[Senate Hearing 107-865]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-865
 
                  NOMINATIONS OF: HARVEY J. GOLDSCHMID
                     PAUL S. ATKINS, DONALD L. KOHN
                  BEN S. BERNANKE, AND PHILIP MERRILL
=======================================================================

                                HEARINGS

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

                            NOMINATIONS OF:

          harvey j. goldschmid, of new york, to be a member of
              the u.s. securities and exchange commission

                               __________

             paul s. atkins, of virginia, to be a member of
              the u.s. securities and exchange commission

                               __________

        donald l. kohn, of virginia, to be a member of the board
               of governors of the federal reverse system

                               __________

      ben s. bernanke, of new jersey, to be a member of the board
               of governors of the federal reserve system

                               __________

     philip merrill, of maryland, to be the president and chairman
             of the export-import bank of the united states

                               __________

                    JULY 18, 30, AND OCTOBER 4, 2002

                               __________

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








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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  PAUL S. SARBANES, Maryland, Chairman

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

           Steven B. Harris, Staff Director and Chief Counsel

             Wayne A. Abernathy, Republican Staff Director

                  Martin J. Gruenberg, Senior Counsel

                        Dean Shahinian, Counsel

         Thomas Readmond, Republican Professional Staff Member

   Jospeh R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)





                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 18, 2002

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Gramm................................................     4
    Senator Dodd.................................................     5
    Senator Allard...............................................     6
    Senator Corzine..............................................     6
        Prepared statement.......................................    24
    Senator Enzi.................................................     7
        Prepared statement.......................................    24
    Senator Miller...............................................    13
    Senator Carper...............................................    15

                               WITNESSES

John Warner, a U.S. Senator from the State of Virginia...........     1
George Allen, a U.S. Senator from the State of Virginia..........     2

                                NOMINEES

Harvey J. Goldschmid, of New York, to be a Member of the U.S. 
  Securities
  and Exchange Commission........................................     8
    Prepared statement...........................................    25
    Biographical sketch of nominee...............................    27
    Response to written questions of:
        Senator Bunning..........................................    71
        Senator Akaka............................................    71
Paul S. Atkins, of Virginia, to be a Member of the U.S. 
  Securities and
  Exchange Commission............................................     9
    Prepared statement...........................................    53
    Biographical sketch of nominee...............................    55
    Response to written questions of:
        Senator Bunning..........................................    72
        Senator Akaka............................................    72

              Additional Materials Supplied for the Record

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

                              ----------                              

                         TUESDAY, JULY 30, 2002

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

Opening statements, comments, or prepared statements of:
    Senator Bunning..............................................    84
        Prepared statement.......................................    93
    Senator Gramm................................................    87
    Senator Reed.................................................    87
    Senator Corzine..............................................    90
    Senator Miller...............................................    92

                                NOMINEES

Donald L. Kohn, of Virginia, to be a Member of the Board of 
  Governors
  of the Federal Reserve System..................................    79
    Prepared statement...........................................    93
    Biographical sketch of nominee...............................    96
Ben S. Bernanke, of New Jersey, to be a Member of the Board of 
  Governors
  of the Federal Reserve System..................................    81
    Prepared statement...........................................   106
    Biographical sketch of nominee...............................   108

                              ----------                              

                        FRIDAY, OCTOBER 4, 2002

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

                               WITNESSES

Barbara Mikulski, a U.S. Senator from the State of Maryland......   119
John Warner, a U.S. Senator from the State of Virginia...........   121

                                NOMINEE

Philip Merrill, of Maryland, to be President and Chairman of the
  Export-Import Bank of the United States........................   124
    Prepared statement...........................................   129
    Biographical sketch of nominee...............................   130
    Response to written questions of:............................
        Senator Miller...........................................   144
        Senator Santorum.........................................   144

              Additional Materials Supplied for the Record

Letter submitted by Congressman Steny H. Hoyer, of Maryland, 
  dated
  October 3, 2002................................................   145
Letter submitted by Edmund B. Rice, dated October 3, 2002........   146


                            NOMINATIONS OF:



                   HARVEY J. GOLDSCHMID, OF NEW YORK



                                  AND



                      PAUL S. ATKINS, OF VIRGINIA



                          TO BE MEMBERS OF THE



                 U.S SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                        THURSDAY, JULY 18, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:05 a.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING COMMENTS OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The hearing will come to order.
    The Committee on Banking, Housing, and Urban Affairs 
convenes today to hold a hearing on two nominees to serve on 
the Securities and Exchange Commission--Professor Harvey 
Goldschmid and Paul Atkins. I am going to defer the balance of 
my opening statement because we have two of our colleagues here 
to present one of the nominees, and I know they have other 
pressing demands on their time.
    Senator Warner, why don't we hear from you and then we will 
go to Senator Allen.

                    STATEMENT OF JOHN WARNER

           A U.S. SENATOR FROM THE STATE OF VIRGINIA

    Senator Warner. Thank you very much, Mr. Chairman, Senator 
Gramm, Senator Dodd, Senator Enzi, colleagues. It is a 
privilege for me to be here today to introduce to this 
Committee, under the advise and consent procedure of the U.S. 
Senate, the President's nominee for the Securities and Exchange 
Commission.
    Mr. Atkins has a vast and distinguished career in the 
private sector and several years of service at the Securities 
and Exchange Commission. Consequently, I and others strongly 
believe that he is eminently qualified to take on these 
important responsibilities, particularly at this critical time 
in the history of corporate America.
    His background at the SEC and in the private sector enables 
Mr. Atkins to take a balanced approach, in my judgment, on 
reform and accountability issues, working in the best interests 
of the private sector and the consumers alike.
    At the height of the Congressional inquiry calling for 
increased corporate responsibility and reform on accounting 
standards, it is critical we confirm those individuals who will 
fill the existing vacancies in the Commission and do so in a 
balanced manner.
    In the coming months, the Commission will be tasked with 
making important regulatory decisions. Consequently, I will put 
the balance of my statement in the record. I thank the 
distinguished Chairman and the Members of the Committee.
    Chairman Sarbanes. Good. We appreciate that very much, 
Senator Warner.
    Senator Allen.

                   STATEMENT OF GEORGE ALLEN

           A U.S. SENATOR FROM THE STATE OF VIRGINIA

    Senator Allen. Thank you, Mr. Chairman. Thank you for your 
leadership on this Committee and for holding this hearing. It 
is good to see Senators Gramm, Dodd, Allard, and Enzi here as 
well.
    I am before you this morning to offer my strong support for 
the confirmation of Paul Atkins, one of President Bush's 
nominees to be a member of the Securities and Exchange 
Commission.
    I will discuss Mr. Atkins' strong qualifications in a 
moment. But Paul has his family here with him, his wife Sarah, 
two of his three sons, Peter and Stewart, and other members who 
are in the Washington area for a wedding this weekend. I am 
sure that will be a wonderful discussion at the wedding 
reception.
    Mr. Chairman, Mr. Atkins is one of my constituents, a 
resident of Arlington, with a wonderful family. He has been 
nominated to the SEC at an important time. It is a hot time 
now, but it is going to be hotter on the SEC. You are jumping 
into a frying pan with the scandals this Committee has been 
addressing, trying to restore confidence and accurate 
accounting, accurate portrayals of the financial condition of a 
company, as well as corporate governance. Mr. Atkins is the 
right person at the right time to bring that experience, that 
knowledge, and especially bring the character that people want 
to see in making determinations on the SEC.
    He is certainly coming in at a challenging time. But he has 
worked since leaving education on financial markets. He has 
worked in the private sector with the SEC to protect investors, 
as well as make sure that the private sector companies comply 
with SEC regulations. He has also worked at the SEC under two 
of its distinguished chairmen, Richard Breeden and Arthur 
Levitt. During his tenure on the Commission, he spearheaded a 
variety of initiatives that are truly relevant in today's 
market environment, 
focusing on investor communication, investor education, and 
efforts to improve corporate governance.
    This is an important time for the SEC and I think that the 
SEC is one of the key players in making sure that confidence 
and proper governance are restored. And I think that this 
gentleman, Mr. Atkins, has all the qualifications one would 
want including experience and character to serve on the SEC and 
to serve our market system. I hope you will move very 
favorably, and he has my full support.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you, Senator Allen. And we thank 
both of our colleagues. I know you have other engagements and 
if you wish to excuse yourselves, please do so.
    Senator Warner. Mr. Chairman, could the nominee introduce 
his family at this time to the Committee? Would that be 
appropriate, Mr. Chairman?
    Chairman Sarbanes. Well, we were going to do that later.
    Senator Warner. All right.
    Chairman Sarbanes. No, no, no. Since you have raised the 
issue, why don't we go ahead and do it now?
    Go ahead.
    Mr. Atkins. Okay. Thank you, Mr. Chairman.
    With me here is my wife, Sarah, two of my sons, Stewart and 
Peter. For the sake of decorum, we left our 2 year old, Henry, 
at home.
    [Laughter.]
    My mother, Carla Atkins. My mother-in-law, Ethelmae 
Humphreys from Missouri. My brother Harold and his fiancee, 
Tracey Wyatt, who is from the great city of Baltimore. They are 
getting married this weekend, which is the reason why everyone 
is in town. My uncle and aunt, Burhard and Ute Gusovius.
    Chairman Sarbanes. Very good. Very impressive.
    Senator Gramm. A man whose mother-in-law is for him is all 
right.
    [Laughter.]
    Senator Warner. I am out of here.
    [Laughter.]
    You are on your own.
    Mr. Atkins. Thank you.
    [Laughter.]
    Chairman Sarbanes. Behind every successful man stands a 
surprised mother-in-law. Is that it?
    Senator Gramm. That is right.
    [Laughter.]
    Chairman Sarbanes. Professor Goldschmid, do you want to 
introduce your family now here at the outset?
    Mr. Goldschmid. I would be delighted. My wife Mary is right 
here. With Mary are our two sons, Paul and Joey. I will mention 
my third son, Charlie, in the opening statement.
    Chairman Sarbanes. Very good. I will finish my statement, 
then yield to my colleagues who are with us.
    The SEC, as Senator Allen just observed, plays a critical 
role in protecting investors, ensuring the integrity and 
efficiency of the securities markets. In recent months, the 
securities markets have experienced a severe erosion in public 
confidence. Investors have seen too many instances of faulty 
accounting, misleading stock recommendations, unreliable 
auditor certifications, and inadequate issuer disclosures, all 
of this at a time when the value of stocks has fallen 
significantly.
    We are making an effort here in the Congress to address 
these problems. Just 3 days ago, the Senate passed the Public 
Company Accountability Reform and Investor Protection Act of 
2002, which came out of this Committee, by a vote of 97 to 0 
and we are now going to conference with the House. The 
conferees were appointed yesterday.
    I welcome the two nominees that are before us this morning. 
Professor Goldschmid is Dwight Professor of Law at Columbia Law 
School. He received both his BA and his JD degrees from 
Columbia. He has really never managed to get out of the 
confines of Columbia University.
    [Laughter.]
    He clerked for Judge Paul Hays of the Second Circuit Court 
of Appeals, practiced law with the firm of Debevoise & 
Plimpton. In 1970, he joined the Columbia Law School faculty 
and has continued teaching there ever since. In 1998 and 1999, 
he took a leave of absence from Columbia to serve as the 
General Counsel of the Securities and Exchange Commission. 
Professor Goldschmid has held numerous positions in legal 
associations, served on numerous legal panels, coauthored books 
on trade regulation, written many articles on securities law, 
antitrust, corporate law, and legal education.
    Mr. Paul Atkins is a graduate of Wofford College and from 
Vanderbilt University School of Law, where he was on the 
Vanderbilt Law Review. He then went on to work with Davis Polk 
& Wardwell in New York and in Paris. From there, he went to 
work at the SEC, on the staff of the SEC, and eventually was 
Executive Assistant to Chairman Richard Breeden and then 
Counselor to Chairman Arthur Levitt. In 1994, he joined Coopers 
& Lybrand, which later became PricewaterhouseCoopers. And 
currently, he is the Principal of the Financial Services 
Regulatory Advisory Group at PWC. Mr. Atkins has published 
articles on the role of the compliance officer. He is coauthor 
of a book, Generally Accepted Risk Principles. And I am looking 
forward this morning to hearing the testimony of both of our 
nominees.
    And I yield to Senator Gramm.

                 COMMENTS OF SENATOR PHIL GRAMM

    Senator Gramm. Well, Mr. Chairman, thank you very much.
    Let me begin by thanking our nominees for their willingness 
to serve. This will be a very difficult time to be at the SEC. 
I have had the great privilege in my period of service on this 
Committee as a Member and Chairman and Ranking Member, to work 
with many great commissioners. I have had an extraordinarily 
high opinion of our last two chairmen. I sat on this Committee 
and listened as everyone lavished praise on Harvey Goldschmid 
for all the knowledge and experience he had. And now, you can 
hardly open a paper without criticism being made--who did I 
say?
    Chairman Sarbanes. Harvey Goldschmid.
    Senator Gramm. We are going to hear it for Harvey 
Goldschmid today. I mean Harvey Pitt.
    Chairman Sarbanes. Yes.
    Senator Gramm. And now, you can hardly open a paper without 
someone saying that the fact that Harvey Pitt did not just come 
in off the turnip truck, that he actually was engaged in 
representing various interests before the SEC. And of course, 
he was one of the most active general counsels and the youngest 
general counsel in the history of the SEC. Now all those things 
are a source of criticism. Well, this is the same Harvey Pitt 
that was here. He, like his predecessor, Arthur Levitt, is 
doing an excellent job, in my opinion.
    So that is the criticism that comes with public service. I 
just want to say that I appreciate people's willingness to 
serve the greatest country in the history of the world, and we 
appreciate it.
    I look forward to working with both of you in your capacity 
when you are confirmed.
    Chairman Sarbanes. Very good.
    Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Thank you, Mr. Chairman. And let me extend my 
best wishes to both of you as well, and to welcome your 
families here, and these young men here. This is a very 
important moment to watch their father in a confirmation 
hearing.
    I want to underscore the comments of both my Chairman and 
the Ranking Member in terms of the obligation to do whatever is 
possible to restore confidence in the marketplace in this 
country.
    It will be a challenging time. Candidly, I cannot think of 
a more exciting time to be at the SEC. You are coming on when 
the expectations are going to be high, and rightfully so, that 
we do everything we can to rebuild what has been historically 
the great selling point, I have always said, of our markets.
    We do not always offer the most attractive deals in the 
world. There are other countries that race to the bottom, to 
use Arthur Burns' line, when it comes to the regulatory 
process.
    We have resisted that over the years, although some have 
tried to move us in that direction. And the fact that we have 
not has been an attractive quality about why foreign capital 
seeks to come to these markets historically. And it is why I am 
worried today that they are not because they, for the first 
time in years, feel as though our structures may not be what we 
have always claimed them to be. Everyone involved in this, the 
private sector, the President, the Congress, but principally 
the SEC will bear responsibility for helping us rebuild that 
sense of confidence.
    I also agree with Senator Gramm. I did not know Harvey Pitt 
at all. I never really met him. I knew nothing about him, 
really. I heard his name mentioned. But, in my view, he hardly 
has been on the job. I think he came on the job in September. 
Enron broke in October. We focus our attention on personalities 
rather than what needs to be done to get us back on track. 
There may come a time when Harvey Pitt may be the wrong person 
for the job, but it is terribly premature and distracting for 
us to be talking about personalities rather than what needs to 
be done within the regulatory and legal schemes in order to 
rebuild the confidence necessary for us to attract capital to 
our markets again. So I am not going to join the chorus on the 
Harvey Pitt discussion. I would rather we focus our attention 
on what needs to be done as public policy people to straighten 
things out here, rather than to try and engage in the attacks 
on individuals.
    Finally, let me just say to both of you here, and I think 
you both worked at the SEC so you have a good understanding. 
You are not coming in as complete outsiders here. In fact, you 
and I talked about this yesterday, Mr. Goldschmid. And that is 
that you have been chosen by the President. That is a high 
honor.
    But unlike a Cabinet officer, in my view, the SEC is in a 
special category. It is not unlike the Secretary of State or 
the Secretary of Defense, for different reasons. Here, the 
temptation of every White House is to have people get in line 
and support their policies. However, it is critically important 
at the SEC that you refrain from getting caught up in the day-
to-day machinations or agendas that are set, both here in 
Congress and at the White House.
    I would urge you to resist that, regardless of the 
Administration that is in office. The SEC is the organization 
that we really count on to provide that confidence. And if 
there is a sense that decisions are being made for a short-term 
political advantage rather than the long-term financial 
interests of our country, then the SEC is damaged. And if it is 
damaged and its credibility is in question, then everything 
else will be as well. So it is going to be critically 
important, if confirmed by the Senate, that you be pillars of 
the institution you have once worked for in terms of restoring 
the sense of confidence that this institution can do the job it 
has been asked to do historically.
    With that, I welcome you. Thank you both for being willing 
to serve as well.
    Chairman Sarbanes. Good. Senator Allard.

                COMMENTS OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. I would like to 
join my colleagues in congratulating you on your appointment by 
the President.
    You do have a huge challenge in front of you. You are going 
to be under a microscope in every little thing that you do, not 
only your personal lives, but all your decisions on the 
Securities and Exchange Commission are going to be under a 
microscope. You are going to find yourself under a lot of 
pressure.
    I am one who has felt that we need to have reform in the 
SEC. You are going to hear a lot of good ideas about what makes 
up good, reasonable reform. And so, you are going to have to 
put aside the chaff, look for the facts, act on behalf of what 
is best to restore the confidence in our markets. I think that 
is the real challenge. And the sooner we can get that 
confidence restored, the better.
    I want to wish you both luck in carrying on your 
responsibilities and thank you for being willing to serve.
    Chairman Sarbanes. Very good.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman. I appreciate your 
holding this hearing and going forward. We need some new blood, 
not because the people there are not doing a good job, but in 
my opinion, we just need to make sure we have an SEC that is 
fully staffed and attentive. It is an extraordinary 
institution. I have had plenty of personal experience and have 
great respect for it.
    I am sure you all will be positive and worthy contributors. 
But I think there is an extraordinary need to do some of the 
kinds of things that Senator Dodd was talking about, bringing 
objectivity and a fairness to this process that make our 
markets healthy and consistent with the principles of a Nation 
that people are innocent till proven guilty, as well as making 
sure there is a real check and balance to what goes on.
    I hope that you will also be strong advocates to make sure 
that the SEC has the resources to be able to do the job that it 
is expected to do. Sometimes regulation and regulators who are 
presumed to have the ability to do something and then do not 
have the resources to really do it, set up a false sense of 
security that ends up undermining the quality of our financial 
markets.
    So, I am pleased you all are here. I look forward to 
hearing your testimony and believe very much in the institution 
and think now, more than ever, the SEC has an extraordinary 
role to play in our society.
    Thank you.
    Chairman Sarbanes. Thank you, Senator Corzine.
    Senator Enzi.

              COMMENTS OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Mr. Chairman.
    I am very pleased that we are beginning to move the 
nominees for the Commission forward. I believe that it is 
important for us to get all the Commissioners there to work on 
enacting the important legislation that we have been working 
on.
    I would also say that both of our nominees have very 
accomplished records, and I am pleased both of them hold the 
Commission in high enough regard that they are willing to 
return to Government service. We thank you for that. You have 
had a taste of the outside and I know the sacrifices that are 
entailed in coming back into Government.
    The issues facing the Commission will require a major 
undertaking. Reforms about the methods by which we review and 
discipline publicly traded companies, executives, and others 
associated with the formation of the capital markets are 
underway. And it is important that we have quality individuals 
with utmost integrity to fill these positions.
    I want to join Senator Gramm in a few comments in support 
of Chairman Pitt. I have looked at some of the numbers of the 
work that he has generated already. He appears to have exceeded 
all previous years. Part of that is because we are in a bit 
more of a crisis now than we have been in previous years. But 
the activities that are going on now did not start now. They 
started earlier. And I am glad he is deeply involved in solving 
some of those problems.
    I would ask that my complete statement be a part of the 
record. And I would also ask that a column by Bob Novak that 
appeared in today's Chicago Sun-Times also be a part of the 
record.
    Chairman Sarbanes. Without objection, so ordered.
    Gentlemen, it is the practice of this Committee to place 
nominees under oath at their nomination hearing.
    So I would ask both of you to stand now. Do you swear or 
affirm that the testimony that you are about to give is the 
truth, the whole truth, and nothing but the truth, so help you 
God?
    Mr. Atkins. I do.
    Mr. Goldschmid. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Goldschmid. I do.
    Mr. Atkins. I do.
    Chairman Sarbanes. Thank you very much.
    We would be happy to hear your opening statements. 
Professor Goldschmid, why don't we start with you and then we 
will go to Paul Atkins.

