, JULY 18, 2002

Page

Opening comments of Chairman Sarbanes ........................................................... 1

Opening statements, comments, or prepared statements of:

Senator Gramm ................................................................................................ 4

Senator Dodd .................................................................................................... 5

Senator Allard ................................................................................................... 6

Senator Corzine ................................................................................................ 6

Prepared statement ................................................................................... 24

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

Prepared statement ................................................................................... 24

Senator Miller ................................................................................................... 13

Senator Carper ................................................................................................. 15

WITNESSES

John Warner, a U.S. Senator from the State of Virginia ..................................... 1

George Allen, a U.S. Senator from the State of Virginia ..................................... 2

NOMINEES

Harvey J. Goldschmid, of New York, to be a Member of the U.S. Securities

and Exchange Commission .................................................................................. 8

Prepared statement .......................................................................................... 25

Biographical sketch of nominee ....................................................................... 27

Response to written questions of:

Senator Bunning ....................................................................................... 71

Senator Akaka ........................................................................................... 71

Paul S. Atkins, of Virginia, to be a Member of the U.S. Securities and

Exchange Commission ......................................................................................... 9

Prepared statement .......................................................................................... 53

Biographical sketch of nominee ....................................................................... 55

Response to written questions of:

Senator Bunning ....................................................................................... 72

Senator Akaka ........................................................................................... 72

ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

News article by Robert Novak, dated July 18, 2002 ............................................. 74

TUESDAY, JULY 30, 2002

Opening statement of Chairman Sarbanes ........................................................... 77

Opening statements, comments, or prepared statements of:

Senator Bunning ............................................................................................... 84

Prepared statement ................................................................................... 93

Senator Gramm ................................................................................................ 87

Senator Reed ..................................................................................................... 87

Senator Corzine ................................................................................................ 90

Senator Miller ................................................................................................... 92

Page

IV

NOMINEES

Donald L. Kohn, of Virginia, to be a Member of the Board of Governors

of the Federal Reserve System ............................................................................ 79

Prepared statement .......................................................................................... 93

Biographical sketch of nominee ....................................................................... 96

Ben S. Bernanke, of New Jersey, to be a Member of the Board of Governors

of the Federal Reserve System ............................................................................ 81

Prepared statement .......................................................................................... 106

Biographical sketch of nominee ....................................................................... 108

FRIDAY, OCTOBER 4, 2002

Opening statement of Chairman Sarbanes ........................................................... 119

WITNESSES

Barbara Mikulski, a U.S. Senator from the State of Maryland ........................... 119

John Warner, a U.S. Senator from the State of Virginia ..................................... 121

NOMINEE

Philip Merrill, of Maryland, to be President and Chairman of the

Export-Import Bank of the United States .......................................................... 124

Prepared statement .......................................................................................... 129

Biographical sketch of nominee ....................................................................... 130

Response to written questions of: ....................................................................

Senator Miller ............................................................................................ 144

Senator Santorum ..................................................................................... 144

ADDITIONAL MATERIALS SUPPLIED FOR THE RECORD

Letter submitted by Congressman Steny H. Hoyer, of Maryland, dated

October 3, 2002 ..................................................................................................... 145

Letter submitted by Edmund B. Rice, dated October 3, 2002 ............................. 146

(1)

NOMINATIONS OF:

HARVEY J. GOLDSCHMID, OF NEW YORK

AND

PAUL S. ATKINS, OF VIRGINIA

TO BE MEMBERS OF THE

U.S SECURITIES AND EXCHANGE

COMMISSION

THURSDAY, JULY 18, 2002

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:05 a.m. in room SD–538 of the Dirksen

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING COMMENTS OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The hearing will come to order.

The Committee on Banking, Housing, and Urban Affairs convenes today to hold a hearing on two nominees to serve on the Securities and Exchange Commission—Professor Harvey Goldschmid

and Paul Atkins. I am going to defer the balance of my opening

statement because we have two of our colleagues here to present

one of the nominees, and I know they have other pressing demands

on their time.

Senator Warner, why don’t we hear from you and then we will

go to Senator Allen.

STATEMENT OF JOHN WARNER

A U.S. SENATOR FROM THE STATE OF VIRGINIA

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

Gramm, Senator Dodd, Senator Enzi, colleagues. It is a privilege

for me to be here today to introduce to this Committee, under the

advise and consent procedure of the U.S. Senate, the President’s

nominee for the Securities and Exchange Commission.

Mr. Atkins has a vast and distinguished career in the private

sector and several years of service at the Securities and Exchange

Commission. Consequently, I and others strongly believe that he is

eminently qualified to take on these important responsibilities, particularly at this critical time in the history of corporate America.

His background at the SEC and in the private sector enables Mr.

Atkins to take a balanced approach, in my judgment, on reform

2

and accountability issues, working in the best interests of the private sector and the consumers alike.

At the height of the Congressional inquiry calling for increased

corporate responsibility and reform on accounting standards, it is

critical we confirm those individuals who will fill the existing vacancies in the Commission and do so in a balanced manner.

In the coming months, the Commission will be tasked with making important regulatory decisions. Consequently, I will put the

balance of my statement in the record. I thank the distinguished

Chairman and the Members of the Committee.

Chairman SARBANES. Good. We appreciate that very much, Senator Warner.

Senator Allen.

STATEMENT OF GEORGE ALLEN

A U.S. SENATOR FROM THE STATE OF VIRGINIA

Senator ALLEN. Thank you, Mr. Chairman. Thank you for your

leadership on this Committee and for holding this hearing. It is

good to see Senators Gramm, Dodd, Allard, and Enzi here as well.

I am before you this morning to offer my strong support for the

confirmation of Paul Atkins, one of President Bush’s nominees to

be a member of the Securities and Exchange Commission.

I will discuss Mr. Atkins’ strong qualifications in a moment. But

Paul has his family here with him, his wife Sarah, two of his three

sons, Peter and Stewart, and other members who are in the Washington area for a wedding this weekend. I am sure that will be a

wonderful discussion at the wedding reception.

Mr. Chairman, Mr. Atkins is one of my constituents, a resident

of Arlington, with a wonderful family. He has been nominated to

the SEC at an important time. It is a hot time now, but it is going

to be hotter on the SEC. You are jumping into a frying pan with

the scandals this Committee has been addressing, trying to restore

confidence and accurate accounting, accurate portrayals of the financial condition of a company, as well as corporate governance.

Mr. Atkins is the right person at the right time to bring that experience, that knowledge, and especially bring the character that people want to see in making determinations on the SEC.

He is certainly coming in at a challenging time. But he has

worked since leaving education on financial markets. He has

worked in the private sector with the SEC to protect investors, as

well as make sure that the private sector companies comply with

SEC regulations. He has also worked at the SEC under two of its

distinguished chairmen, Richard Breeden and Arthur Levitt. During his tenure on the Commission, he spearheaded a variety of initiatives that are truly relevant in today’s market environment,

focusing on investor communication, investor education, and efforts

to improve corporate governance.

This is an important time for the SEC and I think that the SEC

is one of the key players in making sure that confidence and proper

governance are restored. And I think that this gentleman, Mr. Atkins, has all the qualifications one would want including experience and character to serve on the SEC and to serve our market

system. I hope you will move very favorably, and he has my full

support.

3

Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Allen. And we thank

both of our colleagues. I know you have other engagements and if

you wish to excuse yourselves, please do so.

Senator WARNER. Mr. Chairman, could the nominee introduce his

family at this time to the Committee? Would that be appropriate,

Mr. Chairman?

Chairman SARBANES. Well, we were going to do that later.

Senator WARNER. All right.

Chairman SARBANES. No, no, no. Since you have raised the issue,

why don’t we go ahead and do it now?

Go ahead.

Mr. ATKINS. Okay. Thank you, Mr. Chairman.

With me here is my wife, Sarah, two of my sons, Stewart and

Peter. For the sake of decorum, we left our 2 year old, Henry, at

home.

[Laughter.]

My mother, Carla Atkins. My mother-in-law, Ethelmae Humphreys from Missouri. My brother Harold and his fiancee, Tracey

Wyatt, who is from the great city of Baltimore. They are getting

married this weekend, which is the reason why everyone is in

town. My uncle and aunt, Burhard and Ute Gusovius.

Chairman SARBANES. Very good. Very impressive.

Senator GRAMM. A man whose mother-in-law is for him is all

right.

[Laughter.]

Senator WARNER. I am out of here.

[Laughter.]

You are on your own.

Mr. ATKINS. Thank you.

[Laughter.]

Chairman SARBANES. Behind every successful man stands a surprised mother-in-law. Is that it?

Senator GRAMM. That is right.

[Laughter.]

Chairman SARBANES. Professor Goldschmid, do you want to introduce your family now here at the outset?

Mr. GOLDSCHMID. I would be delighted. My wife Mary is right

here. With Mary are our two sons, Paul and Joey. I will mention

my third son, Charlie, in the opening statement.

Chairman SARBANES. Very good. I will finish my statement, then

yield to my colleagues who are with us.

The SEC, as Senator Allen just observed, plays a critical role in

protecting investors, ensuring the integrity and efficiency of the securities markets. In recent months, the securities markets have experienced a severe erosion in public confidence. Investors have seen

too many instances of faulty accounting, misleading stock recommendations, unreliable auditor certifications, and inadequate

issuer disclosures, all of this at a time when the value of stocks has

fallen significantly.

We are making an effort here in the Congress to address these

problems. Just 3 days ago, the Senate passed the Public Company

Accountability Reform and Investor Protection Act of 2002, which

came out of this Committee, by a vote of 97 to 0 and we are now

4

going to conference with the House. The conferees were appointed

yesterday.

I welcome the two nominees that are before us this morning. Professor Goldschmid is Dwight Professor of Law at Columbia Law

School. He received both his BA and his JD degrees from Columbia. He has really never managed to get out of the confines of Columbia University.

[Laughter.]

He clerked for Judge Paul Hays of the Second Circuit Court of

Appeals, practiced law with the firm of Debevoise & Plimpton. In

1970, he joined the Columbia Law School faculty and has continued

teaching there ever since. In 1998 and 1999, he took a leave of absence from Columbia to serve as the General Counsel of the Securities and Exchange Commission. Professor Goldschmid has held numerous positions in legal associations, served on numerous legal

panels, coauthored books on trade regulation, written many articles

on securities law, antitrust, corporate law, and legal education.

Mr. Paul Atkins is a graduate of Wofford College and from Vanderbilt University School of Law, where he was on the Vanderbilt

Law Review. He then went on to work with Davis Polk & Wardwell

in New York and in Paris. From there, he went to work at the

SEC, on the staff of the SEC, and eventually was Executive Assistant to Chairman Richard Breeden and then Counselor to Chairman

Arthur Levitt. In 1994, he joined Coopers & Lybrand, which later

became PricewaterhouseCoopers. And currently, he is the Principal

of the Financial Services Regulatory Advisory Group at PWC. Mr.

Atkins has published articles on the role of the compliance officer.

He is coauthor of a book, Generally Accepted Risk Principles. And

I am looking forward this morning to hearing the testimony of both

of our nominees.

And I yield to Senator Gramm.

COMMENTS OF SENATOR PHIL GRAMM

Senator GRAMM. Well, Mr. Chairman, thank you very much.

Let me begin by thanking our nominees for their willingness to

serve. This will be a very difficult time to be at the SEC. I have

had the great privilege in my period of service on this Committee

as a Member and Chairman and Ranking Member, to work with

many great commissioners. I have had an extraordinarily high

opinion of our last two chairmen. I sat on this Committee and listened as everyone lavished praise on Harvey Goldschmid for all the

knowledge and experience he had. And now, you can hardly open

a paper without criticism being made—who did I say?

Chairman SARBANES. Harvey Goldschmid.

Senator GRAMM. We are going to hear it for Harvey Goldschmid

today. I mean Harvey Pitt.

Chairman SARBANES. Yes.

Senator GRAMM. And now, you can hardly open a paper without

someone saying that the fact that Harvey Pitt did not just come in

off the turnip truck, that he actually was engaged in representing

various interests before the SEC. And of course, he was one of the

most active general counsels and the youngest general counsel in

the history of the SEC. Now all those things are a source of critiVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 NOM2.TXT SBANK4 PsN: SBANK4
5

cism. Well, this is the same Harvey Pitt that was here. He, like his

predecessor, Arthur Levitt, is doing an excellent job, in my opinion.

So that is the criticism that comes with public service. I just

want to say that I appreciate people’s willingness to serve the

greatest country in the history of the world, and we appreciate it.

I look forward to working with both of you in your capacity when

you are confirmed.

Chairman SARBANES. Very good.

Senator Dodd.

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Thank you, Mr. Chairman. And let me extend my

best wishes to both of you as well, and to welcome your families

here, and these young men here. This is a very important moment

to watch their father in a confirmation hearing.

I want to underscore the comments of both my Chairman and the

Ranking Member in terms of the obligation to do whatever is possible to restore confidence in the marketplace in this country.

It will be a challenging time. Candidly, I cannot think of a more

exciting time to be at the SEC. You are coming on when the expectations are going to be high, and rightfully so, that we do everything we can to rebuild what has been historically the great selling

point, I have always said, of our markets.

We do not always offer the most attractive deals in the world.

There are other countries that race to the bottom, to use Arthur

Burns’ line, when it comes to the regulatory process.

We have resisted that over the years, although some have tried

to move us in that direction. And the fact that we have not has

been an attractive quality about why foreign capital seeks to come

to these markets historically. And it is why I am worried today

that they are not because they, for the first time in years, feel as

though our structures may not be what we have always claimed

them to be. Everyone involved in this, the private sector, the President, the Congress, but principally the SEC will bear responsibility

for helping us rebuild that sense of confidence.

I also agree with Senator Gramm. I did not know Harvey Pitt at

all. I never really met him. I knew nothing about him, really. I

heard his name mentioned. But, in my view, he hardly has been

on the job. I think he came on the job in September. Enron broke

in October. We focus our attention on personalities rather than

what needs to be done to get us back on track. There may come

a time when Harvey Pitt may be the wrong person for the job, but

it is terribly premature and distracting for us to be talking about

personalities rather than what needs to be done within the regulatory and legal schemes in order to rebuild the confidence necessary for us to attract capital to our markets again. So I am not

going to join the chorus on the Harvey Pitt discussion. I would

rather we focus our attention on what needs to be done as public

policy people to straighten things out here, rather than to try and

engage in the attacks on individuals.

Finally, let me just say to both of you here, and I think you both

worked at the SEC so you have a good understanding. You are not

coming in as complete outsiders here. In fact, you and I talked

6

about this yesterday, Mr. Goldschmid. And that is that you have

been chosen by the President. That is a high honor.

But unlike a Cabinet officer, in my view, the SEC is in a special

category. It is not unlike the Secretary of State or the Secretary of

Defense, for different reasons. Here, the temptation of every White

House is to have people get in line and support their policies. However, it is critically important at the SEC that you refrain from getting caught up in the day-to-day machinations or agendas that are

set, both here in Congress and at the White House.

I would urge you to resist that, regardless of the Administration

that is in office. The SEC is the organization that we really count

on to provide that confidence. And if there is a sense that decisions

are being made for a short-term political advantage rather than the

long-term financial interests of our country, then the SEC is damaged. And if it is damaged and its credibility is in question, then

everything else will be as well. So it is going to be critically important, if confirmed by the Senate, that you be pillars of the institution you have once worked for in terms of restoring the sense of

confidence that this institution can do the job it has been asked to

do historically.

With that, I welcome you. Thank you both for being willing to

serve as well.

Chairman SARBANES. Good. Senator Allard.

COMMENTS OF SENATOR WAYNE ALLARD

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

my colleagues in congratulating you on your appointment by the

President.

You do have a huge challenge in front of you. You are going to

be under a microscope in every little thing that you do, not only

your personal lives, but all your decisions on the Securities and Exchange Commission are going to be under a microscope. You are

going to find yourself under a lot of pressure.

I am one who has felt that we need to have reform in the SEC.

You are going to hear a lot of good ideas about what makes up

good, reasonable reform. And so, you are going to have to put aside

the chaff, look for the facts, act on behalf of what is best to restore

the confidence in our markets. I think that is the real challenge.

And the sooner we can get that confidence restored, the better.

I want to wish you both luck in carrying on your responsibilities

and thank you for being willing to serve.

Chairman SARBANES. Very good.

Senator Corzine.

COMMENTS OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman. I appreciate your

holding this hearing and going forward. We need some new blood,

not because the people there are not doing a good job, but in my

opinion, we just need to make sure we have an SEC that is fully

staffed and attentive. It is an extraordinary institution. I have had

plenty of personal experience and have great respect for it.

I am sure you all will be positive and worthy contributors. But

I think there is an extraordinary need to do some of the kinds of

things that Senator Dodd was talking about, bringing objectivity

7

and a fairness to this process that make our markets healthy and

consistent with the principles of a Nation that people are innocent

till proven guilty, as well as making sure there is a real check and

balance to what goes on.

I hope that you will also be strong advocates to make sure that

the SEC has the resources to be able to do the job that it is expected to do. Sometimes regulation and regulators who are presumed to have the ability to do something and then do not have

the resources to really do it, set up a false sense of security that

ends up undermining the quality of our financial markets.

So, I am pleased you all are here. I look forward to hearing your

testimony and believe very much in the institution and think now,

more than ever, the SEC has an extraordinary role to play in our

society.

Thank you.

Chairman SARBANES. Thank you, Senator Corzine.

Senator Enzi.

COMMENTS OF SENATOR MICHAEL B. ENZI

Senator ENZI. Thank you, Mr. Chairman.

I am very pleased that we are beginning to move the nominees

for the Commission forward. I believe that it is important for us

to get all the Commissioners there to work on enacting the important legislation that we have been working on.

I would also say that both of our nominees have very accomplished records, and I am pleased both of them hold the Commission in high enough regard that they are willing to return to Government service. We thank you for that. You have had a taste of

the outside and I know the sacrifices that are entailed in coming

back into Government.

The issues facing the Commission will require a major undertaking. Reforms about the methods by which we review and discipline publicly traded companies, executives, and others associated

with the formation of the capital markets are underway. And it is

important that we have quality individuals with utmost integrity

to fill these positions.

I want to join Senator Gramm in a few comments in support of

Chairman Pitt. I have looked at some of the numbers of the work

that he has generated already. He appears to have exceeded all

previous years. Part of that is because we are in a bit more of a

crisis now than we have been in previous years. But the activities

that are going on now did not start now. They started earlier. And

I am glad he is deeply involved in solving some of those problems.

I would ask that my complete statement be a part of the record.

And I would also ask that a column by Bob Novak that appeared

in today’s Chicago Sun-Times also be a part of the record.

Chairman SARBANES. Without objection, so ordered.

Gentlemen, it is the practice of this Committee to place nominees

under oath at their nomination hearing.

So I would ask both of you to stand now. Do you swear or affirm

that the testimony that you are about to give is the truth, the

whole truth, and nothing but the truth, so help you God?

Mr. ATKINS. I do.

Mr. GOLDSCHMID. I do.

8

Chairman SARBANES. Do you agree to appear and testify before

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

Mr. GOLDSCHMID. I do.

Mr. ATKINS. I do.

Chairman SARBANES. Thank you very much.

We would be happy to hear your opening statements. Professor

Goldschmid, why don’t we start with you and then we will go to

Paul Atkins.

