[Senate Hearing 107-643]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-643
 
  NOMINATION HEARING FOR PHYLLIS K. FONG, WALTER LUKKEN, SHARON BROWN-
                                 HRUSKA
                          AND DOUGLAS L. FLORY
=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION


                               __________

                             JUNE 25, 2002

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov






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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                       TOM HARKIN, Iowa, Chairman

PATRICK J. LEAHY, Vermont            RICHARD G. LUGAR, Indiana
KENT CONRAD, North Dakota            JESSE HELMS, North Carolina
THOMAS A. DASCHLE, South Dakota      THAD COCHRAN, Mississippi
MAX BAUCUS, Montana                  MITCH McCONNELL, Kentucky
BLANCHE L. LINCOLN, Arkansas         PAT ROBERTS, Kansas
ZELL MILLER, Georgia                 PETER G. FITZGERALD, Illinois
DEBBIE A. STABENOW, Michigan         CRAIG THOMAS, Wyoming
BEN NELSON, Nebraska                 WAYNE ALLARD, Colorado
MARK DAYTON, Minnesota               TIM HUTCHINSON, Arkansas
PAUL DAVID WELLSTONE, Minnesota      MICHEAL D. CRAPO, Idaho

              Mark Halverson, Staff Director/Chief Counsel

            David L. Johnson, Chief Counsel for the Minority

                      Robert E. Sturm, Chief Clerk

              Keith Luse, Staff Director for the Minority

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

Nomination Hearing for Phyllis K. Fong, Walter Lukken, Sharon 
  Brown-Hruska and Douglas L. Flory..............................    01

                              ----------                              

                         Tuesday, June 25, 2002
                    STATEMENTS PRESENTED BY SENATORS

Harkin, Hon. Tom, a U.S. Senator from Iowa, Chairman, Committee 
  on Agriculture, Nutrition, and Forestry........................    01
Allen, Hon. George, a U.S. Senator from Virginia.................    15
Lugar, Hon. Richard G., a U.S. Senator from Indiana, Ranking 
  Member, Committee on Agriculture, Nutrition, and Forestry......    09
                              ----------                              

                               WITNESSES

Brown-Hruska, Sharon, Burke, Virginia, Nominated to be a Member 
  of the Farm Credit Administration Board........................    06
Flory, Douglas L., McLean, Virginia, Nominated to be a Member of 
  the Farm Credit Administration Board...........................    08
Fong, Phyllis K., Bethesda, Maryland, Nominated to be Inspector 
  General for the United States Department of Agriculture........    03
Lukken, Walter, Washington, DC, Nominated to be a Commissioner of 
  the Commodity Trading Commission...............................    04
                              ----------                              

                                APPENDIX

Prepared Statements:
    Harkin, Hon. Tom.............................................    30
    Brown-Hruska, Sharon.........................................    37
    Flory, Douglas L.............................................    39
    Fong, Phyllis K..............................................    32
    Lukken, Walter...............................................    35
Document(s) Submitted for the Record:
    Baucus, Hon. Max.............................................    49
    Cochran, Hon. Thad...........................................    47
    Warner, Hon. John............................................    44
    Brown-Hruska, Sharon, Biography..............................    79
    Flory, Douglas L., Biography.................................    98
    Fong, Phyllis K., Biography..................................    50
    Lukken, Walter, Biography....................................    64
Questions and Answers:
    Harkin, Hon. Tom to Sharon Brown-Hruska......................   124



                           NOMINATION HEARING

                              ----------                              


                         TUESDAY, JUNE 25, 2002

                                       U.S. Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 p.m., in 
room SR-328A Russell Senate Office Building, Hon. Tom Harkin, 
[Chairman of the Committee], presiding.
    Senate Present: Senators Harkin, Allen, Dayton, and Lugar.

    STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, 
              CHAIRMAN, COMMITTEE ON AGRICULTURE, 
                    NUTRITION, AND FORESTRY

    The Chairman. Good morning, the Senate Agriculture, 
Nutrition, and Forestry Committee will come to order. This 
morning, I wish to welcome to the committee four nominees: Ms. 
Phyllis Fong, Mr. Walter Lukken, Ms. Sharon Brown-Hruska, and 
Mr. Doug Flory. If I could ask them all to come up and just go 
ahead and take the table right here where your names are. I do 
not know if the names are on the back, also, there, but I would 
sure appreciate it.
    I know that Senator Allen and Senator Warner wanted to be 
here. I expect them to come sometime, but they are engaged in a 
meeting right now, which they cannot leave, as well as Senator 
Lugar, but they have advised me to go ahead with the hearing. I 
will recognize them, when they arrive, for introductions, and 
comments and statements that they might have.
    Ms. Fong is nominated to be Inspector General for the 
United States Department of Agriculture. The Office of 
Inspector General was established legislatively in 1978 to 
perform independent and objective audits and investigations 
within USDA, not an easy job, but it is critically important 
for ensuring the efficiency and effectiveness of programs so 
that the American public and the U.S. Congress can feel 
confident in the third largest civilian department in the U.S. 
Government. Since 1983, Ms. Fong has been employed in various 
positions at the U.S. Small Business Administration, including 
Inspector General, a position she has held since being 
appointed by President Clinton in 1999.
    Also, before the committee today are the nominations of Mr. 
Lukken and Ms. Brown-Hruska to be commissioners at the 
Commodity Futures Trading Commission, the CFTC. The CFTC is an 
independent agency that regulates commodity futures and options 
markets with the goal of protecting market participants against 
manipulation, abuse of trade practices and fraud, and to 
protect the integrity of markets that are vitally important to 
the agricultural and financial sectors of our economy. It is a 
very important agency, and its activities are of serious 
interest to this committee.
    As most of us at this hearing know, Mr. Lukken has served 
on the staff of Senator Lugar for the past nine years, first, 
as a member of his personal staff, and most recently as a 
member of the full Agriculture Committee staff. This room is 
not strange to you, Walt.
    Ms. Brown-Hruska is currently an assistant professor of 
Finance at George Mason University School of Management. From 
1990 to 1995, she served as an economist at CFTC.
    Finally, the committee welcomes Doug Flory as nominee for 
the board of directors for the Farm Credit Administration. The 
Farm Credit Administration is extremely important to the 
financial soundness and the integrity of the agricultural 
credit system.
    As an independent agency in the executive branch of the 
U.S. Government, FCA is responsible for the regulation and 
examination of the banks, associations, and related entities, 
such as the Farm Credit Banks and Co-Bank, that collectively 
make up the Farm Credit System, plus the Federal Agricultural 
Mortgage Corporation, otherwise known as Farmer Mac. These 
institutions serve critical components of agriculture, and thus 
this committee has every interest in assuring effective 
oversight. Furthermore, if these institutions fail, it is 
likely that the organizations will look to this committee and 
the taxpayers of the country for help. We take this nomination 
very seriously, Mr. Flory.
    Mr. Flory has a long history with the farm credit 
institutions. Most recently, he served as a member of the 
boards of both the AgFirst Farm Credit Bank and the Farm Credit 
of the Virginias.
    Again, I welcome all of the nominees to the committee and 
look forward to hearing all of your testimony. I will leave the 
record open at this time for any statements and introductions 
to be made by any Senators who may arrive shortly.
    I am required to swear in all nominees, please stand and be 
sworn in. If I could ask you all to please stand.
    [Nominees sworn en masse.]
    The Chairman. I will ask each of you in order, starting 
with Ms. Fong, do you agree that if confirmed, you will appear 
before any duly constituted committee of Congress if asked to 
appear, Ms. Fong?
    Ms. Fong. Yes, I do.
    The Chairman. Mr. Lukken?
    Mr. Lukken. I will.
    The Chairman. Ms. Brown-Hruska?
    Ms. Brown-Hruska. Yes, sir.
    The Chairman. Mr. Flory?
    Mr. Flory. I will.
    The Chairman. Thank you very much.
    Now I would just turn in order for your statements, and in 
the order in which I have them here. We have, first, Ms. Fong, 
nominated to be Inspector General for the United States 
Department of Agriculture. You all have statements. I 
appreciate the fact that you submitted them. I was able to go 
over them. Your statements will be made a part of the record in 
their entirety. If you would like to sum them up, I would 
appreciate that.
    Also, if you have family members that are here that you 
would like to introduce for the committee, we would like to 
recognize them, and we will do that in order as we introduce 
each member or each of the candidates who are here. Before we 
start, I would like to recognize my fellow Senator, Senator 
Nelson, from Nebraska. If you have an opening statement or 
anything like that, we just introduced the candidates for the 
various positions, and we are just going to start with the 
testimony of Ms. Fong.
    Senator Nelson. Thank you, Mr. Chairman. I do not have an 
opening statement. I am very anxious to hear what the nominees 
have to say, so I prefer to listen to them at this point.
    Thank you.
    The Chairman. Thank you, Senator Nelson.
    Ms. Fong, welcome to the committee. Congratulations on your 
nomination, and please proceed.

