[Senate Hearing 109-431]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 109-431

                    NOMINATION OF ERIC THORSON TO BE
                INSPECTOR GENERAL OF THE SMALL BUSINESS
                             ADMINISTRATION

=======================================================================

                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 1, 2006

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED NINTH CONGRESS

                              ----------                              
                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
GEORGE ALLEN, Virginia               TOM HARKIN, Iowa
NORM COLEMAN, Minnesota              JOSEPH I. LIEBERMAN, Connecticut
JOHN THUNE, South Dakota             MARY L. LANDRIEU, Louisiana
JOHNNY ISAKSON, Georgia              MARIA CANTWELL, Washington
DAVID VITTER, Louisiana              EVAN BAYH, Indiana
MICHAEL B. ENZI, Wyoming             MARK L. PRYOR, Arkansas
JOHN CORNYN, Texas
                    Weston J. Coulam, Staff Director
                 Naomi Baum, Democratic Staff Director



                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Snowe, The Honorable Olympia J., Chair, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Maine..........................................................     1
    Prepared statement...........................................
Kerry, The Honorable John F., a United States Senator from 
  Massachusetts..................................................     3
Grassley, The Honorable Charles, a United States Senator from 
  Iowa...........................................................     5
Landrieu, The Honorable Mary L., a United States Senator from 
  Louisiana......................................................   164

                           Witness Testimony

Thorson, Eric, Nominee for Inspector General of the Small 
  Business Administration........................................     9
    Prepared statement...........................................    11
    GAO report...................................................    23
    Letter from Donald Fulwider..................................   107
    Responses to questions from Senator Kerry....................   186

          Alphabetical Listing and Appendix Material Submitted

Grassley, The Honorable Charles
    Opening Statement............................................     5
Kerry, The Honorable John F.
    Opening statement............................................     3
Markup
    The Nomination of Eric Thorson to be Inspector General of the 
      Small Business Administration..............................   189
Landrieu, The Mary L.
    Prepared statement...........................................   167
Snowe, The Honorable Olympia J.                                       1
    Opening statement............................................     1
Thorson, Eric
    Testimony....................................................     9
    Prepared Statement...........................................    11
    GAO report...................................................    23
    Letter from Donald Fulwider..................................   107
    Responses to questions from Senator Kerry....................   186





                    NOMINATION OF ERIC THORSON TO BE 
                    INSPECTOR GENERAL OF THE SMALL 
                        BUSINESS ADMINISTRATION

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

                      United States Senate,
  Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 2:07 p.m., in 
room SR-428, Russell Senate Office Building, the Honorable 
Olympia J. Snowe (Chair of the Committee) presiding.
    Present: Senators Snowe, Isakson, Vitter, Kerry, Landrieu, 
Bayh, Pryor, and Grassley.

  OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, CHAIR, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
                UNITED STATES SENATOR FROM MAINE

    Chair Snowe. The hearing will come to order. Good afternoon 
and welcome to today's hearing to consider the President's 
nomination of Mr. Eric Thorson to be the next Inspector General 
for the Small Business Administration. I also want to welcome 
the Ranking Member of this Committee, Senator Kerry, and thank 
him for working with me on this nomination and this hearing as 
well.
    I also appreciate my colleague, Senator Grassley, for his 
presence here. Senator Grassley will be introducing Mr. 
Thorson, who previously served as Chief Investigator for the 
Senate Finance Committee.
    We come to this hearing at a time when the Inspector 
General's role at the SBA will be all the more critical given 
the enormous challenges the Agency has faced, and continues to 
confront, areas such as the disaster loan program's operation 
and the unacceptable response to Katrina and Rita, enforcement 
of government-wide small business contracting rules, and the 
oversight of SBA lending problems.
    Therefore, it is imperative that the new Inspector General 
be aggressive and tireless as the unprecedented challenges 
require unprecedented responses. So Mr. Thorson, I look forward 
to hearing your testimony to further explore your 
qualifications to carry out as the Inspector General at this 
pivotal juncture for America's 25 million small businesses and 
their employees.
    Mr. Thorson certainly brings a depth and breadth of 
experience from having served, among other roles, as Director 
of Defense Issues for the Legislation and National Security 
Subcommittee of the House Government Operations Subcommittee, 
Chief Investigator for the Permanent Subcommittee on 
Investigations of the Senate Committee on Governmental Affairs, 
and for the Senate Committee on Finance, and Special Assistant 
to Senate Republican leader Trent Lott on corporate fraud 
investigations.
    His past investigative subjects include such major issues 
as Enron and WorldCom. And he worked in both the executive and 
legislative branches under Republicans and Democrats, including 
Representative John Dingle and Representative John Conyers, and 
the late Senator Bill Roth as Chairman of the Finance Committee 
at that time, and, as I mentioned, the then-Majority Leader 
Trent Lott, during his many years of investigative experience. 
Moreover, he has had firsthand knowledge of the trials, 
challenges, and gratification of being a small business owner 
who fulfilled his dream with the help of an SBA veteran's loan.
    Indeed, we have an obligation to ensure that the person 
confirmed as the SBA Inspector General is not only a well-
qualified investigator. They must also show passion in 
identifying barriers that may limit the success and 
entrepreneurial spirit of our small businesses, that form the 
very foundation of the Nation's economic growth and job 
creation potential, having created about three-quarters of all 
net new jobs annually.
    In that light, the Inspector General's office recently 
began an investigation of the SBA's woeful response to 
Hurricanes Katrina and Rita, an area that I and Senator Kerry 
and this Committee has investigated at length. As we have 
learned, the Agency's Disaster Credit Management System was 
incapable of handling the high volume of disaster loan 
applications--nearly 350,000 have been received so far--and the 
SBA failed to accurately monitor its disaster financial 
information and to implement its disaster transformation 
workforce strategy. This tragic response to a tragic and 
devastating disaster must not be repeated. The Inspector 
General will be key in determining how we can ensure such 
bureaucratic lethargy never reoccurs at the SBA.
    Mr. Thorson, you will also bear the responsibility of 
determining, whether SBA's administrative procedures measure up 
to the expectations of America's small business owners. We've 
seen what cannot happen under the Inspector General's watch 
with the STAR loan program, epitomized by the Inspector 
General's December 2005 report finding that eligibility could 
still not be determined for 85 percent of the loans reviewed.
    The series of ongoing investigations on the effectiveness 
of the SBA's Lender Monitoring System, which is used to provide 
oversight of lenders and of SBA's handling of lending programs 
such as the 7(a) and 504 business loans, further underscores 
the Inspector General's vital part in providing aggressive 
oversight and minimizing abuses of the system.
    Similarly, given recent discoveries of small businesses 
losing prime contracting opportunities to large businesses due 
to poor oversight of contracting laws, it is fitting that you 
will bring to this appointment 12 years of experience in 
successfully investigating and reforming Federal contracting 
programs. Uncovering, monitoring, and correcting abuses, lax 
implementation of laws, or waste, fraud, and abuse of 
taxpayers' funds, will require your urgent attention, Mr. 
Thorson. With your success, it will be America's small 
businesses that reap the greatest reward.
    Finally, let me say that, obviously, this hearing has been 
delayed to provide additional time to thoroughly examine 
documents pertaining to the 1997 and 1998 hearings on the 
Internal Revenue Service abuses held by the Finance Committee 
under the leadership, at that time, of Chairman Roth, where Mr. 
Thorson was Chief Investigator.
    During this additional time period, we've had further 
opportunity to analyze all of the issues, documents, and talk 
to people involved in those investigations as well. As the 
record would ultimately show, these hearings led to the 
enactment of the Internal Revenue Service Restructuring and 
Reform Act that we passed, 96 to 2, by the way, in 1998.
    Mr. Thorson, I welcome you. I also want to welcome your 
family. I know your wife Susan is here today. Would you like to 
introduce other members of your family at this point in time, 
and then we'll move on to Senator Kerry.
    Mr. Thorson. Thank you. My wife, Susan, and her father, 
Arthur White. My sister, Karen Miller, with her husband, Jim, 
and my nephew, Chris Miller.
    Chair Snowe. Well, we welcome all of you here today. Thank 
you for being here with us.
    Now I'd like to recognize Senator Kerry.

       OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, 
           A UNITED STATES SENATOR FROM MASSACHUSETTS

     Senator Kerry. Thank you very much, Madam Chairman. I 
personally appreciate your efforts. Thank you for allowing the 
Committee to conduct the necessary due diligence on this 
nomination.
    Mr. Thorson, welcome, and welcome to the members of your 
family also. Of course, we welcome Senator Grassley, for whom 
both you and I have enormous respect. I think his introduction 
is important to all of us here. Let me just say that I also 
want to thank Senators Levin and Lieberman and their staffs for 
their work in reviewing this nomination, which they also 
requested to do.
    You know, it's not often that this Committee is charged 
with confirming administration nominees. But regardless of the 
infrequency of the activity, and given the potential impact 
that these nominees could have on an already fragile Small 
Business Administration, this is a duty that we do take 
seriously.
    The need for the SBA Inspector General to be impartial and 
free of political influence from either side, to be someone who 
will act in the best interest of the Agency, and most 
importantly, in the best interest of small businesses and 
citizens across the country, and the taxpayers whose dollars 
are being spent, that's really an importance that can't be 
overstated here.
    We rely heavily on the work of the SBA's Inspector General 
for unvarnished investigations and analysis. In 2005 alone, the 
SBA Inspector General's office released reports critical of the 
administration's enforcement of anti-bundling rules, reductions 
in staff, and enforcement of small business contracting laws.
    There's much more oversight to be done, as we discussed Mr. 
Thorson, work that will require an independent IG who's willing 
to conduct thorough investigations to address the serious 
management problems afflicting the Agency.
    These issues include: Large businesses receiving contracts 
intended for small businesses, and being counted as small 
businesses when they're not; a review of the challenges facing 
the mentor/protege program; an audit of the contract bundling 
review process and the inadequate staffing level of PCRs that 
led to 87 percent of bundled contracts not being reviewed; 
major staffing shortfalls in the staffing at the Office of 
Technology that oversees the SBIR and SDTR programs; inadequate 
staffing and shortfalls in oversight of the 504 liquidation 
program; and most urgent, the continued inadequate response to 
victims of Hurricanes Katrina and Rita by the SBA Disaster Loan 
Program, and the continued shortfalls in SBA oversight of 
contracts being awarded to rebuild the hurricane-
affected region.
    Now, Madam Chairwoman, I know you know, and I know you 
believe this as I do: The IG does not belong to a party. It's 
appointed by a party. It's appointed by a President. But it 
really assumes a very special trust. There are pressures. We 
all understand the pressures of politics. But this trust is 
most important.
    Now, unfortunately, this nomination comes at a time where 
there's a growing concern over the numbers of Inspectors 
General who are put into that position with very specific 
political ties to an administration that simply doesn't have a 
strong record of nominating people who are going to really be 
free and independent.
    In January of last year, Representative Waxman, who's the 
Ranking Member of the House Committee on Government Reform, 
released a report stating that over 60 percent of the IGs 
appointed by the Bush administration have had prior partisan 
political experience, while less than 20 percent have had audit 
experience, which is what they're really being nominated for.
    Now, after reviewing Mr. Thorson's background, it's clear 
that unlike many of the IG nominees discussed in the Waxman 
report, he does have extensive investigative experience. I 
welcome that. I mentioned that in our conversation.
    The issue has really been one that has arisen about the 
willingness in the record to address serious management 
challenges within the agencies. Will you be an IG who can 
conduct investigations in a nonpartisan manner and who will 
work diligently to identify the larger programs within the 
agency?
    Now, Madam Chair, as you know, in reviewing the record, 
questions were raised by outside entities that came to the 
Committee with respect to the taxpayer abuse hearings of the 
Finance Committee that were held in 1997 and 1998, of which Mr. 
Thorson was the lead investigator.
    There were two GAO reports that concluded--it's their 
conclusion, not mine, not this Committee's, but their 
conclusion with which we needed to obviously review the 
record--that almost all of the claims made during the hearings 
were either unfounded or inaccurate, and from reports at the 
time and in subsequent interviews we have heard that they were, 
in fact, highly partisan hearings.
    Now, I know Mr. Thorson, in our conversation, you dispute 
that, and you will have your chance on the record to make your 
statements about it. I have said that I don't intend to oppose 
this nomination, and I don't. I think it is important for the 
record to adequately reflect what happened in the course of 
that. Our much-
respected colleague, now deceased, on May 4, 1998 in the New 
York Times, Senator Daniel Patrick Moynihan, who both served as 
Chair and Ranking Member, I believe, said the hearings were 
``one-sided and partisan.'' That was his judgment as a senior 
Senator and Member of that Committee.
    You had complete authority over those investigations and 
were the only staff person responsible for clearing the 
witnesses prior to those hearings. The key here is not to go 
back and relitigate. The key here is to have confidence that as 
we go forward, this Committee will have confidence, real 
confidence, that if we put you in this position, that we can 
expect accountability within the Small Business Administration, 
and accountability that's based obviously on fairness and on a 
completely nonpartisan record.
    We need a strong IG who will conduct those kinds of 
investigations. It serves all of us--the Committee, the 
Congress, the Administration--to have that. I look forward to 
your testimony and to some answers to questions as we proceed.
    Thank you, Madam Chairman.
    Chair Snowe. Thank you, Senator Kerry.
    Senator Vitter, do you care to make any comments?
    Senator Vitter. No.
    Chair Snowe. Senator Pryor.
    Senator Pryor. No.
    Chair Snowe. Thank you.
    Here today to introduce Eric Thorson is our colleague, 
Senator Grassley. Senator Grassley is Chair of the Finance 
Committee. We certainly welcome you to this Committee here 
today.
    Chairman Grassley has had an extensive working relationship 
with Mr. Thorson as far back as 1993, where he served as lead 
defense investigator for the House Committee on Government 
Operations, as well, of course, on the Senate Finance 
Committee.
    Senator Grassley, thank you for joining us here today. Your 
full written statement will be entered in the record, and we 
look forward to hearing your introduction of Mr. Thorson.

              OPENING STATEMENT OF THE HONORABLE 
      CHARLES GRASSLEY, A UNITED STATES SENATOR FROM IOWA

    Senator Grassley. Madam Chairwoman and Senator Kerry, it's 
an honor for me to come before the Committee to introduce Mr. 
Thorson. I would associate myself with the remarks of Senator 
Kerry about the necessity for the independence of the Office of 
Inspector General, the importance of the office.
    In addition to saying that I come to support Mr. Thorson 
and agreeing with Senator Kerry about the independence of the 
office, even in this administration, I'm going to take credit 
for, although some people say maybe I shouldn't take credit 
for, the removal of at least three Inspectors General who I 
felt were not doing their job. Maybe somebody would even add it 
up to more. I pay a great deal of attention in both Republican 
and Democratic administrations to make sure that Inspectors 
General are independent, as Senator Kerry has said.
    As both of you know, I've worked very hard to strengthen 
the oversight role of Inspectors General throughout the 
Government. The IGs are our first line of defense against 
fraud, waste, and abuse in Government. We depend on them to 
ensure that every tax dollar spent is spent according to law. 
When that doesn't happen, we in Congress need to know about it 
and take corrective action.
    As you also know so well, being an IG is a tough job, and 
particularly when they're independent, as Senator Kerry says. 
When the IGs aren't doing their job, we need to know that 
they're not doing their job. Congress also has a responsibility 
to watch the watchdogs. We in Congress need to keep a sharp eye 
on the IGs to make sure that they're meeting their 
responsibilities under the IG Act.
    What I'm saying, Madam Chairwoman, is this: It takes a very 
special person to be a good IG. Above all else, an IG must have 
integrity and courage. IGs must be independent. They must 
always set an example of excellence in their personal conduct. 
IGs must meet high standards indeed.
    To the two leaders of this Committee, I say Mr. Thorson 
meets those standards. Mr. Thorson has an outstanding 
reputation for being a man of integrity and courage. He has the 
requisite knowledge, experience, and character to be an IG in 
the Small Business Administration.
    He has senior-level management experience in government, 
having served as Assistant and Deputy Assistant Secretary of 
the Air Force 1985 to 1989. He has executive-level experience 
in the private sector as well, where he was president of his 
own company that operated a fleet of corporate jet aircraft.
    His investigative credentials I think are impressive. Some 
of these were referred to already, but let me repeat: 1997 to 
1998, Chief Investigator, Senate Finance Committee. He led the 
investigation of the abuses of the Internal Revenue Service. 
His findings and recommendations formed the foundation for an 
excellent set of hearings. Those revelations that did surface 
at those hearings helped to generate national support for the 
reform and companion legislation that followed for the IRS.
    1995 to 1997, Mr. Thorson was Chief Investigator of the 
Senate Permanent Subcommittee on Investigations. Prior to that, 
in 1995, he served as the Lead Defense Investigator for the 
House Committee on Governmental Operations.
    During the timeframe, 1993 to 1997, I became directly 
involved in at least three of Mr. Thorson's investigations and 
testified at hearings on those matters. At the time, I remember 
being so impressed with the very professional way Mr. Thorson 
conducted investigations, especially an investigation involving 
the Air Force 
C-17 contract.
    On the C-17 investigation, he worked in close concert with 
the Defense Department IG. That kind of cooperation was in 
keeping with the true spirit of the IG Act, and Mr. Thorson is 
the one who made that happen. On March 17, 1993, the IG 
presented a devastating report to the House Committee on the 
back-door bailout of the C-17 contract.
    I was there. I remember it well. I was a witness and 
testified at that hearing. After complimenting the Chairman, 
Mr. Thorson, and the IG for working together to produce a 
superb piece of work, the record shows that I then said this: 
``This is oversight and investigation at its best.'' These 
words were meant for you, Mr. Thorson.
    Chairwoman Snowe, I know that Mr. Thorson is capable of 
doing, and I feel confident that he can do, what IGs are 
supposed to do and do it very well. In my book, he has passed 
the IG test with flying colors. I'm confident of Mr. Thorson's 
ability to be impartial and independent, to be objective and 
thorough.
    Above all, and in closing, I would mention things that have 
been referred to here and simply say: ``Take all of the work of 
Inspectors General and people that are whistleblowers and 
everything else of people trying to cut out things that are 
wrong in Government.'' I know that there have been some tough 
questions asked. On that score, I would say that my own 
experience has taught me that the hard-hitting investigations 
always generate friction and generate criticism. Always. It 
goes with the territory. It's a fact of life in that line of 
work.
    I came here this afternoon to stand before you with Mr. 
Thorson because I believe he has what it takes to be that top-
notch IG that both of you have defined. If I could, just for 
another Senator, an e-mail between Senator Kyl's office and my 
office says something like this--I don't like to put e-mails in 
the record, but I'll save it for you so you can prove that I 
said it--Kyl's office just asked--CEG mentioned that Kyl also 
supports Mr. Thorson.
    Thank you.
    Chair Snowe. That will be included without objection.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T7287.001
    
    Chair Snowe. Thank you, Chairman Grassley, for being here 
today. Thank you very much.
    Senator Grassley. Thank you.
    Chair Snowe. Appreciate it.
    Senator Landrieu, do you care to make any comments before 
we begin?
    Senator Landrieu. No.
    Chair Snowe. Okay. Mr. Thorson, Rule 3 of the Committee 
requires that all witnesses at nomination hearings give their 
testimony under oath. If you would please stand and raise your 
right hand so the oath can be administered. Do you swear that 
the testimony that you are about to give to this Committee will 
be the truth, the whole truth, and nothing but the truth?
    Mr. Thorson. I do.
    Chair Snowe. You may be seated. And you may begin.