STATEMENT OF HARVEY J. GOLDSCHMID, OF NEW YORK

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

Mr. GOLDSCHMID. Chairman Sarbanes, Senator Gramm, distinguished Members of the Committee, it is with great respect and

pleasure that I appear before you today. I am honored to have been

nominated to serve on the Securities and Exchange Commission.

I have introduced my wife Mary. She is on my right. She has

been an extraordinary partner all through life. She may look a bit

tired today. Normally she is radiant.

Chairman SARBANES. She is radiant today as well, I hasten to

add.

[Laughter.]

Mr. GOLDSCHMID. She spent all day yesterday in the hospital

with our oldest child Charlie, who we had hoped would be here. He

had a back injury. It looked very dangerous for a while.

Thank God it turned out to be okay.

Chairman SARBANES. Good. We are relieved to hear that.

Mr. GOLDSCHMID. My other two children are here and are wonderful, too.

I come from a working class background. My father was a furrier

and a postal worker. My parents believed in our financial markets,

and, because of Social Security and their investments, retired to a

relatively comfortable life in Florida. Our Nation, as this Committee has indicated, is now witnessing the most dramatic business

scandals that have occurred during my professional life. On a very

personal level, I feel the pain of the retirees and the investors

whose futures have been jeopardized. If I am confirmed, I promise

to do all I can to punish corporate wrongdoers, and to rebuild faith

in the fairness and integrity of our markets.

The SEC is a great institution. In January 2000, after I left as

General Counsel and returned to Columbia, I spoke with great

pride of the decency, dedication, professionalism, and common commitment to doing the right thing of the SEC staff from top to bottom. I welcome the opportunity to return to the Commission. If the

Senate confirms me, I will draw my inspiration from two great

former chairmen of the SEC, William L. Cary and Arthur Levitt.

Bill Cary, my treasured teacher and colleague at Columbia, was

chairman during the Kennedy Administration. With independence

and nonpartisanship, he reinvigorated the agency and initiated a

process of reform that changed securities laws and financial markets enormously for the better. Arthur Levitt, my dear friend, you

all know. As chairman, he was outspoken, courageous, uncommonly

wise, and as he often put it, passionate about protecting investors.

9

Day by day, in his remarkably successful 8 year term, Arthur acted

on his beliefs and in the public interest.

The Senate this week took a bold, balanced, and important step

toward restoring investor confidence. I want you to know how

much I appreciate the critical role that you, Chairman Sarbanes,

and this Committee have played with respect to the Public Company Accounting Reform and Investor Protection Act of 2002. The

Nation is very much in your debt for this piece of legislation, and

for the oversight that you have provided for our financial regulatory system. I very much look forward to working with you, Mr.

Chairman Senator Gramm, this Committee, and with Chairman

Pitt and Paul Atkins, and my other new colleagues on the Commission. I feel confident that all of us working together can more than

meet the current challenges.

Thank you, Mr. Chairman, Senator Gramm, Members of the

Committee, for this opportunity to appear today. I would be happy,

of course, to answer questions.

Chairman SARBANES. Thank you, Professor Goldschmid.

Mr. Atkins.

STATEMENT OF PAUL S. ATKINS, OF VIRGINIA

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE COMMISSION

Mr. ATKINS. Thank you, Chairman Sarbanes, Senator Gramm,

and distinguished Members of the Committee, It is a very great

honor for me to appear before this Committee today. I am deeply

grateful for the confidence that the President has shown in me by

nominating me to be a Commissioner, and I appreciate your courtesy in calling me before you today. And also in allowing me to introduce my family and relatives. I also want to thank in particular

Senators Warner and Allen for their kind remarks on my behalf.

Thank you very much. I appreciate their support.

I have always regarded the Securities and Exchange Commission

as one of the finest agencies of the U.S. Government. My 20 year

career has centered on the financial markets and the SEC’s oversight of them. I have reviewed the practices of companies that the

Commission regulates, advised firms on complying with its regulations, and worked with the SEC to investigate and rectify situations where investors have been harmed. In fact, I had the privilege of serving as a Staff Member of the Commission for 4 years

under two of the ablest chairmen that the SEC has had: Richard

C. Breeden and Arthur Levitt. It is a personally meaningful coincidence that the actual term that I have been nominated to fill is the

same one that both Chairman Levitt and Chairman Breeden held.

If confirmed, I would be proud to continue their first-rate efforts to

fight fraud through a vigorous enforcement program.

While at the SEC, I helped pursue policy initiatives that foreshadowed many of the issues affecting the markets today. Under

Chairman Breeden, my primary responsibilities were managing his

effort to improve corporate governance, shareholder communications, and strengthen management accountability through proxy

reform. Under Chairman Levitt, I organized his outreach to individual investors through a series of investor town hall meetings,

10

consumer affairs advisory committee, and other investor education

efforts, including brochures and other things.

Since leaving the SEC, I have continued my work in investor protection by promoting meaningful internal safeguards in the private

sector. I have helped financial services firms improve their compliance efforts and have undertaken investigations into corporate

fraud, at times in conjunction with the SEC and the Justice Department. In the course of this work, I have spoken directly with

hundreds of defrauded investors and learned a valuable lesson in

the process—that the impact of fraud and corporate misconduct is

felt far beyond the headlines. For example, I have heard the Syracuse, New York, electrical union member tell me how he lost the

downpayment on his house through a complex Ponzi scheme. And

I have listened while a respected doctor broke down in tears when

he described how his staff’s pension fund lost thousands of dollars

through the purchase of fraudulent securities.

Abstract commentaries about the evils of fraud in our financial

markets pale in comparison to the direct, personal impact of these

stories. I have no doubt that many Members of this Committee

have experienced similar tragedies from constituents back home.

We need to remember that these people had their property stolen

from them, just as surely as they had been robbed on the street.

It is professionally and personally gratifying to me that I had an

opportunity to recoup even a small part of their stolen savings,

pensions, and dreams.

If confirmed, I will bring to the SEC this important real-world

perspective of how enhanced compliance, rigorous examinations,

and thorough investigations can make a real difference for investor

confidence that ultimately forms the foundation of our markets.

Moreover, I believe I can make an important contribution to the

Commission’s ongoing efforts to improve its own programs and enforcement. The SEC is about to receive greatly enhanced resources

as a result of the President’s increased budget request and the

work of many of you here in Congress. We must ensure that these

resources are used wisely to protect investors to the maximum extent possible.

I know you have a vote coming up, so if I may just submit the

rest of my remarks——

Chairman SARBANES. No, no. If you wish to complete it, go

ahead.

Mr. ATKINS. Okay. Sorry. For many Americans, the SEC has long

been just another Federal agency in Washington with an alphabet

soup acronym. Today, however, the SEC is at the center of a crisis

of trust in the markets that has dealt a serious blow to investor

confidence. In recent months, those markets have been rocked by

one corporate scandal after another, causing millions of investors

to question the integrity of capital markets.

Investors need to believe that the auditors of public companies

are unconflicted, ethical, and acting in the best interests of the

shareholders. Investors also need to believe that corporate officers

are honest and have the best interests of the companies and stockholders in mind, not just what is good for their wallets. They need

to know that their representatives on corporate boards are actively

guarding their interests. And, most of all, investors should be able

11

to rely on the financial reports issued by public companies to

present a clear and accurate picture of the financial health of those

companies.

Those beliefs have been shaken in recent months. The SEC’s top

priority is to work to restore those bedrock principles and the investor confidence that keeps our economy strong. With more than

half of all Americans invested in the stock market, the SEC is entrusted with an enormous responsibility.

The President has issued a powerful call to reinforce the ethic of

corporate responsibility. This Committee and the full Senate have

taken important steps to restore investor confidence, as have the

House and the SEC. Each of these important actors in this process

must remain committed to work together to restore confidence in

our capital markets by rebuilding a mutual trust among market

participants, including investors, corporate executives, and auditors. If confirmed, I will dedicate my energy, experience, integrity,

and independent judgment to achieving that goal. I believe strongly

that the SEC is a vital line of defense in protecting individual investors, and I look forward to the opportunity to return that institution to serve that cause with Chairman Pitt and my fellow commissioners.

I look forward to working with you and thank you very much.

Chairman SARBANES. Thank you both for very fine statements.

We have a vote scheduled at of 10:45 a.m. Senator Gramm has

indicated to me that he is not going to be able to return. So I am

going to yield to him right in the beginning, and then I will be

quite prepared to do that with other colleagues who may find themselves in a similar situation.

As Chairman, you have to be there at the beginning and you

have to be there at the end.

[Laughter.]

So I am going to ask my questions a little later.

Senator Gramm.

Senator GRAMM. Well, Mr. Chairman, thank you very much for

your kindness.

Harvey, you served on the Professional Ethics Executive Committee for the American Institute for Certified Public Accountants.

Is that right?

Mr. GOLDSCHMID. That is correct, Senator.

Senator GRAMM. And in that capacity, you were paid by the accountants. Is that right?

Mr. GOLDSCHMID. I was paid by the AICPA, yes.

Senator GRAMM. Did you feel that that in any way compromised

your integrity?

Mr. GOLDSCHMID. No, sir.

Senator GRAMM. You have done work for Merrill Lynch, for Lehman Brothers, for the National Association of Security Dealers, for

the Nasdaq Stock Exchange, for the American Stock Exchange. Do

you believe that corrupts your judgment or infringes on your independence in this job?

Mr. GOLDSCHMID. No, Senator, I do not. The Commission has a

sensible prophylactic rule that says there will be a 1 year recusal

for former clients. But I do not believe the work I did for former

clients will affect my judgment.

12

Senator GRAMM. Well, let me say on this recusal thing, if I

might, I believe people overdo this recusal business. I think that,

at least it has been my experience in watching the process, that,

if anything, people go too far. Clearly, if you are in some way tied

economically to an interest in the present, that that represents a

conflict of interest. If you are affected personally now, that reflects

a conflict of interest.

But I am concerned about this view that the fact that you have

ever been involved in an industry forever or for any extended period of time affects your judgment, I think that is a bad view.

I would just like to say for the record, that while I am sure there

is some group somewhere that looks at your long association in this

industry and says, they are getting ready to put someone on the

Commission who has worked for all these companies that are doing

business before the Commission and that is a bad thing, I want to

tell you that I find it reassuring.

Mr. GOLDSCHMID. Well, thank you, Senator.

I think it is true that anyone who should be nominated for a

commissionership at the SEC will have some potential conflict by

way of his or her past career. One has to have had that experience.

My experience with the AICPA, of course, was as a public member of the oversight group, and that was serving basically in a public capacity, as I understood it. But we do have to be careful. It is

critically important in Washington that we worry about conflict of

interest and appearance. I do think the SEC’s 1 year recusal period

is a wise rule.

Senator GRAMM. Paul, you of course were with Coopers &

Lybrand. You have been involved with two different accounting

firms. We are in the process of changing legislation as it relates to

those accounting firms. Again, I would just like to say that I think

that is valuable experience. If you are confirmed, you are going to

be working for the Securities and Exchange Commission and not

those accounting firms.

Let me ask both of you, in terms of the SEC and working with

this accounting board, I would like as my final question to ask both

of you when the board is established it is going to be guided by the

law we pass.

But as two people who I believe will be Members of the Securities and Exchange Commission, how do you see the Commission

working with this board? And Harvey, let me start with you.

Mr. GOLDSCHMID. I hope closely and cooperatively. The SEC is

a Government agency. It must take ultimate responsibility. And as

I understand the bill, the Commission will be in a position to take

ultimate responsibility for all that is done. The model is the

NASDR—the National Association of Securities Dealers Regulation

System. I think it will work very well. The trick is to make sure

the members of the new board have the integrity, the decency, and

the experience we need. But it is a very workable system.

Mr. ATKINS. Senator Gramm, I agree with Professor Goldschmid.

I think you all crafted a very good solution, very easy solution, by

piggybacking on Section 19. So, I do anticipate it being something

like the way the SEC reacts with the NASD, interacts with that.

Senator GRAMM. Thank you, Mr. Chairman.

Chairman SARBANES. Thank you, Senator Gramm.

13

Is there any other colleague who has a time situation, because

I would be happy to yield to them now before the vote starts.

Senator Miller.

COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. I do not have any questions. I would just like

to thank both these gentlemen for your willingness to serve, especially at this particular time. And I wish you well.

Mr. GOLDSCHMID. Thank you, Senator.

Mr. ATKINS. Thank you, Senator.

Chairman SARBANES. Senator Corzine.

Senator CORZINE. Yes. A follow up to Senator Gramm’s question.

Are you troubled at all that some disciplinary powers are housed

in the oversight board?

Mr. GOLDSCHMID. Not at all, Senator. That is the way we do

things with broker-dealers. Disciplinary matters go to the NASDR,

and there are appeals to the Commission. That system has worked

quite well. And I am not troubled at all as long as the Commission

has the final say. There is an appeal process.

Senator CORZINE. Since I will not be returning, I want to beat

the drum on one other thing. I presume you both are in support

of pay parity for people at the SEC.

Mr. GOLDSCHMID. The words are absolutely yes.

Senator GRAMM. Well, now we are getting into an area of conflict

of interest.

[Laughter.]

Mr. GOLDSCHMID. Senator Gramm, I remember kidding you at

one point on that. Pay parity, which I know you have supported all

through, will not cover commissioners, as I understand it.

Chairman SARBANES. Well, you certainly endeared yourselves at

this moment to the people down at the SEC.

Senator Enzi.

Senator ENZI. Mr. Chairman, I am not sure what my situation

will be after the vote. It depends on what the floor debate is. I am

on the health committee as well.

Chairman SARBANES. So why don’t you go ahead now.

Jon, did you want to continue?

Senator CORZINE. I just had one final question. I would be remiss

if I did not ask how you felt about expensing of options.

Mr. GOLDSCHMID. Paul, do you want to take that?

[Laughter.]

Let me step back on that. Clearly, there should be a shareholder

vote on options. It is a common ground today and developing. I

agree with Chairman Greenspan that, economically, options should

be expensed. There are complicated issues as to valuation. And my

view is that this is an issue that should go to FASB to look at. But

FASB should look at the expensing issue with the independent

funding that your bill contemplates; FASB must have the ability to

stand back and reach the right result.

Mr. ATKINS. I basically agree with that as well. I think this issue

has been floating around since when I was at the SEC back in the

early 1990’s. The pros and cons of it have been debated. And I

think it is best to leave it to FASB.

14

Chairman SARBANES. We want to strengthen the integrity of the

decisionmaking process on these issues. And we think what the bill

does by providing the independent funding for FASB, is a very significant and important step in helping to achieve that. That is one

of the objectives of the legislation.

Senator Enzi.

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

both of the nominees for meeting with me individually and answering a series of questions I had in regard to the legislation. I appreciate the answers you gave and the insights that you offered.

On a little different issue, I would be interested in knowing what

your position is in regard to setting stock exchange listing standards in the statute.

Mr. GOLDSCHMID. Well, I guess again stepping back, I thought

the report and the proposal by the New York Stock Exchange was

a very good one. It seems to me that the statute works fairly well,

at least if I understand it, in giving the SEC power to make suggestions and recommendations to the exchange.

Listing standards are a basic method of working through corporate governance today in the United States. We used the listing

standards approach when I was General Counsel in terms of audit

committees. I think the bill provisions should work well.

Mr. ATKINS. I basically agree again. I think that, ultimately, you

want to leave the discretion with exchanges. That helps with competition among the exchanges. But I think that you all have come

up with a good balance.

Senator ENZI. Thank you. Senator Dodd and I are on the Subcommittee that deals with the securities laws. We have been contemplating doing a review of those laws. I wonder whether you

would encourage or discourage us from doing that.

Mr. GOLDSCHMID. An academic can never say, ‘‘don’t review.’’ [Laughter.]

The securities laws have, however, served us remarkably well.

The 1933, 1934, and 1940 Acts were enacted in a very different

time. But they have served the Nation very well. And they have

been modernized continually by the broad rulemaking power that

the SEC has, and then by various amendments over the years.

A review makes sense. These are older laws, last century laws.

But the conservative in me says, be cautious. These laws have been

an enormous advantage for the Nation in terms of the discipline,

the accountability, and the quality of disclosure they have generally produced.

Mr. ATKINS. I agree with that. But I definitely think that it is

time to look at these 70 year old laws which you have been speaking about.

The one thing to keep in mind, when you look at the petitions

and the exemptive applications that come to the SEC, particularly

with respect to laws that are both very broad and prescriptive,

such as the Investment Company Act of 1940. Because of the SEC’s

broad rulemaking authority, it has been able to adapt the law over

time. But it shows that the law itself does not necessarily apply to

current conditions. So I think that speaks that it is a good time to

review.

Senator ENZI. Thank you, Mr. Chairman.

15

Chairman SARBANES. Presumably, though, you both would agree

with the observation that given the current turmoil that we are

confronting, the fact that we are about to pass a significant piece

of new legislation, which will have to be integrated into the system,

that a thorough-going review of the securities laws probably should

at least await a calming down of the current market and regulatory

situation.

Otherwise, it seems to me, even if you have the very best of intentions, you are stirring up the pot at a time when we want it to

settle, if possible. Do you have any reaction to that observation?

Mr. ATKINS. I agree completely with that. I think you can only

allocate your resources so much. And so, take one thing at a time.

Mr. GOLDSCHMID. I agree with that, too. Clearly, there are priorities right now. And giving confidence to the markets by dealing

with the present issues and implementing your bill is critical; these

are the high priorities.

Bill Cary, when he was Chairman, set up a special study. And

thinking about the markets in the future makes sense; it is an incredible time in terms of technology and globalization. But those

are backburner issues compared to what is before us right now.

Chairman SARBANES. Very good.

Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you, Mr. Chairman. Thank you both for

being here and your willingness to serve.

I missed the introduction of the family members, but we welcome

all of you, too. And we want to thank each of you for your willingness to share these two men with the rest of us.

The first question I would ask of you is why you are willing to

do this? You all have, I am sure, full plates. Why are you willing

to do this?

Mr. GOLDSCHMID. I have asked myself that question.

[Laughter.]

Senator CARPER. You will probably ask yourself again in a few

years from now.

Mr. GOLDSCHMID. I think that is absolutely right.

[Laughter.]

For me, it is not a good time for the family. Joey, our youngest,

is in high school and it is inconvenient to come. Financially, we will

not even talk about the consequences.

But I have been lucky in life. I have been fortunate. The family

has done well. There is in me a give-back sense. This is a critically

important time for the SEC and the national markets. In the end,

I just felt that I could not say no.

Senator CARPER. All right.

Mr. ATKINS. Similarly, for me, since I have been at the SEC before, the opportunity to come back and use my experience both

there and in what I have done since, especially at this important

time, is really very important to me.

Senator CARPER. Good. Now I realize you do not want to be immodest in front of your families or us, or a national television audience, but why are you the right person for these posts at this time?

16

Mr. GOLDSCHMID. Well, I began teaching at Columbia in 1970.

This has always been my area of study—corporate governance, securities, corporate law; I have been concerned with what to do,

where the Nation should go, what makes sense.

I have been dealing with these issues all of my professional life.

And then, of course, I spent time as General Counsel of the SEC

in 1998–1999, as well as consulting at various other periods.

Senator CARPER. All right.

Mr. ATKINS. My experience is not as long-lived as Harvey’s is,

but similarly, for 20 years basically this has been my life, the securities markets and trying to help firms comply with the regulations

and to protect investors through that.

And so, to be able to give back some of that experience and to

help make things more effective, both inside the agency and outside, is what I would really like to do.

