<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:20216.wais]
S. Hrg. 108-801
NOMINATIONS OF: ROGER W. FERGUSON, JR.,
BEN S. BERNANKE, PAUL S. ATKINS,
APRIL H. FOLEY, AND JOSEPH MAX CLELAND
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
ROGER W. FERGUSON, OF MASSACHUSETTS, TO BE VICE CHAIRMAN OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
BEN S. BERNANKE, OF NEW JERSEY, TO BE A MEMBER OF
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
PAUL S. ATKINS, OF VIRGINIA, TO BE A MEMBER OF
THE U.S. SECURITIES AND EXCHANGE COMMISSION
__________
APRIL H. FOLEY, OF NEW YORK, TO BE FIRST VICE PRESIDENT OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
__________
JOSEPH MAX CLELAND, OF GEORGIA, TO BE A BOARD MEMBER OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
__________
OCTOBER 14 AND DECEMBER 9, 2003
__________
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Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Douglas R. Nappi, Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Bryan N. Corbett, Counsel
Maurice A. Perkins, Professional Staff Member
Martin J. Gruenberg, Democratic Senior Counsel
Dean V. Shahinian, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, OCTOBER 14, 2003
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Bunning.............................................. 2
Senator Sarbanes............................................. 11
NOMINEES
Roger W. Ferguson, Jr., of Massachusetts, to be Vice Chairman of
the Board of Governors of the Federal Reserve System........... 3
Prepared statement........................................... 27
Biographical sketches of nominee............................. 30
Ben S. Bernanke, of New Jersey, to be a Member of the Board of
Governors of the Federal Reserve System........................ 6
Biographical sketches of nominee............................. 39
Paul S. Atkins, of Virginia, to be a Member of the U.S.
Securities and Exchange Commission............................. 8
Prepared statement........................................... 28
Biographical sketches of nominee............................. 51
----------
TUESDAY, DECEMBER 9, 2003
Opening statement of Chairman Shelby............................. 65
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 66
Senator Allard............................................... 68
Senator Miller............................................... 77
WITNESS
Thomas A. Daschle, a U.S. Senator from the State of South Dakota. 68
NOMINEES
April H. Foley, of New York, to be First Vice President of the
Export-Import Bank of the United States........................ 69
Biographical sketches of nominee............................. 78
Joseph Max Cleland, of Georgia, a former U.S. Senator from the
State of Georgia, to be a Board Member of the Export-Import
Bank of the United States...................................... 70
Biographical sketches of nominee............................. 87
Additional Material Supplied for the Record
Letter to Senator Paul S. Sarbanes from the Coalition for
Employment through Exports, Inc. dated December 8, 2003........ 93
(iii)
NOMINATIONS OF:
ROGER W. FERGUSON, JR., OF MASSACHUSETTS
TO BE VICE CHAIRMAN OF AND
BEN S. BERNANKE, OF NEW JERSEY
TO BE A MEMBER OF
THE BOARD OF GOVERNOR OF
THE FEDERAL RESERVE SYSTEM
PAUL S. ATKINS, OF VIRGINIA
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
----------
TUESDAY, OCTOBER 14, 2003
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF SENATOR RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This morning we will consider the nomination of three very
distinguished individuals. Our first nominee will be Dr. Roger
Ferguson, nominated to be Vice Chairman of the Board of
Governors of the Federal Reserve System. Dr. Ferguson first of
all is no stranger to this Committee. He was originally
appointed to the Board of Governors of the Federal Reserve in
1997 and has served as Vice Chairman since October 1999.
Dr. Ferguson has served with great distinction as Vice
Chairman. He oversaw the Fed's preparations for the Year 2000
computer challenge. I would also highlight Dr. Ferguson's
stewardship of the Fed and our financial system through the
troubling day of September 11 and its aftermath. During 2003,
Dr. Ferguson became the Chairman of the Committee on the Global
Financial System, a central bank panel that monitors and
examines broad issues related to financial markets and systems.
Our second nominee is Dr. Ben Bernanke, nominated to be a
member of the Federal Reserve Board. Dr. Bernanke has served as
a member of the Board of Governors of the Federal Reserve since
August 2002. Before Dr. Bernanke became a member of the Board,
he was the Chair of the Economics Department at Princeton
University.
Dr. Bernanke has published many articles on a wide variety
of economic issues, including monetary policy and
macroeconomics. He also served as the Director of the Monetary
Economics Program of the National Bureau of Economic Research.
Our third nominee this morning is Paul Atkins, for the
position of Commissioner at the Securities and Exchange
Commission. He has been serving as Commissioner at the SEC
since July 2002. Before Mr. Atkins' appointment as
Commissioner, he assisted financial service firms in improving
their compliance with SEC regulations and worked with law
enforcement agencies to investigate and rectify situations
where investors had been harmed. Prior to that experience,
Commissioner Atkins served on the staff of two former SEC
Chairmen. In those positions, he assisted in efforts to improve
regulations regarding corporate governance, enhanced
shareholder communications, strengthened management
accountability through proxy reform. He also organized the
SEC's Individual Investor Program, including the first investor
town hall meetings and other investor education programs.
This Committee will continue to look to the Federal Reserve
System for its steady head on monetary policy as well as the
banking and payments system. And we will look to the SEC to
ensure the credibility and integrity of our capital markets.
We look forward to hearing your statements this morning and
to an interesting discussion to follow.
Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman.
I am a little disappointed that we are not having a markup
today since I got up at 5 o'clock to get here for it, but I am
very happy that we are having a hearing, especially this very,
very important hearing, and I thank our witnesses for coming to
testify.
All three of our witnesses today have experience in their
positions which they are nominated for. All are qualified, and
all have a record of work. This is much different from our
usual nomination hearings.
Today, we can judge them on what they have already done in
their jobs and what they have been nominated for. We do not
have to guess; we have a record to look at.
I do not think it will surprise anyone here who has
followed this Committee, but I am going to concentrate with my
limited time on the nominees for the Board of Governors of the
Federal Reserve. As I am sure you both know, I did not support
either of your nominations. I was worried and continue to be
worried about group thinking and a cult of personality at the
Fed surrounding the Chairman.
To get my support this time, you will have to do a better
job of convincing me that you will be an independent voice on
the Board of Governors. Too many Governors, in my opinion,
simply go along with the Chairman. I would, however, like to
commend Vice Chairman Ferguson on another one of his duties.
Not too long ago, the Vice Chairman gave us a very informative
briefing on critical infrastructure in the financial industry
and possible terrorist threats to that infrastructure. I saw
Chairman Greenspan not too long after that briefing and told
him what a good job you did.
I am probably the Fed's biggest critic in the Senate, but I
also think the Fed should be commended when they do a good job.
When we met before your last nomination hearing, I asked if
you disagreed with any monetary policy decisions that the
Chairman had made. You told me that you agreed with him on
every decision. That worries me a great deal. I do not think it
is good for the Chairman to have Governors who will not
challenge him.
I would not be a very good Senator if my staff agreed with
me in everything that I said or did. To get my support, you
both have to show me that you will tell the Chairman when you
think he is wrong.
Once again, thank you, Mr. Chairman, for holding these
hearings, and I thank all of you for testifying today.
Chairman Shelby. I would like all three of you to stand,
hold up your right hand, and be sworn.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Ferguson. I do.
Mr. Bernanke. I do.
Mr. Atkins. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Mr. Ferguson. I do.
Mr. Bernanke. I do.
Mr. Atkins. I do.
Chairman Shelby. Thank you.
Governor Ferguson, we will start with you. First of all,
all of your written statements will be made a part of the
record in their entirety, and you may, briefly sum up any
statement you want to make.
STATEMENT OF ROGER W. FERGUSON, JR.
OF MASSACHUSETTS, TO BE VICE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Ferguson. Thank you very much, Chairman Shelby and
Members of the Committee.
Chairman Shelby. And Governor--and this goes for all three
of you when your turn comes--if you would like to introduce any
members of your family, you are certainly free to do that.
Mr. Ferguson. Thank you for asking me to do that, because
you have maintained peace in my house.
I would like to introduce my wife, Annette Nazareth, who
has come to join me here today, and she has been here a few
other times at various hearings.
Chairman Shelby. Absolutely.
Mr. Ferguson. I am also pleased to appear before you today
as President Bush's nominee to serve as Vice Chairman of the
Board of Governors of the Federal Reserve System. I am honored
that the President has nominated me to serve a second term in
that capacity, and I thank you for holding this hearing.
It has been my privilege, as you noted earlier, to serve
our fellow citizens as a member of the Federal Reserve Board
since 1997 and as Vice Chairman since 1999. I have given this
role my undivided attention, and I hope to be able to continue
in that service. The policy decisions of the Federal Reserve
influence the economic well-being of all Americans. During my
tenure, we have faced challenges in many of our areas of
responsibility, and I would like to briefly review some of
those developments and our responses to them.
Congress has given the Federal Reserve three monetary
policy objectives--maximum employment, stable prices, and
moderate long-term interest rates. We have viewed those
objectives as congruent with the goal of maximum sustainable
growth that can occur only in the context of long-run price
stability. Fostering financial conditions in which Americans
can realize their full potential has presented a number of
challenges in recent years. The impressive step-up in the
advance of technological and organizational efficiencies and a
rapid accumulation of physical capital in the late 1990's have
been the key factors affecting our economy's performance in the
past decade. These developments have made workers increasingly
productive. But faster productivity growth, despite its long-
term benefits, has not insulated the economy from cyclical
swings. The sharp reevaluation that occurred in equity markets
and the retrenchment in business investment and spending that
occurred over the past several years, together with the effects
of terrorist attacks, wars, and corporate scandals, battered
the confidence of households and businesses. In response, the
Federal Reserve made substantial adjustments to its policy
interest rate in order to cushion the effects of these
developments on the broader economy. Other forces, particularly
the growing interconnectedness of the global economy, have been
important background factors in setting monetary policy. Of
late, policymakers have been mindful of the virtual eradication
of inflation and their need to set policy so that the economy
remains in the zone of price stability. But all of our policy
changes have been undertaken in pursuit of maximum sustainable
growth and stable prices.
Making monetary policy has been only part of the challenge.
During my tenure at the Federal Reserve, we have also worked
diligently to communicate to the public what we are doing and
why. Transparency in policymaking is a key part of the
democratic process and fosters efficient decisionmaking in the
private sector. Becoming more transparent has been an important
goal of the central bank in recent years, keeping in mind that
we must balance being open and accountable with the need to
maintain an effective process of decisionmaking by the Federal
Open Market Committee. Transparency requires that we
periodically review our procedures as we did in 1999 and again
last month, to ensure that they appropriately balance these
considerations. I do not know what future changes, if any,
might be called for in how we communicate, but I am confident
that the Federal Reserve will continue to look for ways to
communicate and explain our policies clearly.
While macroeconomic conditions are of central importance,
the role of the Federal Reserve is broader than monetary
policy. Financial stability is an essential precondition for
maintaining a strong economy, and the Federal Reserve played a
key role in maintaining financial and economic stability in the
aftermath of the terrorist attacks of September 11, 2001. Both
you and Senator Bunning have already alluded to my role and
responsibilities on that day, so I will not go further into the
role that I played at that time.
I will point out, however, that the Federal Reserve also
executes its important financial stability responsibilities in
less stressful times through its role in supervising and
regulating our Nation's banking system. The Federal Reserve and
other regulators must foster a competitive environment that
will benefit the users of financial services while also
promoting safety and soundness. I believe that we should
achieve these objectives with a minimum of regulatory burden
and without leaving the impression that any institution is too
big to fail. Currently, we face the challenge of meeting these
goals by developing a new capital Accord to apply to the
largest and most complex internationally active institutions.
As I have testified before this Committee, the existing Accord
no longer suffices for these institutions. Now we need to work
with our financial institutions and other regulators to replace
the existing Accord with a new one that is more risk-sensitive,
builds on advances in risk measurement and management, and
provides proper incentives. And we must do so without
unnecessary complexity and without creating undesirable
competitive imbalances or other unintended consequences.
Last, our payment system is a real presence in the economic
lives of every consumer and business. This system too has been,
and will continue to be, changed greatly by emerging
technologies. From its very founding, the Federal Reserve has
had the responsibility to foster an efficient, safe, and
accessible payment system. In a dynamic economy, markets
appropriately play the key role in guiding the development of
the payments infrastructure. This means that innovation and
competition will be central to the future development of the
payments system, as they are in other areas of the economy.
Regulators and Congress should strive to remove barriers to
innovation when they can do so without sacrificing important
public policy objectives. I have been privileged to work with
this Committee on one such initiative, the Check Truncation
Act, or Check 21. This legislation removes a legal impediment
and should, over time, foster greater use of electronics in the
check-clearing process while also preserving the right of
consumers and banks to receive paper checks. Ultimately, Check
21 should allow depository institutions to provide new and
beneficial services to their customers. I look forward, as I
know you do, to its prompt enactment. And I thank the Committee
and its staff for the strong support you have provided.