STATEMENT OF ERIC THORSON, NOMINEE FOR INSPECTOR GENERAL OF THE 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Thorson. Good afternoon, Senator Snowe and Senator 
Kerry. It is a privilege to come before you for consideration 
to be the next Inspector General of the Small Business 
Administration, and I thank you for allowing me to make a brief 
opening statement.
    I hope that in reviewing my qualifications for this 
nomination, you will find that I bring a strong, varied 
background of related Government experience to this position. I 
have served in the military as an Air Force pilot, in several 
executive branch agencies, and as an investigator for a number 
of Committees in both the House and Senate.
    I began my Government service as a cadet at the U.S. Air 
Force Academy. By that time in my life, I had lost both my 
parents and I could not even pay the uniform deposit required 
upon entrance. I have always looked upon this opportunity as a 
true gift that forever changed my life and set the foundation 
for a debt to this country that I will never be able to repay 
no matter how many years of Government service I accumulate.
    After spending 2 years flying in Southeast Asia, I left the 
Air Force in 1973. I started a tiny flight school in southern 
California with 3 single-engine airplanes. The capitalization 
of the company came from my only credit card. I learned that 
there was a Government agency that had a unique program to 
assist Vietnam returnees with loans to develop a business. I 
applied.
    One day, I received a call from the Small Business 
Administration that I had been approved for one of these 
special loans. I was stunned. By 1985, I had paid back the SBA 
loan in full, and my company was operating over 20 private jet 
aircraft, primarily for the movie industry. My clients included 
Frank Sinatra, Clint Eastwood, Merv Griffin, and Henry Fonda. 
This most interesting time in my career would not have been 
possible except for the SBA.
    1985 was also the year that I was offered a position by the 
Reagan administration as Deputy Assistant Secretary of the Air 
Force for Economic Analysis and Financial Controls. Given my 
background with the Air Force, that was not something I could 
turn down. It was time to start paying back.
    I mentioned earlier having been a congressional 
investigator. In 1995, I had the privilege of being named the 
Chief Investigator for the Senate Permanent Subcommittee on 
Investigations, one of the most incredible jobs I have ever 
had.
    Part of that enjoyment came from working for a very fine 
man, the late Senator William Roth. He believed in the 
importance of nonpartisan oversight and demanded an 
exceptionally high degree of accuracy and integrity in the 
investigations that he authorized. Those lessons are 
particularly applicable to any Inspector General. During that 
time, we conducted investigations involving defense contractor 
fraud, Medicare fraud, and even the Russian Mafia.
    Today, as the nominee to be an Inspector General for the 
SBA, we are on the edge of what I believe will be a crucial 
test for the Agency. As a result of Hurricanes Katrina and 
Rita, the SBA is at the forefront for the disaster relief 
loans, which will involve unprecedented numbers, both in 
applications and dollars.
    Also, history has proven that in this kind of situation, we 
can expect there to be an unprecedented number of attempts to 
defraud the program. It is strongly stated that the first goal 
of the office of the Inspector General is to ``Prevent fraud 
and unnecessary losses in SBA programs.'' The word ``prevent'' 
clearly implies the need to be proactive, to stop fraud before 
it can be accomplished, and to create a deterrent to those who 
might be planning on taking advantage of this Nation's efforts 
to assist those who have lost so much.
    If confirmed as the Inspector General, I can assure you 
that the entire office, both auditors and investigators, will 
use every means to deter such efforts, and work with the 
administrator of the SBA in finding ways to ensure these vital 
loans are distributed to only those in true need.
    I sincerely hope that you find my background and experience 
worthy of this position, and I look forward to answering any 
questions you might have.
    [The prepared statement of Mr. Thorson follows:]
    [GRAPHIC] [TIFF OMITTED] T7287.002
    