Senator CARPER. How would the SEC be different because you

would serve on it?

Mr. GOLDSCHMID. Well, it is always hard to predict I hope the

decisions will be fair, disciplined, important, and wise. We will

push the agency in every way to do its best.

Senator Corzine correctly alluded to the need for greater resources. We, or at least I, will promise, and I am sure Paul will,

too, to use those resources with every bit of effectiveness and wisdom that we can bring to it, and give the country the confidence

that it needs.

Mr. ATKINS. Taxpayers and investors deserve the very best, and

to have their resources used efficiently and effectively. That is

what I really hope to accomplish there, to use my experience to

help that.

Senator CARPER. One last question, if I could, Mr. Chairman.

We are now going to conference between the House and the Senate versions of what I call corporate governance legislation. There

are some provisions in our bill that are different than the provisions in the Senate bill.

If you could just take a moment, each of you, and talk to us

about the provisions that you think must emerge from the final

compromise, or the principles, how they should emerge in the legislation that is the final compromise that goes to the President. What

might some of those be?

Mr. GOLDSCHMID. It is a tough question. It may be a long moment, but, fundamentally, you must have the Accounting Oversight

Board with the independent funding and staffing that the bill contemplates. It must have adequate resources. It must be able to do

quality control studies and look at the accounting firms independently. It must be in a position to discipline effectively, which was

not the case with the AICPA’s oversight committee. I was part of

that oversight group for the AICPA for over a year, and I said from

the beginning, and I think people understood, that the disciplinary

system did not work. We tried our best. There were honorable, decent people serving on what was the Professional Ethics Executive

Committee. It did not work. We need a system of discipline and accountability that does work.

And so, those are the basic kinds of components, and you have

them in the bill. Independence is also a critical element. The sepaVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 NOM2.TXT SBANK4 PsN: SBANK4
17

ration of a large amount of consulting from the auditing process,

with the ability to do that consulting for other nonaudit clients, is

critical right now to making the system work. I also think the governance provisions of the bill are very good.

Generally as you can see, I am very high on what you have done.

Senator CARPER. Thank you.

Mr. Atkins.

Mr. ATKINS. I agree with the framework that you have put in for

oversight over the accounting profession. I think it is a very wellbalanced approach. And the funding that you are providing for the

agency to help improve its information technologies program, for

example, in some ways, the enforcement division cannot even comply with some of the requirements of courts in doing its filings because it does not have the scanning technology available to it.

So there are a lot of things that really need to be updated. And

so, your addressing those issues I think is really timely.

Senator CARPER. Good. Well, I thank you for your responses and

for your willingness to serve. Good luck. Make us proud.

Chairman SARBANES. We are going to have to recess for the vote.

I have a few questions, a couple of such importance that I want to

ask them when I return. So we will take a short break.

I do want to say just before we break up that Senator Carper

asked, why would you want to do this? And I thought your answers

were quite responsive to that.

But I just wanted to observe, this is a magnificent opportunity

to be of service to the country. These are really troubled times and

you both are people of competence and experience. You have both

been in the SEC, which is a definite plus.

And this is a chance to come in and confront these serious problems that we are now experiencing, and in helping to resolve them,

to make a major contribution to the country. Certainly to its economic life, and of course, its economic life impacts all other aspects

of its life.

So, it is a very exciting and challenging time to become an SEC

commissioner. And both of you have manifested in the past, have

a concern about public interest, this is real chance to do something

significant about it.

With that, we will take a short recess and I will return and resume the hearing.

[Recess.]

Chairman SARBANES. The hearing will come to order.

I want to ask both of you first about funding for the Securities

and Exchange Commission.

In the extended hearings that we did in March that led up to reporting out the legislation that is now pending in the Congress, we

heard from witness after witness that the SEC needs additional resources in order to effectively carry out its mission and protect

investors.

John Whitehead, former Cochair at Goldman Sachs, told us, ‘‘I

think the SEC is underfunded and has been for some years. When

you consider the seriousness to the system of just one Enron, it is

dangerous to fool around with the relatively small increases in

budget that the SEC asks for.’’

18

David Walker, the Comptroller General of the United States, testified: ‘‘The SEC’s ability to fulfill its mission is becoming increasingly strained due in part to imbalances between the SEC’s workload and staff resources.’’

Over the last decade, securities markets have experienced unprecedented growth and change, and at the same time, the SEC

has been faced with an ever-increasing workload and ongoing

human capital challenges. Most notably, high staff turnover and

numerous vacancies.

We asked the GAO to do a study, and they came in with a study,

which, if you have not had a chance to review it, I commend to you,

in March of this year: SEC Operations—Increased Workload Creates Challenges. They found that the SEC’s limited staff resources

have resulted in substantial delays in SEC regulatory and oversight processes which hampers competition and reduces market

efficiencies.

In fact, we have heard from people in the securities industries

complaining that the lack of resources at the SEC and the significant increase in their workload has lengthened the time period

markedly within which certain clearances or decisions are reached,

and that they find that handicaps their own ability to function. The

GAO also noted that information technology issues needed additional funding.

Now here is where we are and I want to see how concerned you

are about this problem and how committed you are to trying to do

something about it.

The Senate Appropriations Committee, I think only yesterday,

has reported out a $750 million budget for the SEC. That is a jump

of about $300 million, actually, I think the SEC is terribly underfunded. I have thought that for many years.

But let me just ask you first, what is your own view of the issue

in terms of the lack of adequate resources at the Commission to do

its current job, let alone additional responsibilities which it will be

called upon to undertake?

Mr. Atkins.

Mr. ATKINS. Mr. Chairman, I think that there is a lot to be done

there in bringing it up to snuff, as you have alluded to.

I am sure if it is appropriated, it can be spent. Chairman Pitt

has started a management review of the agency to try to prioritize

and see where additional resources should be used. Offhand, there

are many: Enforcement and—as I referred to earlier—IT systems,

that can be upgraded. And I am sure that is what this study is

going to come up with and help prioritize that. So, I agree. I think

more resources are needed.

Mr. GOLDSCHMID. It is critical, Senator. I like your $776 million

figure even better than the $750 million.

But there is no question about the immense need. It is a need

for more lawyers and accountants. It is a need, and this goes to pay

parity, to recruit experienced litigators and experienced people to

help manage divisions. It is hard for people to live in Washington

on what the SEC can now pay, particularly people with young families, particularly at that experienced level. We are losing people.

We have lost them over the years. It is critical we get the money.

19

Technology is another area. That bill, that budgetary provision,

and that action by the Appropriations Committee is absolutely essential to making the system work.

Chairman SARBANES. I am very concerned about the pay parity

issue. We have been holding out that promise to people now for

some period of time and we have not actually delivered on the

promise. And I know there are people down there that are waiting—it is coming, it is coming—but it is not there yet. And it seems

to me—how important an issue is the pay parity question?

Mr. GOLDSCHMID. For me, it is absolutely critical. Paul and I

talked to senior staff yesterday, and they did indicate that a number of employees are holding out, hoping that it will be completely

funded. If we continue to lose those first-rate lawyers of 10, 12, 15

years of service, or we cannot recruit and we need new litigators

for all of these financial fraud cases, it will make the agency’s job

almost impossible. It is critical that we get pay parity funded.

Chairman SARBANES. Mr. Atkins.

Mr. ATKINS. I agree, although the SEC has had recently some

means of meeting pay parity out of whatever resources that they

have. That is what I understood yesterday they said, but it is not

a permanent issue by any means. And I think they are taking from

one bucket into another.

Chairman SARBANES. They have done a limited amount of it, but

I do not think they have done any benefits. To the extent they have

done it, it has been only on the salary.

Mr. ATKINS. I think you are right.

Chairman SARBANES. It is only part of the package, and that is

a palliative in the short run, but it is not an answer in the long

run. And we need to keep that in mind.

I also am appreciative of the study that the Chairman has undertaken. But when the Congress is prepared to give an agency a significant boost in its appropriation, for good reason here, I think it

is clearly more than warranted, and when I am convinced in my

own mind that whatever study you do will show the need for resources beyond even what the Congress is thinking of providing,

the agency should go ahead and accept this and not say, well, let

us finish the study first and then we will come and ask you because, by that time, we may have moved out of the budget cycle.

You will be in the next budget cycle, which would throw it off for

another 12 or 15 months or something. So there is a chance now

to move, and we need to do it. If the commissioners do not advocate

for the budget of the SEC, who is going to do it? You, in effect,

have to be in the forefront. And I certainly hope that you all will

assume that burden, so to speak.

Some of the SEC employees are organized. Therefore, there is a

bargaining process that takes place. We keep hearing complaints

that they do not feel that management is negotiating with them

over contracts in as serious and as fair a fashion as they think is

needed.

This is a source of some concern because you do not want to have

labor/management unrest at the agency. That also would impede

its ability.

I am just curious and I will ask you a general question. How

would you respond to these expressions of concern that we have

20

been hearing? And generally, what is your view of the nature of the

relationship that one should have with the employees, and the employee organizations?

Mr. ATKINS. It is vital to have a good relationship with the staff

people at the SEC because they are the ones who are doing the

work and they need to feel they are part of the process and need

to feel like the management of the agency is responsive to them.

So that is one thing that, personally, I am very committed to as

far as, in my past and working with my staff, whether at the SEC

or in the private sector. And I intend to carry that through to this

new position.

Mr. GOLDSCHMID. Working out the collective bargaining agreement has taken a very long time. In our briefing yesterday, we

were told that they are right at the end of the process. And it is

critical we get there, too.

Morale is now weaker at the SEC. The agency has taken some

pounding. We want our employees to feel good and to be treated

right. It is very important that everyone at the SEC, from top to

bottom, feel fairly treated and energized.

And I understand, Senator Sarbanes, what you said to both of

us—this is a critical, difficult time, but it is also a time of large

opportunities. The Commission is in the position to make a large

difference by doing things right.

Chairman SARBANES. That is right. What we need to do down at

the SEC is we need to get you enough resources so at least you can

really move forward with the needed initiatives, and start operating in an environment in which you have adequate resources to

do your job, you are not constantly constrained, as Mr. Atkins said,

taking out of one pocket to pay another.

That is no way to run an organization, and anyone will tell you,

if the fiscal constraints on you are that tight, it does not really lead

to efficiency. It leads to inefficiencies. You ought not to have a loose

budget. The budget has to be adequate to the task and people

ought not to be spending a good deal of their time thinking how

can we divert from one place where we need it into another place

where maybe we need it a little more?

The other is to get the labor situation resolved so that everyone

is pointing in the same direction and moving ahead. I am very anxious to accomplish that. We are just receiving the papers on the

final nominee for the vacancy. And it is our intention to try to hold

a further hearing next week on the other two nominees for the remaining vacancies.

The Senate will be in session next week and the following week

before the August break. So that would give us an opportunity to

do the hearing, reporting all the nominees and, with some good

luck, get it through the Senate before the Senate leaves at the beginning of August, so that people would be able to move into their

positions. So that is the timetable we are working on. I am hopeful

it can be achieved.

Mr. Atkins, I have a couple of questions that I need to ask to

you. Yesterday, the SEC announced a settled enforcement action

against PricewaterhouseCoopers, and its broker-dealer affiliate,

PricewaterhouseCoopers Securities, for violations of the auditor

independence rules. They found that, because of these independVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 NOM2.TXT SBANK4 PsN: SBANK4
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ence violations, the firm caused 16 public audit clients to file financial statements with the SEC that did not comply with the reporting provisions of the Federal securities laws.

Steve Cutler, who is the able SEC Director of the Division of Enforcement, said: ‘‘An auditor’s objectivity is critical to the financial

reporting process. Impairment of an auditor’s independence undermines that process and erodes public confidence in our capital markets.’’ He went on to say: ‘‘This case demonstrates the heightened

risk of an audit failure when an accounting firm assists in and approves the accounting treatment of its own consulting fees.’’

And then went on to speak of the loss of objectivity and impartiality that you require of an independent auditor, which is, of

course, an essential piece of the legislation that we have reported

out of this Committee. One title is really devoted to auditor independence and so forth. In your duties at PricewaterhouseCoopers,

did you provide any of the audit or consulting services that were

the subject of the SEC action? Were you in any way involved in

any of that?

Mr. ATKINS. No, sir, I was not involved in any of that.

Chairman SARBANES. Did you make any decisions involving how

PricewaterhouseCoopers would conduct these audits or provide

these consulting services at issue?

Mr. ATKINS. No, not at all.

Chairman SARBANES. And in your work, were you aware that

PricewaterhouseCoopers was violating the auditor independence

rules with respect to the clients that were the subject of the SEC

action?

Mr. ATKINS. Not at all.

Chairman SARBANES. You had no knowledge of it and no responsibilities in this area, I take it.

Mr. ATKINS. It is a completely different part of the firm from me.

So, I was not involved at all.

Chairman SARBANES. Actually, let me ask you this question because you are not an accountant. You are a lawyer.

Mr. ATKINS. Right.

Chairman SARBANES. And I say that benignly because I am a

lawyer as well.

[Laughter.]

Tell me a bit about what it was you went to Pricewaterhouse—

well it was Coopers & Lybrand originally.

Mr. ATKINS. At the time.

Chairman SARBANES. What you went there to do when you left

the SEC. Was Richard Breeden the head of the unit at Coopers &

Lybrand?

Mr. ATKINS. Richard Breeden was there and actually, when I

was looking to leave the SEC, he basically called me up and said,

you have to come and talk to us at Coopers & Lybrand.

Chairman SARBANES. Actually, Chairman Breeden gave some

very powerful testimony to this Committee in the hearings that we

held in March. He has been advising and counseling us as we have

moved along here. He has very strong views about sustaining the

integrity of the regulatory system.

But please go on.

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Mr. ATKINS. Yes. And that is part of his record from even when

he was Chairman of the SEC and before that, with respect to accounting issues.

But, anyway, basically, the idea was to do mock examinations of

financial services firms and help with investigations by the SEC

from a platform that the audit firm provides from an independent

standpoint, versus law firms which are viewed more as advocates.

So we can wear the white hats and be even-handed is the idea.

Chairman SARBANES. You actually were trying to enhance their

ability to meet or to comply with the regulatory standards. Is that

essentially what you were doing?

Mr. ATKINS. Exactly. We were trying to come in as independent

examiners, basically, and work with broker-dealers, investment advisers, and investment companies to help them with investor protection, help them comply with SEC rules.

Chairman SARBANES. Let me ask you this question. And actually,

Senator Gramm asked it in a way and he included Harvey within

its ambit by reference to the consulting work that he had done for

both the Institute of Certified Public Accountants and some of the

investment houses.

But this appearance issue is constantly raised by people and

raised in the press. And essentially, it says, here is someone who

has worked for this large accounting firm, or in your instance, has

consulted extensively. And now they are coming into the SEC and

one of the challenges at the moment is how do we get the accounting profession back to being a real profession, if I may say so?

One of the sad things in all of this is that Arthur Andersen,

which was founded by a man who was the model of rectitude in the

profession and advocated these high standards of auditing and accounting behavior, and was succeeded by Leonard Spacek, who

himself was even more a model of that, that this company which

they established fell on such difficult times. It is really, in many

respects, sad because they had built an institution that commanded

great respect and of high quality, and of course, we know what has

happened to it.

So the question then becomes, how can someone who is coming

out of one of these major companies go into the SEC and then rule

fairly and impartially on the matters that are to come before them?

I am the messenger here. I am reflecting things that are said or

questions that are raised. And I am interested in how you would

respond to that.

Mr. GOLDSCHMID. In my own case, Senator, as I indicated to Senator Gramm, my accounting role was that of a member of the

AICPA’s oversight board, the Profession Ethics Executive Committee. I was one of the first three public members. My job, as I

understood it, was to represent the public in this disciplinary process, which, as I say, just did not work, although there were very

decent, honorable people who were trying in all kinds of ways. I do

not see any conflict or disability there.

It is quite possible, and I consult perhaps a day a week, not even

that, it is quite possible to understand your clients, to advocate for

your clients, and then to come to Washington and Government and

step back from it and remember, what is critical to remember, that

the public interest, and the protection of investors is what counts.

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But as I said to Senator Gramm, prudent rules on conflicts, on

appearances, the 1 year time-out, those all make sense, too. We

have to be careful. We have to assure the public that we are going

to do the job right.

Chairman SARBANES. Mr. Atkins.

Mr. ATKINS. Well, when you work at any institution, that does

not necessarily mean that you have bought into whatever the organization does—all the different part of it.

As for me, when you are in a situation like that, you do see the

good, the bad, and the ugly, as it were. So that can help in going

into an oversight body like the SEC.

I am not an advocate any longer for the firm. I am leaving the

firm. I am disassociating myself and severing my relationship. And

I am now going to be back where I was before, 8 years ago at the

SEC and filling a new role now at the Commission, instead of as

staff to the chairman. So to take off one hat and go to the other,

and having severed that relationship, ensures investors and taxpayers and you in your oversight role that I will be able to carry

that, should I be confirmed, be able to carry that role forward.

Chairman SARBANES. Well, that is a good answer. We have a system where people move from the private sector into the public sector and then back to the private sector, and back and forth.

The real question is, when you go into the public sector, can you

leave behind you as you have just indicated, leave behind you the

private sector and assume your role as representing the public interest? Incidentally, we are around here to maintain oversight over

that question. I should probably throw that into the mix.

Mr. ATKINS. That is highly appropriate.

Chairman SARBANES. Into the mix as well. Well, gentlemen, we

very much appreciate your coming today.

Mr. ATKINS. Thank you.

Chairman SARBANES. I want to say to your families, this was a

relatively easy hearing. It is not always like this. You both bring

a great deal of competency to this assignment. It is important that

we try to get the commissioners in place, and now that we have

the full slate here from the Administration, we are moving forward

as expeditiously as we can.

Thank you very much for coming.

Mr. ATKINS. Thank you.

Mr. GOLDSCHMID. Thank you, Senator.

Chairman SARBANES. The hearing is adjourned.

[Whereupon, at 11:35 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketches of the nominees, response to written questions, and additional material supplied for

the record follow:]

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PREPARED STATEMENT OF SENATOR JON S. CORZINE

Mr. Chairman, I commend you for holding this timely hearing this morning. I

want to start my remarks by congratulating Mr. Atkins and Mr. Goldschmid on

their nominations and thank them for their willingness to serve—particularly during this turbulent period.

Mr. Chairman, enough has already been said about the crisis of confidence that

has taken hold of our financial markets, bred skepticism about corporate governance

practices, and created questions about integrity and transparency of corporate financial statements.

As we deal with these issues, I think its important for us all to understand that

restoring the lost investor confidence cannot be accomplished solely through the enactment of new laws. Particularly if new and existing laws are not enforced. The

responsibility of overseeing our markets and enforcing our securities laws lies

squarely at the feet of the SEC.

The first paragraph of the SEC’s mission outlines the fundamental purpose of the

agency. It states:

‘‘The primary mission of the U.S. Securities and Exchange Commission (SEC) is

to protect investors and maintain the integrity of the securities markets. As more

and more first-time investors turn to the markets to help secure their futures, pay

for homes, and send children to college, these goals are more compelling than ever.’’

That statement has become even more poignant in these times. Many first-time

investors have returned to stashing their money away under their mattresses, thousands of workers have witnessed their 401(k)’s savings—and their dreams of retirement—evaporate seemingly overnight, and millions of parents now wonder whether

it is wise to ‘‘gamble’’ on their child’s college education by investing in our markets.