Mr. Chairman and Members of the Committee, during my years
on the Board of Governors, I have done my best to contribute
positively to all aspects of the Federal Reserve's many
responsibilities. I look forward to the opportunity to continue
to work with you and serve the Nation as Vice Chairman of the
Board of Governors. Thank you for your attention and for
considering my nomination. I would be pleased to answer
questions.
Thank you.
Chairman Shelby. Dr. Bernanke.
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, Senator.
I am honored to have been nominated by the President to
serve a full term as a member of the Board of Governors of the
Federal Reserve System. If I am confirmed by the Senate, I
pledge to continue to devote myself to the pursuit of the
objectives set for the Federal Reserve by Congress: Maximum
employment, stable prices, and moderate long-term interest
rates.
I would like to take this opportunity to talk briefly about
the prospects for the U.S. economy. After several false starts,
the economy is showing signs of sustained recovery. The Bureau
of Economic Analysis estimates that real GDP grew by 3.3
percent at an annual rate in the second quarter. Growth of real
activity appears to have been even more rapid, perhaps
considerably more rapid, in the third quarter. Consumer
spending, supported by expansionary monetary and fiscal
policies, has remained strong. Notably, new housing
construction hit record levels this year and will likely
continue at a high level despite some increases in mortgage
rates this summer. Particularly encouraging, however, are signs
of revival in capital expenditure by businesses. Investment in
equipment and software, especially high-tech equipment, picked
up noticeably in the second quarter and appears to be
strengthening further. Rising sales and profits, easy financing
conditions, and favorable tax provisions should support
investment spending into 2004.
Although economic forecasting is far from an exact science,
private-sector forecasters broadly agree that the economy
should grow at nearly a 4 percent rate in 2004. I believe that
forecast is plausible, assuming that the revival in business
investment remains vigorous. Although there are certainly
downside risks to that forecast, there are also reasonable
scenarios in which growth next year might be higher than the 4
percent consensus, for example, if the rebuilding of inventory
stocks is especially rapid or if economic growth among our
trading partners begins to pick up significantly.
Although the increased growth rate of output is
encouraging, everyone should be concerned that so far, this
growth has not translated into significant job creation. Until
the job market improves, this recovery will not feel like a
recovery to most Americans. A number of factors explain why we
have not yet seen net new job creation. Two are particularly
worth mentioning.
First, we have seen truly remarkable increases in labor
productivity, which have permitted firms to meet the increasing
demands for their output without hiring additional workers.
This strong performance owes in part to heavy investment in
high-technology equipment in the latter part of the 1990's.
Only over a period of time, apparently, have managers learned
how to reorganize their production and distribution processes
to take full advance of the potential of these new
technologies. The resulting increases in productivity have
delayed the need to add new workers, but--it is important to
note--they also imply that American firms and workers will be
significantly more competitive, and that will help our economy
preserve jobs in the long-run.
Second, the past few years have been a period of heightened
uncertainty, reflecting the aftereffects of the terrorist
attacks of 2001, the wars in Afghanistan and Iraq, scandals in
corporate governance, the unsettled state of the world economy,
and other factors. Possibly because of these geopolitical and
economic uncertainties, it appears that employers have been
slower than usual to make commitments to expand their plants,
increase their staff, or add to inventories.
Overlaying these cyclical factors is the continuing
restructuring of the U.S. economy, one that has been going on
for decades. Although restructuring is a persistent feature of
our economic landscape, the displacement of workers and
shifting employment patterns resulting from this restructuring
are far more difficult to cope with in an environment of
generally weak labor markets than they were in periods of rapid
employment growth. Inevitably, in a dynamic economy like that
of the United States, the process of restructuring will
continue and will present an ongoing challenge to American
workers and employers. I believe, however, that the current
weakness of the labor market is more cyclical than structural
in nature, implying that aggregate employment will recover and
unemployment will decline as the economic expansion matures.
The exact timing of the recovery in employment, however, is
not completely clear. Modest encouragement can be taken from
recent data on jobs creation, including increased hiring of
temporary workers, often thought to be a leading indicator of
more permanent hiring. Other indicators, such as the failure of
the average workweek to expand in recent months, and the very
slow decline in new claims for unemployment insurance, are less
encouraging, though they do suggest at least some stabilization
of the job market. I should note that I submitted this
testimony before last week's decline in new unemployment
insurance claims.
However, in my view, the growth of productivity is likely
to slow, at least somewhat, from its recent extraordinary
recent pace, so it seems very unlikely that firms can continue
to meet rapidly rising demands without adding to their capital
stocks, as they have already begun to do, and to their
workforces. Thus, given the rate of increase in spending and
output that we are now witnessing, a reasonable expectation is
that firms will need to add significant numbers of workers
within the next several quarters.
Where does this leave monetary policy? Inflation remains
low, and the Federal Open Market Committee has indicated that
the risks to inflation are to the downside. Thus, currently,
both the price stability and maximum employment objectives of
the Federal Reserve point us in the same direction.
Specifically, in my view, monetary policy can afford to
maintain its accommodative stance for a considerable period,
certainly until a sustainable recovery in employment is under
way and disinflationary risks have been correspondingly
reduced. I expect that the continuing support of monetary and
fiscal policies, together with the natural resiliency and
strength of the U.S. economy, will in all probability lead
ultimately to a sustained expansion without inflation, much as
occurred after the so-called ``jobless recovery'' that followed
the 1991 recession.
I would be happy to take questions.
Chairman Shelby. 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, Mr. Chairman.
First, I would like to introduce my family; I will take you
up on your invitation. First, my sons, Stewart, 10, Peter, 7,
and Henry, who is 3; and my wife Sarah, who is also here.
Chairman Shelby, Ranking Member Sarbanes, and Members of
the Committee, it is a very great honor for me to appear for
the second time before this Committee. I am deeply grateful for
the confidence that President Bush has again shown in me by
nominating me for a second time to be a Commissioner. I
appreciate very much your courtesy in calling me before you
today.
I would also like to note that it has been a pleasure to
work with Chairman Bill Donaldson and my other colleagues on
the Commission, Cynthia Glassman, Harvey Goldschmid, and Roel
Campos. I salute the leadership that Chairman Donaldson has
provided us and the SEC staff. If confirmed once again by the
Senate, I look forward to continuing to work with Chairman
Donaldson and my fellow Commissioners to address the very
weighty issues that are before the SEC.
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. In fact, I should note
that I now have had the privilege of working for four SEC
chairmen--Richard Breeden, Arthur Levitt, Harvey Pitt, and Bill
Donaldson. I have learned much from each of these men, and I am
happy to count them as friends and advisors.
As the Members of this Committee well know, in the past few
years investors have been confronted with spectacular failures
of large and small corporations because of bad accounting
practices and outright fraud. The instances of corporate
managers engaging in theft and reckless mismanagement of
corporate funds are shocking, outrageous, and completely
unacceptable. The revelations of corporate malfeasance
undermined our capital markets in a profound way. ``Corporate
responsibility'' rightfully became a national issue for the
first time in perhaps 70 years. In response to this crisis,
this Committee and Congress acted forcefully, and the President
signed into law the Sarbanes-Oxley Act of 2002, the most
important piece of corporate governance and securities
legislation in the last 70 years.
For many Americans, the SEC, until recently, may have been
just another Federal agency in Washington, DC, with an alphabet
soup acronym. As Enron, MCI, and a host of other corporate
scandals--along with the severe downturn in the marketplace--
showed, the times have radically changed. Millions of Americans
look to the SEC more than ever as the defender of their
financial hopes and dreams, as it should and must be. Investors
rightfully demand a tough cop to fight those who steal their
hard-earned savings and investments.
These are unique and demanding times at the SEC. It would
be a privilege for me to continue to respond to this call and
to give my best efforts to advance the Commission's mandate on
behalf of the investing public.
Thank you.
Chairman Shelby. Governor Ferguson, this past summer, we
had a very different type of crisis with an energy blackout on
the East Coast. Did the Federal Reserve review the performance
of financial and payment systems in response to that crisis?
Mr. Ferguson. Yes. We have taken what I would describe as
an informal look at that, not through a big study, but yes, we
have looked at it.
Chairman Shelby. Do you know if you have learned any lesson
from that yet? I know there is a lot of difference between that
and September 11----
Mr. Ferguson. There are some differences, obviously, but I
think it has pointed out yet again the reliance of the
financial industry on underlying infrastructure such as
electricity, water, et cetera.
I think we have learned a couple of things or observed some
things on that point. First is that indeed, post-September 11,
many financial institutions did put into place backup
arrangements, generators, et cetera, that proved to have been
successful in the case of individual institutions.
Second, I think we learned again that one should think of
this as a ``wide area'' challenge, if you will. Being focused
on a single building, for example, is not sufficient; you must
think about the entire network that supports that. And that
continues to be an important issue and challenge for the
institution. But I would say by and large, my personal view is
that the degree of resilience that was demonstrated in the
blackout is much higher than would have been the case a few
years ago. I think that institutions are moving in the right
direction, although obviously, no one can be complacent yet in
that regard.
Chairman Shelby. Thank you.
Dr. Bernanke, I recently had an opportunity to discuss
economic and financial issues with officials from the Japanese
and Chinese Governments in Tokyo and in Beijing. How would you
assess the conditions of the banking systems in those two
countries?
Mr. Bernanke. Both countries have serious, significant
difficulties with their banking systems. The Japanese banking
system has been in serious trouble since the collapse of the
so-called bubble economy in 1989. There remains a very heavy
preponderance of nonperforming loans, new credit is not being
extended, and profitability remains low.
However, there have been some recent signals of possible
improvement. The Resona recapitalization is a positive step in
the sense that beyond simply injecting capital into the Resona
Bank, the Government of Japan has taken a much stronger hand in
demanding reforms and profitability. They changed the
management. They demanded more rapid reductions in
nonperforming loans and so on.
Also interesting is the recent order by the Financial
Services Agency, the so-called business improvement order,
which essentially demands that banks which have received
capital injections improve their profits over the next few
years.
Under the leadership of Mr. Takenaka, who has been an
important force for reform in Japan, what we are seeing is slow
but steady movement toward accountability in the Japanese
banking system. They are far from out of the woods, but I think
they have made some useful steps. That will be assisted by some
signs of economic recovery in Japan fostered by monetary
policy, increase in the stock market, and so on.
The short answer is that there have been some improvements
like the increased accountability. We still have a long way to
go in Japan.
China is a rather different situation. In China, until
economic reform took place, the Chinese banking system was
essentially the instrument of the state's allocation of credit.
They have not made the transition to a capitalist free market
banking system. They remain deeply under water in terms of
their credits, so it will be a considerable amount of time
before that system is operative in the sense of a Western free
market banking system.
However, I know the Chinese are quite interested in doing
that. I think that is an important step toward opening up their
capital markets, allowing both more incoming financial flows,
as well as allowing Chinese citizens to invest abroad. I think
this is a very important priority for the Chinese Government,
but they have a long way to go. They do not have the managerial
skill, and it will take a while for them to get that situation
straightened out.
Chairman Shelby. Is reform in both Japan and China to their
banking systems critical to the sustained health of our
economy? Is there a connection there?
Mr. Bernanke. Yes, there is a connection, Senator. One of
the reasons that it has limited our domestic economic growth
has been essentially the weak condition of most of our trading
partners. Japan is a particular case-in-point. The Japanese
economy is the second-largest in the world, yet it has been
very depressed now for about 15 years. Domestic reforms, both
structural and to the banking system, along with expansionary
monetary policy, have the potential to bring Japanese growth,
domestic demand, higher. That would be a very important step
toward increasing the demand for our exports and for our
growth.
The Chinese case is a bit different. China is not suffering
from lack of growth, and is growing very rapidly. But clearly,
first of all, its integration into the world financial market
and into the world exchange market depends on reform in the
Chinese banking system. And second, there has certainly been
interest in the United States in having the Chinese move
eventually to a flexible exchange rate system. One important
barrier to doing that immediately is the problems in the
banking system. Free capital flows would create large
withdrawals from their domestic banks, which would lead
presumably to a financial crisis.
Therefore, in order for China to move effectively to a
flexible exchange rate system, they do need to make substantial
reforms in their banking system, and for reasons that we
understand, that would be useful for the United States economy
as well.
Chairman Shelby. Thank you.
Mr. Atkins, mutual fund investors receive disclosure
documents that are often confusing and do not contain adequate
information for investors to understand the full fee structure
of their fund. Given your experience in investor education, how
would you recommend improving upon the transparency and
disclosure regarding mutual funds?
Mr. Atkins. I think that is an excellent question. As far
as the essence of choosing between funds, it is really fee
structure and other expenses that should most concern
investors. That is where we can really concentrate at the SEC
to try to bring more transparency. I believe our Investment
Management Division is working on just such proposals.
Chairman Shelby. It is very important, though, is it not?
Mr. Atkins. It is vitally important.