    [GRAPHIC] [TIFF OMITTED] T7287.003
    
    [GRAPHIC] [TIFF OMITTED] T7287.004
    
    Chair Snowe. Thank you, Mr. Thorson. We appreciate that.
    I'd like to begin with your experiences as the Chief 
Investigator of the Senate Finance Committee because obviously 
Senator Kerry has raised some of those issues here today. I'd 
like to have you provide some insight into your experiences and 
how you approached that investigation because I think it would 
be helpful as well to the Committee. As I said earlier, we've 
talked to a number of people who--in fact, many of whom spoke 
very highly of you throughout the process in working with you 
and the number of positions that you've held, both on the House 
and Senate Committees.
    In response to the Committee, you highlight, obviously, 
your experience. As you're aware, and what Senator Kerry raised 
about the follow-up to the review of the Government 
Accountability Office's report, that they were not able to 
substantiate many of the claims that were made by witnesses 
during the course of the IRS hearing.
    I know that former Chairman Roth wrote in his book about 
the hearings, ``The Power to Destroy,'' that, ``Our 
investigators and professional staff members on the Finance 
Committee made certain that the evidence being gathered was 
corroborated by two or three witnesses and vetted against 
taxpayer files.''
    I'd like to have you lay out for the Committee: What were 
your criteria for selecting and vetting witnesses?
    Mr. Thorson. First of all, we used different criteria for 
different types of witnesses. The first thing that Senator Roth 
originally started to do here was to look at abuses, which 
means taxpayer cases. We started receiving them, first a 
trickle, then hundreds, and eventually thousands.
    In that mail, we began to get letters from IRS employees 
who basically said, ``If you're serious about trying to help 
this agency, we'll help you.'' I didn't pay much attention to 
those. I admit that. That wasn't what we were doing. We were 
looking at taxpayer cases. More and more, I began to look at 
some of these letters and realized eventually that if we were 
going to tell this story, it had to be told by the people who 
really worked there and who lived in those jobs.
    For the taxpayer cases, specifically on the taxpayer 
abuses, I believe there was one panel. We're going back a ways, 
but there were some criminal division cases. But the regular 
taxpayer cases, what we did there, we had 6103 authority 
granted by the chairman, and we went back and we took their 
stories. We had many, many that we could have chosen from. The 
stories really were heart-rending. I mean, they were terrible.
    We decided, first of all, these should be people that owed 
no tax, in our best estimation. We knew that no matter how bad 
the story were, when we put these hearings on, if these 
people--there would be somebody on the panel who would say, 
``well, if they'd just paid their taxes, they wouldn't have had 
this problem.'' We eliminated that by picking only cases where 
we believed these people did not owe anything.
    Once we had that narrowed down, we then went back to the 
IRS and pulled their files. By the way, this is also intending 
to show that they knew who we were talking to. It wasn't like 
they didn't know because we had to go to them to get the files.
    We recovered their files, and went and looked to see that 
what they were telling us matched what the IRS was telling us. 
Obviously, in the cases that we did put on, that was clearly 
the case. We knew everything the IRS knew about them. That's 
how we chose those taxpayers.
    Those cases were also to represent more than just a story. 
They were supposed to represent things that we had heard 
numerous times, not just a one-time situation. You can always 
find those. The idea was that some of these stories would 
really resonate, and that they--that we heard it here, here, 
and here, and we chose a witness to exemplify that.
    I will tell you that one of the stories we heard involved a 
husband and wife having to divorce in order to protect her 
second husband's paycheck. He had nothing to do with the tax 
year for which he was--the woman here was being--the money was 
being taken from them. They went after her second husband. They 
ended up having to divorce.
    What I found was, that wasn't unusual, that that advice was 
being given by tax counsel in order to protect income. Now, 
that should never happen. That never, ever should--people 
should never have to get a divorce because of their government. 
So we chose that particular case.
    By the way, I want to tell you, forgive me. I do get 
passionate about this, so forgive me about this. I lived this 
for 2 years.
    When we chose this particular woman and we asked her if she 
would tell her story, she said that it was so important, given 
what her family had been through, that her whole family would 
be at the hearing. We said, ``ma'am, we can't do that. We have 
rules about what we can pay, and we can pay your travel but we 
can't do that.''
    And she said, ``Oh, no, that's okay. That's not what I 
mean.'' And I said, ``Well, what are you getting at?'' Because 
logistics was a huge part of these hearings. What it boils down 
to, and I don't mean to drag this out, but it's something I'll 
never forget, it was so important that the United States Senate 
would deal with this issue that affected her life, she and her 
husband, and her kids, got in their car and they drove here 
from San Diego, California.
    That's the kind of thing that drove this. Senator Kerry, I 
appreciate very much the time you spent with me yesterday. We 
talked about this kind of thing. I tried to assure you then, 
and I will assure you now, there were no politics to this. I 
have no idea what party any of these people belonged to--I 
didn't care who owned the IRS at that time, or anything else. 
Those were the kinds of things that we were dealing with.
    To get back to the issue, not trying to drag this out too 
much, but the idea was with taxpayers, A, they owed no tax. And 
B, their story matched what was within the IRS files.
    When it came to employees, we realized first of all that 
there was one thing I'd never run into before, ever, and that 
was Federal employees who feared their own agency. It was 
almost universal. Even people who had never had a problem 
within their agency, they knew the kind of things that could 
happen to them. I have a number of quotes that I won't read 
unless I'm asked specifically, but with people of 25 and 30 
years' experience that went into this sort of thing. We knew we 
had to try and figure out how we were going to present this.
    What we decided was, among ourselves--so nobody set this 
for us; we did this ourselves--first of all, we wanted every 
division that we could get represented. That's auditors, 
Examinations Division, and collections. We had heard about a 
group called inspections. That's internal affairs, and they 
carry weapons. District counsel. Maybe we could get their own 
lawyers. That's what we wanted to do. We wanted to spread it.
    We also spread it geographically. We wanted to make sure 
that we drew our witnesses from every part of the country so we 
couldn't be accused of finding only some small pocket of 
problems.
    The third that we set for ourselves, was the most 
difficult: 20 years with the IRS before you could be one of 
those witnesses. Now, this was the panel that we put on that 
was behind a screen. These people were scared. They asked for 
anonymity, and they asked that it not just be granted for the 
hearing but forever. They gave us some pretty good reasons why.
    There is one person behind that screen who has gone public 
today because he's left the IRS. He was an inspections officer. 
He's now with the IG at Customs, and has been willing to talk 
to you all if you ever want to talk to him. He's a very fine 
person. Ironically, I probably have more friends in the IRS 
than anybody you'll ever meet.
    That's kind of how we did that. How we verified some of the 
things that these people were saying was, first of all, one of 
the most difficult tasks of a congressional audit, because we 
don't have a badge, is to keep expanding your sources. One 
thing we were accused of was making cold calls to IRS people. 
We never, ever did that. They had to call us.
    We had to expand that circle of sources and to make sure it 
spread out into different parts of the country. When a person 
would tell us that one thing existed, we would call sources in 
another part of the country and make sure, ``Have you heard the 
same thing? Does this sort of thing go on?''
    A perfect example of that was the fact that in auditors, 
for example, that audit taxpayers, not corporations, but small 
businesses and taxpayers, was: ``We target poor people.'' I 
could never understand that because that doesn't make any 
sense. There's no money there.
    They said, ``No, you don't understand. This has nothing to 
do with money. This has to do with statistics.'' Open and close 
cases as fast as you can. When people are represented by 
counsel or they're represented by CPAs, it slows us down. We go 
after people who can't afford to have help.
    That was universal. We heard that in every part of the 
country. We also heard the allegations of quotas. In one case, 
it was $1,000 an hour. In another case, it was $1,200 an hour. 
We asked for proof of that. We got it, in writing, where it was 
actually specified, $1,200 an hour. If I'm an auditor and I sit 
in your living room and I audit you, I'm going to bump your 
taxes by $1,200 an hour whether you deserve it or not. We heard 
that across the country. We found people who would be saying 
that. They would have their own stories, but they would also 
corroborate them by saying the same thing.
    The GAO report, for instance, references the situation of 
large corporations, where auditors of international, multi-
national companies would zero out large tax debts. Now, first 
of all, they say there was no corroboration. Yet within their 
own report, they say four auditors from different parts of the 
country that didn't know each other, all testifying under oath, 
all said the same thing.
    That is a form of corroboration. Maybe it doesn't meet 
somebody's standard. How could these four people--and remember, 
these aren't disgruntled taxpayers. These are people with 25 
and 30 years with the IRS. These people know what goes on 
inside their agency, and they testified and came forward. None 
of these people were behind a screen. That's what they said.
    Each witness was chosen to tell their own story, but also 
have an overlapping testimony where they testified as to 
something some of the other people said as well.
    Senator Kerry, you made a number of points in your opening 
statement, and I appreciate them, and especially I will come 
back to the nonpartisan part because that's something we talked 
about that's very important to me.
    The other part here is that when the GAO says, ``we did not 
corroborate, we did not find, we did not verify, you've got to 
wonder,'' what were they doing? First of all, if I'm the one 
who, as they state here, that did the verification, how come 
nobody talked to me? How come nobody called and asked for an 
appointment to just see what I did? Nobody called my partner, 
either, who by the way is here in this hearing room today.
    Why didn't that happen? I know of one witness they did 
interview, and she immediately filed a complaint with the 
Finance Committee and called me, even though I was out of 
Government at that point, and registered a complaint of bias by 
the interviewer.
    In the case where we're talking about those kinds of 
things, where they talk about lowering tax debt because of 
influence, because of influences by a corporate taxpayer or 
whatever, one of the things the GAO did find was that, No. 1, 
if you read the reports--and again, I've got it specified; we 
don't need to go into it, but I can--those reductions did 
happen. They were correct on that. What the GAO says was they 
were within the discretion of the manager. But that was never 
an issue. That wasn't the point. The point was, why did they do 
that? And the allegation was influence.
    Well, for example, one of these women who was an auditor, 
again, of multi-national companies--I can't even imagine trying 
to do audits of that kind--she made an allegation that one of 
her bosses maintained a law office on the side from the company 
who they were auditing, in Manhattan. I'm assuming the 
Manhattan corporate real estate is about the most expensive in 
the world.
    Now, the GAO said, ``Yes, we found that was true, but that 
was okay because we verified that their ethics person approved 
this.'' That was all right. That had nothing to do with it. The 
point was, they were operating a law office on the side in the 
facility belonging to the company that they were auditing.
    Those are the kinds of things where I disagree strongly 
with the findings of the GAO. I think there were better ways 
that they could have gone about this, and certainly by talking 
to me. I would have been very willing to. I'm hoping I've 
addressed most of the issues that may have come out of that.
    Chair Snowe. I appreciate that, Mr. Thorson. I think that's 
helpful to the Committee in offering your insights, and being 
able to personally do that here today. I noted in the late 
Chairman Roth's book on ``The Power to Destroy'' that he said 
that first and foremost, he wanted to ensure the investigation 
was fair, above and beyond everything else. I appreciate that. 
I appreciate your comments.
    Let me move on to one of the small business issues, and 
then I'll move on to Senator Kerry. In this role of Inspector 
General that's so crucial and vital at this point, particularly 
in the history of Small Business Administration as far as I'm 
concerned, is the ability to deliver these programs and 
services in an efficient and effective way. As you know, the 
hurricanes, both Katrina and Rita, the Small Business 
Administration really had the opportunity to step up to the 
plate and to offer these programs.
    Unfortunately, we had some considerable difficulties across 
the board--they were widespread from the outset--in 
administering these programs efficiently and effectively and 