Mr. Chairman, now more than ever, the public will be closely scrutinizing the integrity of those who not only run our public companies, but those who lead the

agencies charged with their oversight. And while many have been critical of the

SEC’s leadership in taken on the myriad of challenges facing our markets, I think

it is fair to say that the agency has been operating behind the eight-ball due to insufficient financial and personnel resources, and also because it has been operating

without full membership of its Board.

Mr. Chairman, this hearing will allow us to learn more about the character of

these nominees, who both come before the Committee with strong credentials. I look

forward to Mr. Atkins’ and Mr. Goldschmids’ testimony, and to their response from

questions of this Committee’s Members. Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman, first of all, let me tell you that I am very pleased we

are beginning to move the nominees for the Commission. I believe that we must get

all of the Commissioners there to begin enacting some of these important reforms

being legislated.

I would also say that both of our nominees have very accomplished records and

I am pleased that both of them hold the Commission in high enough regard that

they are willing to return to Government service.

The issues facing the Commission will require a major undertaking. Reforms

about the methods by which we review and discipline publicly traded companies, executives, and others associated with the formation of the capital markets are underway. It is important that we find quality individuals with the utmost integrity to

fill these positions.

I would like to say just a few words about Chairman Pitt. I have to say that

Chairman Pitt and I may not always agree, but I believe the recent attacks on him

to be unwarranted. Mr. Pitt has come under fire for having represented some of the

accounting firms who have been criticized in recent restatements. But I believe

Chairman Pitt’s work in the private sector is a great asset to investors. We need

individuals who are willing to work in Government who know and understand the

industries they regulate. I do not want lifelong Government bureaucrats monitoring

these companies.

These restatements did not all of a sudden appear when Chairman Pitt was confirmed. In most cases, they began during the late 1990’s when companies became

intent on not seeing the Internet bubble burst. I have to ask what was going on

at the SEC while these companies were filing all of these false financial statements?

What I imagine happened was that the companies, who are very familiar with who

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is at the Commission and where the resources are being devoted, thought they could

take advantage of the situation because no one was paying attention.

Just look at what has happened since Chairman Pitt has taken office. He has

opened a record number of investigations of restatements filed by public companies.

He has taken steps to break the relationship between research analysts and investment bankers. He has supported legislation that will increase penalties on corporate

executives engaged in fraudulent behavior. And, he has indicated his support of this

legislation, which by the way, I anticipate to be supported by the majority of the

Senate later today.

The numbers are very clear. In Chairman Levitt’s last year as Chairman, 503

total enforcement actions were filed. Already this year, Chairman Pitt has filed 415.

Officer and Director Bars for 2000 were 38—this year so far 71. Subpoenaed enforcement proceedings in 2000 were 9—this year 18. The numbers go on and on.

My point is that Chairman Pitt seems to be left cleaning up the mess his predecessor left in corporate America.

So, I offer my support for these actions taken by Chairman Pitt. Instead of attacking him, I am more concerned about what was happening at the SEC that bred this

climate where executives felt compelled to engage in this unethical behavior. Why

weren’t some of these actions taken 3 or 4 years ago? Did the SEC Chairman not

see the potential conflicts that could arise out of research analysts getting compensation based on investment banking business?

Therefore, I would say that I commend Chairman Pitt for the work he is doing.

From what I understand, the actions he is taking at the SEC have struck fear

throughout the corporate community that they had better get their act together.

I have a number of issues that I think the Commission needs to address in the

near future. Not the least of which is implementing the accounting reform bill. In

addition, the securities laws need a serious review. The National Market Structure

must be evaluated and revamped. With technological advances that have been

made, we cannot expect the markets to continue to operate on rules and laws that

were developed 25 or 30 years ago. Also, the time seems to have passed the effectiveness of the current rules under which the Intermarket Trading System operates.

I am looking forward to working with the Commission to address these and other

problems.

Again, Mr. Chairman, thank you for moving the nominees along, and I look forward to working with you and the other Members of the Committee on issues affecting the securities industry.

—————

PREPARED STATEMENT OF HARVEY J. GOLDSCHMID

MEMBER-DESIGNATE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

JULY 18, 2002

Chairman Sarbanes, Senator Gramm, Distinguished Members of this Committee,

it is with great respect and pleasure that I appear before you today. I am honored

to have been nominated to serve on the Securities and Exchange Commission.

Please allow me to introduce to you my wife Mary. She has more than supported

and encouraged me; she has been an extraordinary partner in every aspect of my

life. With Mary are our three sons, Charlie, Paul, and Joey, of whom we are very

proud.

I come from a working class background. My father was a furrier and then went

on to become a postal worker. My parents believed in our financial markets, and,

because of Social Security and their investments, retired to a relatively comfortable

life in Florida. Our Nation is now witnessing the most dramatic business scandals

that have occurred during my professional life. On a very personal level, I feel the

pain of the retirees and investors whose futures have been jeopardized. If I am confirmed, I promise to do all that I can to punish corporate wrongdoers, and to rebuild

faith in the fairness and integrity of our financial markets.

The SEC is a great institution. In January 2000, soon after I left as General

Counsel to resume my teaching duties at Columbia, I spoke with enormous pride

of the decency, dedication, professionalism, and common commitment to ‘‘doing the

right thing’’ that ‘‘motivated the SEC’s staff from top to bottom.’’ I welcome the opportunity to return to the SEC at this critical time for investors and our markets.

If the Senate confirms me, I will draw my inspiration from the performances of two

great past chairmen of the SEC, William L. Cary and Arthur Levitt. Bill Cary, my

treasured teacher and colleague at Columbia, was Chairman during the Kennedy

Administration from 1961–1964. He reinvigorated the agency and initiated a process

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of reform that changed securities law and financial markets enormously for the better. Arthur Levitt, my dear friend, you all know. As Chairman, he was outspoken,

courageous, uncommonly wise, and as he often put it, ‘‘passionate about protecting

investors.’’ Day by day in his remarkably successful 8 year chairmanship, Arthur

acted on his beliefs and in the public interest.

The Senate this week took a bold, balanced, and important step toward restoring

investor confidence. I want you to know how much I appreciate the critical role that

you, Chairman Sarbanes and this Committee have played with respect, to the Public

Company Accounting Reform and Investor Protection Act of 2002. The Nation is

very much in your debt for this piece of legislation, and for the oversight you have

provided for our financial regulatory process. I very much look forward to working

with you Mr. Chairman, Senator Gramm, and this Committee, and with Chairman

Pitt and my other new colleagues on the Commission. I feel confident that all of

us working together can more than meet the current challenges.

Thank you, Mr. Chairman, Senator Gramm, and Members of the Committee, for

this opportunity to appear before you today. I would be pleased to try to answer

any questions you may have.

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PREPARED STATEMENT OF PAUL S. ATKINS

MEMBER-DESIGNATE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

JULY 18, 2003

Mr. Chairman, Senator Gramm, Members of the Committee, it is a very great

honor for me to appear before this Committee today. I am deeply grateful for the

confidence that the President has shown in me by nominating me to be a Commissioner. I appreciate your courtesy in calling me before you today.

I have always regarded the Securities and Exchange Commission as one of the

finest agencies of the U.S. Government. My 20 year career has centered on the financial markets and the SEC’s oversight of them. I have reviewed the practices of

companies that the Commission regulates, advised firms on complying with its regulations, and worked with the SEC to investigate and rectify situations where investors have been harmed. In fact, I had the privilege of serving as a Staff Member

of the Commission for 4 years under two of the ablest chairmen that the SEC has

had: Richard C. Breeden and Arthur Levitt. It is a personally meaningful coincidence that the actual term that I have been nominated to fill is the same one that

both Chairman Levitt and Chairman Breeden held. If confirmed as Commissioner,

I would be proud to continue their first-rate efforts to fight fraud through a vigorous

enforcement program.

While at the SEC, I helped pursue policy initiatives that foreshadowed many of

the issues affecting the markets today. Under Chairman Breeden, one of my primary responsibilities was managing his effort to improve corporate governance, enhance shareholder communications, and strengthen management accountability

through proxy reform. Under Chairman Levitt, I organized his outreach to individual investors through an investor town hall program, a consumer affairs advisory

committee, and investor education efforts.

Since leaving the SEC, I have continued my work in investor protection by promoting meaningful internal safeguards in the private sector. I have helped financial

services firms improve their compliance efforts and have undertaken investigations

into corporate fraud, at times in conjunction with the SEC and the Justice Department. In the course of this work, I have spoken directly with hundreds of defrauded

investors and learned a valuable lesson in the process—that the impact of fraud and

corporate misconduct is felt far beyond the headlines. I have heard a Syracuse, New

York electrical union member tell me how he lost the down payment on his house

through a Ponzi scheme. And, I have listened while a respected doctor broke down

in tears when he described thousands of dollars of the pension fund for his staff

(some of whom had been with him for more than 20 years) that were lost through

the purchase of fraudulent securities.

Abstract commentaries about the evils of fraud in our financial markets pale in

comparison to the direct, personal impact of these stories. I have no doubt that

many Members of this Committee have experienced similar tragedies from constituents back home. We need to remember that these people had their property stolen

from them, as surely as if they had been robbed on the street. It is professionally

and personally gratifying to have had the opportunity to help recoup even a small

part of their stolen savings and pensions.

If confirmed, I will bring to the SEC this important real-world perspective of how

enhanced compliance, rigorous examinations and thorough investigations can make

a real difference for investor confidence that ultimately forms the foundation of our

markets. Moreover, I believe I can make an important contribution to the Commission’s ongoing efforts to improve its own programs and enforcement. The SEC is

about to receive greatly enhanced resources as a result of the President’s increased

budget request and the work of many here in Congress. We must ensure that these

resources are used wisely to protect investors to the maximum extent possible, and

I look forward to the opportunity to help achieve that if I am confirmed.

For many Americans, the SEC has long been just another Federal agency in

Washington with an alphabet-soup acronym. Today, however, the SEC is at the center of a crisis of trust that has dealt a serious blow to confidence in our financial

markets. In recent months, those markets have been rocked by one corporate scandal after another, causing millions of investors to question the integrity of the capital markets.

Investors need to believe that auditors of public companies are unconflicted, ethical, and acting in the best interests of shareholders. Investors also need to believe

that corporate officers are honest and have the best interests of their companies and

stockholders in mind, not just what is good for their own wallets. They need to know

that their representatives on corporate boards are actively guarding their interests.

And, most of all, investors should be able to rely on the financial reports issued by

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public companies to present a clear and accurate picture of the financial health of

those companies.

Those beliefs have been shaken in recent months. The SEC’s top priority is to

work to restore those bedrock principles and the investor confidence that keeps our

economy strong. With more than half of all Americans invested in the stock market,

the SEC is entrusted with an enormous responsibility.

The President has issued a powerful call to action to reinforce the ethic of corporate responsibility. This Committee and the full Senate have taken important

steps to restore investor confidence, as have the House and the SEC. Each of these

important actors in this process must remain committed to work together to restore

confidence in our capital markets by rebuilding a mutual trust among market participants, including investors, corporate executives, and auditors. If confirmed, I will

dedicate my energy, experience, integrity, and independent judgment to achieving

that goal. I believe strongly that the SEC is a vital line of defense in protecting individual investors, and I look forward to the opportunity to return to that institution

to serve that cause with Chairman Pitt and my fellow commissioners.

Thank you very much.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM HARVEY J. GOLDSCHMID

Q.1. Obviously we do not want to take anyone’s rights or move so

fast that we falsely accuse or jeopardize a case, but it is very important that the American people see that those who have broken

the law in these latest accounting scandals are brought to justice

quickly. In your role as a Commissioner will you commit to working

toward that end?

A.1. Yes. If confirmed, I will do my utmost to ensure that the Commission enforces the securities laws in a swift and even-handed

manner against those who violate them. Our Nation is now witnessing the most dramatic business scandals that have occurred

during my professional life. As you suggest, it is essential that the

Commission act quickly and decisively when its investigations

uncover evidence of wrongdoing. I support the efforts of the Commission’s Division of Enforcement in recent months to enforce the

securities laws in ‘‘real time,’’ and I am committed to the continued

execution of thorough, fair, and efficient investigations and civil enforcement actions.

Q.2. Will you, as a Commissioner, do everything you can to see

that when promulgating regulations, especially on this accounting

bill where there is a difference of opinion between the SEC and

Congress, that the SEC follows the intent of Congress?

A.2. Yes. It is the Commission’s duty to exercise its rulemaking authority in a way that is faithful to the intent of Congress. If I am

confirmed, I will work hard to ensure that every exercise of the

Commission’s regulatory authority, including its regulatory authority under the new accounting bill, is in accord with the intent of

Congress.

RESPONSE TO A WRITTEN QUESTION OF SENATOR AKAKA

FROM HARVEY J. GOLDSCHMID

Q.1. The use of soft dollars is opaque and not understood by most

individual investors. In a 1998 report, the SEC defined soft dollar

practices as arrangements under which products or services other

than the execution of securities transactions are obtained by an adviser from or through a broker-dealer in exchange for the direction

by the adviser of client brokerage transactions to the broker-dealer.

Soft dollar transactions may result in conflicts of interest for advisers and have an impact on investors. What should be done to improve the transparency of soft dollar transactions?

A.1. Client brokerage is an asset of the client, not the adviser.

However, investment advisers that manage client portfolios commonly receive soft dollar benefits—such as research, other products, or services—in exchange for directing their clients’ trades to

particular broker-dealers. Soft dollar arrangements have the potential to create conflicts of interest because the adviser has an incentive to select or recommend a broker-dealer based on the adviser’s

interest in receiving those benefits rather than on the client’s interest in receiving the best execution of trades at the lowest possible

rates. While the Commission currently requires advisers to disclose

their soft dollar arrangements on Form ADV and to provide that

Form to every client, it is my understanding that the Commission

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has proposed revisions to Form ADV that would enhance the disclosure of the adviser’s soft dollar arrangements and the conflicts

of interest they present. If confirmed, I will support efforts to improve the quality of communications between broker-dealers, investment advisers, and their clients. Similarly, I will encourage the

staff to consider ways of creating transparency in the increasing

use of mutual fund brokerage to reward the sale of fund shares by

broker-dealers.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING

FROM PAUL S. ATKINS

Q.1. Obviously, we do not want to take anyone’s rights or move so

fast that we falsely accuse or jeopardize a case, but it is very important that the American people see that those who have broken

the law in these latest accounting scandals are brought to justice

quickly. In your role as a Commissioner will you commit to working

toward that end?

A.1. Yes. I believe that the SEC’s enforcement role is a vital aspect

of its mission. Investor confidence in the markets depends on a

strong enforcement effort against those who have broken the rules.

It is critical for investors to see that there is an effective, fair enforcer of the rules.

Q.2. Will you, as a Commissioner, do everything you can to see

that when promulgating regulations, especially on this accounting

bill where there is a difference of opinion between the SEC and

Congress, that the SEC follows the intent of Congress?

A.2. Yes. As a creature of statute, the SEC derives its authority

from Congress and as an independent agency, it is called upon to

interpret and enforce the law. It is essential that the SEC abide

by the intent of Congress in its regulatory and enforcement action.

As a Commissioner, I will do everything that I can to ensure that

my actions and the actions of the SEC comport with that intent.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA

FROM PAUL S. ATKINS

Q.1. I have a special interest in financial education along with several other of my colleagues on this Committee. In your statement

you mention that while at the SEC you were involved in investor

education efforts. What is your evaluation of the SEC’s current investor education efforts and what could be done to enhance these

programs?

A.1. I understand that the SEC’s Office of Investor Education and

Assistance (OIEA) has been pursuing a number of initiatives to

reach investors. For example, in January 2002, the SEC launched

a fake ‘‘scam’’ website to warn investors about fraud before they

lose money.

When I was on the staff of the SEC, we produced the first brochures—called Invest Wisely—aimed at individual investors. I understand that the SEC has continued and expanded this effort. It

produces and distributes educational materials in print, and the

staff organizes and attends educational events directed at individual investors. In addition, each year Commission staff individually responds to thousands of investor complaints and questions.

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In every facet of its investor education program, the Commission

works closely in partnership with private organizations, trade associations, and other governmental agencies to leverage its resources

and achieve greater impact for its educational materials. I look forward to reviewing the current status of the SEC’s program in more

detail and exploring with the Chairman, my fellow Commissioners

and the staff ways in which to expand this very important effort

of the Commission.

Q.2. What is your evaluation of the SEC’s current investor education efforts and what could be done to enhance these programs?

A.2. Please see above response to Question 1.

Q.3. The use of soft dollars is opaque and not understood by most

individual investors. In a 1998 report, the SEC defined soft dollar

practices as arrangements under which products or services other

than the execution of securities transactions are obtained by an adviser from or through a broker-dealer in exchange for the direction

by the adviser of client brokerage transactions to the broker-dealer.

Soft dollar transactions may result in conflicts of interests for advisers and have an impact on investors. What should be done to

improve the transparency of soft dollar transactions?

A.3. Currently the Form ADV requires disclosure of soft dollar

practices. In my term as Commissioner, I look forward to reviewing

the state of communications between investment advisers, brokerdealers, and their customers to assure that there are appropriate

disclosures of conflicts of interest and that the disclosure of other

key elements of securities transactions are clear and easily understood by investors.

74

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(77)

NOMINATIONS OF:

DONALD L. KOHN, OF VIRGINIA

AND

BEN S. BERNANKE, OF NEW JERSEY

TO BE MEMBERS OF

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

TUESDAY, JULY 30, 2002

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 2:05 p.m. in room SD–538 of the Dirksen

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The hearing will come to order.

I am very pleased to welcome before the Committee on Banking,

Housing, and Urban Affairs this afternoon Donald Kohn and Ben

Bernanke, who have been nominated by President Bush to be

Members of the Board of Governors of the Federal Reserve System.

This hearing was originally scheduled for this morning. But the

President had his bill signing with respect to the Investor Protection Corporate Accountability Act and therefore we put it off until this afternoon. I hope it did not inconvenience either of our

nominees.

Both of these nominees are highly respected economists who,

based on their records, appear to be well qualified to serve as members of the Federal Reserve Board of Governors.

Don Kohn is well known to Members of this Committee through

his long service at the Fed. A graduate of the College of Wooster

in Ohio, he received his Master’s and PhD, in economics from the

University of Michigan, and then has spent his entire professional

career in the Federal Reserve System, first at the Federal Reserve

Bank of Kansas City and then he came to Washington and has

worked in a number of divisions of the Fed, including being the

Chief of the Capital Markets Section. He was the Associate Director of the Division of Research and Statistics, Deputy Staff Director

of the Office of Staff Director for Monetary and Financial Policy.

From 1987 to 2001, he was Director of the Division of Monetary Affairs of the Fed. And since 2001, has been an adviser to the Board

78

for Monetary Policy. He has also been Secretary and Economist for

the Federal Open Market Committee.

He is the Senior Career Monetary Policy Expert down at the Fed,

widely respected for his expertise. And we are very pleased that

not only, but I think the Fed staff, have been honored by this nomination to move from a career staff position to be a member of the

Board of Governors.

Our research indicates, and I am not altogether vouching for its

accuracy, that this has only happened three times previously in the

history of the Fed, and this is the first time that it has occurred

in the last 25 years. In our view, it is an honor that is well

deserved.

Ben Bernanke is currently Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton—

my alma mater, I hasten to add——

[Laughter.]