Chairman Shelby. Especially in view of some of the
revelations that have come recently, dealing with some of the
mutual fund operatives.
Mr. Atkins. Exactly, yes, and transparency is----
Chairman Shelby. Key to it.
Mr. Atkins. --primary; exactly.
Chairman Shelby. Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. I am
pleased to welcome the nominees before us this morning. They
have all been here before, but we always welcome this
opportunity.
I want to ask a question of Mr. Ferguson and Mr. Bernanke
first. I have discussed this issue before, and that is the
issue of equal employment opportunities at the Federal Reserve.
Vice Chairman Ferguson, I think you and I had a good exchange
about this in one of your earlier hearings.
In February of this year, a number of Members of the House,
including a significant number of Members of the House
Financial Services Committee--and of course, they do not
participate in the nomination process, but they do get in touch
with us about it from time to time--wrote to the Chairman: ``We
are writing to request data on the current status of the equal
employment opportunities at the Federal Reserve System.'' And
they referenced the staff report that the Committee had done
when it was then the House Banking, Finance, and Urban Affairs
Committee back in December 1993, which would now be about--we
are coming up to the 10th anniversary of that report--and asked
a number of questions.
In April, the Congressional Black Caucus wrote to the Fed,
to Chairman Greenspan, to Vice Chairman Ferguson, and Governor
Olson, who I think is in charge of the personnel policies as I
understand it amongst the Governors of the Fed, expressing what
the Congressional Caucus said was ``a deep concern about the
treatment of African American professionals at the Federal
Reserve'' and asked for an inquiry, and then they referenced
the particular case. But I am interested in what the situation
is at the Fed on this important issue.
Mr. Ferguson. Senator Sarbanes, thank you for giving me an
opportunity to address this issue. This is an issue on which
there can be no doubt about the commitment from the top to have
all of our employees treated purely on the basis of a
meritocratic approach, without any extraneous factors coming
into play, as I have said to you before in this room and in
other locations.
It is quite important to recognize, if you will, what the
statistics tell us, because I do not think the Fed story has
actually come out fully. As I look at the statistics on the
Federal Reserve Board, for example, looking at our most senior
people, at what we call the officer level, which is the
equivalent of the Senior Executive Service for the civil
service, in 1992, 20 percent of those individuals, our
officers, were female, and about 11 percent were minorities. In
2002, 10 years later, 31 percent were women and 16 percent were
minorities. Compare that to the last statistics we have for the
Senior Executive Service in the civil service, where 24 to 25
percent were women, and 14 percent minorities.
So at the most senior levels, I would say two things are
reflected in those statistics. One, there clearly has been
progress, and two, frankly, I think the Board of Governors'
staff results have been better than what one sees in the Senior
Executive Service, the most senior part of the Government in
general.
If you look at overall demographics, not just the senior
levels, at the Board, about 51 percent of our employees as of
year-end 2001 were women, 42 percent were minorities. In the
Federal Government, the numbers were 45 percent and 31 percent,
respectively. Again, I think we stack up very favorably against
the entire U.S. Government.
If we think about our pipeline grades, the people that are
likely to move into leadership roles over the next few years,
in 1992, 30 percent of that group were women and 9 percent were
minorities; in 2002, 41 percent were women and 18 percent were
minorities.
I can go on with a number of other statistics on hiring and
promotions, but the message I want to leave you with is that we
take this issue extremely serious. There is no complacency in
the Fed on this issue and there will not be. And if one looks
at the trends over the last 10 years, we certainly have seen
great progress and advancement for women and minorities, and we
stack up very favorably, in fact, I think are better than
comparables such as the Senior Executive Service or the
Government overall.
How have we done that? We have done it because there is, as
I said, no sense of complacency at the top in the Federal
Reserve. We have put through a number of processes and
procedures that have enhanced the focus, if you will, with
respect to the EEO issues that you have raised. We have an
annual review process that we established to assess diversity
and outreach efforts in each of our divisions. Each division
has an annual recruiting and outreach plan to both inform
minorities about employment at the Board and to build a diverse
pool of candidates. We have an explicit EEO component of
performance objectives of the officers and managers. We have
undertaken best practice assessments, and this type of
information we have shared with the House and have shared with
you as well.
I appreciate the opportunity to answer this question,
because in fact I think the Federal Reserve Board has done very
good work over the period before and while I have been there
and will continue to do so. As I have said, the statistics
stack up quite favorably against reasonable comparators here in
Washington, DC.
I could broaden that statement, and I will if you want me
to spend more time on it, talk about the Federal Reserve System
overall, but the message tends to be exactly the same if one
looks at the statistics for the System overall. It is one of
the improvements in all levels, I believe, at least over the
last 10 years and a strong pool of individuals in the pipeline,
if you will, prepared to be promoted to more senior ranks.
I realize that there is an interest in this issue, but I
think our responses put us in reasonably good light, and there
is no complacency.
Senator Sarbanes. Let me just go below the level of the
statistics for a moment. What can you tell us about the actual
process within the Federal Reserve to deal with employee
grievances, whether it is harassment on the job,
discrimination, the ability to have that looked at in a fair
and objective way without punishment or retaliation to the
employees bringing the allegations?
Mr. Ferguson. We have a multitiered process for grievance
resolution, starting first within the division, so if you have
an evaluation--we call it a PMP--that the employee disagrees
with, that
individual has the right within that division to ask for a
reconsideration. And then, through our HR, human resources,
chain of command, those grievances can be carried higher and
higher through the Federal Reserve Board infrastructure,
ultimately coming to the Board of Governors.
Obviously, there is also a parallel process for those who
want to go into the formal Equal Employment Opportunity
complaint process which ultimately would lead to resolution at
the EEO Commission. Clearly, by definition, we cannot tolerate
any retaliation that might occur for someone exercising their
rights.
The reality is that I, and I think all of us, are very
interested in having a very robust process for these
grievances, because if there is any evidence of misbehavior
along the lines that you talk about, I as Vice Chairman want to
know about it, and I think my colleagues on the Board want to
know about it. A grievance process that starts within the
division but the moves outside the division is a superb way to
ferret out those facts. I do not think one can identify a
better, more robust grievance process than the one that we
currently have. It is open to all and is open without any sense
of retaliation.
Senator Sarbanes. Thank you, Mr. Chairman. My time is up,
and I will yield to my colleagues, but I hope we will have
another round.
Chairman Shelby. We will, yes.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
These questions will be for the Vice Chairman and Governor
Bernanke, if you will please give me your opinion on these.
The first question is have you disagreed with any monetary
policy decision that Chairman Greenspan has made since you have
been on the Federal Reserve Board--each of you?
Mr. Ferguson. Let me start, and then Governor Bernanke can
respond.
It is clear from my record that I have not dissented from
any FOMC decision. The monetary policy decisions of the Federal
Reserve are not the decisions of an individual; they are the
decisions of a committee. I am a voting member of that
committee, and I have to this date not dissented.
Having said that, that does not mean that I am not
exercising independent judgment. There are a number of ways in
which I can have and will continue to exercise independent
judgment. You have seen some of them in the role that I played
with respect to September 11, where I had to take the
responsibility independently of the Chairman, who was not
available. I would encourage you to look at my entire record in
terms of independence of judgment.
If I had a strong disagreement with the direction the
Committee was taking, I have an obligation, which I have
exercised many times, to express myself formally and
forcefully, in the Committee discussions to try to persuade my
Committee colleagues to see the economic forecast, the economic
outlook, and the risks to that outlook and the consequent
policy implications the way that I see them.
Senator Bunning. But in the long-run, you voted with the
Committee.
Mr. Ferguson. Well, but in the long-run, that means that
the Committee and I all reached a broad consensus that I could
feel comfortable with.
If there were to be a point going forward when I felt
strongly that the Committee was reaching a consensus that I
could not be a part of, then, by definition, I would exercise
my right to dissent.
Senator Bunning. How long have you been on the Committee?
Mr. Ferguson. I have been on the Committee since November
1997.
Senator Bunning. Since 1997.
Mr. Ferguson. The fact that I have not yet dissented means
that I have managed to get the Committee to vote----
Senator Bunning. All the Committee to the position you
wanted?
Mr. Ferguson. The Committee and I ended up, obviously, in
the same position, yes, so that I could comfortably support and
be part of the consensus.
Senator Bunning. The final decision.
Mr. Ferguson. Sometimes that required my moving, sometimes
it required their moving.
Senator Bunning. Thank you.
Mr. Bernanke.
Mr. Bernanke. I have not dissented in my year on the
Federal Open Market Committee because I basically agreed with
the direction of policy, which has been to ease in order to try
to revive the U.S. economy and improve employment while
maintaining price stability.
However, I have been an independent voice both within and
outside the Federal Reserve System through a series of speeches
and other public discussions. Among those topics on which I
have been prominent in providing leadership include the
discussion of alternative monetary policy tools which might be
used in the event of a deflation or the zero lower bound
binding on nominal interest rates; I have made strong arguments
against the intervention of monetary policy into the stock
market and other financial markets, and I have also taken
leadership in arguing that the Federal Reserve can maintain a
competitive monetary policy for a longer period than usual
because of the slack in the system created by weak labor
markets.
There is an area where in fact I have disagreed quite
publicly with the Chairman, and that is in the area of how best
to achieve Federal Reserve transparency. As I discussed in my
initial confirmation hearing a little over a year ago, I am a
proponent of what is called ``inflation targeting.'' Despite
the name, the approach is not in any way inconsistent with
strong commitment to the dual mandate of the Federal Reserve.
What it does is attempt to provide more information and more
transparency about the Federal Reserve's objectives and long
run goals. In particular, I have argued that the Federal
Reserve should provide information to the public about what it
thinks the long-run inflation or average inflation rate over
the business cycle should be, and I have also argued for other
measures for increased transparency such as moving up release
of the minutes and providing more frequent forecasts by the
Federal Open Market Committee.
Certainly in the area of inflation targeting, Chairman
Greenspan quite clearly disagrees with that position, and our
disagreement has been public, it has been cordial, it has been
based on intellectual arguments. Nevertheless, I clearly have
staked out an independent position on that very important area
of monetary policy.
Senator Bunning. Thank you.
I want to talk to you about regulations on national banks.
I have a lot of small businessmen in my State, and they are
complaining vigorously about the banks not being free and
afraid to make loans because of the regulations that the
Federal Reserve has in monitoring loans. I could give you
chapter and verse if you like, but I am not going to do that
for fear the Fed will come down on the head of some poor banker
down in Louisville, Kentucky. But the fact of the matter is I
have some very small businessmen who cannot get any money out
of the banks. No matter how good or how well they seem to be
doing, the banks are reluctant because of regulatory burdens on
specific loans to get any capital influx from an ordinary
lender.
Can you give me any reason that that would be? In other
words, if you come in and regulate one of the major regional
banks in, say, Louisville, and your regulators go in and take a
look at what kinds of loans have been made, and they check and
say ``This is not permissible,'' and all of a sudden, the poor
bank gets in trouble.
Mr. Ferguson. Senator, I have appeared before this
Committee many times, and there have been times when I am not
sure I know the answer to your question. This is, I must admit,
one of those times.
The reason is that I cannot think of any regulation that
the Federal Reserve has promulgated that is targeted in any way
at limiting legitimate loans to any segment of the population.
Senator Bunning. Can I bring the people before you at the
Federal Reserve?
Mr. Ferguson. Absolutely.
Senator Bunning. The people who want to borrow the money
and who want to lend and are frightened to death to do it.
Mr. Ferguson. What would help me--I am not a very
frightening person--what would help me a great deal----
Senator Bunning. No--but the Federal Reserve is a
frightening body.
Mr. Ferguson. We will take care of it. What would help me a
great deal is to know which regulations they think might be
impinging on private credit decisions that can legitimately be
made. By definition, there are behaviors that one does not want
to see in terms of inappropriate evaluations, but I would be
interested in the regulation that they think is standing in the
way of an appropriate, legitimate, independent credit
evaluation being made by the banks.
Senator Bunning. Okay. We will bring you chapter and verse.
Mr. Ferguson. That is absolutely fair.
Senator Bunning. All right. I want to ask one question
about mutual funds, and then I will get to the rest of them on
the second round.
I was in the business for 25 years. The mutual fund
industry at that time was the most transparent of all of the
vehicles that you could invest in. They wrote everything down
in a prospectus--not everybody understood what was in the
prospectus--and they wrote down their fees, they wrote down
everything. The fact that some mutual funds and some brokers
hedged and did what is illegal should not come down on the
heads of the mutual funds but on the people who regularly
violated the law. There is a law against buying after the close
at certain mutual funds and then selling on the opening and
have the market open stronger. That is what some hedge funds
did, and some brokers violated that trust.
Now, that has nothing to do with the mutual fund industry
except in those individual cases. I have never seen a more
honest and regulated group of people than the people who
generally run mutual funds.
Tell me if you see it differently.
