[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                     THE STATE OF THE INTERNATIONAL 
                            FINANCIAL SYSTEM 
=======================================================================
                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 20, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-42

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                  HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
       



















                         C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 20, 2007................................................     1
Appendix:
    June 20, 2007................................................    43

                               WITNESSES
                        Wednesday, June 20, 2007

Paulson, Hon. Henry M., Jr., Secretary of the Treasury...........     9

                                APPENDIX

Prepared statements:
    Manzullo, Hon. Donald A......................................    44
    Waters, Hon. Maxine..........................................    46
    Paulson, Hon. Henry M., Jr...................................    56


                     THE STATE OF THE INTERNATIONAL



                            FINANCIAL SYSTEM

                              ----------                              


                        Wednesday, June 20, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Waters, Maloney, Gutierrez, 
Watt, Ackerman, Sherman, Moore of Kansas, Hinojosa, Lynch, 
Scott, Green, Cleaver, Moore of Wisconsin, Davis of Tennessee, 
Hodes, Ellison, Perlmutter, Donnelly; Bachus, Pryce, Royce, 
Paul, Gillmor, Manzullo, Biggert, Shays, Capito, Feeney, 
Hensarling, Garrett, Neugebauer, Price, Davis of Kentucky, 
Campbell, Bachmann, and Marchant.
    The Chairman. The hearing of the Committee on Financial 
Services will come to order. This is our annual oversight 
hearing with the Secretary of the Treasury, and I am delighted 
to welcome Secretary Paulson. I think all members of the 
committee who have had dealings with him during his tenure will 
agree we have had a very constructive and cooperative 
relationship. We have made progress on a number of pieces of 
legislation in which the working relationship has been a good 
one. While there hasn't been complete agreement on things 
ranging from the bill for foreign investment in the United 
States, to the GSE legislation, through focusing on how we can 
better help the FINCEN to work in ways that are best both for 
law enforcement and for the ease of, the ability of the 
financial community to work, we have cooperated and look 
forward to this.
    The Secretary obviously has major responsibilities, and the 
frustration all of us will have, of course, is that 5 minutes 
won't be enough to get into all of the issues. But I want to 
begin with what I think is a central issue, and I want to 
congratulate Secretary Paulson for helping to engage in public 
education.
    Mr. Secretary, you said about a month ago, I read in the 
paper you were quoted as trying to explain to people for whom 
increased openness to the world economy and openness in trade 
was sort of obvious why there was resistance, and you noted, 
not personally as your view, but to report to people, that 
there is a degree of unhappiness that has become anger in many 
places among a lot of Americans about what they see as 
inequities in which growth goes forward aided greatly by 
globalization, but the average citizen does not get to 
participate. I believe that is one of our central problems.
    This is a strong and growing economy. My own view, by the 
way, is that the economy is much less subject to some of the 
policy changes we make here at the margins than people might 
think. We have had a strong economy under two very different 
Administrations, that have pursued many different policies.
    The American economy is a vigorous one. What has happened, 
however, is that there has been a growth in inequality. 
Inequality is, of course, not a bad thing, it is an essential 
element in a capitalist system, and the capitalist system is 
without question the best way ever stumbled upon, since no one 
specifically devised it, to promote the greater prosperity of 
the whole.
    But there have been in recent years increasing trends 
towards inequality. There is a debate about what causes that. 
Some of it is the obvious result of trends in the economy, of 
globalization of technology, of the great advantages that 
capital has in terms of its mobility.
    But we have in this country, from certainly the New Deal 
days forward, institutional mechanisms that retarded the growth 
in inequality. They were never aimed at doing away with 
inequality, but they were aimed at countering what could be 
tendencies for it to get out of hand.
    I believe that inequality has clearly reached a 
dysfunctional stage in America, not yet economically, although 
there is one related aspect I hear from many of my friends in 
the financial community, concerns that the savings rate is too 
low, that Americans don't save enough. One prerequisite to be 
able to save is to have some money left over after paying your 
expenses so that you can save it. I believe that part of the 
problem we have seen is while people have not dropped their 
consumption yet, I think this is one of the reasons for the 
problems with the low savings rate on the part of the average 
citizen, which has consequences both for their retirements, but 
also for the economy's ability to generate capital today.
    While it is not clear yet what the economic consequences 
are, it is clear what the political consequences are. I am in 
general agreement with the President's approach to immigration. 
The bill, you would have said, okay, here is the deal, it is 
going to be President Bush and most of the Democratic 
leadership and a lot of the Republican leadership, and the 
business community; looks like a good chance to get a bill.
    Anger over increasing inequality, and I don't believe they 
are directly correlated, but people when they are angry don't 
always connect the dots in the straightest possible line. There 
is no question that the anger at a perceived unfairness in the 
distribution of our increased wealth is a contributing factor 
to the problems of the immigration bill.
    Here in the House, Chairman Rangel of the Ways and Means 
Committee, and Chairman Levin of the Trade Subcommittee, have 
been working with you and others, the USTR in particular, to 
come up with an approach to trade that would accommodate the 
concerns many of us had about the rights of working people and 
of the environment with trade. We are not completely there yet, 
but their efforts have gotten opposition from some people who 
say, oh, no, the inequality situation is so bad here that 
nothing you can do can fix trade.
    In area after area, we have a resistance to policies that I 
know you believe are in our overall economic interest. Many of 
them I agree with you on, some of them I would disagree, and we 
have to deal with the inequality. Now we have reached a point, 
and I appreciate your acknowledging it, when I think people 
understand we have more inequality than is necessary. Recent 
reports show the inequality by the common measure is greater 
than it has been since 1929. That means we are now back to 
being worse than it was under Hoover, not in absolute terms, 
but in inequality terms.
    The question is, what do we do about it? And there are some 
who say, nothing. There are some who say, well, education will 
take care of it. I think education is an important potential 
way of dealing with it, but can't carry the weight people give. 
Part of it has to do with institution. One is government. And 
we are going to do 20 minutes on each side, and I am going to 
apportion the time appropriately.
    One issue is government. I do not think it is possible for 
us to diminish the growth of inequality to an excessive point 
while simultaneously denouncing and demonizing government and 
always calling for it to shrink. Education is an example. Yes, 
I do believe that a better spread of education for the new 
kinds of work can help diminish inequality, but the way in 
which we finance particularly higher education in America today 
reinforces inequality. It does not undercut it. As State after 
State after State cuts funding for the public universities, we 
suffer.
    Community colleges. Mr. Greenspan always cited community 
colleges as one of the best ways to get people the job training 
that will help them get the kind of jobs that aren't going to 
be outsourced, that are going to be good, solid, well-paying 
jobs. I have a community college in my district where we have a 
great need for nurses in the hospitals. A great nursing 
program, young people in the area who could do well as nurses, 
but they only have 42 slots, when they could use 3 or 4 times 
that many, because the funding has been cut. It is a State-
funded institution.
    You cannot simultaneously diminish government at all levels 
and fund higher education in an equitable way. There are other 
things we have to do that help.
    So I do note that I very much agree with your emphasis on 
debt relief and on doing more to help the impoverished 
countries. But understand that in an era in which the budget is 
shrunk for the Department of Health and Human Services, in 
which we have to fight to get decent housing for older people, 
if you shrink all those programs in the United States, people 
shouldn't be surprised when there is resistance to putting more 
money into our international obligations. You can't shrink the 
pot and dip into it more deeply in some areas and not get that 
kind of resistance.
    The other area is labor unions. As long as many in the 
business community and on the Republican side have as their 
goal a constant shrinking of the role of labor unions, we will 
not get the kind of social peace in this country that we need 
if we are going to be able to come together in a progrowth 
approach that diminishes inequality. That is true both 
domestically and internationally.
    One of my problems is within the World Bank. For example, 
if you look at their rating systems on the way in which they 
allocate IDA funds, if you look at the World Bank and IFC, 
countries get credit for not treating the workers very well. 
They don't say it explicitly, but the more social network there 
is for the workers, the more workers have protections against 
arbitrary firing, the more there are vacation days, etc., 
literally then people get downgraded.
    I want to continue to work together on this progrowth 
agenda. I think this committee on both sides has shown an 
understanding of the importance of the financial sector, in 
particular the intermediation function that the financial 
community performs of gathering up money from a large number of 
people and making it available for capital investment. But we 
have to do a better job of dealing with inequality.
    While we now have an agreement that is a problem, as long 
as there is a view that government is a bad thing and unions 
are worse, we will not make the kind of progress towards social 
cohesion in this country that will allow us to substantially 
diminish inequality and go forward.
    The gentleman from Alabama.
    Mr. Bachus. I thank the chairman, and I thank the Secretary 
for being here with us this morning. Let me start by commending 
the job you have done. You have done a wonderful job, you are a 
credit to the Administration, and I think that this committee 
on both sides is very pleased with your performance and your 
initiatives.
    The chairman mentioned income and equity and worker rights 
and jobs, the quality of jobs. Let me say that we 
conservatives, or we Republicans or liberal Republicans, so I 
would say this side of the aisle, is also concerned about the 
income and equities. We are obviously concerned about worker 
rights, safety conditions on the job, and employment.
    The good news is that Americans are making more, they are 
earning more, and they have more, and they are able to buy more 
with what they earn. Good-paying jobs are being created at a 
tremendous pace, and workers' safety is at historic rates, and 
most Americans face a choice of actually two or three jobs, 
choosing which job, not the fact they can't find a job. So our 
economy, as you said in your report, is very strong.
    I want to address one thing, and that is China, and just 
ask you this: You said on page 3--and I am glad you said it, I 
wish the American people realized this when they talk about 
China and how the Chinese people save money--you said it is 
important to address the structural reasons why Chinese 
households save so much and consume so little.
    They don't have Social Security, they don't have Medicaid, 
they don't have Medicare. They have to usually buy their 
children their first home, a lot of the middle class. Their 
educational costs, college educational costs, are tremendous. 
They have to save for that. So they have to save to simply 
exist.
    I believe that addressing exchange imbalances, trade 
imbalances, can be a key to the United States and China having 
a mutually beneficial relationship, which is actually going to 
be key for our children and grandchildren, for these two strong 
countries which account for 40 to 50 percent of the growth 
across the globe to have a beneficial relationship.
    In that regard I want to ask or just mention two or three 
things. The Industrial and Commercial Bank of China and other 
banks are wanting to do business here. They have approached the 
Federal regulators to allow them to open up. I see that as an 
occasion--you announced in your statement this morning that you 
have reached some financial agreements with the Chinese. I 
believe that you can use the occasion of Chinese banks wanting 
to set up here and operate here as a further opportunity for 
them to open their markets to U.S. banks.
    I don't know what is going to happen, I don't know if we 
are going to open our markets. We are in an open economy, and I 
think that is very good, but in opening our economy, I think it 
is an opportunity for us to ask that they open their economies.
    As I have said, the Chinese people have to save a lot of 
money. They have to try to provide for their retirement. Here 
in the United States we have something they don't have: We have 
great investment opportunities. They don't. That is why the 
Shanghai stock market today is--the P ratio is 46, 48 percent. 
You have heard the stories, you have been to China. I have 
talked to people in China where ordinary citizens are taking 
that nest egg, they are taking the money out of their 
mattresses and out of their bank accounts, and they are 
basically doing a crap shoot on their stock market. Now, if, 
which some people predict, that stock market tanks, you are 
going to have political and economic instability in China, 
which is very bad for the Chinese, and it is very bad for us.
    I would ask, and if you would like to comment this morning, 
why the Chinese people cannot invest in the United States. Now, 
the government recently took their reserves, and they are 
investing their reserves around the world. But an excellent 
opportunity, a win-win situation would see instead of the 
Chinese bank overvalued and limited opportunities on the 
Shanghai exchange, are there any serious discussions about 
letting the Chinese people buy in the American markets?
    Now, I am not talking about the Blackstone Group. We all 
read about how China is investing in the Blackstone Group. 
Those are not the Chinese people. That is not the middle-class 
Chinese.
    I believe one answer to the Chinese people being able to 
provide for their retirement, and save for the future is their 
ability to invest in the United States. It is a win for us, and 
a win for them. I would like your comments maybe on that later 
on.
    Let me conclude by saying this: We have all talked about 
their currency being undervalued to our currency; in fact, some 
government reports say 25 percent, other private reports say 28 
percent, and I believe it is actually closer to 50 percent.
    But the one thing that I think the American people miss is 
that there are detriments. Our goods are not as competitive in 
China, but there are advantages. We can buy goods from them 
very cheaply, and my concern is that if that currency revalues 
too quickly, it causes inflation in the United States, and it 
also drives up the costs for American households.
    That is why, again, I believe a much more practical 
approach is for a gradual increase in their currency and at the 
same time allowing them to invest what is a tremendously 
growing amount not only of savings, but of reserves as the 
country has invested in the United States.
    Thank you, Mr. Secretary.
    The Chairman. The gentleman from Illinois is recognized for 
5 minutes.
    Mr. Gutierrez. Good morning, and thank you, Chairman Frank, 
for holding this timely hearing on the state of the 
international financial system. I want to use my few minutes to 
discuss what I believe is an ongoing currency misalignment and 
manipulation by China, the effect this practice has on the 
American economy, and what I and others perceive to be the lack 
of an effective response.