    STATEMENT OF PHYLLIS K. FONG, BETHESDA, MARYLAND, TO BE 
            INSPECTOR GENERAL FOR THE UNITED STATES 
                   DEPARTMENT OF AGRICULTURE

    Ms. Fong. Thank you, Mr. Chairman, and good morning, 
Senator Nelson. I am honored to appear today as President 
Bush's nominee to serve as IG at the Department of Agriculture.
    I was raised in Honolulu, Hawaii, and I am a descendent of 
immigrants from China. My great-grandparents came to Hawaii to 
work in the sugar cane and pineapple fields and to provide 
opportunities for their children. While those industries no 
longer thrive, the love of the land and its fruit is still in 
our blood.
    After attending college in California and law school in 
Tennessee, I embarked on a career in public service with the 
Federal Government over 23 years ago. I am a career member of 
the Senior Executive Service and, in 1999, I was nominated by 
President Clinton and confirmed by the Senate to serve as the 
IG at the Small Business Administration. My tenure at SBA has 
been challenging and rewarding, and I trust that those 
experiences have prepared me for the challenges that lie ahead.
    SBA's mission is to help small businesses grow and thrive. 
SBA does this by providing financial assistance, business 
development and Government contracting opportunities. SBA also 
provides disaster assistance to individuals and businesses who 
are harmed by natural disasters.
    Over the past three years, during my tenure at SBA, I 
believe the IG's office has been very successful in 
accomplishing its dual mission of promoting the effective 
delivery of SBA programs and in addressing fraud. I am proud of 
the efforts of the IG's professional staff, which have resulted 
in more than $155 million in dollar results for the Government 
and over 100 audit and inspection reports. Our investigations 
have led to 163 indictments and 134 convictions of persons who 
have sought to defraud the Government. This has been 
accomplished with an appropriation level of about $11.5 million 
and a staff level of about 107 people.
    Numbers alone do not tell the whole story, however. Over 
the past three years at SBA, we have undertaken a number of 
projects that will ultimately make the SBA IG's office even 
more effective. Briefly, these are:
    Focusing IG efforts, through regular strategic planning, on 
a few key things, rather than solely reacting to external 
events;
    We have moved beyond fraud detection to fraud prevention to 
root out fraud before it occurs, to the extent that we can;
    We have increased the use of interdisciplinary approaches 
and projects that cut across the traditional audit and 
investigative lines;
    We have developed different types of approaches and 
products that will help Agency managers address the issues that 
are before them;
    We have created an atmosphere of openness and communication 
with the Hill and within the Agency;
    Most important, we have fostered a tradition of personal 
integrity, excellence, professionalism and respect for the 
individual.
    These approaches have worked well at SBA.
    If I am confirmed as the IG at USDA, I will bring to that 
job these lessons and skills. I will work very closely with you 
and your staff, and with Secretary Veneman, to ensure that 
USDA's programs are delivered effectively to those who are 
their intended beneficiaries and that fraud is aggressively 
investigated and addressed.
    I look forward to working on these issues with the experts, 
with you, your staff, the Department's program managers, and 
the Department's OIG professional staff. I will bring to the 
table an open and independent mind and a desire to help find 
solutions to the challenging problems facing the Department. I 
will also bring my experience as an IG to address those issues 
that are common to all Federal entities; namely, program and 
employee integrity, human capital management, accountability, 
program performance and financial management.
    Before I finish, I would like to introduce my spouse, Paul 
Tellier, who has been very supportive of all of my efforts 
throughout my career. I could not do this without him.
    The Chairman. Welcome, Mr. Tellier.
    Ms. Fong. That concludes my statement, Mr. Chairman.
    Thank you.
    [The prepared statement of Ms. Fong can be found in the 
appendix on page 32.]
    The Chairman. Thank you very much, Mrs. Fong.
    Now we will turn to Walter Lukken, who is no stranger to 
this room, nominated to be a commissioner of the CFTC.

      STATEMENT OF WALTER LUKKEN, WASHINGTON, DC, TO BE A 
    COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION

    Mr. Lukken. Thank you, Chairman Harkin.
    Chairman Harkin, Senator Nelson, I am honored to appear 
before you as President Bush's nominee to be a commissioner at 
the Commodity Futures Trading Commission. I greatly appreciate 
the President offering me this opportunity to serve the public. 
In particular, I want to express my deep admiration to Senator 
Lugar, for whom I have worked for almost nine years. I would 
not have this opportunity, but for his support and guidance.
    I would like to take this opportunity, first, to introduce 
my wife, Dana; my parents, Wayne and Carol Lukken, which I 
shamelessly mention are from Council Bluffs, Iowa, for the 
chairman--
    [Laughter.]
    Mr. Lukken [continuing]. My wife's parents, Jerry and 
Denise Bostic, from Morgan City, Louisiana, as well as other 
colleagues and friends in the audience today. I truly value 
their support throughout this nomination process.
    The Chairman. Welcome, all of you.
    In 1993, I began my career in Government service with 
Senator Lugar as a legislative assistant handling financial and 
tax matters. In the Lugar office, I learned not only the Senate 
process, but also how fairness, integrity, and Midwestern 
sensibilities can shape important policy decisions. Throughout 
the years, I have tried to emulate these decisionmaking 
qualities in my work, and I promise to bring such values with 
me to the Commission.
    In 1997, I began to cover issues relating to the futures 
and derivative markets for Chairman Lugar on the Senate 
Agriculture Committee. I was drawn to the futures industry 
because of my educational background in law and finance, 
because of the industry's growing importance to the U.S. 
economy, and because of the thoughtful policy debates 
surrounding it.
    In 2000, I was one of the staff assigned to the Commodity 
Futures Modernization Act, which was the most significant 
reform of futures regulation in 25 years. My approach to 
advancing this legislation involved openly engaging staff, both 
Democrats and Republicans, as well as regulators and industry 
members in an attempt to build a consensus among them. I 
believe that this ``open door'' approach left those involved 
with this legislation, even those opposed to it, with the 
belief that the final product was developed in a fair manner. 
If confirmed, I would use such an approach to assist the 
Commission with its implementation of the act.
    Despite several revisions of its statute throughout the 
years, the primary mission of the Commodity Futures Trading 
Commission has remained constant. The CFTC is charged with 
protecting the public from fraud, preventing commodity price 
manipulation, providing a price discovery mechanism for certain 
commodities, and fostering open, competitive and financially 
sound futures and options markets.
    This mission remains as vital today as when the CFTC was 
created. With the crisis of confidence in our financial markets 
caused by corporate misdeeds and our global war on terrorism, 
it is imperative that the commission be a diligent, but calming 
force.
    Like any good Hoosier, I like basketball analogies. Every 
fan knows that a good referee can raise the level of 
competition in a basketball game. The referee's presence 
reassures both teams that the outcome of the game has been 
reached in a just and fair manner. Likewise, appropriate 
regulatory oversight and enforcement, especially during times 
of economic stress, serve to revitalize markets by reassuring 
the public and market participants that the rules of the game 
are being followed.
    However, it is equally important to understand that when 
fouls are not being committed, referees and regulators should 
allow the competition itself to determine the outcome. 
Participants in our markets must have the freedom to compete, 
to innovate, to take risks if our U.S. economy is to grow and 
prosper. Free markets must determine winners and losers, not 
regulators.
    This is a difficult, but necessary, balance to achieve. If 
confirmed, I will work closely with the other members of the 
Commission to prevent and prosecute illegal activities while 
understanding the need to minimize the regulatory footprint on 
market innovation and competition.
    Mr. Chairman, thank you for offering me this opportunity to 
testify, and I welcome any questions.
    [The prepared statement of Mr. Lukken can be found in the 
appendix on page 35.]
    The Chairman. Thank you very much. I like that analogy. 
That is a great analogy, but why do you always beat Iowa all of 
the time?
    [Laughter.]
    The Chairman. Now we turn to Sharon Brown-Hruska, Burke, 
Virginia, nominated to be a commissioner of the Commodity 
Futures Trading Commission.
    Welcome.