Mr. Atkins. No, sir, I do not. What we were, I think,
trying to address before as far as disclosure goes is that over
the years, as our rule book has expanded, so have the
prospectuses and the statements of additional information that
mutual funds put out. This has made it very difficult, I think,
for investors to grasp the essentials because of all of our
mandated disclosures. So, I think that is one of the things
that we want to focus on and try to alleviate.
And certainly, I think most people in the mutual fund
industry are honest and forthright and trying to do the right
thing for their mutual fund shareholders; obviously, there are
some bad eggs, as in every group.
Senator Bunning. We found that out. Thank you very much.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you.
Dr. Bernanke--Governor Bernanke--you are both--if economic
growth develops as is currently forecast in the third and
fourth quarters, do you believe that labor markets will show
significant improvements?
Mr. Bernanke. As I discussed, Senator, in my statement, I
do believe we will see some significant improvements within the
next few quarters. The basic reason for that is that the
productivity gains we are seeing now--6.8 percent in the second
quarter, probably higher than that in the third quarter--are
simply not sustainable. Firms, as they respond to higher
demands for their products, simply must increase their capital
and labor inputs. So, I am confident that with the rate of
growth of output that we expect to see in the next few quarters
and into next year, that employment will pick up.
We have begun to see very early signs of that in the labor
market, admittedly very early, in terms of some change in the
direction of payroll growth and decline in unemployment claims.
Those are very preliminary. I do not want to overstate the
importance of those, but they are consistent with the view that
we will soon be seeing more significant growth in employment.
Chairman Shelby. Do you feel overall pretty good about the
economy as to where we are today and where we are going?
Mr. Bernanke. I am distressed by the slow recovery at the
labor market. I recognize that creates a lot of hardship for
many Americans and many communities. I do feel, though, that as
the economy recovers and as employment recovers, we will have
in fact a very strong, productive, noninflationary economy in
the years to come. I do feel good in the longer term, but I
believe that at the moment, we have a lot of work to do still.
Chairman Shelby. Thank you.
Mr. Atkins, the intermarket trading system--you have made
some interesting statements regarding the trade-through rule
requirements of the intermarket trading system. The trade-
through rule and the ITS as a whole have been the subject of a
lot of criticism. What do you see as the future of ITS, and do
we still need the trade-through rule? I know we are talking
about technical stuff, but you are a Commissioner.
Mr. Atkins. Yes. It is something that I think we really
need to look at; it is long overdue. The trade-through rule and
the ITS system were put into effect back in the mid-1970's, and
obviously, with today's improved technology, there are a lot of
people out there who are interested in various aspects of the
system as far as pricing and trading go.
I think as part of our overall reassessment of market
structure, which I know the Chairman is going to be talking to
the Committee about later this week, we need to look at this
again.
Chairman Shelby. Can we assure customer protection with
greater focus on what you call the ``best execution''
obligations of brokers? That goes to the heart of it, doesn't
it?
Mr. Atkins. Yes, sir. That is the heart of our whole system
and the broker's relationship with his customer--to give best
execution. And, it is all based on the national best bid and
offer, and I think that concept is crucial.
Chairman Shelby. Given the trading technology--you alluded
to it--that we have today, is it not possible to accomplish the
important customer protection goals that led to the trade-
through rule without the rule's impediment on trading speed?
Mr. Atkins. I think that is exactly part of our
reassessment. Now that we have moved away from fractional
trading to trading in pennies and even in sub-pennies, I think
a lot of people are interested more in speed of execution
rather than necessarily having a better price by a fraction of
a cent.
Chairman Shelby. Transparency and speed; right?
Mr. Atkins. Yes, sir.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Mr. Atkins, at your first confirmation
hearing back in July of last year, I indicated a concern about
the pay and benefits parity issue at the Commission with
respect to the employees. Congress, of course, had passed
legislation that said the SEC shall seek to maintain
comparability with such banking agencies regarding compensation
and benefits. It is my understanding that we still have not
fully achieved that.
Could you tell me where we are on that issue and your own
view toward it?
Mr. Atkins. Yes, sir. From my understanding, the Chairman
is working hard on this issue and has been working with the
National Treasury Employees Union to try to get this into
place. From my understanding, progress has been made. He now
has a person in his office specifically designated to deal with
management and employee issues, and I think that person has
been doing a very good job in trying to review the overall
situation at the SEC. It seems that morale is up among the
employees, and I think our retention and recruitment are
better.
I believe that these things will get phased in, and where
they stand exactly, it is really in the Chairman's bailiwick.
That is my understanding at this point.
Senator Sarbanes. Are the Commissioners available to the
union representatives to discuss issues affecting the employees
at the SEC?
Mr. Atkins. Yes and, in fact, I have met with both union
and nonunion employees. Since I was a former staff member 10
years ago, I also have an obvious deep affinity to what goes on
with the staff, and I believe the management issue is a
critical one at the SEC to make sure we can best perform our
functions.
Senator Sarbanes. Would you say that you have what one
might describe as an open door policy toward such meetings by
union or nonunion representatives of SEC employees to meet with
you and discuss matters that are on their agenda?
Mr. Atkins. Oh, absolutely, and I have been doing that, as
I have said, in the last year. Without an open door and without
reaching out also--more than just having an open door, reaching
out and trying to find out what people's concerns are--I do not
think it can be a very effectively managed place.
Senator Sarbanes. The Congress provided significant
additional funds to the Commission, and we are now on track to
further up the amounts in the coming year's budget. How is the
Commission using these extra funds?
Mr. Atkins. As you know, we have hired something like 300
new people already. We did not use the entire allocated amount
from last fiscal year, mainly because it was appropriated late
in the year, and then also, we were waiting for the new
authorization as to accountants and other nonlawyers to be able
to hire them on an expedited track.
I think that you will see in this fiscal year things, from
my understanding, really start to come into place.
Senator Sarbanes. When we provided the extra money, we set
out three areas in which it was to be used, in which we thought
a response was necessary on the part of the Commission and for
which these resources were being provided. One is what you just
mentioned--the addition of further personnel. And as you point
out, we also enacted legislation to make that process easier
for the Commission in terms of taking those people on.
Second was the pay and benefits parity issue, which as I
understand from your response and from what Chairman Donaldson
said at an earlier hearing not very long ago, has not yet fully
been worked out, although everyone keeps assuring me that it is
going to be worked out, and it seems to me a matter of some
importance as far as your staff morale and retention issues are
concerned.
Third was a significant upgrade in the technology at the
Commission. What has happened in that regard?
Mr. Atkins. From what I understand, we have been working to
upgrade our technology capabilities, especially in our
Enforcement Division, where people there are always undermanned
and basically going up against people who have huge resources.
That is a critical area, and from what I understand, the
Chairman has been focusing on that.
You will probably have to ask the Chairman as to precisely
where it all stands now, but again, I know that we have been
focusing on----
Senator Sarbanes. All of these items, of course, affect the
ability of the SEC to function and the level at which it
functions, and I have been listening carefully to your answers.
Let me ask you this question. The other four commissioners
other than the Chairman--to what extent are you involved or
cognizant or do you review or become engaged with this whole
question of the functioning of the Commission--the treatment of
the employees, the technology, et cetera--or do you all say,
``Well, that is the Chairman's job; we do not have anything to
do with that?''
Mr. Atkins. I can only speak for myself, not necessarily my
colleagues, but as I said, I am very concerned about it.
Senator Sarbanes. Let me just interject. I think at the
Fed, you assign out some of these various functions, do you
not, amongst the Members of the Board of Governors?
Mr. Ferguson. Yes. The Fed operates in many of its day-to-
day activities through a committee structure. Each committee
includes three Governors, one of whom is the chairman of the
committee and then there are two other members. The Board has
committees for a number of these internal activities and other
things that we are responsible for.
Senator Sarbanes. On these various issues involving, in
effect, its internal operations.
Mr. Ferguson. Yes. We have one committee for internal
operations, a committee for regulation, and a committee on
payment systems, and other things.
Senator Sarbanes. I am sorry. Please go ahead.
Mr. Atkins. I guess we are under a little bit of a
different statutory framework, because back in the 1950's,
Congress passed what was called ``Reorganization Plan Number
10''--I do not know how they came up with that name--but
basically, it assigns at the SEC staffing and budgetary matters
to the Chairman's office. So, as far as the Chairman's
prerogatives go, I know, at least looking at past Chairmen,
those prerogatives tend to be husbanded carefully, especially
vis-a-vis the other Commissioners.
So, I think there is a deference to the Chairman to allow
him to manage the agency, because obviously, Congress thought
that things would run more efficiently if done that way. Back
in the old days, if you look especially at Joel Seligman's book
on ``The Transformation of Wall Street,'' basically, all five
Commissioners met to approve the hiring of every employee.
Senator Sarbanes. I am not trying to get you to that stage,
but it does seem to me that you have a Chairman who has
indicated he is, as I understand it, quite collegial; is that
correct--Chairman Donaldson----
Mr. Atkins. Yes, sir.
Senator Sarbanes. --which seems to me is a desirable trait
when you are dealing with a multimember commission, and it
would seem to me that an expression of interest and some
involvement by the other Commissioners on some of these issues,
which after all, properly resolved, would enhance the ability
of the Securities and Exchange Commission to do its job, and it
seems to me that is called for.
I will cease, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
I want to go back to something that Governor Bernanke said
about China and the banking system in China. There are quite a
few of us--12, to be exact--in the U.S. Senate who strongly
disagree with your assessment on the Chinese banking system and
the ability of the Chinese banking system to tie its currency,
the yuan, to a fixed rate of exchange with the U.S. dollar,
building in about a 28 percent advantage for the Chinese in all
trade with the United States of America.
We are trying our best to get legislation to enact that
will allow the yuan to float. You have just stated in your
testimony that you think that would be a catastrophe or a
disaster or whatever word you used, that it would be not in the
best interest of the United States or China. I would like to
explore that a little more.
Do you think that the Chinese should be able to tell our
Secretary of the Treasury to take off--``We do not want to hear
from you about this problem''--when he goes there to talk
specifically about trade and about the disadvantage that the
United States has with trade in the yuan being tied to a fixed
rate of exchange with the dollar?
Mr. Bernanke. My comment was a technical one, Senator. I do
think that a purely floating exchange rate would provide some
dangers in the current financial system in China. In
particular, one risk which one might face is that if there were
significant capital outflows as Chinese citizens tried to make
investments abroad, the yuan might actually depreciate and
worsen the competitive situation.
I do not disagree that there are serious issues that you
have properly identified in terms of the trade relationship
that we have with China. I would think an alternative approach
would be two-pronged. One would be to discuss and consider the
possibility of revaluation, which means to keep the exchange
rate fixed but at a different parity, that is, at a different
value; and the other strategy which I would suggest is to the
extent that it is believed that the Chinese are improperly
blocking their markets, for example, or in other ways not
living up to their WTO commitments would be to proceed through
the World Trade Organization and launch complaints that could
then be adjudicated.
So, I am not claiming that there is nothing that can be
done, and I am not claiming that it is not a problem. I am
simply pointing out that the immediate flotation of the yuan
might raise some technical difficulties that other strategies
might not have.
Senator Bunning. But do you agree that there is a built-in
advantage by the fixed rate of exchange that is now in
existence with the yuan and the dollar?
I believe it is an 8-to-1 ratio right now.
Mr. Bernanke. To the extent that that value is artificially
low, that would provide an advantage to trade to the Chinese.
There are some offsetting factors to the extent that the
Chinese Government accumulates reserves, and that expands the
money supply, there will be more inflation in China, which will
partly offset that effect. But clearly that is an issue that
should be--can be--discussed between the Chinese and the
Secretary.
Senator Bunning. My biggest problem is that they did not
pay any attention to the Secretary when he went over there.
They just kind of sloughed him off and said, ``We are going to
do it our way or the highway.'' We think that is not in the
best interest of the United States of America, and we do not
think that is a very good way to treat the Secretary of the
Treasury.
Mr. Bernanke. I have no inside information about those
negotiations, Senator, and I do not want to create any problems
in the exchange markets by making untoward comments, but the
President is visiting Japan, I understand, and I assume there
will be continued discussion of these matters as we go forward.
Senator Bunning. Vice Chairman Ferguson, Mr. Bernanke gave
us his current perspective on the economy and job creation. Do
you have a different opinion than he does about the economy and
job creation? Are we headed down the right path?
Mr. Ferguson. I think we are headed down the right path. I
think the issue is the time frame in which we can start to see
more job creation. Certainly we have seen in some of the more
recent data what I would describe as early indicators that the
labor market is at least stabilizing. I think as we get an
economy that continues to grow above its potential what we will
find indeed is that this pool of underutilized resources will
gradually be closed and that will create more jobs.
Having said that, I expect that the unemployment rate will
come down only gradually over the next year or so, but I do
expect to see a pickup in job creation as the economy grows
above potential, and there are some early signs that the labor
market is starting to stabilize.