——and serves as Chairman of Princeton’s Economics Department. He received his undergraduate degree from Harvard in 1975,

his PhD from MIT in 1979, and he then went to the west coast,

where he was first an Assistant Professor of Economics and then

Associate Professor at Stanford Business School, and came to

Princeton in 1985 as a Professor of Economics.

He is the director of the program in Monetary Economics of the

National Bureau of Economic Research and he is the Editor of the

American Economic Review. Also highly respected as an expert in

monetary policy and it is clear that he would bring very strong

qualifications to the Board of the Governors of the Federal Reserve.

So we look forward to hearing the opening statements from our

witnesses and having an opportunity for some questions.

It is the practice of this Committee to swear in the nominees. So

before you give your statements, I would like to ask you to stand

and take the oath.

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

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

help you God?

Mr. KOHN. I do.

Mr. BERNANKE. I do.

Chairman SARBANES. Do you agree to appear and testify before

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

Mr. BERNANKE. I do.

Mr. KOHN. I do.

Chairman SARBANES. Thank you very much.

Since we believe, at least continue to believe, to some extent, in

the seniority system, and since Don Kohn has been at the Fed for

some years and Ben Bernanke is just coming to the Fed, I think

we will hear Don Kohn’s statement first and then we will go to Dr.

Bernanke.

And if either of you wishes, if you have members of your family

here that you might want to introduce in your opening or in the

course of your statement, we would certainly invite you to do that.

79

STATEMENT OF DONALD L. KOHN, OF VIRGINIA

TO BE A MEMBER OF THE BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM

Mr. KOHN. Thank you very much, Mr. Chairman.

I would like to introduce the members of my family. This is my

wife, Gail, sitting in the seat I used to occupy.

[Laughter.]

My son, Jeff, daughter-in-law, Sue Matthiesen, mother Pat, and

niece, Zoey Kohn.

Chairman SARBANES. Good. Well, we are very pleased to have

them here with us.

Mr. KOHN. Chairman Sarbanes and Members of the Committee,

I very much appreciate your expeditious consideration of my nomination to be a Member of the Federal Reserve Board. I have enjoyed a productive working relationship with this Committee and

its staff over a number of years. Should the Senate confirm my

nomination to the Board, I very much look forward to continuing

to work with you to promote a strong economy and a robust financial system that serves the needs of all Americans. I am most

grateful to President Bush for this nomination and deeply honored

by his judgment that my abilities and experience will help the

Board to carry out the critical responsibilities you, the Congress,

have entrusted to it. Having spent my working life at the Federal

Reserve, I may be more aware than most nominees who come before you of both the challenges and the rewards of the position to

which I aspire.

Our economy has made considerable progress over the last two

decades toward the goals you have set for monetary policy of maximum employment, stable prices, and moderate long-term interest

rates. We have enjoyed two exceptionally long economic expansions

punctuated by relatively mild recessions, an inflation rate that has

reached what many would consider to be a zone of price stability,

and relatively low long-term interest rates that have helped to promote wider homeownership. Technological innovation, deregulation,

and globalization, by fostering greater economic and financial flexibility and resiliency and more rapid increases in productivity,

largely account for this favorable performance. But the conduct of

monetary policy surely also has played a role in establishing a

background conductive to economic vitality. This policy has been

marked by a balancing of discipline and flexibility—the discipline

of focusing on long-run price stability as a necessary precondition

for maximum employment and moderate long-run interest rates,

and the flexibility within that long-term discipline to counter disturbances to the economy and financial markets might threaten

maximum sustainable employment as well as stable prices.

Going forward, in order to do its part in promoting good economic

performance, the Federal Reserve will continue to be faced with the

need to analyze and adapt to a dynamically changing economy and

financial markets. Innovation and deregulation in markets and the

globalization of finance are affecting the flow of funds between savers and spenders and the distribution of risks and returns in the

financial system. These changes, in my view, have not detracted

from the effectiveness of monetary policy, and they have increased

both economic efficiency and financial stability. But they have also

80

opened the economy to new kinds of influences and they are altering the channels through which policy affects the economy. In just

the last few years, our financial and economic stability has been

challenged by crises originating in East Asia and Russia, and by

huge variations in asset prices here and abroad as investors strove

to peer through considerable fog to evaluate the implications of

rapidly changing technologies and market structures. The significance of those asset price movements has been magnified by the

growing importance of wealth to household financial conditions.

Policymakers have been required to decipher the shifting forces

driving the economy and to adjust policy, sometimes rapidly, to

provide a counterweight to developments that threatened to undermine economic performance. Where possible, those policy adjustments have been forward-looking—anticipating the effects of economic forces so as to forestall emerging instabilities. It is a process

in which I have been deeply involved, working with policymakers

and staff, and I would welcome the opportunity in a new role to

bring my experience and expertise to bear on the difficult, but fascinating, issues that confront the Federal Reserve’s conduct of monetary policy.

The increasing volume of finance flowing through securities markets, the spread of wealth to more Americans, and the growing

prominence of global investors in our financial markets have put

an additional premium on the ability of the Federal Reserve to explain its policy to the public. More people from more diverse backgrounds are making important decisions based on their expectations of policy actions and the effects of those actions. When savers

and borrowers understand how the Federal Reserve sees the forces

developing in the economy relative to its objectives, interest rates

and other prices in financial markets are more likely to be set in

a way that helps to achieve these objectives. I have worked extensively in my career at the Federal Reserve to help policymakers explain monetary policy. While we have made considerable progress

in recent years, improving the clarity, completeness, and timeliness

of our various public statements is an ongoing process that must

be continued.

As the Congress recognized when it created the Federal Reserve,

economic stability rests on a foundation of financial stability. In no

area of Federal Reserve responsibilities do changing market structures pose a bigger challenge than in carrying out the supervision

and regulation of banks and holding companies. Changes in the

legislative framework for the financial sector in recent years have

allowed consolidation within the banking sector and, now, between

banking and other financial service providers, permitting markets

to realize economies of scale and scope in the delivery of services.

This consolidation, along with the proliferation of new instruments

to price and trade various aspects of risk, I believe, promotes

sounder, more diversified, institutions and a system in which both

those supplying and using savings have many more alternatives.

The regulatory implementation of these new laws needs to allow

the markets to evolve with changing preferences and technologies,

while preserving competition in the delivery of services and financial stability. It also must protect against the effective spread of

the safety net beyond the core depositories for which Congress inVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00084 Fmt 6601 Sfmt 6601 NOM2.TXT SBANK4 PsN: SBANK4
81

tended special protection. No depository institution should be insulated from market forces by being considered too big to fail. But because banks do have access to the safety net, market signals are

muted by moral hazard. Moreover, as institutions become more

complex and deal in a great number of new instruments, markets

and managers may find it difficult to evaluate some risks accurately, increasing the changes for unexpected losses. In order to

promote efficient resource allocation and maintain financial stability, supervisors must anticipate potential problem areas and

must put into place oversight structures that build on existing market signals and risk management and also simulate market pressures where those signals are inadequate.

The growing access to credit markets for all our citizens is another very positive development in our financial system. It has resulted from efforts to eliminate discriminatory practices along with

the recognition by lenders that profitable opportunities exist in

making credit available to those with lower income and wealth. But

regulators, borrowers, and lenders are still adjusting to the expansion of the market. Many borrowers in the so-called subprime segment of the credit markets are having difficulty servicing the additional debt, more difficulty than lenders anticipated, resulting in

the need for supervisory actions for a number of bank lenders. In

addition, it has increased the opportunities for unscrupulous lenders to take advantage of less well-informed consumers. Clearly, efforts to educate credit users better should have important payoffs.

More generally, the key in this area is to find the very difficult balancing point for regulation that allows the markets to generate the

greatest number of legitimate alternatives for borrowers while proscribing clearly abusive practices.

Meeting these various challenges will require a strong Federal

Reserve System. You have such an institution now. It is widely respected and relied upon, not only to follow the appropriate policies

but for its advice in a variety of economic and financial matters.

Although the Federal Reserve tends to speak with one voice, in my

experience, decisions are preceded by healthy give-and-take among

policymakers with diverse views supported by talented and dedicated staff. Should the Senate see fit to confirm my nomination, I

am looking forward to adding my own perspective to that dialogue

as a policymaker and will do my best to pass on to future generations an institution just as strong as the one its current and past

leaders have bequeathed to this generation of Americans.

Thank you, Mr. Chairman. I would be pleased to answer any

questions you might have.

Chairman SARBANES. Thank you very much.

Mr. Bernanke, we would be happy to receive your statement.

STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

TO BE A MEMBER OF THE BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM

Mr. BERNANKE. Thank you, Mr. Chairman. I would like to start

by introducing my support group—my wife, Anna, my son Joel, my

daughter Alyssa, my brother-in-law, Victor Friedmann, his wife,

Toni Jo Friedmann, and our neighbor, Todd Hunter.

82

Chairman SARBANES. Good. We are very pleased to have them

here with us today.

Mr. BERNANKE. Thank you. Chairman Sarbanes, Senator

Gramm, Members of the Committee, I am deeply honored to appear before you today as the President’s nominee to serve on the

Board of Governors of the Federal Reserve System. If I am confirmed to this important position, I will do my utmost to advance

the economic well-being of all Americans.

The opportunity to serve at the Federal Reserve would be a great

privilege, as it would allow me to apply in the public interest the

fruits of a lifetime of thinking and writing about central banking

and the economy. In my academic career of nearly 25 years, I have

written widely on topics relating to monetary policy, banking and

credit markets, economic growth and business cycles, macroeconomic history, and the statistical analysis of the economy, all of

which bear directly on the work of the Federal Reserve. Moreover,

over the years I have maintained close contact with the Federal Reserve System, as a consultant, visiting scholar, and adviser; and I

have visited and advised the central banks of many industrialized

and developing countries.

In various roles during my career, I have also learned how to

work with people and to get things done. Among other duties, I

have served for the past 6 years as Chair of the Princeton University Economics Department. I also served as the first Director of

Princeton’s new Center for the Study of Financial Markets; as the

Director of the Monetary Economics Program of the National Bureau of Economic Research; as the Editor of the economics profession’s leading research journal; and—last, but certainly not least— as a two-term elected Member of the Montgomery Township, New

Jersey Board of Education.

One of the remarkable features of the Federal Reserve System is

the wide range of its responsibilities, including not only the making

of monetary policy but other important areas such as financial regulation and supervision, consumer protection, payments systems,

international finance, and others. Although at present my greatest

expertise is in monetary policy and macroeconomics, I am keenly

interested in and broadly familiar with each of the Fed’s other

areas of responsibility, and if I am confirmed, I look forward to

learning a great deal more. I particularly look forward to interacting with, and learning from, both colleagues on the Board and

the Federal Reserve’s able staff.

Let me turn briefly to issues of policy and the current economy.

The Federal Reserve has considerable operational independence,

but ultimately derives its legitimacy and powers solely from its legislative mandate. I would like to take this opportunity to strongly

affirm my support for the monetary policy goals set for the Federal

Reserve by Congress in the Federal Reserve Act: maximum employment, stable prices, and moderate long-term interest rates. While

one can always hope to do better, I think the Federal Reserve has,

on the whole, done a remarkably good job of promoting these three

objectives over the past 20 years or so.

In my view, a key operational element in the Fed’s success at

achieving its tripartite objectives has been the Federal Open Market Committee’s emphasis on keeping the rate of core inflation low

83

and stable. Low and stable inflation is intrinsically beneficial, as it

reduces the need for households and firms to expend time and

resources to protect themselves from the adverse effects of rapidly

and erratically changing prices. Consistently low inflation also directly promotes the objectives of high employment and rapid economic growth, by providing a stable monetary environment in

which firms and markets can function most efficiently. In a low-inflation environment, lenders are less concerned about erosion of

their principal, and so nominal interest rates tend to be low.

Finally, a strong commitment to low and stable inflation, by

moderating and anchoring the public’s inflation expectations, actually enhances the ability of monetary policy to respond actively to

short-run economic disturbances when necessary.

For example, during the past year, the Federal Reserve was able

to cut interest rates quite aggressively without engendering significant inflationary pressures or igniting a wage-price spiral. Public

confidence that inflation would be kept under control was essential

to giving the Federal Reserve this heightened flexibility.

In my academic writings, I have argued that the efficacy of monetary policy at achieving its mandated objectives could be further

improved by the Fed’s adoption of an approach known as ‘‘inflation

targeting.’’ In anticipation of possible questions, let me say a bit

more about this proposal. The main operational change under inflation targeting would be that the Fed, in consultation with the executive and legislative branches, would announce an explicit numerical objective for core inflation over the medium term, say 1 to 2

years.

For example, allowing for the upward biases in inflation measurement and a zone of safety to avoid accidental deflation in prices,

an inflation target in the range of 1 to 2 percent per annum for the

core PCE deflator might be a good initial choice, although some

might reasonably disagree about either the number or the choice

of index. As part of the targeting process, the Federal Reserve

would report to Congress its expectations for future inflation, its

reasons for any target misses, and its projected trajectory for bringing inflation to its targeted level.

It is important to stress that inflation targeting, as I interpret

it, would not represent a major departure from the current practice

of U.S. monetary policy or a change in policy objectives. Rather, its

primary goal would be to build on policy successes of the past two

decades by strengthening the Federal Reserve’s institutional commitment to the approach used by the Fed under Chairman Volcker

and Chairman Greenspan. As I discussed a moment ago, the center

piece of this approach is an emphasis on keeping the rate of core

inflation low and stable. Based on the experiences of a number of

other countries that have adopted this model, I believe that an explicit inflation target would improve further the Fed’s ability to

reach all three of the goals set forth in the legislative mandate for

monetary policy. Among the potential advantages of an explicit inflation target are increased stability of the public’s inflation expectations, lower economic and financial uncertainty, increased central

bank credibility, greater continuity and consistency of policy, and,

importantly, enhanced accountability of the Fed. Although I am favorably disposed toward these incremental changes in the current

84

framework of U.S. monetary policy, I know that not everyone

agrees with this view, and that there are important, substantive

arguments to be made on both sides of the issue. I look forward to

discussing these ideas with Federal Reserve colleagues and others

interested in the making of monetary policy.

Turning finally to the current economic situation: In recent

months, investors have been battered by sharp declines in equity

prices, not only in the United States, but in many other countries

as well. The losses in wealth are large and serious indeed. Equally

serious and disturbing is the rash of corporate and accounting

scandals that have certainly played a role in the stock market’s

plunge. Financial markets cannot do their job of efficiently allocating capital and sharing risk if investors do not feel that they are

receiving accurate and timely information, or if they fear that those

who should be stewarding their funds cannot be trusted to do so

honestly. I fully support the efforts of Congress and the President

to restore investor confidence in the accuracy and reliability of financial statements and in the trustworthiness of those who manage our corporations and financial institutions.

Although the fall in equity prices is frightening and dispiriting

for many, I do not think distinctions need to be made. Saturation

coverage by cable TV networks notwithstanding, the stock market

is not the whole economy. While the gyrations of the Dow or

Nasdaq attract the most attention, the broader economy—as reflected in the daily activities of American workers, managers, business owners, and entrepreneurs—has overcome a significant part of

the effects of last year’s recession and the September 11 terrorist

attacks, and by most indications is continuing to grow. Most impressive is the fact that worker productivity continues to expand

rapidly—at more than an 8 percent rate in the first quarter—despite adverse cyclical conditions. New capital and innovative technologies have both played an important role in this resurgence. To

be sure, the cumulative decline in the stock market poses risks for

economic growth over the rest of the year. Despite our current difficulties, however, we should not lose sight of the underlying

strength of our economy.

To conclude, I am grateful for this opportunity to appear before

this Committee. These are indeed challenging times for the United

States, for our economy, and for the Federal Reserve itself. I look

forward to contributing to the making and implementation of sound

economic policies. If I am confirmed, I will devote myself to becoming a constructive and effective Member of the Board of Governors

of the Federal Reserve.

Thank you. I will be pleased to answer any questions.

Chairman SARBANES. Well, I want to thank both of you for your

statements. We will go into 5 minute rounds of questioning now,

unless any Member has an opening statement he wants to make.

COMMENT OF SENATOR JIM BUNNING

Senator BUNNING. I would just like to put one into the record.

Chairman SARBANES. Without objection, so ordered.

I am interested in the question of the transparency of the decisionmaking of the Federal Reserve so that the public can gain a

better understanding. I would just like to hear your views on how

85

important you think that is and what steps might be taken to improve the transparency of board decisions.

Mr. KOHN. Thank you, Mr. Chairman. I think it is absolutely

crucial. As I indicated in my opening statement, the Federal Reserve has become more transparent over the years, announcing our

decisions, giving reasons for the decision, announcing the votes

now. I think we have improved the understanding of the financial

markets and the public at large. We have helped the accountability

of the Federal Reserve with you, the Congress, by becoming more

open. When people understand what we are trying to do, when

markets understand what we are trying to do, what issues we are

dealing with, how we see the forces developing in the economy,

they can evaluate that and they are more likely to anticipate our

actions, to work with us to stabilize financial markets and stabilize

the economy.

So, I think transparency is very crucial to the effectiveness of

monetary policy and I believe there have been a number of studies

coming out in recent years showing that the increased transparency at the Federal Reserve has, in fact, allowed markets to

better anticipate what we are going to do and act in a stabilizing

fashion. I do not have concrete proposals for what we could do next

to increase our transparency. This is a subject that is under constant review at the Open Market Committee. Each step tends to

be small and incremental, in part, because once you take it, you

cannot take it back again. So you need to be sure that it is what

you intend to do. I think we could increase the clarity of what we

are saying, help people understand what it is. This is just something that we need to keep working at, make small steps, get the

feedback from the market and the public as to what they would

like and what works and does not work, and keep pushing at it.

Chairman SARBANES. Good. Dr. Bernanke.

Mr. BERNANKE. I agree with Dr. Kohn that transparency is very

important for effective operation of monetary policy. It reduces uncertainty. It helps markets anticipate and respond more effectively

to monetary policy changes. It is also important to educate markets

and the public about what monetary policy is trying to do in order

to improve decisionmaking. And finally, clarity and transparency

are an important part of the accountability of the Federal Reserve

in representing its goals and objectives and how it is going to approach those goals and objectives.

I want to commend the Federal Reserve. On the whole, there has

been a remarkable movement over the last decade or so toward

greater transparency in terms of releasing minutes, releasing transcripts, providing additional information about the so-called bias of

policy and so on. I think there is more that could be done. One suggestion which I have already made in my statement was to announce an inflation target. Perhaps the minutes and other information could be redacted to allow them to be released more quickly.

I would like to have some experience on the board before I make

too many concrete recommendations.

Chairman SARBANES. That is a prudent point of view.

[Laughter.]

86

Mr. BERNANKE. But I think that, in general, my philosophy is

that the more transparency that can be provided, the better, and

I would work toward that goal.

Chairman SARBANES. I am interested in your statement—you

have this inflation target. What is your unemployment rate target?

Mr. BERNANKE. There is no unemployment rate target, Senator

because what we try to achieve is the greatest possible growth rate

and the lowest possible unemployment that is consistent with an

economy that is not overheating.

Chairman SARBANES. You are going to give an inflation target,

but not an unemployment rate target.

Mr. BERNANKE. Because, conceptually, sir, we have a basic idea

of what is the optimal inflation rate based on considerations——

Chairman SARBANES. Well, now, the European Central Bank has

a target of inflation below 2 percent. But it has been running there

a few tenths of a point higher than 2 percent.