expeditiously. There was virtually no anticipation in terms of 
the numbers of applications that would be filed and how to 
process them acquiring auditors and verifiers and so on and so 
forth.
    How would you approach, for example, the particular 
problems that certainly manifested itself as SBA was responding 
to these hurricanes this last fall? They received more than 
337,000 applications for disaster loans, they've approved 
71,265, and they still have 105,803 applications pending. 
Obviously, what we have seen, what we have experienced, is the 
lack of urgency, the lack of speed and efficiency to the 
response, and it has been very slow in disbursing the funds. In 
fact, out of the 5.1 billion in loans, it's actually disbursed 
only 432 million to borrowers.
    Obviously, without this money, as Senator Landrieu can 
attest, it's very difficult to rebuild and restructure the 
economy in New Orleans and throughout the Gulf region that's 
been hard-hit. How would you approach this particular 
investigation so that we can best learn from these mistakes and 
to prevent them, and anticipate them in the future?
    Once it's obvious that a disaster is about to occur and 
it's imminent, that certainly the Small Business Administration 
should have positioned itself to begin to plan, as the Coast 
Guard anticipated, for example, in prepositioning its assets. 
Clearly, the Small Business Administration had an opportunity 
to begin to plan for how they were going to administer these 
disaster loans.
    Mr. Thorson. Katrina and Rita I think created a situation 
that, while it's been said many times, nobody could anticipate. 
Maybe that's true to some degree. The truth is, once this 
started to happen, I think one of the things I was very 
surprised at was, to this day, there is not an IG presence by 
the SBA in the Gulf area. To be quite honest, I don't 
understand that. I think that's one of the things that has to 
happen immediately. That means from me on down. That is 
something I would intend to do immediately.
    I think another thing is that you've got to put together 
basically--and this has been tried by, I think, Homeland 
Security before--is teams of people, both investigators and 
auditors. You need to go down and you need to see what systems 
are working and what systems are broken. I think Senator Kerry 
used the term ``unvarnished'' at one point, and that's exactly 
what it's got to be. You don't care who's offended by it, but 
you've got to figure out what is going on and where are the 
weaknesses.
    Now, the IG doesn't set the policies, obviously, as to who 
gets a loan or who doesn't. You all do that with the 
Administrator. When those policies are established, the IG does 
measure what is happening against those policies, and then it 
reports to you all and it reports back to the Administrator as 
well. I don't see that happening right now.
    Maybe--I don't mean to be unfair to the Agency. I've 
watched this and had some time to look at this, and I think 
that's one of the first things that has to happen.
    Fraud has got to be a huge problem, given the amount of 
money that's flowing down there right now.
    The second problem, and I would probably rank this right up 
there with it, is the small business set-aside issue that 
you've both raised in your correspondence. I've read all your 
correspondence. The contracting that's going to take place, 
both of what is happening right now and in the future, is just 
staggering.
    I mean, the kind of things that will be contracted out to 
major corporations, we know that. You know that's going to 
happen. Then we have to take and set the policy, check the 
policies, and see what it is that the small businesses are 
entitled to, and then make sure that that's adhered to. It 
doesn't matter who you upset by doing that.
    That's one thing--and again, Senator Kerry, I made you a 
promise. I made you a couple of promises. One was there would 
be no politics to what I do in this office. I want to state 
that publicly here on the record to repeat that because that's 
the way I feel, and it's always the way I've felt, frankly, in 
all of this stuff.
    We need to get down there. We need to put teams together 
and we need to have a presence. There may be required a 
permanent presence in that area. I'm not the expert in that, 
and I don't pretend to be. I'm not an auditor and I'm not a 
criminal investigator. My job will be to focus, to manage, to 
hopefully motivate, and even lead--and lead is different than 
manage; a lot of people confuse those, but they are different--
those auditors and investigators. I would like their input into 
how they would approach this as well. I know that something has 
to happen quite quickly.
    Chair Snowe. Thank you.
    Senator Kerry.
    Senator Kerry. Thank you, Madam Chairman.
    Mr. Thorson, thank you for your pledges with respect to the 
approach to the job. We certainly appreciate that very much.
    I was a little disappointed in your opening statement that 
you focused so significantly on the potential for fraud in the 
loans and fraud among the small businesses themselves and the 
homeowners in the Gulf region, but you didn't focus on the 
management problem itself within the SBA with respect to 
getting people on the ground to do these things. I mean, part 
of avoiding fraud is having sufficient staff.
    Mr. Thorson. Absolutely.
    Senator Kerry. The staff has been cut. As you've just said, 
you're surprised there aren't auditors on the ground. Auditors? 
You've got 300,000 loans waiting to be processed.
    It seems to me that before we start focusing on the fraud 
in the issuance of a loan, we'd better start issuing some 
loans.
    Mr. Thorson. Yes, sir.
    Senator Kerry. That's an oversight issue with respect to 
the SBA itself. What can you tell us today--I mean, is this 
going to be a priority when you get in there? It seems to me 
it's priority No. 1.
    Mr. Thorson. It is. The reason it really didn't rise to 
that level in my statement is simply because fraud is much 
easier to understand, and it's much more easy to see in the 
press accounts and that sort of thing.
     The other thing is, too--and I'm not moving away from your 
statement at all because I agree with it--but I haven't spent a 
day at SBA yet. I don't pretend to know exactly what the 
policies are. If I were going to start wading in with my 
opening statement, I want to know exactly what I'm saying.
    The issues that you've raised--and efficiency of resources 
is another one that I have discussed with your staff as well--
these are huge issues.
    Senator Kerry. The question is--I misspoke. It's not 
300,000. It's 130,000. There are 130,000 loans that are waiting 
to be processed. We've had the Administrator up here, and the 
Chair and I and others on the Committee months ago, on two 
occasions, once when we were assured that things were going to 
be put in place and a few weeks later, when they weren't, with 
more assurances.
    I just want to call to your attention that the Members of 
this Committee on a bipartisan basis are deeply concerned. I'm 
confident you're going to hear from the Senator from Louisiana 
about what is and isn't happening down there.
    Mr. Thorson. Yes, sir. As I said, I've read your 
correspondence, from both you and Senator Snowe, to the Agency. 
I think you've raised some excellent issues. You will not see 
me back away from any of those issues.
    Do I have the perfect answer to solve some of those things? 
No, because I have heard the Agency give you one explanation, 
which is reasonable to some degree. They've talked about the 
limitations of computers systems. They've talked about being 
able to hire people. There are no people to hire that know 
the--I was in that hearing when you held that.
    What we need to do is to be able to get the experts on the 
ground in that area to see what's happening, to see how the 
policies are being adhered to, what steps are being taken. I 
think what you're getting at, sir, is that what they're doing 
isn't--doesn't meet your standards of what you're expecting. If 
that's the case, then we need to be able to look at that as 
well and not only say, ``is that true or not true,'' but ``why, 
and what can be done to fix that.''
    I think, too, my effort would never be to work against the 
Administrator or SBA; but to work with him, but to be able to 
show why we feel, as the experts in this field--which, again, 
I'm not, but I would be managing those people--and to come up 
with reasons as to how to make it better, how to make it work 
better, and to be able to stand before you and say, ``this is 
what we found,'' and to see if you agree.
    Senator Kerry. Sometimes, Mr. Thorson, the accountability 
job of the Inspector General is to measure whether or not the 
achievements and/or approaches of the particular agency are 
accomplishing their goals.
    Mr. Thorson. Correct.
    Senator Kerry. Not necessarily to provide the remedy. It 
may be that Congress has to provide the remedy, or the 
administration. If your job is to go over there, and the SBA is 
supposed to get these loans out, and they have said, ``We're 
putting a program in place to do this and we pledge to you, 
Members of Congress, we're going to have these loans racing 
out,'' et cetera, et cetera, it seems to me your priority is to 
see if that's happening. If it's not, they're not accomplishing 
their goals.
    Would you agree?
    Mr. Thorson. Yes, I do. I think I see my job as maybe a 
little--one more step past that, but which certainly includes 
that part, but also making--and again, as you say, it's not my 
jump to make those things happen. I do think it is part of our 
task to provide recommendations as to where we see the 
weaknesses and where maybe you all can provide the fix.
    Senator Kerry. I completely agree. No question that you are 
supposed to contribute to ways to provide effectiveness in 
management and so forth. We hope you will do that.
    I want a pledge from you today that you understand and see 
this component that its not just the fraud and the homeowners 
that are going to be the targets here. The Agency itself has to 
be measured whether or not it is doing its job.
    Mr. Thorson. I absolutely agree, sir. You have my pledge on 
that.
    Senator Kerry. It's not a question of working with or 
against the Administrator, but the willingness to hold the 
Administrator accountable that will require you to say, you're 
not getting the job done.
    Mr. Thorson. I absolutely agree with that. I do give you 
such a pledge.
    Senator Kerry. I really don't want to belabor it, but I do 
want to just kind of get an extra question or two with respect 
to--if I may, Madam Chairman--just two quick things.
    No. 1, budget cuts really are critical. Every Member of 
this Committee, I think, is concerned about what's happening to 
the budget. Budget cuts lead to fraud and abuse.
    Mr. Thorson. Yes, they do.
    Senator Kerry. If you're putting out $300 billion worth of 
Federal contracts but you don't have sufficient people to 
guarantee they're being put out properly or watch what's 
happening, boy, is that an invitation to abuse and fraud, and 
taxpayer dollars get wasted.
    Can we count on you, should you be confirmed, to ensure 
that the SBA makes its own oversight requirements a priority? 
There are requirements within the SBA for their oversight, and 
they're not doing it, necessarily, because they don't have the 
people.
    Mr. Thorson. I absolutely agree with that, Senator, and 
that would be a priority, yes.
    Senator Kerry. Finally, let me just--I'm trying to sort 
through this because--and Madam Chairman, could I ask unanimous 
consent that the two reports of the GAO just be placed in the 
record, as appropriate?
    Chair Snowe. Without, objection, so ordered.
    [The GAO reports follow:]
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    Senator Kerry. Could we also, because some Senators, I 
know, wanted to pose a few questions who couldn't be here, just 
leave the record open for a week or something like that?
    Chair Snowe. Yes, we will, to about March 8th.
    Senator Kerry. For written questions. Obviously, there's a 
difference of opinion here, and we're not going to sort it out 
today. I want to try to see if we can just give a little more 
meat to it.
    Finance Committee staff have been in touch with our staff. 
Those Finance Committee staff have documented the notion that 
they had a hard time, that they didn't get the names of 
witnesses until the day of the hearing or that there were 
documents that were even withheld. Someone even said that 
apparently some documents were kept in the trunk of your car. 
Is that true?
    Mr. Thorson. We had a person in our office who was sending 
things to the IRS before the hearings. We felt that was going 
on. We knew that was going on. We knew it was going on after we 
left the office. There were times when we would take things out 
with us just simply to make sure that people in the office 
couldn't have access to them.
    Senator Kerry. Did that keeping things from access take 
place on a partisan basis, or was it----
    Mr. Thorson. It had nothing to do with politics. In fact, 
the person I'm talking about was on our--the Republican staff.
    Senator Kerry. Did it result in some people therefore not 
being able to have access or something, or did it create an air 
of--I'm just trying to----
    Mr. Thorson. I don't know. I mean, first of all, like I 
said--and believe me, I'm not ducking your question; we're 
talking about 8 and 9 years ago, and I don't really remember--I 
do know that as far as the staff having access, we weren't 
operating in a vacuum, obviously. This was a huge investigation 
for Senator Roth as well. He watched--he was very proactive in 
this and knew everything that we were doing.
    He had counsel, Frank Polk, who I'm very proud of the fact 
is here in the room today, representing Senator Roth very well. 
And----
    Senator Kerry. Well, I understand that. I'm just trying to 
understand--because later on, and I'm confident that there are 
always two sides to these things. The GAO didn't come to you, I 
understand, to try to ascertain some of these things because 
they went to the actual facts of the cases.
    Here's what they themselves wrote. Let me just read you 
what they said. This is their conclusion.