Senator Bunning. I do not mean to go over, but when
productivity of the American worker outstrips the growth in the
gross domestic product, we have a heck of a time adding jobs.
In other words, if the productivity of the American worker
increases by 5 percent, and we are growing at 4 percent, where
is the need to add new jobs? So we have to get our GDP growing
faster than the productivity increase in our American workers.
Mr. Ferguson. Right; that is correct.
Senator Bunning. And I think we are starting to see that
dual line kind of cross.
Mr. Ferguson. I agree with that. You have the analysis
about right. Productivity in the long-run is a very positive
thing, and there should be no mistake about it. You and I agree
on that. As you point out, in the short-run, if you have an
economy whose potential output is growing relatively rapidly,
then you obviously need to have demand growing even more
rapidly--you and I are using the same physical symbol with the
hands crossing--and we are starting, I think, to see some of
that occur. As that occurs, then in fact you will find that
more jobs are being created and that will gradually eat into
the pool of individuals who are currently underutilized.
Senator Bunning. Thank you very much.
Chairman Shelby. Senator Sarbanes, you have another
question.
Senator Sarbanes. Yes. I wanted to ask a question to the
two nominees for the Board of Governors at the Fed.
Over 2 million of the unemployed workers today are
categorized as long-term unemployed--unemployed for more than
26 weeks. Twenty-three-point-two percent of all unemployed
workers are long-term unemployed currently. This figure has
been above 21 percent for 8 consecutive months now. That is the
first time that has happened in 20 years, since 1983, that we
have had such a high percentage of the unemployed long-term
unemployed over this period of time.
The Center on Budget and Policy Priorities estimates that
over one million American workers have been unemployed for more
than 39 weeks and therefore have exhausted even their extended
unemployment insurance benefits but are still unable to find
work.
We have actually had a rather long bipartisan history of
extending unemployment insurance benefits during periods of
prolonged weakness in the labor market. We have extended
benefits following every recession since World War II, and in a
number of instances for a longer period--a longer period and
greater benefits than is the case today.
Given the current economic situation, shouldn't we again
ease these restraints on the unemployment insurance system and
provide a further extension of benefits in order to meet this
problem?
Mr. Bernanke. Senator, I think in a situation as we have
now, with very long-term unemployment and very slow job
creation, extending unemployment insurance benefits is a
reasonable policy.
I would make the additional suggestion that we take, I
guess I would call it, a caseworker approach to the extent that
individuals have exhausted 39 weeks of benefits. We should do
more than send them a check; we should try to do what we can to
assist them in finding new work.
I think there are some very successful programs involving,
for example, helping workers learn how to write resumes and do
other things that can get them back into the job market. One
might do further things like considering vouchers for
retraining or assistance in relocating.
I agree that under the current circumstances, it is not the
workers' fault that they are unemployed for a long period of
time, but I think that assistance could take the form not only
of a check but also perhaps of other more direct counseling or
training.
Mr. Ferguson. I would agree with the latter points Governor
Bernanke was making. I think one of the things that is
interesting about this slowdown--and we saw it in the earlier
1991-1992 experience--is that we are getting both a cyclical
impact here just from an economy that is growing below
potential. There has also been some research that has shown
that we are getting a longer-term effect as well, that some of
the state and nature of the unemployment in this particular
slowdown reflects productivity as we have discussed already,
but it also reflects the fact that we are at a period of great
business restructuring where businesses, in an effort to
increase productivity, also are finding ways to do more with
fewer workers, and we find that jobs that existed in one
industry no longer exist, et cetera.
So, I would argue that one of the issues that one has to
focus on is how to help the transition of labor from jobs that
no longer exist and may not come back--some certainly will come
back, obviously, but some will not--into jobs that are likely
to be created, perhaps in new locations, perhaps in different
industries. So that some of the issues that Governor Bernanke
has touched on, I think I would also commend to you, in
particular a recognition that some of what we are dealing with
is a long-term secular pattern that also has to be responded to
in addition to trying to make sure the economy returns to
sustainable growth and indeed has a period where it is growing
above trend to start to close some of this gap of resource
utilization.
I think society is being confronted with some of these
secular trends as well as the cyclical ups and downs of the
economy that we have talked about.
Senator Sarbanes. Well, I appreciate those comments, but of
course, the people who are unemployed and have run out of their
benefit checks and cannot find a job face an immediate crisis.
I think it was Harry Hopkins who said, ``People do not eat in
the long-run, they eat in the short-run,'' and that is staring
them right in the face.
Furthermore, as an economic matter, the loss of purchasing
power by no longer providing unemployment benefits to workers
out of work is going to have a macroeconomic impact as well,
would it not? Wouldn't it make it more difficult to move back
out of the economic downturn?
Mr. Ferguson. Well, Senator, it is certainly true that the
forecasts--and they are just that--of growth going through not
just the third quarter but the fourth quarter of this year and
in 2004 build in a number of assumptions, and one of them is an
increase in wage and salary income, which is to say more people
going back to work. So without a doubt, your economic analysis
of the interaction between wages and salaries on the one hand
and macroeconomic impacts on the other is true. That analysis
is part of what is built into the blue chip forecast and almost
every other forecast that includes an increase or expectation
of an increase in real disposable income, an expectation of an
increase in personal consumption expenditures, much of that
predicated on some increases in wages and salaries. Obviously,
your economic analysis is consistent with that of the economics
profession broadly.
Senator Sarbanes. Long-term interest rates dropped by more
than half a point between the FOMC meetings in early May and in
late June. This gave a sizeable boost to mortgage activity,
both for new homes and refinancing old mortgages. Then, long-
term interest rates rose by more than a percentage point in the
weeks following the late June meeting, which of course caused
refinancing to fall by more than 80 percent.
What is your analysis of why we had these swings in long-
term interest rates in May, June, and July, and have statements
by the FOMC and by Fed officials contributed in any way to
these swings?
Mr. Ferguson. I will start, and Governor Bernanke will, I
am sure, give his views on this.
Senator Sarbanes. There are some analysts, I understand,
who think that the bond market participants felt that somehow
they had been misled by the Fed and that this contributed to
these swings. I would like you to address that criticism.
Mr. Ferguson. I would be happy to address it. I think the
movements that we saw during this period in long-term interest
rates reflect a number of factors. I would say some of it has
to do with an understanding of the real economy and its likely
trajectory; some, I will admit, has to do with issues of
understanding or misunderstanding of Federal Reserve
intentions.
During that period, there was quite a bit of focus on an
economy that was growing very slowly, growing below potential.
There was quite a bit of focus on disinflationary pressures,
and there was some concern at that time that those
disinflationary pressures might start to accumulate and mount
and become more severe.
During that period, certainly, there were also some
speeches and statements by the Federal Reserve that reflected
that those risks existed, but it was clear that those risks
were, in the minds of the individuals speaking and in the mind
of the Federal Open Market Committee, I think, quite remote.
I think there may have been perhaps some misperceptions in
the market that the statement that these risks were remote, and
that indeed there were things that we could do to offset those
risks should they increase, were perceived by some people in
the market as perhaps more a statement of imminent action on
our part to take nontraditional measures with respect to
monetary policy than in fact was true.
The other things that happened were not just that there was
a greater clarification about the Federal Reserve's intentions
as time passed, but also the data came in, and there was
greater evidence that the economy appeared to be getting its
footing, shall we say, and there was some evidence that things
were starting to turn.
You have a couple of things going on--economic data that
started to show that the worst outcome seemed less and less
likely, and there was a greater understanding that the
statement that a disinflationary or a deflationary environment
was remote but that we could use nontraditional methodologies
to counteract it turned out in fact to be true. Those forces
were indeed remote, and there was no need to use any of these
nontraditional or unconventional methodologies.
I would say it was certainly a period of time in which
there were a number of different factors that came into play,
and I would not say that there was a miscommunication on the
part of the Federal Reserve so much as perhaps some individuals
in the markets overinterpreted the fact that a number of people
said something was remote and assumed that that meant it was
less remote. In fact, it was just simply a restatement that
these outcomes seemed very remote and that there were tools
that could be used, but the condition precedent of a remote
outcome becoming probable never emerged.
Mr. Bernanke. I agree with most of what Vice Chairman
Ferguson said.
At the May meeting, the statement was the first to break up
the risks to output and inflation and made the explicit
statement that we considered the risk to inflation to be
downward. This was a new situation. The Fed has always been
fighting inflation rather than worrying about inflation going
too low.
The purpose of signaling that inflation had a downward risk
was in a way to try to convey the idea that the Fed would
remain accommodative in order to make sure that disinflation
did not proceed and at the same time support the recovery in
the economy.
It would have been appropriate in fact for bond rates to
fall, reflecting the view that the Fed was going to keep
interest rates low for a period of time.
It does appear to be the case that some bond market
participants overinterpreted that statement to say that the Fed
was involved or planning to take much more dramatic actions
such as purchasing long-term Treasury bonds in an attempt to
bring down long-term yields directly.
Again, we did try to emphasize throughout the process that
we were doing our fiduciary duty in preparing and thinking
about such contingencies but that we felt that those
contingencies were quite remote, and therefore, I think that
interpretation was not really a fair one.
The fluctuations that we have seen in bond yields, besides
responding to genuine news in the economy, have been
exaggerated to some extent by mortgage hedging activity,
including by the Government Sponsored Enterprises, which tend
to create an unstable dynamic. As interest rates rise, there is
a tendency for mortgage hedgers to sell bonds, which then
causes interest rates to rise further. That clearly added to
the volatility during this period as interest rates were moving
up and down.
In short, I think that we tried to convey to the bond
markets that we did intend to keep policy easy, and that should
have lowered interest rates. There was an overreaction to that.
The lesson we have learned from that is that we need to be even
better and more clear in our communication. As I mentioned
earlier, one of my particular interests and concerns about
monetary policy is how we should improve the transparency of
the Fed and make it more clear to markets and to the public
exactly what we are trying to do and what our objectives are.
That episode, I hope, will not create any significant
problems with the ongoing recovery, but it does teach us some
valuable lessons about communication.
Senator Sarbanes. So that kind of volatility is an
undesirable factor, is it not?
Mr. Bernanke. It is indeed.
Mr. Ferguson. Actually, we have to be careful. One expects
interest rates to move based on changing expectations of
monetary policy, and based on incoming information about the
economy. Extreme volatility by definition, one has to be wary
of, but on the other hand, you do expect long-term interest
rates to reflect a variety of forces and, by definition, move.
I think the question that has to be asked is whether or not
both that sudden, relatively dramatic drop in long-term
interest rates, and then the reversal is likely to have a
detrimental long-term impact on the recovery of the U.S.
economy. My judgment is that, although it is a very interesting
period and one that we can learn from--all of us--it is not
inconsistent with the kind of turnaround that we expect to see
and that is built into the forecast.
So, I agree with you. One wants to be careful about having
too much volatility in markets; on the other hand, the opposite
of that is interest rates that do not reflect incoming data,
and you do want to see that, for sure.
Senator Sarbanes. Yes, but these interest rates, wouldn't
you say the swing was beyond what the incoming data would
reasonably have justified?
Mr. Ferguson. Yes, I think it was, for reasons that we
pointed out. One was a misunderstanding on their part of what
interest rate policy and the use of these unconventional tools
might have been, and the second is the so-called convexity
hedging issue.
Chairman Shelby. Do you have any other questions?
Senator Sarbanes. No, Mr. Chairman.
Chairman Shelby. Gentlemen, we thank all of you for your
appearance today, and we will try to move your nominations as
soon as possible so you can continue to do the work that you
are doing.
Thank you. The hearing is adjourned.
[Whereupon, at 11:28 a.m., the hearing was adjourned.]
[Prepared statements and biographical sketches of the
nominees supplied for the record follow:]
PREPARED STATEMENT OF ROGER W. FERGUSON, JR.
Vice Chairman-Designate
Board of Governors of the Federal Reserve System
October 14, 2003
Chairman Shelby, Senator Sarbanes, and Members of the Committee, I
am pleased to appear before you today as President Bush's nominee to
serve as Vice Chairman of the Board of Governors of the Federal Reserve
System. I am honored that the President has nominated me to serve a
second term in that capacity. I thank you for holding this hearing.
It has been my privilege to serve our fellow citizens as a Member
of the Federal Reserve Board since 1997 and as Vice Chairman since
1999. I have given this role my undivided attention, and I hope to be
able to continue in that service. The policy decisions of the Federal
Reserve influence the economic well-being of all Americans. During my
tenure, we have faced challenges in many of our areas of
responsibility, and I would like to review briefly some of those
developments and our responses to them.