    During my subcommittee hearing on the issue of Asia 
currency valuation in the Ways and Means Committee, Trade 
Subcommittee, together with the Energy and Commerce Committee, 
Trade and Consumer Protection Subcommittee, we framed this 
issue as one of Wall Street versus Main Street. To an economist 
on Wall Street, that may seem a little oversimplified, but I 
can tell you that for the American worker it certainly feels 
like they are being forced to battle Wall Street and both ends 
of Pennsylvania Avenue in addition to overseas competitors.
    For the American economy, the American worker, currency 
undervaluation by China, in particular, is reaching critical 
mass. For over 10 years, China has fixed its exchange rate by 
intervening in currency markets. Economists estimate that the 
one is undervalued by at least 9.5 percent, and by as much as 
54 percent. Many economists, including Federal Reserve Chairman 
Bernanke, characterize this undervaluation as a subsidy for 
exports from China.
    Suffice it to say, we cannot compete with this kind of 
ongoing government subsidy, and we cannot continue down the 
current path with our second largest trading partner, because 
the imbalance hurts U.S. workers and businesses and threatens 
the long-term stability of our economy.
    In 2006, the U.S. goods trade deficit with China rose by 
almost 15 percent in 1 year to nearly $233 billion. That is a 
record high. Meanwhile, because the Chinese Government must buy 
U.S. dollars to keep the value of their yuan low, China holds 
more in foreign currency reserve than any country in the world, 
or in history, for that matter.
    Although there are other factors at play, the Chinese 
Government's daily intervention in the currency markets plays a 
key role in expanding U.S. trade deficits. It is not exclusive 
to that. That is why I was extremely disappointed last week 
when the Treasury Department, in its semiannual report to this 
committee on exchange rates, once again declined to find that 
China is engaging in currency manipulation.
    I understand that under the current standards, the issue of 
intent may be an impediment to a finding of manipulation, and 
for that reason I believe that Congress should take a serious 
look at removing the intent requirement from the currency 
manipulation standard.
    I would like to take this opportunity to applaud Secretary 
Paulson for making our economic relationship with China a 
priority and for launching the strategic economic dialogue 
between the two countries. I believe the dialogue will help 
make inroads when it comes to U.S. financial services firms 
gaining access to the Chinese market.
    I am less confident, however, that the dialogue will help 
in getting the Chinese to allow their currency to fluctuate, 
and I think the difference is a matter of priorities from our 
side of the negotiating table.
    I am looking forward to hearing from Secretary Paulson 
today on the issue of China currency valuation in general, the 
reasoning behind the Treasury Department's latest currency 
report on China, and its thoughts on the prospects of SED 
yielding any success on this issue.
    In addition, several bills addressing currency valuation 
have been introduced in this Congress, and I would like to hear 
Mr. Paulson's thoughts on those bills, and in particular the 
idea of removing intent from the manipulation standard.
    I thank you again, Mr. Chairman, and I thank Secretary 
Paulson for joining us this morning.
    The Chairman. The gentleman from Texas, the ranking member 
of the Domestic and International Monetary Policy, Trade, and 
Technology Subcommittee, is recognized for 5 minutes.
    Dr. Paul. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary.
    The recent sharp rise in interest rates may well be 
signaling the end to the painless, easy money decade that has 
allowed us to finance our extravagant welfare spending with 
minimal productive effort and no savings. Monetary inflation 
and foreign borrowing have allowed us to live far beyond our 
means, a type of monetary arrangement that always comes to a 
painful end. As our problems worsen, the blame game will 
certainly accelerate, claiming it is all due to China's 
manipulation of its currency, and demanding protectionist 
measures while unfortunately continuing to gain considerable 
attention.
    Unfortunately, there is little concern for how our own 
policies, monetary, tax, and regulatory, have contributed to 
the problems we face. Too often officials ignore, and even 
distort, important economic information that could be 
beneficial in making market decisions.
    Accurate money supply rates are vital in anticipating 
future price levels to the degree of malinvestment and the 
chances for financial bubbles to form. Since March of 2006, M3 
reports have been discontinued. Private sources now report that 
M3 is increasing at a significantly high 13 percent rate. It is 
said that the CPI is now increasing at a rate of 2.5 percent, 
yet if we use the original method of calculation, we find that 
the CPI is growing at a rate of over 10 percent.
    Since money growth statistics are key to calculating 
currency depreciation, it is interesting to note that in this 
era of global financial markets, in a world engulfed with fiat 
currencies, what the total world money supply is doing. Since 
1997, the world money supply has doubled, and money growth is 
inflation, which is the enemy of the poor and the middle class, 
but a friend to the banks and Wall Street.
    Monetary depreciation is clearly a sinister tax placed on 
the unsuspecting poor. Too many well-meaning individuals 
falsely believe that deficit finance assistance programs can 
help the poor, while instead the results are the opposite.
    Welfare and warfare, guns and butter philosophy always 
leads to harmful inflation. We had severe problems in the 
1960's and the 1970's, and we are doing the same thing once 
again. We have only started to pay for the extravagance of 
financing the current war and rapidly expanding the entitlement 
system by foreign borrowing and creating money and credit out 
of thin air.
    There are reasons to believe that the conditions we have 
created will be much worse than they were in 1979 when interest 
rates of 21 percent were required to settle the markets and 
reverse the stagflation process. Congress, and especially the 
Financial Services Committee, must insist on total transparency 
and accuracy of all government financial statistics. Any market 
interference by government agencies must be done in full public 
view.
    All meetings, decisions, and actions by the President's 
Working Group on Financial Markets must be open to public 
scrutiny. If our government is artificially propping up the 
dollar by directly manipulating gold prices or colluding with 
other central banks, it is information that belongs in the 
public domain.
    The same is true about any interference in the stock, bond, 
or commodity markets. A free-market economy requires the 
government keeps its hands off and allows the consumers to 
exert their rightful control over the economy.
    A strong case can be made that our economy is not nearly as 
robust as our government statistics claim. Unemployment 
numbers, inflation rates, tax revenues, and GDP growth all 
indicate that there is little to worry about, but in my 
estimation we should be much more concerned about the reality 
of the situation we face.
    I yield back.
    The Chairman. The Chair wants to apologize. I had forgotten 
there is a rule that says when a Cabinet officer or the 
Chairman of the Fed testifies, that we limit opening statements 
to the chairman and the ranking member of the committee. So I 
apologize to other members, but we are going to abide by the 
rule.
    I am going to call on the chairwoman of the Financial 
Institutions Subcommittee for an introduction of the witness, 
since he is her constituent.
    Mrs. Maloney. I join my colleagues in welcoming you to the 
committee, and we thank you for your decision to serve our 
country as Secretary of the Treasury.
    Secretary Paulson brings a lifetime of experience and 
leadership in financial institutions, capital markets, the head 
of Goldman Sachs, which is located in the district that I am 
honored to represent. He has been a leader not only at this 
fine institution, but a recognized and respected leader 
nationally and internationally in finance. His decision--
although there were many offers for him to lead many 
organizations, he made the decision to serve our country, and 
we are very grateful.
    As a New Yorker, Mr. Chairman, I have to thank him for 
recognizing that homeland security is part of financial 
security, and his leadership on TRIA and CFIUS are very greatly 
appreciated.
    We look forward to your comments on how to keep America 
competing and winning, and keeping our competitive advantage. 
We thank you for your decision to be our Secretary of the 
Treasury. Thank you for being here.
    The Chairman. Mr. Secretary, please go ahead.

STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., SECRETARY OF 
                          THE TREASURY

    Secretary Paulson. Thank you for, first of all, for making 
me feel so welcome. I thank you, Mr. Chairman, Ranking Member 
Bachus, Congressman Gutierrez, Congressman Paul, and 
Congressman Maloney, for that introduction. Thank you all very 
much. I am delighted to be here today to discuss the state of 
the international economy and financial system.
    As you know, the Bush Administration is committed to 
strengthening U.S. and global economies by promoting domestic 
and international growth. Our policies encourage openness, 
competition, financial stability, and development, both at home 
and abroad.
    As countries around the world have reformed and opened 
their economies, global integration has provided businesses 
with greater access to markets around the world, provided more 
choices for consumers, and reduced the prices of goods and 
services, which is a real benefit, especially to those with 
lower incomes in the United States and abroad.
    Our aim is to help ensure that more people share in the 
benefits created by economic growth and trade opportunities, to 
help every nation reduce poverty, and to build a strong middle 
class.
    A strong U.S. economy benefits the international economy, 
and the U.S. economy is strong. Most recent data showed that 
employers are hiring more than 100,000 people per month, 
businesses are starting to invest again, and consumers are 
spending at a healthy pace.
    Additionally, strong growth helped reduce the fiscal year 
2006 fiscal deficit to 1.9 percent of GDP, from 3.6 percent of 
GDP in 2004. This is considerable progress, and we are on track 
to further reduce that deficit figure in 2007.
    A strong international economy benefits the U.S. economy, 
and we see economic growth in nearly every corner of the world. 
It is especially positive that the world economy is growing 
significantly faster than in either the 1980's or the 1990's, 
and that developing economies are growing twice as fast as 
their recent 10-year average. I might also say they are growing 
3 times as fast as industrial economies.
    Growth in Europe and Japan has also accelerated, giving the 
global economy greater balance and more stability. However, 
Europe and Japan each need further structural reform and 
further, faster domestic-based growth on a sustained basis.
    Rapid growth in China has helped power the global economy, 
and as a major global economic participant, China must also 
address the need for structural reform. China is taking the 
steps to transition from a planned economy to a market-driven 
one, and this process will continue for a number of years. 
While we agree with the Chinese on the direction of change in 
their economic reforms, we differ over pace. I believe there is 
more danger for the Chinese in moving too slowly than in moving 
too quickly, and I advocate an increased pace of reform at 
every opportunity.
    Our relationship with China is multifaceted, and we welcome 
China's growth and integration into the world economy. As our 
relationship with China matures, tensions will naturally 
emerge. Less than 1 year ago, President Bush and President Hu 
established the Strategic Economic Dialogue, which is a focused 
and effective framework for addressing issues of mutual 
concern. The first SED meeting was held in Beijing in December, 
and the second one was held last month here in Washington.
    We have tangible results to show for our work so far, such 
as agreements in civil aviation, energy, the environment, and 
financial services. Through the SED, which allows us to speak 
to senior Chinese officials with one voice, avoiding the 
stovepiping that sometimes characterized past discussions, we 
can work to strengthen the U.S.-China economic relationship. It 
is very important to both of our countries that we get this 
right.
    We have pressed China to move beyond the minimal 
requirements of the WTO commitments, and to continue to open 
their economy to competition from foreign goods and services, 
and to move more quickly towards a market-determined currency.
    You recently received a foreign exchange report which 
emphasizes the need for stronger action from China. 
Additionally, the Chinese need to accelerate the structural 
reform necessary to increase domestic consumption and reduce 
the reliance on investment and exports to drive growth.
    I share your frustration about the pace of change in China. 
I have been, and will continue to be, an outspoken advocate for 
maintaining and extending open trade. This is fundamental to 
the long-term competitiveness of the U.S. economy. As the world 
opens its doors, we must resist the sentiment that favors 
economic isolationism. This is not the time to retreat from the 
principles which have made America so strong and so 
competitive. I share the Chairman's comments on this at the 
beginning.
    In May, the President reaffirmed our commitment to an open 
economy and that our Nation welcomes direct foreign investment. 
Foreign investment strengthens the U.S. economy, improves 
productivity, creates jobs, and spurs healthy competition. It 
is a vote of confidence in our economy when other nations 
invest here.
    I appreciate this committee's efforts to improve and 
strengthen the CFIUS process. Your legislation will contribute 
to this rigorous process for the assessment of national 
security risk in the very limited investment cases where it may 
arise. We have worked hard to open markets and liberalize trade 
in order to promote economic growth and development worldwide. 
The Administration is working hard to complete the Doha Round, 
which has the potential to lift hundreds of millions of people 
out of poverty.
    Last month, congressional leaders and the Administration 
reached bipartisan agreement on labor, environmental, and other 
issues related to pending free trade agreements with Peru, 
Panama, Colombia, and Korea. We are hopeful that congressional 
approval of these agreements will unlock their important 
benefits.
    We also have a strong stake in maintaining the relevance 
and the legitimacy of the international financial institutions 
including the IMF. The IFIs are indispensable to global 
prosperity, which is more effectively pursued through 
multilateral means.
    The IMF is undergoing significant reforms, and we believe 
that successfully completing the reform process is critical to 
the IMF's future credibility. The Administration has pursued a 
proactive reform agenda on development. As you know, the 
President has nominated Ambassador Robert Zoellick to be World 
Bank president. Positive feedback from my extensive 
consultation with foreign ministers around the world reinforced 
our confidence in Ambassador Zoellick's ability to lead the 
Bank's vital mission of economic growth. I believe he will 
rightly keep Africa at the center of the Bank's focus and 
continue the vital campaign to fight corruption and reduce 
poverty.
    The United States seeks to preserve the gains made under 
recent historic debt relief initiatives and to end the lend-
and-forgive cycle that has plagued many of the poorest 
countries in recent decades. Lifting unsustainable debt burdens 
from these countries allows a greater focus on economic growth 
and frees up resources that can be spent on poverty-reduction 
priorities.
    Taken together, policies to embrace openness, promote 
trade, and assist developing economies will enhance economic 
security and prosperity for the American people and people 
around the world. These goals reflect what is best in the 
American people, and I look forward to working with you to 
achieve them.
    Thank you, and, Mr. Chairman, I now welcome your questions, 
and questions from your committee.
    The Chairman. Thank you, Mr. Secretary.