          ``Based on our investigation, we did not find any evidence to 
        support the allegation that IRS managers' decisions to `no 
        change' or `zero out' proposed tax assessments were improper. 
        However, our investigation established that the allegations 
        themselves had been based on an incomplete awareness of the 
        total circumstances surrounding the matters.''

    They also found--I'm skipping down here a little bit--

          ``Generally, we found no corroborating evidence that the 
        criminal investigations described at the hearing were 
        retaliatory against a specific taxpayer. Further, we found no 
        evidence that IRS employees had acted improperly in obtaining 
        and executing the search warrants.''

    Finally, I think they also--well, let me just--I mean, 
those are sort of factual findings as a result of going--they 
also found that the 8 specific cases were not substantiated by 
the facts.
    Mr. Thorson. Well, I would----
    Senator Kerry. That's a pretty dramatic sort of 
contradictory statement.
    Mr. Thorson. Yes. I disagree with their--for instance, 
let's talk about the affidavit for search warrant. In one of 
the cases, in the Colaprete case, which was the Jewish Mother 
Restaurant, they say, ``Well, there were lawsuits here, so we 
couldn't really interview and therefore we don't want to assume 
anything.'' But there was no real evidence.
    Wait a second. There was an application--there was a 
bookkeeper who was accused by Colaprete days before of 
embezzlement. She went to the FBI, to the ATF, and both of them 
rejected her, and so she went to the IRS. Within 48 hours, they 
executed a search warrant.
    The facts that they very easily could have found, if they 
had bothered--and I'm not trying to be critical here of GAO, 
but I am having to defend myself here on this--she had a 
record. She had a prior record of embezzlement. That would have 
been very easy to determine. We knew that. In the case of an 
affidavit for search warrant, they should have--they're 
supposed to have two corroborating witnesses. They did not.
    One of your own--or Senator Snowe's own staff pointed out 
to me that a Federal judge ruled that the IRS lied on that 
affidavit for search warrant. Of course, the easiest one was, 
``Was this true? Did she embezzle from this restaurant when at 
the same time she's trying to get the IRS in?'' Yes. She was 
convicted of stealing--I think it was either $30,000 or 
$60,000. She was convicted for that, of that same restaurant. 
When they say there were no facts to corroborate this, I have a 
really hard time with that.
    In another case--and I won't drag this on, but I appreciate 
very much the way you've been approaching this, and it's very 
valid--all charges were dismissed against a tax preparer. There 
were 23 counts. All counts were dismissed, and the Justice 
Department ended up paying him $75,000 in settlement. Now, that 
doesn't in itself explain everything, but it's sure a pretty 
good indication that maybe this wasn't right.
    I've got one of those for almost every single example 
they've listed here. It's simply by reading their own 
statement. What I think you are reading from, and forgive me if 
I'm making an assumption here, but in the summary up front 
where they give you the findings, it's terribly negative. I 
think it's pretty much what you just read. If you go into the 
report, which I've now read many times, and you read the lines, 
the actual statements--and I've got it by page number--they 
verify this stuff. This happened.
    What we don't agree on is the motivation. Nobody questioned 
that it was within the discretion of the manager to zero out 
those tax bills. That's what they're saying. It was done 
properly. No question it was. Why did he do it? That was the 
problem. That gets to the whole issue of oversight.
    These are auditors and interviewers. We're supposed to 
exercise a different level of judgment in working for you all. 
I took that responsibility very seriously. I interviewed these 
people. I talked to them. I talked to other people in their 
offices.
    Senator Kerry. Let me ask you this. Let me sort of shortcut 
this a little bit because of the time. I'm not trying to cut 
you off at all.
    Mr. Thorson. That's all right.
    Senator Kerry. I appreciate your answer enormously. 
Assuming you're confirmed for this job, is there a lesson you 
feel you take out of those hearings, out of that process, that 
you would apply in this job as Inspector General? I mean, is 
there something, sort of a message about different views and 
the contentiousness of that, that leaves you saying, okay----
    Mr. Thorson. Oh, I'll never forget the contentiousness.
    Senator Kerry. Therefore, does that affect how you might 
approach this job as IG?
    Mr. Thorson. Yes, sir. To some degree, it does. Yet in 
another, it doesn't. What we do up here, and what I did as a 
congressional investigator, is really different than what you 
would do as an IG and working with the professionals who do the 
audits and do the criminal investigations. I do think there's a 
bit of a difference.
    The thing I think you're getting at and I agree with is 
you've got to be really, really careful. One of the things, 
though, that I'm hoping that Senator Roth and his immediate 
staff and his counsel would agree with is, we were really 
careful because we represented him. He, above anyone else I've 
ever worked for, exemplified integrity and character.
    I just--there are some similarities, yes, and there are 
some lessons learned, certainly. I never dreamed that we would 
run into some of the kind of problems we ran into after doing 
those hearings. The American people loved them, and they 
thought the world of the Senate, and certainly Senator Roth 
gained from them.
    For me personally, yes, sir, I think I have to--when doing 
these kinds of things, you have to be very, very careful in how 
you approach them. I also trusted these people that I had 
vetted, and I listened to them, and I stand behind them today. 
If I have to lay the GAO report next to the testimony, I'm 
going to stand behind my witnesses. They were telling the 
truth. They were scared, and they were under oath.
    Yes, sir, there are some lessons there that I will 
obviously carry with me the rest of my life. That was a huge 
event in my life.
    Senator Kerry. Well, Mr. Thorson, I appreciate your 
comment. There is a letter here that I just ask to be part of 
the record from Donald Fulwider, who was the author. He 
responded to the specific questions of Senators. I would ask 
that that be made part of the record by the Chair.
    Chair Snowe. Without objection, so ordered.
    Senator Kerry. Thank you.
    [Letter from Mr. Fulwider follows:]
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    Chair Snowe. Senator Landrieu.
    Senator Landrieu. Thank you.
    Mr. Thorson, I appreciate the passion in which you've 
expressed yourself today. I can hear that you bring a lot of 
emotion to what you do. I've always admired people in that way, 
that you have a purpose for what you want to do.
    It does concern me about some of the past issues Senator 
Kerry and others have raised. I am very focused from here on 
because of Katrina and Rita. I'm very fortunate on this 
Committee to have both leaders, both in the Chair and Ranking 
Member, who have put this issue of helping the 20,000 
businesses that were destroyed by these unprecedented storms 
and multiple levee breaks.
    These businesses would have in many instances survived the 
hurricane. They couldn't survive the unprecedented number of 
levee failures that caused the catastrophic flooding of 10 to 
12 to 15 feet of water. This is how most of these businesses 
went out of business, because of a disastrous and somewhat 
unexpected flood.
    Based on the questioning already about your mission to 
detect and prevent waste and fraud and abuse, I would just add 
to what both Senator Kerry and the Chairwoman said about also 
promoting economy, efficiency, and effectiveness. Because the 
SBA, I mean, is the only thing right now between these 
businesses being able to get themselves back up and running or 
literally going out of business and maybe never coming back.
    This is about generations of families that have owned these 
businesses, people that have put all their life savings in 
these businesses. If this agency doesn't work well, then there 
are just lots of dreams that are crushed.
    That's part of what is the hard thing about us from this 
position, watching an agency that's on the front line and not 
able to deliver. We would think that--I would think that the 
IG, while you want to be focused on fraud and abuse--the real 
issue is the amount of taxpayer dollars being wasted to no good 
end, and having businesses that need to generate jobs not able 
get a hand up.
    My question is: Will you commit to give at least the same 
amount of time, or even a little advantage to the area of 
inefficiency than on prosecuting the individual potential 
wrongdoer, as opposed to turning a blind eye to an agency that 
is maybe falling down on its job to help Americans who need 
help, if ever they need it now?
    Mr. Thorson. Absolutely. Senator Kerry made a good point. 
He said, ``this really isn't mentioned in your statement.'' And 
that's true.
    Trying to comment on how you're going to improve efficiency 
in an agency that you've never been in is somewhat difficult. 
That doesn't mean you're not committed to it, and that doesn't 
mean that you can't do that, because we can. It does mean that 
I don't profess to be an expert in a lot of things. I want to--
that is a goal. That is something I want to do, and I will do. 
You framed it as a commitment, and I will make such a 
commitment to you. I will figure out how to do this and what is 
lacking and how to best make it better.
    Senator Landrieu. Would you also commit that if your 
nomination goes through, within 30 days of your appointment, to 
go down to the Gulf Coast and visit not just the areas of New 
Orleans that are more famous than others, but to actually walk 
through these neighborhoods where these businesses are 
destroyed, all along from Pascagoula to Beaumont, Texas, and 
places in between, to see the destruction of what this 
unprecedented flooding brought forth?
    Mr. Thorson. Earlier I mentioned that I had made a promise 
to Senator Kerry in a meeting we had about politics. I will 
make exactly the same kind of promise to you about that. In 
fact, the truth is, in the months that this nomination has been 
pending, my wife and I have talked many times about what we 
would do, and one of the very first things I intend to do is to 
do exactly as you said.
    That's an easy promise to make, and you can count on that.
    Senator Landrieu. The reason I press that is because every 
Senator that has come down, every House member that I know of, 
has come back and called my office and said to me--not everyone 
has called, but everyone that has called has said this. They've 
said, ``Senator, no matter how many times I've heard you and 
Senator Vitter speak, I could not believe what I saw.''
    Again, it's because it wasn't just the hurricane. We've 
seen hurricanes. We've seen earthquakes. We've seen the 
disaster. What we've never seen is a catastrophic flood, like 
Noah's Ark. I mean, that's what people have to get in their 
mind. It was like Noah's Ark. I mean, and when the water goes 
away after 40 days in that case, or in our case 2 weeks, it's 
just unbelievable the devastation.
    You can look at a map. That's why when people say, ``we 
don't have enough, we can't verify if the business really went 
out of business,'' you don't need to do anything other than to 
look at a map. If they were located anywhere around a certain 
neighborhood, there is a 100-percent chance that they couldn't 
survive.
    It's not like a regular hurricane, where some businesses 
survive and some don't. I mean, you have to be concerned 
somebody might apply for a loan. They didn't have a shingle 
removed from their roof, and they got in anyway. In this case, 
if you were in this zip code or in this neighborhood, there was 
no chance that you were not flooded with 15 feet of water. Just 
go ahead and move the system a lot faster.
    That's what we're trying to get these agencies in 
Washington to understand: Not asking for special favor or more 
money, but just understanding that the nature of the disaster 
was different. That is what we're having a hard time convincing 
people of.
    Mr. Thorson. I was asked earlier about lessons that I had 
learned doing this kind of work, and it fits right into what 
you were just saying. One of the things that I really believed 
in when I was doing hearings and Senate investigations was 
listening to the real people. You had real people--and that 
meant we had real IRS people testify. In one case, we had a 
real Mafia hood testify. Because nothing gets it across as much 
as talking to real people.
    That's true, whether it's you all listening to them, or the 
cameras or whatever. But it makes it real. When you're talking 
about the things that you want to do and passing legislation, 
these are who it affects. These are the people who--what you're 
talking about is exactly the same thing.
    The reason that I felt so strongly from day one when we 
were talking about an IG of SBA and seeing--I did not 
understand, I'll be honest with you. In the very beginning, I 
did not know that disaster relief loans went through SBA. I 
learned that pretty quick.
    You've got to do that. You have to go down there and see it 
and talk to people and understand the real people. That is one 
similarity that is exactly the same because you'll never get a 
feel for it. I think anybody who's listened to me knows I 
pretty much get into my job. It's a very important part of my 
life. I will do that.
    [The prepared statement of Senator Landrieu follows:]
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    Chair Snowe. Thank you, Senator Landrieu.
    I just wanted to follow up on a couple of issues with 
respect to some of the issues that Senator Kerry raised because 
it was important, as part of the Committee's responsibilities, 
to examine a number of the issues regarding the IRS 
investigation that you led on behalf of Chairman Roth and the 
Senate Finance Committee.