But, at the same time the growth in employment figures have

been disappointing, critics have been charging that the ECB is responding too timidly to the European economic slowdown. They

argue that while it is important to maintain confidence that inflation will not grow too rapidly, it is also important to maintain confidence that output growth is being stabilized, since businesses

make their hiring and investment decisions on expectations for

growth.

If they lack confidence that the Central Bank, or if they feel that

the Central Bank is too committed to an inflation target that will

allow growth to stagnate, can’t this result in lower growth and

raise unemployment over a sustained period of time?

Mr. BERNANKE. I agree with the critics of the European Central

Bank, Senator. The European Central Bank has a hierarchical target which places the inflation rate above any other objective. My

view is that low inflation is in part an objective in itself, but it is

also an instrumental means by which we achieve maximum employment and rapid economic growth.

I would take the view that an inflation target actually increases

the flexibility and the ability of a central bank to respond to shortrun economic disturbances to promote employment, to promote

growth. That happens in two ways. First, low inflation tends to

lead to long-run economic growth by creating a more stable monetary environment. But second, and I think very importantly, by

maintaining low and stable inflation expectations, the Central

Bank actually releases itself to have more ability to respond to

short-run economic disturbances.

Chairman SARBANES. Well, let me ask you this question, then I

will yield to my colleagues.

Mr. BERNANKE. Yes.

Chairman SARBANES. If the United States had inflation slightly

above the personal target you have set out in your statement, but

also had very weak output growth, how would you reconcile that

situation? Particularly, how would you reconcile it with the legal

mandate that has been given to the Federal Reserve by statute?

Mr. BERNANKE. I would attempt to restore the economy to its

equilibrium level, which is the level which promotes maximum employment and growth.

87

I would not try to do that by creating artificial inflation or extremely high inflation. But I would try to turn the economy to its

normal potential growth path as quickly as possible.

Chairman SARBANES. What would that mean in that instance,

though, when the inflation is above your target rate, and yet, the

output growth is very weak?

Mr. BERNANKE. I would not return inflation to its target at the

expense of creating a deep recession in the economy. I would take

a gradual approach and I would try to make sure that the economy

was on a stable, maintainable, healthy growth path as part of that

process.

Chairman SARBANES. Senator Gramm.

COMMENTS OF SENATOR PHIL GRAMM

Senator GRAMM. Your thesis is that a low inflation rate promotes

an environment in which economic growth is maximized and unemployment is minimized. Right?

Mr. BERNANKE. That is correct, sir.

Senator GRAMM. Let me be brief, Mr. Chairman, because we are

going to have a vote here in a minute and everybody is going to

have trouble getting back.

Let me say, I think these are two excellent nominees. We have

been blessed with a lot of good people on the Federal Reserve

Board. The Federal Reserve Bank has become in the post-war period our most successful independent agency. And I want to thank

both of you for your willingness to serve.

Let me say, in the case of Dr. Kohn, I do not think we should

have staff members go on the board every day. But every once in

a while, it is a good thing. It encourages good people to come to

work at the Fed. It shows that you can literally come in at the bottom and end up at the top. It is unusual. But I think in that sense,

it is a good thing.

So, I want to commend both of you. Let me stop because I know

other people want to say something or ask a question before we

have this vote in 6 minutes.

Chairman SARBANES. Senator Reed.

COMMENTS OF SENATOR JACK REED

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

Mr. Bernanke, you say your thesis is low interest rates tend to

promote economic growth. But there is an example of Japan, where

interest rates have been very low and economic growth has been

anemic.

As the author of Japanese Monetary Policy—A Case of Self–Induced Paralysis might you draw some conclusions or give us some

insights about the differences?

Mr. BERNANKE. I would be glad to, Senator. I have in fact advised the Bank of Japan, I think their monetary policy is very poor.

One of the benefits of an inflation target is that it avoids deflation as well as excessive inflation. Their deflationary policies have

been highly detrimental to their economy. They should set an inflation target. They have been called upon to set an inflation target

of, say, 1 to 2 percent positive, not negative, inflation. They could

achieve that if they had the will and the desire to do so.

88

Japan is an excellent example of a country without an inflation

target which is allowing prices and the economy to drift without direction, without a frame of reference. And it is an excellent case

study for exactly my point. Their performance is due almost entirely to very poor monetary policy which has been allowing prices

to decline now for almost a dozen years.

Senator REED. Let me follow up. There has been some discussion

in the financial press at least, of are there similarities to the Japanese experience here in the United States that, even though we are

maintaining historically very low interest rates, our growth—we

are in a recession—the growth is coming back somewhat feebly.

What would you say to those types of discussions?

Mr. BERNANKE. Sir, while the Federal Reserve needs to pay close

attention to the state of the economy and the state of inflation, I

think the risks of the United States falling into a Japanese-style

deflation trap are extremely small.

There are two reasons for that. First, our banking system is far

sounder and it is not subject to the massive, nonperforming loan

problem that the banks of Japan now face. Second, I believe the

Federal Reserve, whether it has an explicit inflation target or not,

fully understands the importance of maintaining or avoiding deflation in prices. And so, I think that we have the safeguards and the

initial conditions that allow us to avoid such a trap.

Senator REED. Thank you. Dr. Kohn, why don’t you comment on

this line of questioning?

One other point that I would put in is that the presumption that

we have a sound banking system is one that I share. But we have

to consider the possible effects of the current downturn in corporate

America—declining stock prices, bankruptcies, loans that were

good 6 months ago, and now might be questionable. Dr. Kohn, your

comments?

Mr. KOHN. Senator, I think we still have a sound banking system, even if it is facing some problems, and its bad loans are likely

to get a little worse. The capital level of our banks is extremely

high. They are very well capitalized.

I think even more than the soundness from a capital perspective,

is the way our financial system and our economy operates relative

to Japan’s. It is a much more flexible, diverse financial system, so

that if one type of institution has trouble, there are other sources

of finance for most businesses and households, and that is a real

strength. It is a much more flexible economy, much more adaptable

economy.

And I would say another very big difference between the United

States and Japan is that our legislators have stepped up to the

problem and addressed the emerging issues, instead of trying to

sweep them under the rug or ignore them and hope they go away.

So we have a political and an economic system that is more immune to difficult downward problems.

I completely agree with Dr. Bernanke’s analysis that this is not

really an issue in the United States for other reasons as well. The

Federal Reserve, although we do not have an inflation target per

se, is very aware of the risks of a soft economy enduring, of inflation getting lower and perhaps turning into deflation.

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The FOMC has said in its minutes that it has addressed this

issue and this problem, and will act aggressively to head off such

a thing if it looks like it is occurring. My best guess is it is not occurring. The economy is growing and recovering. I do not think we

have such a problem. But it is always at least a little bit of a risk,

and the lower the inflation rate is, the bigger the risk is. But the

FOMC is very aware of those risks.

Senator REED. Thank you, Mr. Chairman. I note that the votes

are pending, so I will stop here. But just one final comment.

As Vice Chairman of the Joint Economic Committee, we have

been very concerned about the quality of Federal financial statistics, and the ability to generate those statistics. And I would hope

that, at the Federal Reserve, you two would share the interest in

institutionally ensuring that we have even better numbers than we

have today.

Thank you, Mr. Chairman.

Chairman SARBANES. I might note that Chairman Greenspan,

who never recommends a spending program to the Congress, has

recommended that we do better by the statistic. It is not a big item,

but nevertheless—Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman.

This is for Dr. Kohn. As you know from our personal meeting,

I have very big concern about having an independent governors

board for the Federal Reserve. Given your long employment with

the Fed, how can you assure me that you will be independent?

Mr. KOHN. Senator, you have my word for it. I have had a long

association with the Federal Reserve, 32 years. I have worked

closely with Chairman Greenspan for the last 15 years. I think one

reason why he and other governors have found me a useful sounding board, someone they like to work with, is that I interact well

with them and will tell them when I think their analysis is off, or

when I think policy——

Senator BUNNING. That is my next question. So since we have a

very short time, I am going to get more than one question in. Give

me an example of when you either privately or publicly disagreed

with the Chairman. And if privately, did you inform him of the disagreement?

Mr. KOHN. I have had a lot of private conversations with the

Chairman as a staff member. I certainly have told him when I

thought that, as I just noted, the analysis wasn’t quite right. And

I recognize that in my new role, that I will need to take these disagreements into the FOMC, into the Board, that it will be my job

to persuade other voting members of the Board, of the FOMC, that

my analysis is correct and they should do what I recommend.

Senator BUNNING. Last question, and this is for both of you.

Do you think the Chairman of the Federal Reserve should try to

influence security markets or any other markets by coming to the

market itself and trying to talk the market up or down, in his testimony before the Banking Committee?

Mr. KOHN. No, sir, I do not think that that is something he

should be doing. I think he should be talking about the markets

as they interact with monetary policy and our pursuit of our Congressional goals. So he cannot not discuss the markets, but he

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should discuss them in the context of how they affect the pursuit

of the goals.

Senator BUNNING. Doctor.

Mr. BERNANKE. As I have written in some papers, including one

that was presented to the Federal Reserve’s annual conference at

Jackson Hole, Wyoming, I believe that the Federal Reserve should

not attempt to target asset prices. It should respond at most to the

influence of asset prices on the economy. That is, it should keep its

eye on the economic ball, so to speak, and not try to influence or

target asset prices.

Senator BUNNING. Do you think there is any more room right

now for lowering of interest rates in the current circumstances we

are sitting in?

Mr. BERNANKE. We are in a situation where, I would call it a

vigilant optimism, is probably the right approach.

As I said in my statement, I think the economy is recovering. On

the other hand, there is also no sign of inflation. So we can watch

carefully and see how the economy progresses over the next quarter or two. We are getting GDP numbers tomorrow. If necessary,

we certainly could do so.

Senator BUNNING. Doctor.

Mr. KOHN. Senator, I think we do have an economy that is

advancing. There are a lot of positives in the outlook, including

productivity growth, low interest rates already that stimulate consumption.

Senator BUNNING. Thank you.

Thank you, Mr. Chairman.

Chairman SARBANES. Senator Corzine.

COMMENTS OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman.

These are two extraordinary candidates. Anybody from New Jersey with a beard is okay with me.

[Laughter.]

Chairman SARBANES. A rather small club, though, isn’t it?

Senator CORZINE. Yes.

[Laughter.]

And I think on top is joining that future recommendation.

I also have worked with Dr. Kohn for the better part of 20 years

in my private career and find him an exceptional public servant

with great judgment. And I assure you, Senator Bunning, if there

is anybody who will speak his mind, it is Dr. Kohn. He just likes

to do it out of the limelight.

Senator BUNNING. Will I know about it?

Senator CORZINE. I am sure that if you read the minutes carefully, you will find his opinions very clearly espoused.

Let me ask a general question which will lead to a specific. Both

of you I would like to hear your comments on. Do you think our

economy is over-regulated and is it stifling entrepreneurship?

Mr. BERNANKE. I will try this one first.

As an economist, I have a tremendous appreciation for the power

of markets. Free markets are a tremendous source of wealth creation, the most tremendous source of wealth creation that has ever

been created.

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Free markets does not mean anarchy, though. Free markets have

to be carefully monitored. There have to be ground rules that channel the energies of market participants toward constructive ends,

that allow information to be revealed, and that allow markets to

allocate resources in the most productive way.

In the U.S. economy, there are certainly areas where regulation

no doubt is not optimal, and areas where regulation perhaps should

be increased. On the whole, it is the most market-oriented and

properly regulated economy in the world, and I think that is a

major reason why our growth and our development has been so

impressive.

Mr. KOHN. Senator, I do not think you can really generalize

about the whole economy. You need to look at it on a market-bymarket or situation-by-situation basis.

The economy has benefited enormously from the deregulation

that has occurred over the last 30 years. I think it has freed up

lots of markets to the benefit of consumers and businesses, particularly consumers. Think about airlines and trucking and things like

that.

So, I think we should be continually looking for opportunities to

allow those market forces to work and to work more, provided

there can be seen to be enough competition in the markets so that

the benefits of the market forces flow through to the consumers.

That does not mean that all we should be doing is looking for deregulation. Things happen on occasion that suggest that——

Senator CORZINE. Let me ask a specific with regard to the derivatives market, and particularly with regard to energy, natural gas,

and electricity markets. Derivatives particularly, but the markets

themselves. Either or both.

Mr. KOHN. I do not really have any expertise in those markets,

Senator.

I think before I would support additional regulation there, I

would want a thorough analysis of what was going on and is going

on. But I would not rule out that possibility if that is what that

analysis showed.

Mr. BERNANKE. Derivatives are, on the whole, a very valuable

tool. They allow all kinds of risk-sharing, various ways of financing

various kinds of projects and so on. I would be very hesitant to do

anything that would eliminate their use.

From the Federal Reserve’s perspective, the Federal Reserve is

trying to create very sophisticated monitoring systems that will appropriately assess capital charges against different types of derivative books.

Like Dr. Kohn, I am not very familiar with the energy situation.

My impression is that there were some problems with the deregulatory process as well in the energy market which interacted with

some of the risk-taking in derivatives. The same thing happened in

the savings and loan industry. You had some deregulation, which

was not the best, and it interacted with risk-taking on the part of

individuals, to create a problem. So, I think the whole situation

needs to be rethought. I do not think that derivatives are the center of the problem.

Senator CORZINE. Thank you.

Thank you, Mr. Chairman.

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Chairman SARBANES. Senator Miller.

COMMENTS OF SENATOR ZELL MILLER

Senator MILLER. I think you answered the question that I had.

By the way, two very good nominees and thank you for your willingness to serve.

I was going to ask the question which I have asked Chairman

Greenspan the last two times he has been with us, and he was very

forthcoming in his reply. And that was, have either of you formulated a view on the Feinstein derivatives piece of legislation?

Mr. KOHN. I have not, Senator.

Mr. BERNANKE. Neither have I, sir.

Senator MILLER. I believe you need to be looking at it.

Thank you, Mr. Chairman.

Chairman SARBANES. I will say to my colleagues, of course we

have a vote on and we need to go to the vote. I would be happy

to come back if colleagues want to pursue the dialogue.

Otherwise, it is my intention to bring the hearing to a close.

These are very important positions and the term actually is more

than twice the term of a Senator, just to underscore the importance

of these positions. But if not, it is my intention to bring the hearing

to a close.

Let me say that I am appreciative that both of you in your statements made reference or set out the monetary policy goals that

have been set for the Federal Reserve by the Congress in the statute. The Federal Reserve is a creature of the Congress—maximum

employment, stable prices, and moderate long-term interest rates.

Occasionally, we get nominees who come before us and they do

not really know the statutory standard that they are supposed to

be putting into place in policy terms. It is encouraging, and reassuring, I guess would be a better word. It is reassuring, at least

to this Member, that both of you have clearly integrated those statutory goals into your statements.

I spoke with Senator Gramm. We are going to try and see if we

cannot put together a quorum of the Committee tomorrow to try to

report you out. If we can do that, that would open up the possibility, although we do not control, of course, the floor calendar. But

at least it would get you on the calendar and open the possibility

that you might actually be confirmed by the Senate before the Senate leaves at the end of the week for the August recess. And that

would then make it possible for you to move in and assume these

assignments.

As I indicated at the outset, I agree with my colleagues that

these are two very good appointments. I commend the President for

making them, and we look forward to trying to get you on the job.

Thank you for being here.

Mr. KOHN. Thank you very much, Mr. Chairman.

Mr. BERNANKE. Thank you, Mr. Chairman.

Chairman SARBANES. The hearing stands adjourned.

[Whereupon, at 2:56 p.m., the Committee was adjourned.]

[Prepared statements and biographical sketches of the nominees

supplied for the record follow:]

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PREPARED STATEMENT OF SENATOR JIM BUNNING

I would like to thank you, Mr. Chairman, for holding this nomination hearing and

I would like to thank our nominees for coming before us today.

I don’t think it has been any secret that I have occasionally disagreed with the

Chairman of the Federal Reserve, Dr. Alan Greenspan. I think he sometimes starts

getting involved in things that he really is not supposed to worry about, instead of

concentrating on monetary policy. To be fair, many times he gets involved and comments on things that are not under his job description because Members of Congress

ask him for his opinion. I just wish he would decline to answer those questions.

I do think that there has been a problem at the Fed, one we are trying to correct.

I believe there has not been a lot of independent thought over there. Obviously the

Chairman is a very intelligent and well respected man. I am sure he can be very

persuasive and possibly even intellectually intimidating to some especially when the

rest of the Board is going along. But we think all of the board members are smart.

We would not vote for them if we didn’t.

What I want of the individual governors are strong people who will not be afraid

to speak up when they think the Chairman is wrong. I want people who are not

afraid to be the lone dissenting vote. We need strong, independent Fed governors

who are willing to challenge the status quo and to make the hard call. We do not

need governors who never question the chairman, or other board members, who will

never take the contrary view.

This is a 14 year term we are voting on. If we screw it up, it will be a long time

before we can fix it. Many of us won’t around be here to fix it. If our two nominees

can convince me that they will be independent voices who are not afraid to be the

lone dissenter, they will have my support for their nomination.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF DONALD L. KOHN

MEMBER-DESIGNATE OF THE BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

JULY 30, 2002

Chairman Sarbanes, Senator Gramm, Members of the Committee, I very much

appreciate your expeditious consideration of my nomination to be a Member of the

Federal Reserve Board. I have enjoyed a productive working relationship with this

Committee and its staff over a number of years. Should the Senate confirm my nomination to the Board, I very much look forward to continuing to work with you to

promote a strong economy and a robust financial system that serves the needs of

all Americans. I am most grateful to President Bush for this nomination and deeply

honored by his judgment that my abilities and experience will help the Board to

carry out the critical responsibilities you, the Congress, have entrusted to it. Having

spent my working life at the Federal Reserve, I may be more aware than most nominees who come before you of both the challenges and the rewards of the position

to which I aspire.

Our economy has made considerable progress over the last two decades toward

the goals you have set for monetary policy of maximum employment, stable prices,

and moderate long-term interest rates. We have enjoyed two exceptionally long economic expansions punctuated by relatively mild recessions, an inflation rate that

has reached what many would consider to be a zone of price stability, and relatively

low long-term interest rates that have helped to promote wider homeownership.

Technological innovation, deregulation, and globalization, by fostering greater economic and financial flexibility and resiliency and more rapid increases in productivity, largely account for this favorable performance. But the conduct of monetary

policy surely also has played a role in establishing a background conducive to economic vitality. This policy has been marked by a balancing of discipline and flexibility—the discipline of focusing on long-run price stability as a necessary precondition for maximum employment and moderate long-run interest rates, and the

flexibility within that long-term discipline to counter disturbances to the economy

and financial markets that might threaten maximum sustainable employment as

well as stable prices.

Going forward, in order to do its part in promoting good economic performance,

the Federal Reserve will continue to be faced with the need to analyze and adapt

to a dynamically changing economy and financial markets. Innovation and deregulation in markets and the globalization of finance are affecting the flow of funds beVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 NOM2.TXT SBANK4 PsN: SBANK4
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tween savers and spenders and the distribution of risks and returns in the financial

system. These changes, in my view, have not detracted from the effectiveness of

monetary policy, and they have increased both economic efficiency and financial stability. But they have also opened the economy to new kinds of influences and they

are altering the channels through which policy affects the economy. In just the last

few years, our financial and economic stability has been challenged by crises originating in East Asia and Russia, and by huge variations in asset prices here and

abroad as investors strove to peer through considerable fog to evaluate the implications of rapidly changing technologies and market structures. The significance of

those asset price movements has been magnified by the growing importance of

wealth to household financial conditions. Policymakers have been required to decipher the shifting forces driving the economy and to adjust policy, sometimes rapidly,

to provide a counterweight to developments that threatened to undermine economic

performance. Where possible, those policy adjustments have been forward lookinganticipating the effects of economic forces so as to forestall emerging instabilities.