    [The prepared statement of Secretary Paulson can be found 
on page 56 of the appendix.]
    The Chairman. The first question I want to address, I know 
we are going to be talking about this more, the Presidential 
Working Group will be coming to testify, but it deals in part 
with hedge funds, but the particular ownership form is not the 
issue, but I think what many, many of us agree is there was 
some concern about whether or not people are able to keep 
adequate track of the derivatives and the liabilities there.
    Recently Assistant Secretary Ryan made a speech which 
surprised me a little bit because it seemed to express a little 
bit more concern about the potential systemic problems that we 
weren't fully on top of in that area before. Is there some 
greater concern than there was, say, 6 months ago?
    Secretary Paulson. No. Our thinking, Mr. Chairman, hasn't 
changed, but let me address this. As you know, our principles 
of regulation revolve around two primary tenets, investor 
protection and systemic risk. This is going to be very 
important as--
    The Chairman. Let me say that I don't think investor 
protection is a great concern at this point. It is more the 
systemic risk potential.
    Secretary Paulson. I think it is.
    Let me get then to hedge funds, because what we said at the 
President's Working Group is, looking at hedge funds and 
looking at derivatives, that by and large they have made the 
financial markets more competitive, more liquid, and more 
efficient. They have helped disperse risk.
    The Chairman. We do have limited time, and I know you said 
that, but my question is whether Mr. Ryan's speech was somewhat 
of a move off that because it seemed somewhat different in 
tone.
    Secretary Paulson. No, because what Assistant Secretary 
Ryan's speech said is that we have never said there is no 
reason to have concerns, and we have never said that the 
guidelines and the frameworks that came out of the President's 
Working Group was an endorsement of the status quo. What we 
attempted to do there was to say we had all the regulators come 
together and speak with one voice and call for heightened 
vigilance, and what we said is that there are four groups that 
really need to be very vigilant. First of all, the regulators 
are looking very carefully at the risk, and looking at the 
relationships between the regulated entities and these private 
pools of capital, the managers of these private pools, looking 
at it from the investor side and from the prime broker side.
    And so there has been a real focus on transparency, but 
transparency between the regulated entities, the big banks that 
provide credit to them.
    The Chairman. Clearly we have an historic situation where 
securities transactions were regulated in the country in which 
they occurred by the country in which they occurred. That is 
decreasingly a description of reality. We are not sure now. The 
rapidity of movement, the hedge funds have increased.
    Are we on an adequate path so that 10 years from now we 
will have in place a regulatory system that is adequate to this 
really much more transactional approach?
    Secretary Paulson. I think that is a great question because 
what we have seen is global financial flows that have dwarfed 
the trade in goods and services, and they are increasing at a 
very quick rate; that the global financial flows in 2005 were 
on a net basis over $6 trillion, and as a percentage of GDP 
they doubled since 2000. As part of that, we have seen global 
financial institutions--it used to be if you go back to 1995, 
we had roughly $20 trillion managed by institutions. It is now 
around $50 trillion, and it is managed very much on a global 
basis with diversity of investments from around the world.
    The Chairman. My time is expiring.
    Secretary Paulson. So given that, I do think the way we 
need to think about these private pools of capital, hedge funds 
and so on, is to think about them increasingly on a global 
basis, and we are talking actively with regulators--the members 
of the President's Working Group are talking actively with 
regulators in Europe, in the U.K., and around the world, as to 
how to deal with these issues.
    The Chairman. I appreciate it. Whatever dangers there are 
of not having a handle on it multiply almost geometrically when 
they are international.
    I do mean to change to one other question, Mr. Secretary. I 
appreciate what you are doing on China. Now, some of the 
concerns have been here, well, the Chinese have been 
penetrating our economy too much, and we have to sort of defend 
against that, they have unfair advantages, some of which I 
agree with. But we had a hearing the other day on the reverse 
situation, the severe restrictions the Chinese continue to have 
on American financial institutions to prevent them from 
penetrating the Chinese economy on the grounds that we would be 
better at it.
    To some extent it seems to me that the Chinese performed a 
great engineering feat and made the Pacific Ocean one way; that 
when they have a competitive advantage, the argument is let 
them benefit, but in areas where our financial institutions can 
have a competitive advantage, there are restrictions.
    I would certainly think there would be strong sentiment 
here that the time has come for reciprocity. This is a pretty 
mature economy. And when Chinese financial institutions now 
come looking to be able to operate in the United States, if 
there are not reciprocal rights for Americans to do the same 
over there, I would hope we would be resistant.
    Secretary Paulson. Let me say that I agree with you on the 
need to open up their financial system. I actually went to 
Shanghai and gave a speech. By coincidence, it was about a week 
or 10 days after there was shakiness and volatility in their 
market.
    I have argued that this is not only right out of fairness, 
but will be very important to them and to us because their 
economy is not going to develop the way they need it to develop 
in a balanced, structured way where there is domestic 
consumption. They are not going to be able to get to the point 
where they have a currency that is market determined unless 
they have competitive capital markets. And they won't have 
competitive capital markets unless they open up to competition.
    The example I use, which I think is getting some traction 
in China, is that they have $2 trillion in savings in banks 
getting a 2\1/2\ percent return in China, which is a negative 
return after adjusting for inflation.
    The Chairman. Can we do anything about it, more than just 
talk?
    Secretary Paulson. I think we are making progress. They 
have taken some steps. I think they are going to keep taking 
additional steps, and we are going to be leaning on them 
because it is in their best interest as well as ours.
    The Chairman. Thank you.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    I have discussed with the Chinese delegation, and I know 
the Secretary has, I believe, that the Chinese are beginning to 
realize that it is a win-win situation, and when we say open 
their markets, it is to their benefit, and their middle class 
desperately needs the investments that are open to America.
    The ranking member of the subcommittee, Mr. Paul, and 
others have expressed concerns about leverage and about 
liquidity. We have tremendous liquidity and leverage in the 
international markets today, which can actually be a good 
thing, but they can be like a rubber band, and with the 
currency imbalances, and our trade deficits, it is a cause of 
concern.
    With the markets becoming more international, and our 
ability to regulate those markets becoming more compromised, I 
will use that word, or ineffective in many cases, what can we 
do? Is there anything we can do we are not doing?
    Secretary Paulson. I think there is, because one of the 
things that we have emphasized is the need for competitive, 
transparent capital markets around the world. So when the 
concern about capital markets' competitiveness came up, I have 
always been very careful how I have defined it. I believe we 
should welcome strong, liquid, transparent, well-regulated 
capital markets everywhere in the world because they have a 
multiplier effect on economies. If our trading partners have 
stronger economies, we will do better, and there will be less 
risk.
    My focus is on how do we make our markets stronger and 
better, and applaud the progress that others make. I do believe 
strong, efficient, competitive capital markets make a big 
difference in terms of economic growth and development. Also, 
Congressman, we will always have financial shocks from time to 
time. There is nothing we can do to make financial shocks go 
away.
    Today we have a strong global economy. Inflation is 
relatively low. This is as strong an economy as I have ever 
seen globally. But there is always some risk that there will be 
financial shocks. We need to be prepared to deal with financial 
shocks by having good relationships with our counterparts 
around the world, and also by having a global financial system 
that is efficient, modern, and functions well.
    I think that was part of what the chairman was also getting 
at with his question on dealing with hedge funds and private 
pools.
    Mr. Bachus. Let me go to a much smaller question as far as 
a very specific question. You are going to meet with FINCEN on 
Friday, I think it is. This committee has bipartisanly 
overwhelmingly passed legislation to reduce the cost of CTRs on 
seasoned customers, regular ordinary customers. Bill Fox, when 
he was FINCEN Director, embraced that, and the new Director is 
again taking a look at it.
    The largest cost of regulation to the financial industry, 
banking industry, is the Bank Secrecy Act. It is a necessary 
act, but a lot of the regulation, quite frankly, is burdensome 
and unnecessary. How can we reduce the cost to both the 
customer, bank customers, and to the institutions by really 
taking a serious step on some of these unnecessary CTRs?
    Secretary Paulson. Well, thank you for that question.
    First of all, one of my big focuses has been on keeping our 
financial system not just safe and sound, but secure and free 
of abuse, and we are also looking at regulatory burdens. Now, 
in many instances when we look at regulatory burdens, we say, 
how do we balance keeping the integrity of our markets versus 
having unnecessary burdens?
    I do believe that in this particular area there may be ways 
in which we can make changes that will accomplish both, which 
will have us do a better job, and a more effective and more 
efficient job of law enforcement, while at the same time 
reducing some of the regulatory burdens.
    And so our emphasis here is on how can we be more effective 
and efficient and do a better job of getting the bad guys and 
getting at abuse. In doing that, I think we may naturally drive 
toward some things that make a positive difference on the 
regulatory side.
    Mr. Bachus. I can tell you that the legislation this House 
passed by over 400 votes will reduce cost, and it will actually 
make things more clearly relevant to the law enforcement. It 
will basically assist them by eliminating millions of CTRs that 
have no law enforcement value whatsoever.
    The Chairman. The gentleman from Illinois, chairman of the 
subcommittee.
    Mr. Gutierrez. Thank you very much.
    Secretary Paulson, could you talk to us a little bit about 
why you didn't find China manipulating its currency last week 
in your report?
    Secretary Paulson. First of all, thank you for the 
question.
    We clearly found that the currency is undervalued. It 
doesn't reflect economic reality. We have been quite clear on 
that point, not only in the report, but also very clear 
publicly and privately with the Chinese.
    Now, you need to recognize that in July of 2005, the 
Chinese began to reform their currency. They revalued the 
currency, and since then it has been appreciating. The currency 
has now appreciated about 8.6 percent, and over the last year, 
the pace of appreciation has accelerated. The Chinese have 
publicly said that they are going to continue to allow the 
currency to appreciate, and they have cited the reason for not 
moving quicker as the need to have stability.
    Now, we disagree with the assessment. I think there is more 
risk in them moving too slowly, and it is dangerous for their 
own economy and for the world economy. But in terms of 
manipulation, that gets to intent. As a matter of fact, the way 
the law reads is if we had found them guilty of manipulation, 
what we would be asked to do would be to negotiate directly 
with them and press the case and work with them, through the 
IMF and on a multilateral basis.
    We have also been negotiating directly with the Chinese and 
making the case as to why it is in their best interest. In 
terms of the IMF, I have personally, and the U.S. Government 
has worked very hard to get the IMF to come into the modern 
world, to recognize that the days of Bretton Woods have long 
since gone. I am very encouraged by what the IMF has just put 
in place, and I commend Director Rodrigo de Rato for the job 
that he has done.
    Mr. Gutierrez. So we all agree, how undervalued is their 
currency, in your opinion?
    Secretary Paulson. I am not going to give you an opinion. 
Because, do I know? No. You gave a big range. I think the 
important thing is to have more appreciation in the short term 
and get to a point where we have a market-determined currency 
so we are not debating it anymore, and so therefore a big part 
of what we are doing is pushing for structural reforms, opening 
up their capital markets so they can in the intermediate term 
have their currency determined in a competitive marketplace.
    Mr. Gutierrez. I understand. But, Mr. Secretary, you said 
that it is undervalued. You have a responsibility, Treasury has 
a responsibility. So if it is undervalued, you are saying yes, 
but, Congressman, they are moving to correct the imbalance. You 
said they are moving to correct it.
    Secretary Paulson. I said they are not moving quickly 
enough.
    Mr. Gutierrez. Not moving quickly enough, but they are 
moving. So you are cognizant, I am cognizant, we are all 
realizing it is undervalued. Why don't we just say that they 
are manipulating it?
    Secretary Paulson. Because manipulation, as I said, gets to 
intent, and they have a clear policy, and they are moving. But, 
again, rather than focus on the term, what I would focus us on 
is what do we do about it?
    Mr. Gutierrez. So you think it is accidental, the 
disparity? Either they did it intentionally, or it is 
accidental. Tell me how it happened or how you believe it 
happened.
    Secretary Paulson. Let me begin by saying that there are 
many, many countries in the world that don't have market-
determined currencies. China just happens to be by far the 
biggest one. To me, it is an unnatural act to be as integrated 
as they are in terms of goods and services and not in terms of 
capital markets and currency.
    Now, what I have said is that they made a decision to 
reform their currency. They said they were going to allow the 
currency to appreciate gradually, that they recognize the 
principle, but that they also place a big premium on stability.
    Mr. Gutierrez. The chairman has been very kind, but I just 
want to suggest two things. Look, it hurts our workers, and the 
trade imbalance between our country is affected because of the 
very nature of this inequity in our currency, and we need to do 
more to fix it. It is not fair to American workers and our 
American economy.
    Secretary Paulson. We are in agreement on that. But the one 
thing I would just say very quickly: it is very important to 
deal with the currency, but even if the currency were dealt 
with, we would still have a very large trade deficit because 
there need to be major structural changes. A big part of our 
focus is then on those structural changes in addition to the 
currency.
    The Chairman. Thank you.
    I would say, Mr. Secretary, when you said the question was 
intent, and you said they agreed to raise it, but they decided 
to do it at a slow pace for stability, that sounds like intent 
to me.
    The gentleman from Alabama has a request.
    Mr. Bachus. I have a unanimous consent request to introduce 
two studies on undervaluation and overvaluation. One is all the 
countries of the world. In fact, Iceland and Sweden are greatly 
overvalued. So we do have imbalances. I would introduce those 
two studies. One is a recent study.