         STATEMENT OF HARVEY J. GOLDSCHMID, OF NEW YORK

                     TO BE A MEMBER OF THE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Goldschmid. Chairman Sarbanes, Senator Gramm, 
distinguished Members of the Committee, it is with great 
respect and pleasure that I appear before you today. I am 
honored to have been nominated to serve on the Securities and 
Exchange Commission.
    I have introduced my wife Mary. She is on my right. She has 
been an extraordinary partner all through life. She may look a 
bit tired today. Normally she is radiant.
    Chairman Sarbanes. She is radiant today as well, I hasten 
to add.
    [Laughter.]
    Mr. Goldschmid. She spent all day yesterday in the hospital 
with our oldest child Charlie, who we had hoped would be here. 
He had a back injury. It looked very dangerous for a while.
    Thank God it turned out to be okay.
    Chairman Sarbanes. Good. We are relieved to hear that.
    Mr. Goldschmid. My other two children are here and are 
wonderful, too.
    I come from a working class background. My father was a 
furrier and a postal worker. My parents believed in our 
financial markets, and, because of Social Security and their 
investments, retired to a relatively comfortable life in 
Florida. Our Nation, as this Committee has indicated, is now 
witnessing the most dramatic business scandals that have 
occurred during my professional life. On a very personal level, 
I feel the pain of the retirees and the investors whose futures 
have been jeopardized. If I am confirmed, I promise to do all I 
can to punish corporate wrongdoers, and to rebuild faith in the 
fairness and integrity of our markets.
    The SEC is a great institution. In January 2000, after I 
left as General Counsel and returned to Columbia, I spoke with 
great pride of the decency, dedication, professionalism, and 
common commitment to doing the right thing of the SEC staff 
from top to bottom. I welcome the opportunity to return to the 
Commission. If the Senate confirms me, I will draw my 
inspiration from two great former chairmen of the SEC, William 
L. Cary and Arthur Levitt. Bill Cary, my treasured teacher and 
colleague at Columbia, was chairman during the Kennedy 
Administration. With independence and nonpartisanship, he 
reinvigorated the agency and initiated a process of reform that 
changed securities laws and financial markets enormously for 
the better. Arthur Levitt, my dear friend, you all know. As 
chairman, he was outspoken, courageous, uncommonly wise, and as 
he often put it, passionate about protecting investors. Day by 
day, in his remarkably successful 8 year term, Arthur acted on 
his beliefs and in the public interest.
    The Senate this week took a bold, balanced, and important 
step toward restoring investor confidence. I want you to know 
how much I appreciate the critical role that you, Chairman 
Sarbanes, and this Committee have played with respect to the 
Public Company Accounting Reform and Investor Protection Act of 
2002. The Nation is very much in your debt for this piece of 
legislation, and for the oversight that you have provided for 
our financial regulatory system. I very much look forward to 
working with you, Mr. Chairman Senator Gramm, this Committee, 
and with Chairman Pitt and Paul Atkins, and my other new 
colleagues on the Commission. I feel confident that all of us 
working together can more than meet the current challenges.
    Thank you, Mr. Chairman, Senator Gramm, Members of the 
Committee, for this opportunity to appear today. I would be 
happy, of course, to answer questions.
    Chairman Sarbanes. Thank you, Professor Goldschmid.
    Mr. Atkins.

            STATEMENT OF PAUL S. ATKINS, OF VIRGINIA

                     TO BE A MEMBER OF THE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Atkins. Thank you, Chairman Sarbanes, Senator Gramm, 
and distinguished Members of the Committee, It is a very great 
honor for me to appear before this Committee today. I am deeply 
grateful for the confidence that the President has shown in me 
by nominating me to be a Commissioner, and I appreciate your 
courtesy in calling me before you today. And also in allowing 
me to introduce my family and relatives. I also want to thank 
in particular Senators Warner and Allen for their kind remarks 
on my behalf.
    Thank you very much. I appreciate their support.
    I have always regarded the Securities and Exchange 
Commission as one of the finest agencies of the U.S. 
Government. My 20 year career has centered on the financial 
markets and the SEC's oversight of them. I have reviewed the 
practices of companies that the Commission regulates, advised 
firms on complying with its regulations, and worked with the 
SEC to investigate and rectify situations where investors have 
been harmed. In fact, I had the privilege of serving as a Staff 
Member of the Commission for 4 years under two of the ablest 
chairmen that the SEC has had: Richard C. Breeden and Arthur 
Levitt. It is a personally meaningful coincidence that the 
actual term that I have been nominated to fill is the same one 
that both Chairman Levitt and Chairman Breeden held. If 
confirmed, I would be proud to continue their first-rate 
efforts to fight fraud through a vigorous enforcement program.
    While at the SEC, I helped pursue policy initiatives that 
foreshadowed many of the issues affecting the markets today. 
Under Chairman Breeden, my primary responsibilities were 
managing his effort to improve corporate governance, 
shareholder communications, and strengthen management 
accountability through proxy reform. Under Chairman Levitt, I 
organized his outreach to individual investors through a series 
of investor town hall meetings, consumer affairs advisory 
committee, and other investor education efforts, including 
brochures and other things.
    Since leaving the SEC, I have continued my work in investor 
protection by promoting meaningful internal safeguards in the 
private sector. I have helped financial services firms improve 
their compliance efforts and have undertaken investigations 
into corporate fraud, at times in conjunction with the SEC and 
the Justice Department. In the course of this work, I have 
spoken directly with hundreds of defrauded investors and 
learned a valuable lesson in the process--that the impact of 
fraud and corporate misconduct is felt far beyond the 
headlines. For example, I have heard the Syracuse, New York, 
electrical union member tell me how he lost the downpayment on 
his house through a complex Ponzi scheme. And I have listened 
while a respected doctor broke down in tears when he described 
how his staff's pension fund lost thousands of dollars through 
the purchase of fraudulent securities.
    Abstract commentaries about the evils of fraud in our 
financial markets pale in comparison to the direct, personal 
impact of these stories. I have no doubt that many Members of 
this Committee have experienced similar tragedies from 
constituents back home. We need to remember that these people 
had their property stolen from them, just as surely as they had 
been robbed on the street. It is professionally and personally 
gratifying to me that I had an opportunity to recoup even a 
small part of their stolen savings, pensions, and dreams.
    If confirmed, I will bring to the SEC this important real-
world perspective of how enhanced compliance, rigorous 
examinations, and thorough investigations can make a real 
difference for investor confidence that ultimately forms the 
foundation of our markets. Moreover, I believe I can make an 
important contribution to the Commission's ongoing efforts to 
improve its own programs and enforcement. The SEC is about to 
receive greatly enhanced resources as a result of the 
President's increased budget request and the work of many of 
you here in Congress. We must ensure that these resources are 
used wisely to protect investors to the maximum extent 
possible.
    I know you have a vote coming up, so if I may just submit 
the rest of my remarks----
    Chairman Sarbanes. No, no. If you wish to complete it, go 
ahead.
    Mr. Atkins. Okay. Sorry. For many Americans, the SEC has 
long been just another Federal agency in Washington with an 
alphabet soup acronym. Today, however, the SEC is at the center 
of a crisis of trust in the markets that has dealt a serious 
blow to investor confidence. In recent months, those markets 
have been rocked by one corporate scandal after another, 
causing millions of investors to question the integrity of 
capital markets.
    Investors need to believe that the auditors of public 
companies are unconflicted, ethical, and acting in the best 
interests of the shareholders. Investors also need to believe 
that corporate officers are honest and have the best interests 
of the companies and stockholders in mind, not just what is 
good for their wallets. They need to know that their 
representatives on corporate boards are actively guarding their 
interests. And, most of all, investors should be able to rely 
on the financial reports issued by public companies to present 
a clear and accurate picture of the financial health of those 
companies.
    Those beliefs have been shaken in recent months. The SEC's 
top priority is to work to restore those bedrock principles and 
the investor confidence that keeps our economy strong. With 
more than half of all Americans invested in the stock market, 
the SEC is entrusted with an enormous responsibility.
    The President has issued a powerful call to reinforce the 
ethic of corporate responsibility. This Committee and the full 
Senate have taken important steps to restore investor 
confidence, as have the House and the SEC. Each of these 
important actors in this process must remain committed to work 
together to restore confidence in our capital markets by 
rebuilding a mutual trust among market participants, including 
investors, corporate executives, and auditors. If confirmed, I 
will dedicate my energy, experience, integrity, and independent 
judgment to achieving that goal. I believe strongly that the 
SEC is a vital line of defense in protecting individual 
investors, and I look forward to the opportunity to return that 
institution to serve that cause with Chairman Pitt and my 
fellow commissioners.
    I look forward to working with you and thank you very much.
    Chairman Sarbanes. Thank you both for very fine statements.
    We have a vote scheduled at of 10:45 a.m. Senator Gramm has 
indicated to me that he is not going to be able to return. So I 
am going to yield to him right in the beginning, and then I 
will be quite prepared to do that with other colleagues who may 
find themselves in a similar situation.
    As Chairman, you have to be there at the beginning and you 
have to be there at the end.
    [Laughter.]
    So I am going to ask my questions a little later.
    Senator Gramm.
    Senator Gramm. Well, Mr. Chairman, thank you very much for 
your kindness.
    Harvey, you served on the Professional Ethics Executive 
Committee for the American Institute for Certified Public 
Accountants. Is that right?
    Mr. Goldschmid. That is correct, Senator.
    Senator Gramm. And in that capacity, you were paid by the 
accountants. Is that right?
    Mr. Goldschmid. I was paid by the AICPA, yes.
    Senator Gramm. Did you feel that that in any way 
compromised your integrity?
    Mr. Goldschmid. No, sir.
    Senator Gramm. You have done work for Merrill Lynch, for 
Lehman Brothers, for the National Association of Security 
Dealers, for the Nasdaq Stock Exchange, for the American Stock 
Exchange. Do you believe that corrupts your judgment or 
infringes on your independence in this job?
    Mr. Goldschmid. No, Senator, I do not. The Commission has a 
sensible prophylactic rule that says there will be a 1 year 
recusal for former clients. But I do not believe the work I did 
for former clients will affect my judgment.
    Senator Gramm. Well, let me say on this recusal thing, if I 
might, I believe people overdo this recusal business. I think 
that, at least it has been my experience in watching the 
process, that, if anything, people go too far. Clearly, if you 
are in some way tied economically to an interest in the 
present, that that represents a conflict of interest. If you 
are affected personally now, that reflects a conflict of 
interest.
    But I am concerned about this view that the fact that you 
have ever been involved in an industry forever or for any 
extended period of time affects your judgment, I think that is 
a bad view.
    I would just like to say for the record, that while I am 
sure there is some group somewhere that looks at your long 
association in this industry and says, they are getting ready 
to put someone on the Commission who has worked for all these 
companies that are doing business before the Commission and 
that is a bad thing, I want to tell you that I find it 
reassuring.
    Mr. Goldschmid. Well, thank you, Senator.
    I think it is true that anyone who should be nominated for 
a commissionership at the SEC will have some potential conflict 
by way of his or her past career. One has to have had that 
experience.
    My experience with the AICPA, of course, was as a public 
member of the oversight group, and that was serving basically 
in a public capacity, as I understood it. But we do have to be 
careful. It is critically important in Washington that we worry 
about conflict of interest and appearance. I do think the SEC's 
1 year recusal period is a wise rule.
    Senator Gramm. Paul, you of course were with Coopers & 
Lybrand. You have been involved with two different accounting 
firms. We are in the process of changing legislation as it 
relates to those accounting firms. Again, I would just like to 
say that I think that is valuable experience. If you are 
confirmed, you are going to be working for the Securities and 
Exchange Commission and not those accounting firms.
    Let me ask both of you, in terms of the SEC and working 
with this accounting board, I would like as my final question 
to ask both of you when the board is established it is going to 
be guided by the law we pass.
    But as two people who I believe will be Members of the 
Securities and Exchange Commission, how do you see the 
Commission working with this board? And Harvey, let me start 
with you.
    Mr. Goldschmid. I hope closely and cooperatively. The SEC 
is a Government agency. It must take ultimate responsibility. 
And as I understand the bill, the Commission will be in a 
position to take ultimate responsibility for all that is done. 
The model is the NASDR--the National Association of Securities 
Dealers Regulation System. I think it will work very well. The 
trick is to make sure the members of the new board have the 
integrity, the decency, and the experience we need. But it is a 
very workable system.
    Mr. Atkins. Senator Gramm, I agree with Professor 
Goldschmid. I think you all crafted a very good solution, very 
easy solution, by piggybacking on Section 19. So, I do 
anticipate it being something like the way the SEC reacts with 
the NASD, interacts with that.
    Senator Gramm. Thank you, Mr. Chairman.
    Chairman Sarbanes. Thank you, Senator Gramm.
    Is there any other colleague who has a time situation, 
because I would be happy to yield to them now before the vote 
starts.
    Senator Miller.