STATEMENT OF SHARON BROWN-HRUSKA, BURKE, VIRGINIA, NOMINATED TO 
 BE A COMMISSIONER OF THE COMMODITY FUTURES TRADING COMMISSION

    Ms. Brown-Hruska. Thank you, Chairman Harkin, Senator 
Nelson.
    I am grateful and honored to be here before you today as a 
nominee to the Commodity Futures Trading Commission. I thank 
President Bush for giving me the opportunity to put my 
credentials and experience before you for your consideration.
    With me today are my husband, Donald Hruska----
    The Chairman. Welcome, Donald.
    Ms. Brown-Hruska [continuing]. My mom, Mae Brown, my 
brother and his wife, David and Susan Brown----
    The Chairman. Stand up so we can recognize you.
    [Laughter.]
    Ms. Brown-Hruska [continuing]. My niece, Danielle Brown. 
Our little boy, Jacob, is at home today. He is four.
    The Chairman. Well, welcome to you all. Thanks for being 
here.
    Ms. Brown-Hruska. It is a particular honor for me to be 
before the Agriculture, Nutrition, and Forestry Committee. As a 
farm kid from White Hall, Virginia--surrounded by cornfields, 
apple orchards, Herefords and Holsteins--the first vehicle I 
drove was a tractor, my best friends were fellow 4-H Club 
members, and my first job was in the local farm market. This 
background was a gift of my father--my late father--who 
continued to pursue farming, despite its lack of profitability 
at the time, and my mother, whose parents homesteaded in 
Saskatchewan, Canada.
    When it came time to go to college, I received a 
scholarship given by the Frank V. Armstrong Foundation. He was 
the founder of the White House apple products. It is a business 
local to my hometown of Winchester, Virginia. I followed my 
older brother, whose FFA leadership had won him a scholarship 
to Virginia Tech. In short, agriculture nurtured and supported 
me and my family and contributes mightily to the well-being of 
us all.
    The Agriculture Committee's dedication and commitment to 
the agricultural sector of the economy are so important and are 
part of the reason I am so proud to be here before this 
committee.
    As an undergrad at Virginia Tech, I majored in economics 
and international studies. After working for three years as a 
public school teacher in the same county schools I had attended 
as a child, I returned to graduate school to pursue a Ph.D. in 
economics. This time, I followed my husband, who was completing 
his degree, to Virginia Tech.
    Futures markets had always been of great interest to me, 
and I was fortunate that my dissertation chairman, Professor 
Robert Mackay, encouraged me to focus my research on 
derivatives markets and the relationship to the asset and 
commodity markets that underlie them. That research interest 
led me to the Commodity Futures Trading Commission, where I 
worked in the Division of Economic Analysis for five years. 
While in Government service, I found that contributing to the 
study and analysis of futures markets and policy issues was 
rewarding to me, and it was valued by the Commission and the 
industry.
    As a finance professor in the business schools of Virginia 
Tech, Tulane University, and most recently, George Mason 
University, I have taught courses on derivatives, risk 
management, financial market innovation, investments, venture 
capital, and international financial management. It is 
rewarding to teach individuals and businesses about the 
workings of financial markets and the uses and benefits of 
financial instruments like futures, options, and other 
derivatives.
    I have published papers on futures volume and volatility, 
market liquidity, hedging and financial market information. 
Much of my work has highlighted how well these markets 
function, how vital they are to the business and the economy, 
and how regulation can, and has, contributed to ensuring that 
these markets continue to perform their important functions of 
price discovery and risk management.
    As a finance professor and as an economist at the 
Commission, I have seen firsthand how innovative and beneficial 
the derivative markets are and how they can increase the 
efficiency and performance of business and the economy. While 
at the Commission, I spent much of my time employing economic 
reasoning and investigation to evaluate rules and trading 
practices to make certain that they were not anticompetitive, 
fraudulent or manipulative. It was apparent to me then, as it 
is now, that the Commission plays an important role in 
fostering market integrity, financial integrity, and consumer 
protection.
    If confirmed by this committee and the Senate, I would work 
hard to ensure that the Commission continues as a strong and 
effective regulator, fulfilling its mission to guard the public 
interest and making sure that the markets are efficient, 
transparent and financially sound.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Ms. Brown-Hruska can be found in 
the appendix on page 37.]
    The Chairman. Thank you very much, Ms. Brown-Hruska.
    Now we turn to Mr. Doug Flory, of McLean, Virginia, 
nominated to be a member of the Farm Credit Administration 
Board.
    Mr. Flory.

       STATEMENT OF DOUGLAS L. FLORY, McLEAN, VIRGINIA, 
          NOMINATED TO BE A MEMBER OF THE FARM CREDIT 
                      ADMINISTRATION BOARD

    Mr. Flory. Thank you, Mr. Chairman and Senator Nelson.
    This may be an unusual day to have two Hokies sitting 
beside each other.
    [Laughter.]
    Mr. Flory. Both of us are Virginia Tech graduates.
    My name is Douglas Flory, of Grottoes, Virginia, in the 
heart of the Shenandoah Valley.
    I am honored to be before you today, and on May the 9th, 
President George Bush nominated me to serve as Director of the 
Farm Credit Administration. This is a position of great 
importance to those who live and work in rural America, and I 
am humbled by the nomination, as well as the support, for this 
position by my Senators, John Warner and George Allen, of the 
Commonwealth of Virginia, and I am also honored and pleased 
with the strong support of my representative, Bob Goodlatte, 
and many other Senators, Congressmen, Virginia legislators and 
agriculture commodity groups who have been very helpful to me 
as a candidate for this nomination.
    I especially want to mention the strong support of the 
American Farm Bureau Federation, the National Cattlemen's Beef 
Association, and the National Council of Farmer Cooperatives. I 
have a few brief remarks, and then I would like to take any 
questions that you might have.
    As a seventh-generation Augusta County Virginian, I 
continue a long family tradition of involvement in production 
agriculture. My farm operation, Bunker Hill Farm, produces some 
120,000 tom turkeys a year. I am also a 50-percent owner of a 
general livestock grain and farm operation of approximately 
1,300 acres, with 250 brood cows. As a part of this operation, 
we run a performance bull-testing station for purebred Angus 
breeders.
    In my other nonfarm business life, I have been active in a 
variety of businesses which were involved in agriculture in 
rural Virginia. During my almost 40-year career, I was 
assistant general manager of Rockingham Cooperative Farm 
Bureau, a farm supply cooperative. I was vice president of 
Dominion Bank of the Shenandoah Valley, which at the time was 
among the largest agricultural banks in the United States. I 
served as executive vice president, and chief operating officer 
and board member of WRL Foods, a publicly traded poultry food 
company.
    During the past eight years, I was appointed by the 26th 
Judicial Court of Virginia as receiver custodian for 
agriculture and rural businesses. Additionally, I have served 
as an elected farmer director of my local Farm Credit 
Association for seven years and a director of AgFirst Farm 
Credit Bank since 1994.
    I have also enjoyed many important affiliations with 
agriculture and financial institutions that have provided me 
with very important insights and experiences. I have served on 
both the American Bankers Association and the Virginia Bankers' 
Association Agricultural Committees, I have been appointed by 
four Virginia Governors to serve on Virginia's Agriculture 
Credit Committee, Virginia's Agricultural Development Authority 
and the Virginia Agricultural Council.
    Mr. Chairman, I believe this background and experience 
provided me with a very solid foundation to tackle the range of 
issues required by a Farm Credit Administration director.
    In preparing for this hearing, I reviewed earlier 
nomination hearing transcripts for FCA board members. I was 
struck by the comments of Senator Kent Conrad of North Dakota 
during the confirmation hearing of the late FCA chairwoman, 
Marsha Martin, in September 1994. At that hearing, Senator 
Conrad stated, and I quote, ``The Number One priority for the 
FCA board member is the safety and soundness of the Farm Credit 
System, and that is the absolute responsibility of the Farm 
Credit Administration.''
    I want to assure this committee I take that admonition very 
seriously, and I could not agree more wholeheartedly with 
Senator Conrad. FCA has an enormous responsibility ensuring 
that our farmers and ranchers, their cooperatives in rural 
America, have access to constructive, competitively priced 
credit. One way to ensure that credit availability is building 
confidence with this committee, the House Ag Committee, the 
executive branch and the farmers and ranchers of the Farm 
Credit System, as well as those who purchase farm credit 
securities on Wall Street. FCA must be a focused, arm's length 
regulator, and I pledge to this committee that I will be that 
kind of director if the Senate should confirm me for this 
directorship.
    Mr. Chairman, this concludes my remarks. However, I also 
want to thank the committee staff who were very professional 
and helpful, and I very much appreciated their help as I 
prepared for this hearing.
    I look forward to your questions, but I would like to 
introduce my family--my wife, Avery, who has been extremely 
supportive, and my daughter, Beth.
    [The prepared statement of Mr. Flory can be found in the 
appendix on page 39.]
    The Chairman. Welcome to the committee. Thank you, Mr. 
Flory.
    My good friend and the ranking member of the Senate 
Agriculture Committee has arrived. I know he was tied up in a 
meeting and could not be here at the beginning, but I would 
recognize Senator Lugar.

    STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
             INDIANA, RANKING MEMBER, COMMITTEE ON 
              AGRICULTURE, NUTRITION, AND FORESTRY

    Senator Lugar. Thank you very much, Mr. Chairman. I 
apologize for my tardiness. The Republicans in the Senate have 
been having a long caucus this morning.
    [Laughter.]
    Senator Lugar. We have concluded our work. It had to do 
with the length of time people can serve as chairman and 
ranking members.
    The Chairman. Are you OK? I do not want to lose you.
    [Laughter.]
    Senator Lugar. I am fine. I have already served well beyond 
the limits that have been set up for others, but nevertheless, 
it is a pleasure to greet each of the nominees. I have enjoyed 
reading your statements prior to your giving them today. 
Likewise, we have had the FBI checks and visited with them as a 
part of our responsibilities.
    I take special pleasure in mentioning one of the nominees. 
I am very proud to recognize Walt Lukken, who has been 
nominated to be a commissioner of the Commodity Futures Trading 
Commission. He has been a valued part of our office for almost 
nine years, and during the past five years has specialized in 
the futures and derivatives markets for this committee.
    I greatly trust his advice and counsel on these matters and 
so many others. In this capacity, for this committee, he was at 
the center of the passage of the Commodity Futures 
Modernization Act of 2000, which modernized the regulation of 
futures and derivatives markets. His leadership and integrity 
during this debate greatly improved the final product.
    During the 2-year legislative process that led to its 
passage, Walt helped build a bipartisan coalition of Senate 
offices, industry members and agencies in support of enactment 
of these reforms. As a result of his efforts, he was nominated 
by Wall Street Letter for Washington Impact Player of the Year 
2000.
    Walt would be a tremendous addition, in my judgment, to the 
CFTC. I am inordinately proud to introduce him to the committee 
and to commend him today.
    I thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lugar.
    I recognized Senator Nelson earlier.
    Senator Dayton, welcome to the committee. If you just had 
an opening statement or something, then we are going to go into 
the questions.
    Senator Dayton. I would just say I worked for Senator Fritz 
Mondale for two years. I spent about six months trying to get 
one sentence out of him favorably toward me. I am impressed 
that you receive that kind of praise.
    [Laughter.]
    Senator Dayton. I also made note here, Mr. Flory, that 
anybody who can get appointed by four different Governors of 
any State is commendable.
    [Laughter.]
    The Chairman. Thank you.
    I have a few questions for each of you, and we will go in 
order here just for five minutes or so each.
    Ms. Fong, the IG's office is one that was established by 
Congress in the 1970's to be an independent watchdog on the 
departments to which they are attached. It is an interesting 
position. I have often said the IG does not work for the 
Secretary of any department, whether it is Health and Human 
Services or the Department of Defense.
    They are there, of course, appointed by the President, but 
in an independent capacity, to advise both. This is where it 
gets tricky, to advise both the department head, the Secretary 
in this case, and us here in Congress as to their insights, 
their evaluations of what is happening within that department 
and to give us forewarnings of any problem areas that the 
Inspector General might see, through audits and investigations. 
You can issue subpoenas, indictments, fines, administrative 
penalties. You have got a broad array of different actions--
since you have been an Inspector General before--available.
    I am a firm believer in an independent office and also an 
office where the Inspector General is not a passive player, but 
where the Inspector General is actively involved in ensuring 
that taxpayers' dollars are not wasted, making sure that we do 
not have abuse, to make sure that different agencies under the 
department are fulfilling their legal requirements of what they 
are supposed to do.
    With that, I would just ask you, again, your vision of the 
Inspector General's Office, and do you envision playing an 
activist role in that regard, in terms of the audits, and in 
terms of investigations, and informing us here, especially in 
the Senator Agriculture Committee, of keeping us advised and 
informed of any problem areas or suggestions and advice that 
you might have for us to do things that would, A, protect the 
taxpayers' dollar; B, make sure that the laws that we have 
passed here are adequately carried out?
    Ms. Fong. Mr. Chairman, you have hit the nail on the head. 
That is the challenge of the IG's job, to fulfill the mandate 
under the IG Act to keep both the Congress and the 
Administrator or the Secretary, as it may be, fully informed of 
the challenges and the issues before the Department. That is a 
very tough part of the job.
    I commit to you that I will be an active IG. I have been an 
active IG at SBA, and it is my view that, in order to carry out 
the IG Act, an IG must proactively be on the front lines of the 
issues. We must be out there identifying the issues as they 
emerge, as they come to the surface. We must notify the 
Congress, and the Secretary and her program managers, as to 
what we are finding. We must be, a vigilant neighborhood 
watchdog.
    Some have characterized IGs as junkyard dogs, others have 
characterized them as lapdogs. I view our role as being the 
aggressive, assertive watchdog that protects the American 
taxpayers' property and enhances the safety of the American 
taxpayers' investment. If we see crime about to happen, we must 
aggressively go after it. We must look for proactive ways to 
deal with systemic issues that could prevent crime. When we see 
management issues that are coming up, we must talk to all of 
the interested parties so that we can work to achieve a 
solution.
    That is my vision for the IG's Office.
    The Chairman. Ms. Fong, I appreciate that because there is 
a serious concern that I have about the resignation of the last 
Inspector General at USDA. From what I have learned, and I do 
not know all of the details, but this committee is going to 
followup, it may well be that he was asked to resign or even 
forced to resign because he expressed concerns on behalf of the 
public that did not sit well with the Secretary or the 
administration related to the inspection of imported foreign 
meat products. No one in the Congress cares more about the 
protection of the public as it relates to food safety than I 
and the members of this committee. As I said, I do not know all 
of the details of this, but this committee will followup on 
that.
    I just want to have your assurance that you will be 
independent and willing to stand up to the Secretary or to 
Congress. Sometimes you have to stand up against us, too.
    Ms. Fong. You are right.
    The Chairman. Anyone else to say what you believe and what 
your audits, investigations, your team feels needs to be said 
on this or any other issue. I just want your assurance that you 
are willing to stand up, even though it may be where someone 
may ask for your resignation.
    Ms. Fong. All of us IGs who are appointed by the President 
understand that those are the conditions of the job, that we 
serve at the pleasure of the President. Of course, he must 
notify you if he wishes to remove one of us, but that aside, I 
am willing to stand up, as you say, and bring to your attention 
issues that I feel need to come to your attention. My role is 
to bring to the table my independent, objective, professional 
take on what is coming up.
    The Chairman. I appreciate that very much, Ms. Fong.
    Thank you, Ms. Fong.
    I would recognize Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman.
    Ms. Fong, the IG at USDA is responsible for auditing and 
investigating activities of more than 110,000 employees, with 
an annual budget of $76 billion. Now this is in contrast to the 
responsibility that you have had with 4,400 employees and $645 
million, and while this type of transition is not 
unprecedented, it is a significant undertaking.
    I have asked this in the context of the fact that in June 
1998, GAO issued a report that was critical, prior to your 
tenure,--of SBA's Office of the Inspector General for 
conducting very few audits of guaranteed vendors which may have 
offered the opportunity for fraud in the view of the GAO.
    Again, in your statement, you have recited, at least for 
the record, some activities in which you have been involved, 
but obviously you came into a situation in which the GAO report 
had criticized lack of activity. Give us some idea of your 
grasp of the enormity of this new responsibility.
    Ms. Fong. That is a very good question, Senator Lugar.
    I believe that I am ready, and I will tell you why. There 
are three main reasons why my SBA experience has prepared me 
for this job.
    First of all, many significant substantive and programmatic 
issues at SBA also exist at the Department of Agriculture and 
SBA. SBA is a lending agency. We make guaranteed loans, we make 
venture capital available to small businesses, and we provide 
disaster assistance to nonfarm persons and businesses. In these 
program areas, I believe that the issues in SBA and USDA 
programs would be similar, and I will be prepared to deal with 
them at the Department of Agriculture.
    Second, there are a number of issues that cut across all 
Federal agencies. These are the management issues, the ``boiler 
room'' issues that affect how a Government agency runs. Key 
examples include financial management, information technology 
and cyber security, human capital resource management, (which 
has become such a big issue for every agency), and 
accountability and performance--do programs deliver to the 
taxpayer what Congress included them to deliver. I have done a 
lot of work on these issues at SBA, and I will bring my 
experience and expertise to the Department of Agriculture, 
which faces similar challenges.
    Third, as you pointed out, the Department is much bigger 
than SBA, and the Department's IG Office is much bigger than 
SBA's IG Office. I believe, however, that my experience at SBA 
in managing a work force of over 100 people with a multi-
million dollar budget and a mission that includes projects in 
multiple disciplines investigations, audits, and inspections--
has prepared me for the management challenges that I will face 
at USDA, and I am confident that I can lead the organization 
and make it even more productive and effective than it already 
is.
    Senator Lugar. I would just followup with one question. The 
Chairman has cited the previous Inspector General and the meat 
inspection issues. Indeed, he came before the committee on more 
than one occasion with regard to this and other issues. Have 
you examined the issues the last Inspector General faced, as 
well as other issues that may be out there in USDA that his 
investigations, at least if not uncovering, have gone into in a 
substantial way? In other words, do you have some idea of the 
agenda that is there now, quite apart from things that you and 
your staff may uncover?
    Ms. Fong. I believe that I am familiar with the key, 
substantive issues that are facing the Department of 
Agriculture. I have read many of the IG Office's reports. I 
have been briefed by the Acting Inspector General as to the big 
issues that are currently before the Office. I understand that 
there is are a number of significant issues facing the 
Department such as homeland security, meat safety inspections, 
crop insurance, the HACCP system, as well as departmental 
administration, financial management, civil rights, and a 
number of other issues.
    Senator Lugar. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator.
    Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    I have some questions. Maybe I will alternately go with 
you, Mr. Lukken, and then ask the same of you Ms. Brown-Hruska.
    The Chairman. If you do not mind, I was going to go each 
person separately.
    Senator Dayton. Oh, I am sorry. I see. I am sorry. I missed 
that part of it. All right.
    Ms. Fong, what is the most, without violating obviously any 
issues of confidentiality, what is the most controversial, 
going back to what the chairman said, and I agree with him, 
too, and you did as well, what is the most controversial or 
most difficult decision you had to make in SBA, in terms of 
coming forward with something or not?
    Ms. Fong. I would say one of the most significant issues 
that we worked on in the past two years involved the Small 
Disadvantaged Business Certification and Eligibility Program, 
which is a Government procurement certification program. 
Congress authorized SBA to certify small businesses to 
participate in this program.
    Just to give you a general sense of it, we had a number of 
whistle-blower complaints that were involved. Our people also 
felt that the program was perhaps not running as efficiently as 
it should have been. It involved 20 other departments and 
agencies in the Federal Government, and funding from those 
departments and agencies to the tune of multi millions of 
dollars a year. Our office went in and did a number of audits 
and investigations on different aspects of the program and at 
the end of our effort, which took about a year, we came out 
with some very hard-hitting reports that pointed out that the 
program really was overstaffed and overfunded.
    The other departments and agencies were being charged much, 
much more than they should have been charged to participate in 
this program. We projected that over the course of the next 5 
to 10 years, if SBA implemented all of our recommendations, 
there would be savings in the $12-million range per year, 
stretching out for a long period of time.
    There were also some personnel issues and some potential 
criminal issues that we had to work with the Department of 
Justice on for prosecution consideration. We also coordinated 
with the Office of Special Counsel on the whistle-blower issues 
and handled that very successfully, I believe. We were able to 
protect individual rights, while still carrying out our audit 
and investigative responsibilities.
    Senator Dayton. Thank you.
    One request, we clearly need a strong leader for the IG 
office in the USDA. I had an experience just a couple of months 
ago, Mr. Chairman, requesting information from the Department, 
which presumably would have required the involvement of the 
Inspector General, and after 10 weeks had lapsed, received, 
well, indirectly through the chairman, a response that 
basically said that nothing had been done in response to the 
request.
    I guess what I am looking from you as a commitment, not 
that you will, as the chairman said, accede to every request of 
Members of Congress, but that you will respond in a timely 
fashion with what you intend to do or not do.
    Ms. Fong. I will. It is my practice to respond to 
congressional committee requests and individual member requests 
very quickly, to at least let you know what we are doing--that 
we are evaluating it, that we are taking it into 
consideration--and to have a conversation with you about what 
it is you need so that we can respond more effectively.
    Senator Dayton. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Dayton.
    We have been graced with the presence of our Senator from 
Virginia, Senator Allen, and we welcome you here to the 
committee, Senator Allen. I know you are here for the purposes 
of an introduction, and I know you have a busy schedule, so we 
would recognize you at this time for purposes of introduction.
    Thank you, Senator Allen.