    The Chairman. Without objection they will be introduced. We 
could also pass them out during the hearing.
    Mr. Bachus. One is 26 percent undervalued, another is 55 
percent.
    The Chairman. 26 and 55 percent regarding China?
    Mr. Bachus. In China. The Chinese currency.
    The Chairman. If there is no objection, they will be put in 
the record, and the gentleman from Texas is now recognized.
    Dr. Paul. Thank you, Mr. Chairman. There is a lot of 
concern in the Congress for the trade imbalances, and we talk 
about some currency problems, but I don't think we ever get to 
the bottom of that issue. There is a great deal of discussion 
about what China should do or shouldn't do, and I would like to 
concentrate more on what we should do for ourselves, because 
that is where our responsibilities are.
    So often I think about how we have monetary problems here, 
we have tax problems here, and tax policy, regulatory policies, 
and also some of the things that we could do even in trade 
policies that could help. So I don't see how putting all the 
blame on China is necessarily helpful when so many are now 
calling for a solution such as putting tariffs on them. I think 
sometimes they forget a tariff is nothing more than a tax, and 
most likely a tax that would be borne by the poor who now are 
able to buy goods at a cheaper rate. So there is no easy 
solution there.
    In the beginning of your statement, you mentioned that our 
policies are to encourage openness. I want to address that a 
little bit, and I have a question that has to do with the 
President's Working Group on Financial Markets. We have a 
program called the FDIC. It is not a free-market insurance 
program, but everybody knows about it, and there is 
reassurance, and so far the moral hazard has not been so bad 
that it hasn't been helpful at least to keep the old-fashioned 
run on banks from occurring.
    In some ways I see the President's group as some type of an 
insurance program to look at the unruly markets that may or may 
not come, and yet we don't know a whole lot about it. I am 
interested in knowing more about this particular group and the 
meetings, whether there are minutes held, what are the 
discussions, have actions ever been taken; because if the group 
is truly an activist group, we as legislators and Members of 
Congress should have full knowledge of this because the four 
major departments and individuals who make up this group have a 
lot of influence over stock markets and bond markets and 
commodity markets and currency markets. And if we don't know 
what it does, it creates some speculation, and we do read 
articles in the paper about the speculation of what this group 
may or may not be able to do, and I think that that speculation 
can be harmful.
    So could you let us know a little bit more about how this 
group works, and have you taken any precise actions to 
interfere in the market?
    Secretary Paulson. Well, thank you for your question. We 
have, I think, always tried to be very open about what this 
group is. I chair the President's Working Group on Financial 
Markets and its members consist of the Chairman of the Fed, the 
Chairman of the SEC, and the Chairman of the CFTC, and we have 
been asked on a number of occasions to come up with a study. 
There is a study on TRIA for Congress, I think it actually may 
have been for this committee.
    But we talk about issues that are primarily related to the 
markets, and one of the things that we spend a fair amount of 
time on is looking at a systemic risk. There have been a lot of 
changes in the market, the markets continue to evolve, the 
global economy continues to evolve. One of the things we have 
said is that none of us is predicting a financial shock anytime 
soon. As a matter of fact, economic conditions would seem to 
indicate that it is not particularly likely, except financial 
shocks often come when they are not expected. They come from 
time to time, and the next time we do have a financial shock, 
it will be interesting because the United States is even more 
integrated into the global economy.
    There has been an increase in derivatives and private pools 
of capital are playing a bigger role. So we have thought about 
it and are planning along those lines. The most recent thing we 
have done is to come out with guidelines and principles and a 
framework for dealing with some of the challenges posed by 
hedge funds and other private pools of capital.
    And so this had the benefit. This was a forum where you 
could have the regulators come together and speak with one 
voice.
    The Chairman. The gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman. Mr. 
Secretary, I thank you for being here today. And I would like 
very much to talk with you about the IMF or Bolter Funds or 
China, but I am not going to do that. I have decided that my 
work over the next few years will be focused on doing 
everything that I can to protect American citizens, to be a 
real advocate to correct the ills of government, or the private 
sector as it relates to schemes and rip-offs that our people 
have to endure in this Nation.
    There are many people who are already forgetting Katrina, 
for example; we have just thousands upon thousands of people 
who were harmed, and still have not been made whole. But today 
while you are here, I am going to focus on Enron because you 
have a role to play in Enron. I have been following for some 
time now, after the biggest corporate crime in America was 
perpetrated on the people of this country and on the workers, 
what has happened to the victims. And I am very, very surprised 
to find out that our government, this Administration, and you 
have decided that you are more interested in protecting those 
with third party liability as relates to Enron and some other 
cases than you are in protecting the citizens who got ripped 
off with this corporate crime.
    I was very disappointed to read that the solicitor general 
did not file an amicus brief in support of the defrauded 
investors in the Stoneridge investment part of this case 
currently pending before the Supreme Court. This is important 
because this would decide what happens to those Enron victims. 
Those Enron victims lost about $40 billion; about $7.3 billion 
of that has been recovered by the attorneys and lawyers.
    However, I understand--and maybe you can answer this 
question. Why is it an apparent policy position of the Bush 
Administration to favor public enforcement of a private 
enforcement at all relevant to a case involving the 
interpretation of an SEC rule that governs both public and 
private litigation? The issue before the Supreme Court in 
Stoneridge involves who may be sued for participating in a 
scheme to defraud under Rule 10(b).5, not whether the private 
right of action should be scaled back. Why should the 
Administration view that our--as you have called it--overly 
litigious society is harming U.S. financial markets, whether 
valid or not, have any bearing on the correct interpretation of 
scheme liability in Rule 10(b).5 of the securities law? Isn't 
that a question for Congress, not the courts?
    Now, I understand that Mr. Cox sides with the victims of 
Enron and that the SEC voted that they should be able to be 
sued and that they should be able to recover. And again, some 
of these banks have been forced to pay up. But you and the 
Administration are standing in the way. Can you explain that? 
Why would the government be against the people of Enron who 
were defrauded and those banks that literally were in collusion 
with Enron? Should banks be let off and not have to pay?
    Secretary Paulson. Thank you very much for that question. 
Let me begin by saying that I think you are referring to the 
Stoneridge case, and that is what you mentioned. The Stoneridge 
case is about a cable company, Charter Communications, and a 
couple of suppliers, one of which was Motorola. So that is what 
that case is about, Charter Communications and a couple of 
suppliers. Let me step back, before addressing that case and 
say that I am a strong advocate of the protections against 
security fraud. I think the SEC and the Justice Department have 
been particularly vigilant, and the hundreds of millions of 
dollars of fines that have been paid and recovered are very 
significant.
    Now, I asked the Treasury Department to send a letter to 
the solicitor general on the Stoneridge case, which involves 
Charter Communications and Motorola, and some other suppliers. 
I did this because I thought it had enormous implications for 
the U.S. economy. And here's the reason, that when you are 
looking at the uncertainty of primary liability which could go 
to third parties--and as far as I am concerned this would 
create a very uncertain legal environment for all of the 
individuals and all of the public companies that deal with 
public companies, all of the parties that deal with public 
companies in the United States--I think that is ultimately 
harmful to our economy and to the--
    Ms. Waters. I am reclaiming my time for just one second, 
Mr. Secretary. Is it not true that the lawyers were able to 
recover $7.3 billion from three big banks--those banks are 
Citi, JP Morgan, and the Canadian bank--in the Enron case?
    Secretary Paulson. As I said, you are talking about Enron 
and the investors in those cases. I am talking about 
Stoneridge.
    Ms. Waters. No, but the relevance of Stoneridge to Enron 
raised in the Stoneridge case is whether those who participate 
in a scheme to defraud investors under Section 10(b) and Rule 
10(b).5 of the U.S. securities laws can be held liable where 
the participants knowingly engaged in fraudulent financial 
transactions with the public cooperation to falsify its 
financial statements even though they did not themselves make a 
public statement. Isn't that the case?
    Secretary Paulson. I was going to say that the principle is 
important to me in terms of competitiveness and is important to 
people on both sides of the aisle. Senator Schumer and Mike 
Bloomberg did a study that looked at our capital markets and 
the impact on our economy. What did they cite? Excessive 
litigation risk is a big issue. I had a panel who looked at 
this, and Bob Rubin saw this as a big issue. My concern is that 
by exposing all sorts of third parties that happen to do 
business with a public company to primary liability, without 
clear lines is a risk to our economy, to our competitiveness, 
and to jobs. And as I said, I asked the Treasury to write a 
letter to the solicitor general on the Stoneridge case.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. I guess we are looking 
at some of the practical effects in the market today in terms 
of decisions that we have made in the past, but we have the 
outflow of capital from the U.S. markets, to London and to Hong 
Kong--Hong Kong, China, and it appears to be occurring at a 
pretty heavy pace. Only 2 of the 20 initial public offerings 
last year went public here in the United States, and if we 
looked back to 2000, there were 9, and there were 12 in 2001. 
So we have a trend that I think is a serious problem. And there 
is this argument that the current status of our legal system 
and the impact on an overly litigious society has been a factor 
in driving these decisions from entrepreneurs and investors not 
to take advantage of the capital markets of the United States.
    You referenced the Bloomberg-Schumer report, and the 
conclusion of that report is that the prevalence, they say, of 
meritless securities lawsuits and settlements of the United 
States has driven up the apparent and the actual cost of 
business and driven away potential investors. It is not the 
only report that comes to that conclusion. But Mr. Secretary, 
with some recent developments regarding third party liability, 
it appears that this problem may only get worse.
    And I would also just like to touch on Sarbanes-Oxley. 
Section 404 has frequently been cited as a likely cause of the 
outflow of capital. I would like to ask if you see a need to 
redress the burdensome regulatory environment facing our public 
companies on that front. And I would also just like your 
thoughts.
    You mentioned the case of Stoneridge v. Scientific Atlanta 
concerning secondary liability. The question seems to be 
whether attorneys can sue not just a company that engages in 
wrongdoing, but any company that has done business with a 
wrongdoer. And if we went back to the 1996 case of Central 
Bank, the Court at that time said Congress never intended this 
language to cover secondary companies. At that point, the Court 
argued, trying to determine just who is liable in a civil 
setting is problematic here. And they warned of the excessive 
litigation that would come and the difficulties in costs that 
would be experienced by client companies and investors, the 
cost to investors under a case like that, the Central Bank 
case.
    Do you think it is precisely that sort of case that could 
cause even more companies to decide that they are better off 
listing their shares over in London or in China? That is what I 
would like to ask you.
    Secretary Paulson. Well, I thank you very much for the 
question. Yes, there is no doubt that when you go around the 
world, and even here in the United States, one of the 
impediments to listing in the public capital markets in the 
United States is the question of executive litigation risk. And 
as I said, in the Stoneridge case what concerned me was 
exposing a wide range of individuals and businesses in the 
United States that happen to do business in some way with 
public companies to primary liability without bright lines. And 
so that was the case. Reasonable people disagree on this, but 
there are plenty of people on both sides of the aisle that 
share my concern there. And so that is a concern.
    Now, in terms of your Sarbanes-Oxley question, I believe 
that Sarbanes-Oxley is by and large good legislation, and that 
the principles are all the right principles. Some of the issues 
have had to do with implementation. The biggest issue had to do 
with, as you said, Section 404. I think that there have already 
been major steps taken by Chairman Olson of the PCAOB and 
Chairman Cox to rewrite the auditing guidelines, and I am 
optimistic that you are going to see that we have to remain 
vigilant, but we are going to see that implemented in a more 
efficient and effective manner.
    Mr. Royce. Thank you, Mr. Chairman.
    The Chairman. Thank you. The gentlelady from New York.
    Mrs. Maloney. Thank you. First, I would like to thank the 
Secretary for working with this committee on the anti-terrorism 
risk insurance which we will be bringing up later on this week, 
and also for working with us on the legislation to strengthen 
the CFIUS process that reviews foreign direct investment for 
national security concerns. In the wake of the Dubai Ports 
World crisis, it occurred to us that we needed to strengthen 
the process and that we needed a certain and fair process to 
encourage safe foreign direct investment.
    One of the first bills reported out of this committee was a 
CFIUS reform bill, and it passed the House 423 to 0. You don't 
see that with many pieces of legislation. I believe that this 
bipartisan bill really strikes that balance. It was 
reintroduced in the Senate this year and it followed most of 
the House versions on all the key points. One area where it 
differs from the Senate version is that it allows for the 
delegation of sign-off to the Assistant Secretary level, where 
the House had no official sign-off lower than the Under 
Secretary. It was the Secretary, the Deputy Secretary, then at 
the urging of Treasury we lowered it to the Under Secretary. 
And I am concerned about returning to the level of the 
Assistant Secretary. I want to note that it wasn't an Assistant 
Secretary who signed off on the Dubai Ports World transaction.
    And my question is, do you support the Senate language to 
allow for sign-off at the Assistant Secretary level?
    Secretary Paulson. Thank you very much for that question. 
Let me begin by saying that I appreciate your leadership and 
the work of this committee, and that your bill is a strong 
bill. The Senate bill is a strong bill. You have highlighted 
one difference. I was not here at the time of Dubai Ports. I 
have heard various comments and I am not going to comment. I 
don't know where the sign-off occurred, but I will say to you 
that I have a strong, clear preference for sign-off at the 
Assistant Secretary level. It is a Senate confirmed level, and 
I believe this for a couple of reasons:
    First of all, I think that this bill will give us a lot of 
changes and that it is going to make a big difference. And we 
are focused on national security in a very significant way. But 
the signal it sends to the rest of the world, which says that 
we are open for investment, but that it takes an Under 
Secretary or above to sign off on a CFIUS case, to me there is 
a bit of a disconnect there. And also, as someone who is trying 
to run a business, at the Department of the Treasury, we have 
one Under Secretary for International Affairs, and we have one 
Assistant Secretary for International Affairs, and just in 
terms of getting things done, it is not very efficient. I have 
talked about this before. There weren't very many areas we had 
of disagreement, but this is one of them, and on this I just 
respectfully disagree.