    It's our goal to obviously conduct these hearings in a 
transparent fashion. We had a chance to review a number of the 
issues, including the GAO report. I just thought it would be 
important for the record, based on my staff's examination. I 
want to include this in the record.
    When the GAO issued two reports on the claims made with 
respect to the hearings that you helped to facilitate, it 
confirmed facts alleged by the witnesses across 10 different 
categories of factual allegations, including: zeroing out of 
tax assessments in the manager's unlimited discretion to zero 
out taxes; the inability of the IRS to oversee zero-out 
decisions; the perception of favoritism for former IRS 
executives who now practice before their former IRS colleagues; 
illegal use of enforcement statistics for performance 
evaluation of IRS offices; the workplace practices which 
promoted a climate of racial discrimination within the IRS; the 
closure of approximately 100,000 tax cases which lacked proper 
procedures and fair treatment; the abuses of public office for 
private gain by IRS officials; the substantial difference in 
the way IRS imposes discipline on its personnel and executives; 
the inability of the IRS to track allegations of reprisals 
against employees and taxpayers; and the property damage and 
fear of intimidation experienced by some taxpayers or their 
associates during IRS enforcement operations.
    In instances, obviously, it was a matter--not that anything 
was improper, but there was a disagreement in terms of the 
interpretation of the laws. In some cases, witnesses were 
mistaken on some points of fact concerning management 
misconduct and the application of laws and procedures. The GAO 
also found that two witnesses, who testified of being 
intimidated by the IRS in a Federal court, found IRS employees 
misrepresented information in order to search warrants.
    I think that across the board on what you were attempting 
to do as an investigator, your role was obviously to help the 
Congress in examining how the Internal Revenue Service was 
administering its responsibilities, and to obviously highlight 
for the public the problems in the administration of their 
obligations and responsibilities to the taxpayer.
    I thought it was very important to highlight that. We did a 
very thorough examination, and what we found was nothing 
improper. It was a disagreement on the law, a very difficult 
area. It was clear from Chairman Roth's book that he really 
insisted on being fair; and the fact also that hands were tied, 
I gather, in terms of being able to have the IRS come before 
the Committee with its own testimony, as I understand it.
    Chairman Roth indicated that Section 6103 had not been used 
before. Is that correct?
    Mr. Thorson. I really can't say. 6103 is the protection of 
taxpayer information as privileged, and only the Chairman of 
Finance and the Chairman of House Ways and Means have that 
authority. I really don't know when that might have been done 
before.
    Chair Snowe. Yes. He indicated that in his book, as a 
matter of fact. In fact, he said--he mentions that in one of 
the pieces in his book with respect to that.
    I think the point is here that obviously these--I think 
when we're pursuing investigations, it becomes obviously very 
difficult. We appreciate what you've done. Hopefully you'll 
learn from some of these issues as well as you go forward.
    I think clearly the Small Business Administration--it 
becomes equally evident that there are a number of issues that 
will require your aggressive pursuit in examining. Another area 
is the STAR loan program that was created in the aftermath of 
9/11 that began in 2002 and ended in 2003 to help businesses 
that were adversely affected by the economic impact. We 
discovered recently, we had an examination done by the 
Inspector General's office: 85 percent of those loans that were 
issued, they were unable to determine the eligibility, 
verifying the eligibility for such loans.
    How would you approach a program of this nature in the 
future to prevent--the question here is, first, either to 
anticipate, in the instance of disaster loans, when you see a 
disaster imminent, knowing that the SBA is going to have to be 
positioned to respond to that, so you prevent certain problems 
that ultimately developed, as we learned in the last few 
months, with the administration of these programs by the SBA, 
the disaster loan programs.
    Then, secondly, how do you ensure that in the future, that 
you also prevent these types of problems and abuses in the 
administration of a program like the STAR loan? What would you 
recommend?
    Mr. Thorson. Well, in the first instance, these 9/11 loans 
or STAR loans or whatever, one of the things that I believe 
should have been anticipated was perception of what was 
happening here. When you create--when you put together a 
program, one of the things that you could anticipate, or I 
believe maybe should have been anticipated, was the fact that 
when banks were--what is the motivation, first of all? Well, 
banks had a reduced fee on that where they were going to make 
more profit.
    If you've created a situation where banks are going to make 
more profit by using these types of loans, you can bet that's 
what's going to happen. That's exactly what did happen. I 
believe there was a perfume store in St. Croix, et cetera.
    One of the reports that I read was that this was all done 
and it was perfectly proper, that these loans all fit whatever 
the policy was. That's a particular part of what an IG does, is 
measure against those policies. And based on what I've seen, I 
can't argue that that may have been true.
    What happens is when you see it show up on the CBS evening 
news and it becomes sort of a joke or something, you need to be 
able to realize that and anticipate that going forward. I guess 
maybe one of the things, too, that I would say is that my 
experience up here would lend me to be able to do that because 
we dealt a lot with those kind of issues.
    You have to understand what the goal is first as to what 
you are trying to do with those loans. Then did what happened 
meet that goal? I think what you're saying is no, it did not, 
because we didn't intend to fund perfume stores in St. Croix.
    One of the things that I would like to be able to do is to 
look at those things while they're either being done or 
immediately afterwards, whichever is applicable, and to be able 
to point that out, which in this case I truly believe I would 
have been able to, and say, ``you've got a huge hole here.'' 
This is--you have created a profit-making situation that's 
going to get you in trouble. Then work with the Administrator 
on how to close those loops so that what you want is to get it 
to the people who need it and who were entitled to it, and not 
have the disaster that it kind of resulted in.
    Chair Snowe. Well, with respect to the STAR loan program, 
it was just a lack of guidance and instructions, vague 
directions that made it all the more difficult, particularly 
for the lenders, that ultimately developed into this major 
problem.
    I think that it would be important to review many of these 
programs and to see exactly what the eligibility guidelines are 
in many of these programs. Because I think that that is clear; 
the lack of communication between the Agency and the lenders 
involved, and what can be done to ensure that we issue the 
proper guidelines and guidance and instructions with these 
programs so that abuse or fraud doesn't arise as a result.
    That's what happened in this instance, regrettably, because 
there was no way to determine the eligibility, I gather, from 
the loan files when they were reviewing them.
    Mr. Thorson. Well, I think this comes back again to the 
idea of being a little more proactive and to be able to get 
involved on the front end of these things so that you can--
because among other things, it gives you the opportunity to 
work together with the Agency and the Administrator to point 
out where you think, based on the experience you have, that 
you're heading for a problem here. In this case, I think it 
would have been relatively easy to determine.
    Chair Snowe. Absolutely.
    Mr. Thorson. The incentive here was pretty clear, and 
therefore you knew what the banks were going to do. They were 
going to do as many of these as they could possibly do because 
they made more profit. That's a pretty simple analysis of it, 
and that's exactly what happened.
    Chair Snowe. The 85 percent, I think that's an indication 
of the depth of the problem that obviously something was 
terribly wrong.
    Mr. Thorson. Exactly.
    Chair Snowe. The SBA has also failed to accurately predict 
disaster loan volumes. That's the other issue. We've had to get 
additional funding through a supplemental because they 
neglected to anticipate, to identify, not necessarily precisely 
but within range of what would be required with respect to 
these recent disasters.
    Unfortunately, we've had to go forward and approve $712 in 
supplemental funds. The SBA could not even predict the 
situation in December and early in the month of January. It's 
only in the last few weeks that they finally realized that they 
would need this additional funding, and so we've had to provide 
it. In the meantime, those who depend on these programs had to 
wait in order to ensure that there were sufficient funds to go 
forward with additional loans.
    It's the unevenness as well. What I've learned, I think, in 
the last few months with respect to how the Small Business 
Administration operates, it's not only the failure to predict, 
to anticipate, or to prevent serious problems. It's the lack of 
efficiency in the administration of these programs.
    We've heard it's an unprecedented crisis. That requires an 
unprecedented response. Therefore, I think that the SBA has to 
be positioned to meet the challenges irrespective of when they 
occur.
    Mr. Thorson. Each of you, I believe, have discussed the 
idea and used the word ``efficiency.'' That really is maybe one 
of the most difficult parts of doing the work of an IG, which 
is to be able to look at an agency and tell an agency how they 
can make themselves more efficient, how they can do things 
better. I think that's a natural source of friction when you 
are telling the head of an agency how he can better run his 
agency.
    Where that's necessary and where we have developed--and I 
say ``we'' as the IGs, the real pros that do this kind of 
thing--that is not a problem in being able to do that. The real 
work there is to be able to identify those things and to be 
able to make constructive suggestions as to how to make it more 
efficient.
    It's easy to talk about fraud and stuff, which is why I had 
it in my opening statement. It's a lot more difficult to be 
able to assess an agency and to be able to point to places 
where the efficiencies can be improved, and make 
recommendations on how to fix it. To say, ``here's how we 
suggest you can do it.''
    Chair Snowe. Absolutely.
    Mr. Thorson. It is absolutely important.
    Chair Snowe. It is critical, and I think all the more so 
given the previous track record and experiences, unfortunate 
examples of what we need to do to improve in the delivery of 
these programs, not only for the present time but also in the 
future.
    We still have a lot of work to be done in order to complete 
this process in response to the hurricanes of last fall. We 
still have a long ways to go.
    Mr. Thorson. Yes, ma'am.
    Chair Snowe. Many people are depending on these programs to 
rebuild the economies and rebuild their homes. I think that's 
going to be an important contribution in your role as Inspector 
General. I think it's an excellent idea about the fact of you 
going down there and being on the ground and being able to do 
that.
    Our staff went down there last fall because I insisted on 
it to see exactly what was going on and what was going wrong. 
We quickly realized many of the challenges that the SBA was 
facing, and it was obviously additional personnel, additional 
resources, more computers, loan verifiers, and auditors.
    Mr. Thorson. A physical presence is important for many 
reasons. It's important to the people who are on the receiving 
end of these loans and that have experienced the disaster. It's 
also important from a leadership point of view for your own 
group.
    That's why I said early on as we talked about the need for 
the IG to be there and to see that. You're also sending a 
message to the people that work for you, that this is important 
and this is how it's got to be done. I truly believe that. That 
isn't for any other reason than for that. But it is absolutely 
true.
    The people in the IG office need to know that I will be 
there. They are also going to be there. We're going to be there 
a long time. This isn't something that's going to get solved in 
the next 60 days or something. This is going to be a long time.
    Hurricane season starts again in June. It's not going to 
take much to cause trouble in this area all over again. We need 
to be there when this happens, and we need to be right there at 
the forefront, and for many reasons. The fraud is only one part 
of it.
    Chair Snowe. Well, I appreciate it, Mr. Thorson. I want to 
thank you for testifying here today. I know that your 
investigative experience both within the executive and 
legislative branch will go a long way in helping to make the 
SBA and our Government more accountable in spending the 
taxpayers' dollars wisely and efficiently.
    I appreciate your testimony this afternoon, and the record 
will remain open for 2 days, until March 3rd. Additionally, any 
written requests for Mr. Thorson will be submitted to the 
Committee by noon on Friday, March 3rd. We also will forward 
them to Mr. Thorson, and any time that you have a response to 
any of the questions that are submitted to the Committee, we 
hope that you could include them for the record by March 9th.
    Again, I want to thank you, Mr. Thorson. I'm looking 
forward to working with you in the future.
    Mr. Thorson. Thank you.
    Chair Snowe. This hearing will be adjourned.
    [Whereupon, at 3:34 p.m., the Committee was adjourned.]
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MARKUP OF THE NOMINATION OF ERIC THORSON TO BE INSPECTOR GENERAL OF THE 
                     SMALL BUSINESS ADMINISTRATION