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. I do not have any questions. I would just 
like to thank both these gentlemen for your willingness to 
serve, especially at this particular time. And I wish you well.
    Mr. Goldschmid. Thank you, Senator.
    Mr. Atkins. Thank you, Senator.
    Chairman Sarbanes. Senator Corzine.
    Senator Corzine. Yes. A follow up to Senator Gramm's 
question. Are you troubled at all that some disciplinary powers 
are housed in the oversight board?
    Mr. Goldschmid. Not at all, Senator. That is the way we do 
things with broker-dealers. Disciplinary matters go to the 
NASDR, and there are appeals to the Commission. That system has 
worked quite well. And I am not troubled at all as long as the 
Commission has the final say. There is an appeal process.
    Senator Corzine. Since I will not be returning, I want to 
beat the drum on one other thing. I presume you both are in 
support of pay parity for people at the SEC.
    Mr. Goldschmid. The words are absolutely yes.
    Senator Gramm. Well, now we are getting into an area of 
conflict of interest.
    [Laughter.]
    Mr. Goldschmid. Senator Gramm, I remember kidding you at 
one point on that. Pay parity, which I know you have supported 
all through, will not cover commissioners, as I understand it.
    Chairman Sarbanes. Well, you certainly endeared yourselves 
at this moment to the people down at the SEC.
    Senator Enzi.
    Senator Enzi. Mr. Chairman, I am not sure what my situation 
will be after the vote. It depends on what the floor debate is. 
I am on the health committee as well.
    Chairman Sarbanes. So why don't you go ahead now.
    Jon, did you want to continue?
    Senator Corzine. I just had one final question. I would be 
remiss if I did not ask how you felt about expensing of 
options.
    Mr. Goldschmid. Paul, do you want to take that?
    [Laughter.]
    Let me step back on that. Clearly, there should be a 
shareholder vote on options. It is a common ground today and 
developing. I agree with Chairman Greenspan that, economically, 
options should be expensed. There are complicated issues as to 
valuation. And my view is that this is an issue that should go 
to FASB to look at. But FASB should look at the expensing issue 
with the independent funding that your bill contemplates; FASB 
must have the ability to stand back and reach the right result.
    Mr. Atkins. I basically agree with that as well. I think 
this issue has been floating around since when I was at the SEC 
back in the early 1990's. The pros and cons of it have been 
debated. And I think it is best to leave it to FASB.
    Chairman Sarbanes. We want to strengthen the integrity of 
the decisionmaking process on these issues. And we think what 
the bill does by providing the independent funding for FASB, is 
a very significant and important step in helping to achieve 
that. That is one of the objectives of the legislation.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. And I want to thank 
both of the nominees for meeting with me individually and 
answering a series of questions I had in regard to the 
legislation. I appreciate the answers you gave and the insights 
that you offered.
    On a little different issue, I would be interested in 
knowing what your position is in regard to setting stock 
exchange listing standards in the statute.
    Mr. Goldschmid. Well, I guess again stepping back, I 
thought the report and the proposal by the New York Stock 
Exchange was a very good one. It seems to me that the statute 
works fairly well, at least if I understand it, in giving the 
SEC power to make suggestions and recommendations to the 
exchange.
    Listing standards are a basic method of working through 
corporate governance today in the United States. We used the 
listing standards approach when I was General Counsel in terms 
of audit committees. I think the bill provisions should work 
well.
    Mr. Atkins. I basically agree again. I think that, 
ultimately, you want to leave the discretion with exchanges. 
That helps with competition among the exchanges. But I think 
that you all have come up with a good balance.
    Senator Enzi. Thank you. Senator Dodd and I are on the 
Subcommittee that deals with the securities laws. We have been 
contemplating doing a review of those laws. I wonder whether 
you would encourage or discourage us from doing that.
    Mr. Goldschmid. An academic can never say, ``don't 
review.''
    [Laughter.]
    The securities laws have, however, served us remarkably 
well. The 1933, 1934, and 1940 Acts were enacted in a very 
different time. But they have served the Nation very well. And 
they have been modernized continually by the broad rulemaking 
power that the SEC has, and then by various amendments over the 
years.
    A review makes sense. These are older laws, last century 
laws. But the conservative in me says, be cautious. These laws 
have been an enormous advantage for the Nation in terms of the 
discipline, the accountability, and the quality of disclosure 
they have generally produced.
    Mr. Atkins. I agree with that. But I definitely think that 
it is time to look at these 70 year old laws which you have 
been speaking about.
    The one thing to keep in mind, when you look at the 
petitions and the exemptive applications that come to the SEC, 
particularly with respect to laws that are both very broad and 
prescriptive, such as the Investment Company Act of 1940. 
Because of the SEC's broad rulemaking authority, it has been 
able to adapt the law over time. But it shows that the law 
itself does not necessarily apply to current conditions. So I 
think that speaks that it is a good time to review.
    Senator Enzi. Thank you, Mr. Chairman.
    Chairman Sarbanes. Presumably, though, you both would agree 
with the observation that given the current turmoil that we are 
confronting, the fact that we are about to pass a significant 
piece of new legislation, which will have to be integrated into 
the system, that a thorough-going review of the securities laws 
probably should at least await a calming down of the current 
market and regulatory situation.
    Otherwise, it seems to me, even if you have the very best 
of intentions, you are stirring up the pot at a time when we 
want it to settle, if possible. Do you have any reaction to 
that observation?
    Mr. Atkins. I agree completely with that. I think you can 
only allocate your resources so much. And so, take one thing at 
a time.
    Mr. Goldschmid. I agree with that, too. Clearly, there are 
priorities right now. And giving confidence to the markets by 
dealing with the present issues and implementing your bill is 
critical; these are the high priorities.
    Bill Cary, when he was Chairman, set up a special study. 
And thinking about the markets in the future makes sense; it is 
an incredible time in terms of technology and globalization. 
But those are backburner issues compared to what is before us 
right now.
    Chairman Sarbanes. Very good.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman. Thank you both for 
being here and your willingness to serve.
    I missed the introduction of the family members, but we 
welcome all of you, too. And we want to thank each of you for 
your willingness to share these two men with the rest of us.
    The first question I would ask of you is why you are 
willing to do this? You all have, I am sure, full plates. Why 
are you willing to do this?
    Mr. Goldschmid. I have asked myself that question.
    [Laughter.]
    Senator Carper. You will probably ask yourself again in a 
few years from now.
    Mr. Goldschmid. I think that is absolutely right.
    [Laughter.]
    For me, it is not a good time for the family. Joey, our 
youngest, is in high school and it is inconvenient to come. 
Financially, we will not even talk about the consequences.
    But I have been lucky in life. I have been fortunate. The 
family has done well. There is in me a give-back sense. This is 
a critically important time for the SEC and the national 
markets. In the end, I just felt that I could not say no.
    Senator Carper. All right.
    Mr. Atkins. Similarly, for me, since I have been at the SEC 
before, the opportunity to come back and use my experience both 
there and in what I have done since, especially at this 
important time, is really very important to me.
    Senator Carper. Good. Now I realize you do not want to be 
immodest in front of your families or us, or a national 
television audience, but why are you the right person for these 
posts at this time?
    Mr. Goldschmid. Well, I began teaching at Columbia in 1970. 
This has always been my area of study--corporate governance, 
securities, corporate law; I have been concerned with what to 
do, where the Nation should go, what makes sense.
    I have been dealing with these issues all of my 
professional life. And then, of course, I spent time as General 
Counsel of the SEC in 1998-1999, as well as consulting at 
various other periods.
    Senator Carper. All right.
    Mr. Atkins. My experience is not as long-lived as Harvey's 
is, but similarly, for 20 years basically this has been my 
life, the securities markets and trying to help firms comply 
with the regulations and to protect investors through that.
    And so, to be able to give back some of that experience and 
to help make things more effective, both inside the agency and 
outside, is what I would really like to do.
    Senator Carper. How would the SEC be different because you 
would serve on it?
    Mr. Goldschmid. Well, it is always hard to predict I hope 
the decisions will be fair, disciplined, important, and wise. 
We will push the agency in every way to do its best.
    Senator Corzine correctly alluded to the need for greater 
resources. We, or at least I, will promise, and I am sure Paul 
will, too, to use those resources with every bit of 
effectiveness and wisdom that we can bring to it, and give the 
country the confidence that it needs.
    Mr. Atkins. Taxpayers and investors deserve the very best, 
and to have their resources used efficiently and effectively. 
That is what I really hope to accomplish there, to use my 
experience to help that.
    Senator Carper. One last question, if I could, Mr. 
Chairman.
    We are now going to conference between the House and the 
Senate versions of what I call corporate governance 
legislation. There are some provisions in our bill that are 
different than the provisions in the Senate bill.
    If you could just take a moment, each of you, and talk to 
us about the provisions that you think must emerge from the 
final compromise, or the principles, how they should emerge in 
the legislation that is the final compromise that goes to the 
President. What might some of those be?
    Mr. Goldschmid. It is a tough question. It may be a long 
moment, but, fundamentally, you must have the Accounting 
Oversight Board with the independent funding and staffing that 
the bill contemplates. It must have adequate resources. It must 
be able to do quality control studies and look at the 
accounting firms independently. It must be in a position to 
discipline effectively, which was not the case with the AICPA's 
oversight committee. I was part of that oversight group for the 
AICPA for over a year, and I said from the beginning, and I 
think people understood, that the disciplinary system did not 
work. We tried our best. There were honorable, decent people 
serving on what was the Professional Ethics Executive 
Committee. It did not work. We need a system of discipline and 
accountability that does work.
    And so, those are the basic kinds of components, and you 
have them in the bill. Independence is also a critical element. 
The separation of a large amount of consulting from the 
auditing process, with the ability to do that consulting for 
other nonaudit clients, is critical right now to making the 
system work. I also think the governance provisions of the bill 
are very good.
    Generally as you can see, I am very high on what you have 
done.
    Senator Carper. Thank you.
    Mr. Atkins.
    Mr. Atkins. I agree with the framework that you have put in 
for oversight over the accounting profession. I think it is a 
very well-balanced approach. And the funding that you are 
providing for the agency to help improve its information 
technologies program, for example, in some ways, the 
enforcement division cannot even comply with some of the 
requirements of courts in doing its filings because it does not 
have the scanning technology available to it.
    So there are a lot of things that really need to be 
updated. And so, your addressing those issues I think is really 
timely.
    Senator Carper. Good. Well, I thank you for your responses 
and for your willingness to serve. Good luck. Make us proud.
    Chairman Sarbanes. We are going to have to recess for the 
vote. I have a few questions, a couple of such importance that 
I want to ask them when I return. So we will take a short 
break.
    I do want to say just before we break up that Senator 
Carper asked, why would you want to do this? And I thought your 
answers were quite responsive to that.
    But I just wanted to observe, this is a magnificent 
opportunity to be of service to the country. These are really 
troubled times and you both are people of competence and 
experience. You have both been in the SEC, which is a definite 
plus.
    And this is a chance to come in and confront these serious 
problems that we are now experiencing, and in helping to 
resolve them, to make a major contribution to the country. 
Certainly to its economic life, and of course, its economic 
life impacts all other aspects of its life.
    So, it is a very exciting and challenging time to become an 
SEC commissioner. And both of you have manifested in the past, 
have a concern about public interest, this is real chance to do 
something significant about it.
    With that, we will take a short recess and I will return 
and resume the hearing.
    [Recess.]
    Chairman Sarbanes. The hearing will come to order.
    I want to ask both of you first about funding for the 
Securities and Exchange Commission.
    In the extended hearings that we did in March that led up 
to reporting out the legislation that is now pending in the 
Congress, we heard from witness after witness that the SEC 
needs additional resources in order to effectively carry out 
its mission and protect 
investors.
    John Whitehead, former Cochair at Goldman Sachs, told us, 
``I think the SEC is underfunded and has been for some years. 
When you consider the seriousness to the system of just one 
Enron, it is dangerous to fool around with the relatively small 
increases in budget that the SEC asks for.''
    David Walker, the Comptroller General of the United States, 
testified: ``The SEC's ability to fulfill its mission is 
becoming increasingly strained due in part to imbalances 
between the SEC's workload and staff resources.''
    Over the last decade, securities markets have experienced 
unprecedented growth and change, and at the same time, the SEC 
has been faced with an ever-increasing workload and ongoing 
human capital challenges. Most notably, high staff turnover and 
numerous vacancies.
    We asked the GAO to do a study, and they came in with a 
study, which, if you have not had a chance to review it, I 
commend to you, in March of this year: SEC Operations--
Increased Workload Creates Challenges. They found that the 
SEC's limited staff resources have resulted in substantial 
delays in SEC regulatory and oversight processes which hampers 
competition and reduces market 
efficiencies.
    In fact, we have heard from people in the securities 
industries complaining that the lack of resources at the SEC 
and the significant increase in their workload has lengthened 
the time period markedly within which certain clearances or 
decisions are reached, and that they find that handicaps their 
own ability to function. The GAO also noted that information 
technology issues needed additional funding.
    Now here is where we are and I want to see how concerned 
you are about this problem and how committed you are to trying 
to do something about it.
    The Senate Appropriations Committee, I think only 
yesterday, has reported out a $750 million budget for the SEC. 
That is a jump of about $300 million, actually, I think the SEC 
is terribly underfunded. I have thought that for many years.
    But let me just ask you first, what is your own view of the 
issue in terms of the lack of adequate resources at the 
Commission to do its current job, let alone additional 
responsibilities which it will be called upon to undertake?
    Mr. Atkins.
    Mr. Atkins. Mr. Chairman, I think that there is a lot to be 
done there in bringing it up to snuff, as you have alluded to.
    I am sure if it is appropriated, it can be spent. Chairman 
Pitt has started a management review of the agency to try to 
prioritize and see where additional resources should be used. 
Offhand, there are many: Enforcement and--as I referred to 
earlier--IT systems, that can be upgraded. And I am sure that 
is what this study is going to come up with and help prioritize 
that. So, I agree. I think more resources are needed.
    Mr. Goldschmid. It is critical, Senator. I like your $776 
million figure even better than the $750 million.
    But there is no question about the immense need. It is a 
need for more lawyers and accountants. It is a need, and this 
goes to pay parity, to recruit experienced litigators and 
experienced people to help manage divisions. It is hard for 
people to live in Washington on what the SEC can now pay, 
particularly people with young families, particularly at that 
experienced level. We are losing people. We have lost them over 
the years. It is critical we get the money.
    Technology is another area. That bill, that budgetary 
provision, and that action by the Appropriations Committee is 
absolutely essential to making the system work.
    Chairman Sarbanes. I am very concerned about the pay parity 
issue. We have been holding out that promise to people now for 
some period of time and we have not actually delivered on the 
promise. And I know there are people down there that are 
waiting--it is coming, it is coming--but it is not there yet. 
And it seems to me--how important an issue is the pay parity 
question?
    Mr. Goldschmid. For me, it is absolutely critical. Paul and 
I talked to senior staff yesterday, and they did indicate that 
a number of employees are holding out, hoping that it will be 
completely funded. If we continue to lose those first-rate 
lawyers of 10, 12, 15 years of service, or we cannot recruit 
and we need new litigators for all of these financial fraud 
cases, it will make the agency's job almost impossible. It is 
critical that we get pay parity funded.
    Chairman Sarbanes. Mr. Atkins.
    Mr. Atkins. I agree, although the SEC has had recently some 
means of meeting pay parity out of whatever resources that they 
have. That is what I understood yesterday they said, but it is 
not a permanent issue by any means. And I think they are taking 
from one bucket into another.
    Chairman Sarbanes. They have done a limited amount of it, 
but I do not think they have done any benefits. To the extent 
they have done it, it has been only on the salary.
    Mr. Atkins. I think you are right.
    Chairman Sarbanes. It is only part of the package, and that 
is a palliative in the short run, but it is not an answer in 
the long run. And we need to keep that in mind.
    I also am appreciative of the study that the Chairman has 
undertaken. But when the Congress is prepared to give an agency 
a significant boost in its appropriation, for good reason here, 
I think it is clearly more than warranted, and when I am 
convinced in my own mind that whatever study you do will show 
the need for resources beyond even what the Congress is 
thinking of providing, the agency should go ahead and accept 
this and not say, well, let us finish the study first and then 
we will come and ask you because, by that time, we may have 
moved out of the budget cycle. You will be in the next budget 
cycle, which would throw it off for another 12 or 15 months or 
something. So there is a chance now to move, and we need to do 
it. If the commissioners do not advocate for the budget of the 
SEC, who is going to do it? You, in effect, have to be in the 
forefront. And I certainly hope that you all will assume that 
burden, so to speak.
    Some of the SEC employees are organized. Therefore, there 
is a bargaining process that takes place. We keep hearing 
complaints that they do not feel that management is negotiating 
with them over contracts in as serious and as fair a fashion as 
they think is needed.
    This is a source of some concern because you do not want to 
have labor/management unrest at the agency. That also would 
impede its ability.
    I am just curious and I will ask you a general question. 
How would you respond to these expressions of concern that we 
have been hearing? And generally, what is your view of the 
nature of the relationship that one should have with the 
employees, and the employee organizations?
    Mr. Atkins. It is vital to have a good relationship with 
the staff people at the SEC because they are the ones who are 
doing the work and they need to feel they are part of the 
process and need to feel like the management of the agency is 
responsive to them. So that is one thing that, personally, I am 
very committed to as far as, in my past and working with my 
staff, whether at the SEC or in the private sector. And I 
intend to carry that through to this new position.
    Mr. Goldschmid. Working out the collective bargaining 
agreement has taken a very long time. In our briefing 
yesterday, we were told that they are right at the end of the 
process. And it is critical we get there, too.
    Morale is now weaker at the SEC. The agency has taken some 
pounding. We want our employees to feel good and to be treated 
right. It is very important that everyone at the SEC, from top 
to bottom, feel fairly treated and energized.
    And I understand, Senator Sarbanes, what you said to both 
of us--this is a critical, difficult time, but it is also a 
time of large opportunities. The Commission is in the position 
to make a large difference by doing things right.
    Chairman Sarbanes. That is right. What we need to do down 
at the SEC is we need to get you enough resources so at least 
you can really move forward with the needed initiatives, and 
start operating in an environment in which you have adequate 
resources to do your job, you are not constantly constrained, 
as Mr. Atkins said, taking out of one pocket to pay another.
    That is no way to run an organization, and anyone will tell 
you, if the fiscal constraints on you are that tight, it does 
not really lead to efficiency. It leads to inefficiencies. You 
ought not to have a loose budget. The budget has to be adequate 
to the task and people ought not to be spending a good deal of 
their time thinking how can we divert from one place where we 
need it into another place where maybe we need it a little 
more?
    The other is to get the labor situation resolved so that 
everyone is pointing in the same direction and moving ahead. I 
am very anxious to accomplish that. We are just receiving the 
papers on the final nominee for the vacancy. And it is our 
intention to try to hold a further hearing next week on the 
other two nominees for the remaining vacancies.
    The Senate will be in session next week and the following 
week before the August break. So that would give us an 
opportunity to do the hearing, reporting all the nominees and, 
with some good luck, get it through the Senate before the 
Senate leaves at the beginning of August, so that people would 
be able to move into their positions. So that is the timetable 
we are working on. I am hopeful it can be achieved.
    Mr. Atkins, I have a couple of questions that I need to ask 
to you. Yesterday, the SEC announced a settled enforcement 
action against PricewaterhouseCoopers, and its broker-dealer 
affiliate, PricewaterhouseCoopers Securities, for violations of 
the auditor independence rules. They found that, because of 
these independence violations, the firm caused 16 public audit 
clients to file financial statements with the SEC that did not 
comply with the reporting provisions of the Federal securities 
laws.
    Steve Cutler, who is the able SEC Director of the Division 
of Enforcement, said: ``An auditor's objectivity is critical to 
the financial reporting process. Impairment of an auditor's 
independence undermines that process and erodes public 
confidence in our capital markets.'' He went on to say: ``This 
case demonstrates the heightened risk of an audit failure when 
an accounting firm assists in and approves the accounting 
treatment of its own consulting fees.''
    And then went on to speak of the loss of objectivity and 
impartiality that you require of an independent auditor, which 
is, of course, an essential piece of the legislation that we 
have reported out of this Committee. One title is really 
devoted to auditor independence and so forth. In your duties at 
PricewaterhouseCoopers, did you provide any of the audit or 
consulting services that were the subject of the SEC action? 
Were you in any way involved in any of that?
    Mr. Atkins. No, sir, I was not involved in any of that.
    Chairman Sarbanes. Did you make any decisions involving how 
PricewaterhouseCoopers would conduct these audits or provide 
these consulting services at issue?
    Mr. Atkins. No, not at all.
    Chairman Sarbanes. And in your work, were you aware that 
PricewaterhouseCoopers was violating the auditor independence 
rules with respect to the clients that were the subject of the 
SEC action?
    Mr. Atkins. Not at all.
    Chairman Sarbanes. You had no knowledge of it and no 
responsibilities in this area, I take it.
    Mr. Atkins. It is a completely different part of the firm 
from me. So, I was not involved at all.
    Chairman Sarbanes. Actually, let me ask you this question 
because you are not an accountant. You are a lawyer.
    Mr. Atkins. Right.
    Chairman Sarbanes. And I say that benignly because I am a 
lawyer as well.
    [Laughter.]
    Tell me a bit about what it was you went to 
Pricewaterhouse--well it was Coopers & Lybrand originally.
    Mr. Atkins. At the time.
    Chairman Sarbanes. What you went there to do when you left 
the SEC. Was Richard Breeden the head of the unit at Coopers & 
Lybrand?
    Mr. Atkins. Richard Breeden was there and actually, when I 
was looking to leave the SEC, he basically called me up and 
said, you have to come and talk to us at Coopers & Lybrand.
    Chairman Sarbanes. Actually, Chairman Breeden gave some 
very powerful testimony to this Committee in the hearings that 
we held in March. He has been advising and counseling us as we 
have moved along here. He has very strong views about 
sustaining the integrity of the regulatory system.
    But please go on.
    Mr. Atkins. Yes. And that is part of his record from even 
when he was Chairman of the SEC and before that, with respect 
to accounting issues.
    But, anyway, basically, the idea was to do mock 
examinations of financial services firms and help with 
investigations by the SEC from a platform that the audit firm 
provides from an independent standpoint, versus law firms which 
are viewed more as advocates. So we can wear the white hats and 
be even-handed is the idea.
    Chairman Sarbanes. You actually were trying to enhance 
their ability to meet or to comply with the regulatory 
standards. Is that essentially what you were doing?
    Mr. Atkins. Exactly. We were trying to come in as 
independent examiners, basically, and work with broker-dealers, 
investment advisers, and investment companies to help them with 
investor protection, help them comply with SEC rules.
    Chairman Sarbanes. Let me ask you this question. And 
actually, Senator Gramm asked it in a way and he included 
Harvey within its ambit by reference to the consulting work 
that he had done for both the Institute of Certified Public 
Accountants and some of the investment houses.
    But this appearance issue is constantly raised by people 
and raised in the press. And essentially, it says, here is 
someone who has worked for this large accounting firm, or in 
your instance, has consulted extensively. And now they are 
coming into the SEC and one of the challenges at the moment is 
how do we get the accounting profession back to being a real 
profession, if I may say so?
    One of the sad things in all of this is that Arthur 
Andersen, which was founded by a man who was the model of 
rectitude in the profession and advocated these high standards 
of auditing and accounting behavior, and was succeeded by 
Leonard Spacek, who himself was even more a model of that, that 
this company which they established fell on such difficult 
times. It is really, in many respects, sad because they had 
built an institution that commanded great respect and of high 
quality, and of course, we know what has happened to it.
    So the question then becomes, how can someone who is coming 
out of one of these major companies go into the SEC and then 
rule fairly and impartially on the matters that are to come 
before them?
    I am the messenger here. I am reflecting things that are 
said or questions that are raised. And I am interested in how 
you would respond to that.
    Mr. Goldschmid. In my own case, Senator, as I indicated to 
Senator Gramm, my accounting role was that of a member of the 
AICPA's oversight board, the Profession Ethics Executive 
Committee. I was one of the first three public members. My job, 
as I understood it, was to represent the public in this 
disciplinary process, which, as I say, just did not work, 
although there were very decent, honorable people who were 
trying in all kinds of ways. I do not see any conflict or 
disability there.
    It is quite possible, and I consult perhaps a day a week, 
not even that, it is quite possible to understand your clients, 
to advocate for your clients, and then to come to Washington 
and Government and step back from it and remember, what is 
critical to remember, that the public interest, and the 
protection of investors is what counts.
    But as I said to Senator Gramm, prudent rules on conflicts, 
on appearances, the 1 year time-out, those all make sense, too. 
We have to be careful. We have to assure the public that we are 
going to do the job right.
    Chairman Sarbanes. Mr. Atkins.
    Mr. Atkins. Well, when you work at any institution, that 
does not necessarily mean that you have bought into whatever 
the organization does--all the different part of it.
    As for me, when you are in a situation like that, you do 
see the good, the bad, and the ugly, as it were. So that can 
help in going into an oversight body like the SEC.
    I am not an advocate any longer for the firm. I am leaving 
the firm. I am disassociating myself and severing my 
relationship. And I am now going to be back where I was before, 
8 years ago at the SEC and filling a new role now at the 
Commission, instead of as staff to the chairman. So to take off 
one hat and go to the other, and having severed that 
relationship, ensures investors and taxpayers and you in your 
oversight role that I will be able to carry that, should I be 
confirmed, be able to carry that role forward.
    Chairman Sarbanes. Well, that is a good answer. We have a 
system where people move from the private sector into the 
public sector and then back to the private sector, and back and 
forth.
    The real question is, when you go into the public sector, 
can you leave behind you as you have just indicated, leave 
behind you the private sector and assume your role as 
representing the public interest? Incidentally, we are around 
here to maintain oversight over that question. I should 
probably throw that into the mix.
    Mr. Atkins. That is highly appropriate.
    Chairman Sarbanes. Into the mix as well. Well, gentlemen, 
we very much appreciate your coming today.
    Mr. Atkins. Thank you.
    Chairman Sarbanes. I want to say to your families, this was 
a relatively easy hearing. It is not always like this. You both 
bring a great deal of competency to this assignment. It is 
important that we try to get the commissioners in place, and 
now that we have the full slate here from the Administration, 
we are moving forward as expeditiously as we can.
    Thank you very much for coming.
    Mr. Atkins. Thank you.
    Mr. Goldschmid. Thank you, Senator.
    Chairman Sarbanes. The hearing is adjourned.
    [Whereupon, at 11:35 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of the 
nominees, response to written questions, and additional 
material supplied for the record follow:]
              PREPARED STATEMENT OF SENATOR JON S. CORZINE
    Mr. Chairman, I commend you for holding this timely hearing this 
morning. I want to start my remarks by congratulating Mr. Atkins and 
Mr. Goldschmid on their nominations and thank them for their 
willingness to serve--particularly during this turbulent period.
    Mr. Chairman, enough has already been said about the crisis of 
confidence that has taken hold of our financial markets, bred 
skepticism about corporate governance practices, and created questions 
about integrity and transparency of corporate financial statements.
    As we deal with these issues, I think its important for us all to 
understand that restoring the lost investor confidence cannot be 
accomplished solely through the enactment of new laws. Particularly if 
new and existing laws are not enforced. The responsibility of 
overseeing our markets and enforcing our securities laws lies squarely 
at the feet of the SEC.
    The first paragraph of the SEC's mission outlines the fundamental 
purpose of the agency. It states:

    ``The primary mission of the U.S. Securities and Exchange 
Commission (SEC) is to protect investors and maintain the integrity of 
the securities markets. As more and more first-time investors turn to 
the markets to help secure their futures, pay for homes, and send 
children to college, these goals are more compelling than ever.''