    Mrs. Maloney. But in your Department, you can structure it 
to the number of Under Secretaries who are there and the number 
of Assistant Secretaries. And considering the fact that the 
Dubai Ports World transaction was signed off at the Assistant 
Secretary level, aren't you concerned, as some of us are, that 
Assistant Secretaries don't reliably have the political and 
substantive judgment necessary to make these decisions? The 
biggest criticism of Dubai Ports World was the fact that no one 
of stature or great leadership in the Treasury Department 
signed off on it. It was a criticism of the level of sign-off, 
and to lower it to a lower level of sign-off really depletes 
the purpose of the bill to strengthen accountability in the 
process.
    Secretary Paulson. I think that would be a gross 
oversimplification of the Dubai Ports World case. And again, I 
can just tell you that I would be most comfortable having an 
Assistant Secretary be able to sign off. I take responsibility 
for my role in CFIUS and the Department does. And I think in 
terms of letting us operate efficiently and sending the right 
signal to the rest of the world an Assistant Secretary is a 
better route. You and I respectfully disagree. We agree on most 
things on this issue, and, I guess, why don't we just leave it 
at that.
    Mrs. Maloney. How many Assistant Secretaries are there at 
Treasury now?
    Secretary Paulson. We have one Assistant Secretary for 
International Affairs and we have one Under Secretary, and the 
idea of saying you could have--
    The Chairman. We only have 5 minutes. That was a fairly 
simple question. How many Assistant Secretaries are there? It 
probably ought to be able to be answered fairly quickly.
    Secretary Paulson. Well, we have multiple Assistant 
Secretaries, but they--
    The Chairman. I understand that. But again, we only have 5 
minutes.
    Secretary Paulson. We have one Assistant Secretary in the 
international area.
    Mrs. Maloney. That is the total number?
    Secretary Paulson. Yes.
    The Chairman. The gentleman from Connecticut.
    Mr. Shays. Thank you, Mr. Chairman. I would think it would 
be a pretty exciting time to be a Secretary, and given how well 
the world economy is doing and the U.S. economy it would be a 
pretty heady business. Yet I get the sense from the American 
people that they don't feel the economic security that the 
indicators would seem to say they should feel. My sense is they 
don't feel that sense of comfort because the world is 
extraordinarily competitive and so they don't have a sense of 
job security. But when you talk about this among your 
colleagues, what is your conclusion for why public confidence 
doesn't match the statistics?
    Secretary Paulson. In terms of the way--
    Mr. Shays. The strength of the economy, the fact that 
unemployment has gone down, very real growth in GDP. And yet 
there isn't this sense among the American people that their 
life is secure and their economy is doing well.
    Secretary Paulson. I think this is a feeling in the United 
States and in a number of other places around the world. I 
think part of it may be related to the point that the chairman 
made earlier on the widening income gap. Part of it may be 
related to the pace of change, part of it is related to the 
technological advancements which are continuing to force people 
to change and giving more of an advantage to those who know how 
to use technology.
    Mr. Shays. So the future of our being able to compete is 
going to be based on how well our populace is educated and how 
willing we are to allow people with technical skills to 
immigrate into this country. Do you as Secretary of the 
Treasury get involved in those issues or are those issues that 
you have to punt to someone else?
    Secretary Paulson. Get involved in immigration issues?
    Mr. Shays. Immigration and technology and making sure that 
Americans are keeping pace.
    Secretary Paulson. Those fall in other people's areas.
    Mr. Shays. Let me ask you, with regard to what you refer to 
as a historic debt relief initiative, how are you able to make 
sure that it is not lend and forgive as you talk about this 
cycle?
    Secretary Paulson. Well, I have to say that is always a 
challenge. I think there is much more buy-in when you talk to 
people at the World Bank and to my counterparts from around the 
world at the G-7. I think there is a growing consensus and a 
structure for reducing the likelihood.
    Mr. Shays. But is there anything concrete that your people 
talk about that say this is going to be different because we 
are going to not only--the debt relief is historic. It is 
larger than any time in past history and it is global. I mean, 
there is great participation. But is there anything that the 
United States is doing in a concrete way to make sure that we 
are not going to just see a repeat of this in a few years?
    Secretary Paulson. I think that is a good comment. I think 
a lot of this is not just going to be the structure that is put 
in place in the highly indebted countries--the poorer 
countries. There is going to have to be restraint and 
discipline from those that lend. There has been a lot of 
discussion about making sure that the developed countries and 
the multilateral institutions act in concert.
    Mr. Shays. Let me put it in my own words. Is your basic 
point that whereas we have lent in the past, that countries are 
in a unified way going to be a lot stricter on how we give out 
credit?
    Secretary Paulson. Yes, and that there is a big focus on 
debt sustainability when we look at new lending. And there is a 
big focus on trying to discourage other nations from coming in 
and free-riding and following this forgiveness by making new 
loans.
    Mr. Shays. Thank you.
    Ms. Waters. [presiding] Mr. Ackerman.
    Mr. Ackerman. Thank you, Madam Chairwoman. Welcome, Mr. 
Secretary. Good to see you. I want to thank you first for the 
good work that you are doing, and especially including the 
section in your prepared comments, the issue of strengthening 
the international framework against illicit finance and how 
important your role is and the role of the Treasury in fighting 
terrorism. You possess tools that are very, very important to 
winning this war on terrorism and providing whatever 
transparency we can in the international community where 
people, players, companies, and sometimes countries are helping 
to finance terrorism and terrorist activities. Thank you for 
the good work that you are doing in the areas of nuclear 
proliferation, etc., specifically with regard to North Korea 
and Iran.
    I have basically one question this morning, and that goes 
to the issue of the Iran Sanctions Act. This Act has been on 
the books. Unfortunately and regrettably, not one entity was 
sanctioned during the whole duration of the existence of this 
bill during the time of the Clinton presidency, and that wasn't 
a good thing. And in addition to that we have seen the same 
exact thing throughout the Bush presidency, which was greatly 
heralded, that if you harbor terrorists, it is just as bad as 
if you are a terrorist kind of approach, yet the Administration 
has not sanctioned anybody. And we know who some of these 
people are. We know what some of them are doing, and yet there 
are no sanctions.
    It may be above your pay grade because you don't do the 
sanctioning; the President does that. So you may feel 
uncomfortable commenting on that as it might be above your pay 
grade.
    Secretary Paulson. Let me make a couple of comments. First 
of all, we have been, the Administration has been, and Treasury 
has been very active in terms of taking financial measures 
against a number of Iranian entities, including Bank Saderat, 
which has been active in financing terrorists, and then with 
Bank Sepah, which has been a big financer of proliferation and 
missiles, and weapon systems acquisitions. So we have been 
quite active there, and we have been quite active in engaging 
private sector banks from around the world.
    Mr. Ackerman. I know indeed that--
    Secretary Paulson. To answer your question, I think that 
engaging in secondary boycotts, sanctioning companies in other 
nations, I think it is our collective judgment that this would 
work against what we are doing right now, which has the 
potential to be quite successful, building a multilateral 
consensus.
    Mr. Ackerman. I understand that is your opinion.
    Secretary Paulson. Yes.
    Mr. Ackerman. But you also, as we, are sworn to uphold your 
constitutional responsibilities and the Constitution and the 
laws. We passed a law and nobody is enforcing that law. Nobody 
has put anybody on this list. And whether you consider it a 
secondary or a tertiary or quaduciary boycott of a company that 
is participating in something that is going to result in 
destruction in the United States and want to observe the 
niceties of not doing that or not, that is your opinion. But I 
would suggest that the President should be, a President could 
and should have, this is a nonpartisan comment, should have 
some countries and some companies on that list. We do not.
    But something that I think you can comment on, because 
indeed with both Bank Saderat and Bank Sepah you have been 
doing some good work, and you do have people from Treasury and 
different places in the world trying to convince them not to do 
business. Could you give us the names? That is something you 
can do. Give us the names of some companies that are not 
cooperating with Treasury on this.
    Secretary Paulson. In terms of--
    Mr. Ackerman. Which is the number one company that is not 
cooperating?
    Secretary Paulson. Well, in terms of--I will tell you 
this--
    Mr. Ackerman. That is investing in Iran.
    Secretary Paulson. I would say in terms of the financial 
sector around the world--
    Mr. Ackerman. Mr. Secretary, with all due respect, we each 
have only 5 minutes.
    Secretary Paulson. Right.
    Mr. Ackerman. And you can run the clock on each of us if 
you would like. I would like you to give me three names, Mr. 
Chairman, if I might, I would like you to give me three names 
of companies anywhere in the world that you like that are not 
cooperating. You can do that. I know you can.
    Secretary Paulson. That are not cooperating?
    Mr. Ackerman. Do you want me to repeat the whole thing? I 
know you understand me, so let's not run the clock and repeat 
the question again. Give me three companies that are not 
cooperating with us.
    Secretary Paulson. I am not prepared to single out three 
companies.
    Mr. Ackerman. Would you get back to us in writing on that 
or you just don't want to?
    Secretary Paulson. I will get back to your question in 
writing, but I doubt, just to be very direct with you, that you 
will get a list from the Treasury Department of companies that 
aren't cooperating. If we find companies that are violating the 
law, we are going to take action against them.
    Mr. Ackerman. And you have a reluctance to cooperate with 
the Congress and providing the companies that are not 
cooperating with U.S. law.
    Secretary Paulson. There are a variety of nations that we 
would like to get more support from, but we are getting support 
and we are building support.
    Mr. Ackerman. We would like to help you with that, but--
    The Chairman. The gentleman's time has expired. The 
gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. Mr. Secretary, I 
don't think I have heard a discussion today about the patterns 
of entitlement spending within the Federal budget. Recently 
Chairman Bernanke of the Fed said that without early and 
meaningful action to address the rapid growth of entitlements 
the U.S. economy could be seriously weakened with future 
generations bearing much of the cost. He said that at a House 
Budget Committee hearing.
    Recently Controller General Walker of GAO said that the 
rising cost of government entitlements are a fiscal cancer that 
threatens catastrophic consequences for our country and could 
bankrupt America. Most of the models I have seen from OMB and 
CBO and others, who slice and dice the numbers here, have us on 
a collision course over the next several decades of either 
having a Federal Government consisting of a little more than 
Medicare, Medicaid, and Social Security or a doubling of taxes 
on the next generation just to balance the budget. So far I 
have seen no evidence in this Congress that there is an 
interest in attempting to reform these entitlement programs.
    My question is, do you concur with the assessment of 
Controller General Walker and Chairman Bernanke and, if so, 
what could be the long-term implications for America's 
competitiveness in the international economy?
    Secretary Paulson. I do concur and I do believe that 
perhaps the two biggest intermediate to long-term structural 
economic issues we have are the need for entitlement reform and 
energy--those would be the two that I would cite. In the 
entitlement area we have a fiscal situation in the short term 
which is manageable and getting better. But if you look out a 
number of years, we have an entitlement issue which is driven 
by two factors--demographics and rising health care costs going 
up much quicker than the economy overall. This is frustrating 
because the sooner we deal with these as a country, the more 
flexibility we will have and the less onerous the penalty will 
be. Also, the price paid by the younger generation will be 
less.
    So this is something--and I would tend to leave it with one 
positive comment--that I believe is a bipartisan issue. I do 
believe that people on both sides of the aisle understand it. I 
really do hope that sometime over the next several years we 
will all get together to solve it, because it is not going to 
go away, and the longer we wait, the more expensive it is going 
to be to solve the problem.
    Mr. Hensarling. Returning to the issue of Chinese currency, 
possible Chinese currency manipulation, I rarely have an 
opportunity to quote my mother at these hearings, but my mother 
once said that life is often full of lousy options, and it 
appears to me we may have a lousy option in dealing with 
Chinese currency. Isn't it true whether through market forces 
or through currency manipulation or through acts of divinity 
there will be winners or losers every time there are 
adjustments in the currency exchange rates? If you are in the 
export business or the import business, depending on which way 
the currency fluctuates there will be winners and losers. For 
those who are advocating various tariffs and sanctions won't 
that simply drive up the cost of many of our manufactured goods 
that could have a detrimental impact on the disposable income 
and the standard of living for low- and middle-income 
Americans?
    Secretary Paulson. If your question is do low-income 
American consumers benefit from low prices from cheaper 
imports, I think the answer to that is yes. As China moves 
toward a market determined currency, the winner will be the 
global system the world overall. It will benefit the United 
States and China. I believe we have a responsibility of 
fairness to press the Chinese toward getting to the point where 
they are not just partway integrated into the global system. 
The global system is not going to work over time unless those 
that play such a big role selling goods and services are truly 
integrated in terms of the financial markets and their 
currencies.
    Mr. Hensarling. Thank you.