  STATEMENT OF HON. GEORGE ALLEN, A U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman, I appreciate that 
courtesy, and thank you, Senator Lugar, Senator Dayton, and I 
want to thank you all for scheduling this important hearing 
today.
    President Bush, Mr. Chairman and members of the committee, 
has wisely nominated Doug Flory of Grottoes, Virginia, to serve 
on the Farm Credit Administration board, and I am delighted to 
be here with Doug and endorse him wholeheartedly.
    Doug brings--and I am sure you have already read through 
it--a wealth of experience which is important in this role. His 
experience is in farming, as well as in banking and financing. 
He has been involved in farming his entire life. He continues 
to be involved in poultry, livestock and grain operations in 
the Shenandoah Valley of Virginia. In addition, he has served 
in a variety of roles, senior officer with Dominion Bank, also 
executive vice president for WLR Foods for four years. He has 
served as a director on several important Farm Credit 
institutions over the years, including one in Virginia. He is 
involved in poultry associations, banking, farm managers, rural 
appraisers, all. This is exactly the type of person you would 
want to have overseeing the Farm Credit Administration.
    I wholeheartedly endorse his nomination. Hopefully, you 
will be able, before the July 4th recess, to vote on this fine 
individual.
    I will also say that Senator Warner would love to be here. 
I am not sure if he will make it or not. He is managing the 
defense authorization bill on the floor at this time, but I 
know that he would want me also to relate to you his strong 
endorsement of Doug Flory, and I thank you all for this brief 
interlude and opportunity to introduce a fine Virginian.
    Thank you, Mr. Chairman.
    The Chairman. Senator Allen, thank you very much for 
gracing us again with your presence and for your strong support 
of Mr. Flory.
    You are right. He has a big resume, and he has been very 
active, and I do not think we will have any problems at all. He 
is the type of person that we do need on that board, and I 
thank you for being here, Senator Allen.
    Senator Dayton. Mr. Chairman, I would just observe that Mr. 
Flory, in his remarks today, he had been appointed by four 
different Governors of Virginia. I thought that was a 
commendable ability to get along with a variety of different 
perspectives--four points of view.
    Senator Allen. Yes, and he----
    Senator Dayton. I assume you were one of the four. I just 
wanted to check on that.
    [Laughter.]
    Senator Allen. Thank you very much.
    The Chairman. Thank you.
    This is for both Mr. Lukken and for Ms. Brown-Hruska. The 
agriculture futures and options markets now make up a smaller 
share of the CFTC's fear of oversight than in the past. When 
this first started back in the 1970's, when I first got here, 
it was almost all agriculture. Now it is becoming a smaller and 
smaller part. However, the honesty and integrity of those 
markets are extremely important to the farmers, and ranchers, 
and agricultural businesses in the United States.
    I guess I just want both your assurances that you will make 
certain that the CFTC devotes adequate resources and attention 
to agriculture under its jurisdiction.
    Mr. Lukken.
    Mr. Lukken. Well, having worked on this committee, I guess 
I know where my bread is buttered.
    [Laughter.]
    Mr. Lukken. Once I get down there at the CFTC, if 
confirmed, I would be very diligent in making sure that 
agriculture is looked after. I know the CFTC is doing a pretty 
good job at that right now, in fact. There were recent 
allegations regarding cattle futures manipulation, and the CFTC 
did an excellent job, a thorough job of looking into those 
allegations and providing a report on that, and they continue 
to oversee and monitor those markets to give assurances to 
those businesses and farmers who have to use those markets. I 
fully understand the importance of these markets and will be 
sure to look after them.
    The Chairman. I appreciate that very much, Mr. Lukken.
    Ms. Brown-Hruska.
    Ms. Brown-Hruska. Thank you very much.
    I have studied crop yield, insurance futures, and cattle 
futures, and looked at a number of markets, agricultural 
markets, in my research and when I was at the CFTC, and that is 
where the rubber hits the road when it comes to price 
discovery, and the importance of price discovery to the 
underlying markets, to the underlying agricultural markets.
    It is so important because the futures markets are the most 
liquid market. It is where a lot of us look to find where the 
prices are being determined, and so it is important to monitor 
those markets, to put every resource that you have to surveil 
and enforce the rules to make sure that there is no fraudulent 
or anticompetitive activities taking place there. It is a top 
priority for me.
    Thank you very much.
    The Chairman. I appreciate both your answers. Thank you 
very much.
    Senator Lugar.
    Senator Lugar. Thank you, Mr. Chairman.
    One of the major factors in the Commodity Future Trading 
Act that was passed two years ago was the provision for swaps, 
to give legal certainty, and we had lots of testimony over two 
years about that issue.
    Now, since the passage of that act, many questions have 
arisen with regard to the amount of coverage, metals and energy 
and many critics, given the crisis of energy prices and the 
scandal surrounding Enron cite specifically the omission of 
energy. Likewise a considerable debate occurs in academic 
circles at over.
    I would like the opinion of both of you as to what we ought 
to do with regard to energy and metals legislatively. 
Administratively, you can only deal with what Congress has 
provided, but given your broad experience in this field can you 
give us at least some pointers as to what ought to be good 
public policy?
    Mr. Lukken, do you have a view on this?
    Mr. Lukken. Obviously, Senator Feinstein has offered an 
amendment on the floor to take care of this problem. The 
intention behind the Feinstein amendment is a very good one. 
One of the public policies that we aim to prevent down at the 
Commission is commodity manipulation, and that is what possibly 
was happening out in California. There were allegations that 
several companies were moving energy around to manipulate the 
price and that California residents may have suffered as a 
result.
    The CFMA did reserve for the CFTC authority to, use their 
antimanipulation authorities to go after these type of abuses. 
Last week, in fact, they issued three subpoenas to energy 
companies trying to find documents, and they will prosecute 
these violators, if that is what they find. I guess the 
question is do we need more, and that is something that is 
going to come out with investigations that agencies are having, 
with the hearing that this comittee is probably going to have 
in a couple of weeks. It is good process to let this sort of 
work its way through and to understand a little clearer what 
exactly the problem is to allow regulators to come to us and 
say, ``This is the information we need, this is the information 
we do not need'', and to solve these manipulation problems.
    The beauty of the Commodity Futures Modernization Act was 
we created a flexible, tiered structure for regulating. If we 
determine that the tier is too low for energy, that they are 
not being regulated enough, well, we have the option, as 
policymakers, to increase that regulation, and the outline is 
there to do that. If policymakers make that decision, we will 
certainly abide by that.
    Senator Lugar. Ms. Brown-Hruska.
    Ms. Brown-Hruska. I would like to second everything he 
said.
    [Laughter.]
    Senator Lugar. That was a pretty good answer.
    Ms. Brown-Hruska. Yes, I thought it was great.
    I am not yet familiar with all of the specifics of the CFTC 
authority with regard to enforcing these provisions on 
manipulation and antifraud in the energy and metal markets. I 
know that there were some exemptions provided for them, but 
there were also some parts of the regulation that remains.
    More generally, though, I do believe regulators can, and 
should vigorously investigate, collect evidence, build a solid 
case and prosecute without reserve those who would commit fraud 
or manipulation.
    If you confirm me to serve on the CFTC, I would work 
diligently to assist and support the individuals responsible 
for surveillance and enforcement, to vigorously investigate and 
prosecute those who would attempt to operate outside of the 
rules.
    With respect to the CFTC's authority in the OTC markets, I 
believe that this is a crucial and important matter for 
Congress to be considering. As I understand it, there are 
multiple regulatory authorities who have responsibility to 
oversee the participants in these markets.
    The CFTC is the agency which has overseen the exchange-
traded derivatives markets for 28 years. It has a wealth of 
expertise. They understand derivatives and the vital functions 
of hedging and risk management, as do I. It is appropriate and 
good that Congress is looking at this issue and working with 
the regulatory agencies involved in their deliberations. For my 
own part, I am looking forward to serving with Chairman 
Newsome, drawing from his wisdom and leadership, the 
perspective and experience of Commissioner Tom Erickson and 
Commissioner Holum-Peterson. These are resources that I would 
rely upon if I were confirmed to join them.
    I look forward to working with the CFTC staff, Walt Lukken, 
assisting Congress in making whatever determination you do as 
regards jurisdiction and issues associated with these markets.
    Senator Lugar. I thank you. I have one question that 
follows, on Chairman Harkin's question with regard to 