    That statement has become even more poignant in these times. Many 
first-time investors have returned to stashing their money away under 
their mattresses, thousands of workers have witnessed their 401(k)'s 
savings--and their dreams of retirement--evaporate seemingly overnight, 
and millions of parents now wonder whether it is wise to ``gamble'' on 
their child's college education by investing in our markets.
    Mr. Chairman, now more than ever, the public will be closely 
scrutinizing the integrity of those who not only run our public 
companies, but those who lead the agencies charged with their 
oversight. And while many have been critical of the SEC's leadership in 
taken on the myriad of challenges facing our markets, I think it is 
fair to say that the agency has been operating behind the eight-ball 
due to insufficient financial and personnel resources, and also because 
it has been operating without full membership of its Board.
    Mr. Chairman, this hearing will allow us to learn more about the 
character of these nominees, who both come before the Committee with 
strong credentials. I look forward to Mr. Atkins' and Mr. Goldschmids' 
testimony, and to their response from questions of this Committee's 
Members. Thank you, Mr. Chairman.
                               ----------
             PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
    Thank you, Mr. Chairman, first of all, let me tell you that I am 
very pleased we are beginning to move the nominees for the Commission. 
I believe that we must get all of the Commissioners there to begin 
enacting some of these important reforms being legislated.
    I would also say that both of our nominees have very accomplished 
records and I am pleased that both of them hold the Commission in high 
enough regard that they are willing to return to Government service.
    The issues facing the Commission will require a major undertaking. 
Reforms about the methods by which we review and discipline publicly 
traded companies, executives, and others associated with the formation 
of the capital markets are underway. It is important that we find 
quality individuals with the utmost integrity to fill these positions.
    I would like to say just a few words about Chairman Pitt. I have to 
say that Chairman Pitt and I may not always agree, but I believe the 
recent attacks on him to be unwarranted. Mr. Pitt has come under fire 
for having represented some of the accounting firms who have been 
criticized in recent restatements. But I believe Chairman Pitt's work 
in the private sector is a great asset to investors. We need 
individuals who are willing to work in Government who know and 
understand the industries they regulate. I do not want lifelong 
Government bureaucrats monitoring these companies.
    These restatements did not all of a sudden appear when Chairman 
Pitt was confirmed. In most cases, they began during the late 1990's 
when companies became intent on not seeing the Internet bubble burst. I 
have to ask what was going on at the SEC while these companies were 
filing all of these false financial statements? What I imagine happened 
was that the companies, who are very familiar with who is at the 
Commission and where the resources are being devoted, thought they 
could take advantage of the situation because no one was paying 
attention.
    Just look at what has happened since Chairman Pitt has taken 
office. He has opened a record number of investigations of restatements 
filed by public companies. He has taken steps to break the relationship 
between research analysts and investment bankers. He has supported 
legislation that will increase penalties on corporate executives 
engaged in fraudulent behavior. And, he has indicated his support of 
this legislation, which by the way, I anticipate to be supported by the 
majority of the Senate later today.
    The numbers are very clear. In Chairman Levitt's last year as 
Chairman, 503 total enforcement actions were filed. Already this year, 
Chairman Pitt has filed 415. Officer and Director Bars for 2000 were 
38--this year so far 71. Subpoenaed enforcement proceedings in 2000 
were 9--this year 18. The numbers go on and on. My point is that 
Chairman Pitt seems to be left cleaning up the mess his predecessor 
left in corporate America.
    So, I offer my support for these actions taken by Chairman Pitt. 
Instead of attacking him, I am more concerned about what was happening 
at the SEC that bred this climate where executives felt compelled to 
engage in this unethical behavior. Why weren't some of these actions 
taken 3 or 4 years ago? Did the SEC Chairman not see the potential 
conflicts that could arise out of research analysts getting 
compensation based on investment banking business?
    Therefore, I would say that I commend Chairman Pitt for the work he 
is doing. From what I understand, the actions he is taking at the SEC 
have struck fear throughout the corporate community that they had 
better get their act together.
    I have a number of issues that I think the Commission needs to 
address in the near future. Not the least of which is implementing the 
accounting reform bill. In addition, the securities laws need a serious 
review. The National Market Structure must be evaluated and revamped. 
With technological advances that have been made, we cannot expect the 
markets to continue to operate on rules and laws that were developed 25 
or 30 years ago. Also, the time seems to have passed the effectiveness 
of the current rules under which the Intermarket Trading System 
operates. I am looking forward to working with the Commission to 
address these and other problems.
    Again, Mr. Chairman, thank you for moving the nominees along, and I 
look forward to working with you and the other Members of the Committee 
on issues affecting the securities industry.
                               ----------
               PREPARED STATEMENT OF HARVEY J. GOLDSCHMID
    Member-Designate of the U.S. Securities and Exchange Commission
                             July 18, 2002
    Chairman Sarbanes, Senator Gramm, Distinguished Members of this 
Committee, it is with great respect and pleasure that I appear before 
you today. I am honored to have been nominated to serve on the 
Securities and Exchange Commission.
    Please allow me to introduce to you my wife Mary. She has more than 
supported and encouraged me; she has been an extraordinary partner in 
every aspect of my life. With Mary are our three sons, Charlie, Paul, 
and Joey, of whom we are very proud.
    I come from a working class background. My father was a furrier and 
then went on to become a postal worker. My parents believed in our 
financial markets, and, because of Social Security and their 
investments, retired to a relatively comfortable life in Florida. Our 
Nation is now witnessing the most dramatic business scandals that have 
occurred during my professional life. On a very personal level, I feel 
the pain of the retirees and investors whose futures have been 
jeopardized. If I am confirmed, I promise to do all that I can to 
punish corporate wrongdoers, and to rebuild faith in the fairness and 
integrity of our financial markets.
    The SEC is a great institution. In January 2000, soon after I left 
as General Counsel to resume my teaching duties at Columbia, I spoke 
with enormous pride of the decency, dedication, professionalism, and 
common commitment to ``doing the right thing'' that ``motivated the 
SEC's staff from top to bottom.'' I welcome the opportunity to return 
to the SEC at this critical time for investors and our markets. If the 
Senate confirms me, I will draw my inspiration from the performances of 
two great past chairmen of the SEC, William L. Cary and Arthur Levitt. 
Bill Cary, my treasured teacher and colleague at Columbia, was Chairman 
during the Kennedy Administration from 1961-1964. He reinvigorated the 
agency and initiated a process of reform that changed securities law 
and financial markets enormously for the better. Arthur Levitt, my dear 
friend, you all know. As Chairman, he was outspoken, courageous, 
uncommonly wise, and as he often put it, ``passionate about protecting 
investors.'' Day by day in his remarkably successful 8 year 
chairmanship, Arthur acted on his beliefs and in the public interest.
    The Senate this week took a bold, balanced, and important step 
toward restoring investor confidence. I want you to know how much I 
appreciate the critical role that you, Chairman Sarbanes and this 
Committee have played with respect, to the Public Company Accounting 
Reform and Investor Protection Act of 2002. The Nation is very much in 
your debt for this piece of legislation, and for the oversight you have 
provided for our financial regulatory process. I very much look forward 
to working with you Mr. Chairman, Senator Gramm, and this Committee, 
and with Chairman Pitt and my other new colleagues on the Commission. I 
feel confident that all of us working together can more than meet the 
current challenges.
    Thank you, Mr. Chairman, Senator Gramm, and Members of the 
Committee, for this opportunity to appear before you today. I would be 
pleased to try to answer any questions you may have.

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                  PREPARED STATEMENT OF PAUL S. ATKINS
    Member-Designate of the U.S. Securities and Exchange Commission
                             July 18, 2003
    Mr. Chairman, Senator Gramm, Members of the Committee, it is a very 
great honor for me to appear before this Committee today. I am deeply 
grateful for the confidence that the President has shown in me by 
nominating me to be a Commissioner. I appreciate your courtesy in 
calling me before you today.
    I have always regarded the Securities and Exchange Commission as 
one of the finest agencies of the U.S. Government. My 20 year career 
has centered on the financial markets and the SEC's oversight of them. 
I have reviewed the practices of companies that the Commission 
regulates, advised firms on complying with its regulations, and worked 
with the SEC to investigate and rectify situations where investors have 
been harmed. In fact, I had the privilege of serving as a Staff Member 
of the Commission for 4 years under two of the ablest chairmen that the 
SEC has had: Richard C. Breeden and Arthur Levitt. It is a personally 
meaningful coincidence that the actual term that I have been nominated 
to fill is the same one that both Chairman Levitt and Chairman Breeden 
held. If confirmed as Commissioner, I would be proud to continue their 
first-rate efforts to fight fraud through a vigorous enforcement 
program.
    While at the SEC, I helped pursue policy initiatives that 
foreshadowed many of the issues affecting the markets today. Under 
Chairman Breeden, one of my primary responsibilities was managing his 
effort to improve corporate governance, enhance shareholder 
communications, and strengthen management accountability through proxy 
reform. Under Chairman Levitt, I organized his outreach to individual 
investors through an investor town hall program, a consumer affairs 
advisory committee, and investor education efforts.
    Since leaving the SEC, I have continued my work in investor 
protection by promoting meaningful internal safeguards in the private 
sector. I have helped financial services firms improve their compliance 
efforts and have undertaken investigations into corporate fraud, at 
times in conjunction with the SEC and the Justice Department. In the 
course of this work, I have spoken directly with hundreds of defrauded 
investors and learned a valuable lesson in the process--that the impact 
of fraud and corporate misconduct is felt far beyond the headlines. I 
have heard a Syracuse, New York electrical union member tell me how he 
lost the down payment on his house through a Ponzi scheme. And, I have 
listened while a respected doctor broke down in tears when he described 
thousands of dollars of the pension fund for his staff (some of whom 
had been with him for more than 20 years) that were lost through the 
purchase of fraudulent securities.
    Abstract commentaries about the evils of fraud in our financial 
markets pale in comparison to the direct, personal impact of these 
stories. I have no doubt that many Members of this Committee have 
experienced similar tragedies from constituents back home. We need to 
remember that these people had their property stolen from them, as 
surely as if they had been robbed on the street. It is professionally 
and personally gratifying to have had the opportunity to help recoup 
even a small part of their stolen savings and pensions.
    If confirmed, I will bring to the SEC this important real-world 
perspective of how enhanced compliance, rigorous examinations and 
thorough investigations can make a real difference for investor 
confidence that ultimately forms the foundation of our markets. 
Moreover, I believe I can make an important contribution to the 
Commission's ongoing efforts to improve its own programs and 
enforcement. The SEC is about to receive greatly enhanced resources as 
a result of the President's increased budget request and the work of 
many here in Congress. We must ensure that these resources are used 
wisely to protect investors to the maximum extent possible, and I look 
forward to the opportunity to help achieve that if I am confirmed.
    For many Americans, the SEC has long been just another Federal 
agency in Washington with an alphabet-soup acronym. Today, however, the 
SEC is at the center of a crisis of trust that has dealt a serious blow 
to confidence in our financial markets. In recent months, those markets 
have been rocked by one corporate scandal after another, causing 
millions of investors to question the integrity of the capital markets.
    Investors need to believe that auditors of public companies are 
unconflicted, ethical, and acting in the best interests of 
shareholders. Investors also need to believe that corporate officers 
are honest and have the best interests of their companies and 
stockholders in mind, not just what is good for their own wallets. They 
need to know that their representatives on corporate boards are 
actively guarding their interests. And, most of all, investors should 
be able to rely on the financial reports issued by public companies to 
present a clear and accurate picture of the financial health of those 
companies.
    Those beliefs have been shaken in recent months. The SEC's top 
priority is to work to restore those bedrock principles and the 
investor confidence that keeps our economy strong. With more than half 
of all Americans invested in the stock market, the SEC is entrusted 
with an enormous responsibility.
    The President has issued a powerful call to action to reinforce the 
ethic of corporate responsibility. This Committee and the full Senate 
have taken important steps to restore investor confidence, as have the 
House and the SEC. Each of these important actors in this process must 
remain committed to work together to restore confidence in our capital 
markets by rebuilding a mutual trust among market participants, 
including investors, corporate executives, and auditors. If confirmed, 
I will dedicate my energy, experience, integrity, and independent 
judgment to achieving that goal. I believe strongly that the SEC is a 
vital line of defense in protecting individual investors, and I look 
forward to the opportunity to return to that institution to serve that 
cause with Chairman Pitt and my fellow commissioners.
    Thank you very much.
        
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM HARVEY J. 
                           GOLDSCHMID

Q.1. Obviously we do not want to take anyone's rights or move 
so fast that we falsely accuse or jeopardize a case, but it is 
very important that the American people see that those who have 
broken the law in these latest accounting scandals are brought 
to justice quickly. In your role as a Commissioner will you 
commit to working toward that end?

A.1. Yes. If confirmed, I will do my utmost to ensure that the 
Commission enforces the securities laws in a swift and even-
handed manner against those who violate them. Our Nation is now 
witnessing the most dramatic business scandals that have 
occurred during my professional life. As you suggest, it is 
essential that the Commission act quickly and decisively when 
its investigations 
uncover evidence of wrongdoing. I support the efforts of the 
Commission's Division of Enforcement in recent months to 
enforce the securities laws in ``real time,'' and I am 
committed to the continued execution of thorough, fair, and 
efficient investigations and civil enforcement actions.

Q.2. Will you, as a Commissioner, do everything you can to see 
that when promulgating regulations, especially on this 
accounting bill where there is a difference of opinion between 
the SEC and Congress, that the SEC follows the intent of 
Congress?

A.2. Yes. It is the Commission's duty to exercise its 
rulemaking authority in a way that is faithful to the intent of 
Congress. If I am confirmed, I will work hard to ensure that 
every exercise of the Commission's regulatory authority, 
including its regulatory authority under the new accounting 
bill, is in accord with the intent of Congress.

RESPONSE TO A WRITTEN QUESTION OF SENATOR AKAKA FROM HARVEY J. 
                           GOLDSCHMID

Q.1. The use of soft dollars is opaque and not understood by 
most individual investors. In a 1998 report, the SEC defined 
soft dollar practices as arrangements under which products or 
services other than the execution of securities transactions 
are obtained by an adviser from or through a broker-dealer in 
exchange for the direction by the adviser of client brokerage 
transactions to the broker-dealer. Soft dollar transactions may 
result in conflicts of interest for advisers and have an impact 
on investors. What should be done to improve the transparency 
of soft dollar transactions?

A.1. Client brokerage is an asset of the client, not the 
adviser. However, investment advisers that manage client 
portfolios commonly receive soft dollar benefits--such as 
research, other products, or services--in exchange for 
directing their clients' trades to particular broker-dealers. 
Soft dollar arrangements have the potential to create conflicts 
of interest because the adviser has an incentive to select or 
recommend a broker-dealer based on the adviser's interest in 
receiving those benefits rather than on the client's interest 
in receiving the best execution of trades at the lowest 
possible rates. While the Commission currently requires 
advisers to disclose their soft dollar arrangements on Form ADV 
and to provide that Form to every client, it is my 
understanding that the Commission has proposed revisions to 
Form ADV that would enhance the disclosure of the adviser's 
soft dollar arrangements and the conflicts of interest they 
present. If confirmed, I will support efforts to improve the 
quality of communications between broker-dealers, investment 
advisers, and their clients. Similarly, I will encourage the 
staff to consider ways of creating transparency in the 
increasing use of mutual fund brokerage to reward the sale of 
fund shares by broker-dealers.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM PAUL S. 
                             ATKINS

Q.1. Obviously, we do not want to take anyone's rights or move 
so fast that we falsely accuse or jeopardize a case, but it is 
very important that the American people see that those who have 
broken the law in these latest accounting scandals are brought 
to justice quickly. In your role as a Commissioner will you 
commit to working toward that end?

A.1. Yes. I believe that the SEC's enforcement role is a vital 
aspect of its mission. Investor confidence in the markets 
depends on a strong enforcement effort against those who have 
broken the rules. It is critical for investors to see that 
there is an effective, fair enforcer of the rules.

Q.2. Will you, as a Commissioner, do everything you can to see 
that when promulgating regulations, especially on this 
accounting bill where there is a difference of opinion between 
the SEC and Congress, that the SEC follows the intent of 
Congress?

A.2. Yes. As a creature of statute, the SEC derives its 
authority from Congress and as an independent agency, it is 
called upon to interpret and enforce the law. It is essential 
that the SEC abide by the intent of Congress in its regulatory 
and enforcement action. As a Commissioner, I will do everything 
that I can to ensure that my actions and the actions of the SEC 
comport with that intent.

  RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA FROM PAUL S. 
                             ATKINS

Q.1. I have a special interest in financial education along 
with several other of my colleagues on this Committee. In your 
statement you mention that while at the SEC you were involved 
in investor education efforts. What is your evaluation of the 
SEC's current investor education efforts and what could be done 
to enhance these programs?

A.1. I understand that the SEC's Office of Investor Education 
and Assistance (OIEA) has been pursuing a number of initiatives 
to reach investors. For example, in January 2002, the SEC 
launched a fake ``scam'' website to warn investors about fraud 
before they lose money.
    When I was on the staff of the SEC, we produced the first 
brochures--called Invest Wisely--aimed at individual investors. 
I understand that the SEC has continued and expanded this 
effort. It produces and distributes educational materials in 
print, and the staff organizes and attends educational events 
directed at individual investors. In addition, each year 
Commission staff individually responds to thousands of investor 
complaints and questions. In every facet of its investor 
education program, the Commission works closely in partnership 
with private organizations, trade associations, and other 
governmental agencies to leverage its resources and achieve 
greater impact for its educational materials. I look forward to 
reviewing the current status of the SEC's program in more 
detail and exploring with the Chairman, my fellow Commissioners 
and the staff ways in which to expand this very important 
effort of the Commission.

Q.2. What is your evaluation of the SEC's current investor 
education efforts and what could be done to enhance these 
programs?

A.2. Please see above response to Question 1.

Q.3. The use of soft dollars is opaque and not understood by 
most individual investors. In a 1998 report, the SEC defined 
soft dollar practices as arrangements under which products or 
services other than the execution of securities transactions 
are obtained by an adviser from or through a broker-dealer in 
exchange for the direction by the adviser of client brokerage 
transactions to the broker-dealer. Soft dollar transactions may 
result in conflicts of interests for advisers and have an 
impact on investors. What should be done to improve the 
transparency of soft dollar transactions?

A.3. Currently the Form ADV requires disclosure of soft dollar 
practices. In my term as Commissioner, I look forward to 
reviewing the state of communications between investment 
advisers, broker-dealers, and their customers to assure that 
there are appropriate disclosures of conflicts of interest and 
that the disclosure of other key elements of securities 
transactions are clear and easily understood by investors.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                            NOMINATIONS OF:



                      DONALD L. KOHN, OF VIRGINIA



                                  AND



                     BEN S. BERNANKE, OF NEW JERSEY



                            TO BE MEMBERS OF



                       THE BOARD OF GOVERNORS OF



                       THE FEDERAL RESERVE SYSTEM

                              ----------                              


                         TUESDAY, JULY 30, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 2:05 p.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The hearing will come to order.
    I am very pleased to welcome before the Committee on 
Banking, Housing, and Urban Affairs this afternoon Donald Kohn 
and Ben Bernanke, who have been nominated by President Bush to 
be Members of the Board of Governors of the Federal Reserve 
System.
    This hearing was originally scheduled for this morning. But 
the President had his bill signing with respect to the Investor 
Protection Corporate Accountability Act and therefore we put it 
off un-
til this afternoon. I hope it did not inconvenience either of 
our nominees.
    Both of these nominees are highly respected economists who, 
based on their records, appear to be well qualified to serve as 
members of the Federal Reserve Board of Governors.
    Don Kohn is well known to Members of this Committee through 
his long service at the Fed. A graduate of the College of 
Wooster in Ohio, he received his Master's and PhD, in economics 
from the University of Michigan, and then has spent his entire 
professional career in the Federal Reserve System, first at the 
Federal Reserve Bank of Kansas City and then he came to 
Washington and has worked in a number of divisions of the Fed, 
including being the Chief of the Capital Markets Section. He 
was the Associate Director of the Division of Research and 
Statistics, Deputy Staff Director of the Office of Staff 
Director for Monetary and Financial Policy. From 1987 to 2001, 
he was Director of the Division of Monetary Affairs of the Fed. 
And since 2001, has been an adviser to the Board for Monetary 
Policy. He has also been Secretary and Economist for the 
Federal Open Market Committee.
    He is the Senior Career Monetary Policy Expert down at the 
Fed, widely respected for his expertise. And we are very 
pleased that not only, but I think the Fed staff, have been 
honored by this nomination to move from a career staff position 
to be a member of the Board of Governors.
    Our research indicates, and I am not altogether vouching 
for its accuracy, that this has only happened three times 
previously in the history of the Fed, and this is the first 
time that it has occurred in the last 25 years. In our view, it 
is an honor that is well 
deserved.
    Ben Bernanke is currently Howard Harrison and Gabrielle 
Snyder Beck Professor of Economics and Public Affairs at 
Princeton--my alma mater, I hasten to add----
    [Laughter.]
    ----and serves as Chairman of Princeton's Economics 
Department. He received his undergraduate degree from Harvard 
in 1975, his PhD from MIT in 1979, and he then went to the west 
coast, where he was first an Assistant Professor of Economics 
and then Associate Professor at Stanford Business School, and 
came to Princeton in 1985 as a Professor of Economics.
    He is the director of the program in Monetary Economics of 
the National Bureau of Economic Research and he is the Editor 
of the American Economic Review. Also highly respected as an 
expert in monetary policy and it is clear that he would bring 
very strong qualifications to the Board of the Governors of the 
Federal Reserve.
    So we look forward to hearing the opening statements from 
our witnesses and having an opportunity for some questions.
    It is the practice of this Committee to swear in the 
nominees. So before you give your statements, I would like to 
ask you to stand and take the oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Kohn. I do.
    Mr. Bernanke. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Bernanke. I do.
    Mr. Kohn. I do.
    Chairman Sarbanes. Thank you very much.
    Since we believe, at least continue to believe, to some 
extent, in the seniority system, and since Don Kohn has been at 
the Fed for some years and Ben Bernanke is just coming to the 
Fed, I think we will hear Don Kohn's statement first and then 
we will go to Dr. Bernanke.
    And if either of you wishes, if you have members of your 
family here that you might want to introduce in your opening or 
in the course of your statement, we would certainly invite you 
to do that.