    The Chairman. Thank you. The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman. First I would like to 
thank you for the clarity of your answer to Mr. Ackerman. He 
asked you about the Iran Sanctions Act and why it did not apply 
to a single company, and your response was you thought it was 
bad public policy to sanction foreign companies. And I think 
that clarifies really the Administration view toward Congress, 
which is the laws that we pass are advisory and when they 
constitute bad public policy they will be ignored. Other than 
that you think it is terrible public policy, is there any 
reason at all legally, if you were just going to follow this 
statute, not opine on whether it is good public policy, that 
this Administration has not identified a single oil company 
that has invested more than $20 million in Iran?
    Secretary Paulson. Again, I take your point.
    Mr. Sherman. Thank you. Sir, I am going to go on to the 
next question.
    Secretary Paulson. I will advise other people within the 
Administration. But the point that I was respectfully trying to 
make--
    Mr. Sherman. Sir, I will reclaim my time. I think your 
answer is very clear.
    Second, I would just like to clarify for the record the 
exchange of correspondence that I had with the Treasury 
Department over whether there should be an emergency plan for 
dealing with a 20 percent decline in the value of the dollar in 
any week or similar catastrophe or a 40 percent decline in a 
single month. The response from your Department has been that 
we don't need to worry about that.
    I would urge you to work with my office if there is any 
legislation that you think would give you the tools necessary 
to deal with such a catastrophe, and I urge you again to work 
with the other Agencies of the Administration to put together 
an emergency plan. If, however, you don't think it is worth 
your time, that is fine. It is entirely up to you.
    It has been widely reported the extraordinary efforts the 
Administration made to save Mr. Wolfowitz's job. You, yourself, 
made phone calls. When it comes to keeping the World Bank from 
making disbursements to Iran, the Administration voted against 
those loans, as you are required to by law, and in this case 
you actually followed the law. But how hard--can you describe, 
compare the extraordinary efforts that you made to save Mr. 
Wolfowitz's job with energy expended to try to prevent the 
World Bank from disbursing loans to Iran. Actually, I will ask 
that as a more specific question. Have you made any phone calls 
at the ministerial level urging that we stop making 
disbursements on the $1.3 billion of World Bank loans headed 
for Iran?
    Secretary Paulson. I have not made any personal phone calls 
on that.
    Mr. Sherman. Did you make any personal phone calls to help 
keep Mr. Wolfowitz's job?
    Secretary Paulson. I made personal phone calls with regard 
to Mr. Wolfowitz to make sure that there was a fair process.
    Mr. Sherman. I am glad that this is how we have allocated 
our chits in power in the World Bank. But let me move on to 
another question.
    We have had two Iranian banks that you have prevented from 
doing business.
    Mr. Bachus. Mr. Chairman.
    The Chairman. Yes.
    Mr. Bachus. I would ask in fairness--
    The Chairman. We will stop the clock during this 
conversation.
    Mr. Bachus. I would ask in fairness that the Secretary, if 
he is asked a question, that he does have a chance to answer.
    The Chairman. I would say the general rule is that the 
member controls the time. If the Secretary at the end wants to 
add something he can. I would say that I think the Secretary is 
having trouble adjusting to the 5-minute rule. In several 
cases, people have asked questions and the answers have been, 
it seems to be, more discursive.
    Mr. Bachus. Mr. Chairman.
    The Chairman. I am sorry. It is not my time. I recognize 
the gentleman and I am trying to explain what is going on. The 
Secretary has on occasion been more discursive and has frankly 
repeated stuff that everybody knew. But if at the end he feels, 
the members control the time, that he wants to add, I would be 
glad to recognize him for that.
    Mr. Bachus. I thank the chairman. I think that in this 
case, the Secretary was asked a question, and after two words 
he was cut off.
    The Chairman. Well, members control the time. And members 
do have a right, it seems to me, to ask a specific question and 
try to get a specific answer, particularly under the 5-minute 
rule.
    The gentleman from California is recognized.
    Mr. Sherman. Thank you. It is only in the Senate where you 
are allowed to filibuster. You have prohibited two Iranian 
banks from doing business with the U.S. Fed and U.S. banking 
system. Why not all of them?
    Secretary Paulson. We have a general prohibition against 
them doing business in the United States. We took action 
against the two banks because we had very hard intelligence and 
very strong evidence of clear wrongdoing. As a result, it was 
possible to go around the world, and with this conduct of clear 
misbehavior build a multilateral consensus. So we are looking 
at all of our options.
    Mr. Sherman. I am reclaiming my time. You do need 
cooperation from the rest of the world on some things, but you 
could stop every bank that is of assistance to the Islamic 
Republic of Iran and is located in the Islamic Republic of Iran 
from doing business with the Fed without seeking international 
consensus.
    Secretary Paulson. They are excluded from the United 
States.
    Mr. Sherman. They got the U-turn transactions.
    Secretary Paulson. They got the U-turn.
    Mr. Sherman. And we could stop the U-turn without this 
lobbying effort?
    Secretary Paulson. That is one thing that we are 
considering. But as I said, and I spent a lot of time on this, 
Congressman, I believe that when we can show people that we 
have hard evidence, it is a lot easier to get the kind of 
support that we are currently getting from around the world, 
which I think is isolating Iran from the global financial 
system.
    Mr. Sherman. Let me just point out that the centrifuges in 
Iran continue to turn and I wish we were as willing to 
inconvenience international corporations as we have 
inconvenienced American soldiers fighting in Iraq, and I yield 
back.
    Secretary Paulson. I have spent a lot of my time on this 
issue. It is very important to me, and we share the same 
objective here.
    The Chairman. The gentleman from California, Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. And thank you very 
much, Mr. Secretary. A few kind of relatively broad questions, 
unlike some of what you have been getting. What do you see as 
the greatest risks to business and capital formation in the 
United States? I mean some people will say Sarbanes-Oxley is a 
big one. I suspect from your previous answer you don't agree 
with that. Litigation risk perhaps. What do you see as the 
biggest impediments to people forming companies and capital in 
the capital markets in the United States?
    Secretary Paulson. Congressman, when people say Sarbanes-
Oxley, I think they are using that as code for a lot of things. 
Not just the Sarbanes-Oxley Act, but the way it is implemented, 
all of the new listing rules that have come into place, the 
different changes in the boardroom, and the changes to the 
accounting system. Because the business scandals in this 
country were largely accounting scandals, and that is what 
Congresswoman Waters commented on with respect to Enron and 
others, there were big changes in accounting. And some of the 
secondary, and tertiary effects of those changes have not all 
been positive. We had, for instance, around 1,500 restatements 
last year in the accounting area.
    I believe that all of these changes taken together have 
been a deterrent to public listing in the United States. At the 
Treasury Department, we focused on three things: First, the 
accounting industry and how that works and how the accountants 
relate to boards and to managements and to shareholders and how 
to deal with the restatements and the time and effort and money 
that is spent in that area, number one.
    Second we are focused on regulatory structure. We have a 
regulatory system that has been built up in this country over 
many years. And so how we resolve some of those issues. And 
then the enforcement, legal system and getting at, again, the 
issues that we had an opportunity to discuss earlier with 
Stoneridge. And so I would say those are the three areas we 
focused on.
    Mr. Campbell. Okay. And litigation risk is kind of that 
third?
    Secretary Paulson. Yes.
    Mr. Campbell. There is a lot of talk around here about 
raising the tax rate on capital gains and dividends, either 
straight up or through on the higher income taxpayers, let us 
say, through the modifications in the Alternative Minimum Tax. 
What effect would that have, do you believe, on growth, capital 
formation, and job formation?
    Secretary Paulson. Well, I think it would be a negative. I 
think that the tax reform reducing the capital gains rate, 
equalizing it with dividends, was a major improvement. It was 
not only a reduction in taxes, but also a major reform that 
eliminated some of the biases that we have in our tax system. 
It has also helped drive jobs and growth, and I think it has 
been very positive. And, given where we are in our business 
expansion today, I wouldn't recommend increasing the dividend 
and capital gains rates.
    Mr. Campbell. And as a final question, we have a lot of 
angst about our savings rate, but yet globally there is a lot 
of global liquidity. Chairman Bernanke has called it a global 
savings glut. What does that mean for us, what does that mean 
for the economy, what does that mean going forward in this 
global savings glut?
    Secretary Paulson. What has happened is that there has been 
a wall of money from around the world. Asia, Germany, Russia, 
something like $450 billion last year from the 10 oil exporting 
nations, $6 trillion in capital flows. Now, that money needs to 
find a home, and the U.S. economy is very attractive relative 
to other places, looked at historically or going forward. To me 
the key is to continue to keep our economy strong, to have 
policies that enhance confidence in our economy, to be open for 
investment, and to encourage foreign investment because we have 
attracted a lot. The U.S. economy is 25 percent of global GDP, 
but we have 40 percent of global financial assets here in this 
country, and that is very important.
    Mr. Campbell. Thank you, Mr. Secretary.
    The Chairman. Mr. Secretary, we have a vote that is 
probably going to take about 30 minutes. We have some members 
here. Is it possible for you to take a break and come back at 
about say 12:40 and stay for another 40 minutes or so.
    Secretary Paulson. Okay.
    The Chairman. I have to accommodate the members who are 
here. I will not allow any members who have not already been 
here.
    Secretary Paulson. I have a lunch and then I am supposed to 
speak to a group of international students at 1:45.
    The Chairman. Where is that going to be?
    Secretary Paulson. That is going to be at the Executive 
Office Building. I am supposed to chair an economic principles 
lunch at 1:00, so the idea would be that I would come back at 
12:45 and be here until 1:15.
    The Chairman. If we can. We will try to accommodate as many 
members as possible. I appreciate it. We will finish some more 
questions now.
    Secretary Paulson. Could we do whatever we can to get me 
out of here by 1:15?
    The Chairman. Yes.
    The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Secretary, for being 
here. Mr. Secretary, international currency policies, and 
particularly China's exchange rate policy, are a concern for 
American manufacturers and other folks as well. I would like to 
stay on the topic of currency policy, but I would like to draw 
focus to another side of the issue.
    According to the most recent Treasury statistics, today 
foreign nations hold over $2.2 trillion, or 44 percent, of all 
publicly held U.S. debt, with China alone holding over $400 
billion of our public debt. This makes China the largest 
foreign lender of the United States Government. I am concerned 
that we may be too reliant on foreign countries as creditors, 
some of whom may not have our best interests at heart. Add to 
this the Wall Street Journal and others have reported that 
China may be considering riskier investment strategies with its 
foreign currency reserves which could result in fewer purchases 
of investments like U.S. Treasury bonds and more buying of 
investments that are riskier but have better long-term returns.
    Mr. Secretary, do you have any concerns, or are you 
concerned that China may be leaning towards a more aggressive 
investment strategy with our foreign reserves and what dangers, 
if any, does this pose to our country as a result of China's 
holding a substantial portion of our public debt?
    Secretary Paulson. Thank you very much, Congressman. I have 
spent a lot of time over my career looking at government bond 
markets, and I would begin by saying that roughly 50 percent of 
our treasury debt is held globally outside of the United 
States. That is very similar to many other governments. And in 
my judgment it is good to have a diversity of holders and to 
have people want to invest here. The Chinese, as you point out, 
own roughly $400 billion of our treasury debt. The Japanese own 
more than that, maybe another $200 billion.
    U.S. treasuries trading volume is about $500 billion a day, 
so the Chinese own less than one day's trading volume. I 
believe they own our securities and invest in this country 
because it is in their best interest. They do so because they 
get the best return on a risk adjusted basis. In terms of what 
they are doing with their sovereign wealth funds, this is a 
trend we see around the world, and it is one you expect to see 
with countries that have a substantial amount of reserves, 
countries are going to want to invest their reserves in the way 
that makes the most sense for them. I see that as an 
opportunity, too, because I do believe they are going to want 
to make investments in the United States, foreign direct 
investments, which I think will be a good thing. But again, I 
am not alarmed by holdings of U.S. treasuries, whether they be 
in China, Japan, the Middle East or wherever. I think this is 
good for our country and it is not unusual.
    Mr. Moore of Kansas. Thank you, Mr. Secretary. What would 
you expect the result would be if for whatever reason China 
decided to sell off or not hold any more our debt? What would 
be the impact on interest rates in this country?
    Secretary Paulson. Interest rates are lower by virtue of 
the fact that U.S. treasuries are held around the world. If 
China decided to sell off U.S. treasuries slowly over time, 
which I don't expect because I am not quite sure where else 
they would want to invest their money, I don't think it would 
have a big impact. Because as I said, it is less than one day's 
trading volume.
    Mr. Moore of Kansas. If it wasn't sold off slowly what 
would be the impact, if it happened over just say a period of 
months?
    Secretary Paulson. I wouldn't speculate about that. I don't 
think it is a major concern or a major risk.
    Mr. Moore of Kansas. I hope you are right. Thank you.
    The Chairman. The gentleman from New Jersey will be the 
last questioner in this period and we will resume at 12:45. The 
gentleman from New Jersey.
    Mr. Garrett. Thank you, Mr. Chairman. And my colleague from 
Texas, as he very rarely gets to quote his mother at these 
hearings, and I have never quoted his mother, but I am sure she 
has said to him at one time, son, always obey the rules. When 
it comes to small businesses in this country, specifically 
Sarbanes-Oxley, the rules that are about to be imposed upon 
them are pretty large and monumental. With regard to the entire 
Sarbanes-Oxley, some people have described it as being use of a 
sledgehammer to try to fix a problem when maybe just a little 
tap would have been more appropriate. We all agree 
accountability, transparency, they are laudable goals, but we 
are wondering whether we could have done it in a more 
competitive fashion. As you said before, and we all know we are 
in a global economy, but I often think that the burden we put 
on these companies, $4 million to $6 million per accelerated 
filer, 50 times what the original SEC estimates cost, are 
burdensome, but even more so on the small companies. The big 
ones we know what the outcome of Sarbanes-Oxley is. Some of the 
studies show that only 1 of 24 listings, over $1 billion, have 
been in the United States as opposed to foreign exchanges. I 
think the studies will show if we do go forward with some of 
these implementations on the small companies it is going to be 
even more detrimental.