                              ----------                              


                        THURSDAY, MARCH 9, 2006

                      United States Senate,
  Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 2:13 p.m., in 
room 
S-216, The Capitol, the Honorable Olympia J. Snowe (Chair of 
the Committee) presiding.
    Present: Senators Snowe, Bond, Burns, Allen, Coleman, 
Thune, Isakson, Vitter, Enzi, Cornyn, Kerry, Harkin, Landrieu, 
Cantwell, and Pryor.
    The Clerk. Hello, Senator. You're voting for Eric Thorson 
to be Inspector General of the SBA.
    Senator Burns. Conrad Burns votes aye.
    The Clerk. Hello, Senator Bond. We're voting for Eric 
Thorson to be Inspector General of the SBA.
    Senator Bond. Exactly what I want to do.
    The Clerk. Senator, you're voting for Eric Thorson to be 
Inspector General of the SBA.
    Senator Cantwell. Aye.
    Senator Vitter. Aye.
    The Clerk. Senator, you're voting----
    Senator Isakson. Isakson votes aye.
    The Clerk. Senator, you're voting for Eric Thorson to be 
the Inspector General of the SBA.
    Senator Harkin. I assume it's yes. Yes, yes, yes, I'm 
voting for Eric. Good guy.
    The Clerk. Senator, you're voting for Eric Thorson to be 
the Inspector General of the Small Business Administration.
    Senator Enzi. Aye.
    The Clerk. Thank yoy very much.
    Senator Allen, we're voting for Eric Thorson to be 
Inspector General,
    Senator Allen. He's a good Virginian. I want him in there. 
Aye, big aye.
    The  Clerk. Hello, Senator Landrieu. We're voting for Eric 
Thorson for the Inspector General of the SBA.
    Senator Landrieu. Yes.
    The Clerk. Thank you, ma'am.
    Senator Pryor, we're voting for Eric Thorson to be the 
Inspector General of the Small Business Administration.
    Senator Pryor. Aye. That was easy.
    The Clerk. We're voting for Eric Thorson to be Inspector 
General of the SBA.
    Senator Thune. Yes.
    The Clerk. We're voting for Eric Thorson to be Inspector 
General of the SBA.
    Senator Coleman. Aye for Eric Thorson.
    The Clerk. Thank you very much.
    Senator Kerry. This is the vote?
    The Clerk. For Eric Thorson to be Inspector General.
    Senator Kerry. Aye.
    The Clerk. And you need to cast Senator Bayh's vote by 
proxy.
    Senator Kerry. Aye by proxy. Any other proxies?
    The Clerk. Everyone came and voted who's planning to vote. 
Thank you sir.
    Senator Snowe, we're voting for Eric Thorson to be 
Inspector General of the Small Business Administration.
    Chair Snowe. Aye.
    Senator Cornyn. Are we the last ones to vote? It doesn't 
look like it's going to change the outcome, but I'll vote aye.
    Chair Snowe. Thank you. Thank you all.
    [Whereupon, at 2:29 p.m., the committee was adjourned.]
  

                                  
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