Congress has given the Federal Reserve three monetary policy
objectives: Maximum employment, stable prices,and moderate long-term
interest rates. We have viewed these objectives as congruent with a
goal of maximum sustainable growth that can occur only in the context
of long-run price stability. Fostering financial conditions in which
Americans can realize their full potential has presented a number of
challenges in recent years. The impressive step-up in the advance of
technological and organizational efficiencies and a rapid accumulation
of physical capital in the late 1990's have been the key factors
affecting our economy's performance in the past decade. These
developments have made workers increasingly productive. But faster
productivity growth, despite its long-term benefits, has not insulated
the economy from cyclical swings. The sharp reevaluation that occurred
in equity markets and the retrenchment in business investment and
spending that occurred over the past several years--together with the
effects of terrorist attacks, wars, and corporate scandals--battered
the confidence of households and businesses. In response, the Federal
Reserve made substantial adjustments to its policy interest rate in
order to cushion the effects of these developments on the broader
economy. Other forces--particularly the growing interconnectedness of
the global economy--have been important background factors in setting
monetary policy. Of late, policymakers have been mindful of the virtual
eradication of inflation and their need to set policy so that the
economy remains in the zone of price stability. But all of our policy
changes have been undertaken in pursuit of maximum sustainable growth
and stable prices.
Making monetary policy has been only part of the challenge. During
my tenure at the Federal Reserve, we have also worked diligently to
communicate to the public what we are doing and why. Transparency in
policymaking is a key part of the democratic process and fosters
efficient decisionmaking in the private sector. Becoming more
transparent has been an important goal of the central bank in recent
years, keeping in mind that we must balance being open and accountable
with the need to maintain an effective process of decisionmaking by the
Federal Open Market Committee. Transparency requires that we
periodically review our procedures, as we did in 1999 and again last
month, to ensure that they appropriately balance these considerations.
I do not know what future changes, if any, might be called for in how
we communicate, but I am confident that the Federal Reserve will
continue to look for ways to communicate and explain our policies
clearly.
While macroeconomic conditions are of central importance, the role
of the Federal Reserve is broader than monetary policy. Financial
stability is an essential precondition for maintaining a strong
economy, and the Federal Reserve played a key role in maintaining
financial and economic stability in the aftermath of the terrorist
attacks on September 11, 2001. As the only Board member in Washington,
DC, on that day, I had responsibility for overseeing the Federal
Reserve System's response to the terrorist attacks. Working with many
able colleagues in the System, the U.S. Government, and the private
sector, we at the Federal Reserve responded effectively to the attacks.
By providing ample liquidity and reassuring the public and the banking
community, we helped our financial markets and the supporting
infrastructure recover very quickly. Since that terrible day, I have
done all in my power to enhance the resilience of the financial system
of the United States, and I pledge to continue to work on these issues
in the years ahead.
The Federal Reserve executes its important financial stability
responsibilities in less stressful times through its role in
supervising and regulating our Nation's banking system. The Federal
Reserve and other regulators must foster a competitive environment that
will benefit the users of financial services, while also promoting
safety and soundness. I believe that we should achieve these objectives
with a minimum of regulatory burden and without leaving the impression
that any institution is too big to fail. Currently, we face the
challenge of meeting these goals by developing a new capital accord to
apply to the largest, most complex internationally active institutions.
As I have testified before this Committee, the existing accord no
longer suffices for these institutions. Now we need to work with our
financial institutions and other regulators to replace the existing
accord with a new one that is more risk-sensitive, builds on advances
in risk measurement and management, and provides proper incentives. And
we must do so without unnecessary complexity and without creating
undesirable competitive imbalances or other unintended consequences.
Technology and deregulation have encouraged consolidation in the
financial sector. With central bank and treasury officials from twelve
other major industrial economies, I have reviewed the likely effects of
the global trend toward consolidation and its implications for central
banks and regulators. Because financial systems will continue to
consolidate, the regulatory community needs to monitor developments
closely. But our study also found that existing policies appear
adequate to allow regulators to maintain safe and sound financial
industries now and in the intermediate term. This is true both for
financial stability and for the maintenance of markets through which
monetary policy can continue to work using the same mechanisms as in
the past.
Last, our payment system is a real presence in the economic lives
of every consumer and business. This system too has been, and will
continue to be, changed greatly by emerging technologies. From its very
founding, the Federal Reserve has had the responsibility to foster an
efficient, safe, and accessible payment system. In a dynamic economy,
markets appropriately play the key role in guiding the development of
the payments infrastructure. This means that innovation and competition
will be central to the future development of the payment system--as
they are in other areas of the economy. Regulators and Congress should
strive to remove barriers to innovation when we can do so without
sacrificing important public policy objectives. I have been privileged
to work with this Committee on one such initiative, the Check
Truncation Act, or Check 21. This legislation removes a legal
impediment and should, over time, foster greater use of electronics in
the check-clearing process while also preserving the right of consumers
and banks to receive paper checks. Ultimately, Check 21 should allow
depository institutions to provide new and beneficial services to their
customers. I look forward, as I know you do, to its prompt enactment.
And I thank the Committee and its staff for the strong support you have
provided.
Mr. Chairman and Members of the Committee, during my years on the
Board of Governors, I have done my best to contribute positively to all
aspects of the Federal Reserve's many responsibilities. I look forward
to the opportunity to continue to work with you and serve the Nation as
Vice Chairman of the Board of Governors. Thank you for your attention
and for considering my nomination. I would be pleased to answer any
questions.
----------
PREPARED STATEMENT OF PAUL S. ATKINS
Member-Designate, U.S. Securities and Exchange Commission
October 14, 2003
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, it is a very great honor for me to appear for the second
time before this Committee. I am deeply grateful for the confidence
that President Bush has again shown in me by nominating me for a second
time to be a Commissioner. I appreciate your courtesy in calling me
before you today.
I would also like to note that it has been a pleasure to work with
Chairman Bill Donaldson and my other colleagues on the Commission,
Cynthia Glassman, Harvey Goldschmid, and Roel Campos. I salute the
leadership that Chairman Donaldson has provided us and the SEC staff.
If confirmed once again by the Senate, I look forward to continuing to
work with Chairman Donaldson and my fellow Commissioners to address the
very weighty issues that are before the SEC.
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.
In fact, I should note that I now have had the privilege of working
closely with four SEC Chairmen: Richard Breeden, Arthur Levitt, Harvey
Pitt, and Bill Donaldson. I have learned much from each of these men
and am happy to count them as friends and advisors.
As the Members of this Committee well know, in the past few years
investors have been confronted with spectacular failures of large and
small corporations because of bad accounting practices and outright
fraud. The instances of corporate managers engaging in theft and
reckless mismanagement of corporate funds are shocking, outrageous, and
completely unacceptable. The revelations of corporate malfeasance
undermined our capital markets in a profound way. ``Corporate
Responsibility'' rightfully became a national issue for the first time
in perhaps 70 years. In response to this crisis, this Committee and the
Congress acted forcefully and the President signed into law the
Sarbanes-Oxley Act of 2002, the most important piece of corporate
governance and securities legislation in the last 70 years.
For many Americans, the SEC until the last couple of years may have
been just another Federal agency in Washington, DC, with an alphabet-
soup acronym. As Enron, MCI, and a host of other corporate scandals--
along with the severe downturn in the marketplace--showed, the times
have radically changed. Millions of Americans look to the SEC more than
ever as the defender of their financial hopes and dreams, as it should
and must be. Investors rightfully demand a tough cop to fight those who
steal their hard-earned savings and investment.
These are unique and demanding times at the SEC. It would be a
privilege for me to continue to respond to this call and to give my
best efforts to advance the Commission's mandate on behalf of the
investing public.
In my relatively short tenure as an SEC Commissioner, I have had
the privilege of serving at the agency as we attempted to fulfill the
high expectations of Congress in implementing the Sarbanes-Oxley
legislation. As the Commission considered this important legislation, I
tried to be mindful that investors need to have confidence 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. Investors need to know that auditors of public companies are
unconflicted, ethical, and acting in the best interests of investors.
They need to know that their representatives on corporate boards are
actively guarding their interests. And, last, but certainly not least,
investors must be able to rely on the financial reports issued by
public companies to present a clear and accurate picture of the
financial health of those companies. If confirmed, I will continue to
make decisions based on these bedrock principles.
We at the SEC have heard the calls from the investing public, and
we are working hard to be more vigilant, more aggressive, and more
faithful defenders of the public trust. We have, I believe, made
significant steps to restore confidence in our financial system. If
confirmed, I will continue to work toward achieving these critical
objectives.
As I said the last time that I was before you, the SEC is a vital
line of defense in protecting investors and the integrity of our
financial markets. If confirmed, I will continue to dedicate my energy,
experience, integrity, and independent judgment to achieving that goal.
I look forward to the opportunity to return to my position at the SEC
to serve with Chairman Donaldson and my fellow Commissioners.
Thank you very much and I would be happy to answer any questions
that you might have.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
NOMINATIONS OF:
APRIL H. FOLEY, OF NEW YORK
TO BE FIRST VICE PRESIDENT OF
AND
JOSEPH MAX CLELAND, OF GEORGIA
TO BE A BOARD MEMBER OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
----------
TUESDAY, DECEMBER 9, 2003
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:30 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
The purpose of this hearing is to review the nomination of
April Foley to be First Vice President of the Export-Import
Bank of the United States--Ms. Foley already serves as a member
of the Bank's Board of Directors--and the nomination of Max
Cleland to the Board of Directors of the same institution.
The Export-Import Bank is the principal U.S. Government
entity for financing the export of U.S. goods and services. As
the United States becomes more economically interdependent with
a growing number of trade partners, the Bank's role in leveling
the playing field for American companies seeking to market
their goods and services overseas continues to grow. In fact,
an agency that just a few short years ago was the target of
serious efforts aimed at its dissolution has not only survived
but has also seen its mission expand. Especially with the
increase in emphasis over the past decade on the Bank's loan
guarantee and risk insurance programs, the opening of new
markets in developing countries will almost certainly tax its
energy and resources more than ever before.
It is for this reason that the importance of the role of
the Export-Import Bank's Board of Directors should not be
underestimated. The positions for which these two highly
respected individuals have been nominated oversee an
organization with an annual budget of $600 million and which
supports billions of dollars in U.S. exports every year. Ms.
Foley, of course, is an incumbent member of the Bank's Board.
Our former colleague and friend Max Cleland, however, will be
new to the Bank, and I firmly believe will make an admirable
addition.
Prior to assuming her position as a member of the Ex-Im's
Board of Directors, April Foley was a member of the Board of
Directors and President of the United Way of Northern
Westchester, New York. She has been Director of Business
Planning for Corporate Strategy for PepsiCo and served as
Director of Strategy for Reader's Digest Association. She
carries with her the battle scars from having cast the deciding
vote against Ex-Im Bank support for the natural gas extraction,
pipeline, and processing facilities the Government of Peru
intends to build in sensitive rainforest and marine preserves.
Given the stakes involved in that project for U.S. companies,
Ms. Foley has already demonstrated her independence and her
integrity.
The second nominee, of course, is Max Cleland, a former
U.S. Senator from Georgia. Senator Cleland is currently a
member of the National Commission on Terrorist Attacks Upon the
United States. Prior to his election to the Senate, he served
in the Administration of President Carter as Secretary of
Veterans Affairs, and has also served in the Georgia State
Senate and as that State's Secretary of State. I am pleased
that he is here with us today.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman.
I am pleased to welcome before the Committee on Banking,
Housing, and Urban Affairs former Senator Max Cleland, who has
been nominated to be a member of the Board of Directors of the
Export-Import Bank, and Ms. April Foley, who has been nominated
to be the First Vice President of the Export-Import Bank.
I would like to begin by thanking Chairman Shelby for
holding this confirmation hearing today. Both of these
nominations were received by the Senate on November 24, so
there was no opportunity to hold a hearing on them before the
Senate recessed on November 25. I should also note that Senator
Miller was unable to be here this morning but asked that his
statement of strong support for Senator Cleland's nomination be
inserted in the record of the hearing.
Senator Cleland has given extraordinary service to our
country for nearly 40 years. I am very pleased that he will be
able to continue that career of public service as a member of
the Board of the Export-Import Bank.
Senator Cleland received his undergraduate degree from
Stetson University in 1964 and a master's degree from Emory
University in 1968. He served in the United States Army from
1965 to 1969, at which time he retired with the rank of
captain. During his service, he received the Soldiers' Medal
for Heroism, the Bronze Star for Meritorious Service, and the
Silver Star for Gallantry in Action. Senator Cleland served as
a Senator in the Georgia legislature from 1971 to 1975 and as a
staff member of the U.S. Senate Veterans' Affairs Committee
from 1975 to 1977.
President Carter appointed Senator Cleland to be
Administrator of the Veterans Administration in 1977, a
position he held until 1981. From 1983 to 1996, Senator Cleland
served as Secretary of State of Georgia. From 1997 to 2003, he
served as U.S. Senator from Georgia. He is currently a member
of the Independent
Commission on Terrorist Attacks on the United States and
Distinguished Adjunct Professor and Member of the Center for
Presidential and Congressional Studies at American University.
April Foley received her undergraduate degree from Smith
College in 1969 and an MBA from Harvard Business School in
1975. She worked in senior management positions for Wilson
Sporting Goods from 1976 to 1981. From 1981 to 1993, she served
as Director of Business Planning for PepsiCo Company. From 1994
to 1995, she was Director of Strategy for Reader's Digest.