            STATEMENT OF DONALD L. KOHN, OF VIRGINIA

            TO BE A MEMBER OF THE BOARD OF GOVERNORS

                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Kohn. Thank you very much, Mr. Chairman.
    I would like to introduce the members of my family. This is 
my wife, Gail, sitting in the seat I used to occupy.
    [Laughter.]
    My son, Jeff, daughter-in-law, Sue Matthiesen, mother Pat, 
and niece, Zoey Kohn.
    Chairman Sarbanes. Good. Well, we are very pleased to have 
them here with us.
    Mr. Kohn. Chairman Sarbanes and Members of the Committee, I 
very much appreciate your expeditious consideration of my 
nomination to be a Member of the Federal Reserve Board. I have 
enjoyed a productive working relationship with this Committee 
and its staff over a number of years. Should the Senate confirm 
my nomination to the Board, I very much look forward to 
continuing to work with you to promote a strong economy and a 
robust financial system that serves the needs of all Americans. 
I am most grateful to President Bush for this nomination and 
deeply honored by his judgment that my abilities and experience 
will help the Board to carry out the critical responsibilities 
you, the Congress, have entrusted to it. Having spent my 
working life at the Federal Reserve, I may be more aware than 
most nominees who come before you of both the challenges and 
the rewards of the position to which I aspire.
    Our economy has made considerable progress over the last 
two decades toward the goals you have set for monetary policy 
of maximum employment, stable prices, and moderate long-term 
interest rates. We have enjoyed two exceptionally long economic 
expansions punctuated by relatively mild recessions, an 
inflation rate that has reached what many would consider to be 
a zone of price stability, and relatively low long-term 
interest rates that have helped to promote wider homeownership. 
Technological innovation, deregulation, and globalization, by 
fostering greater economic and financial flexibility and 
resiliency and more rapid increases in productivity, largely 
account for this favorable performance. But the conduct of 
monetary policy surely also has played a role in establishing a 
background conductive to economic vitality. This policy has 
been marked by a balancing of discipline and flexibility--the 
discipline of focusing on long-run price stability as a 
necessary precondition for maximum employment and moderate 
long-run interest rates, and the flexibility within that long-
term discipline to counter disturbances to the economy and 
financial markets might threaten maximum sustainable employment 
as well as stable prices.
    Going forward, in order to do its part in promoting good 
economic performance, the Federal Reserve will continue to be 
faced with the need to analyze and adapt to a dynamically 
changing economy and financial markets. Innovation and 
deregulation in markets and the globalization of finance are 
affecting the flow of funds between savers and spenders and the 
distribution of risks and returns in the financial system. 
These changes, in my view, have not detracted from the 
effectiveness of monetary policy, and they have increased both 
economic efficiency and financial stability. But they have also 
opened the economy to new kinds of influences and they are 
altering the channels through which policy affects the economy. 
In just the last few years, our financial and economic 
stability has been challenged by crises originating in East 
Asia and Russia, and by huge variations in asset prices here 
and abroad as investors strove to peer through considerable fog 
to evaluate the implications of rapidly changing technologies 
and market structures. The significance of those asset price 
movements has been magnified by the growing importance of 
wealth to household financial conditions.
    Policymakers have been required to decipher the shifting 
forces driving the economy and to adjust policy, sometimes 
rapidly, to provide a counterweight to developments that 
threatened to undermine economic performance. Where possible, 
those policy adjustments have been forward-looking--
anticipating the effects of economic forces so as to forestall 
emerging instabilities. It is a process in which I have been 
deeply involved, working with policymakers and staff, and I 
would welcome the opportunity in a new role to bring my 
experience and expertise to bear on the difficult, but 
fascinating, issues that confront the Federal Reserve's conduct 
of monetary policy.
    The increasing volume of finance flowing through securities 
markets, the spread of wealth to more Americans, and the 
growing prominence of global investors in our financial markets 
have put an additional premium on the ability of the Federal 
Reserve to explain its policy to the public. More people from 
more diverse backgrounds are making important decisions based 
on their expectations of policy actions and the effects of 
those actions. When savers and borrowers understand how the 
Federal Reserve sees the forces developing in the economy 
relative to its objectives, interest rates and other prices in 
financial markets are more likely to be set in a way that helps 
to achieve these objectives. I have worked extensively in my 
career at the Federal Reserve to help policymakers explain 
monetary policy. While we have made considerable progress in 
recent years, improving the clarity, completeness, and 
timeliness of our various public statements is an ongoing 
process that must be continued.
    As the Congress recognized when it created the Federal 
Reserve, economic stability rests on a foundation of financial 
stability. In no area of Federal Reserve responsibilities do 
changing market structures pose a bigger challenge than in 
carrying out the supervision and regulation of banks and 
holding companies. Changes in the legislative framework for the 
financial sector in recent years have allowed consolidation 
within the banking sector and, now, between banking and other 
financial service providers, permitting markets to realize 
economies of scale and scope in the delivery of services. This 
consolidation, along with the proliferation of new instruments 
to price and trade various aspects of risk, I believe, promotes 
sounder, more diversified, institutions and a system in which 
both those supplying and using savings have many more 
alternatives. The regulatory implementation of these new laws 
needs to allow the markets to evolve with changing preferences 
and technologies, while preserving competition in the delivery 
of services and financial stability. It also must protect 
against the effective spread of the safety net beyond the core 
depositories for which Congress intended special protection. No 
depository institution should be insulated from market forces 
by being considered too big to fail. But because banks do have 
access to the safety net, market signals are muted by moral 
hazard. Moreover, as institutions become more complex and deal 
in a great number of new instruments, markets and managers may 
find it difficult to evaluate some risks accurately, increasing 
the changes for unexpected losses. In order to promote 
efficient resource allocation and maintain financial stability, 
supervisors must anticipate potential problem areas and must 
put into place oversight structures that build on existing 
market signals and risk management and also simulate market 
pressures where those signals are inadequate.
    The growing access to credit markets for all our citizens 
is another very positive development in our financial system. 
It has resulted from efforts to eliminate discriminatory 
practices along with the recognition by lenders that profitable 
opportunities exist in making credit available to those with 
lower income and wealth. But regulators, borrowers, and lenders 
are still adjusting to the expansion of the market. Many 
borrowers in the so-called subprime segment of the credit 
markets are having difficulty servicing the additional debt, 
more difficulty than lenders anticipated, resulting in the need 
for supervisory actions for a number of bank lenders. In 
addition, it has increased the opportunities for unscrupulous 
lenders to take advantage of less well-informed consumers. 
Clearly, efforts to educate credit users better should have 
important payoffs. More generally, the key in this area is to 
find the very difficult balancing point for regulation that 
allows the markets to generate the greatest number of 
legitimate alternatives for borrowers while proscribing clearly 
abusive practices.
    Meeting these various challenges will require a strong 
Federal Reserve System. You have such an institution now. It is 
widely respected and relied upon, not only to follow the 
appropriate policies but for its advice in a variety of 
economic and financial matters. Although the Federal Reserve 
tends to speak with one voice, in my experience, decisions are 
preceded by healthy give-and-take among policymakers with 
diverse views supported by talented and dedicated staff. Should 
the Senate see fit to confirm my nomination, I am looking 
forward to adding my own perspective to that dialogue as a 
policymaker and will do my best to pass on to future 
generations an institution just as strong as the one its 
current and past leaders have bequeathed to this generation of 
Americans.
    Thank you, Mr. Chairman. I would be pleased to answer any 
questions you might have.
    Chairman Sarbanes. Thank you very much.
    Mr. Bernanke, we would be happy to receive your statement.

          STATEMENT OF BEN S. BERNANKE, OF NEW JERSEY

            TO BE A MEMBER OF THE BOARD OF GOVERNORS

                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman. I would like to 
start by introducing my support group--my wife, Anna, my son 
Joel, my daughter Alyssa, my brother-in-law, Victor Friedmann, 
his wife, Toni Jo Friedmann, and our neighbor, Todd Hunter.
    Chairman Sarbanes. Good. We are very pleased to have them 
here with us today.
    Mr. Bernanke. Thank you. Chairman Sarbanes, Senator Gramm, 
Members of the Committee, I am deeply honored to appear before 
you today as the President's nominee to serve on the Board of 
Governors of the Federal Reserve System. If I am confirmed to 
this important position, I will do my utmost to advance the 
economic well-being of all Americans.
    The opportunity to serve at the Federal Reserve would be a 
great privilege, as it would allow me to apply in the public 
interest the fruits of a lifetime of thinking and writing about 
central banking and the economy. In my academic career of 
nearly 25 years, I have written widely on topics relating to 
monetary policy, banking and credit markets, economic growth 
and business cycles, macroeconomic history, and the statistical 
analysis of the economy, all of which bear directly on the work 
of the Federal Reserve. Moreover, over the years I have 
maintained close contact with the Federal Reserve System, as a 
consultant, visiting scholar, and adviser; and I have visited 
and advised the central banks of many industrialized and 
developing countries.
    In various roles during my career, I have also learned how 
to work with people and to get things done. Among other duties, 
I have served for the past 6 years as Chair of the Princeton 
University Economics Department. I also served as the first 
Director of Princeton's new Center for the Study of Financial 
Markets; as the Director of the Monetary Economics Program of 
the National Bureau of Economic Research; as the Editor of the 
economics profession's leading research journal; and--last, but 
certainly not least--as a two-term elected Member of the 
Montgomery Township, New Jersey Board of Education.
    One of the remarkable features of the Federal Reserve 
System is the wide range of its responsibilities, including not 
only the making of monetary policy but other important areas 
such as financial regulation and supervision, consumer 
protection, payments systems, international finance, and 
others. Although at present my greatest expertise is in 
monetary policy and macroeconomics, I am keenly interested in 
and broadly familiar with each of the Fed's other areas of 
responsibility, and if I am confirmed, I look forward to 
learning a great deal more. I particularly look forward to 
interacting with, and learning from, both colleagues on the 
Board and the Federal Reserve's able staff.
    Let me turn briefly to issues of policy and the current 
economy. The Federal Reserve has considerable operational 
independence, but ultimately derives its legitimacy and powers 
solely from its legislative mandate. I would like to take this 
opportunity to strongly affirm my support for the monetary 
policy goals set for the Federal Reserve by Congress in the 
Federal Reserve Act: maximum employment, stable prices, and 
moderate long-term interest rates. While one can always hope to 
do better, I think the Federal Reserve has, on the whole, done 
a remarkably good job of promoting these three objectives over 
the past 20 years or so.
    In my view, a key operational element in the Fed's success 
at achieving its tripartite objectives has been the Federal 
Open Market Committee's emphasis on keeping the rate of core 
inflation low and stable. Low and stable inflation is 
intrinsically beneficial, as it reduces the need for households 
and firms to expend time and 
resources to protect themselves from the adverse effects of 
rapidly and erratically changing prices. Consistently low 
inflation also directly promotes the objectives of high 
employment and rapid economic growth, by providing a stable 
monetary environment in which firms and markets can function 
most efficiently. In a low-inflation environment, lenders are 
less concerned about erosion of their principal, and so nominal 
interest rates tend to be low.
    Finally, a strong commitment to low and stable inflation, 
by moderating and anchoring the public's inflation 
expectations, actually enhances the ability of monetary policy 
to respond actively to short-run economic disturbances when 
necessary.
    For example, during the past year, the Federal Reserve was 
able to cut interest rates quite aggressively without 
engendering significant inflationary pressures or igniting a 
wage-price spiral. Public confidence that inflation would be 
kept under control was essential to giving the Federal Reserve 
this heightened flexibility.
    In my academic writings, I have argued that the efficacy of 
monetary policy at achieving its mandated objectives could be 
further improved by the Fed's adoption of an approach known as 
``inflation targeting.'' In anticipation of possible questions, 
let me say a bit more about this proposal. The main operational 
change under inflation targeting would be that the Fed, in 
consultation with the executive and legislative branches, would 
announce an explicit numerical objective for core inflation 
over the medium term, say 1 to 2 years.
    For example, allowing for the upward biases in inflation 
measurement and a zone of safety to avoid accidental deflation 
in prices, an inflation target in the range of 1 to 2 percent 
per annum for the core PCE deflator might be a good initial 
choice, although some might reasonably disagree about either 
the number or the choice of index. As part of the targeting 
process, the Federal Reserve would report to Congress its 
expectations for future inflation, its reasons for any target 
misses, and its projected trajectory for bringing inflation to 
its targeted level.
    It is important to stress that inflation targeting, as I 
interpret it, would not represent a major departure from the 
current practice of U.S. monetary policy or a change in policy 
objectives. Rather, its primary goal would be to build on 
policy successes of the past two decades by strengthening the 
Federal Reserve's institutional commitment to the approach used 
by the Fed under Chairman Volcker and Chairman Greenspan. As I 
discussed a moment ago, the center piece of this approach is an 
emphasis on keeping the rate of core inflation low and stable. 
Based on the experiences of a number of other countries that 
have adopted this model, I believe that an explicit inflation 
target would improve further the Fed's ability to reach all 
three of the goals set forth in the legislative mandate for 
monetary policy. Among the potential advantages of an explicit 
inflation target are increased stability of the public's 
inflation expectations, lower economic and financial 
uncertainty, increased central bank credibility, greater 
continuity and consistency of policy, and, importantly, 
enhanced accountability of the Fed. Although I am favorably 
disposed toward these incremental changes in the current 
framework of U.S. monetary policy, I know that not everyone 
agrees with this view, and that there are important, 
substantive arguments to be made on both sides of the issue. I 
look forward to discussing these ideas with Federal Reserve 
colleagues and others interested in the making of monetary 
policy.
    Turning finally to the current economic situation: In 
recent months, investors have been battered by sharp declines 
in equity prices, not only in the United States, but in many 
other countries as well. The losses in wealth are large and 
serious indeed. Equally serious and disturbing is the rash of 
corporate and accounting scandals that have certainly played a 
role in the stock market's plunge. Financial markets cannot do 
their job of efficiently allocating capital and sharing risk if 
investors do not feel that they are receiving accurate and 
timely information, or if they fear that those who should be 
stewarding their funds cannot be trusted to do so honestly. I 
fully support the efforts of Congress and the President to 
restore investor confidence in the accuracy and reliability of 
financial statements and in the trustworthiness of those who 
manage our corporations and financial institutions.
    Although the fall in equity prices is frightening and 
dispiriting for many, I do not think distinctions need to be 
made. Saturation coverage by cable TV networks notwithstanding, 
the stock market is not the whole economy. While the gyrations 
of the Dow or Nasdaq attract the most attention, the broader 
economy--as reflected in the daily activities of American 
workers, managers, business owners, and entrepreneurs--has 
overcome a significant part of the effects of last year's 
recession and the September 11 terrorist attacks, and by most 
indications is continuing to grow. Most impressive is the fact 
that worker productivity continues to expand rapidly--at more 
than an 8 percent rate in the first quarter--despite adverse 
cyclical conditions. New capital and innovative technologies 
have both played an important role in this resurgence. To be 
sure, the cumulative decline in the stock market poses risks 
for economic growth over the rest of the year. Despite our 
current difficulties, however, we should not lose sight of the 
underlying strength of our economy.
    To conclude, I am grateful for this opportunity to appear 
before this Committee. These are indeed challenging times for 
the United States, for our economy, and for the Federal Reserve 
itself. I look forward to contributing to the making and 
implementation of sound economic policies. If I am confirmed, I 
will devote myself to becoming a constructive and effective 
Member of the Board of Governors of the Federal Reserve.
    Thank you. I will be pleased to answer any questions.
    Chairman Sarbanes. Well, I want to thank both of you for 
your statements. We will go into 5 minute rounds of questioning 
now, unless any Member has an opening statement he wants to 
make.

                 COMMENT OF SENATOR JIM BUNNING

    Senator Bunning. I would just like to put one into the 
record.
    Chairman Sarbanes. Without objection, so ordered.
    I am interested in the question of the transparency of the 
decisionmaking of the Federal Reserve so that the public can 
gain a better understanding. I would just like to hear your 
views on how important you think that is and what steps might 
be taken to improve the transparency of board decisions.
    Mr. Kohn. Thank you, Mr. Chairman. I think it is absolutely 
crucial. As I indicated in my opening statement, the Federal 
Reserve has become more transparent over the years, announcing 
our decisions, giving reasons for the decision, announcing the 
votes now. I think we have improved the understanding of the 
financial markets and the public at large. We have helped the 
accountability of the Federal Reserve with you, the Congress, 
by becoming more open. When people understand what we are 
trying to do, when markets understand what we are trying to do, 
what issues we are dealing with, how we see the forces 
developing in the economy, they can evaluate that and they are 
more likely to anticipate our actions, to work with us to 
stabilize financial markets and stabilize the economy.
    So, I think transparency is very crucial to the 
effectiveness of monetary policy and I believe there have been 
a number of studies coming out in recent years showing that the 
increased transparency at the Federal Reserve has, in fact, 
allowed markets to better anticipate what we are going to do 
and act in a stabilizing fashion. I do not have concrete 
proposals for what we could do next to increase our 
transparency. This is a subject that is under constant review 
at the Open Market Committee. Each step tends to be small and 
incremental, in part, because once you take it, you cannot take 
it back again. So you need to be sure that it is what you 
intend to do. I think we could increase the clarity of what we 
are saying, help people understand what it is. This is just 
something that we need to keep working at, make small steps, 
get the feedback from the market and the public as to what they 
would like and what works and does not work, and keep pushing 
at it.
    Chairman Sarbanes. Good. Dr. Bernanke.
    Mr. Bernanke. I agree with Dr. Kohn that transparency is 
very important for effective operation of monetary policy. It 
reduces uncertainty. It helps markets anticipate and respond 
more effectively to monetary policy changes. It is also 
important to educate markets and the public about what monetary 
policy is trying to do in order to improve decisionmaking. And 
finally, clarity and transparency are an important part of the 
accountability of the Federal Reserve in representing its goals 
and objectives and how it is going to approach those goals and 
objectives.
    I want to commend the Federal Reserve. On the whole, there 
has been a remarkable movement over the last decade or so 
toward greater transparency in terms of releasing minutes, 
releasing transcripts, providing additional information about 
the so-called bias of policy and so on. I think there is more 
that could be done. One suggestion which I have already made in 
my statement was to announce an inflation target. Perhaps the 
minutes and other information could be redacted to allow them 
to be released more quickly. I would like to have some 
experience on the board before I make too many concrete 
recommendations.
    Chairman Sarbanes. That is a prudent point of view.
    [Laughter.]
    Mr. Bernanke. But I think that, in general, my philosophy 
is that the more transparency that can be provided, the better, 
and I would work toward that goal.
    Chairman Sarbanes. I am interested in your statement--you 
have this inflation target. What is your unemployment rate 
target?
    Mr. Bernanke. There is no unemployment rate target, Senator 
because what we try to achieve is the greatest possible growth 
rate and the lowest possible unemployment that is consistent 
with an economy that is not overheating.
    Chairman Sarbanes. You are going to give an inflation 
target, but not an unemployment rate target.
    Mr. Bernanke. Because, conceptually, sir, we have a basic 
idea of what is the optimal inflation rate based on 
considerations----
    Chairman Sarbanes. Well, now, the European Central Bank has 
a target of inflation below 2 percent. But it has been running 
there a few tenths of a point higher than 2 percent.
    But, at the same time the growth in employment figures have 
been disappointing, critics have been charging that the ECB is 
responding too timidly to the European economic slowdown. They 
argue that while it is important to maintain confidence that 
inflation will not grow too rapidly, it is also important to 
maintain confidence that output growth is being stabilized, 
since businesses make their hiring and investment decisions on 
expectations for growth.
    If they lack confidence that the Central Bank, or if they 
feel that the Central Bank is too committed to an inflation 
target that will allow growth to stagnate, can't this result in 
lower growth and raise unemployment over a sustained period of 
time?
    Mr. Bernanke. I agree with the critics of the European 
Central Bank, Senator. The European Central Bank has a 
hierarchical target which places the inflation rate above any 
other objective. My view is that low inflation is in part an 
objective in itself, but it is also an instrumental means by 
which we achieve maximum employment and rapid economic growth.
    I would take the view that an inflation target actually 
increases the flexibility and the ability of a central bank to 
respond to short-run economic disturbances to promote 
employment, to promote growth. That happens in two ways. First, 
low inflation tends to lead to long-run economic growth by 
creating a more stable monetary environment. But second, and I 
think very importantly, by maintaining low and stable inflation 
expectations, the Central Bank actually releases itself to have 
more ability to respond to short-run economic disturbances.
    Chairman Sarbanes. Well, let me ask you this question, then 
I will yield to my colleagues.
    Mr. Bernanke. Yes.
    Chairman Sarbanes. If the United States had inflation 
slightly above the personal target you have set out in your 
statement, but also had very weak output growth, how would you 
reconcile that situation? Particularly, how would you reconcile 
it with the legal mandate that has been given to the Federal 
Reserve by statute?
    Mr. Bernanke. I would attempt to restore the economy to its 
equilibrium level, which is the level which promotes maximum 
employment and growth.
    I would not try to do that by creating artificial inflation 
or extremely high inflation. But I would try to turn the 
economy to its normal potential growth path as quickly as 
possible.
    Chairman Sarbanes. What would that mean in that instance, 
though, when the inflation is above your target rate, and yet, 
the output growth is very weak?
    Mr. Bernanke. I would not return inflation to its target at 
the expense of creating a deep recession in the economy. I 
would take a gradual approach and I would try to make sure that 
the economy was on a stable, maintainable, healthy growth path 
as part of that process.
    Chairman Sarbanes. Senator Gramm.