agriculture. I found, with regard to my own modest farm 
operation, that knowledge about the markets, about options and 
futures, forward sales, plus utilization of risk management 
crop insurance legislation that this committee has passed is 
absolutely essential for getting some rate of return out of my 
investment on that farm. That is probably true for most farmers 
in America and probably, in many cases, makes the difference as 
to whether they have a reasonably small profit or none at all 
or losses.
    The risk management aspect is one thing that I stressed 
during our farm bill debate, and I do not want to revisit all 
of that debate, but it appeared to me that one of the ways that 
we could be most helpful to farmers in the commodity title 
would be through enhancing the risk management safety net 
aspects so that many more farmers would participate, and the 
safety net, in fact, would be more certain.
    I am just curious about the CFTC as you see it of 
attempting to help producers of all sizes in this country 
understand the markets that you regulate, understand the 
possibilities, as well as the dangers that are there. It 
appears to me that this is one of the broad gaps in American 
agriculture, among those who know and those who do not, and 
that knowledge is power, and in this case the power to make a 
profit, as opposed to a loss.
    This is not entirely your responsibility. We all have that 
responsibility, this committee, as candidates for election, 
whatever fora we have. What do you foresee the CFTC might do to 
enhance some knowledge in respect for these markets?
    Mr. Lukken, do you have a view on that?
    Mr. Lukken. I have always wondered about the disconnect 
between trying to help--you have a useful tool for farmers and 
the futures markets, that as we have struggled throughout the 
years, we could never figure out why these were not either more 
user friendly for farmers or why they could not use these 
products to help manage risk, and just very few farmers seem to 
do that.
    It is one of my goals, when I get to the CFTC, is explore 
this, whether it is a marketing issue, are we not presenting 
the products correctly to them? Is it a regulation issue? Do 
they not have the tools that they need? I don't know. I mean, 
it is something that I will have to look into, but the CFTC has 
an Ag Advisory Committee there that occasionally gathers, and 
it is ag leaders, it includes USDA, the Risk Management 
Division down at USDA, and so it has some pretty good thinkers 
that can sort of think through these issues and try to come up 
with ways to help farmers manage risk because, as you said, 
this is something we struggled for a long time and hopefully we 
can improve upon.
    Senator Lugar. Ms. Brown-Hruska.
    Ms. Brown-Hruska. Thank you.
    Education is very important. It is something that I have 
spent my life doing, and it is important for us to try to make 
derivatives like futures and options and other things that are 
available to farmers accessible, in terms of how they work and 
how they can be used, and that is a job that the Commission can 
perform in their public relations, and in their pamphlets, and 
in their speaking opportunities. It is something that I would 
certainly like to contribute to.
    Senator Lugar. Thank you.
    The Chairman. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Mr. Lukken, Senator Lugar alluded to the decision made some 
time ago regarding energy, taking energy out of the oversight 
of the Commission. Given your experience over the last several 
years, are there any commodities that you believe are included 
now in the Commission's oversight that should not be or are 
there any that are not that you believe should be included in 
the oversight.
    Mr. Lukken. The approach, when Congress looked at the CFMA, 
was to try to really look at the public policies that back the 
CFTC: manipulation, consumer protection and overseeing, the 
retail public. Those markets that didn't deal with a product 
that could be manipulated or didn't deal with retail customers, 
we tried to have less regulatory structure for them. That 
included financial swaps that large banks use, that the 
financial instruments are so numerous they couldn't be 
manipulated. It was the agreement of the President's working 
group to exclude those from the CFTC's jurisdiction, although 
there are many other banking regulators that may have 
jurisdiction over them.
    As you sort of think about that structure, and you could 
sort of think of agricultural products and say, ``Here is 
something that can be manipulated that farmers use, the retail 
public is served, those deserve the highest level of regulation 
we have,'' and you could think about energy somewhere in 
between. Where we position that is the thing that policymakers 
will be struggling with.
    Congress looked at the energy exemption when it was 
struggling with this back in 2000. It worked with the CFTC. 
They wanted to add additional safeguards to the energy 
provisions, and we provided those safeguards that were 
ultimately enacted into the act.
    Now there have been subsequent events. We may need to add 
more safeguards, and that will hopefully come out in the 
hearings and the investigations that we are having. It is just 
a matter of where on that spectrum between the highly 
manipulatable products and the ones that you can't manipulate 
do you place these other types of products. Energies and metals 
are the ones that are mainly named.
    Senator Dayton. You mentioned before deferring to 
policymakers, presumably Congress, in terms of some of these 
decisions, this is an area where, frankly, we are going to have 
extremely limited expertise and time to focus, and you are 
going to have, hopefully, your entire pursuit will be this. 
Given the complexity of them and the proliferation of them, I 
hope that you will take an aggressive and active role in 
bringing to our attention areas of deficiency, rather than 
waiting for something to appear, as you say, in the headlines 
of the paper.
    Ms. Brown-Hruska, I notice that you were with the Division 
of Economic Analysis for several years, and it says here that--
and this is back from 1990 to 1995--we are looking at some of 
these areas, such as the anticompetitive nature of derivative 
markets and the like. I am impressed that the Commission at 
that stage was on the, I would say, the cutting edge or front 
edge of some of these new financial instruments.
    My question is, given the ingenuity with which these 
instruments seem to be newly devised or varied, and often with 
the intent, in part, at least, to have an instrument that 
circumvents or avoids any kind of regulatory oversight. How do 
you think the Commission can stay abreast of, stay current, 
with these kind of cutting-edge developments, and again will 
you be willing to bring to us areas where you think the 
Commission should be involved that it is not at that time?
    Ms. Brown-Hruska. Yes, It is very important. That is an 
excellent point. There is such complexity that has come forth 
from the over-the-counter markets especially, and at times it 
appears that some of the goals are not that honorable: some are 
developed to try to avoid taxes, and some are developed to try 
to cook the books, and that certainly is inappropriate, and it 
is something that I believe that the CFTC and other regulatory 
agencies and Congress need to get to the bottom of. It is very 
important.
    Senator Dayton. Do you think the Commission is equipped in 
terms of staffing and expertise, to apprise itself, apprise the 
members of the Commission on these new developments?
    Ms. Brown-Hruska. Well, I know when I was there, I was very 
impressed with the skill and expertise of the Commodity Futures 
Trading Commission staff and with the commissioners at the 
time. There was a great awareness of the innovation, and 
especially a great understanding on how these instruments could 
be used to manage price risk and to actually lower price 
volatility that we sometimes see from spikes in supply and 
demand in the underlying markets.
    There is an understanding, and also there were a lot of 
important cases, I recall, that came up where people were, 
institutions were developing and using derivatives for ill 
gain, and the CFTC went after them then, and the CFTC is 
prepared to go after them now.
    Senator Dayton. This is my final question, Mr. Chairman.
    Just briefly, from each of you, the people who are most 
interested in the Commission and its dealings are those who are 
in the businesses, the industries that are being overseen. The 
cacophony of responses is always less regulation, deregulate, 
take Government strictures off of us and let the markets 
dictate results and get out of the way. Those who are perhaps 
exposed in those areas, although anybody who gets into those 
kind of tradings should be well-advised that it is participant 
beware, are not going to be heard from, and I am thinking 
particularly of, say, the Enron pensioners and others who may 
even unwittingly be pulled in.
    Can you just give me, briefly, your role of the regulatory 
responsibility of the Commission and what is appropriate 
regulation in an era which emphasizes deregulation?
    We will start with you, Ms. Brown-Hruska, please.
    Ms. Brown-Hruska. Sure. Thank you, Senator. That is a very 
important question, and regulators have an obligation to ensure 
the economic and financial integrity of the markets and to be 
accountable to the individuals and institutions who use the 
markets and the citizens who pay their taxes.
    I am sure that if I were confirmed by this committee and 
this Senate, I would dedicate myself to upholding the values 
that include protection of the public interest, and that 
includes consumers, investors, hedgers. It is important to be 