I should note that Ms. Foley had been previously nominated
to be a member of the Ex-Im Bank Board on April 11. However,
she received a recess appointment on May 14 and has been
serving on the Board since then. Her nomination to be a member
of the Ex-Im Bank Board was withdrawn by the White House on
November 21, prior to the submission of her nomination to be
First Vice President of the Ex-Im Bank.
I believe that both of these nominees are well-qualified
for these positions, and I intend to support their nominations.
Senator Cleland, of course, will bring a perhaps unprecedented
dimension of stature and weight to the Board of the Ex-Im Bank.
I think it is fair to say that calls from him on behalf of the
Ex-Im Bank to U.S. exporters and commercial banks, foreign
companies and governments, and indeed, Members of Congress and
other executive branch agencies, will be returned with greater
haste than your average Ex-Im Bank Board member.
I also know that he brings a passionate commitment to the
promotion of U.S. exports and the creation of American jobs,
the principal mission of the Export-Import Bank. His service on
the Senate Commerce and Small Business Committees as well as
the assistance he provided to exporters from Georgia provide
him with substantial background for his new position.
By all reports, Ms. Foley has performed with great
distinction during her brief service on the Board of the
Export-Import Bank. Her significant background in senior
management positions in the private sector will serve her well.
The Charter of the Ex-Im Bank provides that the First Vice
President shall serve as Vice Chairman of the Board of the
Export-Import Bank.
Mr. Chairman, I want to enter in the record a letter sent
to us from the Coalition for Employment Through Exports, a
business-labor group which has been very interested in the
export issue and has been a source of good advice, I think, to
the Committee, signed by its president, Edmund B. Rice, and I
am going to take a moment just to quote from it.
In the 8 months since she was appointed to the Bank's
Board, April Foley has quickly distinguished herself as a hard-
working, dedicated director. She has demonstrated a keen
understanding of the fierce competition that U.S. exporters
confront in global markets and the key role that the Bank plays
to help level the playing field against foreign companies that
have the active financial support of their governments in
financing transactions and projects.
This sharp focus on increasing U.S. exports and export-
related jobs is complemented by her prior private sector
management experience, which makes her an excellent choice to
be First Vice President of the Bank with that position's added
responsibilities.
And with respect to Senator Cleland, Mr. Rice says:
``Former Senator Cleland's distinguished public service in the
military and in the Senate needs no further elaboration. He
would bring to the Bank's Board a well-honed ability to
determine public policy in a wide range of areas, and we are
confident that he would add an important dimension to the
Board's governance of the Bank.''
Mr. Chairman, I would close by just saying that I believe
that both of these nominees are very well-qualified for these
positions. I intend to support their nominations.
Chairman Shelby. Senator Allard.
COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, thank you.
I wanted to be here this morning specifically so that I
could welcome my good friend Senator Cleland to the Committee.
Senator Cleland and I worked together on the Armed Services
Committee and worked on some pretty sensitive issues, and I
think at the time we were working together, a lot of the
export-import issues as far as defense products were concerned
were something that received a lot of discussion. And
obviously, his experience on the Small Business Committee is
something I have appreciated. Being a small businessman myself,
I put a lot of importance on small business, and I think if
there is an area where we need to have emphasis and help, it is
in the small business area and working on the exports and
imports of this country. It seems like larger corporations have
the personnel to do it, but those that probably need assistance
at least to get started are in the small business community and
helping out small business entrepreneurs.
And he has had experience on Commerce, Science, and
Transportation Committee--that covers most bases. I think he
will do a great job on the Board of Directors of the Export-
Import Bank, and I wanted to be here just to specifically say
hello to him and wish him well, and I plan on supporting him
for this position.
I would also like to welcome April Foley to the Committee.
Her extensive experience in financial planning and strategy
development will make her a valuable asset on the Board of the
Export-Import Bank, and further, her previous employment
experiences
allowed her to interact with many different people on many
different levels, and I think that is important. This will be
key as she works to create relationships internationally,
working to keep the U.S. economy strong and growing.
So, Mr. Chairman, thank you for giving me the time to
welcome these nominees, and I suppose Senator Daschle has a
word or two that he wants to say, too, so I will yield over the
rest of my time.
Thank you.
Chairman Shelby. I will call on Senator Daschle, our former
Majority Leader, the Democratic leader, a friend and colleague
of all of us, for any remarks he wishes to make.
COMMENTS OF THOMAS A. DASCHLE
A U.S. SENATOR FROM THE STATE OF SOUTH DAKOTA
Senator Daschle. Mr. Chairman, I would begin by thanking
you, the Members of the Committee, and your staff for
rearranging your schedules to hold this hearing. It means a
great deal to many of us, and this would not have happened were
it not for your willingness to do so. So I am grateful to you
for that.
You have spoken so eloquently and articulately about the
qualifications of each of our candidates. I congratulate our
nominees, and I simply wanted to come before the Committee this
morning to say just a word about our dear friend Max Cleland.
Max went to Vietnam at six-foot-four and came back having
sustained injuries that most of us could never have tolerated
or endured. But I think he stands even taller than that today
in this country and in the Senate in large measure because of
the man he is. With his integrity, his willingness to work
hard, his sense of fairness and bipartisanship, he has become
an inspiration to us all.
Max has written two books--``Going for the Max'' and
``Strong at the Broken Places.'' This man is strong in broken
places, and he serves as an inspiration, not only to those who
have also endured tragedy and hardship, but also to those of us
who have had the good fortune to work with him. He is a
dedicated public servant. You have articulated well his
qualifications, as well as his experience, so I could do no
more than to commend him to the Committee, thank him for his
willingness to continue in public service today, and wish him
well as he begins a new chapter in his life.
I thank the Committee.
Chairman Shelby. Senator Daschle, thank you for your
remarks.
Chairman Shelby. Will both of you raise your right hand, or
raise your hand and affirm?
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Ms. Foley. I do.
Senator Cleland. I do.
Chairman Shelby. Do you agree to appear and testify before
any duly-constituted committee of the Senate?
Ms. Foley. I do.
Senator Cleland. I do.
Chairman Shelby. Welcome, Ms. Foley and Senator Cleland.
I understand you might want to introduce any family members
that you have here, and Ms. Foley, we will start with you.
STATEMENT OF APRIL H. FOLEY, OF NEW YORK
TO BE FIRST VICE PRESIDENT OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
Ms. Foley. Mr. Chairman, Senator Sarbanes, esteemed Members
of the Committee, I am honored to come before you as you
consider my nomination to be First Vice President and Vice
Chair of the Export-Import Bank of the United States.
Many thanks to you and your fine staffs for scheduling this
hearing. I also want to say happy birthday to Senator Daschle.
Senator Sarbanes. He left the room. We forgot to do that.
Ms. Foley. I did not get that in soon enough.
I am deeply appreciative of President Bush for the faith
and trust he has placed in me. His nomination provides me with
an exceptional opportunity to serve my country. We are all
proud citizens of the finest country in the world. It is a rare
gift to have the chance to serve it in such a significant way.
I would like to recognize a family member who is here
today. Ellen James, who is the sister of my late husband,
Gifford Foley.
I would also like to recognize my colleagues here who have
been enormously supportive of me.
I fully endorse the mission of the Ex-Im Bank, and I will
strive to successfully fulfill it. If confirmed, I will work
diligently to support U.S. exports, create jobs for deserving
Americans, and level the playing field with foreign
competitors. I will act to protect the fiduciary interests of
the American taxpayer. I will actively seek creative
enhancements to Ex-Im's products and programs to better respond
to the changing needs of the marketplace. I will work with the
organization to identify new approaches tailored specifically
to the requirements of small business. I will back Ex-Im's
efforts to be a relentless competitor. I will strive to foster
a positive working environment of honesty, openness, personal
recognition, and respect. I will commit myself to serving this
country with integrity, balance, and vigor.
It would be a great honor and privilege to serve under the
extraordinary leadership of Chairman Philip Merrill, and with
such accomplished colleagues as Director Joe Grandmaison and
Senator Max Cleland.
Mr. Chairman, Senator Sarbanes, Members of the Committee, I
respectfully ask for your favorable consideration of my
nomination. I am pleased to respond to your questions.
Chairman Shelby. Thank you, Ms. Foley.
Senator Cleland.
STATEMENT OF JOSEPH MAX CLELAND, OF GEORGIA
A FORMER U.S. SENATOR FROM THE STATE OF GEORGIA
TO BE A BOARD MEMBER OF
THE EXPORT-IMPORT BANK OF THE UNITED STATES
Senator Cleland. Thank you very much, Mr. Chairman. It is
an honor to be here with my potential colleague, Ms. Foley, and
I would like to say a special word of thanks to all of you for
the wonderful words of welcome and the wonderful words of
praise that I have heard today. I have them on tape and will
play them late at the midnight hour.
[Laughter.]
I would like to recognize some people who have meant a lot
to me and do mean a lot to me--Ms. Nancy Ross, the woman I am
in love with and my fiancee; Bob Vaughn--we served together in
Vietnam; Gamin Michael, we served together in the Veterans
Administration; Lynn Kimmerly, who was on my staff here in the
Senate; Andy Van Landingham, who was also on my staff here;
Mashio Cameron, a distinguished member of my former staff; and
two people who have made it possible for me to survive here
this year in Washington and whom I hope to bring to the Bank
with me--Elaine Iler and Adil Durrani. Also, I would like to
thank Mr. Peter Cohen and Jeri Thompson for their wonderful
support.
May I just say, Mr. Chairman, Senator Sarbanes, and
distinguished Members of the Committee, it is good to be back
home in the U.S. Senate. Senator Byrd used to say that people
come to the Senate to make an impact on it and find out that
the Senate makes an impact on them. So for the last 6 years of
my life, it has made an impact on me, a positive impact, and I
have enjoyed serving the people of Georgia and the United
States.
I wanted to have this new opportunity, if this Committee so
decides, to have a new home at the Export-Import Bank. I would
like to thank the Minority Leader, Senator Tom Daschle, for his
unstinting support and his wonderful words today, and President
Bush for the opportunity to continue my service in public life.
As a former Chairman of the Ex-Im Bank, Mr. John Robson once
declared before this Committee: ``I relish this new challenge
because I have never found a canvas as big to paint on as
public service offers.'' Those are my feelings exactly, Mr.
Chairman.
But what kind of picture shall we, working together, paint?
The picture I would like to paint over the course of my tenure
on Ex-Im Bank's Board is of an expanding economy that creates
jobs. One way to maximize the jobs created in this country is
by an expansion of our exports. Ex-Im Bank is needed now more
than ever to create jobs here in this country. Since its
creation by President Franklin Roosevelt almost 70 years ago,
this marvelous agency is one of the tremendous tools we have at
our disposal to reverse the downturn in the job market.
In 2003, Ex-Im Bank created and sustained thousands of jobs
in America through supporting $14 billion in our Nation's
exports. In my home State of Georgia over the last few years,
the Bank has supported over $600 million in exports for 126
different companies in 45 separate communities. That is quite
an impact just in my State alone. This is a picture of job
creation and support for our exports that I would like to paint
for my whole country were I to be confirmed by the U.S. Senate.
Last, I think my service in this body--as Senator Allard
has pointed out, as the Chairman has pointed out, and Senator
Sarbanes has pointed out--my experience on the Senate Commerce
Committee and on the Senate Small Business Committee for 6
years, especially gives me a chance to be a spokesperson for
small business, which is one of the things I would like to do
at the Bank.
Thank you for your time, Mr. Chairman. Thank you for this
hearing. Senator Sarbanes, Senator Allard, thank you for
coming. I would like to especially thank Ms. Foley and Mr. Joe
Grandmaison for helping me prepare for today's hearing and the
wonderful staff at Ex-Im Bank, and certainly want to thank
Chairman Phil Merrill. It is just great to have the opportunity
to potentially serve with them.
Thank you again, Mr. Chairman, and I would just like to ask
you and the Members of the Committee for your support as a
Director of the Ex-Im Bank.
Chairman Shelby. Thank you, Senator.
Iraq is estimated to be in debt to foreign lenders to the
tune of $116 billion. Alongside that debt load is an estimated
cost to rebuild Iraq of about $200 billion. As Iraq struggles
to rebuild and come to grips with the implications, including
the state of the nation's dilapidated infrastructure, with a
history of autocratic rule and war, it is clear that at least
in the short-term, its only real hope for generating meaningful
revenue is its oil, the industry's oil reserves.
There have been a number of proposals for how to exploit
Iraq's future oil revenues to facilitate economic
reconstruction. The Export-Import Bank itself had floated a
proposal to issue bonds against Iraq's oil revenue. Now it
would obviously be unfair to place too much of the burden for
Iraq's reconstruction on an agency like the Export-Import Bank.