It is a process in which I have been deeply involved, working with policymakers and

staff, and I would welcome the opportunity in a new role to bring my experience

and expertise to bear on the difficult, but fascinating, issues that confront the Federal Reserve’s conduct of monetary policy.

The increasing volume of finance flowing through securities markets, the spread

of wealth to more Americans, and the growing prominence of global investors in our

financial markets have put an additional premium on the ability of the Federal Reserve to explain its policy to the public. More people from more diverse backgrounds

are making important decisions based on their expectations of policy actions and

their effects. When savers and borrowers understand how the Federal Reserve sees

the forces developing in the economy relative to its objectives, interest rates, and

other prices in financial markets are more likely to be set in a way that helps to

achieve these objectives. I have worked extensively in my career at the Federal Reserve to help policymakers explain monetary policy. While we have made considerable progress in recent years, improving the clarity, completeness, and timeliness

of our various public statements is an ongoing process that must be continued.

As the Congress recognized when it created the Federal Reserve, economic stability rests on a foundation of financial stability. In no area of Federal Reserve responsibilities do changing market structures pose a bigger challenge than in carrying out the supervision and regulation of banks and holding companies. Changes

in the legislative framework for the financial sector in recent years have allowed

consolidation within the banking sector and, now, between banking and other financial service providers, permitting markets to realize economies of scale and scope in

the delivery of financial services. This consolidation, along with the proliferation of

new instruments to price and trade various aspects of risk, I believe, promotes

sounder, more diversified, institutions and a system in which both those supplying

and using savings have many more alternatives. The regulatory implementation of

these new laws needs to allow the markets to evolve with changing preferences and

technologies, while preserving competition in the delivery of services and financial

stability. It also must protect against the effective spread of the safety net beyond

the core depositories for which Congress intended special protection. No depository

institution should be insulated from market forces by being considered ‘‘too big to

fail.’’ But because banks do have access to the safety net, market signals are muted

by moral hazard. Moreover, as institutions become more complex and deal in a great

number of new instruments, markets and managers may find it difficult to evaluate

some risks accurately, increasing the chances for unexpected losses. In order to promote efficient resource allocation and maintain financial stability, supervisors must

anticipate potential problem areas and must put in place oversight structures that

build on existing market signals and risk management and simulate market pressures where those signals are inadequate.

The growing access to credit markets for all our citizens is another very positive

development in our financial system. It has resulted from efforts to eliminate discriminatory practices along with the recognition by lenders that profitable opportunities exist in making credit available to those with lower income and wealth. But

regulators, borrowers, and lenders are still adjusting to the expansion of the market.

Many borrowers in the so-called subprime segment of the credit markets are having

difficulty servicing the additional debt, more difficulty than lenders anticipated, resulting in the need for supervisory actions for a number of bank lenders. In addition, it has increased the opportunities for unscrupulous lenders to take advantage

of less well-informed consumers. Clearly, efforts to educate credit users better

should have important payoffs. More generally, the key in this area is to find the

difficult balancing point for regulation that allows the markets to generate the

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greatest number of legitimate alternatives for borrowers while proscribing clearly

abusive practices.

Meeting these various challenges will require a strong Federal Reserve System.

You have such an institution now. It is widely respected and relied upon, not only

to follow the appropriate policies but for its advice in a variety economic and financial matters. Although the Federal Reserve tends to speak with one voice, in my experience decisions are preceded by healthy give-and-take among policymakers with

diverse views supported by talented and dedicated staff. Should the Senate see fit

to confirm my nomination, I am looking forward to adding my own perspective to

that dialogue as a policymaker and will do my best to pass on to future generations

an institution just as strong as the one its current and past leaders have bequeathed to this generation of Americans.

Thank you. I would be pleased to answer any questions you might have.

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PREPAPRED STATEMENT OF BEN S. BERNANKE

MEMBER-DESIGNATE OF THE BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

JULY 30, 2002

Chairman Sarbanes, Senator Gramm, Members of the Committee, I am deeply

honored to appear before you today as the President’s nominee to serve on the

Board of Governors of the Federal Reserve System. If I am confirmed to this important position, I will do my utmost to advance the economic well-being of all Americans. The opportunity to serve at the Federal Reserve would be a great privilege, as

it would allow me to apply in the public interest the fruits of a lifetime of thinking

and writing about central banking and the economy. In my professional academic

career of nearly 25 years, I have written widely on topics relating to monetary policy, banking and credit markets, economic growth and business cycles, macroeconomic history, and the statistical analysis of the economy, all of which bear directly on the work of the Federal Reserve. Moreover, over the years I have maintained close contact with the Federal Reserve System, as a consultant, visiting

scholar, and adviser; and I have visited and advised the central banks of many other

industrialized and developing countries.

In various roles during my career, I have also learned how to work with people

and to get things done. Among other duties, I have served for the past 6 years as

Chair of the Princeton University Economics Department. I also served as the first

Director of Princeton’s new Center for the Study of Financial Markets; as the Director of the Monetary Economics program of the National Bureau of Economic Research; as the Editor of the economics profession’s leading research journal; and—

last, but certainly not least—as a two-term elected Member of the Montgomery

Township (New Jersey) Board of Education.

One of the remarkable features of the Federal Reserve System is the wide range

of its responsibilities, including not only the making of monetary policy but other

important areas such as financial regulation and supervision, consumer protection,

payments systems, international finance, and others. Although at present my greatest expertise is in monetary policy and macroeconomics, I am keenly interested in

and broadly familiar with each of the Fed’s other areas of responsibility, and if I

am confirmed I look forward to learning a great deal more. I particularly look forward to interacting with, and learning from, both colleagues on the Board and the

Federal Reserve’s able staff.

Let me turn briefly to issues of policy and the current economy. The Federal Reserve has considerable operational independence but ultimately derives its legitimacy and powers solely from its legislative mandate. I would like to take this opportunity to strongly affirm my support for the monetary-policy goals set for the

Federal Reserve by Congress in the Federal Reserve Act: maximum employment,

stable prices, and moderate long-term interest rates. While one can always hope to

do better, I think the Federal Reserve has on the whole done a remarkably good

job of promoting these three objectives over the past 20 years or so.

In my view, a key operational element in the Fed’s success at achieving its tripartite objective has been the Federal Open Market Committee’s emphasis on keeping the rate of core inflation low and stable. Low and stable inflation is intrinsically

beneficial, as it reduces the need for households and firms to expend time and resources to protect themselves from the adverse effects of rapidly and erratically

changing prices. Consistently low inflation also directly promotes the objectives of

high employment and rapid economic growth, by providing a stable monetary environment in which firms and markets can function most efficiently. In a low-inflation

environment, lenders are less concerned about erosion of their principal, and so

nominal interest rates tend to be low. Finally, a strong commitment to low and stable inflation, by moderating and anchoring the public’s inflation expectations, actually enhances the ability of monetary policy to respond actively to short-run economic disturbances when necessary. For example, during the past year the Federal

Reserve was able to cut interest rates quite aggressively without engendering significant inflationary pressures or igniting a wage-price spiral. Public confidence that

inflation would be kept under control was essential to giving the Federal Reserve

this heightened flexibility.

In my academic writings, I have argued that the efficacy of monetary policy at

achieving its mandated objectives could be further improved by the Fed’s adoption

of an approach known as inflation targeting. In anticipation of possible questions,

let me say a bit more about this proposal. The main operational change under inflation targeting would be that the Fed, in consultation with the executive and legislaVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00110 Fmt 6601 Sfmt 6621 NOM2.TXT SBANK4 PsN: SBANK4
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tive branches, would announce an explicit numerical objective core inflation over the

medium term, say 1 to 2 years. For example, allowing for the upward biases in inflation measurement and a zone of safety to avoid accidental deflation in prices, an

inflation target in the range of 1–2 percent per annum for the core PCE deflator

might be a good initial choice, although some might reasonably disagree about

either the number or the choice of index. As part of the targeting process, the Federal Reserve would report to Congress its expectations for future inflation, its reasons for any target misses, and its projected trajectory for bringing inflation to its

targeted level.

It is important to stress that inflation targeting, as I interpret it, would not represent a major departure from the current practice of U.S. monetary policy or a

change in policy objectives. Rather, its primary goal would be to build on policy successes of the past two decades by strengthening the Federal Reserve’s institutional

commitment to the approach used by the Fed under Chairman Volcker and Chairman Greenspan. As I discussed a moment ago, the centerpiece of this approach is

an emphasis on keeping the rate of core inflation low and stable. Based on the experiences of a number of other countries that have adopted this model, I believe that

an explicit inflation target would improve further the Fed’s ability to reach all three

of the goals set forth in the legislative mandate for monetary policy. Among the potential advantages of an explicit inflation target are increased stability of the

public’s inflation expectations, lower economic and financial uncertainty, increased

central bank credibility, greater continuity and consistency of policy, and, importantly, enhanced accountability of the Fed. Although I am favorably disposed toward

these incremental changes in the current framework of U.S. monetary policy, I know

that not everyone agrees with this view, and that there are important, substantive

arguments to be made on both sides of the issue. I look forward to discussing these

ideas with Federal Reserve colleagues and others interested in the making of monetary policy.

Turning finally to the current economic situation: In recent months, investors

have been battered by sharp declines in equity prices, not only in the United States

but in many other countries as well. The losses in wealth are large and serious indeed. Equally serious and disturbing is the rash of corporate and accounting scandals that have certainly played a role in the stock market’s plunge. Financial markets cannot do their job of efficiently allocating capital and sharing risk if investors

do not feel that they are receiving accurate and timely information, or if they fear

that those who should be stewarding their funds cannot be trusted to do so honestly.

I fully support the efforts of Congress and the President to restore investor confidence in the accuracy and reliability of financial statements and in the trustworthiness of those who manage our corporations and financial institutions.

Although the fall in equity prices is frightening and dispiriting for many, I do

think distinctions need to be made. Saturation coverage by cable-TV networks notwithstanding, the stock market is not the whole economy. While the gyrations of

the Dow or Nasdaq attract the most attention, the broader economy—as reflected

in the daily activities of American workers, managers, business owners, and entrepreneurs—has overcome a significant part of the effects of last year’s recession and

the September 11 terrorist attacks, and by most indications is continuing to grow.

Most impressive is the fact that worker productivity continues to expand rapidly at

more than an 8 percent rate in the first quarter—despite adverse cyclical conditions.

New capital and innovative technologies have both played an important role in this

resurgence. To be sure, the cumulative decline in the stock market poses risks for

economic growth over the rest of the year. Despite our current difficulties, however,

we should not lose sight of the underlying strength of our economy.

To conclude, I am grateful for this opportunity to appear before this Committee.

These are indeed challenging times for the United States, for our economy, and for

the Federal Reserve itself. I look forward to contributing to the making and implementation of sound economic policies. If I am confirmed, I will devote myself to becoming a constructive and effective Member of the Board of Governors of the Federal Reserve.

Thank you. I will be pleased to answer any questions.

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(119)

NOMINATION OF

PHILIP MERRILL, OF MARYLAND

TO BE PRESIDENT AND CHAIRMAN

OF THE EXPORT–IMPORT BANK

OF THE UNITED STATES

FRIDAY, OCTOBER 4, 2002

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 2:30 p.m. in room SD–538 of the Dirksen

Senate Office Building, Senator Paul S. Sarbanes (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

Chairman SARBANES. The hearing will come to order.

The Committee on Banking, Housing, and Urban Affairs convenes this morning to take up the nomination of Philip Merrill to

be President of the Export–Import Bank.

We have two of our colleagues here to introduce Mr. Merrill. And

before I do my statement, I will go to them because I know they

have other pressing engagements.

Senator WARNER. Mr. Chairman, one of our colleagues is due in

another hearing, so, apart from seniority, I will yield to my good

friend, Senator Mikulski.

Chairman SARBANES. Well, John, I was going to recognize home

State preference, in any event.

Senator WARNER. Oh, I see.

[Laughter.]

It is your Committee. You can run it as you please.

[Laughter.]

Chairman SARBANES. Senator Mikulski.

STATEMENT OF BARBARA MIKULSKI

A U.S. SENATOR FROM THE STATE OF MARYLAND

Senator MIKULSKI. Thank you very much, Senator Sarbanes, for

having this hearing. And I thank the distinguished Senator from

Virginia for yielding to me.

It is the Senators from the Potomac here today to introduce Phil

Merrill to you. And as the senior Senator from Maryland, you know

his background quite well.

For the record, I would like to ask unanimous consent that a letter from Congressman Steny Hoyer extolling the virtues of Mr.

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Merrill as to why this appointment should be made, would be entered into the record.

Chairman SARBANES. Yes, I have Steny’s letter here and it will

be entered into the record. And when we have a little more time,

I may even quote from it.

But please go ahead.

Senator MIKULSKI. Well, thank you. Senator Sarbanes, you have

been a reformer on the Export–Import Bank and you have been a

leader to ensure that this Bank meets the needs of the American

foreign policy, promotes exporting jobs abroad, and really ensures

management and fiscal responsibility.

Your reform philosophy on the Export–Import Bank I believe will

be best carried out by Mr. Phil Merrill, who is being nominated by

the President. Mr. Merrill brings an extraordinary career to this

job, a career that covers both public service and the private sector.

First of all, the job requires someone who understands business,

banking, and management. Mr. Merrill is an innovator, an entrepreneur and a successful businessman. And when one reviews his

record, as we know, he has been a leader in publishing both the

Annapolis Capital, the Washingtonian magazine, and the whole

Capital-Gazette umbrella organization. Six newspapers in Maryland, as well as a magazine. So he knows how to meet a bottom

line and he knows the stresses on business because of his interaction there all of the time.

At the same time, Mr. Merrill brings a great deal of background

in the area of foreign policy. He has earned both a national and

international reputation, serving in six Administrations. He served

as an Assistant Secretary General of NATO. He was awarded the

Distinguished Service medal, the highest civilian award at the Department of Defense. He has held other posts at the Department.

He has even negotiated the Law of the Sea Conference, and I remember what a tidal mess that was.

Mr. MERRILL. Rubick’s Cube.

Senator MIKULSKI. He served as a special assistant with the

State Department and as a senior intelligence analyst, and we

could go through a variety of work that he has done both at the

Defense Department and at the State Department. Again, knowing

foreign policy and making sure that there is sound management to

implement our policy.

He also has a history, as does his entire family, Ellie and his

three children are here with us today, Doug, Cathy, and Nancy, of

being a philanthropist. Most of the philanthropy, has been very

quiet and has been focused on education, the environment, and

probably a lot of other things that we do not even know about but

that it is somewhere in that thick brief.

What is clearly visible has been his role in education—The board

at the Hopkins School of Advanced International Studies, the board

of visitors at the University of Maryland. And not only being on

boards, but essentially putting his own personal and family resources behind that.

He has recently endowed the University of Maryland with $10

million at the school of journalism to ensure competency in the

field and also a framework of ethical journalism. Isn’t it great that

somebody is willing to put up $10 million so that journalists would

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know how to write, be competent, and have an ethical framework?

This is who we want in our Government.

And then, of course, he has been a staunch supporter, as has

been the Chairman, of the Chesapeake Bay Foundation. For those

of us who have worked with the Bay Foundation, we know they

were in kind of frugal and limited facilities. Through Mr. Merrill

and, again, the Merrill Foundation and the support of the entire

family, has just created a new environmental framework, a new architecture, and a green building to operate.

So a successful businessman, a public servant with extensive experience in foreign policy, and a philanthropic heart that also is

matched by, quite frankly, a contribution.

It is not about what your wealth does. The fact that you were

willing to continue to be a giver, and what we see in Mr. Merrill

is that he continually wants to give back to this great country that

made his own success. I hope we move him unanimously through

the Committee and the Senate.

Chairman SARBANES. Thank you very much. We appreciate that

very strong statement on Mr. Merrill’s behalf. And I know you have

a conflicting engagement.

Senator MIKULSKI. Excuse me.

Chairman SARBANES. Senator Warner.

STATEMENT OF JOHN WARNER

A U.S. SENATOR FROM THE STATE OF VIRGINIA

Senator WARNER. I am going to ask that my statement be placed

in the record because that was a magnificent introduction by our

colleague from the great State of Maryland, and she summarized

so much of the pertinent information.

I join you today because I have been privileged to be a personal

friend, but also in recognition of the silent but very important philanthropy that has been spread throughout the greater metropolitan area of Washington by both the nominee and his lovely wife,

Eleanor, known to us as Ellie. And I might add, I think the record

should reflect that this has been a husband and wife team for

many years, both of them having served in public office.

Ms. Merrill was on Senator Keating’s staff, and you and I recall

that eminent Member of our institution of many years. And then

she went on to the Department of State to serve in positions of

communications.

So it has been a team effort to put together this extraordinary

career, which has been recited by my colleague and more fully laid

out in my biographical sketch.

But I did not know that you had worked on the Law of the Sea.

When I was the Secretary of the Navy under Mel Laird, Eliot Richardson, and Jim Schlesinger, as the Department’s representatives.

Chairman SARBANES. Those were the glorious days of the Navy,

too.

Senator WARNER. That is right.

[Laughter.]

Mr. Chairman, we had 1,800 ships when I was Secretary.

[Laughter.]

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But, anyway, that was an extraordinary challenge, Law of the

Sea, and it did not unfold quite the way all of us wished, but who

knows.

But this man is eminently qualified to take on this post, as the

Chairman and our colleagues in the Senate know. And I would just

conclude by saying that I think that America is fortunate that an

individual who has done so many things diversified to prepare him

for this important task, once again steps forward for public service.

So I urge the Committee to have this hearing completed,

wrapped up, and hopefully, get to the floor. And I indicate to the

Chairman, full willingness on our side of the aisle to follow the

Chairman’s instructions to expedite this nomination, such as can

be confirmed before the unknown concluding date of this Congress.

Chairman SARBANES. Well, Senator Warner, thank you very

much for that statement, and also for that offer to be helpful on

the floor as we try to move the nomination through.

Senator WARNER. Yes.

Chairman SARBANES. The papers just came a couple of days ago,

and we are trying to move along here.

Senator WARNER. Well, we are expediting a number in our Committee. And you know, having been around here a quarter of a century plus, it can be done.

Chairman SARBANES. Thanks very much, John.

Mr. MERRILL. Yes. And it is very kind of you, and kind of you

to come personally.

Chairman SARBANES. Let me say at the outset that I regard this

as a very important nomination. One of the major economic challenges our country faces is competition in international trade.

My own view is that as long as that competition is based simply

on the price and quality of the goods and services being sold, I have

every confidence that U.S. exporters can do very well.

However, it is not that simple. Other governments move in. They

provide export subsidies to their companies in one way or another,

and that places our exporters at a competitive disadvantage that

they cannot be expected to meet on their own. They are just not

on a level playing field.

The Export–Import Bank exists in part to help U.S. exporters

level the playing field by matching the subsidies offered by foreign

governments and allowing our exporters to compete on the basis of

price and quality.