accountable to these individuals, and being accountable to the 
people who are at that level and who pay their taxes means 
being accountable to this committee and to the Senate.
    I would be committed to the committee and dedicate myself 
to upholding the important functions of economic integrity of 
the market, and the financial integrity of the market, and 
investigating to the full extent that is possible any 
violations of the laws that are there.
    Senator Dayton. Thank you.
    Mr. Lukken.
    Mr.Lukken. Senator Dayton, as you mentioned, there are many 
times when the market incentives work against the public's 
mission, whether that is consumer protection or manipulation, 
and that is the time when we have to be the most diligent and 
the most present. There are certainly times recently that we 
have seen that, where certain misdeeds in the corporate 
community have happened. Despite the claim that they were self-
disciplining themselves and the markets were working, they 
obviously weren't, and so we have to be a diligent force now, 
especially during times of economic stress, to be out there, to 
make sure that the community knows that we are watching, we are 
reassuring folks, and that when we find misconduct, to be 
diligent and go after that, be aggressive, and I promise to do 
that.
    Senator Dayton. Thank you, Mr. Chairman.
    The Chairman. If I might just followup on that just 
briefly. CFTC, you can use subpoenas, you can go after things 
after the fact, but one of the things, and I do not want to put 
words in Senator Dayton's mouth, one of the things I am 
concerned about is making sure that CFTC uses whatever 
authority it has to prevent these things in the first place. 
You mentioned, Mr. Lukken, this committee probably within the 
next few days, after we get back from the 4th of July recess, 
we will be having a hearing on derivatives, and especially what 
happened in the energy area. We are gathering information on 
that right now, and so CFTC will be, of course, part of that 
hearing process.
    I guess I just want to know if you believe that the CFTC 
has the adequate ability to get information prior to something 
happening; in other words, to get the kind of information on an 
ongoing basis to sort of raise the red flag and say, wait a 
minute, if you continue down this way, we are going to have 
some real problems and to alert the public and to alert us here 
in the Congress.
    I have no doubt that CFTC has the authority and the power 
to get it after the fact, and to issue subpoenas and do the 
kind of things you have to do, but I am more interested in the 
CFTC preventing the kinds of manipulations and lack of 
discovery, price discovery in the first place. I guess my 
question is do you think that you have enough authority to do 
that in the CFTC?
    Mr. Lukken. Well, it is a little difficult to know, before 
I get down there, exactly what information they are currently 
receiving, and so, for me, it is a little difficult to answer 
that question. I promise that once I get down there, that is 
hopefully what is going to come out of some of these 
investigations that are ongoing in some of these hearings that 
you will be having is to find out that type of information--are 
you receiving enough beforehand? Can you prevent this type of 
activity? If not, then maybe we need to change it. If so, then 
maybe we can keep it the same. I mean, those are the types of 
questions that hopefully will come out during these 
investigations.
    The Chairman. Yes.
    Mr. Lukken. Congress tried to, in the CFMA, provide some 
authority for the CFTC to do some beforehand in the energy 
markets, especially for multilateral transactions, so Enron was 
a bilateral facility, their trading mechanism, but there are 
some multilateral energy derivative companies out there that 
have to register with the CFTC, have to do certain reporting 
requirements, have to record keep. There are all sorts of other 
requirements on them, so that is going to have to be looked at 
to see whether that is proper level or not.
    The Chairman. Well, that is one of the things we are going 
to be looking at when we go down this hearing.
    Senator Dayton. If I could just followup on that, Mr. 
Chairman. I certainly agree with you. You can put words in my 
mouth any time if you find----
    [Laughter.]
    Senator Dayton. I do not expect you to identify ahead of 
time that an Enron is proceeding in ways that it is. It would 
be great if you could do so, but I mean there are just too many 
companies, too many players. What you need to do is make sure 
that the staff determines that these instruments are 
structurally sound. I remember reading once a couple of years 
ago some hotshot said to his colleagues, ``We don't sell these 
instruments to the sophisticated investors, we sell them to the 
unsophisticated investors.'' In other words, we contrive 
something and try to get people who think they can make some 
money quickly and do not understand what they are getting 
themselves into.
    Everybody is going to be involved in these markets. In my 
view, as I said, you should have a big warning sign, there is 
no gain without risk involved. The instrument itself needs to 
be structurally sound and not a contrivance in such a way that, 
and if it is being perpetrated on the public by some active 
sales people, that is where you have to be really aggressive 
and step in with both feet, and I hope you will consider that.
    Thank you.
    The Chairman. Mr. Flory, the New York Times has written a 
series of stories concerning Farmer Mac, and I am sure you have 
read those over, and they have been, if I might say, less than 
flattering. Specific concerns raised include the independence 
of Farmer Mac's board of members, the overcompensation of 
executives, insider control of stock, inadequate capital and 
reserves and questionable investment practices.
    Now I understand that you have not had access to materials 
that would allow you to specifically comment on this situation. 
I am not asking this. I am just, nonetheless, these set of 
circumstances provides a timely hypothetical and I just, again, 
I want to know have you looked at those articles, are you aware 
of them, and just, as a new board member, how you might 
approach responding to those concerns, and this committee will 
probably also be delving into those at some point down the 
road.
    Mr. Flory. Yes, Senator Harkin, I am aware of the public 
exposure, the same as the rest of us around here who have read 
the press. As you say, I have no access to current information 
at the Board. I am very familiar with Farmer Mac's mission, and 
it is extremely important, as it rounds out the credit needs of 
the American farmer and rancher in rural America.
    However, I will pledge to you and the committee that as I 
become involved as a board member, if I am confirmed, that I 
will move in that direction very fast and will have a great 
interest in that.
    The Chairman. Thank you, Mr. Flory.
    Senator Lugar.
    Senator Lugar. Thank you, Mr. Chairman.
    Mr. Flory, several years ago during the savings and loan 
crisis, farm credit came to a crisis. Often the two were 
compared; the size of the crisis in farm credit was 
substantially less but, nevertheless, many of the problems very 
similar.
    This committee likes to believe that our solution to the 
farm credit crisis was a lot less expensive to the American 
taxpayer. It was being suggested at the time that the 
liabilities might go to $10 billion--and we have roughly 
settled it for something less than $1.3--but, still, this was a 
shock not only to farmers and bankers, but to the public as a 
whole that all of this proceeded without either the proper 
oversight or reforms.
    Now, subsequently, we have had fairly smooth going, and 
hopefully your tenure will be a part of that, but the Farm Mac 
situation the chairman mentions is a warning signal on the 
horizon that things are never particularly safe, and I 
appreciate the chairman's thoughts. We may even do some 
oversight during the waning weeks and months of this year.
    As I read the press account, it reminded me of the 
testimony we heard on long-term capital management a while 
back. That is extraordinary leverage. Now that extreme case of 
long-term capital sets a parameter at the outside, and Farmer 
Mac, in its worst condition, could not be at least that 
leveraged, but the charge is being made that the reserves 
behind various investments are inadequate, substantially 
inadequate, and that is going to cause some problems in markets 
such as the ones we have now unless somebody does something 
about it.
    I appreciate that you are studying it. You have not been 
into the private details and so forth. Hopefully, you and the 
other commissioners will be there very rapidly. This committee 
probably should be there. We need to wrestle this one to the 
ground before it gets out of hand, and I say that as somebody 
who was here at the beginning of Farmer Mac.
    We saw the need in order to get to every small town, small 
county, remote place in America that said we are being left 
behind in terms of farm credit, and we heard that call, and 
there is great sympathy in this committee for saving every 
family farm, wherever it may be. Farmer Mac was one of the 
responses to that call, but it may have moved away from at 
least that initial purpose at least as we envisioned it, and if 
so, perhaps we can help you in forming remedies.
    I do not have a further question, but I thought I would 
take the advantage of this hearing to make a comment so that 
you will understand, the gravity the chairman and I feel about 
this and that apparently you share.
    Let me just state that in the Farm Credit Administration, 
from time-to-time, without getting into all of the private 
comments the board members make to any of us, there seems to be 