                 COMMENTS OF SENATOR PHIL GRAMM

    Senator Gramm. Your thesis is that a low inflation rate 
promotes an environment in which economic growth is maximized 
and unemployment is minimized. Right?
    Mr. Bernanke. That is correct, sir.
    Senator Gramm. Let me be brief, Mr. Chairman, because we 
are going to have a vote here in a minute and everybody is 
going to have trouble getting back.
    Let me say, I think these are two excellent nominees. We 
have been blessed with a lot of good people on the Federal 
Reserve Board. The Federal Reserve Bank has become in the post-
war period our most successful independent agency. And I want 
to thank both of you for your willingness to serve.
    Let me say, in the case of Dr. Kohn, I do not think we 
should have staff members go on the board every day. But every 
once in a while, it is a good thing. It encourages good people 
to come to work at the Fed. It shows that you can literally 
come in at the bottom and end up at the top. It is unusual. But 
I think in that sense, it is a good thing.
    So, I want to commend both of you. Let me stop because I 
know other people want to say something or ask a question 
before we have this vote in 6 minutes.
    Chairman Sarbanes. Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. Bernanke, you say your thesis is low interest rates 
tend to promote economic growth. But there is an example of 
Japan, where interest rates have been very low and economic 
growth has been anemic.
    As the author of Japanese Monetary Policy--A Case of Self-
Induced Paralysis might you draw some conclusions or give us 
some insights about the differences?
    Mr. Bernanke. I would be glad to, Senator. I have in fact 
advised the Bank of Japan, I think their monetary policy is 
very poor.
    One of the benefits of an inflation target is that it 
avoids deflation as well as excessive inflation. Their 
deflationary policies have been highly detrimental to their 
economy. They should set an inflation target. They have been 
called upon to set an inflation target of, say, 1 to 2 percent 
positive, not negative, inflation. They could achieve that if 
they had the will and the desire to do so.
    Japan is an excellent example of a country without an 
inflation target which is allowing prices and the economy to 
drift without direction, without a frame of reference. And it 
is an excellent case study for exactly my point. Their 
performance is due almost entirely to very poor monetary policy 
which has been allowing prices to decline now for almost a 
dozen years.
    Senator Reed. Let me follow up. There has been some 
discussion in the financial press at least, of are there 
similarities to the Japanese experience here in the United 
States that, even though we are maintaining historically very 
low interest rates, our growth--we are in a recession--the 
growth is coming back somewhat feebly. What would you say to 
those types of discussions?
    Mr. Bernanke. Sir, while the Federal Reserve needs to pay 
close attention to the state of the economy and the state of 
inflation, I think the risks of the United States falling into 
a Japanese-style deflation trap are extremely small.
    There are two reasons for that. First, our banking system 
is far sounder and it is not subject to the massive, 
nonperforming loan problem that the banks of Japan now face. 
Second, I believe the Federal Reserve, whether it has an 
explicit inflation target or not, fully understands the 
importance of maintaining or avoiding deflation in prices. And 
so, I think that we have the safeguards and the initial 
conditions that allow us to avoid such a trap.
    Senator Reed. Thank you. Dr. Kohn, why don't you comment on 
this line of questioning?
    One other point that I would put in is that the presumption 
that we have a sound banking system is one that I share. But we 
have to consider the possible effects of the current downturn 
in corporate America--declining stock prices, bankruptcies, 
loans that were good 6 months ago, and now might be 
questionable. Dr. Kohn, your comments?
    Mr. Kohn. Senator, I think we still have a sound banking 
system, even if it is facing some problems, and its bad loans 
are likely to get a little worse. The capital level of our 
banks is extremely high. They are very well capitalized.
    I think even more than the soundness from a capital 
perspective, is the way our financial system and our economy 
operates relative to Japan's. It is a much more flexible, 
diverse financial system, so that if one type of institution 
has trouble, there are other sources of finance for most 
businesses and households, and that is a real strength. It is a 
much more flexible economy, much more adaptable economy.
    And I would say another very big difference between the 
United States and Japan is that our legislators have stepped up 
to the problem and addressed the emerging issues, instead of 
trying to sweep them under the rug or ignore them and hope they 
go away.
    So we have a political and an economic system that is more 
immune to difficult downward problems.
    I completely agree with Dr. Bernanke's analysis that this 
is not really an issue in the United States for other reasons 
as well. The Federal Reserve, although we do not have an 
inflation target per se, is very aware of the risks of a soft 
economy enduring, of inflation getting lower and perhaps 
turning into deflation.
    The FOMC has said in its minutes that it has addressed this 
issue and this problem, and will act aggressively to head off 
such a thing if it looks like it is occurring. My best guess is 
it is not occurring. The economy is growing and recovering. I 
do not think we have such a problem. But it is always at least 
a little bit of a risk, and the lower the inflation rate is, 
the bigger the risk is. But the FOMC is very aware of those 
risks.
    Senator Reed. Thank you, Mr. Chairman. I note that the 
votes are pending, so I will stop here. But just one final 
comment.
    As Vice Chairman of the Joint Economic Committee, we have 
been very concerned about the quality of Federal financial 
statistics, and the ability to generate those statistics. And I 
would hope that, at the Federal Reserve, you two would share 
the interest in institutionally ensuring that we have even 
better numbers than we have today.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. I might note that Chairman Greenspan, 
who never recommends a spending program to the Congress, has 
recommended that we do better by the statistic. It is not a big 
item, but nevertheless--Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    This is for Dr. Kohn. As you know from our personal 
meeting, I have very big concern about having an independent 
governors board for the Federal Reserve. Given your long 
employment with the Fed, how can you assure me that you will be 
independent?
    Mr. Kohn. Senator, you have my word for it. I have had a 
long association with the Federal Reserve, 32 years. I have 
worked closely with Chairman Greenspan for the last 15 years. I 
think one reason why he and other governors have found me a 
useful sounding board, someone they like to work with, is that 
I interact well with them and will tell them when I think their 
analysis is off, or when I think policy----
    Senator Bunning. That is my next question. So since we have 
a very short time, I am going to get more than one question in. 
Give me an example of when you either privately or publicly 
disagreed with the Chairman. And if privately, did you inform 
him of the disagreement?
    Mr. Kohn. I have had a lot of private conversations with 
the Chairman as a staff member. I certainly have told him when 
I thought that, as I just noted, the analysis wasn't quite 
right. And I recognize that in my new role, that I will need to 
take these disagreements into the FOMC, into the Board, that it 
will be my job to persuade other voting members of the Board, 
of the FOMC, that my analysis is correct and they should do 
what I recommend.
    Senator Bunning. Last question, and this is for both of 
you.
    Do you think the Chairman of the Federal Reserve should try 
to influence security markets or any other markets by coming to 
the market itself and trying to talk the market up or down, in 
his testimony before the Banking Committee?
    Mr. Kohn. No, sir, I do not think that that is something he 
should be doing. I think he should be talking about the markets 
as they interact with monetary policy and our pursuit of our 
Congressional goals. So he cannot not discuss the markets, but 
he should discuss them in the context of how they affect the 
pursuit of the goals.
    Senator Bunning. Doctor.
    Mr. Bernanke. As I have written in some papers, including 
one that was presented to the Federal Reserve's annual 
conference at Jackson Hole, Wyoming, I believe that the Federal 
Reserve should not attempt to target asset prices. It should 
respond at most to the influence of asset prices on the 
economy. That is, it should keep its eye on the economic ball, 
so to speak, and not try to influence or target asset prices.
    Senator Bunning. Do you think there is any more room right 
now for lowering of interest rates in the current circumstances 
we are sitting in?
    Mr. Bernanke. We are in a situation where, I would call it 
a vigilant optimism, is probably the right approach.
    As I said in my statement, I think the economy is 
recovering. On the other hand, there is also no sign of 
inflation. So we can watch carefully and see how the economy 
progresses over the next quarter or two. We are getting GDP 
numbers tomorrow. If necessary, we certainly could do so.
    Senator Bunning. Doctor.
    Mr. Kohn. Senator, I think we do have an economy that is 
advancing. There are a lot of positives in the outlook, 
including productivity growth, low interest rates already that 
stimulate consumption.
    Senator Bunning. Thank you.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman.
    These are two extraordinary candidates. Anybody from New 
Jersey with a beard is okay with me.
    [Laughter.]
    Chairman Sarbanes. A rather small club, though, isn't it?
    Senator Corzine. Yes.
    [Laughter.]
    And I think on top is joining that future recommendation.
    I also have worked with Dr. Kohn for the better part of 20 
years in my private career and find him an exceptional public 
servant with great judgment. And I assure you, Senator Bunning, 
if there is anybody who will speak his mind, it is Dr. Kohn. He 
just likes to do it out of the limelight.
    Senator Bunning. Will I know about it?
    Senator Corzine. I am sure that if you read the minutes 
carefully, you will find his opinions very clearly espoused.
    Let me ask a general question which will lead to a 
specific. Both of you I would like to hear your comments on. Do 
you think our economy is over-regulated and is it stifling 
entrepreneurship?
    Mr. Bernanke. I will try this one first.
    As an economist, I have a tremendous appreciation for the 
power of markets. Free markets are a tremendous source of 
wealth creation, the most tremendous source of wealth creation 
that has ever been created.
    Free markets does not mean anarchy, though. Free markets 
have to be carefully monitored. There have to be ground rules 
that channel the energies of market participants toward 
constructive ends, that allow information to be revealed, and 
that allow markets to allocate resources in the most productive 
way.
    In the U.S. economy, there are certainly areas where 
regulation no doubt is not optimal, and areas where regulation 
perhaps should be increased. On the whole, it is the most 
market-oriented and properly regulated economy in the world, 
and I think that is a major reason why our growth and our 
development has been so 
impressive.
    Mr. Kohn. Senator, I do not think you can really generalize 
about the whole economy. You need to look at it on a market-by-
market or situation-by-situation basis.
    The economy has benefited enormously from the deregulation 
that has occurred over the last 30 years. I think it has freed 
up lots of markets to the benefit of consumers and businesses, 
particularly consumers. Think about airlines and trucking and 
things like that.
    So, I think we should be continually looking for 
opportunities to allow those market forces to work and to work 
more, provided there can be seen to be enough competition in 
the markets so that the benefits of the market forces flow 
through to the consumers. That does not mean that all we should 
be doing is looking for deregulation. Things happen on occasion 
that suggest that----
    Senator Corzine. Let me ask a specific with regard to the 
derivatives market, and particularly with regard to energy, 
natural gas, and electricity markets. Derivatives particularly, 
but the markets themselves. Either or both.
    Mr. Kohn. I do not really have any expertise in those 
markets, Senator.
    I think before I would support additional regulation there, 
I would want a thorough analysis of what was going on and is 
going on. But I would not rule out that possibility if that is 
what that analysis showed.
    Mr. Bernanke. Derivatives are, on the whole, a very 
valuable tool. They allow all kinds of risk-sharing, various 
ways of financing various kinds of projects and so on. I would 
be very hesitant to do anything that would eliminate their use.
    From the Federal Reserve's perspective, the Federal Reserve 
is trying to create very sophisticated monitoring systems that 
will appropriately assess capital charges against different 
types of derivative books.
    Like Dr. Kohn, I am not very familiar with the energy 
situation. My impression is that there were some problems with 
the deregulatory process as well in the energy market which 
interacted with some of the risk-taking in derivatives. The 
same thing happened in the savings and loan industry. You had 
some deregulation, which was not the best, and it interacted 
with risk-taking on the part of individuals, to create a 
problem. So, I think the whole situation needs to be rethought. 
I do not think that derivatives are the center of the problem.
    Senator Corzine. Thank you.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. Senator Miller.