For that reason, I believe it is vital that the Export–Import Bank

be led by someone of exceptional stature and experience who can

assert the Ex-Im Bank’s important role in U.S. trade policy.

The previous president, John Robson, certainly met that standard and I take a moment this morning to honor him and his contributions to the public interest of the country and to regret his untimely death.

Let me say, I am confident that the nominee before us today,

Phil Merrill, can meet that standard as well. I know our nominee

well. He is a leading citizen of our State, has had a long and distinguished record of service both to the State and to the Nation.

He received his undergraduate degree from Cornell University,

later served on its board of trustees. He is a graduate of the program for management development at the Harvard Business

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School. He worked as a reporter for the Newark Evening News, as

a writer-reporter for WABD Channel 5 in New York, for J. Walter

Thompson and company after service in the Army.

And from 1961 to 1967, worked for the Department of State as

a Special Assistant to the Deputy Secretary of State, and Senior Intelligence Analyst in the Bureau of Intelligence and Research.

He attended the University of Chicago for a year on a Stevenson

Fellowship. And then he acquired and became Chairman of the

Board of Capital-Gazette Communications, publishers of the Washingtonian magazine, the Annapolis Capital, and a number of other

newspapers in Maryland.

During this very successful business career, he left from time to

time to do public service, Counselor to the Undersecretary of Defense for Policy in the early 1980’s, Assistant Secretary General of

NATO from 1990 to 1992. He received the medal for distinguished

service in 1988 from the Secretary of Defense, which is the highest

civilian honor given by the Department of Defense.

As others have mentioned, he has been involved in a number of

very important philanthropic activities, working in the nonprofit

sector, the Aspen Institute, the Chesapeake Bay Foundation, the

Johns Hopkins University, the University of Maryland. It is a very

long list and I will not go through all of it, but we welcome and

commend that kind of citizen involvement, which contributes so

much to the strength of our Nation.

I believe that Phil Merrill will bring to the position of President

and Chairman of the Ex-Im Bank the kind of seasoned experience

and senior leadership positions in both the private and public sectors that the Ex-Im Bank requires.

Earlier this year, the Congress, after a great deal of effort, but

we finally succeeded in reauthorizing the Ex-Im Bank, through

September 2006, and provided it with significant expanded authority. So its statutory mandate is there now for almost 5 years, as

we look ahead into the future.

In a sense, that sets the stage for a new President to come in

and carry out the Ex-Im Bank’s mission with energy and imagination, and I am sure Phil Merrill will take full advantage of that opportunity, and we look forward to working with him in his important role.

Now I do want to put in the record the letter from Congressman

Hoyer. Let me just read the first paragraph of it.

Dear Mr. Chairman:

I write to express my strong support for the nomination of Philip Merrill to serve

as Chairman and President of the Export–Import Bank of the United States.

Mr. Merrill has a long and distinguished career of public service, and I believe

his experience and background make him an ideal candidate to lead that important

organization.

And I also have a letter from the Coalition for Employment

Through Exports, from Ed Rice, the President of that organization.

We work very closely with the coalition on a number of issues involving exports. In my opinion, they are a highly responsible organization. We have been privileged to have the benefit of their advice and counsel over the years, and I am going to take just a moment to read a fair part of this letter because the Coalition is exVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00127 Fmt 6601 Sfmt 6601 NOM2.TXT SBANK4 PsN: SBANK4
124

tremely interested in the work of the Export–Import Bank. Its

member companies embrace a lot of our major exporters.

Dear Mr. Chairman:

As the Committee considers the nomination of Philip Merrill to be Chairman and

President of the Export–Import Bank, I write on behalf of our Coalition members

to support Mr. Merrill’s confirmation and to express our appreciation to you and

your Committee colleagues for your expedited action on this matter.

In nominating Mr. Merrill, the President has chosen an individual who would

bring a solid combination of experience and accomplishment in both the business

world and Government service. Experience in both of these sectors is important in

leading the Bank as it grapples with difficult issues related to globalization and U.S.

competitiveness in world markets.

In addition, the Bank is also faced with implementation of the recently enacted

changes in the Bank’s statutory charter, which will require energetic and skilled

leadership by a new Chairman. Mr. Merrill’s long experience in business management and in a variety of sensitive Government assignments would be a particularly

important asset in accomplishing these new mandates.

We continue to value the leadership that you and your Committee colleagues provide in overseeing and reauthorizing the Bank, and we look forward to working with

Mr. Merrill should the Senate confirm him for this position.

Sincerely, Edmund B. Rice, President of the Coalition for Employment Through

Exports.

And we are very pleased to have that letter, given the continuing

and constant interest of the Coalition in the work of the Ex-Im

Bank and the work of this Committee with regard to it, and it will

be put in the record.

Now, it is the practice of the Committee of long standing to place

nominees under oath. So, I am going to ask you to stand and take

the oath.

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

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

help you God?

Mr. MERRILL. I do.

Chairman SARBANES. Do you agree to appear and testify before

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

Mr. MERRILL. I do.

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

to receive your statement, and if you want to introduce the members of your family that are here, we would be glad for you to do

that as well.

STATEMENT OF PHILIP MERRILL, OF MARYLAND

TO BE PRESIDENT AND CHAIRMAN

OF THE EXPORT–IMPORT BANK

OF THE UNITED STATES

Mr. MERRILL. Mr. Chairman, I first want to thank you and Senators Mikulski and Warner for those wonderfully gracious introductory statements and for your respective, let me say, prior attention

to my family, and particularly to Ellie.

I call to the Chairman’s attention that everytime that I have

come into Government, the general consensus has been that when

Ellie has taken over our company or our companies, they have done

infinitely better than under my management.

[Laughter.]

And so, you may have the wrong Merrill here.

[Laughter.]

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I also want to introduce my daughter Nancy and my daughter

Cathy and her husband Paul Williams, who were kind enough to

show up here today.

Mr. Chairman, I am very pleased to come before you, frankly, especially you, as you consider my nomination to be President and

Chairman of the Export–Import Bank of the United States.

I want to thank President Bush for his confidence in nominating

me for this position and if confirmed, I looked forward to working

with you and with the other Members of the Committee to promote

the Bank’s basic function of promoting and creating U.S. jobs.

It is particularly interesting to me, or fortunate to me, to have

the Chairman of the Committee, at least at this point, be from my

home State of Maryland, and so, that is a fortuitous coincidence.

I know the Committee has my biographical information, so I will

not go into the details of that, but ask that they be submitted separately.

It is with some mixed emotion that I appear before you today.

The previous Chairman, John Robson, was a friend for more than

two decades, and I, like you, am saddened by his death.

However, I am also honored and excited by the opportunity to

serve our country again. If confirmed, I shall pursue, what I said

here was with energy and enthusiasm, and I will now add imagination, to the challenges and opportunities that are presented in carrying out the mission of the Bank to support U.S. exports and U.S.

jobs.

I am no stranger to the public policy arena or the Government

process. So the question might be, why do you want to do this

again? I will quote something that John Robson said in his confirmation statement: ‘‘I have never found a canvas as big to paint

on as public service offers and I am particularly excited about the

prospect of leading the Export–Import Bank.’’ I echo that sentiment.

If confirmed, this would be the seventh time I have taken the

oath of office. Actually, the eighth, if one includes, as I do, the very

first time as a private in the United States Army.

Each time I have felt the same mixture of inspiration, dedication,

determination, and appreciation for everything this country has

done for me, for my family, and for the cause of freedom and free

institutions.

If confirmed for this position, I believe I would bring to the Bank:

—a record of successful business management and investment;

—extensive Government experience in international affairs and

the ability to assess both political and commercial risk; and

—a strong desire and demonstrated willingness to serve our

country.

The Export–Import Bank has enjoyed strong bipartisan Congressional support since its establishment under President Franklin

Roosevelt. The Bank performs important roles in fostering American exports and thereby stimulating economic activity and job creation here at home.

The bipartisan support from the Congress and President Bush

for passage of Ex-Im’s 5 year reauthorization, for which I thank

you, Senator, ensures that the Bank will continue to move forward

to help U.S. exporters.

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I note particularly the desire of Congress to devote resources to

small- and medium-sized enterprises. I pledge to make every effort

to carry out that charge and to assist these, as well as all other

U.S. businesses in the highly competitive international markets of

the 21st century.

If confirmed, I look forward to working with this Committee, the

Congress, the career professionals at Ex-Im Bank, the Administration’s trade team, the entire exporting community, and especially

with the Chairman.

You have my commitment to continue close dialogue with this

Committee and the Congress as the Bank adjusts its policy and operations to the challenge of the 21st century.

Mr. Chairman, I respectfully ask for your favorable consideration

of my nomination and will be pleased to respond to your questions.

Chairman SARBANES. Well, thank you very much. I have just a

few questions for the record.

First, you have been nominated for a term that expires on January 20, 2005.

Mr. MERRILL. That is right.

Chairman SARBANES. Is it your intention to serve out this term,

if confirmed?

Mr. MERRILL. Absolutely, yes, sir.

Chairman SARBANES. Second, I want to talk about this tied aid

credits and these market windows that some countries are using.

This has been kind of a running issue and in the latest authorization, I think we pretty well put it to rest because there was an

internal dispute within the Administration between Ex-Im Bank

and the Treasury.

The Congress I think resolved that dispute. I was on this Committee when we first put the war chest into place. That was an effort to arm the Ex-Im Bank so that it could counter what other

countries were doing in support of their exporters.

We made an effort, of course, through the OECD to try to get

rules that preclude some of the special financing so that the competition can remain on price and quality. But do you have a view

about this whole issue about the tied aid war chest and the role

it can play?

Mr. MERRILL. Well, Senator, yes, I do. From our point of view,

we need it as a tool essentially to level the playing field. It is not

a perfect world. If confirmed, I will work diligently with the Treasury Department to implement the tied aid procedures which have

been mandated in the new Ex-Im Bank charter, which I have here.

But this is really an OECD problem and we have to work with

them to bring it under control.

Chairman SARBANES. Well, we have been doing that and that has

been of some help. But we have to continue to counter.

Now something has developed that concerns us. Germany and

Canada, in particular, are using a new tactic to undercut the

OECD rules on export credit terms. They have set up, in effect, private enterprises, but essentially, government-sponsored, to supplement official export credits. They call those market windows, and

they are currently at least exempt from the OECD rules. So they

come in with that and they end up providing financing terms sigVerDate 11-MAY-2000 13:37 Mar 14, 2003 Jkt 000000 PO 00000 Frm 00130 Fmt 6601 Sfmt 6601 NOM2.TXT SBANK4 PsN: SBANK4
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nificantly more attractive than what OECD rules allow. And the

U.S. exporters are very much concerned about that.

Now we gave in the reauthorization to the Ex-Im Bank explicit

authority to match market window’s financing, which it previously

did not have. It may be implicit, but it was an arguable question.

We gave them explicit authority to match it and we also directed

the United States to seek negotiations for multilateral disciplines

and transparency within the OECD credit arrangement encompassing market windows. But how important a problem do you

think that this is?

Mr. MERRILL. Well, it is a very important problem. I am aware

that Canada and Germany have pushed the limits to the uttermost

in terms of making what they call private deals and are really public subsidies available. I think you have it right when you say— well, anything you say, I am going to say you have it right.

[Laughter.]

But in this particular case, I think you have it right when you

say that they are a bigger problem by far than the rest of the

OECD countries.

Nevertheless, it could spread. The key word is transparency, and

that is what we have to push for. That requires us to cooperate

with any number of other agencies, especially the Treasury.

Anyway, it is a big problem, I am aware of it, and I intend to

pay very close attention to it and keep it down to the lowest possible amount that is humanly or administratively possible.

Chairman SARBANES. You have a particular opportunity to

broaden the national consensus in support of the Ex-Im Bank and

the push for exports. I know you will do this, but I hope that you

will have an open door for the Coalition for Employment Through

Exports that I mentioned, for the labor movement.

Properly presented, we ought not to have any split there because

it is, as you said, you are for exports and jobs. You went right to

it, and made the job connection.

A number of unions have actually been supportive of this export

effort and they recognize the benefits that flow to their workers

from it. Actually, export industries usually pay better. The pay

scales are higher.

But you have the bully pulpit as the head of the Ex-Im Bank and

therefore, a chance to work on developing this broad national consensus. And it is very important that you have an open door to all

of these various groups to feel that they are in consultation with

the Ex-Im Bank and that their concerns and that their advice and

counsel is heard.

Mr. MERRILL. Senator, let me say that I have some experience

in that area. Again, I agree with you that you have the benefit in

this job and with this Bank of having the support of labor, as well

as management.

That is a very analogous situation to which the Defense Department has found itself over the years because you have had any

number of labor institutions very supportive of varying acquisition

and production programs. I probably should stop there, but I will

give you one anecdote.

I once invited the leaders of the 10 largest labor unions in the

country to lunch with Cap Weinberger. Nine of them showed up.

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We paid attention there to our supporters. By the way, the one who

did not show was William Wimpensinger of the electricians. But all

of the nine showed up, including the head of the National Maritime

Union, where I have been a card-carrying member.

And so, I think the analogy is fairly precise. That is, the Bank

is in the same fortunate position of needing, seeking, and having

the support of both the business community, export community of

the United States and the labor community of the United States.

And I intend to take full advantage of it.

Chairman SARBANES. Very good. I have no further questions.

Let me just say that the Congress will clearly be in session next

week. We do not know whether beyond that. And I am hopeful that

we can consider those nominees the first part of next week and try

to move things along.

We are anxious to get people into place before the Congress adjourns so that they can get on the job.

Mr. MERRILL. I am equally anxious and do not particularly want

to wait 5 more months.

Chairman SARBANES. All right. Very good.

Mr. MERRILL. So I thank you for everything you have done.

Chairman SARBANES. The hearing stands adjourned.

[Whereupon at 11:45 a.m., the hearing was adjourned.]

[Prepared statements, biographical sketch of the nominee, response to written questions, and additional material supplied for

the record follow:]

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PREPARED STATEMENT OF PHILIP MERRILL

PRESIDENT AND CHAIRMAN-DESIGNATE OF THE

EXPORT–IMPORT BANK OF THE UNITED STATES

FRIDAY, OCTOBER 4, 2002

Mr. Chairman, Members of the Committee, I am very pleased to come before you

as you consider my nomination to be President and Chairman of the Export–Import

Bank of the United States. I would like to recognize the members of my family who

are here today—My wife, Ellie, my daughter Nancy, and my daughter Cathy and

her husband Paul Williams.

I want to thank President Bush for his confidence in nominating me for this position and, if confirmed, I look forward to working with this Committee, and Chairman Sarbanes from my home State of Maryland.

I know the Committee has my biographical information, so I will not go into the

details of my qualifications but ask that they be submitted with this oral statement.

It is with some mixed emotion that I appear before you today. I have mixed emotions because the previous Chairman, John Robson, was a friend for more than two

decades, and I am saddened by his death. However, I am also honored and excited

by the opportunity to serve our country again. If confirmed, I look forward with energy and enthusiasm to the challenges and opportunities that are presented in pursuing the mission of the Bank to support U.S. exports and U.S. jobs.

I am no stranger to the public policy arena or the Government process. So the

question might be, why do you want to do this again? I will quote something that

John Robson said in his confirmation statement:

‘‘I have never found a canvas as big to paint on as public service offers and I am

particularly excited about the prospect of leading the Export–Import Bank.’’

I echo that sentiment.

If confirmed, this would be the seventh time I have taken the oath of office—actually, the eighth—if one includes, as I do, the very last time as a private in the

United States Army.

Each time I have felt the same mixture of inspiration, dedication, determination,

and appreciation for everything this country has done for me, for my family, and

for the cause of freedom and free institutions.

If confirmed for this position, I believe I would bring to the Bank:

• A record of successful business management and investment.

• Extensive Government experience in international affairs and the ability to assess

political and commercial risk.

• And of course, a strong desire and willingness to serve our country.

The Export–Import Bank has enjoyed strong bipartisan Congressional support

since its establishment under President Franklin Roosevelt. The Bank performs important roles in fostering American exports and thereby stimulating economic activity and job creation here at home. The bipartisan support from the Congress and

President Bush for passage of Ex-Im’s 5 year reauthorization ensures that the Bank

will continue to move forward to help U.S. exporters.

I note particularly the desire of Congress to devote resources to small- and medium-size enterprises. I pledge to make every effort to carry out that charge and

to assist these as well as all other U.S. businesses in the highly competitive international markets of the 21th century.

If confirmed, I look forward to working with this Committee, the Congress, the

career professionals at Ex-Im Bank, the Administration’s trade team, and the entire

exporting community. You have my commitment to continue close dialogue with this

Committee and the Congress as the Bank adjusts its policy and operations to the

challenge of the 21th century.

Mr. Chairman, Members of the Committee, I respectfully ask for your favorable

consideration of my nomination and will be pleased to respond to your questions.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER

FROM PHILIP MERRILL

Q.1. The renewable energy technology (RET) industry includes

companies representing solar power, wind power, fuel cells, and

modern biomass. As the domestic RET industry matures they believe that the growing energy needs in the developing world could

provide huge export opportunities for U.S. companies. They believe

the Export–Import Bank could assist the domestic RET industry

with access to these markets. What has been the Ex-Im Bank’s

past and current experience with financing needs for renewable energy technology companies? What would be your view and the

Bank’s view of financing for RET companies in the future?

A.1. While I have not been briefed on specific transactions, I am

aware that Ex-Im Bank has had a long-standing commitment to

supporting renewable energy exports. Although a number of broad

factors outside of Ex-Im Bank’s control impact the renewable energy export market, Ex-Im Bank clearly can play a valuable role

in promoting renewable energy exports. As evidence of the Bank’s

commitment to supporting such exports, earlier this year the Bank

established an advisory committee to provide advice and recommendations to Ex-Im Bank regarding renewable energy export

financing. I am optimistic that renewable energy export financing

by the Export–Import Bank will increase in the future.

RESPONSE TO A WRITTEN QUESTION OF SENATOR SANTORUM

FROM PHILIP MERRILL

Q.1. I understand the Export–Import Bank was contacted in July

by Members of the House Financial Services Committee regarding

allegations of fraud and money laundering by beneficiaries of ExIm guaranties. I am aware of allegations that Tyumen Oil Co., an

Ex-Im Bank beneficiary, may be committing fraud and diverting

profits by wiring funds through banks located in the United States

to offshore entities. As you are aware, the ‘‘Maloney Amendment’’ in the recently enacted Ex-Im Bank Reauthorization Act of 2002

specifically provides for the Ex-Im Bank to ‘‘deny an application for

assistance with respect to a transaction if the Bank has substantial

credible evidence that any party to the transaction has committed

an act of fraud or corruption in connection with a transaction involving a good or service that is the same as, or substantially similar to, a good or service the export of which is to subject of the application.’’ Are you familiar with situations such as this, where

beneficiaries of Ex-Im guaranties are alleged to be committing illegal actions and to have an undue impact on the economies of countries such as Russia? If confirmed as President of the Ex-Im Bank,

do you believe this type of situation would warrant your attention?

Do you believe there should be standards related to this to which

Ex-Im beneficiaries should be held accountable?

A.1. While I have not been briefed on specific transactions, I am

aware that Ex-Im Bank takes very seriously matters of fraud and

corruption, in that such matters relate to creditworthiness. I believe that Ex-Im Bank should and does conduct due diligence with

respect to fraud and corruption issues as they relate to Ex-Im Bank

transactions. If confirmed, I assure you that all such matters would

warrant my attention.

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