an occasional lack of communication among some of the 
principals who are involved. I hope that you, as a person who 
has had some longevity in Government, serving under four 
governors, may facilitate people talking to each other in a 
better way. I just say this as an outside comment, as one who 
has listened to a number of people and tried to facilitate this 
dialog.
    Clearly, it is important, that you all share the same data. 
You may demarcate responsibilities, as the case may be, and 
organize your affairs, but nevertheless the committee would 
like to have confidence that everybody is on the same page, 
whether we are talking about Farmer Mac or whatever else may 
come along the trail, because ultimately all of you are 
responsible.
    I thank you for indulging me on these editorial comments, 
but they may be pertinent to your service.
    Mr. Flory. Thank you, Senator Lugar, and they are.
    The Chairman. Thanks, Senator.
    Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Mr. Flory, you have a resume here that would seem to 
prepare you extraordinarily well for this position because you 
have really been on the operating side of agriculture, as well 
as the financial side. Your farm itself, Bunker Hill, going 
from beef cattle, sheep, hay, now to turkey, primarily, 
certainly, you have had to identify the changing trends and 
fortunes and misfortunes involved in the agriculture economy, 
and as Senator Lugar was referring, in terms of the credit side 
as well.
    Can you give, from your perspective, an assessment of where 
we are today in terms of the whole structure of agriculture 
finance. Are we relying too much on credit versus--well, a 
profit might be nice, I am sure, but are we past the danger 
zone?
    Mr. Flory. Senator Dayton, I believe this committee and 
others that have dealt with, and most recently the Farm bill, 
in my view too many farmers, and producers, and ranchers across 
the country are too dependent on our Government programs and 
not dependent enough on our markets and our market-driven 
economies in agriculture.
    That is a concern to me, and as time goes on, it would 
appear to me that there should be public policy and hopefully 
some market arrangements that will at least remedy some of 
that. That, in itself, leaves some concern to me, and I know 
others, that if, for some reason, the support levels are not 
there, that we could have--and I certainly hope it would not be 
the kinds of things we had in the 1980's--but at least some 
stress in agriculture.
    To further comment, all of those who provide credit to 
agriculture, be it Farm Credit System, be it commercial bankers 
of the savings and loans and FSA. We all learned some good 
lessons out of the 1980's. We are better prepared, we are 
better capitalized, we have insurance funds in place to assist 
us, but at the same time we also need to remain very diligent 
as we move forward and look at the risk points out there, and 
that is a big concern to me.
    Senator Dayton. I agree with your comment about the 
reliance on the Government programs. Of course, Government 
programs have also proliferated in their numbers and their 
complexities. I just realized in the last couple of years, 
sitting on this committee and going through this farm bill, how 
intricately aware and knowledgeable farmers have to be on just 
a whole variety of these programs.
    Is there any way, and maybe this would be something that 
you could come back to us in a year or two, but that we could 
consolidate and simplify some of these financing different 
entities? Do you have any suggestions or words of wisdom on 
that account?
    Mr. Flory. That is a very tough question. Each financing 
entity, whether it be Farm Credit or commercial bankers or FSA, 
all have a mission--and Farmer Mac, also--they have a very 
definite mission in providing agricultural credit throughout 
the United States. In some instances, they compete with each 
other. In other instances, and hopefully, as we go down the 
road, they will complement each other in working together to 
supply that credit that is needed for agriculture, and most 
particularly, as we go through the generational change of 
ownership of farms with young farmers and beginning farms. That 
is the most important area we have.
    Cooperation, and I am one that believes that we should work 
together, all of those both private and public institutions 
that are providing credit need to work hand-in-hand in being 
certain that we supply the family farmer and the commercial 
farmer adequate credit.
    Senator Dayton. Thank you.
    Thank you, Mr. Chairman. We have, in my opinion, four very 
well-qualified nominees. Thank you.
    The Chairman. I concur with that. We have four very well-
qualified nominees.
    We thank you for being here, for your testimony, for your 
service. For the family members and others who are here, you 
should be very proud of these nominees for their dedication to 
public service, and with Senator Lugar, I hope we can move 
these nominees at a relatively rapid pace.
    Senator Lugar. Mr. Chairman, may I ask just one more 
question in Mr. Flory's presence? The temptation overwhelms me.
    The Chairman. Sure.
    Senator Lugar. Getting back to my modest farm operation 
again----
    [Laughter.]
    Senator Lugar. I am delighted that the value of my acreage 
seems to be rising each year, at least this is what people who 
are involved in farmland surveys at Purdue University, quite 
apart from the private market, tell me. I am pleased about that 
because if the operating profit seems too small, the capital 
gain tends to offer some returns, some future for me or for my 
heirs.
    Now the problem with all of this comes back when 
occasionally a country banker will say there is certain 
formation here of what you might call a bubble effect. In other 
words, here you have a situation in which obviously you are not 
making a whole lot of money, given the assets that you have and 
the net worth that you claim for all of this. Yet, at the same 
time, your land keeps rising every year, and as country bankers 
we get worried about this kind of collateral.
    Just to make your point. If, for example, the Congress 
should take a shift at some point and say, by and large, farm 
program costs--we did not mean it this way--but somehow they 
just got out of hand. Prices kept coming down because of 
oversupply, not only in this country, but worldwide; therefore, 
the disparity, to keep everything afloat, got larger and 
larger, and finally people said enough is enough, and so they 
began to shear off some of the funding.
    Now, if you are a country banker sitting out there and that 
begins to happen, and you have already had some modest fears 
about the rising land value and your collateral, why you might 
overreact. In other words, you might say this is it, we are 
going to have to batten down the hatches at this point. 
Whereupon, a lot of farmers would find it very difficult to get 
the credit that they had been accustomed, and therefore what 
was a mildly disquieting situation becomes really a rampant 
panic in that process.
    What kind of guidance can Farm Credit Administration give 
not to legislators, we have made our decisions with regard to 
the farm programs for a while, but to farm owners, about the 
land value situation? Do you make comments from time-to-time 
about land values and how we stabilize the situation given the 
vagaries of political discussion about farm policy? I ask this 
in seriousness because it appears to me, if there is one large 
cloud on the horizon of your responsibilities, it might be this 
one. If there is enough of a shift, in terms of sentiment with 
regard to farm payments, people may begin to have some qualms 
about the collateral and therefore about the credit they 
extend.
    Mr. Flory. Senator, there are several aspects that we need 
to always be very aware of. First of all, Farm Credit is one of 
the major suppliers of credit throughout the United States, and 
they are a single-industry lender. They have one mission, and 
that is to supply farmers, ranchers and rural America and 
farmer co-ops loans, and they have done it through good times 
and bad, with the caveat that during the 1980's there were some 
real stresses among folks, and I hope we have learned some 
lessons.
    Commercial bankers, particularly my experience with those 
that are in very rural areas, have the same philosophy. That is 
their bread and butter. They need that loan portfolio, they 
need those farmers' deposits in order to be a viable bank. I 
just think the land values will always be something that we 
must be aware of and how they are being affected publicly and 
privately, and they are the underpinning for the value of the 
farm assets out there, and we have got to make certain that 
they stay valuable within reason.
    I started in banking early on, and we were balance-sheet 
lenders. During the 1970's we had, out of necessity, became 
cash-flow lenders. If we continue to keep our eye on cash-flow 
and make certain that we can pay the bills, then the farmer, 
and rancher and the co-op will be very strong, and we will have 
less problems back at the Agency.
    Senator Lugar. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Lugar.
    I thank all of the nominees for being here. Again, I thank 
you for your public service, and we hope that we can expedite 
getting you on board as soon as possible.
    The committee will stand adjourned.
    [Whereupon, at 11:31 a.m., the committee was adjourned.]
      
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                            A P P E N D I X

                             June 25, 2002



      
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                         QUESTIONS AND ANSWERS

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