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. I think you answered the question that I 
had.
    By the way, two very good nominees and thank you for your 
willingness to serve.
    I was going to ask the question which I have asked Chairman 
Greenspan the last two times he has been with us, and he was 
very forthcoming in his reply. And that was, have either of you 
formulated a view on the Feinstein derivatives piece of 
legislation?
    Mr. Kohn. I have not, Senator.
    Mr. Bernanke. Neither have I, sir.
    Senator Miller. I believe you need to be looking at it.
    Thank you, Mr. Chairman.
    Chairman Sarbanes. I will say to my colleagues, of course 
we have a vote on and we need to go to the vote. I would be 
happy to come back if colleagues want to pursue the dialogue.
    Otherwise, it is my intention to bring the hearing to a 
close. These are very important positions and the term actually 
is more than twice the term of a Senator, just to underscore 
the importance of these positions. But if not, it is my 
intention to bring the hearing to a close.
    Let me say that I am appreciative that both of you in your 
statements made reference or set out the monetary policy goals 
that have been set for the Federal Reserve by the Congress in 
the statute. The Federal Reserve is a creature of the 
Congress--maximum employment, stable prices, and moderate long-
term interest rates.
    Occasionally, we get nominees who come before us and they 
do not really know the statutory standard that they are 
supposed to be putting into place in policy terms. It is 
encouraging, and reassuring, I guess would be a better word. It 
is reassuring, at least to this Member, that both of you have 
clearly integrated those statutory goals into your statements.
    I spoke with Senator Gramm. We are going to try and see if 
we cannot put together a quorum of the Committee tomorrow to 
try to report you out. If we can do that, that would open up 
the possibility, although we do not control, of course, the 
floor calendar. But at least it would get you on the calendar 
and open the possibility that you might actually be confirmed 
by the Senate before the Senate leaves at the end of the week 
for the August recess. And that would then make it possible for 
you to move in and assume these assignments.
    As I indicated at the outset, I agree with my colleagues 
that these are two very good appointments. I commend the 
President for making them, and we look forward to trying to get 
you on the job.
    Thank you for being here.
    Mr. Kohn. Thank you very much, Mr. Chairman.
    Mr. Bernanke. Thank you, Mr. Chairman.
    Chairman Sarbanes. The hearing stands adjourned.
    [Whereupon, at 2:56 p.m., the Committee was adjourned.]
    [Prepared statements and biographical sketches of the 
nominees supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR JIM BUNNING
    I would like to thank you, Mr. Chairman, for holding this 
nomination hearing and I would like to thank our nominees for coming 
before us today.
    I don't think it has been any secret that I have occasionally 
disagreed with the Chairman of the Federal Reserve, Dr. Alan Greenspan. 
I think he sometimes starts getting involved in things that he really 
is not supposed to worry about, instead of concentrating on monetary 
policy. To be fair, many times he gets involved and comments on things 
that are not under his job description because Members of Congress ask 
him for his opinion. I just wish he would decline to answer those 
questions.
    I do think that there has been a problem at the Fed, one we are 
trying to correct. I believe there has not been a lot of independent 
thought over there. Obviously the Chairman is a very intelligent and 
well respected man. I am sure he can be very persuasive and possibly 
even intellectually intimidating to some especially when the rest of 
the Board is going along. But we think all of the board members are 
smart. We would not vote for them if we didn't.
    What I want of the individual governors are strong people who will 
not be afraid to speak up when they think the Chairman is wrong. I want 
people who are not afraid to be the lone dissenting vote. We need 
strong, independent Fed governors who are willing to challenge the 
status quo and to make the hard call. We do not need governors who 
never question the chairman, or other board members, who will never 
take the contrary view.
    This is a 14 year term we are voting on. If we screw it up, it will 
be a long time before we can fix it. Many of us won't around be here to 
fix it. If our two nominees can convince me that they will be 
independent voices who are not afraid to be the lone dissenter, they 
will have my support for their nomination.
    Thank you, Mr. Chairman.
                               ----------
                  PREPARED STATEMENT OF DONALD L. KOHN
           Member-Designate of the Board of Governors of the
                         Federal Reserve System
                             July 30, 2002
    Chairman Sarbanes, Senator Gramm, Members of the Committee, I very 
much appreciate your expeditious consideration of my nomination to be a 
Member of the Federal Reserve Board. I have enjoyed a productive 
working relationship with this Committee and its staff over a number of 
years. Should the Senate confirm my nomination to the Board, I very 
much look forward to continuing to work with you to promote a strong 
economy and a robust financial system that serves the needs of all 
Americans. I am most grateful to President Bush for this nomination and 
deeply honored by his judgment that my abilities and experience will 
help the Board to carry out the critical responsibilities you, the 
Congress, have entrusted to it. Having spent my working life at the 
Federal Reserve, I may be more aware than most nominees who come before 
you of both the challenges and the rewards of the position to which I 
aspire.
    Our economy has made considerable progress over the last two 
decades toward the goals you have set for monetary policy of maximum 
employment, stable prices, and moderate long-term interest rates. We 
have enjoyed two exceptionally long economic expansions punctuated by 
relatively mild recessions, an inflation rate that has reached what 
many would consider to be a zone of price stability, and relatively low 
long-term interest rates that have helped to promote wider 
homeownership. Technological innovation, deregulation, and 
globalization, by fostering greater economic and financial flexibility 
and resiliency and more rapid increases in productivity, largely 
account for this favorable performance. But the conduct of monetary 
policy surely also has played a role in establishing a background 
conducive to economic vitality. This policy has been marked by a 
balancing of discipline and flexibility--the discipline of focusing on 
long-run price stability as a necessary precondition for maximum 
employment and moderate long-run interest rates, and the flexibility 
within that long-term discipline to counter disturbances to the economy 
and financial markets that might threaten maximum sustainable 
employment as well as stable prices.
    Going forward, in order to do its part in promoting good economic 
performance, the Federal Reserve will continue to be faced with the 
need to analyze and adapt to a dynamically changing economy and 
financial markets. Innovation and deregulation in markets and the 
globalization of finance are affecting the flow of funds between savers 
and spenders and the distribution of risks and returns in the financial 
system. These changes, in my view, have not detracted from the 
effectiveness of monetary policy, and they have increased both economic 
efficiency and financial stability. But they have also opened the 
economy to new kinds of influences and they are altering the channels 
through which policy affects the economy. In just the last few years, 
our financial and economic stability has been challenged by crises 
originating in East Asia and Russia, and by huge variations in asset 
prices here and abroad as investors strove to peer through considerable 
fog to evaluate the implications of rapidly changing technologies and 
market structures. The significance of those asset price movements has 
been magnified by the growing importance of wealth to household 
financial conditions. Policymakers have been required to decipher the 
shifting forces driving the economy and to adjust policy, sometimes 
rapidly, to provide a counterweight to developments that threatened to 
undermine economic performance. Where possible, those policy 
adjustments have been forward looking-anticipating the effects of 
economic forces so as to forestall emerging instabilities. It is a 
process in which I have been deeply involved, working with policymakers 
and staff, and I would welcome the opportunity in a new role to bring 
my experience and expertise to bear on the difficult, but fascinating, 
issues that confront the Federal Reserve's conduct of monetary policy.
    The increasing volume of finance flowing through securities 
markets, the spread of wealth to more Americans, and the growing 
prominence of global investors in our financial markets have put an 
additional premium on the ability of the Federal Reserve to explain its 
policy to the public. More people from more diverse backgrounds are 
making important decisions based on their expectations of policy 
actions and their effects. When savers and borrowers understand how the 
Federal Reserve sees the forces developing in the economy relative to 
its objectives, interest rates, and other prices in financial markets 
are more likely to be set in a way that helps to achieve these 
objectives. I have worked extensively in my career at the Federal 
Reserve to help policymakers explain monetary policy. While we have 
made considerable progress in recent years, improving the clarity, 
completeness, and timeliness of our various public statements is an 
ongoing process that must be continued.
    As the Congress recognized when it created the Federal Reserve, 
economic stability rests on a foundation of financial stability. In no 
area of Federal Reserve responsibilities do changing market structures 
pose a bigger challenge than in carrying out the supervision and 
regulation of banks and holding companies. Changes in the legislative 
framework for the financial sector in recent years have allowed 
consolidation within the banking sector and, now, between banking and 
other financial service providers, permitting markets to realize 
economies of scale and scope in the delivery of financial services. 
This consolidation, along with the proliferation of new instruments to 
price and trade various aspects of risk, I believe, promotes sounder, 
more diversified, institutions and a system in which both those 
supplying and using savings have many more alternatives. The regulatory 
implementation of these new laws needs to allow the markets to evolve 
with changing preferences and technologies, while preserving 
competition in the delivery of services and financial stability. It 
also must protect against the effective spread of the safety net beyond 
the core depositories for which Congress intended special protection. 
No depository institution should be insulated from market forces by 
being considered ``too big to fail.'' But because banks do have access 
to the safety net, market signals are muted by moral hazard. Moreover, 
as institutions become more complex and deal in a great number of new 
instruments, markets and managers may find it difficult to evaluate 
some risks accurately, increasing the chances for unexpected losses. In 
order to promote efficient resource allocation and maintain financial 
stability, supervisors must anticipate potential problem areas and must 
put in place oversight structures that build on existing market signals 
and risk management and simulate market pressures where those signals 
are inadequate.
    The growing access to credit markets for all our citizens is 
another very positive development in our financial system. It has 
resulted from efforts to eliminate discriminatory practices along with 
the recognition by lenders that profitable opportunities exist in 
making credit available to those with lower income and wealth. But 
regulators, borrowers, and lenders are still adjusting to the expansion 
of the market. Many borrowers in the so-called subprime segment of the 
credit markets are having difficulty servicing the additional debt, 
more difficulty than lenders anticipated, resulting in the need for 
supervisory actions for a number of bank lenders. In addition, it has 
increased the opportunities for unscrupulous lenders to take advantage 
of less well-informed consumers. Clearly, efforts to educate credit 
users better should have important payoffs. More generally, the key in 
this area is to find the difficult balancing point for regulation that 
allows the markets to generate the greatest number of legitimate 
alternatives for borrowers while proscribing clearly abusive practices.
    Meeting these various challenges will require a strong Federal 
Reserve System. You have such an institution now. It is widely 
respected and relied upon, not only to follow the appropriate policies 
but for its advice in a variety economic and financial matters. 
Although the Federal Reserve tends to speak with one voice, in my 
experience decisions are preceded by healthy give-and-take among 
policymakers with diverse views supported by talented and dedicated 
staff. Should the Senate see fit to confirm my nomination, I am looking 
forward to adding my own perspective to that dialogue as a policymaker 
and will do my best to pass on to future generations an institution 
just as strong as the one its current and past leaders have bequeathed 
to this generation of Americans.
    Thank you. I would be pleased to answer any questions you might 
have.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 PREPAPRED STATEMENT OF BEN S. BERNANKE
           Member-Designate of the Board of Governors of the
                         Federal Reserve System
                             July 30, 2002
    Chairman Sarbanes, Senator Gramm, Members of the Committee, I am 
deeply honored to appear before you today as the President's nominee to 
serve on the Board of Governors of the Federal Reserve System. If I am 
confirmed to this important position, I will do my utmost to advance 
the economic well-being of all Americans.
    The opportunity to serve at the Federal Reserve would be a great 
privilege, as it would allow me to apply in the public interest the 
fruits of a lifetime of thinking and writing about central banking and 
the economy. In my professional academic career of nearly 25 years, I 
have written widely on topics relating to monetary policy, banking and 
credit markets, economic growth and business cycles, macroeconomic 
history, and the statistical analysis of the economy, all of which bear 
directly on the work of the Federal Reserve. Moreover, over the years I 
have maintained close contact with the Federal Reserve System, as a 
consultant, visiting scholar, and adviser; and I have visited and 
advised the central banks of many other industrialized and developing 
countries.
    In various roles during my career, I have also learned how to work 
with people and to get things done. Among other duties, I have served 
for the past 6 years as Chair of the Princeton University Economics 
Department. I also served as the first Director of Princeton's new 
Center for the Study of Financial Markets; as the Director of the 
Monetary Economics program of the National Bureau of Economic Research; 
as the Editor of the economics profession's leading research journal; 
and--last, but certainly not least--as a two-term elected Member of the 
Montgomery Township (New Jersey) Board of Education.
    One of the remarkable features of the Federal Reserve System is the 
wide range of its responsibilities, including not only the making of 
monetary policy but other important areas such as financial regulation 
and supervision, consumer protection, payments systems, international 
finance, and others. Although at present my greatest expertise is in 
monetary policy and macroeconomics, I am keenly interested in and 
broadly familiar with each of the Fed's other areas of responsibility, 
and if I am confirmed I look forward to learning a great deal more. I 
particularly look forward to interacting with, and learning from, both 
colleagues on the Board and the Federal Reserve's able staff.
    Let me turn briefly to issues of policy and the current economy. 
The Federal Reserve has considerable operational independence but 
ultimately derives its legitimacy and powers solely from its 
legislative mandate. I would like to take this opportunity to strongly 
affirm my support for the monetary-policy goals set for the Federal 
Reserve by Congress in the Federal Reserve Act: maximum employment, 
stable prices, and moderate long-term interest rates. While one can 
always hope to do better, I think the Federal Reserve has on the whole 
done a remarkably good job of promoting these three objectives over the 
past 20 years or so.
    In my view, a key operational element in the Fed's success at 
achieving its tripartite objective has been the Federal Open Market 
Committee's emphasis on keeping the rate of core inflation low and 
stable. Low and stable inflation is intrinsically beneficial, as it 
reduces the need for households and firms to expend time and resources 
to protect themselves from the adverse effects of rapidly and 
erratically changing prices. Consistently low inflation also directly 
promotes the objectives of high employment and rapid economic growth, 
by providing a stable monetary environment in which firms and markets 
can function most efficiently. In a low-inflation environment, lenders 
are less concerned about erosion of their principal, and so nominal 
interest rates tend to be low. Finally, a strong commitment to low and 
stable inflation, by moderating and anchoring the public's inflation 
expectations, actually enhances the ability of monetary policy to 
respond actively to short-run economic disturbances when necessary. For 
example, during the past year the Federal Reserve was able to cut 
interest rates quite aggressively without engendering significant 
inflationary pressures or igniting a wage-price spiral. Public 
confidence that inflation would be kept under control was essential to 
giving the Federal Reserve this heightened flexibility.
    In my academic writings, I have argued that the efficacy of 
monetary policy at achieving its mandated objectives could be further 
improved by the Fed's adoption of an approach known as inflation 
targeting. In anticipation of possible questions, let me say a bit more 
about this proposal. The main operational change under inflation 
targeting would be that the Fed, in consultation with the executive and 
legislative branches, would announce an explicit numerical objective 
core inflation over the medium term, say 1 to 2 years. For example, 
allowing for the upward biases in inflation measurement and a zone of 
safety to avoid accidental deflation in prices, an inflation target in 
the range of 1-2 percent per annum for the core PCE deflator might be a 
good initial choice, although some might reasonably disagree about 
either the number or the choice of index. As part of the targeting 
process, the Federal Reserve would report to Congress its expectations 
for future inflation, its reasons for any target misses, and its 
projected trajectory for bringing inflation to its targeted level.
    It is important to stress that inflation targeting, as I interpret 
it, would not represent a major departure from the current practice of 
U.S. monetary policy or a change in policy objectives. Rather, its 
primary goal would be to build on policy successes of the past two 
decades by strengthening the Federal Reserve's institutional commitment 
to the approach used by the Fed under Chairman Volcker and Chairman 
Greenspan. As I discussed a moment ago, the centerpiece of this 
approach is an emphasis on keeping the rate of core inflation low and 
stable. Based on the experiences of a number of other countries that 
have adopted this model, I believe that an explicit inflation target 
would improve further the Fed's ability to reach all three of the goals 
set forth in the legislative mandate for monetary policy. Among the 
potential advantages of an explicit inflation target are increased 
stability of the public's inflation expectations, lower economic and 
financial uncertainty, increased central bank credibility, greater 
continuity and consistency of policy, and, importantly, enhanced 
accountability of the Fed. Although I am favorably disposed toward 
these incremental changes in the current framework of U.S. monetary 
policy, I know that not everyone agrees with this view, and that there 
are important, substantive arguments to be made on both sides of the 
issue. I look forward to discussing these ideas with Federal Reserve 
colleagues and others interested in the making of monetary policy.
    Turning finally to the current economic situation: In recent 
months, investors have been battered by sharp declines in equity 
prices, not only in the United States but in many other countries as 
well. The losses in wealth are large and serious indeed. Equally 
serious and disturbing is the rash of corporate and accounting scandals 
that have certainly played a role in the stock market's plunge. 
Financial markets cannot do their job of efficiently allocating capital 
and sharing risk if investors do not feel that they are receiving 
accurate and timely information, or if they fear that those who should 
be stewarding their funds cannot be trusted to do so honestly. I fully 
support the efforts of Congress and the President to restore investor 
confidence in the accuracy and reliability of financial statements and 
in the trustworthiness of those who manage our corporations and 
financial institutions.
    Although the fall in equity prices is frightening and dispiriting 
for many, I do think distinctions need to be made. Saturation coverage 
by cable-TV networks notwithstanding, the stock market is not the whole 
economy. While the gyrations of the Dow or Nasdaq attract the most 
attention, the broader economy--as reflected in the daily activities of 
American workers, managers, business owners, and entrepreneurs--has 
overcome a significant part of the effects of last year's recession and 
the September 11 terrorist attacks, and by most indications is 
continuing to grow. Most impressive is the fact that worker 
productivity continues to expand rapidly at more than an 8 percent rate 
in the first quarter--despite adverse cyclical conditions. New capital 
and innovative technologies have both played an important role in this 
resurgence. To be sure, the cumulative decline in the stock market 
poses risks for economic growth over the rest of the year. Despite our 
current difficulties, however, we should not lose sight of the 
underlying strength of our economy.
    To conclude, I am grateful for this opportunity to appear before 
this Committee. These are indeed challenging times for the United 
States, for our economy, and for the Federal Reserve itself. I look 
forward to contributing to the making and implementation of sound 
economic policies. If I am confirmed, I will devote myself to becoming 
a constructive and effective Member of the Board of Governors of the 
Federal Reserve.
    Thank you. I will be pleased to answer any questions.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

                             NOMINATION OF



                      PHILIP MERRILL, OF MARYLAND



                      TO BE PRESIDENT AND CHAIRMAN



                       OF THE EXPORT-IMPORT BANK



                          OF THE UNITED STATES

                              ----------                              


                        FRIDAY, OCTOBER 4, 2002

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                      Washington, DC.

    The Committee met at 2:30 p.m. in room SD-538 of the 
Dirksen Senate Office Building, Senator Paul S. Sarbanes 
(Chairman of the Committee) presiding.

         OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES

    Chairman Sarbanes. The hearing will come to order.
    The Committee on Banking, Housing, and Urban Affairs 
convenes this morning to take up the nomination of Philip 
Merrill to be President of the Export-Import Bank.
    We have two of our colleagues here to introduce Mr. 
Merrill. And before I do my statement, I will go to them 
because I know they have other pressing engagements.
    Senator Warner. Mr. Chairman, one of our colleagues is due 
in another hearing, so, apart from seniority, I will yield to 
my good friend, Senator Mikulski.
    Chairman Sarbanes. Well, John, I was going to recognize 
home State preference, in any event.
    Senator Warner. Oh, I see.
    [Laughter.]
    It is your Committee. You can run it as you please.
    [Laughter.]
    Chairman Sarbanes. Senator Mikulski.

                 STATEMENT OF BARBARA MIKULSKI

           A U.S. SENATOR FROM THE STATE OF MARYLAND

    Senator Mikulski. Thank you very much, Senator Sarbanes, 
for having this hearing. And I thank the distinguished Senator 
from Virginia for yielding to me.
    It is the Senators from the Potomac here today to introduce 
Phil Merrill to you. And as the senior Senator from Maryland, 
you know his background quite well.
    For the record, I would like to ask unanimous consent that 
a letter from Congressman Steny Hoyer extolling the virtues of 
Mr. Merrill as to why this appointment should be made, would be 
entered into the record.
    Chairman Sarbanes. Yes, I have Steny's letter here and it 
will be entered into the record. And when we have a little more 
time, I may even quote from it.
    But please go ahead.
    Senator Mikulski. Well, thank you. Senator Sarbanes, you 
have been a reformer on the Export-Import Bank and you have 
been a leader to ensure that this Bank meets the needs of the 
American foreign policy, promotes exporting jobs abroad, and 
really ensures management and fiscal responsibility.
    Your reform philosophy on the Export-Import Bank I believe 
will be best carried out by Mr. Phil Merrill, who is being 
nominated by the President. Mr. Merrill brings an extraordinary 
career to this job, a career that covers both public service 
and the private sector.
    First of all, the job requires someone who understands 
business, banking, and management. Mr. Merrill is an innovator, 
an entrepreneur and a successful businessman. And when one 
reviews his record, as we know, he has been a leader in 
publishing both the Annapolis Capital, the Washingtonian 
magazine, and the whole Capital-Gazette umbrella organization. 
Six newspapers in Maryland, as well as a magazine. So he knows 
how to meet a bottom line and he knows the stresses on business 
because of his interaction there all of the time.
    At the same time, Mr. Merrill brings a great deal of 
background in the area of foreign policy. He has earned both a 
national and international reputation, serving in six 
Administrations. He served as an Assistant Secretary General of 
NATO. He was awarded the Distinguished Service medal, the 
highest civilian award at the Department of Defense. He has 
held other posts at the Department. He has even negotiated the 
Law of the Sea Conference, and I remember what a tidal mess 
that was.
    Mr. Merrill. Rubick's Cube.
    Senator Mikulski. He served as a special assistant with the 
State Department and as a senior intelligence analyst, and we 
could go through a variety of work that he has done both at the 
Defense Department and at the State Department. Again, knowing 
foreign policy and making sure that there is sound management 
to implement our policy.
    He also has a history, as does his entire family, Ellie and 
his three children are here with us today, Doug, Cathy, and 
Nancy, of being a philanthropist. Most of the philanthropy, has 
been very quiet and has been focused on education, the 
environment, and probably a lot of other things that we do not 
even know about but that it is somewhere in that thick brief.
    What is clearly visible has been his role in education--The 
board at the Hopkins School of Advanced International Studies, 
the board of visitors at the University of Maryland. And not 
only being on boards, but essentially putting his own personal 
and family resources behind that.
    He has recently endowed the University of Maryland with $10 
million at the school of journalism to ensure competency in the 
field and also a framework of ethical journalism. Isn't it 
great that somebody is willing to put up $10 million so that 
journalists would know how to write, be competent, and have an 
ethical framework? This is who we want in our Government.
    And then, of course, he has been a staunch supporter, as 
has been the Chairman, of the Chesapeake Bay Foundation. For 
those of us who have worked with the Bay Foundation, we know 
they were in kind of frugal and limited facilities. Through Mr. 
Merrill and, again, the Merrill Foundation and the support of 
the entire family, has just created a new environmental 
framework, a new architecture, and a green building to operate.
    So a successful businessman, a public servant with 
extensive experience in foreign policy, and a philanthropic 
heart that also is matched by, quite frankly, a contribution.
    It is not about what your wealth does. The fact that you 
were willing to continue to be a giver, and what we see in Mr. 
Merrill is that he continually wants to give back to this great 
country that made his own success. I hope we move him 
unanimously through the Committee and the Senate.
    Chairman Sarbanes. Thank you very much. We appreciate that 
very strong statement on Mr. Merrill's behalf. And I know you 
have a conflicting engagement.
    Senator Mikulski. Excuse me.
    Chairman Sarbanes. Senator Warner.

                    STATEMENT OF JOHN WARNER

           A U.S. SENATOR FROM THE STATE OF VIRGINIA

    Senator Warner. I am going to ask that my statement be 
placed in the record because that was a magnificent 
introduction by our colleague from the great State of Maryland, 
and she summarized so much of the pertinent information.
    I join you today because I have been privileged to be a 
personal friend, but also in recognition of the silent but very 
important philanthropy that has been spread throughout the 
greater metropolitan area of Washington by both the nominee and 
his lovely wife, Eleanor, known to us as Ellie. And I might 
add, I think the record should reflect that this has been a 
husband and wife team for many years, both of them having 
served in public office.
    Ms. Merrill was on Senator Keating's staff, and you and I 
recall that eminent Member of our institution of many years. 
And then she went on to the Department of State to serve in 
positions of communications.
    So it has been a team effort to put together this 
extraordinary career, which has been recited by my colleague 
and more fully laid out in my biographical sketch.
    But I did not know that you had worked on the Law of the 
Sea. When I was the Secretary of the Navy under Mel Laird, 
Eliot Richardson, and Jim Schlesinger, as the Department's 
representatives.
    Chairman Sarbanes. Those were the glorious days of the 
Navy, too.
    Senator Warner. That is right.
    [Laughter.]
    Mr. Chairman, we had 1,800 ships when I was Secretary.
    [Laughter.]
    But, anyway, that was an extraordinary challenge, Law of 
the Sea, and it did not unfold quite the way all of us wished, 
but who knows.
    But this man is eminently qualified to take on this post, 
as the Chairman and our colleagues in the Senate know. And I 
would just conclude by saying that I think that America is 
fortunate that an individual who has done so many things 
diversified to prepare him for this important task, once again 
steps forward for public service.
    So I urge the Committee to have this hearing completed, 
wrapped up, and hopefully, get to the floor. And I indicate to 
the Chairman, full willingness on our side of the aisle to 
follow the Chairman's instructions to expedite this nomination, 
such as can be confirmed before the unknown concluding date of 
this Congress.
    Chairman Sarbanes. Well, Senator Warner, thank you very 
much for that statement, and also for that offer to be helpful 
on the floor as we try to move the nomination through.
    Senator Warner. Yes.
    Chairman Sarbanes. The papers just came a couple of days 
ago, and we are trying to move along here.
    Senator Warner. Well, we are expediting a number in our 
Committee. And you know, having been around here a quarter of a 
century plus, it can be done.
    Chairman Sarbanes. Thanks very much, John.
    Mr. Merrill. Yes. And it is very kind of you, and kind of 
you to come personally.
    Chairman Sarbanes. Let me say at the outset that I regard 
this as a very important nomination. One of the major economic 
challenges our country faces is competition in international 
trade.
    My own view is that as long as that competition is based 
simply on the price and quality of the goods and services being 
sold, I have every confidence that U.S. exporters can do very 
well.
    However, it is not that simple. Other governments move in. 
They provide export subsidies to their companies in one way or 
another, and that places our exporters at a competitive 
disadvantage that they cannot be expected to meet on their own. 
They are just not on a level playing field.
    The Export-Import Bank exists in part to help U.S. 
exporters level the playing field by matching the subsidies 
offered by foreign governments and allowing our exporters to 
compete on the basis of price and quality.
    For that reason, I believe it is vital that the Export-
Import Bank be led by someone of exceptional stature and 
experience who can assert the Ex-Im Bank's important role in 
U.S. trade policy.
    The previous president, John Robson, certainly met that 
standard and I take a moment this morning to honor him and his 
contributions to the public interest of the country and to 
regret his untimely death.
    Let me say, I am confident that the nominee before us 
today, Phil Merrill, can meet that standard as well. I know our 
nominee well. He is a leading citizen of our State, has had a 
long and distinguished record of service both to the State and 
to the Nation.
    He received his undergraduate degree from Cornell 
University, later served on its board of trustees. He is a 
graduate of the program for management development at the 
Harvard Business School. He worked as a reporter for the Newark 
Evening News, as a writer-reporter for WABD Channel 5 in New 
York, for J. Walter Thompson and company after service in the 
Army.
    And from 1961 to 1967, worked for the Department of State 
as a Special Assistant to the Deputy Secretary of State, and 
Senior Intelligence Analyst in the Bureau of Intelligence and 
Research.
    He attended the University of Chicago for a year on a 
Stevenson Fellowship. And then he acquired and became Chairman 
of the Board of Capital-Gazette Communications, publishers of 
the Washingtonian magazine, the Annapolis Capital, and a number 
of other newspapers in Maryland.
    During this very successful business career, he left from 
time to time to do public service, Counselor to the 
Undersecretary of Defense for Policy in the early 1980's, 
Assistant Secretary General of NATO from 1990 to 1992. He 
received the medal for distinguished service in 1988 from the 
Secretary of Defense, which is the highest civilian honor given 
by the Department of Defense.
    As others have mentioned, he has been involved in a number 
of very important philanthropic activities, working in the 
nonprofit sector, the Aspen Institute, the Chesapeake Bay 
Foundation, the Johns Hopkins University, the University of 
Maryland. It is a very long list and I will not go through all 
of it, but we welcome and commend that kind of citizen 
involvement, which contributes so much to the strength of our 
Nation.
    I believe that Phil Merrill will bring to the position of 
President and Chairman of the Ex-Im Bank the kind of seasoned 
experience and senior leadership positions in both the private 
and public sectors that the Ex-Im Bank requires.
    Earlier this year, the Congress, after a great deal of 
effort, but we finally succeeded in reauthorizing the Ex-Im 
Bank, through September 2006, and provided it with significant 
expanded authority. So its statutory mandate is there now for 
almost 5 years, as we look ahead into the future.
    In a sense, that sets the stage for a new President to come 
in and carry out the Ex-Im Bank's mission with energy and 
imagination, and I am sure Phil Merrill will take full 
advantage of that opportunity, and we look forward to working 
with him in his important role.
    Now I do want to put in the record the letter from 
Congressman Hoyer. Let me just read the first paragraph of it.