    Now, I will say this also, that I commend the SEC and the 
PCAOB, the work they are doing to try to revise this system, 
and the rules and what have you are good, but I think it may be 
a little unfair to the small guys because they being right in 
the middle of the year, calendar year so to speak, with the 
rules just coming forward and being enacted and implemented or 
asked to be implemented may be a burden on them.
    So my first question is this: I just dropped in a piece of 
legislation, it is a bipartisan piece of legislation, that 
would extend for another year the current exemption for the 
small guys, for the smaller businesses, because the burden is 
greater on them. One study says, out of Nasdaq, it indicates 
that the burden of compliance as a percentage of revenues is 11 
times greater for small companies, and there is probably a good 
reason for that. Again, in light of the fact that we are sort 
of in the middle of the game here and we are trying to throw 
that on to them, I want to know what your thoughts are of that 
idea of just giving a 1-year extension to allow them some 
breathing room.
    Secretary Paulson. I share your concern about small 
business, and it is very important that Sarbanes-Oxley be 
implemented in a much more efficient way that looks at the--
section 404 should look at the costs versus benefits. Now, with 
regard to small businesses, they have a need also, if they are 
public, to have good control systems. And right now my 
understanding is that the earliest that these regulations would 
go into effect for the smallest businesses would be 2008.
    Mr. Garrett. Let's have a clarification for my benefit. 
That would mean for the filing of that period of time, correct?
    Secretary Paulson. Well, it would be for the filing which 
would, I think, be at the end of 2008. And so given the changes 
that have been made to section 404, and the changes that are 
being made, and given the fact that there is a delay, that I 
have been comfortable with the way--
    Mr. Garrett. For my benefit here, if that is the case, in 
which case the filing would be for 2009 or 2008, I would be in 
agreement with you.
    Secretary Paulson. I thought it is was going to go into 
effect for the 2008 year.
    Mr. Garrett. But if it is not, if it is for the filing--
    Secretary Paulson. If that would be the case, they would be 
filing the statement whenever they did, which would be early 
2009. They would be living with the rules in 2008.
    Mr. Garrett. It is just for section B for that period of 
time, but for the others the management reports would be still 
for 2008 looking back towards where we are now?
    Secretary Paulson. That is right.
    Mr. Garrett. Which is the problem, that they would be 
looking for--basically we are right in the middle of 2007 with 
the regs still coming down and they will be looking to 
implement them. It is not as bad for the large guys who have 
already been basically implementing some system and we are just 
asking them to change it as we are going along, but for the 
small guys, isn't it an added burden because they haven't done 
it so far?
    Secretary Paulson. You and I are discussing something we 
are in agreement on. I wanted the burden to be less and less 
for the smaller firms. The large firms have been dealing with 
it for a number of years now, and as I understand it, the 
regulations have been greatly modified. Through the 
conversations I have had with the PCAOB and with Chairman Cox, 
I am comfortable with the current path, but I understand your 
point of view.
    Mr. Garrett. But are you comfortable with them having to 
implement it for the other provisions in filing 2008 or 2007 
for regulations that are just now being implemented.
    Secretary Paulson. I think they will have time to 
transition, yes.
    Mr. Garrett. Okay.
    Secretary Paulson. I am sorry, I understand your concern 
but--
    Mr. Garrett. If the Chair lets me, where is their 
transition period if they are really just being thrown the 
regulations right now, because it is not just a filing in 2009, 
it is a filing in 2008?
    Secretary Paulson. The larger companies have been dealing 
with this now for a couple of years.
    Mr. Garrett. But the small guys haven't.
    Secretary Paulson. The small companies haven't and so there 
has been a modification. They have had a chance to look at what 
is going on. The rules are being modified. So, again, I would 
be happy to have some of our people talk with you about this 
off-line and I am sure that Chairman Cox would also.
    Mr. Garrett. Thanks.
    The Chairman. We will recess. I thank the Secretary. We 
will start promptly at 12:45 p.m..
    Mr. Bachus. Mr. Chairman, I would like, and this is my 
personal opinion, but I would like to express to the Secretary 
my compliments. I think you were badgered, and your patience 
under fire was commendable.
    Secretary Paulson. I didn't look at it as badgering. It is 
my job to come up here and to respond. Thank you.
    Mr. Bachus. I did not mean Mr. Garrett. I meant earlier.
    [Recess]
    The Chairman. The committee will reconvene.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Secretary, for your patience and 
your generosity of time and staying with us for this session.
    Let me first start off, Mr. Secretary, with a few 
questions. In your testimony you were very positive about the 
economy and our policies of international financial security 
around the world. Let me ask you, first of all, do you know the 
unemployment rate in the African American community?
    Secretary Paulson. Too high.
    Mr. Scott. Do you know what it is?
    Secretary Paulson. I don't know the exact number. I have 
seen numbers getting way up there.
    Mr. Scott. And specifically not just in the African 
American community but among African American males.
    Secretary Paulson. Yes.
    Mr. Scott. It is catastrophic--over 40 percent, and in some 
areas even higher than that. That is not a good sign certainly 
for that community. I would like to ask you to take a close 
look at that.
    As our top economist, as our Secretary of the Treasury, to 
have a segment of our constituency hovering at 40 or 50 percent 
unemployment is intolerable, and I would like to see us address 
that, find some reasons for that, particularly when you are so 
glowing with the soaring aspects of the economy otherwise, but 
for the African American community it is a serious case of 
extreme depression.
    The other point I wanted to discuss with you is the squeeze 
on the middle class, another great area of concern. And if we 
look at how the middle class has contributed and has downsized, 
so to speak, we can almost see it in direct proportion to the 
loss of manufacturing jobs in this country.
    So when we look at this economy I think, and the sector of 
African Americans especially and the squeeze on the middle 
class, the squeeze of middle class jobs, which are basically 
manufacturing jobs, and the loss of this has been directly tied 
to what I see as a very warped trade policy that in effect 
rewards companies and gives tax incentives for our companies to 
move overseas, to set up manufacturing plants overseas, and 
then if they make profits and keep those profits overseas, they 
are not taxed in our system. That is another area that we have 
to address.
    And I agree with you, the world is too short, globalization 
is too important, the world economy is too important. We are so 
involved in it that isolationism is certainly not the answer. 
But perhaps some protectionism, something to realize now that 
we have to come home in so many measures, because America is 
suffering, America is not satisfied.
    The polls for the President of the United States are 
devastatingly low, and for us in Congress, it is even lower: 
something in the area of 18 or 19 percent dissatisfaction of us 
in Congress, and around 20 percent as far as the President of 
the United States.
    So America is upset about a few things. But there is no 
trade policy that exemplifies what is wrong with our trade 
policy, what is wrong with this country than the Korean Free 
Trade Agreement that is impending. Are you familiar with that, 
Mr. Secretary?
    Secretary Paulson. Yes, I am.
    Mr. Scott. If you look at that, it shows what is wrong with 
our trade policies. Here we are with a country like South 
Korea. Are you aware, for example, that last year 700,000 
automobiles were imported into this country from Korea and yet 
less than 5,000 United States automobiles were imported into 
Korea. Within this agreement, that is one thing, their tariffs, 
their complexities of them all are arranged in such a way to 
give this a terribly bad deal for the United States.
    But the other point is as a part of these agreements they 
have what is known as these sort of economic industrial zones 
that are created--
    The Chairman. If he is going to have time to answer.
    Mr. Scott. My point is on that point--that are created 
basically to employ North Koreans who come in and work and take 
the money back into the North Korean economy. My bottom line is 
I would like to get your response on this agreement, your 
thoughts on it, would you, please?
    Secretary Paulson. Congressman, thank you for your 
comments. I very much share your concern with unemployment 
among young African Americans and males. Now with regard to the 
Korean Free Trade Agreement, I will pass on your comments to 
Ambassador Schwab and ask her to get back to you. But in terms 
of the auto sector, that is one that was focused on, so I am 
aware of the numbers you cited. I also am aware that Ambassador 
Schwab believes that there were a number of breakthroughs on 
this agreement that are going to make it much easier to import 
automobiles to Korea in the future.
    Also with regard to manufacturing I would just have this to 
say to you, and it is very interesting. In 1950, we had 14 
million manufacturing jobs in the U.S. economy; that was 30 
percent of the employment. Today we have 14 million 
manufacturing jobs; that is 10 percent. Manufacturing has 
shrunk as a percentage of the U.S. economy. We have 7 times as 
much output as we did in 1950 and we are still the largest 
manufacturer in the world, 2\1/2\ times greater than China, 
bigger than Japan, a couple times bigger than Germany, but it 
has been automation.
    I would just simply say to you, and I am not debating it, I 
understand the issue, but that there are many other industries 
that have taken their place, and that of the top industries, 
many are in service industries right now--engineering, computer 
sciences, we can just go through that long list.
    But I think the name of the game is transitioning people 
from manufacturing jobs to other good jobs and finding good 
jobs, so we agree on that. I am not disagreeing with you, I am 
just saying that there have been changes all over the world 
that have been driven by automation.
    The Chairman. The gentlewoman from Minnesota.
    Mrs. Bachmann. Thank you, Mr. Paulson, for your willingness 
to come back to this committee and speak to us this afternoon. 
I am the lone Republican holdout on this side. But thank you, 
Mr. Secretary, for coming back to this committee. I appreciate 
your time.
    The question was asked of you earlier regarding entitlement 
spending, and that is an area of deep concern of mine as well. 
The untold story that so many Americans aren't talking about is 
really the great prosperity that we are enjoying right now, low 
unemployment, the markets are doing great, and the stock market 
is doing great. We have a great success story, but it is a very 
short window that we have before the great drawdown on 
entitlements will begin to occur, and I know members in this 
room may disagree on how we should address this situation, but 
I think there would be very little disagreement on the fact 
that we can't sustain what we are doing now.
    I wonder if perhaps, and I have several questions I would 
like to ask you, but I first wonder if you would answer what 
would be your first suggestion for what at a minimum Congress 
should begin to do this session to address the entitlement 
looming crisis that we are looking at.
    Secretary Paulson. Okay. I think you are wise to say that 
the time to address these problems is during a time of economic 
strength. Now I don't want to sound like Don Quixote here, and 
even though I think it is unlikely, I still believe there is 
always a possibility we could get people on both sides of the 
aisle to come to the table and come with open minds to put 
forward their best ideas and come up with solutions.
    There have also been budget proposals put forward by the 
Administration, including in the Medicare area, to slow down 
the rate of growth of spending and the trajectory of growth as 
it relates to things like program efficiency.
    Mrs. Bachmann. Reclaiming my time, the Federal budget is 
very misleading, and this is something I wonder if you can 
comment on. It encourages Congress to over commit to future 
entitlement spending because the true long-term costs are not 
properly accounted for. This is something that I am concerned 
about. It seems that we could benefit from a process that would 
incorporate present value calculations of our overall 
commitments under current law and not just over a limited time 
horizon, like maybe 75 years, an estimate of all future sources 
of revenues and outlays, then split into major spending 
categories, Medicare, Social Security, and the rest of 
government.
    I am just wondering, Mr. Secretary, if you agree that that 
would be helpful or do you think that Treasury's annual 
financial report to the Federal Government would be a good 
place to include such an estimate? Because having good data to 
work off of helps us.
    Secretary Paulson. I agree with you, good data to work off 
of helps, but there are so many different reports and analyses. 
But as I talk to people, I don't find disagreement as to the 
problem. I don't have a lot of people in either party standing 
up saying there is no problem.
    Mrs. Bachmann. Right, I agree with that.
    Secretary Paulson. So I really do think it is more about 
political will than it is about economic analysis.
    Mrs. Bachmann. I agree absolutely. Mr. Secretary, that is 
why I am wondering, what would be your minimum goal for 
Congress this term in beginning to address this problem? If we 
agree there is a problem, what would be the minimum goal, in 
your estimation?
    Secretary Paulson. A minimum goal I had was to talk about 
this issue with as many people as I could, and depoliticize it 
in order to get agreement on both sides that there is a 
problem, so it would be easier whenever that time comes to come 
together to solve it.
    Mrs. Bachmann. I think we can get there. But what I am 
wondering is, on the solution side of the equation, Mr. 
Secretary, what would be your minimum goal on the solution side 
of the equation?
    Secretary Paulson. Other than what I have just suggested, 
which is to make progress toward understanding the problem and 
agreeing that it needs to be solved, the minimum would be to 
have people on both sides agree to come together and sit down 
with an eye towards solving the problem.
    Mrs. Bachmann. I guess we will end with that, Mr. Chairman.
    The Chairman. I thank the ``Lone Ranger'' for her comments. 
And now the gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    I thank you for the ocularity that you provided at the 
genesis of this hearing. You made some most important comments 
about equality and inequality, and I would like to just for a 
moment make a few additional comments and thank the Secretary 
of for being here today.
    Mr. Secretary, you have indicated that you have concern for 
reducing poverty, building a strong middle class, and that you 
want to see people around the world, I suppose, share in the 
benefits of this economic growth. In this country, we have 
persons who work full time and live below the poverty line. We 
are the richest country in the world--1 out of every 110 
persons is a millionaire--yet we still have people working full 
time and living in poverty.