The scope of the Bank's mission and its limited resources
mean it can only do so much, as we know. To the extent, though,
that the Bank has a seat at the table of the U.S. and foreign
lending agencies that make the decisions on how best to aid
Iraq's reconstruction, I would appreciate hearing from both of
you your assessments of how Iraq's future oil reserves factor
into the Bank's calculations of what can be achieved here.
I know this is very complicated, what I am asking you. I
would also like to hear from you about your views of the
approach the Bank would take to calculate the risk with regard
to a country with such an enormous debt load relative to the
current state of its economy and the estimated cost of
rebuilding. Ms. Foley.
I hate to hit you all with this, but this is very
important.
Ms. Foley. No. I think it is an excellent question, and I
want to first compliment Chairman Philip Merrill for taking a
leadership role in the area of Iraqi reconstruction and also
compliment Peter Saba, who is part of the Bank, who has worked
very diligently with the team there to get some financing
products on the table.
At Ex-Im Bank, I think a top priority for us is to make a
contribution to Iraq reconstruction.
Chairman Shelby. And you will be at the table.
Ms. Foley. Definitely, we will be at the table--and in
fact, we have just come forward with a $500 million line of
credit to finance short-term transactions with the CPA which is
guaranteed by the Development Fund of Iraq, which is basically
where the oil revenues are collected.
This is a short-term facility. We took the leadership role
in establishing this facility, and then we worked with 15 other
countries to have similar facilities so that now, instead of
$500 million on the table, there is $2 billion on the table.
We will be moving forward to put a medium-term product on
the table, and I am planning to go to Iraq in 2004 and try to
move the ball forward and see what more we can contribute.
Chairman Shelby. You are very familiar with the fact that
President Bush has enlisted the help of former Secretary of
State James Baker to try to bring that debt load down.
Ms. Foley. Yes, he has, and we are fully supportive and
feel that it is a top priority because medium-term and long-
term financing really cannot occur before that debt is
rescheduled or forgiven.
Chairman Shelby. Max, do you have any comment?
Senator Cleland. Yes, sir. Mr. Chairman, I have always
thought that this nation, Iraq, which has the second-largest
oil reserves in the world, has a tremendous natural asset that
it can leverage and that we can leverage in assisting it to
rebuild.
I think the Bank has taken a very forward step already.
They have evaluated the risk, and I think they have approached
it properly by in effect taking it one step at a time. Ms.
Foley talked about short-term debt, less than 180 days. I think
that that is the proper way to do it and that the Bank has
backed some $500 million in exports for U.S. companies who want
to export there. This support has now increased to 15 other
nations and involves some $2 billion in assets to back exports
for Iraq reconstruction.
So, I would support the continued evaluation of Iraq and
leveraging the oil that they have. We will take it one step at
a time, and I think the Bank has already taken a good first
step.
Chairman Shelby. What about Russia? I will start with you,
Ms. Foley, since you are on the Board now. How do we secure the
environment for U.S. investment in Russia, considering the
history and considering what is going on there? There is a lot
of potential and a lot of danger, is not there?
Ms. Foley. There is. There is both. I think some of the
messages that Senator Evans--excuse me--Secretary Evans and the
Commerce Department----
Senator Sarbanes. I am sure the Secretary does not mind
being promoted.
[Laughter.]
Ms. Foley. --good point--Secretary Evans is trying to get
the message of the importance of good corporate governance,
ethical conduct, and the rule of law. I think a lot of progress
is being made on all of those fronts in Russia. Even so, Ex-Im
Bank has to be cautious in how it approaches each transaction.
We have a well-developed risk assessment program for every
country which evaluates a complex array of economic, political,
and credit factors. We feel these evaluations provide us with
adequate protection for the risks that we take.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Chairman, I am going to forego questions, particularly
in view of the very strong statements of both Ms. Foley and
Senator Cleland. I thought they were an exceedingly strong,
concise statement of their responsibilities on the Export-
Import Bank Board.
I just want to mention a couple of points for their
consideration. First of all, as you indicate, I think this
issue of Iraq reconstruction is very complex. The Board needs
to work through it very carefully. Obviously, that challenge
could consume all of the resources of the Board that are
available to us, leaving it with very little or nothing to do
elsewhere.
There is a matter of balance that has to be taken into
account. I do not quarrel with there being a role to play, but
I think it needs to be thought through very carefully so the
Bank's fundamental role of helping exports and jobs all over
the world is not markedly circumscribed.
Second, Senator Allard took the lead in the Committee last
year with the support of many of us to increase the percentage
of Ex-Im Bank financing that must go to small business. It has
been increased from 15 to 20 percent. I think that does pose a
challenge to the Ex-Im Bank to move up to that level, and I was
heartened by the commitment on the part of both of you here
this morning to the small business challenge and particularly
the experience that Senator Cleland brings to that issue.
Finally, this Committee put the Tied Aid Credit War Chest
into the law, and we have been strongly supportive of it. I
think it is essential. We are trying to get agreements at OECD
not to underwrite exports, so the competition is simply on the
basis of price and quality. But if other countries are not
going to play by that rule and are going to significantly
underwrite their exporters, for us to fail to provide support
for our own exporters means they will not be competing on a
level playing field, and I think that needs to constantly be
borne in mind.
But again, Mr. Chairman, I am excited by these two
nominees. I think they will add to the quality of the Ex-Im
Bank with Chairman Merrill and Director Grandmaison and give us
a very strong team at the Ex-Im Bank.
I know the President has one further appointment to make,
which I understand is in the works, so we will have a full
complement there, but I have always felt that Ex-Im has a very
important role to play in terms of the workings of our economy,
and I wish you both well.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I would like to follow up a little bit on Senator Sarbanes'
small business comments. As he mentioned, we had provisionally
put in the authorization bill to increase the role of small
business in exports and imports, and as Senator Sarbanes
pointed out, it is not an easy issue to deal with. I was
wondering--this is to both of you--if you have any thoughts on
what initiatives you might put forward and might talk about
that would meet the goals that were laid out in that
legislation.
Senator Cleland. Let me take that if I can, Senator. About
98 percent of the jobs in America are created by small
businesses, basically defined as 200 employees or less. As a
matter of fact, during the 1980's and 1990's, a massive growth
period, most of the new jobs created in America were by
businesses with 19 employees or less.
So, I think the whole evolution of small business in
America is a challenge to us all. One of the things I would
like to specialize in, given my interest in small business, is
how the Bank can leverage its power and its financial support
for exports for small business companies. I think that is a
tremendous payoff there if we can find good ways to do it. I
appreciate your particular interest in this, and it is
something that I would like to personally tackle. I do not have
any great ideas right now, but it is something that I would
like to put right on the front burner when and if I am
confirmed by the Senate.
Ms. Foley. It is a good question, and it is a difficult
question. First of all, the Bank fully supports the 20 percent
hurdle, and we are trying to not only meet it but also exceed
it. But because of the limited resources that we have at the
Bank, it really takes a different type of approach than we use
for our normal large business transactions. Increasingly what
we are seeing is that to be effective with small business, we
have to have products designed for use by financial
institutions that work through their vast branch networks. They
can provide access to a greater number of small businesses. So
therefore, the financial institution acts as a multiplier for
our business.
So right now we are in the process of evaluating our
product and program lineup for financial institutions to make
sure that our products are tailored properly to meet the needs
of small businesses. In cases where they are not, we are trying
to adjust the product line so that we have faster turnaround
time, we have less paperwork, we have an electronic application
process, et cetera, et cetera. Local currency is also an
important small business-type feature to have.
We are looking at all of these, and I think that when we
get these programs into place, we will be much more effective
in working through our multipliers to get the small business
volume that we want to pump through Ex-Im Bank.
Senator Allard. I think both of you have given good
responses. I might add that I think part of the problem with
small business is the communication problem and how you are
going to get the message out to them and help them. I think you
need to seek out those organizations that have a certain appeal
to small business--it might be the local chamber, it might be
the NFIB, or any other group of small business people--and let
them know it is available. And even that is a relatively small
percentage of all the small businesses that we have out there.
I think that is one of the challenges considering some of the
limited resources you might have dedicated, so you want to
think of ways, while you get that message out there, that you
can help small businesses. The banks, as you suggested, could
be a good avenue, as well. Frequently, when small businesses
are expanding, they go to a bank and ask for a loan, and I
think this is a good opportunity for banks to help out a little
bit in that area.
The other question I have is a little more pointed, and I
do not mean it to reflect at all on what I think is happening
now at the Export-Import Bank, but I do think it is really
important that we have an inspector general there that is
functioning. We put that language in the Export-Import
authorization bill, and I have noticed that in this last year,
it was not requested, and I hope that--in fact, I am going to
ask for a commitment from each one of you that you work as
members of that Board to get in the President's budget a
request for money for an inspector general. The inspector is
the eyes and ears--you can understand this, Senator Cleland; we
rely on them--they are the eyes and ears of the Members of the
Congress, and I think it adds to the credibility of the Export-
Import Bank to have it there. I think it makes those of us who
have some oversight of the Bank feel more comfortable about
what is happening. And I hope, again, and I ask that each one
of you will work to fund the IG position in the next budget.
Senator Cleland. May I take that one first?
Senator Allard. Yes.
Senator Cleland. Thank you for mentioning that. It is a
little-known part of credible, honest, straightforward,
accountable government, but the inspector general is a valuable
tool for that to happen in any agency.
When I was head of the Veterans Administration in the late
1970's, I created the Office of Inspector General in the VA,
and it is still there today. The VA is right across the street,
so I bring the same passion across the street now to Ex-Im
Bank's Board to create an Office of Inspector General.
Senator Allard. I appreciate your commitment to that.
Ms. Foley.
Ms. Foley. My understanding is that it was requested in
fact in the President's budget but did not get through.
Senator Allard. At what level?
Ms. Foley. I do not know.
Senator Allard. Okay. But the Board actually made the
request from the Export-Import Bank, and when it went up for
review, it got taken out. Is that what happened?
Ms. Foley. That is my understanding.
Senator Allard. Okay. That is interesting. Well, continue
your efforts if you would, please----
Ms. Foley. Okay.
Senator Allard. --to track that down. Maybe we need an
amendment in the Senate.
Ms. Foley. Let me assure you in the meantime, as chair of
the Audit Committee, that we have a very rigorous audit and
control function at the Bank.
Senator Allard. Thank you.
Chairman Shelby. I just want to tell both of you that I
believe both of you are exemplary nominees. Ms. Foley is
already on there, and we know Senator Cleland well; he is
highly respected. We are going to push both of these
nominations as quickly and expeditiously as we can under the
circumstances that we find ourselves in. We are going to be
working with the leadership on both sides, Senator Daschle and
Senator Frist, because these are important positions; you know
it.
So we thank you both, and we look forward to moving you as
soon as possible. You will have widespread support in the
Senate. Thank you.
Senator Cleland. Thank you, Mr. Chairman.
Ms. Foley. Thank you.
Chairman Shelby. The hearing is adjourned.
[Whereupon, at 10:11 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of the
witnesses, and additional material supplied for the record
follow:]
PREPARED STATEMENT OF SENATOR ZELL MILLER
Mr. Chairman, Members of the Committee, in all of my years in
politics, I know of no other person who has embodied leadership,
service and sacrifice more than Max Cleland.
On and off the battlefield Max's story should serve as a continual
inspiration to us all.
When his Nation called in 1966, Max Cleland did not hesitate. He
answered the call to arms and went to battle. His answer was, ``Count
me in.''
He volunteered for service, and he volunteered for Vietnam when he
could have stayed stateside and been safe and sound.
During his service in uniform, Max received the Silver Star Medal,
one of the highest awards that can be given for gallantry in action.
Listen to this citation:
Captain Cleland distinguished himself by exceptionally valorous
action on 4 April 1968 . . . during an enemy attack near Khe
Sanh. When the battalion command post came under a heavy enemy
rocket and mortar attack, Captain Cleland, disregarding his own
safety, exposed himself to the rocket barrage as he left his
covered position to administer first aid to his wounded
comrades. He then assisted in moving the injured personnel to
covered positions. Continuing to expose himself, Captain
Cleland organized his men into a work party to repair the
battalion communications equipment, which had been damaged by
enemy fire. His gallant action is in keeping with the highest
traditions of the military service, and reflects great credit
upon himself, his unit and the United States Army.
Those are not my words. That is Uncle Sam talking.
And 4 days after that incident that earned him the Silver Star came
the grenade explosion that so grievously wounded him. His would be a
great story if you stopped there. But Max Cleland did not stop there.
He continued to lead by courageously overcoming this tragedy and
serving in the Georgia state Senate. And he followed that up by
distinguished tours of duty as head of the Veterans Administration and
as an esteemed member of this body.
I have known and respected and loved Max Cleland for over 30 years.
His is an American story; one of inspiration for us all. Mr. Chairman,
I have no doubt that the Export-Import Bank and the Nation will benefit
by his appointment and service on this board.
Thank you, Mr. Chairman.
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