    Dear Mr. Chairman:
    I write to express my strong support for the nomination of 
Philip Merrill to serve as Chairman and President of the 
Export-Import Bank of the United States.
    Mr. Merrill has a long and distinguished career of public 
service, and I believe his experience and background make him 
an ideal candidate to lead that important organization.

    And I also have a letter from the Coalition for Employment 
Through Exports, from Ed Rice, the President of that 
organization.
    We work very closely with the coalition on a number of 
issues involving exports. In my opinion, they are a highly 
responsible organization. We have been privileged to have the 
benefit of their advice and counsel over the years, and I am 
going to take just a moment to read a fair part of this letter 
because the Coalition is extremely interested in the work of 
the Export-Import Bank. Its member companies embrace a lot of 
our major exporters.

    Dear Mr. Chairman:
    As the Committee considers the nomination of Philip Merrill 
to be Chairman and President of the Export-Import Bank, I write 
on behalf of our Coalition members to support Mr. Merrill's 
confirmation and to express our appreciation to you and your 
Committee colleagues for your expedited action on this matter.
    In nominating Mr. Merrill, the President has chosen an 
individual who would bring a solid combination of experience 
and accomplishment in both the business world and Government 
service. Experience in both of these sectors is important in 
leading the Bank as it grapples with difficult issues related 
to globalization and U.S. competitiveness in world markets.
    In addition, the Bank is also faced with implementation of 
the recently enacted changes in the Bank's statutory charter, 
which will require energetic and skilled leadership by a new 
Chairman. Mr. Merrill's long experience in business management 
and in a variety of sensitive Government assignments would be a 
particularly important asset in accomplishing these new 
mandates.
    We continue to value the leadership that you and your 
Committee colleagues provide in overseeing and reauthorizing 
the Bank, and we look forward to working with Mr. Merrill 
should the Senate confirm him for this position.
    Sincerely, Edmund B. Rice, President of the Coalition for 
Employment Through Exports.

    And we are very pleased to have that letter, given the 
continuing and constant interest of the Coalition in the work 
of the Ex-Im Bank and the work of this Committee with regard to 
it, and it will be put in the record.
    Now, it is the practice of the Committee of long standing 
to place nominees under oath. So, I am going to ask you to 
stand and take the oath.
    Do you swear or affirm that the testimony that you are 
about to give is the truth, the whole truth, and nothing but 
the truth, so help you God?
    Mr. Merrill. I do.
    Chairman Sarbanes. Do you agree to appear and testify 
before any duly-constituted committee of the U.S. Senate?
    Mr. Merrill. I do.
    Chairman Sarbanes. Thank you very much. We would be happy 
to receive your statement, and if you want to introduce the 
members of your family that are here, we would be glad for you 
to do that as well.

            STATEMENT OF PHILIP MERRILL, OF MARYLAND

                  TO BE PRESIDENT AND CHAIRMAN

                   OF THE EXPORT-IMPORT BANK

                      OF THE UNITED STATES

    Mr. Merrill. Mr. Chairman, I first want to thank you and 
Senators Mikulski and Warner for those wonderfully gracious 
introductory statements and for your respective, let me say, 
prior attention to my family, and particularly to Ellie.
    I call to the Chairman's attention that everytime that I 
have come into Government, the general consensus has been that 
when Ellie has taken over our company or our companies, they 
have done infinitely better than under my management.
    [Laughter.]
    And so, you may have the wrong Merrill here.
    [Laughter.]
    I also want to introduce my daughter Nancy and my daughter 
Cathy and her husband Paul Williams, who were kind enough to 
show up here today.
    Mr. Chairman, I am very pleased to come before you, 
frankly, especially you, as you consider my nomination to be 
President and Chairman of the Export-Import Bank of the United 
States.
    I want to thank President Bush for his confidence in 
nominating me for this position and if confirmed, I looked 
forward to working with you and with the other Members of the 
Committee to promote the Bank's basic function of promoting and 
creating U.S. jobs.
    It is particularly interesting to me, or fortunate to me, 
to have the Chairman of the Committee, at least at this point, 
be from my home State of Maryland, and so, that is a fortuitous 
coincidence.
    I know the Committee has my biographical information, so I 
will not go into the details of that, but ask that they be 
submitted separately.
    It is with some mixed emotion that I appear before you 
today. The previous Chairman, John Robson, was a friend for 
more than two decades, and I, like you, am saddened by his 
death.
    However, I am also honored and excited by the opportunity 
to serve our country again. If confirmed, I shall pursue, what 
I said here was with energy and enthusiasm, and I will now add 
imagination, to the challenges and opportunities that are 
presented in carrying out the mission of the Bank to support 
U.S. exports and U.S. jobs.
    I am no stranger to the public policy arena or the 
Government process. So the question might be, why do you want 
to do this again? I will quote something that John Robson said 
in his confirmation statement: ``I have never found a canvas as 
big to paint on as public service offers and I am particularly 
excited about the prospect of leading the Export-Import Bank.''
    I echo that sentiment.
    If confirmed, this would be the seventh time I have taken 
the oath of office. Actually, the eighth, if one includes, as I 
do, the very first time as a private in the United States Army.
    Each time I have felt the same mixture of inspiration, 
dedication, determination, and appreciation for everything this 
country has done for me, for my family, and for the cause of 
freedom and free institutions.
    If confirmed for this position, I believe I would bring to 
the Bank:

    --a record of successful business management and 
investment;
    --extensive Government experience in international affairs 
and the ability to assess both political and commercial risk; 
and
    --a strong desire and demonstrated willingness to serve our 
country.

    The Export-Import Bank has enjoyed strong bipartisan 
Congressional support since its establishment under President 
Franklin Roosevelt. The Bank performs important roles in 
fostering American exports and thereby stimulating economic 
activity and job creation here at home.
    The bipartisan support from the Congress and President Bush 
for passage of Ex-Im's 5 year reauthorization, for which I 
thank you, Senator, ensures that the Bank will continue to move 
forward to help U.S. exporters.
    I note particularly the desire of Congress to devote 
resources to small- and medium-sized enterprises. I pledge to 
make every effort to carry out that charge and to assist these, 
as well as all other U.S. businesses in the highly competitive 
international markets of the 21st century.
    If confirmed, I look forward to working with this 
Committee, the Congress, the career professionals at Ex-Im 
Bank, the Administration's trade team, the entire exporting 
community, and especially with the Chairman.
    You have my commitment to continue close dialogue with this 
Committee and the Congress as the Bank adjusts its policy and 
operations to the challenge of the 21st century.
    Mr. Chairman, I respectfully ask for your favorable 
consideration of my nomination and will be pleased to respond 
to your questions.
    Chairman Sarbanes. Well, thank you very much. I have just a 
few questions for the record.
    First, you have been nominated for a term that expires on 
January 20, 2005.
    Mr. Merrill. That is right.
    Chairman Sarbanes. Is it your intention to serve out this 
term, if confirmed?
    Mr. Merrill. Absolutely, yes, sir.
    Chairman Sarbanes. Second, I want to talk about this tied 
aid credits and these market windows that some countries are 
using.
    This has been kind of a running issue and in the latest 
authorization, I think we pretty well put it to rest because 
there was an internal dispute within the Administration between 
Ex-Im Bank and the Treasury.
    The Congress I think resolved that dispute. I was on this 
Committee when we first put the war chest into place. That was 
an effort to arm the Ex-Im Bank so that it could counter what 
other countries were doing in support of their exporters.
    We made an effort, of course, through the OECD to try to 
get rules that preclude some of the special financing so that 
the competition can remain on price and quality. But do you 
have a view about this whole issue about the tied aid war chest 
and the role it can play?
    Mr. Merrill. Well, Senator, yes, I do. From our point of 
view, we need it as a tool essentially to level the playing 
field. It is not a perfect world. If confirmed, I will work 
diligently with the Treasury Department to implement the tied 
aid procedures which have been mandated in the new Ex-Im Bank 
charter, which I have here. But this is really an OECD problem 
and we have to work with them to bring it under control.
    Chairman Sarbanes. Well, we have been doing that and that 
has been of some help. But we have to continue to counter.
    Now something has developed that concerns us. Germany and 
Canada, in particular, are using a new tactic to undercut the 
OECD rules on export credit terms. They have set up, in effect, 
private enterprises, but essentially, government-sponsored, to 
supplement official export credits. They call those market 
windows, and they are currently at least exempt from the OECD 
rules. So they come in with that and they end up providing 
financing terms significantly more attractive than what OECD 
rules allow. And the U.S. exporters are very much concerned 
about that.
    Now we gave in the reauthorization to the Ex-Im Bank 
explicit authority to match market window's financing, which it 
previously did not have. It may be implicit, but it was an 
arguable question.
    We gave them explicit authority to match it and we also 
directed the United States to seek negotiations for 
multilateral disciplines and transparency within the OECD 
credit arrangement encompassing market windows. But how 
important a problem do you think that this is?
    Mr. Merrill. Well, it is a very important problem. I am 
aware that Canada and Germany have pushed the limits to the 
uttermost in terms of making what they call private deals and 
are really public subsidies available. I think you have it 
right when you say--well, anything you say, I am going to say 
you have it right.
    [Laughter.]
    But in this particular case, I think you have it right when 
you say that they are a bigger problem by far than the rest of 
the OECD countries.
    Nevertheless, it could spread. The key word is 
transparency, and that is what we have to push for. That 
requires us to cooperate with any number of other agencies, 
especially the Treasury.
    Anyway, it is a big problem, I am aware of it, and I intend 
to pay very close attention to it and keep it down to the 
lowest possible amount that is humanly or administratively 
possible.
    Chairman Sarbanes. You have a particular opportunity to 
broaden the national consensus in support of the Ex-Im Bank and 
the push for exports. I know you will do this, but I hope that 
you will have an open door for the Coalition for Employment 
Through Exports that I mentioned, for the labor movement.
    Properly presented, we ought not to have any split there 
because it is, as you said, you are for exports and jobs. You 
went right to it, and made the job connection.
    A number of unions have actually been supportive of this 
export effort and they recognize the benefits that flow to 
their workers from it. Actually, export industries usually pay 
better. The pay scales are higher.
    But you have the bully pulpit as the head of the Ex-Im Bank 
and therefore, a chance to work on developing this broad 
national consensus. And it is very important that you have an 
open door to all of these various groups to feel that they are 
in consultation with the Ex-Im Bank and that their concerns and 
that their advice and counsel is heard.
    Mr. Merrill. Senator, let me say that I have some 
experience in that area. Again, I agree with you that you have 
the benefit in this job and with this Bank of having the 
support of labor, as well as management.
    That is a very analogous situation to which the Defense 
Department has found itself over the years because you have had 
any number of labor institutions very supportive of varying 
acquisition and production programs. I probably should stop 
there, but I will give you one anecdote.
    I once invited the leaders of the 10 largest labor unions 
in the country to lunch with Cap Weinberger. Nine of them 
showed up. We paid attention there to our supporters. By the 
way, the one who did not show was William Wimpensinger of the 
electricians. But all of the nine showed up, including the head 
of the National Maritime Union, where I have been a card-
carrying member.
    And so, I think the analogy is fairly precise. That is, the 
Bank is in the same fortunate position of needing, seeking, and 
having the support of both the business community, export 
community of the United States and the labor community of the 
United States. And I intend to take full advantage of it.
    Chairman Sarbanes. Very good. I have no further questions.
    Let me just say that the Congress will clearly be in 
session next week. We do not know whether beyond that. And I am 
hopeful that we can consider those nominees the first part of 
next week and try to move things along.
    We are anxious to get people into place before the Congress 
adjourns so that they can get on the job.
    Mr. Merrill. I am equally anxious and do not particularly 
want to wait 5 more months.
    Chairman Sarbanes. All right. Very good.
    Mr. Merrill. So I thank you for everything you have done.
    Chairman Sarbanes. The hearing stands adjourned.
    [Whereupon at 11:45 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketch of the nominee, 
response to written questions, and additional material supplied 
for the record follow:]
                  PREPARED STATEMENT OF PHILIP MERRILL
                President and Chairman-Designate of the
                Export-Import Bank of the United States
                        Friday, October 4, 2002
    Mr. Chairman, Members of the Committee, I am very pleased to come 
before you as you consider my nomination to be President and Chairman 
of the Export-Import Bank of the United States. I would like to 
recognize the members of my family who are here today--My wife, Ellie, 
my daughter Nancy, and my daughter Cathy and her husband Paul Williams.
    I want to thank President Bush for his confidence in nominating me 
for this position and, if confirmed, I look forward to working with 
this Committee, and Chairman Sarbanes from my home State of Maryland.
    I know the Committee has my biographical information, so I will not 
go into the details of my qualifications but ask that they be submitted 
with this oral statement.
    It is with some mixed emotion that I appear before you today. I 
have mixed emotions because the previous Chairman, John Robson, was a 
friend for more than two decades, and I am saddened by his death. 
However, I am also honored and excited by the opportunity to serve our 
country again. If confirmed, I look forward with energy and enthusiasm 
to the challenges and opportunities that are presented in pursuing the 
mission of the Bank to support U.S. exports and U.S. jobs.
    I am no stranger to the public policy arena or the Government 
process. So the question might be, why do you want to do this again? I 
will quote something that John Robson said in his confirmation 
statement:

    ``I have never found a canvas as big to paint on as public service 
offers and I am particularly excited about the prospect of leading the 
Export-Import Bank.''

    I echo that sentiment.
    If confirmed, this would be the seventh time I have taken the oath 
of office--actually, the eighth--if one includes, as I do, the very 
last time as a private in the United States Army.
    Each time I have felt the same mixture of inspiration, dedication, 
determination, and appreciation for everything this country has done 
for me, for my family, and for the cause of freedom and free 
institutions.
    If confirmed for this position, I believe I would bring to the 
Bank:

 A record of successful business management and investment.
 Extensive Government experience in international affairs and 
    the ability to assess political and commercial risk.
 And of course, a strong desire and willingness to serve our 
    country.

    The Export-Import Bank has enjoyed strong bipartisan Congressional 
support since its establishment under President Franklin Roosevelt. The 
Bank performs important roles in fostering American exports and thereby 
stimulating economic activity and job creation here at home. The 
bipartisan support from the Congress and President Bush for passage of 
Ex-Im's 5 year reauthorization ensures that the Bank will continue to 
move forward to help U.S. exporters.
    I note particularly the desire of Congress to devote resources to 
small- and medium-size enterprises. I pledge to make every effort to 
carry out that charge and to assist these as well as all other U.S. 
businesses in the highly competitive international markets of the 21th 
century.
    If confirmed, I look forward to working with this Committee, the 
Congress, the career professionals at Ex-Im Bank, the Administration's 
trade team, and the entire exporting community. You have my commitment 
to continue close dialogue with this Committee and the Congress as the 
Bank adjusts its policy and operations to the challenge of the 21th 
century.
    Mr. Chairman, Members of the Committee, I respectfully ask for your 
favorable consideration of my nomination and will be pleased to respond 
to your questions.

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 RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER FROM PHILIP 
                            MERRILL

Q.1. The renewable energy technology (RET) industry includes 
companies representing solar power, wind power, fuel cells, and 
modern biomass. As the domestic RET industry matures they 
believe that the growing energy needs in the developing world 
could provide huge export opportunities for U.S. companies. 
They believe the Export-Import Bank could assist the domestic 
RET industry with access to these markets. What has been the 
Ex-Im Bank's past and current experience with financing needs 
for renewable energy technology companies? What would be your 
view and the Bank's view of financing for RET companies in the 
future?

A.1. While I have not been briefed on specific transactions, I 
am aware that Ex-Im Bank has had a long-standing commitment to 
supporting renewable energy exports. Although a number of broad 
factors outside of Ex-Im Bank's control impact the renewable 
energy export market, Ex-Im Bank clearly can play a valuable 
role in promoting renewable energy exports. As evidence of the 
Bank's commitment to supporting such exports, earlier this year 
the Bank established an advisory committee to provide advice 
and recommendations to Ex-Im Bank regarding renewable energy 
export financing. I am optimistic that renewable energy export 
financing by the Export-Import Bank will increase in the 
future.

RESPONSE TO A WRITTEN QUESTION OF SENATOR SANTORUM FROM PHILIP 
                            MERRILL

Q.1. I understand the Export-Import Bank was contacted in July 
by Members of the House Financial Services Committee regarding 
allegations of fraud and money laundering by beneficiaries of 
Ex-Im guaranties. I am aware of allegations that Tyumen Oil 
Co., an Ex-Im Bank beneficiary, may be committing fraud and 
diverting profits by wiring funds through banks located in the 
United States to offshore entities. As you are aware, the 
``Maloney Amendment'' in the recently enacted Ex-Im Bank 
Reauthorization Act of 2002 specifically provides for the Ex-Im 
Bank to ``deny an application for assistance with respect to a 
transaction if the Bank has substantial credible evidence that 
any party to the transaction has committed an act of fraud or 
corruption in connection with a transaction involving a good or 
service that is the same as, or substantially similar to, a 
good or service the export of which is to subject of the 
application.'' Are you familiar with situations such as this, 
where beneficiaries of Ex-Im guaranties are alleged to be 
committing illegal actions and to have an undue impact on the 
economies of countries such as Russia? If confirmed as 
President of the Ex-Im Bank, do you believe this type of 
situation would warrant your attention? Do you believe there 
should be standards related to this to which Ex-Im 
beneficiaries should be held accountable?

A.1. While I have not been briefed on specific transactions, I 
am aware that Ex-Im Bank takes very seriously matters of fraud 
and corruption, in that such matters relate to 
creditworthiness. I believe that Ex-Im Bank should and does 
conduct due diligence with respect to fraud and corruption 
issues as they relate to Ex-Im Bank transactions. If confirmed, 
I assure you that all such matters would warrant my attention.

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