    We mentioned saving. Many times, much of the time what 
persons who are full-time workers are doing is not saving, they 
are postponing consumption, and there is a difference between 
saving and postponing consumption. They literally have things 
that they could consume that they forego so as to have some 
semblance of savings.
    There is also the inequality of opportunity that the 
chairman talked about very briefly, and it has to do with, in 
my comment, earnings. We have CEOs who are making much, much 
more than the average worker, 500 times and even more in terms 
of increases in their salaries.
    And then we have the inequality of the opportunity to 
learn. In my opinion, we are not putting enough into the 
institutions of higher education so that all persons can have 
equal access to education.
    With that said, I now go to your statement wherein you 
indicate that you want to end the policy of lend and forgive, 
the policy that has to some extent benefited many of the 
nations of Africa. Given our history as it relates to Africa, 
our history in this country, it seems to me that we have a 
moral imperative to do more than anyone else on the planet when 
it comes to Africa.
    My concern with ending the lend and forgive policy is in 
which direction will it take us if you do this? Will we cease 
to lend, or will we accord more grants? There are many 
directions that we can go in, and the phrase ``end lend and 
forgive'' causes me some degree of concern.
    So I would like for you, if you would, to tell me, will we 
continue to lend? Is that a yes or no? If you would, I would 
beg you to begin by saying yes or no, because sometimes when 
people finish, I don't know whether they have said yes or no. 
If you could.
    Secretary Paulson. Congressman, you took a while to ask the 
question, and I would like just a minute or two to answer.
    Mr. Green. I agree that you should say all that you desire, 
Mr. Secretary, after you just tell me whether you think we will 
continue to lend--
    Secretary Paulson. Obviously.
    Mr. Green. I take that as a yes.
    Secretary Paulson. In terms of this Administration, I can't 
think of any Administration that has ever worked so hard or 
done so much to make a difference in Africa, and we could just 
tick off all of the various things in terms of what has been--
    Mr. Green. Without ticking them off, let me mention one 
other thing. You indicated in your comment that you have made a 
call on behalf of Mr. Wolfowitz because you wanted to make sure 
there was a fair process. You did say this. My concern is this: 
Given that there has never been a female to head the World 
Bank, never in the history of World Bank, have you made any 
calls to indicate that it may be time for a capable, competent, 
qualified female to head the World Bank?
    Secretary Paulson. The last time I was asked the question, 
I was asked whether I made a call on lending to Iran. Now, 
there haven't been any votes to lend to Iran since I have been 
Secretary.
    With regard to this situation, I worked to make sure the 
proper governance process was in place as it related to Paul 
Wolfowitz. Once that was done, I called around the world to 
listen to what leaders around the world wanted, and what I 
heard was they wanted someone--
    Mr. Green. Do you agree that there are capable, competent, 
qualified females? Did you make any phone calls to assist any 
female, any female who is capable, competent, and qualified to 
hold this position?
    Secretary Paulson. I did not, and I think it would be a 
great day when a woman runs the World Bank.
    Mr. Green. What have you done to accelerate the movement 
toward that great day? Things don't happen by accident; they 
usually happen by design. What have you done by design to 
assist in the process, since you were willing to assist Mr. 
Wolfowitz?
    Secretary Paulson. What I was doing with regard to Mr. 
Wolfowitz was working to assure a fair process, and then what I 
did after that was to make sure that we would get someone who 
was very well regarded and considered an expert around the 
world to lead the efforts for development and for lending to 
poor countries, and someone who has a big--
    Mr. Green. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    Thank you, Mr. Secretary.
    The Chairman. Mr. Secretary, may I ask you, we have been 
joined by one member who was not here at the close. I think we 
can fit them both in if you can do that.
    Secretary Paulson. I will be very brief.
    The Chairman. We may have to cut the gentleman to 3 or 4 
minutes. The gentlelady from Wisconsin under our agreement will 
go first and then finish with the gentleman from Illinois.
    Ms. Moore of Wisconsin. Thank you so much, Mr. Chairman, 
and thank you, Mr. Secretary, for sticking around.
    I do have a question about vulture funds. As you know, 
vulture funds are specialized asset management companies that 
buy the distressed commercial debt of the poorest and most 
indebted countries, most notably in Africa, and knowing that 
the multilateral debt relief has put the governments in these 
countries in a better position to pay.
    These companies are formed specifically to prey upon a 
particular country, and then they sort of disappear. They buy 
these debts at a deep discount and then go after them in courts 
of countries, particularly United States and Britain. We even 
have a couple of cases, the Elliott case, where they paid $11 
million for the debt of Peru and recovered $55 million from a 
New York court. And, of course, the resident of Washington, 
D.C., Michael Sheehan, from Donagan International, which bought 
debt for $3.8 million from Zambia. I did that just as 
background information for those people who may be watching us 
here.
    A third of the countries receiving this debt relief have 
been targeted by lawsuits and 38 litigating creditors with 
judgments awarded in 26 of these cases. And I say all this to 
say that I am very, very concerned that vulture funds didn't 
come up in the G8 meeting. Your testimony has perhaps some 
vague reference to those vulture funds on page 6, paragraph 4. 
I am not even sure you are referring to them.
    You spent a lot of time answering questions of the 
gentleman from Texas Mr. Green, and Mr. Shays earlier, talking 
about placing more restraints on lenders, but you really didn't 
talk about what we could do with these vulture funds. The 
Department of the Treasury has been briefed by NGOs like the 
Debt Relief International, which has given you really a 
thorough briefing on what you can do, but yet in your testimony 
you say, oh, we are working with various fora, thinking about 
what we might do, exploring what we might do. And what you 
could be doing right now is providing some technical assistance 
and legal assistance to these countries like Liberia where the 
predators are just waiting to prey on them. You could be giving 
them advice about what to do before they come, during these 
lawsuits, and the Treasury is missing in action on this. Why?
    Secretary Paulson. I would just say to you, Congresswoman, 
that I have been asked not to overreact to some questions, but 
let me say when you say we could be doing more for Liberia, 
maybe we could always do more. But we have been so active and 
Treasury's Office of Financial--
    Ms. Moore of Wisconsin. Listen--reclaiming my time. Listen, 
I know that this Administration has done a lot for Africa. I 
want to stipulate to that, I want to acknowledge that. I am 
talking about why aren't we giving technical assistance to 
these countries to stave off these vulture funds?
    Secretary Paulson. I would say this: We are doing 
everything we can to help them, and I deplore what the vulture 
funds are doing, and we use moral solutions. But the vulture 
funds have the rule of law on their side. When countries enter 
into debt agreements, laws apply. And so the one thing I take 
some comfort in is that they haven't been overly successful. 
The judgments they have realized at the end have not been as 
high as they might have been.
    But this is a problem, it is a difficult problem to deal 
with because of the way our legal system works, and it is one 
that we are focused on.
    Ms. Moore of Wisconsin. Why aren't you advising Congress 
about what we might do since these cases are being brought 
primarily in the United States? Why didn't you bring it up in 
the G8 where these nations could change their laws?
    Secretary Paulson. I wouldn't know how to change the law, 
because how could you change a law that says--
    Ms. Moore of Wisconsin. There is no transparency.
    Secretary Paulson. This is not about transparency. The law 
basically says if you borrow money, you have an obligation to 
pay it back.
    Ms. Moore of Wisconsin. We could define ``odious debt.'' if 
there are illegitimate regimes that have changed, there are 
ways that we can define. You could use the forum of the G8 to 
define ``odious debt.''
    The Chairman. The gentlewoman's time has expired. Now, 3 
minutes for the gentleman from Illinois, and 3 minutes for the 
gentleman from Tennessee.
    Mr. Manzullo. Secretary Paulson, thank you for your service 
and your patience. I was disappointed that the Treasury 
Department once again did not label China as a currency 
manipulator--not disappointed in you, but disappointed in the 
decision. I think you are doing a great job over there.
    In previous years, the excuse of Treasury was that China 
did not meet the two conditions required by law, that you 
needed a trade surplus with the United States, and with the 
rest of the world to be a currency manipulator. Now they have 
both, about $400 billion; 177 billion with the rest of the 
world, the rest with us.
    In your prior testimony you said that we clearly found 
China has manipulated its currency. You also said it is an 
unnatural act. Then you also said you have to show intent. 
Well, I can't see how intent could be shown any more clearly 
than every day the Chinese intervening in the market.
    I mean, we are just at the point now where we need Treasury 
to say, hey, we have given them enough rope, we are going to 
label them as a currency manipulator. Mr. Secretary, how much 
more evidence do you need before you find out that they are a 
currency manipulator?
    Secretary Paulson. We are not arguing over how the currency 
is valued, and we don't have a difference of opinion as to what 
China needs to do. And what the act in question says, that if 
we had found them a manipulator, which we didn't, the remedy 
would have been to do what we are doing right now, which is 
work to press them directly through negotiations and work with 
the IMF.
    We have had big success with the IMF. Recently--I think it 
was on Friday--they had a successful vote which is going to 
allow them to approach their currency surveillance process in a 
different way, which I think will help us in our work to 
achieve--
    Mr. Manzullo. But when you make the official designation, 
that goes a long way nationally and internationally as a 
currency manipulator. That encourages them more to clean up 
their act.
    Secretary Paulson. There are many, many countries in the 
world that don't have market-determined currencies. There are 
many--
    Mr. Manzullo. But it is not killing our manufacturing base.
    Secretary Paulson. Here we have a country that has 
recognized the principle and is moving its currency. So to say 
they are manipulating to gain an unfair advantage in trade gets 
to motive.
    Mr. Manzullo. So it may be against their motive, but not 
against what they are doing, especially when you represent a 
highly industrialized manufacturing district and people that 
could compete, but they are getting killed because of the--
    Secretary Paulson. I appreciate your comments. I am 
certainly not here to defend China's currency practices. Any of 
the Chinese who have sat down across the table from me know 
that I am not patient.
    The Chairman. The gentleman will suspend.
    The gentleman from Tennessee.
    Mr. Davis of Tennessee. Mr. Chairman, thank you very much.
    Secretary Paulson, it is good to see you here. I am glad 
that you spent the time that you have, and you certainly had 
several questions that have been asked of you, and I appreciate 
your engagement to answer some. And some I wonder if you have 
actually answered those, at least not to my satisfaction; 
others you may have.
    I live in Tennessee. I represent an area where low-wage, 
low-skilled jobs have been leaving almost at a rate of--
    Secretary Paulson. I missed the industry.
    Mr. Davis of Tennessee. Lower-skilled, lower-wage 
industries have been leaving almost as if it is a rabbit 
fleeing with hounds behind him. There is a saying we have is 
that you have to be careful; you can eat corn out of the crib, 
but not the seed corn, because you will be hungry the next 
year.
    My fear is that our economic policy is gradually chipping 
away at that sackful of seed corn, that we may ultimately 
destroy or at least have a significant impact on our industries 
in America. I look at China that has probably 20 percent of the 
world population and India with another 20 percent, being 40 
percent from those two nations, and I would assume, and I 
believe I may be correct, that probably when you look at the 
production of those two countries, it is mainly for export, it 
appears to be.
    In our country probably 90 percent of the people can 
actually purchase what we produce in this country, maybe 10 
percent can't, but most, if it is a house, or an automobile. 
Most can afford clothing, things we can buy. But in India and 
China, 40 percent of the world's population cannot purchase 
what is being produced in their own country. I think that is a 
bad--you talk about globalization. I don't think that is a real 
plus to say we are in a globalized economy.
    Number two, I look at this trade policy that we have, and I 
look at our debts that we are adding up, and I heard someone 
today talk about entitlements, is that really going to destroy 
our economy. I wonder if they realize in the budget is $2 
billion a year in Iraq to no-bid contractors, which seems to be 
an entitlement to them, is also having a tremendous impact on 
our economy in this country and our ability to invest in our 
own country.
    So we have had a lot of talk today that I believe tries to 
justify each person's positions rather than look at America 
itself.
    The question I want to ask you--and there was an editorial 
in the New York Times today that discussed bipartisan 
legislation introduced in the Senate last week that calls for a 
gradual process of imposing economic and political pressure on 
China unless they move faster to increase the flexibility of 
their exchange rate.
    I am inclined to agree with the legislation itself, but 
what the editorial suggests is that maybe we need to look at 
other areas of globalization rather than just China opening up.
    The Chairman. If the gentleman wants an answer, we will 
have to wrap up that question soon.
    Mr. Davis of Tennessee. I would like your opinion on the 
legislation, if you are familiar with 1607; if not, the 
economic pros and cons of threatening China mildly or strongly 
to take more action in the immediate future.
    Secretary Paulson. Congressman, at the beginning of your 
statement you talked about the need for major structural reform 
in China, where most of their growth is exports, manufacturing 
for exports. We are going to have a big imbalance, a trade 
imbalance, until China engages in widespread structural reform, 
until they have the kinds of social safety nets where their 
citizens don't have to have precautionary savings, savings at 
the 50 percent level.
    So I do believe that what it is going to take over time is 
direct engagement, but it is going to be more of a gradual 
process because it is difficult or impossible for us to mandate 
structural reform in China. So that would be my answer. Thank 
you.
    Mr. Davis of Tennessee. So that safety net you are talking 
about is an entitlement?
    The Chairman. Mr. Secretary, thank you for coming. And the 
hearing is adjourned.
    [Whereupon, at 1:17 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 20, 2007

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